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Annual Report > Report of the directors > Financial review > Line of business results for 2006 and 2005 > BT Retail

LINE OF BUSINESS RESULTS FOR 2006 AND 2005


BT Retail


      2006
£m
    2005
£m
 

 
Revenue
    8,452     8,698  
Gross margin
    2,354     2,354  
Sales, general and administration costs
    1,563     1,600  
EBITDA
    791     754  
Operating profit
    644     607  
Capital expenditure
    153     170  

 

BT Retail’s results demonstrated a continued strategic shift towards new wave products with growth in broadband, networked IT services and mobility revenues. Despite the substitution by new wave products, traditional revenue was defended by changes in pricing structure and packages to benefit frequent users and marketing campaigns focusing on key customer service promises. BT Privacy, a service to address the problem of unwanted calls by giving customers greater control over the calls they receive, was launched on 1 July 2005, with 3.7 million customers registered by 31 March 2006. As at 31 March 2006, 16.2 million customers were on BT Together packages. In the SME UK business market the focus remains on placing customers on commitment packages whereby lower call prices are received for annual committed spend. By 31 March 2006 there were 513,000 Business Plan sites, up 15% in the year. Cost transformation programmes continued to successfully reduce the cost base of the traditional business, allowing investment in new wave products and services.
     BT Retail’s revenue decreased by 3% in the 2006 financial year to £8,452 million. The growth in new wave revenue of 38% in the 2006 financial year continued to reduce our dependence on traditional revenue, the decline in which was driven by the impact of regulation and competition. After adjusting for the regulatory impact of the reduction in mobile termination rates, revenue declined by 2% in the 2006 financial year. Revenue for the two years is summarised as follows:
 

      2006     2005  
      £m     £m  

 
BT Retail revenue
             
Traditional
    7,088     7,712  
Networked IT services
    363     304  
Broadband
    730     502  
Mobility and other
    271     180  
New wave
    1,364     986  

 
Total
    8,452     8,698  

 

Traditional revenue comprises calls made by customers on the BT fixed line network in the UK, analogue lines, equipment sales, rentals and other voice products. Overall revenue was 8% lower in the 2006 financial year. The reduction includes the effect of continued high levels of migration to broadband which is reflected in a 46% fall in dial up minutes over the year, a reduction of 10% in ISDN lines and general competitive pressure. The decline in private circuits and ISDN reflects customers migrating to new wave products and services, including broadband and IPVPN.
     New wave revenue grew by 38% to £1,364 million in the 2006 financial year driven primarily by broadband, mobility and networked IT services. New wave revenue comprised 16% of BT Retail’s revenue in the 2006 financial year, compared to 11% in the 2005 financial year.
     Broadband revenue grew by 45% to £730 million in the 2006 financial year. The growth of broadband continues to accelerate with 2,584,000 BT Retail connections at 31 March 2006, an increase of 47% over last year.
     BT Retail had net additions of 832,000 broadband customers in the year, a 31% market share of the broadband DSL net additions.
     Broadband is increasingly critical to the success of SMEs and BT Business Broadband revenue continues to grow.
     Revenue from mobility and other new wave services increased by 49% to £268 million in the 2006 financial year. During the year we launched BT Fusion, the world’s first seamless combined fixed and mobile communications services on a single handset. The consumer launch was in June 2005 and the business market launch was in February 2006.
     Networked IT services revenue increased by 19% to £363 million in the 2006 financial year. SME’s have become increasingly interested in the benefits they can achieve by converging their voice and data into one network and BT Business networked IT services are integrating and simplifying the way customers are unifying their organisation’s voice and data services. The portfolio includes IP infrastructure – WAN/LAN and IP telephony and also Data Centre Services, Security, Applications and outsourcing.
     BT Retail’s gross margin percentage increased by 0.8 percentage points in the 2006 financial year reflecting improved margin management and greater efficiency in managing the service provider network.
     Gross margin is revenue less costs directly attributable to the provision of the products and services reflected in revenue 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.
     Cost transformation programmes in the 2006 financial year generated selling, general and administration cost savings of £206 million. These savings were driven by cost reduction programmes focused on elimination of failure, channel effectiveness, overheads 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.
     BT Retail’s EBITDA increased by 5% to £791 million in the 2006 financial year. This is a significant improvement compared to last year, which experienced EBITDA decline. The benefits from the investment in new products and value added services have contributed to an improved EBITDA performance in the current year. This was also reflected in the 6% improvement in operating profit to £644 million in the 2006 financial year.
     Capital expenditure for the 2006 financial year was £153 million, a decrease of 10% resulting from tight controls over expenditure.
 

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