BT Group plc (BT.L) today announces its results for the first quarter to 30 June 2011.
Ian Livingston, Chief Executive, commenting on the results, said:
"We continue to make progress towards delivering our financial, operational and growth goals.
"We grew profit before tax1 by 20% at the same time as investing in the future of the business. Our share of DSL broadband net additions was 56%. Our super-fast broadband network has now passed over 5m premises and the customer base has almost trebled in the last six months. BT Global Services is making further progress in high growth economies and secured its largest ever contract in Latin America."
Operating results overview
Revenue was down 5% at £4,764m. Underlying revenue excluding transit was down 3%, with transit revenue down by £109m to £300m, including mobile termination rate reductions of £79m. Adjusted EBITDA increased by 3% to £1,436m reflecting the continued delivery of cost reductions. Foreign exchange movements had no significant impact on group revenue or EBITDA in the quarter.
Total operating costs before specific items decreased by 6% to £4,165m. Depreciation and amortisation increased by 1% to £739m due to capital expenditure on shorter-lived assets over recent years. Total operating costs excluding depreciation and amortisation decreased by £269m, of which payments to telecommunications operators (including transit) amounted to £136m.
Total labour costs of £1,457m, including leaver costs of £28m (Q1 2011: £10m), decreased by 3% after adjusting for certain labour related costs of £22m classified as Other costs in the prior year. Payments to telecommunications operators were down 14% due to lower mobile termination rates and reduced transit and wholesale call volumes. We saw further reductions across our other cost categories as the group continues to drive efficiency improvements.
Capital expenditure increased by 11% to £582m and is expected to be around £2.6bn for the full year.
We added 141,000 retail broadband customers, representing 56% of the DSL and LLU market net additions of 251,000. We remain the UK's number one broadband retailer with a customer base of 5.8m at 30 June 2011. This represents a 37% share of the total DSL and LLU market of 16.0m.
Our overall copper line base increased by 18,000, continuing the trend seen in recent quarters.
We have now passed more than 5m premises with our super-fast broadband network. Take up has been strong with the number of customers currently using the service having almost trebled over the last six months to over 200,000.
Net finance expense
Adjusted net finance expense was £168m, a reduction of £60m, primarily due to the reduction in net debt and the repayment of higher coupon debt in the second half of last year.
Profit before tax
Adjusted profit before tax was £533m, up 20%, reflecting the improved operating results and lower finance expense.
Tax
The effective tax rate on profit before specific items was 24.1% (Q1 2011: 24.5%). This compares with the UK statutory rate of 26% (Q1 2011: 28%) reflecting the continued focus on tax efficiency within the group.
Specific items
Specific items were a net charge of £16m before tax (Q1 2011: £71m) and £19m after tax (Q1 2011: £53m). Specific operating costs comprise property rationalisation charges of £44m (Q1 2011: £30m) and BT Global Services restructuring charges of £22m (Q1 2011: £21m). Net interest income on pensions was £50m (Q1 2011: £20m charge).
The UK Finance Bill, under which the UK corporation tax rate will reduce from 26% to 25% on 1 April 2012, was enacted on 5 July 2011. As a result, a specific tax credit of around £80m is expected to be recognised in the second quarter for the re-measurement of deferred tax balances.
Earnings per share
Adjusted EPS was 5.2p, up 18%, and reported EPS was 5.0p, up 35%.
Free cash flow
Adjusted free cash flow was an inflow of £308m, down £151m. The decrease reflects the receipt in the prior year of around £200m relating to a major customer contract, but is an improvement compared with the historical outflows in the first quarter. The cash cost of specific items was £61m, principally comprising BT Global Services restructuring charges of £46m and property rationalisation costs of £13m, giving reported free cash flow of £247m.
Net debt and liquidity
Net debt was £8,585m at 30 June 2011, a reduction of £231m compared with 31 March 2011. At 30 June 2011, the group had cash and investment balances of £600m and available facilities of £1.5bn.
Pensions
The IAS 19 net pension position at 30 June 2011 was a deficit of £1.8bn net of tax (£2.4bn gross of tax), compared with a deficit of £1.4bn at 31 March 2011 (£1.8bn gross of tax). The market value of the BT Pension Scheme (BTPS) assets was £36.7bn at 30 June 2011 (31 March 2011: £37.0bn). The value of the BTPS liabilities was £38.9bn (31 March 2011: £38.7bn).
Outlook
These results add to our confidence in delivering our outlook. This year we expect continuing good performances in BT Retail and Openreach to offset weakness in BT Wholesale EBITDA and to make further progress towards delivering our financial, operational and growth goals.
BT Global Services
Revenue decreased by 5%. Excluding a £64m reduction in transit revenue, underlying revenue excluding transit decreased by 2%.
Total order intake in the quarter was £1.6bn, up 2%, with the 12 month rolling order intake up 8%. Contracts signed in the quarter included a contract with Lancashire County Council for a range of services for local councils and schools; our largest ever contract in Latin America with the Brazilian Post Office and Telegraph Company (Correios) for managed network services; and a contract with National Australia Group for the provision of outsourced ICT services.
Net operating costs reduced by 6%, or 3% excluding transit. EBITDA was £138m, up 6%, after leaver costs of £2m. Last year leaver costs were included in the BT Global Services restructuring charge within specific items. Depreciation and amortisation reduced by 5% as a result of lower capital expenditure over the last two years. This contributed to a 31% reduction in the operating loss.
Capital expenditure increased by 14% principally due to investment in network infrastructure. Operating cash flow was £22m lower as improvements in working capital largely offset the receipt in the prior year of around £200m relating to a major customer contract. We continue to expect to generate around £200m of operating cash flow for the full year.
BT Retail
Revenue decreased by 4% reflecting the ongoing decline in calls and lines revenue. Consumer revenue decreased by 6% with lower calls and lines revenue partially offset by further growth in broadband revenue. Consumer ARPU increased by £4 in the quarter to £330 largely due to the increasing penetration of broadband in our customer base. Business revenue remained flat, despite fewer working days in April, with growth in IT services offsetting the decline in the voice business. During the quarter we reduced our consumer and business fixed to mobile call charges, after Ofcom lowered mobile termination rates, with BT playing a leading role in the Terminate the Rate campaign.
Broadband net additions were 141,000 in the quarter, representing a 56% market share of DSL and LLU net additions. Including cable, this was our best ever market share at 59% of broadband net additions. We added 71,000 customers to BT Infinity, our super-fast broadband service, which was around 50% more than last quarter and our customer base currently stands at over 200,000. The BT Vision customer base has now reached over 600,000.
The total number of wi-fi hotspots grew by more than 200,000 in the quarter bringing the total to over 3m. During the quarter BT entered into a strategic relationship with Hilton Worldwide to provide a fully managed suite of wi-fi and internet services across nearly 100 properties in the UK and the Republic of Ireland.
Net operating costs decreased by 6% principally due to reductions in total labour costs of 9% achieved through a range of cost transformation initiatives including our one-contact-resolution and right-first-time programmes. As a result EBITDA increased by 1% and with depreciation and amortisation decreasing by 8%, operating profit increased by 4%.
Capital expenditure increased by 11% reflecting continued investment in broadband in the UK and investment in fibre-based transmission in the Republic of Ireland. Operating cash flow was flat year on year.
BT Wholesale
Revenue declined by 5% reflecting a reduction in transit revenue of £43m driven by mobile termination rate reductions. Underlying revenue excluding transit decreased by 1% primarily due to broadband lines migrating to LLU and the impact of regulatory decisions. Managed network services (MNS) revenue was flat, as sales lead times for new contracts have lengthened. MNS and IP services revenue in the quarter represented 33% of external revenue (Q1 2011: 30%).
We continued to upgrade customers to Wholesale Broadband Connect (WBC), our next generation copper broadband service. The number of Ethernet circuits installed has also continued to grow and has almost trebled since last year. Since its launch a year ago our global IP Exchange platform, which enables VoIP-to-VoIP and VoIP-to-traditional voice call interconnection, now has over 150 communications provider customers. During the quarter we transferred a further 232,000 LLU lines onto our broadband platform, substantially completing the migration under one of our largest MNS contracts.
Net operating costs reduced by 3%. Excluding the impact of transit, net operating costs were up 4% as the benefit of lower labour costs was offset by the impact of changes in the product mix and network migration costs on some of our MNS contracts. As a result EBITDA declined by 9% and with depreciation and amortisation reducing by 1%, operating profit declined by 16%.
Capital expenditure increased by £7m principally as a result of increased investment in our WBC and Ethernet roll-out. Operating cash flow decreased by 45% driven by the EBITDA decline and the timing of debtor receipts.
Openreach
Revenue increased by 5% due to growth in Ethernet, broadband and LLU, partly offset by the reduction in WLR. This was the strongest reported revenue growth since the formation of Openreach.
Our overall copper line base increased by 18,000 continuing the trend seen in recent quarters as customers recognise the advantages of fixed-line broadband.
Net operating costs increased by 4% due to pay inflation, additional engineering activity and higher leaver costs, which have offset efficiency improvements. EBITDA increased by 5% and depreciation and amortisation increased by 8% reflecting the investment in super-fast broadband and Ethernet. As a result operating profit increased by 3%.
Capital expenditure increased by 7% principally due to the investment in our super-fast broadband network which now passes more than 5m premises. We are on track to make fibre-based services available to 10m UK premises by 2012 and to two thirds of premises by the end of 2015. Operating cash flow was down 21% primarily due to the timing of debtor receipts and payments to suppliers.
Ian Livingston, Chief Executive, commenting on the results, said:
"We continue to make progress towards delivering our financial, operational and growth goals.
"We grew profit before tax1 by 20% at the same time as investing in the future of the business. Our share of DSL broadband net additions was 56%. Our super-fast broadband network has now passed over 5m premises and the customer base has almost trebled in the last six months. BT Global Services is making further progress in high growth economies and secured its largest ever contract in Latin America."
Operating results overview
Revenue was down 5% at £4,764m. Underlying revenue excluding transit was down 3%, with transit revenue down by £109m to £300m, including mobile termination rate reductions of £79m. Adjusted EBITDA increased by 3% to £1,436m reflecting the continued delivery of cost reductions. Foreign exchange movements had no significant impact on group revenue or EBITDA in the quarter.
Total operating costs before specific items decreased by 6% to £4,165m. Depreciation and amortisation increased by 1% to £739m due to capital expenditure on shorter-lived assets over recent years. Total operating costs excluding depreciation and amortisation decreased by £269m, of which payments to telecommunications operators (including transit) amounted to £136m.
Total labour costs of £1,457m, including leaver costs of £28m (Q1 2011: £10m), decreased by 3% after adjusting for certain labour related costs of £22m classified as Other costs in the prior year. Payments to telecommunications operators were down 14% due to lower mobile termination rates and reduced transit and wholesale call volumes. We saw further reductions across our other cost categories as the group continues to drive efficiency improvements.
Capital expenditure increased by 11% to £582m and is expected to be around £2.6bn for the full year.
We added 141,000 retail broadband customers, representing 56% of the DSL and LLU market net additions of 251,000. We remain the UK's number one broadband retailer with a customer base of 5.8m at 30 June 2011. This represents a 37% share of the total DSL and LLU market of 16.0m.
Our overall copper line base increased by 18,000, continuing the trend seen in recent quarters.
We have now passed more than 5m premises with our super-fast broadband network. Take up has been strong with the number of customers currently using the service having almost trebled over the last six months to over 200,000.
Net finance expense
Adjusted net finance expense was £168m, a reduction of £60m, primarily due to the reduction in net debt and the repayment of higher coupon debt in the second half of last year.
Profit before tax
Adjusted profit before tax was £533m, up 20%, reflecting the improved operating results and lower finance expense.
Tax
The effective tax rate on profit before specific items was 24.1% (Q1 2011: 24.5%). This compares with the UK statutory rate of 26% (Q1 2011: 28%) reflecting the continued focus on tax efficiency within the group.
Specific items
Specific items were a net charge of £16m before tax (Q1 2011: £71m) and £19m after tax (Q1 2011: £53m). Specific operating costs comprise property rationalisation charges of £44m (Q1 2011: £30m) and BT Global Services restructuring charges of £22m (Q1 2011: £21m). Net interest income on pensions was £50m (Q1 2011: £20m charge).
The UK Finance Bill, under which the UK corporation tax rate will reduce from 26% to 25% on 1 April 2012, was enacted on 5 July 2011. As a result, a specific tax credit of around £80m is expected to be recognised in the second quarter for the re-measurement of deferred tax balances.
Earnings per share
Adjusted EPS was 5.2p, up 18%, and reported EPS was 5.0p, up 35%.
Free cash flow
Adjusted free cash flow was an inflow of £308m, down £151m. The decrease reflects the receipt in the prior year of around £200m relating to a major customer contract, but is an improvement compared with the historical outflows in the first quarter. The cash cost of specific items was £61m, principally comprising BT Global Services restructuring charges of £46m and property rationalisation costs of £13m, giving reported free cash flow of £247m.
Net debt and liquidity
Net debt was £8,585m at 30 June 2011, a reduction of £231m compared with 31 March 2011. At 30 June 2011, the group had cash and investment balances of £600m and available facilities of £1.5bn.
Pensions
The IAS 19 net pension position at 30 June 2011 was a deficit of £1.8bn net of tax (£2.4bn gross of tax), compared with a deficit of £1.4bn at 31 March 2011 (£1.8bn gross of tax). The market value of the BT Pension Scheme (BTPS) assets was £36.7bn at 30 June 2011 (31 March 2011: £37.0bn). The value of the BTPS liabilities was £38.9bn (31 March 2011: £38.7bn).
Outlook
These results add to our confidence in delivering our outlook. This year we expect continuing good performances in BT Retail and Openreach to offset weakness in BT Wholesale EBITDA and to make further progress towards delivering our financial, operational and growth goals.
BT Global Services
Revenue decreased by 5%. Excluding a £64m reduction in transit revenue, underlying revenue excluding transit decreased by 2%.
Total order intake in the quarter was £1.6bn, up 2%, with the 12 month rolling order intake up 8%. Contracts signed in the quarter included a contract with Lancashire County Council for a range of services for local councils and schools; our largest ever contract in Latin America with the Brazilian Post Office and Telegraph Company (Correios) for managed network services; and a contract with National Australia Group for the provision of outsourced ICT services.
Net operating costs reduced by 6%, or 3% excluding transit. EBITDA was £138m, up 6%, after leaver costs of £2m. Last year leaver costs were included in the BT Global Services restructuring charge within specific items. Depreciation and amortisation reduced by 5% as a result of lower capital expenditure over the last two years. This contributed to a 31% reduction in the operating loss.
Capital expenditure increased by 14% principally due to investment in network infrastructure. Operating cash flow was £22m lower as improvements in working capital largely offset the receipt in the prior year of around £200m relating to a major customer contract. We continue to expect to generate around £200m of operating cash flow for the full year.
BT Retail
Revenue decreased by 4% reflecting the ongoing decline in calls and lines revenue. Consumer revenue decreased by 6% with lower calls and lines revenue partially offset by further growth in broadband revenue. Consumer ARPU increased by £4 in the quarter to £330 largely due to the increasing penetration of broadband in our customer base. Business revenue remained flat, despite fewer working days in April, with growth in IT services offsetting the decline in the voice business. During the quarter we reduced our consumer and business fixed to mobile call charges, after Ofcom lowered mobile termination rates, with BT playing a leading role in the Terminate the Rate campaign.
Broadband net additions were 141,000 in the quarter, representing a 56% market share of DSL and LLU net additions. Including cable, this was our best ever market share at 59% of broadband net additions. We added 71,000 customers to BT Infinity, our super-fast broadband service, which was around 50% more than last quarter and our customer base currently stands at over 200,000. The BT Vision customer base has now reached over 600,000.
The total number of wi-fi hotspots grew by more than 200,000 in the quarter bringing the total to over 3m. During the quarter BT entered into a strategic relationship with Hilton Worldwide to provide a fully managed suite of wi-fi and internet services across nearly 100 properties in the UK and the Republic of Ireland.
Net operating costs decreased by 6% principally due to reductions in total labour costs of 9% achieved through a range of cost transformation initiatives including our one-contact-resolution and right-first-time programmes. As a result EBITDA increased by 1% and with depreciation and amortisation decreasing by 8%, operating profit increased by 4%.
Capital expenditure increased by 11% reflecting continued investment in broadband in the UK and investment in fibre-based transmission in the Republic of Ireland. Operating cash flow was flat year on year.
BT Wholesale
Revenue declined by 5% reflecting a reduction in transit revenue of £43m driven by mobile termination rate reductions. Underlying revenue excluding transit decreased by 1% primarily due to broadband lines migrating to LLU and the impact of regulatory decisions. Managed network services (MNS) revenue was flat, as sales lead times for new contracts have lengthened. MNS and IP services revenue in the quarter represented 33% of external revenue (Q1 2011: 30%).
We continued to upgrade customers to Wholesale Broadband Connect (WBC), our next generation copper broadband service. The number of Ethernet circuits installed has also continued to grow and has almost trebled since last year. Since its launch a year ago our global IP Exchange platform, which enables VoIP-to-VoIP and VoIP-to-traditional voice call interconnection, now has over 150 communications provider customers. During the quarter we transferred a further 232,000 LLU lines onto our broadband platform, substantially completing the migration under one of our largest MNS contracts.
Net operating costs reduced by 3%. Excluding the impact of transit, net operating costs were up 4% as the benefit of lower labour costs was offset by the impact of changes in the product mix and network migration costs on some of our MNS contracts. As a result EBITDA declined by 9% and with depreciation and amortisation reducing by 1%, operating profit declined by 16%.
Capital expenditure increased by £7m principally as a result of increased investment in our WBC and Ethernet roll-out. Operating cash flow decreased by 45% driven by the EBITDA decline and the timing of debtor receipts.
Openreach
Revenue increased by 5% due to growth in Ethernet, broadband and LLU, partly offset by the reduction in WLR. This was the strongest reported revenue growth since the formation of Openreach.
Our overall copper line base increased by 18,000 continuing the trend seen in recent quarters as customers recognise the advantages of fixed-line broadband.
Net operating costs increased by 4% due to pay inflation, additional engineering activity and higher leaver costs, which have offset efficiency improvements. EBITDA increased by 5% and depreciation and amortisation increased by 8% reflecting the investment in super-fast broadband and Ethernet. As a result operating profit increased by 3%.
Capital expenditure increased by 7% principally due to the investment in our super-fast broadband network which now passes more than 5m premises. We are on track to make fibre-based services available to 10m UK premises by 2012 and to two thirds of premises by the end of 2015. Operating cash flow was down 21% primarily due to the timing of debtor receipts and payments to suppliers.
