BT GROUP PLC
RESULTS FOR THE FIRST QUARTER TO 30 JUNE 2010
BT Group plc (BT.L) today announces its results for the first quarter to 30 June 2010. Unless otherwise stated, the changes in results are year on year against the first quarter to 30 June 2009.
Key points:
- Revenue of £5,006m, down 4%
- Operating costs1 reduced by £291m
- Adjusted EBITDA2 of £1,399m, up 6%
- Adjusted profit before tax2 of £446m, up 17%
- Adjusted earnings per share2 of 4.4p, up 16%, reported earnings per share of 3.7p, up 32%
- Free cash flow of £415m, up £537m
- Net debt of £8.9bn, down by more than £1.6bn
- Fibre roll out passes over 1.5m UK premises in July
- Full year outlook remains unchanged
Ian Livingston, Chief Executive, commenting on the first quarter results, said:
“We have made an acceptable start to the year, delivering improved financial results while investing in the future of the business. In TV we are offering great value premium sports packages and can now compete on a more even playing field. We hit the first major milestone in our fibre roll out, passing over 1.5m premises, and we are now running at an average rate of around 100,000 premises passed every week. In BT Global Services we continue to win significant contracts due to our ability to deliver a world class service to our customers.
“Despite the challenging environment, these financial results underpin our outlook for the full year.”
Group results
Line of business results
BT Group plc
RESULTS FOR THE FIRST QUARTER TO 30 JUNE 2010
GROUP RESULTS
Revenue
Revenue was down 4% at £5,006m. Foreign exchange movements had no significant impact on revenue in the quarter. Excluding the reduction in low margin transit revenue, principally due to mobile termination rate reductions, revenue was down 3%.
The 2009/10 line of business comparative results have been restated for customer account moves from BT Retail to BT Wholesale effective from 1 April 2010, but these have no impact on total group results. The impact on line of business revenue and EBITDA in 2009/10 is detailed in Note 2.
We have also simplified the group’s internal trading model with effect from 1 April 2010. The effect of the changes is primarily to reduce internal revenue in both BT Wholesale and Openreach by around £62m per quarter in 2010/11. There is no impact from these changes on total group revenue. In the line of business commentaries for BT Wholesale and Openreach, revenue has been measured against an adjusted basis taking account of the changes in the internal trading model to enable a like for like comparison.
In the prior year, revenue, EBITDA and operating cash flow included a one-off benefit of £38m in BT Retail.
Operating results
As stated in our 2009/10 final results announcement, for 2010/11 onwards, group and line of business results are reported after leaver costs. The impact on line of business EBITDA in 2009/10 is detailed in Note 2.
Adjusted EBITDA increased by 6% to £1,399m reflecting continued progress in the delivery of cost reductions. This was despite the increase in the IAS 19 pension service cost of around £25m. Foreign exchange movements did not have a significant impact on EBITDA in the quarter.
Total group operating costs, before specific items, decreased by 6% to £4,424m, primarily due to reductions in total labour costs and the delivery of other cost savings by all lines of business. Depreciation and amortisation decreased by 1% to £729m. Excluding depreciation and amortisation, group operating costs reduced by £291m or 7%.
Total labour costs were £1,468m, a decrease of 8%. Direct staff costs, including leaver costs of £10m (Q1 2009/10: £45m), decreased by 4% to £1,253m. Other operating costs decreased by 9% to £2,442m, principally due to reductions in indirect labour costs.
Capital expenditure reduced by 6% to £523m but we still expect our capital expenditure for the full year to be around £2.6bn, with an acceleration in expenditure over the rest of the year reflecting the phasing of our major investment programmes.
Net finance expense
Net finance expense was £228m, an increase of £14m, principally reflecting the impact of the step-up in interest rates on some of our debt following last year’s credit rating change and inflation on our index linked bonds. We are now including the net interest on pensions within specific items because of its volatile nature.
Tax
The effective tax rate on the profit before specific items was 24.5% (Q1 2009/10: 23.0%) compared with the UK statutory rate of 28%, reflecting the continued focus on tax efficiency within the group.
Specific items
Specific items in the quarter were a net charge of £71m before tax, £53m after tax. Specific items comprise property rationalisation charges of £30m (Q1 2009/10: £nil), BT Global Services restructuring charges of £21m (Q1 2009/10: £41m) and net interest expense on pensions of £20m (Q1 2009/10: £69m).
Earnings per share
Adjusted EPS was 4.4p, up 16%. Reported EPS was 3.7p, up 32%.
Free cash flow
Free cash flow was an inflow of £415m, an improvement of £537m. The increase is due to the improved profitability and lower capital expenditure and also reflects progress towards achieving a less volatile cash flow profile through the year. Working capital outflow has significantly improved, benefitting from the receipt of around £200m relating to a major customer contract. Tax payments were £5m in the quarter, compared with a receipt of £210m in the prior year due to the tax settlement reached last year. There was a net cash outflow of £44m relating to specific items (Q1 2009/10: net outflow of £69m), principally comprising BT Global Services restructuring costs. Excluding these, free cash flow before specific items was £459m (Q1 2009/10: £53m outflow).
Net debt and liquidity
As a result of the strong cash flow performance, net debt reduced to £8,879m (31 March 2010: £9,283m; 30 June 2009: £10,517m). Our undrawn committed facilities of £2,150m and cash and investments of £2,448m provide us with a strong liquidity and funding position.
Pensions
The IAS 19 net pension position at 30 June 2010 was a deficit of £5.7bn net of tax (£7.9bn gross of tax), unchanged from 31 March 2010. The market value of the BT Pension Scheme assets was £33.9bn at 30 June 2010 (31 March 2010: £35.3bn). The value of the BT Pension Scheme liabilities was £41.7bn (31 March 2010: £43.0bn). The IAS 19 liability valuation is based on an AA bond rate of 5.30% (31 March 2010: 5.50%) and an inflation rate of 3.10% (31 March 2010: 3.60%).
The funding valuation and recovery plan remain under review by the Pensions Regulator. The Trustee’s estimate the funding valuation deficit at 31 March 2010 was around £6.6bn, a significant reduction on the position at 31 December 2008 of £9.0bn.
We believe that the recent announcement by the Minister of Pensions on the change to CPI for the indexation of pensions may lead to a reduction in the liabilities of the BT Pension Scheme. We are reviewing this in detail with our legal and actuarial advisers, and discussing it with the Trustee.
Outlook
At this stage, our outlook for the full year remains unchanged. However we expect the growth in EBITDA in the second quarter to be lower, due to the timing of the additional investments we announced in our 2009/10 final results.
BT Global Services
Revenue decreased by 3%. Foreign exchange movements had no significant impact in the quarter. The reduction reflects declines in UK calls and lines revenue, the broader economic conditions and the impact of mobile termination rate reductions.
Total order intake was £1.6bn (Q1 2009/10: £1.4bn). Contracts signed in the quarter included a four year extension with Unilever to supply managed services in over 100 countries; a two year extension with Connecting for Health for the N3 contract to provide managed network services; a three year extension with Capgemini to provide network services for the Metropolitan Police, and a new five year contract with Nationwide to provide managed security services. The UK government’s recent announcement of spending cuts represents both opportunities and challenges and we are actively engaged with the UK government in this regard.
Net operating costs decreased by 7%. We have made further progress with our cost efficiency initiatives during the quarter including supplier renegotiations and rationalisation across Asia, EMEA and the US. Our cost reduction activities helped deliver EBITDA of £130m, more than double the prior year.
Capital expenditure decreased by 21%, principally due to the timing of capital expenditure across certain of our larger customer contracts. The significant improvement in operating cash flow reflects the improvement in EBITDA, lower capital expenditure and a strong working capital performance, including the receipt of around £200m relating to a major customer contract.
BT Retail
Revenue decreased by 7%, although excluding the one-off benefit of £38m recognised last year the decrease was 5%. This decline was largely due to the ongoing reduction in calls and lines revenue. Excluding the one-off revenue benefit last year, our Consumer revenues were down 6%. Business revenues were down 4% reflecting a reduction in calls and lines revenue which was partially offset by increased growth of 10% in our managed solutions and IT services revenue.
Consumer ARPU increased to £314, up £5 over the previous quarter, principally due to increasing take up of broadband across our customer base. Broadband net additions were 96,000 in the quarter and BT’s retail market share was 40%. Since the launch in January of our fibre based broadband product, BT Infinity, we have seen order levels accelerate. In July we launched our premium TV sports packages, offering BT broadband customers Sky Sports packages from £6.99 a month.
Net operating costs decreased by 8%. This was principally due to reductions in total labour costs, achieved through a range of programmes including improvements to customer service at first point of contact and reducing levels of customer complaints by addressing root causes. Further cost savings have been achieved through simplifying our portfolio of products and services, renegotiating supplier contracts and enhancing our debtor management processes. EBITDA decreased by 2% although excluding the one-off benefit recognised last year, EBITDA increased by 7%. Depreciation and amortisation decreased by 5%. Operating profit declined by 1%, although excluding the one-off benefit recognised last year this was an increase of 11%.
Operating cash flow for the quarter was down 11%, although excluding the one-off benefit recognised last year, operating cash flow increased by 1%.
BT Wholesale
Revenue declined by 10%, although adjusting the prior year for the changes in the internal trading model, revenue reduced by 6%. Excluding the £44m reduction in low margin transit revenue, primarily due to mobile termination rate reductions, revenue declined by 2%. This decline reflected in part continued reductions in broadband and circuits revenue of £69m. Managed network services (MNS) revenue grew by 19% to £199m and now represents 24% of external revenue (Q1 2009/10: 19%). 42% of external revenue is now underpinned by long term contracts (Q1 2009/10: 34%).
During the quarter we signed in excess of £1bn of MNS contracts including a major contract with Orange to take on the management and development of its UK fixed line broadband infrastructure for consumers and SMEs.
Also, as part of our efforts to exploit growth in the global IP voice telephony market, during the quarter we launched the global availability of IP Exchange, the wholesale service that enables communications providers to connect VoIP to VoIP and VoIP to traditional voice calls. This is the first BT Wholesale service designed specifically for the global communications market. The service is already being used by over 100 fixed line and mobile operators in the UK.
Net operating costs reduced by 14%, partly due to changes in the internal trading model. Excluding these, net operating costs fell by 8% due to reductions in total labour resource and continued control of discretionary expenditure, as well as lower mobile termination rates. Benefits from various initiatives in customer services, such as improved performance in broadband operations and further automation of order entry processes delivered sustainable savings in the quarter. This resulted in EBITDA being broadly flat at £339m. Depreciation and amortisation decreased by 10%, contributing to an 11% increase in operating profit. Operating cash flow increased by £96m due to improved working capital.
Openreach
Revenue declined by 8%, although adjusting the prior year for changes in the internal trading model, revenue reduced by 4%. The decrease of 4% is primarily due to a one-off internal billing in the prior year to ensure compliance with the Undertakings. Otherwise, revenue was broadly flat as the growth in Ethernet volumes stimulated by lower prices and other connection revenues offset the continued migration from WLR to lower priced MPF. The ongoing growth of end-customers using other CPs' WLR and LLU products contributed to the switch from internal to external revenues, with external revenue increasing by 15%. Excluding the change in the trading model and the prior year one-off billing, internal revenue decreased by 6%.
Net operating costs reduced by 17% partly due to changes in the internal trading model offsetting the revenue decline and lower leaver costs. Excluding these, net operating costs reduced by 8% driven by cost savings delivered through efficiencies in provision and repair, planning and network build, and service centres. As a result, EBITDA increased by 8%. Depreciation and amortisation increased by 7% reflecting increased investment in software to support the business. Overall this contributed to an 8% increase in operating profit.
Capital expenditure increased by 16% due to the increased investment in our fibre roll out. In July we achieved the first major milestone in our fibre roll out passing over 1.5m UK premises, and we are now running at an average rate of around 100,000 premises passed per week. These premises now have access to super-fast fibre-based broadband at download speeds of up to 40Mbps. Operating cash flow was broadly maintained due to the improvement in EBITDA being offset by the increase in capital expenditure.
A conference call for analysts and investors will be held at 9.00am on July 29, 2010 and a simultaneous webcast will be available at www.bt.com/results
The second quarter and half year results for 2010/11 are expected to be announced on 11 November 2010.
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
