BT 2007 Annual Report Download - page 40

BT Group plc Annual Report & Form 20-F 39
BT Retail’s revenue in the 2006 financial year, compared to 11%
in the 2005 financial year.
Broadband revenue grew by 45% to £730 million in the 2006
financial year. The growth of broadband continues to accelerate
with 2,584,000 BT Retail connections at 31 March 2006, an
increase of 47% over last year.
BT Retail had net additions of 832,000 broadband customers
in the year, a 31% market share of the broadband DSL net
additions.
Broadband is increasingly critical to the success of SMEs and
BT Business Broadband revenue continues to grow.
Revenue from mobility and other new wave services increased
by 49% to £268 million in the 2006 financial year. During the
year we launched BT Fusion, the world’s first seamless combined
fixed and mobile communications services on a single handset.
The consumer launch was in June 2005 and the business market
launch was in February 2006.
Networked IT services revenue increased by 19% to
£363 million in the 2006 financial year. SME’s have become
increasingly interested in the benefits they can achieve by
converging their voice and data into one network and BT
Business networked IT services are integrating and simplifying
the way customers are unifying their organisation’s voice and
data services. The portfolio includes IP infrastructure – WAN/LAN
and IP telephony and also Data Centre Services, Security,
Applications and outsourcing.
BT Retail’s gross margin percentage increased by 0.8
percentage points in the 2006 financial year reflecting improved
margin management and greater efficiency in managing the
service provider network.
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.
Cost transformation programmes in the 2006 financial year
generated selling, general and administration cost savings of
£206 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.
BT Retail’s EBITDA increased by 5% to £791 million in the
2006 financial year. This is a significant improvement compared
to last year, which experienced EBITDA decline. 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 6% improvement in
operating profit to £644 million in the 2006 financial year.
Capital expenditure for the 2006 financial year was
£153 million, a decrease of 10% resulting from tight controls
over expenditure.
BT Wholesale 2006 2005
£m £m
Revenue 9,232 9,095
Gross variable profit 7,031 6,933
EBITDA 3,894 3,864
Operating profit 1,992 1,950
Capital expenditure 2,013 1,981
In the 2006 financial year, revenue totalled £9,232 million, an
increase of 2%. External revenue increased by 11% to
£4,226 million in the 2006 financial year (an increase of 15%
excluding the impact of regulatory reductions to mobile
termination rates). The increase reflects particularly strong
growth in new wave revenues, mainly broadband. The regulatory
price reductions on mobile termination rates have no impact on
profitability.
External revenue from traditional products increased by 1% in
the 2006 financial year. Excluding the impact of regulatory
reductions to mobile termination rates external traditional
revenue was up 6% in the 2006 financial year. The increase in
traditional revenue was mainly driven by growth in Partial
Private Circuits (PPCs) and Wholesale Access. Customers
continued to migrate from lower bandwidth products to less
expensive alternatives such as PPCs and broadband and this is
reflected in revenue from PPCs which increased by 18% to
£225 million in the 2006 financial year. Substitution to
broadband has resulted in the continued declining trend in Flat
Rate Internet Access Call Origination revenues which have more
than halved to £26 million in the 2006 financial year. Wholesale
access revenues have increased by £142 million in the 2006
financial year as a result of increased volumes from other service
providers.
New wave revenue, including broadband and managed
services, grew by 56% to £1,033 million in the 2006 financial
year. Broadband revenues grew by 74% year on year. Wholesale
broadband connections, including LLU lines, increased to
7.9 million at 31 March 2006, an increase of 2.9 million
compared to prior year.
Internal revenue decreased by 5% to £5,006 million in the
2006 financial year. The reduction reflects both the impact of
lower volumes of calls, lines and private circuits, and lower
regulatory prices being reflected in internal charges.
Gross variable profit increased by 1% to £7,031 million for
the 2006 financial year reflecting volume changes and changes
in the mix towards more profitable products.
In the 2006 financial year, network and selling, general and
administration costs, excluding leaver costs, were 3% higher at
£3,103 million. Leaver costs were £34 million in the 2006
financial year and £62 million in the 2005 financial year. Activity
levels in the network, driven by broadband and LLU volumes,
have increased in the 2006 financial year. The financial impact
of this increased activity has been mitigated by a series of cost
reduction programmes focusing on efficiency, discretionary cost
management and process improvements.
EBITDA at £3,894 million in the 2006 financial year was 1%
higher. EBITDA margins were maintained at 42% across both
financial years.
Depreciation and amortisation were flat in the 2006 financial
year at £1,902 million.
Operating profit at £1,992 million increased by 2% in the
2006 financial year. The operating profit margin increased to
22% compared to 21% in the 2005 financial year.
Capital expenditure on property, plant and equipment and
computer software at £2,013 million increased by 2% in the
2006 financial year. This reflects increased capital expenditure to
prepare for the 21st Century Network and to invest in new
systems to ensure compliance with the Undertakings agreed with
Ofcom. Investment in legacy network technologies continues to
be lower than last year.
Report of the Directors Financial