BT 2005 Annual Report Download - page 31

Line of business results
In the following commentary, we discuss the operating
results of the group for the 2005, 2004 and 2003
financial years in relation to the lines of business.
There is extensive trading between the lines of
business and their profitability is dependent on the
transfer price levels. The intra-group trading
arrangements and operating assets are subject to review
and have changed in certain circumstances. Where that is
the case the comparative figures have been restated to
reflect those changes.
The table below analyses the trading relationships
between each of the lines of business for the 2005
financial year. The majority of the internal trading is BT
Wholesale selling calls, access lines and other network
products to BT Retail. This trading relationship also
reflects the pass through of termination charges on other
telecom operator networks and the sale of wholesale
broadband ISP products. BT Retail also trades with BT
Wholesale, selling apparatus, operator assistance and
directory enquiries services and conferencing for onward
sale to other telecom operators. BT Global Services’
turnover with BT Retail mainly reflects the sales of BT
Global Services products in the UK. BT Global Services
trades with BT Wholesale mainly for use of the IP/ATM
network, International Direct Dial traffic settlements and
certain dial IP revenue share arrangements. BT
Wholesale’s turnover with BT Global Services reflects the
use of the network infrastructure for BT Global Services’
products.
Internal cost recorded by:
Internal turnover
recorded by:
BT
Retail
£m
BT
Wholesale
£m
BT Global
Services
£m
Other
£m
Total
£m
BT Retail – 230 213 4 447
BT Wholesale 4,689 – 475 3 5,167
BT Global Services 3,028 663 – 19 3,710
Total 7,717 893 688 26 9,324
The line of business results are presented and discussed
before goodwill amortisation and exceptional items, for
the reasons set out above, to provide a meaningful
comparison of the trading results between the financial
years under review. Goodwill amortisation and exceptional
items are discussed separately in a group context in this
Financial review.
In addition to measuring financial performance of the
lines of business based on the operating profit before
goodwill amortisation and exceptional items,
management also measure the operating financial
performance of the lines of business based upon the
EBITDA before exceptional items. EBITDA is defined as
the group operating profit (loss) before depreciation and
amortisation. This may not be directly comparable to the
EBITDA of other companies as they may define it
differently. EBITDA excludes depreciation and
amortisation, both being non cash items, from group
operating profit and is a common measure, particularly in
the telecommunications sector, used by investors and
analysts in evaluating the operating financial performance
of companies.
EBITDA before exceptional items is considered to be a
good measure of the operating performance because it
reflects the underlying operating cash costs, by
eliminating depreciation and amortisation, and excludes
non-recurring exceptional items that are predominantly
related to corporate transactions. EBITDA is not a direct
measure of the group’s liquidity, which is shown by the
group’s cash flow statement and needs to be considered
in the context of the group’s financial commitments. A
reconciliation of EBITDA before exceptional items to
group operating profits (losses) by line of business and for
the group is provided in the table across the page above.
Trends in EBITDA before exceptional items are discussed
for each line of business in the following commentary.
BT Retail 2005
£m
2004
£m
2003
£m
Group turnover 12,562 12,940 13,217
Gross margin 3,300 3,517 3,621
Sales, general and
administration costs
a
2,051 2,123 2,204
Group operating profit
a
1,120 1,232 1,216
EBITDA
a
1,249 1,394 1,417
Capital expenditure 154 118 109
a
Before goodwill amortisation and exceptional items
BT Retail’s results demonstrated a continued strategic
shift towards new wave products with growth in
networked IT services, broadband and mobility products.
Despite the substitution by new wave products,
traditional turnover was defended by changes in pricing
structure and packages to benefit frequent users and
marketing campaigns focusing on key customer service
promises. In the consumer market BT changed the basic
voice offering on 1 July 2004 so that all standard
customers were placed onto BT Together option 1
thereby lowering call prices to approximately 9 million
customers. As at 31 March 2005, 17.6 million customers
were on BT Together packages. In the business market
the focus remains on placing customers on commitment
packages whereby lower call prices are received for annual
committed spend. By 31 March 2005 there were 445,000
Business Plan sites, up 67% in the year. Cost
transformation continues to successfully reduce the cost
30 BT Group plc Annual Report and Form 20-F 2005 Operating and financial review
Line of business summary
Group turnover Group operating profit (loss) Goodwill amortisation Exceptional charges (credits)
2005
£m
2004
£m
2003
£m
2005
£m
2004
£m
a
2003
£m
a
2005
£m
2004
£m
2003
£m
2005
£m
2004
£m
2003
£m
BT Retail 12,562 12,940 13,217 1,115 1,231 1,215 511–––
BT Wholesale 8,979 8,883 9,251 1,940 1,884 2,070 ––––(1) –
BT Global Services 6,381 5,782 5,417 (4) (116) (394) 11 11 19 –––
Other 25 35 41 (262) (129) (315) –––59 8198
Intra-group (9,324) (9,121) (9,199) –––––––––
Group totals 18,623 18,519 18,727 2,789 2,870 2,576 16 12 20 59 7198
a
Restated following adoption of UITF17 and UITF38 (see note 1 on page 81)