GROUP RESULTS

In the 2007 financial year, the growth in new wave revenue of 17% more than offset the 3% decline in traditional revenue to £12,849 million. The continued decline in traditional revenue reflects regulatory intervention, competition and also technological changes that we are using to drive customers from traditional services to new wave services, such as broadband and IPVPN. In the 2006 financial year, the growth in new wave revenue of 38% more than offset the 5% decline in traditional revenue.
     Given the nature of our new wave activities and their relative immaturity, the profit margins generated from these activities are currently lower than those from the group’s mature traditional products and service offerings. The adverse impact on the group’s overall profitability has been mitigated by the overall growth in revenues and our cost efficiency programmes which achieved savings of over £500 million in the 2007 financial year. We expect to continue to pursue profitable growth in new wave markets, defend our traditional business and generate sustainable cost savings.
     The table below analyses revenue by customer segment. Major corporate includes the external revenue of BT Global Services’ major corporate customers. Business includes the external revenue of BT Retail from small and medium sized enterprises (SME) customers. Consumer includes the external revenue of BT Retail from consumer customers. Wholesale includes the external revenue of Openreach, BT Wholesale and BT Global Services’ global carrier business.

Major corporate (UK and international) revenue increased by 5% to £7,244 million in the 2007 financial year driven by the growth in new wave revenue. This reflects the continued migration from traditional voice only services to networked IT services contracts and broadband. New wave revenue increased by 9% to £4,433 million and represented 61% of all major corporate revenue compared to 59% and 51% in the 2006 and 2005 financial years, respectively. Networked IT services contract wins in the 2007 financial year were £5.2 billion. We believe these wins in the 2007 financial year, combined with the £5.4 billion of contracts won in the 2006 financial year and the £7.2 billion of contracts won in the 2005 financial year, are building the foundation for future revenue growth as we increase the level of networked IT services provided to major corporate customers.
     Revenue from Business (smaller and medium sized enterprise) customers in the 2007 financial year increased by 1% to £2,353 million, which compares with a decline of 5% in the 2006 financial year. This improvement reflects the continued focus on innovative pricing plans and propositions that are designed to deliver value to our customer base by bringing together IT, broadband and communication services. New wave revenue in this segment increased by 24% to £677 million driven mainly by the 20% growth during the year in the number of BT Business Broadband customers to 579,000 at 31 March 2007. The expansion of the BT Business Plan portfolio continued during the year with the number of locations increasing by 16% to 598,000, offsetting some of the decline in traditional revenue.
     Consumer revenue in the 2007 financial year was 3% lower at £5,124 million, which compares with a 5% decline in the 2006 financial year. New wave consumer revenue increased by 34% to £858 million, driven primarily by growth in broadband. Residential broadband connections increased by 32% to 2,758,000 at 31 March 2007. Traditional consumer revenue declined by 8% in the year, reflecting the shift towards new wave products.
     After a period of sustained growth the proportion of consumer revenue under contract was 68% (2006 – 67% and 2005 – 64%) as a result of the reductions in package prices made during the year. There are now 15.1 million BT Together customers, with more than 3 million customers choosing higher value packages, BT Together Options 2 and 3. The underlying 12 months rolling average revenue per customer household (net of mobile termination charges) of £262 in the 2007 financial year was 4% higher than the 2006 financial year and 3% higher than the 2005 financial year. Increased penetration of broadband and the growth of value added propositions have more than offset the lower call revenues.
     Wholesale (UK and global carrier) revenue in the 2007 financial year increased by 10% to £5,485 million driven by WLR and LLU. New wave revenue increased by 36% driven by the continuing growth in broadband. Global carrier revenue decreased by 3% in the 2007 financial year.
     In the UK, BT had 10.7 million wholesale broadband DSL and LLU connections, including 1.9 million LLU lines, at 31 March 2007, an increase of 2.6 million connections in the year.
     Group operating costs before specific items increased by 4% to £17,746 million in the 2007 financial year. Our cost efficiency programmes achieved savings of over £500 million in the 2007 financial year which enabled us to invest in growing our new wave activities and increase our profits. Total operating costs of £17,915 million, including specific items, increased by 4% and 12% compared to the 2006 and 2005 financial years, respectively.
     Staff costs excluding leaver costs, increased by £243 million to £5,076 million in the 2007 financial year due to the additional staff required to grow the networked IT services business and to service increased levels of activity in the network. Leaver costs of £147 million in the 2007 financial year compared to £133 million and £166 million in the 2006 and 2005 financial years, respectively. Payments to other telecommunications operators in the 2007 financial year were £4,162 million, an increase of 3% mainly reflecting the impact of higher volumes. Other operating costs before specific items in the 2007 financial year increased by 5% to £6,159 million. This reflects the cost of investing in new wave activities and supporting new networked IT services contracts.
     BT’s share of associates’ and joint ventures’ post tax profit before specific items was £15 million in the 2007 financial year, compared with profits of £16 million in the 2006 financial year and losses of £14 million in the 2005 financial year. During the 2005 financial year Albacom contributed post tax losses of £22 million prior to becoming a subsidiary.
     Net finance expense before specific items was £233 million for the 2007 financial year, an improvement of £239 million against the 2006 financial year following an improvement of £127 million against the 2005 financial year. This improvement in both years was due to a number of factors including the net finance income associated with the group’s defined benefit pension obligation of £420 million, which was £166 million higher than the 2006 financial year, which in turn was £56 million higher than the 2005 financial year. The repayment of maturing debt in the 2006 financial year has also reduced net finance expense in the 2007 financial year. The reduction was offset by a gain of £27 million in the 2006 financial year on redemption of the group’s US dollar convertible bond. As well as this gain in the 2006 financial year, the improvement on the 2005 financial year was due to the reduction in the level of net debt.
     The above factors resulted in the group achieving a profit before specific items and taxation of £2,495 million in the 2007 financial year, an increase of 15%. In the 2006 financial year, the profit before specific items and taxation of £2,177 million was 5% higher than the 2005 financial year. The improvement in the 2007 financial year reflects revenue growth, cost efficiency savings and lower net finance expenses.
     The taxation expense on the profit before specific items for the 2007 financial year was £611 million, an effective rate of 24.5%, compared to 24.5% and 26.0% in the 2006 and 2005 financial years, respectively. The effective tax rate reflects the continued focus on tax efficiency within the group.
     Basic earnings per share before specific items were 22.7 pence for the 2007 financial year, an increase of 16% from 19.5 pence in the 2006 financial year which compares to 18.1 pence in the 2005 financial year.