Results for the fourth quarter and year to 31 March 2015

BT Group plc (BT.L) today announced its results for the fourth quarter and year to 31 March 2015.

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

“It’s been a ground-breaking year for BT, in which we’ve made some key decisions and announced some major investments to underpin the future growth of the business. Profit before tax and free cash flow have both grown strongly and we have delivered or beaten the outlook we set at the start of the year.

“Our superfast broadband network now passes more than three-quarters of the UK and we’ve announced plans to upgrade to ultrafast. This will be another multi-year investment by Openreach and is the right thing for both BT and the UK, providing even faster speeds in an already competitive market. We delivered our best ever performance for fibre connections in the fourth quarter with Openreach adding almost half a million premises to our network. Our retail business delivered a record-breaking 266,000 of these connections.

“Shareholders approved our proposed £12.5 billion acquisition of EE last week. While we await regulatory approval, we have pushed ahead with our own mobility plans, launching our great value BT Mobile consumer service in March.

“Our BT Sport TV channels are now in more than 5.2 million homes, with the customer base growing again in the quarter. We’re pleased to have secured FA Premier League football rights for a further three years, and an extension with Aviva Premiership Rugby for four more years. With exclusive live football from the UEFA Champions League and UEFA Europa League, we’ll be showing even more top sporting action from this summer.

“For our business customers, we launched a number of innovative services this year including BT Assure Threat Defence, BT One Phone and BT Cloud Voice. And while in the UK public sector trading remains tough, we continue to see good growth in Asia and the Middle East.

“We will continue to deliver on our investments and improve the service we provide to our customers. This year we recruited 2,500 new engineers and more than 500 new agents into our UK contact centres, with over 500 new apprentices across the group. Each of our customer-facing lines of business made improvements in service this year. We have increased the speed of service delivery, repaired faults faster and fixed more customer issues first time. But we recognise we’re not yet where we want to be and this will continue to be a priority for us.

“We made further progress with transforming our costs, contributing to a 6% decline in operating costs⁴ in the fourth quarter. We’ve reorganised our business, increased productivity and streamlined our processes.

“Our performance during the year is reflected in our full year dividend, which is up 14%. Our results and the investments we are making position us well for the future and enable us to increase our free cash flow outlook for the coming year.”

¹ Before specific items

² Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals

³ Before specific items, pension deficit payments and the cash tax benefit of pension deficit payments

⁴ Excludes specific items, transit costs, foreign exchange movements and the effect of acquisitions and disposals and is before depreciation and amortisation

Key points for the fourth quarter:

• Underlying revenue¹ excluding transit down 1.3%
• Underlying operating costs² excluding transit down 6%
• EBITDA³ grew 7%, partly helped by the settlement of ladder pricing arrangements
• Our best ever quarter for Openreach fibre broadband net connections of 455,000, up 31%
• Agreed definitive terms for proposed acquisition of mobile operator EE
• Secured content for FA Premier League to 2018/19 and Aviva Premiership Rugby to 2020/21
• Launched great value mobile offerings into the consumer market
• 2014 triennial pension funding valuation agreed in January

Key points for the year:

• Results in line with or ahead of our outlook for the year
• Underlying revenue¹ excluding transit down 0.4%
• Underlying operating costs² excluding transit down 2%
• EBITDA³ of £6,271m, up 3%
• Earnings per share³ up 12%
• Normalised free cash flow⁴ of £2,830m, up 16%
• Net debt at £5,119m down £1,909m including the benefit of our £1.0bn share placing
• Proposed final dividend of 8.5p, up 13%, giving a full year dividend of 12.4p, up 14%

Outlook for 2015/16:

Our outlook for 2015/16, which is for BT Group excluding EE, is as follows:

• We continue to expect growth in underlying revenue¹ excluding transit in 2015/16
• We expect modest growth in adjusted EBITDA. This is despite a year-on-year impact of around £170m due to lower income from both ladder pricing and the sale of redundant copper, a higher pensions operating charge and higher leaver costs. We will also incur costs relating to the launch of our UEFA Champions League and UEFA Europa League content in the year
• Normalised free cash flow⁴ is expected to be around £2.8bn. This compares with £2,830m in 2014/15 and is despite an increase of around £90m in ordinary pension contributions
• No change to our dividend and share buyback outlook

¹ Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals

² Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals and is before depreciation and amortisation

³ Before specific items

⁴ Before specific items, pension deficit payments and the cash tax benefit of pension deficit payments

GROUP RESULTS FOR THE FOURTH QUARTER
AND YEAR TO 31 MARCH 2015

Note: Reported revenue and EBITDA for the year ending 31 March 2015 include a specific item benefit of £128m relating to settlements reached for prior years following the Supreme Court judgment on ladder pricing.

¹ Before specific items. Specific items are defined below and analysed in Note 4 to the condensed consolidated financial statements

² Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals

³ Before specific items, pension deficit payments and the cash tax benefit of pension deficit payments

⁴ Certain results for the fourth quarter and year to 31 March 2014 have been restated. See Note 1 to the condensed consolidated financial statements
n/m - not meaningful

^Notes:

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 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. Reconciliations of reported to adjusted revenue, operating costs and operating profit are set out in the Group income statement. Specific items are set out in Note 4. Reconciliations of EBITDA, adjusted profit before tax and adjusted EPS to the nearest measures prepared in accordance with IFRS are provided in Notes 7, 8 and 9 respectively.

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 sustainable 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 RESULTS FOR THE YEAR
TO 31 MARCH 2015

Overview

Invest for growth This year we have made some key decisions and announced some major investments to underpin the future growth of the business. We agreed definitive terms to acquire EE for £12.5bn, subject to approval by the Competition and Markets Authority. We secured FA Premier League rights through to the end of the 2018/19 season and extended our Aviva Premiership Rugby rights to the 2020/21 season. BT Consumer launched great value mobile propositions and we have set out our plans to deliver ultrafast broadband with G.fast to most of the UK. For our business customers, we launched a number of innovative solutions, including BT Assure Threat Defence in BT Global Services and cloud-based voice services in BT Business and BT Wholesale.

We have delivered on our underlying business in globally challenging markets, achieving or beating the outlook we set at the start of the year. Our strong financial discipline has enabled us to continue to invest in our five strategic growth areas while delivering growth in normalised free cash flow of £380m or 16%. Our strong free cash flow means we have been able to reduce our net debt whilst supporting the BT Pension Scheme. Our proposed full year dividend to shareholders is 12.4p, up 14%.

The key measure of our revenue trend, underlying revenue excluding transit, was down 0.4%, which is in line with our outlook of broadly flat. Good growth in BT Consumer was offset by declines in our other lines of business. BT Consumer revenue was up 7%, with strong growth in the broadband and TV customer bases. We are very pleased with the performance of BT Sport which has contributed to both top and bottom-line growth. Openreach revenue was down 1% driven by regulatory price changes which were partly offset by the benefit of fibre growth. BT Business revenue¹ declined marginally with lower call and line volumes reflecting the migration of customers to broadband and IP services. BT Wholesale revenue¹ was down 7%. The impact of regulatory price changes and a large contract termination were partly offset by the recognition of ladder pricing revenue in the fourth quarter. In BT Global Services, UK public sector revenue was lower, with this partly offset by our high-growth regions. BT Global Services generated orders of £6.5bn this year, down 7%. BT Business and BT Wholesale order intakes were broadly in line with last year.

Transform our costs

We have made further progress in transforming our costs. Net labour costs were 8% lower for the year as we increased productivity while reallocating our labour resource to be more efficient. Total labour costs including capitalised labour were down by less, at 4%, as we have used more indirect labour in capital projects, primarily in Openreach due to the Broadband Delivery UK (BDUK) programme. We have continued to insource jobs which increases productivity and lowers our overall costs. This year across the group we insourced around 2,000 roles, bringing the total to more than 12,000 for the last six years. And in BT Global Services we have replicated the forensic approach to cost transformation that we have applied in the UK to our overseas operations.

Underlying operating costs² excluding transit were down 2% contributing to EBITDA growth of 3%.

Deliver superior customer service

Improving the service we provide our customers is a key part of our strategy. We made progress this year but we are not satisfied and still want to do better. ‘Right First Time’ is our key measure of customer service and it improved by 4.7% compared with 1.5% last year. All lines of business contributed to this improvement. We delivered significantly better repair performance and reduced lead times for providing UK lines and broadband. Within BT Global Services, we provided significantly more IP Connect Global circuits on time. Openreach exceeded all 60 minimum service levels set by Ofcom, though our ambition and plans are to achieve even higher levels of customer service.

Mobility 

In February we announced our proposed acquisition of EE from Deutsche Telekom and Orange. We believe EE is a high quality mobile business and the combination of BT and EE will provide our current and future customers with innovative, seamless services that combine the power of fibre broadband with wi-fi and advanced mobile capabilities. Integrating the two organisations will accelerate BT’s mobility strategy and increase our capacity for investment and product innovation to ensure the UK has world-class digital infrastructure for the future. Shareholders approved the transaction on 30 April 2015 and we are now awaiting approval from the Competition and Markets Authority. In the meantime BT Business launched BT One Phone and a range of new mobile services in the year, and in March we re-entered the consumer mobile market.

¹ Excludes specific items, transit revenue, foreign exchange movements and the effect of acquisitions and disposals

² Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals and is before depreciation and amortisation

Broadband

Our investment in superfast fibre broadband is a success story for the UK. To take it further we have announced large-scale trials this summer of ultrafast fibre broadband with G.fast technology. With the right investment and regulatory environment, we expect to deploy it at scale helping to make ultrafast broadband speeds of up to 500Mbps available to most of the UK within a decade.

So far we have passed more than 22m premises with our superfast fibre broadband network, over three-quarters of the UK. Our rollout is nearly two years ahead of our original schedule and, following competitive tenders for additional funding, we continue to work with the government to help take fibre to 95% of the UK.

Openreach achieved a record 455,000 fibre broadband net connections in the fourth quarter, an increase of 31%. We have now connected around 4.2m homes and businesses, 19% of those passed and more than 50% higher than a year ago. We added 266,000 retail fibre broadband customers in the last quarter, taking our own fibre customer base to 3m. The UK broadband market¹ grew by 248,000 in the fourth quarter, of which our retail share was 121,000 or 49%. Openreach grew the physical line base by 215,000 for the year, the best performance on record, helped by new homes being built and customers reconnecting their fixed-lines to benefit from broadband services.

Income statement Reported revenue was £17,979m, down 2%. Adjusted revenue, which is before specific items, was £17,851m, also down 2%. We had a £231m negative impact from foreign exchange movements, a £119m reduction in transit revenue and an £8m negative impact from disposals. Excluding these, our key measure of the group’s revenue trend, underlying revenue excluding transit, was down 0.4% which is in line with our outlook for the year of being broadly flat.

Adjusted operating costs² decreased by £591m to £11,580m. Underlying operating costs³ excluding transit were down 2%, reflecting an 8% reduction in net labour costs and lower payments to other telecommunications operators. These were partly offset by increased programme rights charges reflecting a full year of BT Sport. Property and energy costs were 1% higher while other costs were down 1%. Sales of redundant copper generated net income of £29m and we expect no benefit from this in 2015/16.

In aggregate, we have reduced our adjusted operating costs² and capital expenditure by around £5.5bn over the last six years.

Adjusted EBITDA of £6,271m was up 3%. Depreciation and amortisation decreased 6% to £2,538m largely due to more efficient delivery of our capital investment programmes in recent years. Adjusted net finance expense was £560m, down 5% as we reduced our net debt.

Adjusted profit before tax was £3,172m, up 12% reflecting the growth in EBITDA and the benefit of our focus on capital expenditure efficiencies and debt reduction which have lowered depreciation and finance expense. Reported profit before tax (which includes specific items) was £2,645m, up 14%. The effective tax rate on the profit before specific items for the year was 19.9% (2013/14: 21.7%).

Adjusted EPS of 31.5p was up 12%. Reported EPS (which includes specific items) was 26.5p, up 3%. These are based on a weighted average number of shares in issue of 8,056m, up 3% as a result of a large employee share plan which matured in August 2014 and the £1.0bn share placing in February 2015 to raise funds for the proposed acquisition of EE. A reconciliation of reported EPS to adjusted EPS is provided in note 9.

Specific items

Specific items resulted in a net charge after tax of £406m (2013/14: £196m). Details are provided in note 4 and the principal components are described below.

We recognised revenue and EBITDA of £128m being the prior year impacts of ladder pricing agreements with the UK mobile operators following the Supreme Court judgment earlier this financial year. We also recognised a charge of £75m following an assessment of certain other historical regulatory matters (see Regulation below).

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

Restructuring charges of £315m (2013/14: £276m) were incurred as part of our group-wide restructuring programme and relate primarily to leavers, and property and network rationalisation. This charge was higher than we announced at the start of the year partly reflecting the strong take-up of leaver programmes in the fourth quarter.

We had a property rationalisation net benefit of £22m being a profit of £67m on the disposal of a surplus building in London, partly offset by a £45m increase in onerous lease provisions. We incurred costs of £36m relating to the planned acquisition of EE. Of these, £19m are in operating costs, £10m directly relate to the share placing and so have been recognised in equity, and £7m are financing costs.

Net interest expense on pensions was £292m (2013/14: £235m). We recognised a £25m gain (2013/14: £4m loss) on the disposal of an associate and a £6m net profit on the disposal of a number of small businesses. The tax credit on specific items was £121m (2013/14: £111m). Last year also included a £208m tax credit on the re-measurement of deferred tax balances.

Capital expenditure 

Capital expenditure was 1% lower than last year at £2,326m and was net of £392m grant funding (2013/14: £126m) mainly relating to our activity on the BDUK programme. Capital expenditure was higher in Openreach with additional capitalised labour reflecting the pace and complexity of the rollout of the BDUK programme. Capital expenditure was also higher in BT Business as BT Fleet invested in vehicles to support Openreach business requirements. These increases were offset by declines in BT Global Services and BT Wholesale.

Free cash flow 

Normalised free cash flow² was up £380m or 16% at £2,830m. The increase reflects favourable working capital movements (including the timing of BT Sport programme rights payments in the prior year), growth in EBITDA, lower ordinary pension contributions and lower tax and interest payments. These were partly offset by higher net cash capital expenditure due to the timing of grant funding cash receipts.

The net cash cost of specific items was £154m (2013/14: £356m) mainly comprising restructuring costs of £267m (2013/14: £267m), ladder pricing receipts of £88m (2013/14: £nil) and a net property rationalisation benefit of £51m (2013/14: cost of £55m). Free cash flow, which includes specific items, pension deficit payments of £876m, and a £106m (2013/14: £77m) tax benefit from pension deficit payments, was £2,782m (2013/14: £2,171m).

A reconciliation of cash generated from operations to free cash flow is provided in note 5.

Net debt and liquidity

Net debt was £5,119m at 31 March 2015, a reduction of £1,909m in the year reflecting the strong cash generation of the business and £1.0bn from the share placing supporting our planned acquisition of EE. This reduction was after making £876m of pension deficit payments, paying dividends of £924m and completing a share buyback of 80m shares for £320m.

At 31 March 2015 the group held cash and current investment balances of £3.9bn. We also have a £1.5bn committed facility, and a £3.6bn committed acquisition facility to be used for the EE transaction, both of which were undrawn at 31 March 2015. Out of total gross debt of £9.8bn, £1.8bn is repayable in 2015/16. During the year we issued a Eurobond amounting to £0.8bn and repaid maturing term debt of £1.2bn.

Pensions

The IAS 19 net pension position at 31 March 2015 was a deficit of £6.1bn net of tax (£7.6bn gross of tax), compared with £6.3bn (£7.9bn gross of tax) at 31 December 2014 and £5.6bn (£7.0bn gross of tax) at 31 March 2014. A significant fall in the IAS19 real discount rate, from 0.97% at 31 March 2014 to 0.39%, resulted in a higher value being placed on the liabilities. This more than offset an increase in the assets from positive investment returns and deficit payments of £876m (of which £875m relates to the BT Pension Scheme (BTPS)).

The fall in the real discount rate is expected to increase the defined benefit pensions operating charge in the income statement by around £20m in 2015/16, from £254m this year. It is also expected to reduce the net pension interest expense within specific items from £292m this year to around £225m for 2015/16. We expect the cash ordinary contributions for the BTPS to increase from £168m in 2014/15 to around £260m in 2015/16.

¹ Before depreciation and amortisation

² Before specific items, pension deficit payments and the cash tax benefit of pension deficit payments

BT and the Trustee of the BTPS reached agreement on the 2014 triennial funding valuation and recovery plan in January 2015. The funding deficit at 30 June 2014 was £7.0bn with the increase from the 2011 valuation reflecting the low interest rate environment at the valuation date. A 16-year recovery plan was agreed reflecting BT’s long-term sustainable cash flow generation. We paid £875m in deficit payments to the BTPS in March 2015 and £625m in April 2015. Further payments of £250m will be made in each of 2015/16 and 2016/17, bringing the total for the three years to 31 March 2017 to £2.0bn.

Regulation 

In July 2014 the Supreme Court ruled in our favour, overturning a July 2012 Court of Appeal judgment which had assessed that our wholesale ladder termination pricing policy, previously in place for 0800, 0845 and 0870 calls from mobile phones terminating on our network, should not have been applied. We received the Supreme Court Order, setting out the details of their decision, in December 2014. In 2014/15 we recognised a specific item credit of £128m in revenue and EBITDA, reflecting the outcome of commercial negotiations with mobile operators to recover ladder pricing revenues that relate to prior years. We also recognised a benefit of around £30m in our trading revenue and EBITDA for this year and expect to recognise a further benefit of around half this amount during the first half of 2015/16. All ladder pricing will cease from the end of June 2015 when new pricing arrangements for Non-Geographic Call Services in the UK come into effect.

In August 2014 the Competition Appeal Tribunal (CAT) handed down judgment on various appeals brought against a December 2012 Ofcom determination on the pricing of certain Ethernet products. We disagree with the CAT’s judgment and have applied for permission to appeal to the Court of Appeal. Ofcom had determined that BT had overcharged for certain services between 1 April 2006 and 31 March 2011, and required BT to make repayments. The CAT judged that we should also pay interest on these amounts. Ofcom is currently considering this matter; the total amount payable will depend on the interest rate Ofcom determines to be appropriate, which is a matter that affected parties may appeal. Together with a review of our regulatory risk position in relation to other historical matters, we recognised a specific item charge of £75m this year.

In October 2014 Ofcom closed a Competition Act investigation having found no grounds for taking any action, following an allegation that BT had abused its dominant position by squeezing the margin between the prices BT Consumer charges for some of its fibre broadband products and the wholesale price charged by Openreach. Alongside this, Ofcom has continued with plans to implement a regular ‘margin squeeze test’ using its regulatory powers, and in March published its final methodology for doing this, indicating that our prices passed the test. Despite this, we believe the design of the test is flawed and are considering our options, including an appeal.

In March 2015 Ofcom announced a review of the UK’s digital communications markets which will focus on: ensuring the right incentives for private-sector investment to help increase availability and quality of service; maintaining strong competition and tackling obstacles or bottlenecks; and identifying whether there is scope for deregulation. The first phase of the review will examine current and future market factors that may affect digital communications services, and Ofcom expects to publish a discussion document on this in the summer.

Dividends

The Board is proposing a final dividend of 8.5p, up 13%, giving a full year dividend of 12.4p, up 14% (2013/14: 15%). Subject to shareholder approval, this will be paid on 7 September 2015 to shareholders on the register at 14 August 2015. The ex-dividend date is 13 August 2015. The final dividend, amounting to approximately £712m (2013/14: £611m), will be recognised as an appropriation of retained earnings in the quarter to 30 September 2015.

Principal risks and uncertainties

The group’s principal risks and uncertainties are disclosed in note 11.

Outlook 

We continue to expect growth in underlying revenue excluding transit in 2015/16. We expect modest growth in adjusted EBITDA in 2015/16. This is despite a year-on-year impact of around £170m due to lower income from both ladder pricing and the sale of redundant copper, a higher pensions operating charge and higher leaver costs. We will also incur costs relating to the launch of our UEFA Champions League and UEFA Europa League content in the year.

Normalised free cash flow is expected to be around £2.8bn. This compares with £2,830m in 2014/15 and is despite an increase of around £90m in ordinary pension contributions. We are targeting a BBB+/Baa1 credit rating over the medium term. For 2015/16, we continue to expect to grow our dividend per share by 10%-15% and to undertake a c.£300m share buyback to help offset the dilutive effect of maturing all-employee share plans.  

GROUP RESULTS FOR THE FOURTH QUARTER
TO 31 MARCH 2015

Income statement Revenue of £4,639m was down 2% in the quarter with a £33m negative impact from foreign exchange movements, an £11m reduction in transit revenue and a £3m impact from disposals.

Underlying revenue excluding transit was down 1.3%, reflecting declines in UK public sector revenues in BT Global Services which more than offset the benefit of around £30m from ladder pricing agreements relating to current year trading.

Operating costs¹ decreased £223m, or 7%. Underlying operating costs² excluding transit were down 6% as we continue to focus on transforming our cost base. Adjusted EBITDA increased 7% to £1,819m, benefiting from the ladder pricing agreements mentioned above.

Depreciation and amortisation remained flat at £650m. Adjusted net finance expense was £138m, a decrease of 10%.

Adjusted profit before tax was £1,030m, up 14%. Reported profit before tax (which includes specific items) was £842m, up 13%. The effective tax rate on the profit before specific items for the quarter was 19.9% (Q4 2013/14: 21.2%).

Adjusted EPS of 10.0p was up 11%. Reported EPS (which includes specific items) was 8.4p, up 17%. These are based on a weighted average number of shares in issue of 8,221m (Q4 2013/14: 7,858m).

Specific items 

Specific items in the quarter resulted in a net charge after tax of £135m (Q4 2013/14: £144m). Restructuring charges of £157m (Q4 2013/14: £94m) were incurred as part of our group-wide restructuring programme. We recognised £70m of revenue related to ladder pricing and £22m of costs relating to historical regulatory matters (see Regulation above).

We recognised a property rationalisation net benefit of £22m (Q4 2013/14: £nil) being a profit of £67m on the disposal of a surplus building in London partly offset by a £45m increase in onerous lease provisions. Transaction fees relating to the proposed acquisition of EE of £19m were recognised in the quarter as specific operating costs, with a further £10m recognised in equity and £7m as a finance expense.

Net interest expense on pensions was £74m (Q4 2013/14: £59m). The tax credit on specific items was £53m (Q4 2013/14: £33m). Last year also included a tax charge of £23m on the re-measurement of deferred tax balances.

Capital expenditure 

Capital expenditure was £678m, up 18% primarily reflecting our investment in BT Fleet vehicles to support Openreach requirements, and is net of £117m grant funding relating to our activity on the BDUK programme.

Free cash flow 

Normalised free cash flow was £1,267m, down 6%. This decrease primarily reflects higher capital expenditure and working capital movements, partly offset by higher EBITDA and lower tax payments.

The cash cost of specific items was £3m (Q4 2013/14: £92m). Free cash flow, which includes specific items and a £53m (Q4 2013/14: £19m) tax benefit from pension deficit payments, was £1,317m (Q4 2013/14: £1,273m).

Broadband 

Openreach achieved 455,000 net fibre broadband connections in the quarter, an increase of 31%. We added 266,000 BT retail fibre broadband customers, our best ever quarter. Overall DSL and fibre broadband market net additions were 248,000. We added 121,000 retail broadband customers, a 49% market share.

¹ Before depreciation and amortisation

² Excludes specific items, foreign exchange movements, the effect of acquisitions and disposals and is before depreciation and amortisation

OPERATING REVIEW

BT Global Services

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

Revenue declined 7% in the quarter including a £24m negative impact from foreign exchange movements and a £2m increase in transit revenue. Underlying revenue excluding transit decreased 6% primarily reflecting lower UK revenue. For the year, revenue declined 7% including a £206m negative impact from foreign exchange movements and a £9m decline in transit revenue. Underlying revenue excluding transit declined 4% for the year.

Revenue in the UK was down 14% in the fourth quarter and 11% for the year primarily reflecting lower public sector revenue. We expect further declines in public sector revenue next year. In the high-growth regions² underlying revenue excluding transit was flat for the quarter. We continue to see good growth in AMEA but this was offset by declines in some Latin American countries where we changed our portfolio focus, given increased currency uncertainty. Underlying revenue excluding transit was up 9% for the year in the high-growth regions. In the US and Canada it declined 1% for the quarter and 3% for the year, while in Continental Europe it was up 2% for the quarter and the year.

Total order intake was £2.0bn in the quarter, down 9%. For the year it was down 7% to £6.5bn, after last year benefited from some large contract re-signs. In the quarter, we signed a new contract with Dixons Carphone to carry all of its voice and data traffic across 1,200 sites. We renewed a multi hundred million pound deal in the UK public sector. We also signed a new contract with Kimberly-Clark to implement and manage cloud-based solutions for a global network of 42,000 users. We renewed and expanded a contract with Sasol to provide managed security, conferencing, collaboration and other network services connecting 118 sites across the Americas, Middle East, Africa, Asia and Europe.

During the quarter, we launched BT Cloud Connect to provide customers with high performance network connectivity to data and applications regardless of whether they are hosted on their premises or in the cloud. We strengthened our cyber threat monitoring and defence services by launching BT Assure Threat Intelligence. We also extended the reach of our BT MeetMe with Dolby Voice conferencing service into Asia Pacific and integrated it with leading industry collaboration platforms.

Operating costs declined 10% for the quarter and 8% for the year. Underlying operating costs excluding transit were down 10% for the quarter and 5% for the year reflecting the impact of lower revenue and the benefit of our cost transformation programmes including a 15% reduction in total labour costs for the year. EBITDA in the quarter increased 9% and was up 1% for the year. Excluding foreign exchange movements, underlying EBITDA was up 13% in the quarter and 3% for the year. Depreciation and amortisation was down 18% in the quarter, driven by lower depreciation on some UK public sector contracts, and the impact of some assets becoming fully depreciated. Operating profit of £219m was up 35% in the quarter.

Capital expenditure declined 5% in the quarter, and 9% in the year, largely reflecting lower property investments, partly offset by an increase in network infrastructure. Operating cash flow was an inflow of £599m for the quarter, an improvement of £40m. Operating cash flow for the year was £349m. This was £150m lower than last year largely driven by a year on year impact of around £120m from early customer receipts in the fourth quarter of last year.

² Asia Pacific, the Middle East and Africa (AMEA) and Latin America.

BT Business

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

Revenue was down 2% for the quarter and the year, with underlying revenue excluding transit down 1%.

SME & Corporate voice revenue decreased 9% in the quarter, reflecting a continued fall in business call and line volumes, as customers move to data and VoIP services. The number of business lines declined 7%. In the quarter, we further enhanced our IP voice portfolio with the launch of BT Cloud Phone – a ‘plug and play’ IP phone system aimed at small businesses. This follows the launch of BT Cloud Voice and BT One Phone earlier in the year, demonstrating our commitment to meeting the changing communications needs of today’s businesses.

SME & Corporate data and networking revenue increased 5% in the quarter with continued growth in our networking products including fibre broadband. Business fibre broadband net additions were up 58%. IT services revenue declined 1% in the quarter with a decrease in lower margin hardware sales as we continue to focus our strategy towards providing higher margin managed services. Foreign exchange movements had a £9m negative impact on BT Ireland revenue. Its underlying revenue excluding transit was up 7% driven by software sales and fibre broadband.

Order intake in the quarter decreased 7% to £611m but was broadly flat at £2,073m for the year. Major deals signed in the quarter include Primark Stores, for managed services and a point of sale solution, and in the charitable sector Shaw Trust, for network, unified communications and managed IT services. In Ireland we signed deals with Kerry Group and NI Direct.

Operating costs were down 6% in the quarter and 5% for the year. Underlying operating costs excluding transit were down 4% in the quarter, mainly reflecting the impact of our cost transformation programmes. The lower costs offset the decline in revenue and as a result EBITDA was up 6% for the quarter and 4% for the year.

During the quarter depreciation and amortisation was up 2% and operating profit grew 6%. Capital expenditure increased £56m due to the investment in BT Fleet vehicles to support Openreach. This has driven a £60m increase for the year. Operating cash flow was 10% lower in the quarter reflecting the higher capital expenditure partly offset by growth in EBITDA and favourable working capital movements. For the full year, operating cash flow increased 9% due to growth in EBITDA and the timing of working capital movements.

BT Consumer

Revenue for the quarter was up 3%, with a 10% increase in broadband and TV revenue whilst calls and lines revenue was broadly flat. Consumer ARPU increased 6% to £415. For the year, revenue was up 7% with a 16% increase in broadband and TV revenue and a 1% increase in calls and lines.

We had our best ever quarter for superfast fibre broadband growth, with 266,000 retail net additions, taking our customer base to 3m. Of our broadband customers, 39% are now on fibre. BT added 121,000 retail broadband customers, representing 49% of the DSL and fibre broadband market net additions in the quarter. Our consumer line losses of 61,000 were broadly in line with the third quarter.

We announced our move back into the consumer mobile market in March, launching three bring-your-own phone (SIM-only) deals offering bundles of 4G data, minutes and texts from £5 a month for existing BT Broadband homes. Our plans offer a combination of 4G on the UK’s biggest network, unlimited access to the most extensive wi-fi coverage via more than 5m BT Wi-fi hotspots, free BT Sport on the BT Sport App and family-friendly features like spending caps on all tariffs. In the six weeks since launch, we have signed up more than 50,000 customers.

We secured FA Premier League football broadcast rights for a further three years until the end of the 2018/19 season, including four more games per season and the prime Saturday evening slot. We are paying 18% more per game, the equivalent of around 6% inflation per year. We also signed an extension with Aviva Premiership Rugby to broadcast top-flight rugby until the end of the 2020/21 season. These rights enhance our existing schedule of football, rugby and other international sport, including the exclusive live footballing action from the UEFA Champions League and UEFA Europa League starting this summer. BT Sport average daily audience figures increased 15% year on year from the start of the football season in August to the end of March.

We continued our lead in Buy-to-Keep content by becoming the first pay TV provider to offer TV box sets in addition to movies. Our customers can now stream TV box sets ranging from The Walking Dead to Downton Abbey, to their set-top box, smartphones, tablets and PCs. We added 52,000 TV customers, taking our TV customer base to 1.14m.

Operating costs decreased 2% in the quarter with savings from our cost transformation programmes partly offset by higher costs associated with the growth in revenue. Operating costs for the year increased 2% reflecting the first full financial year of BT Sport programme rights charges. EBITDA was up 18% for the quarter and 24% for the year, reflecting a continued strong performance across voice and broadband. Depreciation and amortisation increased 5% and operating profit was up 21% for the quarter.

Capital expenditure increased 47% in the quarter, reflecting the continued investment in our BT Sport and TV products and investment in our mobile proposition, but was down 2% for the year. Operating cash flow decreased £9m as the higher capital expenditure and a £29m deposit for the new FA Premier League rights offset the growth in EBITDA. For the full year operating cash flow was up £341m, or 72%, largely reflecting stronger EBITDA and last year’s deposit of around £60m for the UEFA broadcast rights.

BT Wholesale

Revenue for the quarter was flat. Underlying revenue excluding a £15m decline in transit revenue was up 3%. The improvement on the 5% decline last quarter mainly reflects the benefit of recognising around £30m of revenue related to ladder pricing for the current year. This reflects agreements reached with UK mobile operators following the Supreme Court ruling earlier this financial year. Amounts relating to prior years have been recognised within specific items.

Underlying revenue excluding transit was down 7% for the year. This mainly reflects lower traditional calls, lines and circuits revenue, including the impact of regulatory price changes following Ofcom’s Narrowband Market Review, and the termination of the Post Office contract. These two effects are not expected to have any further impact.

Managed solutions revenue decreased 6% in the quarter due to lower connection volumes on certain contracts.

Calls, lines and circuits revenue was up 11% for the quarter as the ladder pricing revenue more than offset the impact of Ofcom’s Narrowband Market Review. Broadband revenue declined 16% as lines continue to migrate to LLU.

We continued to see good growth in IP services with revenue up 25% in the quarter. Ethernet and IP Exchange revenues again showed double digit growth following our ongoing investment in these growing markets.

Order intake for the quarter was £956m, up 82% reflecting a major contract re-sign. It was £1,908m for the year, which is in line with last year.

Operating costs decreased 5% in the quarter and 12% for the year. Underlying operating costs excluding transit were down 2% in the quarter, including a 28% reduction in selling and general administration costs as we continue to focus on our cost transformation activities.

EBITDA was up 14% in the quarter reflecting the revenue benefit of the ladder pricing agreements. EBITDA for the year declined 9% reflecting the impact of the Narrowband Market Review and the termination of the Post Office contract. Depreciation and amortisation reduced 10% in the quarter with operating profit up 30%.

Capital expenditure declined 2% in the quarter and 14% for the year reflecting lower spend on our Wholesale Broadband Connect rollout programme. Operating cash flow decreased 58% in the quarter and 25% in the year, both largely driven by working capital movements as last year benefited from the timing of customer receipts.

Openreach

Revenue was flat in the quarter and down 1% for the year. Regulatory price reductions had a negative impact of around £50m in the quarter and around £180m in the year, the equivalent of around 4% of our revenue. In the quarter this was mostly offset by 43% growth in fibre broadband revenue.

The physical line base grew 76,000 in the quarter and by 215,000 over the year, the best annual performance on record. The UK broadband market¹ increased by 248,000 connections in the quarter compared with 217,000 in the prior year.

We continue to make progress with extending the reach of superfast fibre broadband beyond our commercial footprint, as part of the BDUK programme. Overall, our superfast fibre broadband network is available to more than 22m premises, over three-quarters of the UK.

We achieved a record 455,000 fibre broadband net connections, an increase of 31%. This brings the number of homes and businesses connected to around 4.2m, 19% of those passed and more than 50% higher than a year ago. Of the net additions in the quarter, 42% were provided to our external communications provider customers, continuing to demonstrate market-wide demand for fibre.

During the year we exceeded all of the 60 minimum service levels introduced by Ofcom in July for the installation of new lines and repairs to existing services. The service levels become more stretching in 2015/16 and we will continue to report on them quarterly.

Operating costs were down 2% for the quarter and the year driven by cost efficiencies that were partly offset by a smaller benefit from the sale of redundant copper. In the year redundant copper sales generated net income of £29m and we expect no benefit from this in 2015/16. EBITDA was up 1% in the quarter and with depreciation and amortisation 1% lower, operating profit was up 3%. EBITDA was flat for the year.

Capital expenditure increased 10% in the quarter and is net of £117m grant funding (Q4 2013/14: £59m) mainly relating to the BDUK programme. The higher capital expenditure was driven by higher volumes of Ethernet provision, the expansion of our network to new homes and an increase in BDUK fibre rollout. Capital expenditure increased 3% for the year and was net of grant funding of £378m (2013/14: £126m).

Operating cash flow decreased 14% in the quarter largely due to the timing of customer receipts and was up 1% for the year.

¹ DSL and fibre

We will hold the fourth quarter and full year 2014/15 results presentation for analysts and investors in London at 9.00am today and a simultaneous webcast will be available at www.bt.com/results

We expect to publish the BT Group plc Annual Report & Form 20-F 2015 on 21 May 2015. The Annual General Meeting of BT Group plc will be held at Old Billingsgate, 1 Old Billingsgate Walk, London, EC3R 6DX, on 15 July 2015 at 11.00am.

We are scheduled to announce results for the first quarter to 30 June 2015 on 30 July 2015.

The full release and 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
Forward-looking statements – caution advised