BT GROUP PLC Results for the second quarter and half year to 30 September 2013

BT Group plc (BT.L) today announced its results for the second quarter and half year to 30 September 2013. 

Gavin Patterson, Chief Executive Officer, commenting on the results, said: 

“These are good results, with growth in earnings per share and free cash flow. 

“This has been our strongest ever quarter for fibre take-up with Openreach net connections up 70%. Our fibre network now passes more than 17 million premises. It is open to all and many other service providers have now got behind it. 

“BT Sport has made a confident start and is already delivering for viewers. More than two million of our customers are signed up to it and our wholesale contract with Virgin Media means it is available to around four million homes in total. It is also delivering for the business, helping us achieve a record 93% share4 of broadband net adds in the quarter, our lowest line losses for five years and 4% revenue growth in our BT Retail Consumer business. 

“BT Retail’s Business division again saw good growth in IT services while BT Global Services and BT Wholesale both generated strong order books. 

“I feel privileged to be the new CEO of BT and am determined to build on the strong foundations that are already in place. These are exciting times for the company and we are determined to deliver our strategy with energy and discipline.” 

Financial highlights for the second quarter:

• Key revenue measure5 down 0.5% compared with a 5.5% decline in the prior year
• EBITDA decline reflects the expected BT Sport investment 
• Efficiencies from cost transformation programmes running at a faster pace than in the first quarter 
• Profit before tax2 and earnings per share2 up 2% 
• Interim dividend up 13% to 3.4p 
• Outlook reaffirmed

1 Results for the second quarter and half year to 30 September 2012 have been 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 
4 DSL and fibre, excluding cable 
5 Underlying revenue excluding transit 

RESULTS FOR THE SECOND QUARTER AND HALF YEAR TO 30 SEPTEMBER 2013
Group results

Note: Reported revenue and EBITDA in the second quarter and half year to 30 September 2012 included a specific item charge of £85m and £58m, respectively, relating to the retrospective regulatory impact of the Court of Appeal decision on ladder pricing.

Line of business results2

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 telecommunications licences, pension deficit payments and the cash tax benefit of pension deficit payments 
n/m = not meaningful 

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 SECOND QUARTER 
TO 30 SEPTEMBER 2013

Overview 

We have made further progress towards profitable revenue growth. Underlying revenue excluding transit was down only 0.5%, compared with a decline of 5.5% in the prior year, with the effect of regulation offsetting some strong performances within the business. 

The rollout of our fibre broadband network continues at a strong pace. We have now passed more than 17m premises in the UK with more than 2m homes and businesses now using our fibre-based services. All of our major communications provider (CP) customers are actively marketing and selling fibre. This contributed to Openreach’s best ever quarter for fibre take-up with 316,000 net connections, an increase of 70%. We added 195,000 retail fibre broadband customers, up 24%, and our base now stands at around 1.7m. The UK broadband market1 grew by 168,000 in the quarter, 12% more than the second quarter last year, of which our share was 156,000, up 92%. 

We are making progress with extending the reach of fibre to rural areas. We have now won 44 regional contracts3, supporting the government’s focus on regional fibre broadband, and are already rolling out fibre in 13 of these. 

This quarter we delivered the successful launch of BT Sport. It now has over 2m customers and we saw the benefit it is having on our broadband, TV and line customer numbers. Our line losses were the lowest for five years and our retail share of broadband market growth1was the highest on record, at 93%. The wholesale contract we agreed with Virgin Media takes the reach of BT Sport to around 4m homes. 

BT Global Services’ investments in the high-growth regions of the world continue to help offset revenue declines elsewhere. BT Business saw good growth in IT services and BT Wholesale’s performance was supported by our investments in IP Exchange. BT Global Services and BT Wholesale both generated strong order books. 

We are focusing on improving our end-to-end processes – not only will this improve customer service but it will also generate efficiencies across the group. We achieved further savings in the quarter as we drive cost transformation across our business and implement our group-wide restructuring programme. Excluding our investment in BT Sport, our cost efficiency savings are running at a faster pace than in the first quarter. 

Income statement 

Our key measure of the group’s revenue trend, underlying revenue excluding transit, was down 0.5% as the impact of regulatory price reductions was largely offset by a strong performance in BT Retail’s Consumer business. Adjusted revenue of £4,491m was flat with a £36m positive impact from foreign exchange movements and an £8m positive impact from acquisitions partly offset by a £24m reduction in transit revenue. 

Operating costs2 were up 2%. Our underlying operating costs2 excluding transit were up 1% as the efficiencies from our cost transformation programmes were more than offset by our investment of around £140m in BT Sport and an £18m increase in the non-cash pensions operating charge. Excluding these, underlying operating costs2 excluding transit were down 5%. 

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

Net labour costs decreased by 2%. Payments to telecommunications operators were down 2% due to lower mobile termination rates. Property and energy costs were 3% lower partly reflecting the insourcing of our facilities management and our focus on energy efficiency which offset higher energy prices. Network operating and IT costs were 4% lower as we rationalise our networks and systems. Other operating costs increased by 13% principally due to BT Sport. 

Adjusted EBITDA of £1,434m was down 4%. This included the impact of our investment in BT Sport, which was consistent with our indication last quarter. Excluding the impact of foreign exchange movements and acquisitions, underlying EBITDA was also down 4%. 

Depreciation and amortisation of £677m was down 6% reflecting the more efficient delivery of our capital expenditure programmes over the last few years. Net finance expense was £148m, a decrease of 12% mainly due to lower net debt and a lower average interest rate. 

Adjusted profit before tax of £609m was up 2% as the lower depreciation and amortisation and net finance expense more than offset the decline in EBITDA. Reported profit before tax (which includes specific items) was £499m, down 10%. The effective tax rate on profit before specific items was 22.3% (Q2 2012/13: 22.7%). 

Adjusted EPS was 6.0p, up 2%, and reported EPS (which includes specific items) was 7.8p, up 16%. These are based on a weighted average number of shares in issue of 7,864m (Q2 2012/13: 7,839m). 

Specific items 

Specific items resulted in a net credit after tax of £140m (Q2 2012/13: £65m). Specific items included group-wide restructuring charges of £52m and net interest expense on pensions of £58m (Q2 2012/13: £29m). The UK Finance Act 2013 introduced further reductions in the UK corporation tax rate from 23% to 21% on 1 April 2014 and from 21% to 20% on 1 April 2015. As a result, a specific tax credit of £231m (Q2 2012/13: £76m) has been recognised for the 
re-measurement of deferred tax balances. 

Capital expenditure 
Capital expenditure was flat at £595m. 

Free cash flow Normalised free cash flow was an inflow of £610m, an increase of £294m compared with the prior year. This reflects improvements in working capital in BT Global Services and lower tax and VAT payments, partly offset by an instalment of around £120m for Premier League football broadcast rights and lower EBITDA. 

Specific items resulted in a net cash outflow of £72m (Q2 2012/13: £90m) and mainly comprised restructuring costs of £50m and property rationalisation costs of £18m. Reported free cash flow, which includes the cash tax benefit from pension deficit payments of £19m (Q2 2012/13: £162m) and is after specific items, was £557m (Q2 2012/13: £388m). 

Net debt and liquidity 
Net debt was £8,074m at 30 September 2013, £16m higher than at 30 June 2013 and £963m lower than the prior year. The movement in the quarter largely reflects the reported free cash inflow of £557m and an inflow of £42m from the exercise of employee share options, which were largely offset by dividend payments of £507m and an outflow of £77m for the purchase of 23m shares under our share buyback programme. 

At 30 September 2013 cash and current investment balances were £1.2bn and available facilities were £1.5bn providing us with a strong liquidity and funding position. During the second half of 2013/14 £0.3bn of term debt and £0.5bn of short-term borrowing is repayable. 

Pensions 
The IAS 19 net pension position at 30 September 2013 was a deficit of £5.4bn net of tax (£6.7bn gross of tax), compared with £4.0bn (£5.2bn gross of tax) at 30 June 2013. The higher deficit primarily reflects a reduction in the discount rate due to a tightening in corporate credit spreads, and an increase in future inflation expectations. The IAS 19 accounting position and key assumptions for the valuation are provided in Note 10. 

Regulation 
As expected, regulatory charge controls impacted revenue and EBITDA in the quarter. We estimate that the WLR, LLU and ISDN30 charge controls will have a negative impact of around £120m on group revenue and EBITDA in the year and that the Leased Lines Charge Control will have an annual negative impact of around £50m-£100m on group revenue and EBITDA this year and next. 

Ofcom published its final statement on its review of the wholesale narrowband market in September. On 1 January 2014 prices for fixed call termination will be significantly reduced with the effect partly offset by a higher fixed call origination price cap. Price controls will continue until 30 September 2016. 

Dividends 
In line with our full year outlook for 10%−15% growth in dividends per share, the Board has declared an interim dividend of 3.4p per share, up 13%, and totalling £268m (Q2 2012/13: £236m). It will be paid on 3 February 2014 to shareholders on the register on 27 December 2013. The ex-dividend date is 23 December 2013. The election date for participation in BT’s Dividend Investment Plan in respect of this dividend is 27 December 2013. The final dividend for the year to 31 March 2013 of 6.5p per share, amounting to £512m, was approved at the Annual General Meeting on 17 July 2013. 

Outlook 
Our outlook is unchanged. We continue to expect an improved trend in underlying revenue excluding transit in 2013/14 compared with 2012/13. We expect adjusted EBITDA to be £6.0bn−£6.1bn in 2013/14, £6.2bn−£6.3bn in 2014/15 and to grow further in 2015/16. We expect capital expenditure in 2013/14 and 2014/15 to be broadly level with 2012/13 and normalised free cash flow to be around £2.3bn in 2013/14, around £2.6bn in 2014/15 and to grow further in 2015/16.

GROUP RESULTS FOR THE HALF YEAR 
TO 30 SEPTEMBER 2013

Income statement 

Our key measure of the group’s revenue trend, underlying revenue excluding transit, was down 0.8% in the first half mainly reflecting the anticipated impact of regulatory price reductions. Adjusted revenue of £8,940m was down 1% with a £75m reduction in transit revenue, a £68m positive impact from foreign exchange movements and a £16m positive net impact from acquisitions and disposals. 

Underlying operating costs1 excluding transit were flat as efficiencies from our cost transformation programmes offset the investment in BT Sport and a £31m increase in the 
non-cash pensions operating charge. Operating costs1 were also flat. 

1 Before depreciation and amortisation 

Net labour costs decreased by 3%. Payments to telecommunications operators were down 5% due to lower mobile termination rates. Property and energy costs were down 4% and network operating and IT costs were flat. Other operating costs increased by 10% principally due to BT Sport. 

Adjusted EBITDA, which includes the impact of our investment in BT Sport, was £2,874m, down 2%. Excluding foreign exchange movements and the net impact from acquisitions and disposals, underlying EBITDA was down 3%. 

Depreciation and amortisation of £1,374m was down 5% reflecting the more efficient delivery of our capital expenditure programmes over the last few years. Net finance expense was £294m, down 13% mainly due to lower net debt and a lower average interest rate. 

Adjusted profit before tax of £1,204m was up 3% as the lower depreciation and amortisation and net finance expense more than offset the decline in EBITDA. Reported profit before tax (which includes specific items) was £948m, down 13%. 

The effective tax rate on profit before specific items was 22.5% (HY 2012/13: 22.7%). 

Adjusted EPS was 11.9p, up 3%, and reported EPS (after specific items) was 12.2p, up 1%. These are based on a weighted average number of shares in issue of 7,852m (HY 2012/13: 7,813m). 

Specific items 
Specific items resulted in a net credit after tax of £26m (HY 2012/13: £42m). Specific items include group-wide restructuring charges of £136m and net interest expense on pensions of £117m (HY 2012/13: £57m). A specific tax credit of £231m (HY 2012/13: £76m) has also been recognised for the re-measurement of deferred tax balances. 

Capital expenditure 
Capital expenditure was £1,191m, down 2%. 

Free cash flow Normalised free cash flow was an inflow of £550m, an increase of £358m compared with the prior year. This reflects improvements in working capital in BT Global Services, lower tax and VAT payments and lower cash capital expenditure, partly offset by an instalment of around £120m for Premier League football broadcast rights and lower EBITDA. 

Specific items resulted in a net cash outflow of £206m (HY 2012/13: £123m) and mainly comprised restructuring costs of £156m and property rationalisation costs of £30m. 

Reported free cash flow, which includes the cash tax benefit from pension deficit payments of £39m (HY 2012/13: £324m), and is after specific items, was £383m (HY 2012/13: £393m). 

Related party transactions 
Transactions with related parties during the half year to 30 September 2013 are disclosed in Note 14. 

Principal risks and uncertainties A summary of the group’s principal risks and uncertainties is provided in Note 15.

OPERATING REVIEW

BT Global Services

1 Restated, see Note 1 to the condensed consolidated financial statements 
n/m = not meaningful 

Revenue 
Underlying revenue excluding transit decreased by 5%, partly reflecting the expected smaller benefit from contract milestones compared with the prior year. We expect this to reverse to give a larger year on year benefit in the third quarter. 

In the quarter, an increase in revenue in the high-growth regions of Asia Pacific, Latin America, Turkey, the Middle East and Africa was offset by declines elsewhere. 

Reported revenue was down 4% including a £9m decline in transit revenue and a £28m positive impact from foreign exchange movements. 

Total order intake in the quarter was £1.5bn, up 19%. We signed contracts throughout our key geographies, covering the main industry sectors and services from across our portfolio. In the consumer packaged goods sector, we signed a contract with Unilever for global network outsourcing, including a network providing voice, data, video and mobility services to the company’s 173,000 employees across nearly 100 countries. In the global banking and financial services sector, we will provide Visa Europe with a new access platform for its card authorisation, and clearing and settlement services. In the manufacturing sector, Fiat Spa and CNH Industrial renewed their global outsourcing contract. In the UK, Wipro Systems asked us to provide the wide area networking and voice services supporting its service delivery to a leading British utility company while ManpowerGroup contracted for global wide area networking services. 

Operating results 

Operating costs were down 5% but underlying operating costs excluding transit declined by 8% reflecting the reduction in revenue and the benefit of our cost transformation programmes. 

During the quarter we continued to make good progress on increasing the cost efficiency and reliability of our network. We completed the closure of our remaining legacy global data network, migrating the last customers to our strategic global network which provides improved reliability and service. We are enhancing our end-to-end service processes, back-office efficiency across Europe, and continuing to improve the way in which we procure access circuits and customer premises equipment. 

EBITDA increased by 10% mainly driven by our cost transformation initiatives. Depreciation and amortisation reduced by 1% and operating profit improved by £21m. 

Capital expenditure was down 4% contributing to EBITDA less capital expenditure increasing by £24m to £81m. Operating cash flow was an inflow of £74m. This was an improvement of £193m compared with the prior year which had been impacted by the timing of contract-related receipts and the delay in some debtor receipts.

BT Retail

1 Restated, see Note 1 to the condensed consolidated financial statements 

Revenue 
Revenue and underlying revenue excluding transit were up 2%. 

Consumer2 revenue increased by 4%, a significant improvement compared with the first quarter. The increase was driven by 17% growth in broadband and TV revenue following the successful launch of BT Sport in August, and helped by a smaller decline in calls and lines revenue compared with previous quarters, down only 1%. 

We now have more than 2m BT Sport retail customers which include customers watching via satellite, BT TV, online or via the app. During the quarter we also signed a contract with Virgin Media which increases the reach of BT Sport to around 4m households. 

BT Sport had a positive impact on our line, broadband and TV customer numbers in the quarter. Consumer2 line losses of 65,000 were 64% better than last year and the lowest for five years. We added 156,000 retail broadband customers, representing 93% of the DSL and fibre broadband market net additions, taking our broadband customer base to around 7m. We added 195,000 retail fibre broadband customers and now have around 1.7m. We also added 70,000 TV customers taking the base to over 900,0003. We now have 5.2m BT Wi-fi hot spots with usage more than doubling to 6.6bn minutes in the quarter. 

We have strengthened our TV proposition to include Sky Movies and have launched new channel packs that allow customers to build a TV service tailored to their needs. The launch of our latest router, the slimline Hub 5, will offer our fibre customers market-leading wireless reliability using the latest technology. 

Business revenue was flat as 7% growth in IT services and 6% higher broadband revenue were offset by a 5% decline in calls and lines revenue. 

BT Enterprises underlying revenue decreased by 1%, the result of lower hardware sales in BT Conferencing. BT Ireland underlying revenue excluding transit increased by 2%, in line with the first quarter, reflecting growth in the business division. 

Operating results 
Operating costs increased by 8%. Excluding our investment in BT Sport of around £140m, they were down 3% reflecting the benefits of our cost transformation programmes. EBITDA was down £66m, or 13%. Depreciation and amortisation decreased by 16% due to lower capital expenditure in recent years, and operating profit was down 12%. 

Capital expenditure was down 13% reflecting the additional broadband-related investment in the prior year. Operating cash flow decreased by 24%, partly reflecting the first of two instalments of around £120m for this season’s Premier League football broadcast rights. 

2 Includes customers in Northern Ireland 
3 Only includes those BT Sport customers who watch the channels through BT TV

BT Wholesale

1 Restated, see Note 1 to the condensed consolidated financial statements 

Revenue 
Underlying revenue excluding transit increased by 3%, or 1% excluding the impact of the Court of Appeal decision on ladder pricing in the second quarter of last year. 

The increase in revenue was primarily due to 18% growth in managed solutions revenue and 23% growth in IP services helped by IP Exchange voice minutes increasing by around 60%. These were largely offset by a 12% decline in broadband revenue, as lines continue to migrate to LLU, and a 15% decline, excluding ladder pricing, in traditional calls and lines revenue. 

Reported revenue increased by 1% despite a £9m decline in transit revenue from mobile termination rate reductions. 

Total order intake was £409m, up 33%. We signed a contract with EE for migration of its transit and terminating traffic onto IP Exchange, which will reduce its network costs and enable the provision of new services to its customers. We also signed contracts with: Spitfire, for exclusive supply of Ethernet services; Timico Technology Group, for the migration of IP voice traffic to IP Exchange and the management of their broadband and wholesale calls estate; and Nine Telecom, being a contract re-sign and expansion for increased volumes of wholesale calls. 

Operating results 

Operating costs excluding transit were flat, as lower labour and selling and general administration costs offset higher cost of sales. Reported operating costs decreased by 2%, reflecting lower transit revenue. 

EBITDA increased by 11%, or 3% excluding ladder pricing. With depreciation and amortisation being flat, operating profit increased by 20% or 5% excluding ladder pricing. 

Capital expenditure increased by 11% due to higher spend on the IP Exchange platform to increase its capacity to meet growing demand. Operating cash flow was an inflow of £154m due to the timing of customer receipts and lower VAT payments.

Openreach

1 Restated, see Note 1 to the condensed consolidated financial statements 

Revenue 
Revenue declined by 1% as regulatory price changes had a negative impact of around £70m, or the equivalent of around 5%. This was partly offset by growth in fibre broadband revenue, which again more than doubled, and a 3% increase in Ethernet revenue driven by higher volumes. 

We achieved 316,000 net fibre connections in the quarter, an increase of 70%, helping to bring the number of homes and businesses now connected to over 2m. All of our major CP customers are now engaged in marketing and selling fibre and the external net additions in the quarter have more than quadrupled. 

We are making progress with extending the reach of fibre to rural areas. Overall, we have now won 44 regional contracts2. We have commenced surveys and civil works in 22 of these and started rolling out fibre in a further 13 including Cornwall, North Yorkshire, Wales, Surrey and Rutland, passing more than 100,000 premises in the quarter. We have now passed more than 17m premises in total with our fibre broadband network. 

We have started field trials in Braintree and Barnet to see how effective vectoring3 is at increasing speeds for more customers across our fibre broadband network. 

The physical line base declined by 8,000 compared with a 38,000 decline last year. Over the past 12 months, our physical line base has increased by 140,000. 

Operating results 
Operating costs increased by 2% due to pay inflation and the additional engineering resource we have recruited to support fibre provision in rural areas. This contributed to EBITDA declining 3%. With depreciation and amortisation down 1%, operating profit was down 7%. 

Capital expenditure decreased by 4% reflecting £15m of grant income relating to our investment in the regional broadband programme. Operating cash flow decreased by 5%. 

2 Includes Broadband Delivery UK programme, Cornwall and Northern Ireland 
3 Vectoring reduces interference between signals in co-located copper wires, thereby improving end-user data speeds in fibre-to-the-cabinet networks 

The second quarter and half year 2013/14 results presentation for analysts and investors will be held in London at 9.00am today and a simultaneous webcast will be available at www.bt.com/results

Results for the third quarter to 31 December 2013 are expected to be announced on Friday 31 January 2014. 

The full financial statements are available to download as PDF documents  
Full results release
Group income statement
Group statement of comprehensive income
Group statement of changes in equity
Group cash flow statement
Group balance sheet
Notes to the condensed consolidated financial statements
Statement of directors' responsibilities
Independent review report to BT Group plc on the half year interim financial information
Forward-looking statements – caution advised