Openreach

In 2008, revenue from Openreach increased by 1% to £5,266 million (2007: £5,223 million, 2006: £5,188 million), consistent with the 1% increase in 2007. The increase in both years is despite the regulatory price cuts on WLR and LLU made during 2006 and 2008. LLU now forms over 20% of our revenue, with WLR at 60%, reflecting the change in mix compared with 2006 when 10% of our revenue was from LLU and 70% was from WLR. This is the result of growth in the LLU market and unbundling activity taking place within the exchanges.
     External revenue was £886 million in 2008 an increase of 29% (2007: 115% increase), and reflects the strong growth of the broadband market and active competition among communications providers. The significant growth in 2007 was the result of the creation of Openreach and the regulatory price changes, leading to a significant increase in unbundling activity by communications providers. External revenue now forms 17% of our revenue compared with 13% in 2007 and 6% in 2006.
     At 31 March 2008, we had 4.3 million external LLU lines, a 2.4 million increase in the year. External WLR lines and channels have increased by 0.4 million to 4.7 million at 31 March 2008. We currently have over 450 active communications providers as our customers.

Number of installed external WLR and LLU lines at 31 March (000s)
			LLU
			WLR

     Revenue from other BT lines of business decreased by 3% to £4,380 million in 2008 (2007: £4,528 million, 2006: £4,870 million) compared with a decline of 7% in 2007. These reductions reflect the shift of WLR volumes from other BT lines of businesses to external communications providers, and also the impact of various price cuts. This impact has been partially mitigated by the growth in the backhaul Ethernet portfolio.
     Operating costs increased by 2% in 2008, compared with an increase of 4% in 2007. This was despite significant investment in delivering the Undertakings, improving our service and inflationary pressures and reflects the success of our cost efficiency initiatives.
     Over the past few years, we have made significant investment in delivering the Undertakings and more recently in improving our service. On the Undertakings, we have delivered Equivalence of Inputs for WLR this year and LLU in the prior year as well as a number of other key milestones. On service, we have invested in people and in the health of our network, such as recruiting and training engineers and service centre personnel. Three quarters of our volume workforce have been multiskilled to help meet the demands that the market, or the weather, place on our business or network. This was particularly highlighted following the worst of the flooding that occurred in July 2007, when we reduced reactive workstacks to normal levels within two weeks. Overall benefits from these investments have led to lead times on provision and repair improving by at least 40% since the beginning of the year and the number of access fault volumes has decreased by 10%.
     Now that Openreach has established itself as a stand alone business we have increasingly focused on driving cost efficiencies in our business. In addition to the benefits from the improved service and lower faults, we have improved productivity and driven down overtime by effective resource planning. We have also managed the increase in activities that has resulted from trading on an equivalent basis and also the demands from the market by improving and automating our processes and off-shoring work where it is appropriate. Focus on non-pay costs, such as efficient use of our vehicle fleet, and value-added services have also contributed towards improving our cost base.
     EBITDA was £1,911 million in 2008 (2007: £1,927 million, 2006: £2,028 million), broadly flat compared with 2007. This compares with a year on year decrease of 5% in 2007. EBITDA margin was 36% in 2008 (2007: 37%, 2006: 39%).
     Depreciation and amortisation was £689 million in 2008, 3% lower than in 2007. This compares with a decrease of 13% in 2006. The reduction in the year is mainly due to a number of the access network assets reaching the end of their useful economic lives. The reduction in the prior year was mainly due to the extension to the asset life of copper and duct consistent with Ofcom’s review, partially offset by increased LLU depreciation.
     Operating profit was £1,222 million in 2008 (2007: £1,220 million, 2006: £1,228 million), which was broadly flat year on year compared with both 2007 and 2006.

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