BT 2003 Annual Report Download - page 35

week are on target to reach one million connections in
the summer of 2003.
In the 2003 financial year, internal turnover
decreased by 7% to £7,788 million after a decrease of
1% to £8,345 million in the 2002 financial year. The
unwind of the Concert global venture has resulted in
a reduction of internal revenues in the 2003 financial
year. Excluding the Concert related revenues in the
2002 financial year, the reduction in internal turnover
in the 2003 financial year was 4%. This reduction was
primarily due to a reduction in prices on sales to
BT Retail, partly offset by the increased sales to other
BT lines of business.
Despite network volume increases in the 2003
financial year, BT Wholesale’s operating costs,
excluding depreciation and exceptional items,
decreased by 10% to £7,538 million, mainly due to
the £905 million of Concert related costs in the 2002
financial year offset by an increase in leaver costs of
£108 million. In the 2002 financial year, operating
costs, excluding depreciation and exceptional items,
rose by 9% to £8,355 million. The principal reasons
for these changes are discussed below.
Interconnect payments to other network operators
decreased by 18% in the 2003 financial year to
£3,143 million. The unwind of the Concert global
venture accounted for the majority of this reduction
as interconnect payments to Concert were no longer
made. In the 2002 financial year, these costs increased
by 11% to £3,849 million compared to the prior year.
These costs are mainly recharged to BT Retail with no
margin or reflect external transit revenues with a
minimal margin.
Net staff costs in the 2003 financial year, at
£815 million, increased by 19% after increasing by
15% to £686 million in the 2002 financial year.
The increase in the 2003 financial year reflects an
increase in leaver costs compared to the prior year
of £108 million. The increase in both years also reflects
a change in the mix of capital and current work.
Payments to other BT lines of business declined by
12% in the 2003 financial year to £3,010 million after
increasing by 6% to £3,429 million in the 2002
financial year. The reduction in the 2003 financial year
was principally due to the unwind of the Concert global
venture which reduced the cost of sales of BT Retail
products, and a reduction in service costs. The increase
in the 2002 financial year was mainly due to an
increase in payments to BT Retail for cost of sales of
BT Retail products and services, and an increase in
payments to BT Global Services for broadband services,
offset by reductions in other group charges.
Depreciation costs were broadly flat in the 2003
financial year at £1,923 million, after an increase
of 10% to £1,914 million in the 2002 financial year.
The increase in the 2002 financial year was due
to a reduction in assumed asset lives as BT continues
its programme of network investment offset by the
effect of reduced capital expenditure.
In the 2002 financial year an exceptional bad debt
charge of £79 million was recognised as a result of the
severe liquidity problems in the TMT sector during the
latter part of the year.
EBITDA at £3,847 million in the 2003 financial year
was 7% lower than in the 2002 financial year following
a reduction of 3% to £4,156 million, before exceptional
items, in the 2002 financial year.
Operating profit at £1,924 million in the 2003
financial year was 14% lower after a reduction of 12%
to £2,242 million, before exceptional items, in the
2002 financial year. The operating profit margins,
before exceptional items, achieved in each of the 2003,
2002 and 2001 financial years have been reducing at
17%, 18% and 22%, respectively.
Capital expenditure on plant and equipment at
£1,652 million in the 2003 financial year was 16%
lower than the 2002 financial year, following a decline
in the 2002 financial year of 13% to £1,974 million.
This reflects continued cost control, tight governance
and the alignment of capital spend with the
development of the future network strategy.
During the 2003 financial year, BT Wholesale
focused its cost reduction programme on managed
cash costs (operating costs excluding payments to
other network operators and depreciation, plus capital
expenditure). After adjusting for the unwind of Concert,
managed cash costs at £6,047 million decreased by
1% despite the 5% increase in network volumes and
extra leaver payments of £108 million in the 2003
financial year. After allowing for price changes and
volume effects, the managed cash cost savings were
£237 million in the 2003 financial year, exceeding the
full year target of £200 million. Managed cash costs
are used to measure the controllable operating and
capital cash costs of the BT Wholesale business.
Accordingly it excludes payments to other network
operators and depreciation. Targets have been set for
achieving managed cash cost savings and accordingly
performance against those targets is reported.
BT Wholesale maintained its strong cash
generation performance with operating free cash flow
(EBITDA less capital expenditure) of £2,195 million in
the 2003 financial year. This follows an increase of 9%
to £2,182 million, before exceptional items, in the
2002 financial year.
BT Global Services 2003
£m
2002
£m
2001
£m
Group turnover 5,251 4,472 3,468
Group operating loss* (427) (353) (309)
EBITDA* 178 146 50
Capital expenditure 439 609 935
Operating free cash flow* (261) (463) (885)
* Before goodwill amortisation and exceptional items
BT Global Services (formerly known as BT Ignite) is
BT’s business services and solutions business, serving
customers worldwide. It is an ICT service provider,
offering integrated data and value-added services to
meet the European needs of global multi-site
corporates and the global needs of European
corporates. BT Global Services now includes the former
Concert managed services network infrastructure in
Europe, Africa, the Middle East and the Americas within
its business supporting the frame relay, ATM IP and
other data services. The Global Products and Global
Financial review
34 BT Annual Report and Form 20-F 2003