BT 2007 Annual Report Download - page 37

Traditional revenue comprises calls made by customers on the BT
fixed line network in the UK, analogue lines, equipment sales,
rentals and other voice products. Traditional revenue was 7%
lower in the 2007 financial year driven by high levels of
migration to broadband which is reflected in a 15% fall in dial
up minutes over the year, a reduction in the overall fixed to
fixed calls market and general competitive pressure.
New wave revenue grew by 31% to £1,784 million in the
2007 financial year, driven primarily by broadband, networked IT
services and other new wave services. New wave revenue
comprised 21% of BT Retail’s revenue in the 2007 financial year
compared to 16% in the 2006 financial year.
Broadband revenue grew by 30% to £946 million in the 2007
financial year. The growth of broadband continues to accelerate
with net additions of 796,000 connections, a 30% market share
of total broadband DSL net additions. In addition the acquisition
of PlusNet in January 2007 added 195,000 connections at
31 March 2007 giving BT 3,659,000 retail broadband
connections, overtaking Virgin Media to become the UK’s
leading broadband provider by market share. Broadband is
increasingly critical to the success of SMEs and BT Business
broadband revenue continues to grow.
Revenue from networked IT services at £375 million increased
by 3% in the 2007 financial year despite the closure of our
Home Computing business following the removal of the tax
relief available to our customers under this Government backed
initiative. Excluding Home Computing, the underlying growth in
networked IT services was 15% in the 2007 financial year. As
SMEs become increasingly aware of the benefits they can
achieve by converging their voice and data into one network,
BT Business has responded by developing tools, packages and
services that offer a simple and complete solution. The portfolio
includes IP infrastructure – WAN/LAN and IP telephony and also
Data Centre Services, Security, Applications and outsourcing. We
launched BT Business One Plan which combines fixed, mobile
and broadband communications in October 2006 and over
18,000 plans had been sold as at 31 March 2007.
Mobility and other new wave revenues grew to £463 million
from £271 million in the 2007 financial year, driven by the
acquisition of dabs.com and advertising revenues from
Payphones and Directories. Revenue from dabs.com, an internet
and IT retailer acquired by the group in April 2006, increased by
18% since acquisition despite a very competitive PC market.
We have moved from focusing on pure mobile to converged
services and bundles of products. In January 2007 we launched
BT Fusion Wi-Fi handsets and we have recently set up Wi-Fi
zones in 12 UK city centres and are already seeing a significant
increase in local authority support to expand further with
mobility applications and services that will benefit businesses,
consumers and community services. BT Openzone, our public
wireless broadband service, grew usage by 60% compared to the
2006 financial year.
BT Retail’s future new wave growth will come predominantly
from the mass market roll out of broadband, converged services,
BT Vision and networked IT services to SME customers. New
sales are generally bundled with free or subsidised hardware and
include upfront investment in marketing and customer
acquisitions. During the initial stages of roll-out profitability is
impacted by these costs. Within BT Retail the potential impact
of growing new wave revenue on reported profitability has been
more than offset by the defence of more profitable traditional
revenues, through the combination of service and value and cost
management programmes.
BT Retail’s gross margin percentage increased by 1.7 percentage
points in the 2007 financial year reflecting an increased focus
on margin management.
Gross margin is revenue less costs directly attributable to the
provision of the products and services reflected in revenue in the
period. Selling, general and administration costs are those costs
that are ancillary to the business processes of providing products
and services and are the general business operating costs. BT
Retail analyses its costs in this manner for management purposes
in common with other retail organisations and it has set target
savings for selling, general and administration expenses.
Cost transformation programmes in the 2007 financial year
generated selling, general and administration cost savings of
£223 million. These savings were driven by cost reduction
programmes focused on elimination of failure, channel
effectiveness, overheads and removal of inefficiencies and
duplication. The majority of these initiatives were targeted at
people related costs, with significant savings in billing, IT
operations and other support functions. These savings allowed
the business to invest in new wave activities such as BT Vision
and dabs.com.
BT Retail’s EBITDA increased by 18% to £845 million in the
2007 financial year, a significant improvement compared to last
year. The benefits from the investment in new products and
value added services have contributed to an improved EBITDA
performance in the current year. This was also reflected in the
18% improvement in operating profit to £674 million in the
2007 financial year.
Capital expenditure for the 2007 financial year was 8% higher
at £166 million due to extra expenditure on implementation of
the systems development required under the Undertakings.
BT Wholesale 2007 2006a
£m £m
Revenue 7,584 7,343
Gross variable profit 3,736 3,623
EBITDA 1,922 1,861
Operating profit 724 759
Capital expenditure 1,017 975
aRestated to reflect the creation of Openreach.
BT Wholesale is the line of business within BT that provides
network services and solutions within the UK. Its customers include
communications companies, fixed and mobile network operators,
internet and other service providers interconnecting with BT’s UK
fixed line network. The customer base also includes BT’s other lines
of business, BT Retail, BT Global Services and Openreach.
A significant amount of BT Wholesale’s revenue is internal (2007:
47%, 2006: 47%).
In the 2007 financial year, revenue was £7,584 million, an
increase of 3%. External revenue increased by 4% to £4,057 million
in the 2007 financial year. The increase reflects particularly strong
growth in new wave revenues, mainly broadband.
External revenue from traditional products remained flat in
the 2007 financial year at £2,960 million. The performance in
the traditional businesses was mainly driven by growth in transit
revenues, offset by continued migration from lower bandwidth
products to less expensive alternatives such as PPCs and
broadband. Substitution to broadband has resulted in the
continued declining trend in Flat Rate Internet Access Call
Origination revenues, which have more than halved to £9 million
in the 2007 financial year.
New wave revenue, including broadband and managed
services, grew by 17% to £1,097 million in the 2007 financial
Report of the Directors Financial review
36 BT Group plc Annual Report & Form 20-F