Carphone Warehouse 2004 Annual Report Download - page 13

The Carphone Warehouse Group PLC Annual Report 2004
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to us of leasing the bandwidth we require is a very small
proportion of our overall network cost.
The outlook for Opal continues to be promising. We are
building up our sales resource to drive further organic
growth and investing further in building network capacity.
We plan to resize the network to carry 2 billion minutes
per month to meet future demand while retaining capex
near the levels of the last 12 months. This will allow us
to continue to grow the business and offer competitive
tariffs through increased network efficiency.
Our residential fixed line service, TalkTalk, which was launched
in February 2003, made excellent progress during the year.
By March 2004 we had attracted 385,000 customers to
our service. In its first full year, TalkTalk generated revenue
of £30.2m and incurred a loss of £11.0m after marketing
and customer recruitment costs of £20.3m. As the base
continues to grow, the profitability of existing customers
will comfortably offset the cost of recruiting new customers
and we are confident that TalkTalk will become a major
contributor to overall Group earnings in the years ahead.
We identified a significant opportunity in the residential
fixed line market arising from a major change in regulation
in 2002. The introduction of automated Carrier Pre-Select
(‘CPS’) made it much easier for new entrants to switch
customers from BT, with no requirement to change
telephone numbers, dial prefixes or install dialler boxes.
The acquisition of Opal in November 2002 allowed us to
enter this market supported by a highly efficient network,
meaning that we can offer very competitive tariffs while
still achieving attractive margins. The cost of customer
recruitment is a key consideration for alternative providers,
and the combination of our trusted telecoms brand with
our physical presence of over 500 stores across the UK
gives us a significant advantage in this respect.
Approximately 150,000-200,000 customers are switching
from BT to CPS providers each month at present, and by
the year end TalkTalk was capturing over 30% of this
market on a monthly basis. On 1 April 2004 we launched
a major new proposition offering free calls between TalkTalk
customers regardless of time of day or duration. We believe
this enhancement to the service will accelerate the growth
of our customer base and help to establish TalkTalk as the
number one alternative to BT in the residential market.
In addition, we anticipate that further regulatory changes
in the next twelve months will enable us to offer our
customers line rental and broadband services.
The early success of TalkTalk has prompted us to consider
the development of fixed line operations outside the UK.
Although different geographical markets are at varying stages
of deregulation, our strengthening brand and increasing
physical presence give us two material advantages in the
creation of profitable fixed line businesses.
To this end, we made two acquisitions close to the year
end. In Spain we acquired Xtra Telecom, an alternative
telecoms carrier with national coverage in Spain. It has
three switches and low cost, leased infrastructure with
a high level of interconnect into the Telefonica network. It is
currently carrying approximately 45 million minutes of traffic
per month for business and wholesale customers and the
international pre-pay market. The existing Xtra sales team
will continue to pursue new business in the SME market
and will benefit in the medium term from the expertise and
product portfolio of Opal. In addition, The Phone House will
be launching a residential fixed line service in Spain using
the Xtra network in September 2004.
In Switzerland we acquired N Tel, a switchless reseller with
a base of 44,000 customers of whom approximately 90%
were residential. N Tel is achieving good organic growth in
its own right and will continue to be run as a stand-alone
business, but we intend to enhance its long-term potential
by developing tariffs to be distributed through our Phone
House stores. We also intend to use N Tel as the platform
for organic growth into other markets, including Germany.
In addition to these two acquisitions, we have also
negotiated network terms in France to develop our own
reseller business, which was launched in May 2004. We
expect our non-UK residential operations to break even
in the year to March 2005.
Wholesale
2004 2003
£m £m
Turnover 178.1 806.6
Contribution 1.8 7.5
Support costs (1.7) (2.4)
EBITDA 0.1 5.1
Depreciation (0.9) (1.0)
EBIT (0.8) 4.1
EBIT % (0.5%) 0.5%
Wholesale operations in the year predominantly comprised
our pre-pay voucher distribution business and the wholesale
shipment of trade-in handsets. The substantial majority of
the prior year’s turnover related to mobile phone wholesale
trading activities. In view of the continued uncertainty
regarding the actual implementation of joint and several
Opal has a clearly focused engineering
strategy that directs investment towards
those elements of the network that create
cost efficiency and allow us to add value
to customers.