Carphone Warehouse 2007 Annual Report Download - page 10

Chief Executive’s Review continued
equipment within BT’s exchange network, enabling
us to take control of the copper wire (or “local loop”)
that connects customers’ houses with their local
exchange. OFCOM, the UK telecoms regulator, had
just finalised its market review, which finally gave
visibility and certainty to LLU. Its attractions for a
telecoms service provider are that it allows us to
provide calls, line rental and broadband services
to our customers at a much lower cost price than
BT’s wholesale product suite.
In April 2006 we announced a revolutionary new
service, TalkTalk Free Broadband, giving free
broadband connectivity to customers who sign up
for our calls and line rental package. At the same time,
we announced a rapid acceleration of our LLU roll-out,
aiming to unbundle 1,000 exchanges over the following
14 months. Demand for the new proposition has been
exceptional, and by March 2007 we had signed up
655,000 live customers. In addition, our engineers at
Carphone Warehouse Networks, the re-branded Opal
network team, completed all of our planned equipment
installation well ahead of schedule, with 1,024
exchanges live by the end of the financial year.
Broadband via LLU is a scale game, with unit costs
falling with every additional customer connected to
an unbundled exchange. As a result, we were
delighted to acquire the customer base of AOL in
the UK in December 2006. This immediately took
our market share to around 16%, and gives us the
scale we need to ensure a significant payback on
our infrastructure investment. In addition, we now
operate with two differentiated brands, allowing us
to address two distinct and valuable segments of
the broadband marketplace.
The one flat note to our broadband launch has been
the impact on customer service levels resulting from
the very strong demand we generated. For much of
the year we were slow to answer calls in our contact
centres and failed to resolve enough of our customers’
problems first time around. This inevitably led to
a poor customer experience and our fair share of
negative publicity. We continue to invest substantially
in improving the provisioning process and providing
high quality support, and are confident that as the
new financial year progresses, we will begin to make
customer service a positive differentiator for the
TalkTalk brand.
Outlook
The outlook for the Group remains positive. The key
drivers of the Distribution division – network appetite
for customers, a vibrant handset market, and our own
physical expansion – all remain firmly in place. As our
strategy evolves, we believe that our opportunities for
growth in the medium term are increasing, both
through the development of our wireless solutions
model, and through the Geek Squad and Best Buy
Mobile ventures. Our ability to achieve continued
growth in sales and profitability stems in no small part
from our historical success in adapting the business
model to address the opportunities and challenges of
a dynamic market.
Physical expansion and market share gains remain at
the heart of our strategy, and we plan to open a
further 250 stores this year, in addition to the US roll-
out. Our market share in continental Europe still lags
our UK share, which itself continues to grow: there is
no structural reason why, in time, our market shares
across most of our European markets cannot reach
the 20% level.
We are targeting 15% growth in subscription
connections, a little ahead of our planned space
growth, as we anticipate further growth in this higher
value part of the market and invest in improved store
productivity. The pre-pay market is quieter, after
18 months of very significant growth, and we expect
this to be reflected in our own pre-pay connections
growth during the year. We expect gross profit per
connection, an important KPI for the business, on both
subscription and pre-pay to be stable year-on-year.
Our Ongoing and Insurance revenue streams, key
components of customer lifetime value driven by
subscription connections, are set to rise in line with
mobile subscriptions growth. Progress in our Mobile
businesses will be steady, as our German service
provision business continues to increase customer
numbers, revenues and profits, and our MVNO
operations across Europe start to come out of
their launch phases.
In our UK Fixed Line operations, our broadband and
unbundling strategy will begin to bear fruit, as margins
The Carphone Warehouse Group PLC Annual Report 2007
6
The launch of Free Broadband
changed the face of the UK
broadband market forever
Contribution from recurring
revenues up 28.9%
(£m)
121.4
161.2
213.5
275.1
04 05 06 07
% of contribution from
recurring revenues
(% of total)
57.6 59.4 59.7 62.2
04 05 06 07