3 February 2011
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BT GROUP PLC
Results for the third quarter and nine months to 31 December 2010
BT Group plc (BT.L) today announces its results for the third quarter and nine months to 31 December 2010.
Key points for the third quarter:
- Revenue of £5,038m, down 3%
- EBITDA1 of £1,484m, up 7%
- Profit before tax1 of £531m, up 30% (after specific items, up 111%)
- Earnings per share1 of 5.4p, up 32% (after specific items, up 96%)
- Free cash flow2 of £515m, up 69%
- Net debt of £8.7bn, down £1.4bn
- DSL broadband net additions of 188,000, 53% market share
- BT Global Services expected to generate operating cash flow of around £100m in 2010/11 and around £200m in 2011/12
Ian Livingston, Chief Executive, commenting on the results, said:
“Profits and cash flow in the quarter were ahead of last year. BT Retail had a good quarter with growth in business revenues and our highest share of DSL broadband net additions for eight years. Openreach benefited from a stronger broadband market and growth in its copper line base. BT Global Services is now expected to be cash flow positive this year, a year earlier than targeted.
“These results show that we are making progress on a number of fronts. There is always more to do but our performance underpins our outlook for this year and the period to 2012/13.”
1 Before specific items
2 Before pension deficit payment of £525m (Q3 2009/10: £525m)
Unless otherwise stated, the changes in results are year on year against the third quarter or nine months to 31 December 2009.
RESULTS FOR THE THIRD QUARTER AND NINE MONTHS TO 31 DECEMBER 2010
BT Group plc
RESULTS FOR THE THIRD QUARTER TO 31 DECEMBER 2010
Operating results overview
Revenue was down 3% to £5,038m. Excluding the reduction in low margin transit revenue, which includes the impact of mobile termination rate reductions, revenue was down 2%. Adjusted EBITDA increased by 7% to £1,484m reflecting continued delivery of cost reductions and lower leaver costs. Foreign exchange movements had no significant impact on group revenue or EBITDA in the quarter.
Total group operating costs reduced by £238m or 5%, to £4,408m. Depreciation and amortisation was £751m, broadly flat year on year. Excluding depreciation and amortisation, group operating costs reduced by £235m or 6% in the quarter and £722m in the nine months.
Total labour costs decreased by 3% to £1,436m. Direct labour costs, before leaver costs, decreased by 1% to £1,201m with the reduction in direct labour resource being largely offset by pay inflation and higher pension costs. Leaver costs were £12m (Q3 2009/10: £58m). Indirect labour costs reduced by 9% as the group continues to reduce agency and contractor resource and redeploy existing permanent staff to protect jobs where possible.
Payments to telecommunications operators were down by 12% to £937m reflecting lower mobile termination rates and transit and wholesale call volumes. Property and energy costs were 12% lower reflecting efficiency savings and lower energy prices.
Capital expenditure increased by £126m to £680m mainly due to the ongoing investment in our fibre roll out programme.
Net finance expense
Net finance expense was £207m, a decrease of £16m, reflecting the lower net debt levels and the maturing of high coupon debt in the quarter.
The effective tax rate on the profit before specific items was 21.7% for the nine months, in line with our current expectations for the full year.
Specific operating costs comprise property rationalisation charges of £26m (Q3 2009/10: £nil), BT Global Services restructuring charges of £40m (Q3 2009/10: £159m) and intangible asset impairment charges of £39m (Q3 2009/10: £nil). Net interest expense on pensions was £20m (Q3 2009/10: £69m). In addition, there was a profit of £35m from the disposal of a 5.5% interest in our associate Tech Mahindra, reducing our holding to 24.4%. The tax credit in respect of these items was £19m (Q3 2009/10: £63m).
Earnings per share
Adjusted EPS was 5.4p, up 32% due to the higher operating profit and lower net finance expense. Reported EPS was 4.5p, up 96% primarily due to lower specific item charges compared with the prior year.
Free cash flow
Free cash flow was an inflow of £515m (Q3 2009/10: £305m) before the pension deficit payment of £525m (Q3 2009/10: £525m) reflecting improved profitability and working capital, partially offset by higher capital expenditure. There was a net cash outflow of £54m relating to specific items (Q3 2009/10: £221m outflow) principally comprising BT Global Services restructuring charges. Excluding these items, free cash flow before specific items was £569m (Q3 2009/10: £526m). In addition, we received £67m from the disposal of a 5.5% interest in Tech Mahindra.
Net debt and liquidity
Net debt was £8,674m at 31 December 2010 (31 December 2009: £10,112m) a reduction of £1,438m in the year. During the quarter our 9.375% 2010 US$ bond matured resulting in a repayment of £1,742m, funded through existing cash and investment balances. After this repayment, cash and investment balances at 31 December 2010 were £1,195m.
The IAS 19 net pension position at 31 December 2010 was a deficit of £2.7bn net of tax (£3.7bn gross of tax), compared with a deficit of £5.7bn at 31 March 2010 (£7.9bn gross of tax). The market value of the BT Pension Scheme assets has increased by £1.1bn since 31 March 2010 to £36.4bn at 31 December 2010, and the value of liabilities has decreased by £3.0bn to £40.0bn. The liability calculation is based on the AA bond rate of 5.40% (31 March 2010: 5.50%) and future RPI inflation expectations of 3.35% (31 March 2010: 3.60%). The reduction in liabilities includes the £2.9bn impact of the government’s decision regarding the future indexation of pensions.
We now expect BT Global Services to be cash flow positive a year earlier than previously targeted, generating operating cash flow of around £100m in 2010/11. For 2011/12, we expect BT Global Services to generate operating cash flow of around £200m. Otherwise our outlook remains unchanged.
BT Global Services
Revenue decreased by 7% in the quarter, or 6% excluding foreign exchange movements. This decrease reflects the impact of lower wholesale and transit revenues (including the impact of mobile termination rate reductions), reduced UK calls and lines revenue and a one-off revenue adjustment of around £20m. We expect the decline in revenue to be slightly higher in the fourth quarter reflecting the effect of mobile termination rate reductions and the anniversary of the one-off benefit relating to a major contract milestone in the fourth quarter of the prior year. Underlying revenue trends are expected to be better in 2011/12.
Total order intake for the quarter was up 8% at £1.7bn. This reflects some significant contract wins and extensions with leading organisations in the global financial services sector. We also signed new contracts in the UK with Gala Coral for broadband and voice services across 1,600 outlets, and outside the UK with customers such as DigitPA (Agency for the Digital Public Administration) in Italy to connect 340 offices in 125 countries and ArcelorMittal to support operations in over 700 sites across more than 40 countries.
Net operating costs reduced by 8% during the quarter as a result of further progress with our cost efficiency initiatives, including further supplier negotiations, and the impact of the decline in wholesale call volumes and mobile termination rate reductions. EBITDA for the quarter was £141m, an increase of 15%. Depreciation and amortisation was down by 9%, resulting in a 51% improvement in the operating loss.
Operating cash flow for the quarter was £115m compared with an outflow of £27m last year and largely reflects an improvement in working capital. We have been targeting a more even cash profile over the year and benefited from some significant customer collections in the quarter including some receipts that were expected in the fourth quarter. In the nine months operating cash flow was an inflow of £49m compared with an outflow of £595m last year. We expect to generate positive operating cash flow of around £100m for the full year, a year earlier than previously targeted. We now also expect to generate around £200m of operating cash flow in 2011/12.
Total revenue decreased by 3%, an improvement on the 4% decline last quarter. Consumer revenue decreased by 4%, compared with a 6% decrease last quarter, reflecting growth in broadband and slowing line losses. Business revenue increased by 1%, the first growth in two years, driven by continuing growth in IT services and mobility and a slowing of the decline in calls revenue.
We had a good quarter in broadband with net additions of 188,000, representing a 53% market share of DSL and LLU net additions, our highest share for eight years. Our high share reflects the success of our broadband strategy, including BT Infinity and Wi-Fi, as well as our competitive offers and growth in our Plusnet brand. We also saw the take up of BT Vision more than double, with 40,000 net additions in the quarter, the highest for seven quarters.
Consumer ARPU increased to £322, up £5 over the previous quarter, largely due to the increasing penetration of broadband in our customer base.
Net operating costs decreased by 4% with savings being partially offset by the planned investments in subscriber acquisition costs, marketing and product development. The decrease in costs was driven by reductions in total labour costs of 6% resulting from productivity and efficiency improvements, coupled with procurement savings. EBITDA increased by 4% and with depreciation and amortisation down by 6%, operating profit increased by 7%.
Capital expenditure increased by 28% principally due to investment in supporting enhancements to our products and services and the fibre roll out in Northern Ireland. Operating cash flow reduced by 13% primarily due to a working capital outflow and increased capital expenditure, partly offset by the increase in EBITDA.
Adjusted revenue was broadly flat reflecting a reduction in broadband revenue, partly as a result of continued migration to LLU, being offset by growth in managed network services (MNS) revenue. MNS revenue represented 24% of external revenue (Q3 2009/10: 22%).
During the quarter, we signed a new contract with KCOM Group to provide next generation IP Voice Services nationally for resale to their small and medium size enterprise and corporate customers across the UK. This contract supports their move to a unified communications solution and builds on the ten year MNS contract signed with BT Wholesale in 2009.
Net operating costs were broadly flat, after reflecting the impact of changes in the internal trading model. EBITDA decreased by 2% and with depreciation and amortisation down by 10%, operating profit increased by 7%.
Capital expenditure increased by 28% reflecting the increased investment in our Ethernet and Wholesale Broadband Connect (ADSL2+) roll out. Operating cash flow decreased by 37% primarily due to the timing of working capital payments and increased capital expenditure.
Adjusted revenue was broadly flat year on year with an increase in volumes for both copper and Ethernet products being offset by the impact of price reductions. External revenue grew 16% due to LLU operators’ growth in end-users and points of presence. However, this has been partially offset by the migration from WLR to lower priced MPF rental revenue. Internal revenue decreased by 6% excluding the impact of the change in the internal trading model.
In the quarter, our overall copper line base increased by 43,000, compared with a loss of 67,000 last year, a significant improvement in trends.
Net operating costs reduced by 8%, after reflecting the impact of changes in the internal trading model. Excluding leaver costs, which were lower in the quarter, net operating costs declined by 5%, benefitting from process efficiencies in engineering activities. EBITDA increased by 13% and with depreciation and amortisation up by 3%, operating profit increased by 21%.
Capital expenditure increased by 31% due to the investment in fibre roll out and the increase in communications providers’ infrastructure build and provision activities. These volume increases have resulted in increased overtime, which has been partly offset by unit cost savings achieved through efficiencies and lower input costs from suppliers. The fibre roll out has been impacted by the poor weather but the programme is now progressing again at a good pace and we are seeing encouraging take up. Operating cash flow decreased by 2%, as the increase in EBITDA was largely offset by the additional capital expenditure.
A conference call for analysts and investors will be held at 10:30am today and a simultaneous webcast will be available at www.bt.com/results.
The fourth quarter and full year results to 31 March 2011 are expected to be announced on 12 May 2011.
The full release and financial accounts are available to download as a PDF documents .
Full financial release
Group income statement
Group cash flow statement
Group balance sheet
Notes to the condensed consolidated financial statements
Forward-looking statements – caution advised