The following section provides a
summary of the operating results of the group for the 2007 and the 2006
financial years in relation to each line of business.
Impact of Openreach on
segmental disclosure
Prior to the 2007 financial
year, the group was organised into three primary segments: BT Global
Services, BT Retail and BT Wholesale. On 22 September 2005, BT entered
into the Undertakings with Ofcom as a result of which BT was required to
establish a new line of business and primary segment called Openreach.
Openreach was launched operationally on 21 January 2006 and is separately
reported within BT’s results for the first time in the 2007 financial
year.
In accordance with the
timetable set out in the Undertakings, the group was required to
facilitate the reporting of Openreach as a separate line of business by
the end of July 2006. This was achieved and discrete financial information
has been presented to senior management on the new business structure with
respect to periods from 1 April 2006 onwards.
Both IFRSs and US GAAP
require segmental information to be presented on a consistent basis for
all years reported. In the event of a restructuring of business segments,
comparative information is therefore required to be restated, unless this
is impracticable. The results for the 2006 financial year have been
restated to reflect the separate reporting of Openreach as a new business
segment. These restatements also reflect the impact of the new internal
trading arrangements which have been implemented due to the creation of
Openreach. The results for the 2005 financial year, however, have not been
restated as it is impracticable to do so.
Some of the products and
services that Openreach now sell were previously provided by BT Wholesale,
but in a different form. As a result of the Undertakings, new ‘equivalent
products’ which did not previously exist had to be created for both
external and internal customers. The changes required to capture the
separate reporting of these new products and services were introduced
during the 2006 financial year and therefore actual data was available to
support the estimates and assumptions required to restate the results for
that year. The equivalent products and services did not exist in the 2005
financial year, and therefore the level of estimation and extrapolation
required to restate the results for that year would have been too
significant to provide sufficiently objective and reliable information.
Furthermore, the
fundamental level of reorganisation and restructuring which occurred,
combined with the fact that the products previously sold by BT Wholesale
no longer exist, mean it is also impracticable to report the results for
the current financial year on the old business segment structure.
In order to assist the
reader in understanding the year on year performance, additional
disclosures have been included below showing the previously reported
segmental data for the 2006 and 2005 financial years in respect of the
group’s three primary businesses, prior to the creation of Openreach.
There is extensive trading
between the lines of business and their profitability is dependent on the
transfer price levels. For regulated products and services those transfer
prices are based on market prices, whilst for other products and services
the transfer prices are agreed between the relevant lines of business on
an arm’s length basis.
The table below analyses the
trading relationships between each of the lines of business for the 2007
financial year. The majority of the internal trading is Openreach selling
calls, access lines, broadband connections and other network products to
BT Wholesale, BT Retail and BT Global Services. This trading relationship
also reflects the pass through of termination charges on other
telecommunication operators’ networks and the sale of wholesale broadband
ISP products. BT Retail also trades with BT Wholesale, selling apparatus,
operator assistance and directory enquiries services and conferencing for
onward sale to other telecommunication operators. BT Global Services’
revenue with BT Retail mainly reflects the sales of BT Global Services’
products in the UK. BT Global Services trades with BT Wholesale mainly for
use of the IP/ATM network, International Direct Dial traffic and certain
dial IP arrangements. BT Wholesale’s revenue with BT Global Services
reflects the use of the UK network infrastructure for BT Global Services’
products.
| |
|
|
Internal
cost recorded by |
|
| |
|
|
|
|
| |
|
|
BT Global
Services
£m |
|
|
BT
Retail
£m |
|
|
BT
Wholesale
£m |
|
|
Openreach
£m |
|
|
Other
£m |
|
|
Total
£m |
|
|
|
| Internal
revenue recorded by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BT Global Services
|
|
|
– |
|
|
596 |
|
|
988 |
|
|
13 |
|
|
42 |
|
|
1,639 |
|
|
BT Retail
|
|
|
156 |
|
|
– |
|
|
177 |
|
|
71 |
|
|
13 |
|
|
417 |
|
|
BT Wholesale
|
|
|
1,115 |
|
|
1,105 |
|
|
– |
|
|
1,307 |
|
|
– |
|
|
3,527 |
|
|
Openreach
|
|
|
441 |
|
|
2,517 |
|
|
1,499 |
|
|
– |
|
|
35 |
|
|
4,492 |
|
|
|
|
Total
|
|
|
1,712 |
|
|
4,218 |
|
|
2,664 |
|
|
1,391 |
|
|
90 |
|
|
10,075 |
|
|
|
The line of
business results are presented and discussed before
specific items, for the reasons set out above, to provide
a meaningful comparison of the trading results between
the financial years under review. Specific items are
discussed separately in a group context in this Financial
review.
In
addition to measuring financial performance of the lines
of business based on the operating profit before specific
items, management also measure the operating financial
performance of the lines of business based upon the
EBITDA before specific items. EBITDA is defined as the
group profit (loss) before depreciation, amortisation,
finance expense and taxation. This is a non GAAP measure
and therefore may not be directly comparable to the
EBITDA of other companies, as they may define it differently.
EBITDA excludes finance expense, taxation, depreciation
and amortisation, the latter two being non cash items,
from group operating profit and is a common measure,
particularly in the telecommunications sector, used
by investors and analysts in evaluating the operating
financial performance of companies.
EBITDA
before specific items is considered to be a useful measure
of the group’s operating performance because it reflects
the underlying operating cash costs, by eliminating
depreciation and amortisation, and excludes significant
one off or unusual items which have little predictive
value. EBITDA is not a direct measure of the group’s
liquidity, which is shown by the group’s cash flow statement
and needs to be considered in the context of the group’s
financial commitments. A reconciliation of EBITDA before
specific items to group operating profit (loss) by line
of business and for the group is provided in the Line
of business summary (opens in a new window).
Trends in EBITDA before specific items are discussed
for each line of business in the following commentary.
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