BTPLC Annual Report 2005 - Financial review

	2005 £m	2004 £m	2003 £m

Group turnover	12,562	12,940	13,217
Gross margin	3,300	3,517	3,621
Sales, general and administration costs^a	2,051	2,123	2,204
Group operating profit^a	1,120	1,232	1,216
EBITDA^a	1,249	1,394	1,417
Capital expenditure	154	118	109

^a	Before goodwill amortisation and exceptional items

BT Retail’s results demonstrated a continued strategic shift towards new wave products with growth in networked IT services, broadband and mobility products. Despite the substitution by new wave products, traditional turnover was defended by changes in pricing structure and packages to benefit frequent users and marketing campaigns focusing on key customer service promises. In the consumer market BT changed the basic voice offering on 1 July 2004 so that all standard customers were placed onto BT Together option 1 thereby lowering call prices to approximately 9 million customers. As at 31 March 2005, 17.6 million customers were on BT Together packages. In the business market the focus remains on placing customers on commitment packages whereby lower call prices are received for annual committed spend. By 31 March 2005 there were 445,000 Business Plan sites, up 67% in the year. Cost transformation continues to successfully reduce the cost base of the traditional business, allowing investment in new wave products and services.
BT Retail’s turnover decreased by 3% in the 2005 financial year to £12,562 million after declining by 2% in the 2004 financial year. The growth in new wave turnover of 28% in the 2005 financial year (2004 – 29%) was more than offset by the decline in traditional turnover driven by the impact of regulation and competition. After adjusting for the regulatory impact of the reduction in mobile termination rates, turnover declined by 2% in the 2005 financial year (2004 – 1%). Turnover for the three years is summarised as follows:


BT Retail turnover

	2005	2004	2003
	£m	£m	£m

Voice services	8,054	8,906	9,552
Intermediate products	1,728	1,868	1,982
Traditional	9,782	10,774	11,534
ICT	1,978	1,734	1,502
Broadband	541	307	131
Mobility	184	84	42
Other	77	41	8
New wave	2,780	2,166	1,683

Total	12,562	12,940	13,217

Voice services comprise calls made by customers on the BT fixed line network in the UK, analogue lines, equipment sales, rentals and other business voice products. Overall turnover from voice services was 10% lower in the 2005 financial year (8% excluding the impact of regulatory reductions to mobile termination rates) after a decrease of 7% in the 2004 financial year. The reduction includes the effect of continued migration to broadband with a 25% fall in dial up minutes over the year, a reduction in market share reflecting regulatory and competitive pressure and a decline in the overall fixed to fixed calls market.
     Turnover from intermediate products in the 2005 financial year of £1,728 million decreased by 7% after decreasing by 6% in the 2004 financial year. The reduction was mainly driven by the continued decline in private circuits and ISDN as customers migrate to new wave products including broadband, and IPVPN. As a result of regulatory changes, partial private circuits used by UK fixed network operators are no longer provided by BT Retail, but are provided as a BT Wholesale product. Private circuit revenues declined by £68 million in the 2005 financial year and by £88 million in the 2004 financial year.
     New wave turnover grew by 28% to £2,780 million in the 2005 financial year compared to growth of 29% in the 2004 financial year. New wave turnover accounted for 22% of BT Retail’s turnover in the 2005 financial year compared to 17% and 13% in the 2004 and 2003 financial years, respectively. ICT solutions are the main component and increased by 14% in the 2005 financial year to £1,978 million after an increase of 15% in the 2004 financial year reflecting the growth in new IP based services and solutions contracts. Broadband turnover grew by 76% to £541 million in the 2005 financial year after an increase of 134% in the 2004 financial year. The growth of broadband continues to accelerate with 1,752,000 BT Retail connections at 31 March 2005, an increase of 81% over last year. BT Retail had net additions of 785,000 broadband customers in the year, a 29% share of the broadband DSL market additions. Turnover from mobility services increased by 119% in the 2005 financial year after doubling in the 2004 financial year. BT Mobile had over 372,000 contract mobile connections at 31 March 2005, an increase of 158% from 31 March 2004. BT Openzone has grown significantly this year with paid minutes across the network almost four times higher and the number of access sites is now over 20,000 worldwide. Other new wave turnover has grown by 88% primarily driven by revenues from BT Phone Books (now covering 171 different regions) increasing to £65 million.
     The total number of BT Retail lines, which includes voice, digital and broadband, were flat at 30 million at 31 March 2005, reflecting the continued growth in broadband offset by the declining PSTN lines.
     The gross margin percentage decreased by 0.9 percentage points in the 2005 financial year after a decrease of 0.2 percentage points in the 2004 financial year. The decline primarily reflects the change in revenue mix from traditional business to lower margin new wave services. As the broadband and mobility customer base grows, the additional subscriber acquisition costs are written off as incurred. In addition, the creation and development of new value added services resulted in increased development costs.
     Gross margin is turnover less costs directly attributable to the provision of the products and services reflected in turnover in the period. Selling, general and administration costs are those costs that are ancillary to the business processes of providing products and services and are the general business operating costs. BT Retail analyses its costs in this manner for management purposes in common with other retail organisations and it has set target savings for selling, general and administration costs.
     Cost transformation programmes in the 2005 financial year generated selling, general and administration cost savings of £124 million before leaver costs in the traditional business (£27 million net of new wave investment). The savings in the year were driven by cost reduction programmes focused on ‘Elimination of Failure’ in end to end processes, particularly through initiatives in the customer contact centres. Additionally, sustainable cost reduction programmes targeted the identification and removal of inefficiencies and duplication. The majority of these initiatives were targeted at people related costs, with significant savings in billing, IT operations and other support functions. In the 2004 financial year savings of £228 million before leaver costs were also driven by cost reduction programmes.
     The number of employees in BT Retail at 31 March 2005 and 31 March 2004 was 39,500 and 41,500, respectively.
     BT Retail’s EBITDA before exceptional items and goodwill amortisation declined by 10% to £1,249 million in the 2005 financial year after showing a decline in the 2004 financial year of 2% to £1,394 million. The increased rate of decline in the 2005 financial year is due to a 9% fall (compared to 7% in 2004 financial year) in traditional turnover coupled with increased investment in new wave activities, particularly in mobility and broadband, that laid the foundations for further growth in new wave activities. In the 2004 financial year, cost savings more than offset the decline in turnover and the impact on margins of the product mix.
     Capital expenditure for the 2005 financial year was £154 million, an increase of 31% from the 2004 financial year, mainly due to increased expenditure on software.

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