Carphone Warehouse offers "free" broadband to subscribers of its TalkTalk fixed-line telecoms service but has been criticised heavily over the past year for a series of customer service problems. It expects to lose up to £75m on its entry into the broadband market this year and its investment in customer service will also reduce its profitability in fiscal 2008.

Following its acquisition of AOL's UK business last year, Carphone Warehouse had 2.27 million broadband customers at the end of March, making it the third largest broadband provider behind BT and Virgin Media. The company has installed its own equipment in 1,024 of BT's local exchanges, with 702,000 customers now using its lines directly. Carphone's broadband customers only become profitable once they have been migrated on to an "unbundled" line within the exchange.

Charles Dunstone, the chief executive of Carphone Warehouse, said: "The delays we reported in migration earlier in the year mean we are still a little behind our original business plan; but the current momentum of customer recruitment and migration gives us confidence that we will make up the lost ground by the summer."

The mobile phone retailer will also invest up to £15m in its joint ventures with Virgin Mobile in France and Best Buy in the UK and the US. Carphone Warehouse is looking to get its mobile phone retail trial with Best Buy off the ground in the US and is in advanced talks about launching "The Geek Squad" home IT help service in the UK in partnership with the US electrical goods retailer.

The higher costs will wipe up to £30m off its profits for the year to March 2008.

Steve Davies, an analyst with Numis Securities, remained confident that the company should make substantial returns out of its broadband investment in the medium term.

However the company's performance in the retail market during 2006 was a cause for concern. Dan Gardiner, an analyst at Bridgewell Securities, said growth during the fourth quarter was disappointing given the rapid store roll-out. Michael Williams, an analyst at Citigroup, said that with mobile operators such as Vodafone and Orange looking to drive more mobile phone sales through their own stores, "cracks are widening" in the retailer's distribution business.

Mr Dunstone said growth in sales of handsets was slower than expected during the year, particularly in the pre-pay market.