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Revenues down but profits up at UK incumbent in third quarter

BT Reports Fiscal Q3 Profit of £675M

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LONDON -- BT Group plc (BT.L) today announced its results for the third quarter and nine months to 31 December 2012. Ian Livingston, Chief Executive, commenting on the results, said: "Our fibre plans are helping to make the UK a broadband leader in Europe. More than 13 million premises can access our fibre broadband and we are passing around 100,000 additional premises every week. Take-up is growing strongly with around 1.25 million homes and businesses now enjoying the benefits of faster speeds. This gives us an excellent platform for our push into TV and Sport later this year. Our pre-season training is going well. We have secured attractive new content and world class production facilities at the Olympic Park and are building a strong team. “Our engineers have worked tirelessly following some of the wettest weather on record. Not only did they complete a record number of field visits in the quarter, they also connected a further 281,000 homes and businesses to broadband and helped us grow the number of landlines. BT Global Services has also done well securing £1.9bn of new orders, up 17%. “We have made progress in a number of areas and delivered solid financial results. These are in line with our expectations for the year, which remain unchanged.” Operating results overview
Our key measure of the underlying revenue trend, underlying revenue excluding transit, was down 3.1%, an improvement compared with recent quarters reflecting better performances from BT Global Services and BT Wholesale. Whilst improving, our underlying revenue trend continues to be impacted by the tough conditions in Europe and the financial services sector, regulatory price reductions and lower revenue from calls and lines. Reported revenue of £4,359m was down 9% which includes the impact of certain regulatory decisions which have been treated as a specific item (see Specific items below). Excluding specific items, revenue was down 6% at £4,510m. This decline includes a £66m reduction in transit revenue (including mobile termination rate reductions of £37m), a £50m negative impact from foreign exchange movements, and an £8m impact from disposals. Underlying operating costs before depreciation and amortisation were down 7%, or 5% excluding transit, reflecting the impact of our cost transformation programmes and reduced cost of sales due to the decline in revenue. Total operating costs before depreciation and amortisation and specific items decreased by £274m, or 8%, to £3,069m, and have reduced by over £1bn for the nine months. Adjusted EBITDA increased by 2% to £1,548m. Foreign exchange movements and disposals had no significant impact on EBITDA. Depreciation and amortisation decreased by 4% to £706m largely due to lower overall capital expenditure over the last three financial years. Capital expenditure decreased by 14% to £572m primarily reflecting the higher spend last year on Wholesale Broadband Connect. Profit before tax
Adjusted profit before tax was £675m, up 7%, reflecting the higher EBITDA and lower depreciation and amortisation. Reported profit before tax (which includes specific items) was £628m, down 4%. Tax
The effective tax rate on the profit before specific items was 22.7% (Q3 2012: 24.1%) and is in line with our outlook of around 23% for the full year. Fibre and broadband
We have passed more than 13m premises with our fibre broadband, an increase of around 1.3m in the quarter. Take-up is growing strongly and we achieved around 250,000 connections in the quarter, with around 1.25m homes and businesses now taking a fibre based service. Total broadband market net additions grew 7% to 281,000 of which we added 122,000 retail broadband customers, a 44% share. Regulation
In the quarter Ofcom issued its final determinations on disputes over historic Ethernet pricing (see Specific items below). We disagree with the determinations and are likely to appeal against them. These determinations cover the period from April 2006 to March 2011 and do not impact Openreach’s current pricing for Ethernet products. The charge controls for WLR, LLU and ISDN30 products which became effective in April 2012 impacted revenue in the quarter. We continue to expect these to have a negative impact of around £100m-£200m on group revenue in the 2013 financial year with a further similar year on year impact in the 2014 financial year. The July 2012 Court of Appeal decision against wholesale ladder termination pricing also impacted the third quarter year on year EBITDA trend by £12m. Ofcom’s final determination on the Business Connectivity Market Review and the associated Leased Lines Charge Control is expected to be issued in the next few months. We also expect the consultation on the Wholesale Narrowband Market Review in the next few weeks. Specific items
Specific items resulted in a net charge after tax of £38m (Q3 2012: £15m net credit). Charges of £151m and £36m were recognised against revenue and EBITDA, respectively, following Ofcom’s determinations on historic Ethernet pricing. Restructuring charges of £28m (Q3 2012: £8m) were incurred. In the quarter we started the next phase of our group-wide restructuring programme which is expected to generate future cost savings and further improve customer service delivery. As part of this programme, we commenced the reorganisation of BT Innovate & Design and BT Operate, our two internal service units, to form BT Technology, Service and Operations (BT TSO). This new unit is responsible for the innovation, design, test, build and running of our global networks and systems on an end to end basis. We are also further rationalising and transforming our resources, processes, networks and systems within BT Global Services. We expect additional group restructuring costs to be incurred over the remainder of this year and next. A profit of £9m was recognised on the disposal of our remaining 9.1% interest in Tech Mahindra. Our total investment in Tech Mahindra has in aggregate generated returns of around £350m. Net interest income on pensions was £8m (Q3 2012: £50m). Earnings per share
Adjusted EPS was 6.6p, up 8%, reflecting the growth in profit before tax. Reported EPS (which includes specific items) was 6.2p, down 2%. These are based on a weighted average number of shares in issue of 7,865m (Q3 2012: 7,766m). BT Group plc

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