BT 2010 Annual Report Download - page 34

REVIEW OF THE YEAR OUR LINES OF BUSINESS
32 BT GROUP PLC ANNUAL REPORT & FORM 20-F
Fibre-based broadband access
Pilots of our fibre-based broadband access service in Whitchurch,
South Glamorgan and Muswell Hill, North London proved the
effectiveness of FTTC solutions. We have also continued trials of
FTTP at Ebbsfleet to prove the technology in a greenfield location,
and have announced further brownfield trials at Highams Park in
East London and Bradwell Abbey in Buckinghamshire for this year.
Mass deployment of FTTC accelerated during 2010. We aim to
make our fibre services available to 4m UK premises by the end of
2010, and to be available to at least 40% of UK premises in 2012,
with an expected 25% of these being FTTP and the remainder FTTC.
Operating review
In 2010 Openreach made significant improvements in the quality
of service delivery of its products.
Faults due to the access network reduced by 11% compared with
the previous year as a result of our focused network investment and
quality programmes. Over the past three years, fault rates have
reduced from one fault every nine years to one fault every 15 years.
Ofcom’s charge controls on Openreach impacted the LLU, WLR
and Ethernet products. Both the LLU and WLR controls expire on
31 March 2011 and importantly, the former allowed Openreach to
raise the price of Metallic Path Facilities (MPF) rentals. The controls
which apply to Ethernet require downward movement in prices
each year for the period until September 2012.
Ofcom has agreed two variations to BT’s Undertakings which
allow Openreach to control and operate fibre-based broadband
access equipment for FTTC and FTTP deployments, and has also
confirmed its approach that, for the time being, there will be no
predicted future price regulation applied to BT’s new fibre-based
products.
Some key customers are taking the decision to reduce ongoing
rental costs by moving from WLR and Shared Metallic Path Facility
(SMPF) to MPF, taking advantage of the difference in the regulated
prices.
In 2010 our cost transformation programmes have provided the
platform to deliver continued efficiencies which have allowed us to
resource our fibre-based broadband roll out and, at the same time,
reduce our total labour resource as well as enabling future
productivity improvements to be made.
Supplier contract renegotiations, engineering process
improvements and more orders delivered ‘right first time’ have all
helped to reduce costs further.
During 2010, we rationalised our civil engineering work, reducing
from several suppliers to a single long-term national contract with a
Carillion-Telent joint venture.
The winter of 2010 saw some extreme weather conditions in the
UK with considerable flooding and snow. Our engineers
demonstrated their commitment by working hard to keep our
customers connected. On 20 November 2009, just under 10,000
phone lines and 37,000 broadband lines were cut off as bridges
collapsed and extensive flooding affected homes and businesses in
an area of Cumbria. Within 12 hours phone services to the majority
of customers had been restored and most broadband lines were
working again within 36 hours.
Financial performance
2010 2009 2008
£m £m £m
External revenue 1,211 1,013 888
Revenue from other BT lines
of business 3,953 4,218 4,378
Revenue 5,164 5,231 5,266
Net operating costs 3,204 3,235 3,355
Adjusted EBITDA 1,960 1,996 1,911
Depreciation and
amortisation 856 778 689
Adjusted operating profit 1,104 1,218 1,222
Capital expenditure 907 951 1,073
Operating cash flow 1,167 1,079 841
In 2010 revenue decreased by 1% (2009: 1% decrease). The 2010
decrease reflects lower Ethernet prices, a reduced WLR base due
to the depressed housing market and the difficult economic
conditions. These factors were partially offset by volume growth in
Ethernet and LLU which now forms 26% of our revenue, with WLR
at 56%, reflecting the change in mix compared with 2009 (23%
and 59%, respectively). This was due to the growth in the
broadband market and the ongoing migration of end customers
from BT to other CPs as well as targeted offers to the CP community
to help stimulate and drive demand for our products.
External revenue was £1,211m in 2010, an increase of 20%
(2009: 14% increase) and reflecting the continuing migration of
end customers to other CPs’ WLR and in particular, LLU rentals.
External revenue represented 23% of our revenue in 2010
compared with 19% in 2009 and 17% in 2008.
Revenue from other BT lines of business decreased by 6% to
£3,953m in 2010 (2009: 4% decrease). These reductions reflect
the shift of WLR and LLU volumes from other BT lines of business to
external CPs and the effect of lower Ethernet prices, partially offset
by volume increases.
Net operating costs decreased by 1% in 2010 (2009: 4%
decrease). Cost reductions have been achieved through a decrease
in total labour costs, process improvements and efficiencies and a
reduction in the number of faults due to the improved quality of
our network and lower levels of connection activity.
Adjusted EBITDA decreased by 2% (2009: 4% increase) as the
reduction in revenue was only partially offset by cost savings.
Depreciation and amortisation increased by 10% to £856m
(2009: 13% increase) reflecting the higher value and shorter-lived
A BT engineer during the winter snow