BT Group plc (BT.L) today announced its results for the first quarter to 30 June 2014.
Gavin Patterson, Chief Executive, commenting on the results, said:
“We have made a good start to the year. We have delivered growth in underlying revenue excluding transit and in profit before tax, and free cash flow was strong.
“Our fibre broadband network now covers more than twenty million premises. We are passing over 70,000 additional premises each week and demand is strong with more than three million already signed up. We have announced a further 2,500 new jobs in recent months to support our strategic investments in fibre and customer service.
“I’m excited by the launch of BT One Phone for the business market as well as our other mobility plans. We’ll say more on these later this financial year. The second season of BT Sport is about to start with a great line-up of content and it will continue to be free with BT Broadband. We are building on solid foundations and I am confident we will deliver on our strategy.”
Key points for the first quarter:
- Underlying revenue excluding transit up 0.5%
- Cost transformation running at a similar pace to last financial year; underlying operating costs4 excluding transit and BT Sport down 3%
- EBITDA1 flat and earnings per share1 up 10%
- BT Global Services and BT Business both grew EBITDA despite lower revenue
- Our outlook remains unchanged
1 Before specific items. Specific items are defined below
2 Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals
3 Before specific items, purchases of telecommunications licences, pension deficit payments and the cash tax benefit of pension deficit payments
4 Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals, and is before depreciation and amortisation
GROUP RESULTS FOR THE FIRST QUARTER TO
30 JUNE 2014
Line of business results1
1 Before specific items
2 Before purchases of telecommunications licences
3 Before specific items, purchases of telecommunications licences, pension deficit payments and the cash tax benefit of pension deficit payments
4 Certain results have been restated. See Note 1 to the condensed consolidated financial statements
1. The commentary focuses on the trading results on an adjusted basis, which is a non-GAAP measure, 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 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 with 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.
2. Trends in underlying revenue, trends in underlying operating costs, and underlying EBITDA are non-GAAP 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 and underlying operating costs excluding transit as transit traffic is low-margin and is significantly affected by reductions in mobile termination rates.
BT Group plc
GROUP RESULTS FOR THE QUARTER TO 30 JUNE 2014
Our key measure of the group’s revenue trend, underlying revenue excluding transit, was up 0.5%. This was driven by BT Consumer where revenue was up 10% primarily reflecting the benefit of BT Sport and the take-up of fibre broadband.
BT Global Services revenue was lower with the benefits of our investments in the high-growth regions of the world being offset by revenue declines elsewhere, including in the UK public sector. BT Business revenue declined reflecting lower calls and lines volumes. Ofcom’s Narrowband Market Review and the migration of services off a previously terminated contract again impacted BT Wholesale revenue. Openreach revenue remained flat as regulatory price changes offset growth in fibre broadband.
Our cost transformation is running at a similar pace to last financial year, with underlying operating costs3 excluding transit and BT Sport down 3%. Our lines of business showed strong management of costs as we continue to share best practice around the group.
We have passed more than 20m premises with our fibre broadband rollout. Openreach achieved 341,000 net fibre additions, 29% more than last year. Over 3m homes and businesses are connected to our fibre broadband network, 15% of those passed. We have more than 2.3m retail fibre broadband customers, having added 226,000 this quarter. The UK broadband market1 grew by 163,000, of which our share was 104,000 or 64%.
Revenue of £4,354m was down 2% reflecting a £71m negative impact from foreign exchange movements and a £46m reduction in transit revenue. Underlying revenue excluding transit was up 0.5% compared with a 1.1% decline last year.
Operating costs2 decreased by £90m to £2,919m. Underlying operating costs3 excluding transit were up 1% but decreased 3% excluding BT Sport.
Net labour costs decreased 4%. Payments to telecommunications operators were down 18% primarily reflecting lower transit volumes in BT Wholesale and lower call volumes.
Property and energy, network operating and IT and other costs increased £67m, or 6%, with higher BT Sport costs partly offset by our cost transformation activities. Within this, BT Sport programme rights charges were £78m (Q1 2013/14: £nil).
Adjusted EBITDA of £1,435m was flat. Depreciation and amortisation of £652m was down 6%, in line with last quarter. Adjusted net finance expense was £145m, down £1m.
Adjusted profit before tax was £638m, up 7% reflecting the decline in depreciation and amortisation. Reported profit before tax (which includes specific items) was £546m, up 22%. The effective tax rate on the profit before specific items was 19.9% (Q1 2013/14: 22.6%).
Adjusted EPS of 6.5p was up 10%. Reported EPS (which includes specific items) was 5.6p, up 27%. These are based on a weighted average number of shares in issue of 7,856m (Q1 2013/14: 7,839m).
Specific items resulted in a net charge after tax of £70m (Q1 2013/14: £114m). Restructuring charges of £44m (Q1 2013/14: £84m) were incurred as part of our group-wide restructuring programme and relate primarily to leavers, and property and network rationalisation. Net interest expense on pensions was £73m (Q1 2013/14: £59m). We recognised a £25m gain on the disposal of an investment.
1 DSL and fibre
2 Before depreciation and amortisation
3 Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals, and is before depreciation and amortisation
Capital expenditureCapital expenditure1 was £516m. This was 13% lower than last year reflecting the phasing of expenditure within the year. Capital expenditure was net of £73m grant funding (Q1 2013/14: £12m) relating to our activity on the Broadband Delivery UK (BDUK) programme. The increase in funding compared with last year broadly offset the overall increase in our fibre capital expenditure.
Free cash flow
Normalised free cash flow2 was an inflow of £122m, £182m better than last year. The improvement reflects movements in working capital and lower levels of capital expenditure, partly offset by higher tax payments. The net cash cost of specific items was £80m (Q1 2013/14: £134m) mainly comprising restructuring costs of £63m (Q1 2013/14: £106m) and property rationalisation costs of £9m (Q1 2013/14: £12m). After specific items and a £19m cash tax benefit from pension deficit payments, reported free cash flow was an inflow of £61m (Q1 2013/14: £174m outflow).
Net debt and liquidity
Net debt was £7,079m at 30 June 2014, an increase of £51m since 31 March 2014 but £979m lower than at 30 June 2013. We incurred a cash cost of £141m on our share buyback programme, acquiring 39m shares. We continue to expect to spend around £300m on our share buyback programme for the year as a whole.
We issued a five year €1bn bond with an effective annualised interest rate of 2.7%. Proceeds of £811m were used in part to repay a €750m (£631m) bond which matured in the quarter. Debt of £0.5bn matured in July and a further £0.2bn is repayable during the remainder of 2014/15. At 30 June 2014 the group had cash and current investment balances of £2.2bn and available facilities of a further £1.5bn, providing us with a strong liquidity and funding position.
The IAS 19 net pension position at 30 June 2014 was a deficit of £5.8bn net of tax (£7.2bn gross of tax), compared with £5.6bn (£7.0bn gross of tax) at 31 March 2014. The higher deficit primarily reflects a fall in the real discount rate. The IAS 19 accounting position and key assumptions for the valuation are:
We have commenced work on the next triennial actuarial valuation of the BT Pension Scheme (‘the Scheme’) which will be calculated as at 30 June 2014.
On 4 July 2014 the Scheme entered into arrangements to hedge part of the Scheme’s exposure to potential increases in longevity. These arrangements required no additional cash contributions from BT.
On 16 July 2014 the Court of Appeal handed down its judgment on the scope and extent of the Crown Guarantee for the Scheme, which was granted by the Government on BT’s privatisation. All parties now need to consider the judgment and its consequences in detail, including the possibility of an appeal to the Supreme Court. The Crown Guarantee is not taken into account for the purposes of the actuarial valuation of the Scheme and is an entirely separate matter, only being relevant in the highly unlikely event that BT became insolvent.
1 Before purchases of telecommunications licences
2 Before specific items, purchases of telecommunications licences, pension deficit payments and the cash tax benefit of pension deficit payments
In June 2014, Ofcom issued its final statements on its review of the Fixed Access and Wholesale Broadband Access markets. New price controls over certain services in these markets have been imposed from 1 July 2014 to 31 March 2017. In most cases, as agreed with Ofcom, the controls have been backdated to 1 April 2014. We expect the Fixed Access charge controls to impact Openreach by £80m-£100m this year.
In June 2014, Ofcom completed an investigation following a complaint which alleged that BT had abused its dominant position, by squeezing the margin between the prices BT Consumer charged for some of its fibre broadband products and the wholesale price charged by Openreach. Ofcom provisionally found that there were no grounds for action. It is also consulting on imposing an ex ante test by which we must demonstrate that we maintain an appropriate margin between prices for our wholesale and retail fibre access products.
In July 2014, the Supreme Court overturned a Court of Appeal decision, made in July 2012, which had disallowed our ladder pricing policy. Ladder pricing links the amounts that BT charges mobile operators for mobile calls to 080X, 084X and 087X numbers terminating on our network to the retail price charged by mobile operators to their customers. We will now start proceedings to recover the money that was refunded to the mobile operators as a result of the Court of Appeal ruling. We are awaiting the Court Order after which we will also be pursuing claims for further termination charges for the period since the Court of Appeal ruling. Any ongoing benefit will depend on whether the mobile operators alter their pricing which would impact the termination rates we charge them.
BT Global Services
Revenue declined 6% mainly reflecting a £68m negative impact from foreign exchange movements and a £12m decrease in transit revenue. Underlying revenue excluding transit decreased 2%.
As expected, public sector revenue in the UK declined due to lower levels of expenditure in the sector and our focus on only pursuing business that generates economic value. This decline was partially offset by an increase in underlying revenue in the high-growth regions of Asia Pacific, Latin America, Turkey and the Middle East and Africa.
With effect from 1 April 2014 we have transferred our Conferencing and Security businesses into BT Global Services. We did this to allow us to simplify the way we provide integrated collaboration solutions to our global customers, help us better compete in the market and take full advantage of global opportunities.
Total order intake was £1.1bn. This was down 38% reflecting a large contract renewal with Credit Suisse in the prior year and a smaller number of contracts coming up for renewal in this quarter. Order intake was £6.3bn on a rolling twelve month basis, down 8%.
We signed contracts across all of our key geographies. We agreed a new networking and IT services contract with the Security Industry Authority, the regulatory and licensing body for the private security industry in the UK. We also agreed a contract with a subsidiary of Capita, Smart DCC, to deliver a security solution for the UK smart metering programme. In the US, we extended our relationship with MasterCard for global network services.
Operating resultsOperating costs declined 7%. Underlying operating costs excluding transit declined 2% reflecting the benefit of our cost transformation programmes as well as the reduction in revenue.
EBITDA increased 1%. Excluding foreign exchange movements, underlying EBITDA increased 4%. Depreciation and amortisation reduced 8% due to lower capital expenditure in recent years.
Capital expenditure declined 9% due to the phasing of expenditure. Operating cash flow was an outflow of £337m (Q1 2013/14: £262m) reflecting the usual seasonal phasing of working capital as well as the previously disclosed early customer receipts of around £60m that we received in the fourth quarter of last year.
Revenue and underlying revenue excluding transit were down 3%.
SME & Corporate voice revenue decreased 4%. The decline in call and lines volumes has continued, with the number of business lines down 8%, partly reflecting the migration of customers to VoIP services.
SME & Corporate data and networking revenue was flat, with growth in fibre broadband offset by a decline in networking revenue.
IT services revenue decreased 2%, a disappointing performance, driven by lower hardware sales.
Excluding a £3m negative impact from foreign exchange movements, BT Ireland underlying revenue excluding transit declined 3%. Growth in the Republic of Ireland was more than offset by a decline in networking revenue in Northern Ireland.
In July, we launched BT One Phone, a new service that brings together all of a company’s office phone system and mobile needs into a single service delivered on a mobile phone. This fixed-mobile convergence offering is hosted in the cloud and provides business customers with a solution that is convenient and flexible, at a lower cost of ownership.
Order intake was up 3% for the quarter at £484m and down 6% to £2,111m on a rolling twelve month basis.
Operating costs were down 5%, reflecting the impact of our cost transformation programmes and the reduction in revenue, and drove 2% growth in EBITDA. We have continued to realise cost synergies by combining BT Enterprises, the non-consumer parts of BT Ireland and the previous Business unit together into one organisation. This has enabled us to reduce total labour resource by 9%.
Depreciation and amortisation was down 19% due to lower capital expenditure in recent years. This contributed to operating profit growing 8%.
Capital expenditure decreased £9m due to the phasing of expenditure. Operating cash flow increased 74%, mainly driven by the timing of working capital movements.
Revenue increased 10%, with 26% growth in broadband and TV revenue reflecting the impact of BT Sport. The improved performance in calls and lines revenue continued with growth of 2%. ARPU increased 8% year on year to £398 and BT Wi-fi usage doubled to over 12bn minutes.
Consumer line losses of 69,000 were 47% better than last year. Including business, BT added 104,000 retail broadband customers, 64% of the DSL and fibre broadband market net additions. Fibre continued to grow strongly with 226,000 BT retail fibre broadband net additions, up 15%, taking the customer base to over 2.3m.
We commenced the exchange of legacy set-top boxes in the quarter which resulted in some TV customer churn, as anticipated. As part of this process, we have also removed 35,000 inactive customers from our TV base. Excluding these, we added 40,000 TV customers in the quarter.
BT Sport had a strong quarter with continued growth in the residential subscriber base. We now have more than 19,000 pubs, clubs, hotels and other commercial premises signed up to BT Sport. We provided coverage from this year’s showpiece grass court tennis tournaments in the run-up to Wimbledon following an agreement with the Lawn Tennis Association. Following the acquisition of rights to the Portuguese Primeira Liga, we now have live football from nine top-flight leagues. The new European Rugby Championship and the European Rugby Challenge Cup competitions, for which we have some of the top picks, launch in the new season.
Operating costs increased 12% with higher costs associated with BT Sport and the increased revenue partly offset by our cost transformation activities.
EBITDA was up 3%. Depreciation and amortisation was in line with the prior year and operating profit was up 4%.
Capital expenditure reduced 30% partly reflecting our investment in BT Sport in the prior year. Operating cash flow increased 55% mainly reflecting the timing of working capital and the lower capital expenditure.
RevenueRevenue decreased 18%. This includes a £34m decline in transit revenue driven by lower volumes.
Underlying revenue excluding transit decreased 14%. This was primarily due to a 21% decline in managed solutions revenue which reflects a particularly strong performance in the prior year as well as the ongoing impact of the Post Office contract termination.
Traditional calls, lines and circuits revenue declined 23%, partly due to lower fixed termination rates following Ofcom’s Narrowband Market Review.
Broadband revenue declined 15% as lines continue to migrate to LLU. We continue to see strong growth in IP services, with revenue up 42%.
Order intake was £264m, compared with £509m last year, and was down 18% to £1,665m on a rolling twelve month basis.
Operating costs decreased 17%. Underlying operating costs excluding transit reduced 12% reflecting lower cost of sales as a result of the decline in revenue. Selling and general administration costs reduced 17%.
EBITDA decreased 20% reflecting the lower revenue. Depreciation and amortisation decreased 8% and operating profit decreased 28%.
Capital expenditure declined £11m or 17% driven by lower spend on the Wholesale Broadband Connect rollout programme. Operating cash flow of £11m was £42m better than last year reflecting improved billing processes and the timing of customer receipts.
RevenueRevenue was flat with regulatory price changes having a negative impact of around £40m, the equivalent of 3%. This was mostly offset by 46% growth in fibre broadband revenue. We expect the regulatory impact to be higher in the second quarter as the remaining Fixed Access Market Review controls come into effect.
The physical line base grew by 12,000 and has increased by 82,000 over the past twelve months.
We have passed more than 20m premises with our fibre broadband rollout. We achieved 341,000 net fibre connections, an increase of 29%. That brings the number of homes and businesses connected to more than 3m, 15% of those passed. Overall DSL and fibre broadband market net additions were 163,000, 14% down on last year.
We have committed to increase transparency around our customer service performance and have started publishing regular reports on the Openreach website which show how we are performing against a set of provision and repair service measures.
Operating costs reduced 3% as cost efficiencies offset pay inflation and the additional engineering resource we have recruited to support fibre provision in rural areas. EBITDA increased 3%, and with depreciation and amortisation down 5%, operating profit was up 17%.
Capital expenditure decreased 8%. While our commercial fibre build is nearing completion, we have increased the overall intensity of our fibre rollout through the BDUK programme. We received grant funding of £73m (Q1 2013/14: £12m) relating to the BDUK programme with the increase from last year broadly offsetting the overall increase in our fibre capital expenditure. Operating cash flow increased 11%.
A conference call for analysts and investors will be held at 9.00am today and a simultaneous webcast will be available at www.bt.com/results
The second quarter and half year results for 2014/15 are expected to be announced on Thursday 30 October 2014.