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31 January 2014

BT GROUP PLC
RESULTS FOR THE THIRD QUARTER AND
NINE MONTHS TO 31 DECEMBER 2013

BT Group plc (BT.L) today announced its results for the third quarter and nine months to
31 December 2013.

Q314 results

Gavin Patterson, Chief Executive, commenting on the third quarter results, said:

"This is an encouraging set of results, with profit before tax up 8%, earnings per share up 12% and growth in revenue.

"Our strategic investments are delivering. It was another record quarter for fibre take-up and there are now more than 18 million premises with access to our fibre. That number will grow further as the BDUK programme progresses.

"Fibre helps SMEs to compete and underpins our TV plans. Our direct BT Sport customer base passed 2.5 million in the quarter and helped to support 6% revenue growth in our Consumer business. We achieved some particularly strong audience figures in December and the exclusive rights to the UEFA Champions League and UEFA Europa League that we have won will further strengthen the appeal of our proposition.

"Outside the UK our businesses in the high-growth regions of the world again delivered double-digit revenue growth.

"The momentum on our cost transformation has enabled us to raise our EBITDA outlook for the year. It is important that we keep up the progress we are making across the group whilst continuing to focus on improving the service we provide to our customers.”

Financial highlights for the third quarter:

  • Underlying revenue excluding transit up 2.4% compared with a decline of 3.2% in the prior year
  • EBITDA2 flat at £1,537m, with cost transformation offsetting the investment in BT Sport
  • Earnings per share2 up 12%
  • 2013/14 EBITDA2 now expected to be at the upper end of the £6.0bn-£6.1bn range

1
Restated, see Note 1 to the condensed consolidated financial statements
2 Before specific items
3 Before specific items, purchases of telecommunications licences, pension deficit payments and the cash tax benefit of pension deficit payments

GROUP RESULTS FOR THE THIRD QUARTER AND NINE MONTHS TO
31 DECEMBER 2013

Q314 Group results

Note: In the third quarter and nine months to 31 December 2012, reported revenue and EBITDA included a specific item charge of £151m and £36m, respectively, relating to Ofcom’s determinations on historic Ethernet pricing.

Line of business results2

Q314 line of business results
1 Restated, see Note 1 to the condensed consolidated financial statements
2 Before specific items which are defined below
3 Before specific items, purchases of telecommunication licences, pension deficit payments and the cash tax benefit of pension deficit payments



Notes:

a)       The commentary focuses on the trading results on an adjusted basis being before specific items. Unless otherwise stated, revenue, operating costs, earnings before interest, tax, depreciation and amortisation (EBITDA), operating profit, profit before tax, net finance expense, earnings per share (EPS) and normalised free cash flow are measured before specific items. This is consistent with the way that financial performance is measured by management and is reported to the Board and the Operating Committee and assists in providing a meaningful analysis of the trading results of the group. The directors believe that presentation of the group’s results in this way is relevant to the understanding of the group’s financial performance as specific items are those that in management’s judgement need to be disclosed by virtue of their size, nature or incidence. In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Specific items may not be comparable to similarly titled measures used by other companies. Reported revenue, reported operating costs, reported EBITDA, reported operating profit, reported profit before tax, reported net finance expense, reported EPS and reported free cash flow are the equivalent unadjusted or statutory measures.

 

b)       Underlying revenue, underlying costs and underlying EBITDA are measures which seek to reflect the underlying performance of the group that will contribute to long-term profitable growth and as such exclude the impact of acquisitions and disposals, foreign exchange movements and any specific items. We focus on the trends in underlying revenue excluding transit revenue as transit traffic is low-margin and is significantly affected by reductions in mobile termination rates.


BT Group plc
GROUP RESULTS FOR THE THIRD QUARTER TO
31 DECEMBER 2013


Overview
The results for the quarter demonstrate further progress towards sustainable and profitable revenue growth. Underlying revenue excluding transit was up 2.4% with the benefits from our strategic investments offsetting regulatory pressures.

BT Global Services delivered a strong performance helped by the timing of contract milestones and supported by our operations in the high-growth regions of the world. BT Retail generated strong revenue growth driven primarily by Consumer and achieved further growth in Business IT services. BT Wholesale reported another good order intake although its revenue was impacted by the migration of services off a previously terminated contract.

We have now passed more than 18m premises in the UK with our fibre broadband network and are making progress with extending the reach of fibre to rural areas. Openreach achieved 339,000 net fibre connections, an increase of 38%, with around 2.4m homes and businesses now connected. We added 228,000 retail fibre broadband customers, up 14%, and now have around 1.9m customers.

The UK broadband market1 grew by 252,000 in the quarter, 4% more than in the third quarter last year, of which our share of net additions was 150,000, or 60%. We have more than 2.5m direct BT Sport customers, as people continue to be attracted to our great value offering, and we achieved some particularly strong audience figures in December. During the quarter we further strengthened our football proposition, winning the exclusive live broadcast rights for the UEFA Champions League and the UEFA Europa League for three seasons from 2015/16.

We continue to make good progress in transforming our cost base and this has enabled us to raise our EBITDA outlook for the year. We are also making further investments to improve our customer service.

Income statement
Underlying revenue excluding transit was up 2.4% compared with a decline of 3.2% in the prior year. Adjusting for the timing of contract milestones, growth in underlying revenue excluding transit was slightly positive. Adjusted revenue of £4,599m was up 2% with a £4m positive impact from foreign exchange movements and an £8m positive impact from acquisitions offset by a £45m reduction in transit revenue.

Operating costs2 were up 2%. Our underlying operating costs2 excluding transit were up 4% as efficiencies from our cost transformation programmes were more than offset by our investment of around £140m in BT Sport and a £17m increase in the non-cash pensions operating charge. Excluding these, underlying operating costs2 excluding transit were down 2%, a smaller decline than in the second quarter partly reflecting the costs associated with the contract milestones.

Adjusted EBITDA was flat at £1,537m. Depreciation and amortisation decreased 5% to £670m. Net finance expense was £144m, a decrease of 14% mainly due to lower net debt and a lower average interest rate.

Adjusted profit before tax was £722m. This was up 8% due to the lower depreciation and amortisation and net finance expense, reflecting our focus in recent years on capital expenditure efficiencies and debt reduction. Reported profit before tax (which includes specific items) was £617m, up 6%. The effective tax rate on the profit before specific items was 20.9% (Q3 2012/13: 22.7%) as we now expect our effective tax rate to be around 22% for the full year.

Adjusted EPS was 7.3p, up 12%, and reported EPS (which includes specific items) was 6.3p, up 11%. These are based on a weighted average number of shares in issue of 7,867m
(Q3 2012/13: 7,865m).

Specific items
Specific items were a net charge after tax of £78m (Q3 2012/13: £65m) and consisted of group-wide restructuring charges of £46m (Q3 2012/13: £28m), net interest expense on pensions of £59m (Q3 2012/13: £28m) and a £27m (Q3 2012/13: £18m) tax credit on specific items.


1 DSL and fibre, excluding cable
2 Before depreciation and amortisation


Capital expenditure
Capital expenditure of £581m was up 2% in the quarter and down 1% for the nine months.

Free cash flow
Normalised free cash flow was an inflow of £554m, £253m lower than the prior year principally reflecting movements in working capital including the payment of the £60m deposit for the UEFA broadcast rights. For the nine months to 31 December 2013 normalised free cash flow was an inflow of £1,104m, £105m above the prior year.

The cash cost of specific items was £58m (Q3 2012/13: £96m) and mainly comprised restructuring costs of £43m and property rationalisation costs of £7m. Reported free cash flow, which includes the cash tax benefit from pension deficit payments of £19m (Q3 2012/13: £157m) and is after specific items, was an inflow of £515m (Q3 2012/13: £868m).

Net debt and liquidity
Net debt was £7,640m at 31 December 2013, a reduction of £434m compared with 30 September 2013 and £500m lower than the prior year. The movement in the quarter largely reflects the reported free cash inflow of £515m partly offset by an outflow of £76m for the purchase of 20m shares under our share buyback programme.

Pensions
The IAS 19 net pension position at 31 December 2013 was a deficit of £5.8bn net of tax (£7.3bn gross of tax), compared with £5.4bn (£6.7bn gross of tax) at 30 September 2013. The higher deficit primarily reflects an increase in market inflation expectations. BT estimates that on a median valuation basis, which reflects the expected returns from the assets held and likely liabilities, the BT Pension Scheme (BTPS) surplus remained broadly unchanged from 30 September 2013. The IAS 19 accounting position and key assumptions for the valuation are:

Q314 pensions table

Regulation
During the quarter Ofcom issued a new consultation on the fixed access market. This included adjustments to its proposed WLR and LLU charge controls and details of additional service commitments to be imposed on Openreach. We expect the final statement in early spring 2014.

Following Ofcom’s wholesale narrowband market review, which came into effect on 1 January 2014, fixed call termination rates will be significantly reduced. The effect of this will be partly offset by a higher fixed call origination price cap. These price controls will continue until 30 September 2016.

2013/14 outlook
We continue to expect an improved trend in underlying revenue excluding transit compared with 2012/13. As a result of our cost transformation activities we now expect adjusted EBITDA to be at the upper end of the £6.0bn-£6.1bn range and capital expenditure to be below the 2012/13 level. We still expect normalised free cash flow to be around £2.3bn for the year as these improvements will be offset by the £60m deposit for the UEFA broadcast rights that we paid in the quarter.

OPERATING REVIEW

BT Global Services


Q314 BT Global Services results


Revenue
Underlying revenue excluding transit increased 4%. This was an improvement compared with recent quarters largely reflecting the expected benefit from the timing of contract milestones. After a £16m decrease in transit revenue and a £1m positive impact from foreign exchange movements, reported revenue was up 3%.

Revenue in the UK grew 2% as the contract milestones offset continued declines in central and local government business. We expect further reductions in local government revenues, reflecting the ongoing lower levels of spend and our continuing focus on only pursuing business that generates economic value.

Outside the UK, we again generated double-digit underlying revenue growth in the high-growth regions of the world. During the quarter we announced a new phase of investment into Asia Pacific, the Middle East and Africa (AMEA) including plans to hire more than 400 people in the region and launch new portfolio capabilities and sector-specific solutions.

Total order intake in the quarter was £1.5bn (Q3 2012/13: £1.9bn) with orders growing 4% on a 12-month rolling basis. In the quarter, we signed contracts across all of our key geographies. We signed a contract with Tesco to deliver new collaboration services for its global workforce. We will be providing a contact centre solution for Alsea, a cafe and restaurant operator with operations across Latin America. We also extended our contract for global network services with HeidelbergCement in Germany, serving 1,100 locations in 37 countries.

Operating results
Operating costs were flat with underlying operating costs excluding transit increasing 1%. This reflects costs associated with the contract milestones offsetting the benefit of our cost transformation programmes, which continued at a similar pace to the second quarter.

EBITDA increased 22%, partly reflecting the contract milestones. For the nine months, EBITDA grew 14%. Depreciation and amortisation reduced 3% and operating profit improved by £53m.

Capital expenditure was up 15% partly reflecting a property purchase in Latin America. Operating cash flow was an inflow of £78m, a reduction of £62m compared with the prior year reflecting the timing of contract-related receipts.

BT Retail


Q314 BT Retail results

Revenue
Underlying revenue excluding transit was up 3%, the best performance for 5 years. Reported revenue increased 4%.

Consumer2 revenue increased 6% driven by 22% growth in broadband and TV revenue, reflecting the benefit of BT Sport to our top line.

We have more than 2.5m BT Sport retail customers, which include those watching via satellite, BT TV, online or via the app. During the quarter, we won the exclusive live broadcast rights to all 350 matches each season from the UEFA Champions League and UEFA Europa League, for three years from 2015/16. We will pay around £300m per season for the rights.

Consumer line losses of 70,000 were 60% better than last year. We added 150,000 retail broadband customers, up 23%, representing 60% of the DSL and fibre broadband market net additions. We achieved our best ever quarter in fibre, with 228,000 retail fibre broadband net additions, and now have around 1.9m fibre customers. We added 53,000 TV customers, more than double the prior year. In December we upgraded our BT Wi-fi app to enable BT broadband customers to connect automatically when they are in range of any of our 5.4m BT Wi-fi hotspots. As a result of this update, by the end of the quarter 28% more broadband customers were using our free wi-fi service than at the start of the quarter.

Business revenue was flat in the quarter with 6% growth in IT services partly offset by a 1% decline in calls and lines revenue. We announced a five-year contract with Adecco Group UK for IT services and the supply and management of a new voice and data network.

BT Enterprises underlying revenue was flat in the quarter with continued lower hardware sales in BT Conferencing, particularly in Europe, offsetting growth in BT Fleet. BT Ireland underlying revenue excluding transit grew 3%.

Operating results
Operating costs increased 8%, reflecting our investment of around £140m in BT Sport, leading to EBITDA declining 8%. Depreciation and amortisation decreased 14% due to lower capital expenditure in recent years, and operating profit was down 6%.

Capital expenditure was down 4%. Operating cash flow decreased 25% primarily reflecting the deposit of £60m for the UEFA broadcast rights and the lower EBITDA.

2 Includes customers in Northern Ireland

BT Wholesale


Q314 BT Wholesale results

Revenue
Underlying revenue excluding transit decreased 5%. This was below the 1% growth in the first half of the year as managed solutions revenue decreased 4% having grown in recent quarters. This reflected the migration of services off the previously terminated Post Office contract, and lower levels of network build from some of our customers.

Revenue continued to decline in traditional calls and lines, down 14%, and in broadband, down 15%, where lines are migrating to LLU. These effects were partly offset by strong growth in IP services of 38%. Reported revenue decreased 9% which included a £27m decline in transit revenue.

The fourth quarter’s revenue will be impacted by lower fixed call termination rates following Ofcom’s wholesale narrowband market review which came into effect on 1 January 2014.

Total order intake was £467m, up 12% partly due to the highest performing quarter for Ethernet orders in the six year history of the product. IP Exchange continued to grow strongly with voice minutes reaching a new high of 3bn, up 77%.

Operating results
Underlying operating costs excluding transit reduced 5% due to lower cost of sales as well as lower selling and general administration costs. Reported operating costs decreased 10% reflecting lower transit costs.

EBITDA decreased 5% driven by the lower revenue. Depreciation and amortisation decreased 6% and operating profit decreased 3%.

Capital expenditure increased 17% due to investment in systems to drive future efficiencies. Operating cash flow was an inflow of £30m, £85m lower than last year due to the timing of customer receipts.

Openreach


Q314 Openreach results

Revenue
Revenue declined 1% as regulatory price changes had a negative impact of around £70m, or the equivalent of around 5%. This was partly offset by 72% growth in fibre broadband revenue and a 5% increase in Ethernet revenue driven by higher volumes.

The physical line base grew by 72,000. This was above the 48,000 increase last year in part because we carried out 18% more customer visits this quarter. Over the past 12 months, our physical line base has increased by 164,000.

We achieved 339,000 net fibre connections in the quarter, an increase of 38%, helping to bring the number of homes and businesses now connected to around 2.4m. We launched a fibre self-install option which makes it easier for communications providers to connect their customers. Overall broadband market2 growth was 252,000, 4% up on last year.

We are making progress with extending the reach of fibre to rural areas. Overall, we have now won 46 regional broadband contracts3 and are building in 36 areas, passing around 170,000 premises in the quarter. We have now passed more than 18m premises in total with our fibre broadband network.

Operating results
Operating costs reduced 2% as cost efficiencies offset pay inflation and the additional engineering resource we have recruited to support fibre provision in rural areas. The adverse weather conditions during December disrupted service to some of our customers and impacted our costs in the quarter as we sought to help those affected. EBITDA was flat, and with depreciation and amortisation down 4%, operating profit was up 4%.

Capital expenditure decreased 13% reflecting £42m of grant income relating to our investment in the regional broadband programme. Operating cash flow increased 1%.


2 DSL and fibre, excluding cable
3 Includes Broadband Delivery UK programme, Cornwall and Northern Ireland


A conference call for analysts and investors will be held at 9:00am today and a simultaneous webcast will be available at www.btplc.com/results  

The fourth quarter and full year results for 2013/14 are expected to be announced on Thursday 8 May 2014.

The full financial statements are available to download as PDF documents

Full results release 
Group income statement 
Group cash flow statement 
Group balance sheet 
Notes to the condensed consolidated financial statements 
Forward-looking statements – caution advised