BT Wholesale is the line of business within BT that provides network services and solutions within the UK. Its customers include communications companies, fixed and mobile network operators and service providers. The customer base includes BT’s lines of business, BT Retail and BT Global Services. The majority of BT Wholesale’s turnover is internal (2004 – 68%, 2003 – 69%, 2002 – 68%) and mainly represents trading with BT Retail. External turnover is derived from providing wholesale products and solutions to other operators interconnecting with BT’s UK fixed network, including mmO₂ since the demerger. Internal turnover and costs with mmO₂ for the 2002 financial year have been reclassified as external in this section to enable a meaningful year on year comparison.
     In the 2004 financial year, turnover totalled £10,859 million, a decline of 3% following a decrease of 9% to £11,247 million in the 2003 financial year. The reduction in the 2004 and 2003 financial years is primarily due to lower sales volumes and prices to BT Retail. The results for the 2002 financial year included turnover of £770 million relating to the former Concert global venture, which was re-integrated from 1 April 2002. Excluding this Concert turnover in the 2002 financial year, the underlying turnover declined by 3% in the 2003 financial year.
     External turnover declined by 2% in the 2004 financial year to £3,445 million which is fully accounted for by regulatory price reductions on mobile termination rates which have reduced external turnover by £126 million, although this has no impact on profitability. In the 2003 financial year external turnover declined by 11% to £3,525 million, although excluding sales to Concert in the 2002 financial year, the underlying external turnover increased by 3%.
     The decline in external turnover from traditional products in the 2004 and 2003 financial years is due to the mobile termination rate impact and price reductions, Network Charge Control (NCC) and other Oftel price determinations, coupled with unfavourable market conditions. Turnover from retail private circuits at £207 million reduced by 36% in the 2004 financial year and in the 2003 financial year at £325 million reduced by 9%. The decline is due to the migration of customers from retail private circuits to lower priced partial private circuits, introduced in August 2001. Turnover from partial private circuits showed an increase of 43% to £152 million in the 2004 financial year and an increase of 89% to £106 million in the 2003 financial year. FRIACO generated turnover of £78 million in the 2004 financial year (2003 – £84 million, 2002 – £68 million) and the trend follows the move to flat rate packages by internet service providers in 2003 and their subsequent substitution by broadband in 2004. Conveyance and low margin transit revenues of £2,054 million decreased compared to the 2003 financial year and at £2,075 million increased marginally compared to the 2002 financial year.
     New wave turnover, including broadband and managed services, at £361 million, showed strong growth of 54% following growth of 110% in the 2003 financial year. This growth in the 2004 financial year completely offsets the reduction in external traditional turnover after excluding the impact of mobile termination rate cuts. Wholesale broadband lines had an installed base of 2.2 million at 31 March 2004 representing growth of 177% on the number of lines as at 31 March 2003 which had grown 380% on the previous year. At 14 May 2004 the installed base was 2.45 million, with net additions growing at more than 35,000 connections per week since January 2004.
     In the 2004 financial year, internal turnover decreased by 4% to £7,414 million after a decrease of 8% to £7,722 million in the 2003 financial year. Lower call and retail private circuit volumes, reductions on mobile termination rates and price reductions reflected most of the decline in the 2004 financial year. The unwind of the Concert global venture resulted in a reduction of internal revenues in the 2003 financial year. Excluding the Concert related revenues in the 2002 financial year, the reduction in internal turnover in the 2003 financial year was 5%. This reduction was primarily due to a reduction in prices on sales to BT Retail, partly offset by the increased sales to BT Global Services.
     Despite network volume increases in the 2004 financial year, operating costs, excluding depreciation and exceptional items, decreased by 4% to £7,351 million (10% to £7,691 million in 2003). The movement in the 2003 financial year was mainly due to £905 million of Concert related costs in the 2002 financial year offset by an increase in leaver costs of £108 million.
     Interconnect payments to other network operators remained broadly flat in the 2004 financial year at £3,165 million. In the 2003 financial year, these payments decreased by 18% to £3,143 million and the unwind of the Concert global venture accounted for the majority of this reduction as interconnect payments to Concert were no longer made. These costs are mainly recharged to BT Retail with no margin or reflect external transit revenues with a minimal margin.
     Net staff costs in the 2004 financial year, at £805 million, decreased by 1% after increasing by 19% to £816 million in the 2003 financial year. The increase in the 2003 financial year reflects an increase in leaver costs compared to the prior year of £108 million.
     Payments to other BT lines of business declined by 8% in the 2004 financial year to £2,933 million after declining by 12% to £3,175 million in the 2003 financial year. The reduction in the 2004 financial year reflects the decline in private circuits purchased from BT Retail. The reduction in the 2003 financial year was principally due to the unwind of the Concert global venture which reduced the cost of sales of BT Retail products, and a reduction in service costs.
     EBITDA before exceptional items at £3,600 million in the 2004 financial year was 2% lower than in the 2003 financial year following a reduction of 9% to £3,681 million in the 2003 financial year. EBITDA margins before exceptional items were maintained at 33% across all three financial years.
     Depreciation costs were broadly flat at £1,919 million in the 2004 financial year and £1,923 million in the 2003 financial year.
     Operating profit before goodwill amortisation and exceptional items at £1,681 million decreased by 4% in the 2004 financial year. This was after a reduction of 18% to £1,758 million in the 2003 financial year. The operating profit margin, before exceptional items, remained broadly flat in the 2004 and 2003 financial years.
     Capital expenditure on plant and equipment at £1,809 million in the 2004 financial year was 10% higher than the 2003 financial year reflecting the focused expenditure on transformational projects. In the 2003 financial year capital expenditure declined by 16% to £1,652 million which reflected cost control, tight governance and the alignment of capital spend with the development of the future network strategy.
     Managed cash costs are used to measure the controllable operating and capital cash costs of the BT Wholesale business. Accordingly it is based on operating costs excluding payments to other network operators and depreciation, plus capital expenditure. Targets have been set for achieving managed cash cost savings and accordingly performance against those targets is reported. In the 2004 financial year, managed cash costs at £5,995 million decreased by 3%, despite a 10% increase in capital expenditure. In the 2003 financial year, after adjusting for the unwind of Concert, managed cash costs at £6,200 million decreased by 1% despite the extra leaver payments of £108 million in the 2003 financial year. After allowing for price changes and volume effects, the efficiency cost savings were £280 million in the 2004 financial year and £237 million in the 2003 financial year. This brings the two year efficiency cost savings total to £517 million, which is above our two year target of £500 million.

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