BT 2007 Annual Report Download - page 34

continuing growth in broadband. Global carrier revenue
decreased by 3% in the 2007 financial year.
In the UK, BT had 10.7 million wholesale broadband DSL and
LLU connections, including 1.9 million LLU lines, at 31 March
2007, an increase of 2.6 million connections in the year.
Group operating costs before specific items increased by 4%
to £17,746 million in the 2007 financial year. Our cost
efficiency programmes achieved savings of over £500 million in
the 2007 financial year which enabled us to invest in growing
our new wave activities and increase our profits. Total operating
costs of £17,915 million, including specific items, increased by
4% and 12% compared to the 2006 and 2005 financial years,
respectively.
Staff costs excluding leaver costs, increased by £243 million
to £5,076 million in the 2007 financial year due to the
additional staff required to grow the networked IT services
business and to service increased levels of activity in the
network. Leaver costs of £147 million in the 2007 financial year
compared to £133 million and £166 million in the 2006 and
2005 financial years, respectively. Payments to other
telecommunications operators in the 2007 financial year were
£4,162 million, an increase of 3% mainly reflecting the impact
of higher volumes. Other operating costs before specific items in
the 2007 financial year increased by 5% to £6,159 million. This
reflects the cost of investing in new wave activities and
supporting new networked IT services contracts.
BT’s share of associates’ and joint ventures’ post tax profit
before specific items was £15 million in the 2007 financial year,
compared with profits of £16 million in the 2006 financial year
and losses of £14 million in the 2005 financial year. During the
2005 financial year Albacom contributed post tax losses of
£22 million prior to becoming a subsidiary.
Net finance expense before specific items was £233 million
for the 2007 financial year, an improvement of £239 million
against the 2006 financial year following an improvement of
£127 million against the 2005 financial year. This improvement
in both years was due to a number of factors including the net
finance income associated with the group’s defined benefit
pension obligation of £420 million, which was £166 million
higher than the 2006 financial year, which in turn was
£56 million higher than the 2005 financial year. The repayment
of maturing debt in the 2006 financial year has also reduced net
finance expense in the 2007 financial year. The reduction was
offset by a gain of £27 million in the 2006 financial year on
redemption of the group’s US dollar convertible bond. As well as
this gain in the 2006 financial year, the improvement on the
2005 financial year was due to the reduction in the level of net
debt.
The above factors resulted in the group achieving a profit
before specific items and taxation of £2,495 million in the 2007
financial year, an increase of 15%. In the 2006 financial year,
the profit before specific items and taxation of £2,177 million
was 5% higher than the 2005 financial year. The improvement
in the 2007 financial year reflects revenue growth, cost
efficiency savings and lower net finance expenses.
The taxation expense on the profit before specific items for
the 2007 financial year was £611 million, an effective rate of
24.5%, compared to 24.5% and 26.0% in the 2006 and 2005
financial years, respectively. The effective tax rate reflects the
continued focus on tax efficiency within the group.
Basic earnings per share before specific items were 22.7 pence
for the 2007 financial year, an increase of 16% from 19.5 pence
in the 2006 financial year which compares to 18.1 pence in the
2005 financial year.
LINE OF BUSINESS RESULTS FOR 2007 AND 2006
The following section provides a summary of the operating
results of the group for the 2007 and the 2006 financial years
in relation to each line of business.
Impact of Openreach on segmental disclosure
Prior to the 2007 financial year, the group was organised into
three primary segments: BT Global Services, BT Retail and BT
Wholesale. On 22 September 2005, BT entered into the
Undertakings with Ofcom as a result of which BT was required
to establish a new line of business and primary segment called
Openreach. Openreach was launched operationally on 21 January
2006 and is separately reported within BT’s results for the first
time in the 2007 financial year.
In accordance with the timetable set out in the Undertakings,
the group was required to facilitate the reporting of Openreach
as a separate line of business by the end of July 2006. This was
achieved and discrete financial information has been presented
to senior management on the new business structure with
respect to periods from 1 April 2006 onwards.
Both IFRSs and US GAAP require segmental information to be
presented on a consistent basis for all years reported. In the
event of a restructuring of business segments, comparative
information is therefore required to be restated, unless this is
impracticable. The results for the 2006 financial year have been
restated to reflect the separate reporting of Openreach as a new
business segment. These restatements also reflect the impact of
the new internal trading arrangements which have been
implemented due to the creation of Openreach. The results for
the 2005 financial year, however, have not been restated as it is
impracticable to do so.
Some of the products and services that Openreach now sell
were previously provided by BT Wholesale, but in a different
form. As a result of the Undertakings, new ‘equivalent products’
which did not previously exist had to be created for both
external and internal customers. The changes required to capture
the separate reporting of these new products and services were
introduced during the 2006 financial year and therefore actual
data was available to support the estimates and assumptions
required to restate the results for that year. The equivalent
products and services did not exist in the 2005 financial year,
and therefore the level of estimation and extrapolation required
to restate the results for that year would have been too
significant to provide sufficiently objective and reliable
information.
Furthermore, the fundamental level of reorganisation and
restructuring which occurred, combined with the fact that the
products previously sold by BT Wholesale no longer exist, mean
it is also impracticable to report the results for the current
financial year on the old business segment structure.
In order to assist the reader in understanding the year on
year performance, additional disclosures have been included
below showing the previously reported segmental data for the
2006 and 2005 financial years in respect of the group’s three
primary businesses, prior to the creation of Openreach.
There is extensive trading between the lines of business and
their profitability is dependent on the transfer price levels. For
regulated products and services those transfer prices are based
on market prices, whilst for other products and services the
transfer prices are agreed between the relevant lines of business
on an arm’s length basis.
BT Group plc Annual Report & Form 20-F 33
Report of the Directors Financial