BT Posts Q1 Results

LONDON -- FIRST QUARTER RESULTS TO JUNE 30, 2007

HIGHLIGHTS

Chief Executive’s statement

Ben Verwaayen, Chief Executive, commenting on the first quarter results, said:

“We have got the year off to a strong start with another robust all round performance. Revenue, EBITDA and earnings per share all continue to grow as BT builds on the achievements of last year.

“There is success across the board. BT Retail’s share of the broadband(2) net additions in the quarter was 38 per cent; contract wins in BT Global Services and BT Wholesale were £2 billion; outside the UK we gained more than 100 new customers.

“We are keeping BT ahead of the game by delivering software driven services that will offer faster, more resilient and cost effective services to our customers wherever in the world they are.”

The income statement, cash flow statement and balance sheet from which this information is extracted are set out on pages 15 to 20.

(1)Specific items are significant one off or unusual items as defined in note 4 on page 24.

(2)Includes DSL and LLU connections.

GROUP RESULTS

Revenue was 3.5 per cent higher at £5,033 million in the quarter with continued strong growth in new wave revenue. EBITDA before specific items and leaver costs grew by 2.8 per cent, the sixth consecutive quarter of growth. Earnings per share before specific items and leaver costs increased by 3 per cent to 6.0 pence, the twenty first quarter of year on year growth.

The strong growth in new wave revenue continued and at £1,815 million was 11 per cent higher than last year. New wave revenue is mainly generated from networked IT services and broadband and accounted for 36 per cent of the group’s revenue. Networked IT services revenue grew by 8 per cent to £1,061 million, and broadband revenue increased by 19 per cent to £540 million.

Progress continues in our transformation into a truly global software driven services organisation. BT Global Services contract wins were £1.7 billion in the first quarter, with £9.2 billion achieved over the last twelve months. This includes the wholesale white label managed services contract with the Post Office, part of the Royal Mail Group which is a BT Global Services customer. In addition BT Wholesale won a five year contract to manage the T-Mobile access network in the UK.

BT had 11.2 million wholesale broadband connections (DSL and LLU) at June 30, 2007, including 2.4 million local loop unbundled lines, an increase of 2.5 million connections year on year as the broadband market continued to show strong growth. There were 459,000 additional connections in the first quarter, which is seasonally the slowest quarter of the year. BT Retail’s share of the net additions in the quarter was 38 per cent and it is expected to maintain its position as the UK’s number one retail broadband provider.

Revenue

Revenue from the group’s traditional businesses was maintained year on year. This performance reflects the robust defence of the traditional business despite price reductions arising from the highly competitive nature of our markets, regulatory intervention and migration of customers to new wave services.

Major corporate (UK and international) revenue showed growth of 5 per cent. Migration from traditional voice only services to networked IT services continued with new wave revenue now representing over 60 per cent of all major corporate revenue.

Revenue from smaller and medium sized UK businesses grew 2 per cent year on year, continuing the recent improving trend. New wave revenue grew by 12 per cent driven by growth in broadband and other new wave services. We continue to focus on innovative pricing plans and propositions that deliver value to our customer base by bringing together IT, broadband and communication services.

Consumer revenue in the first quarter was 2 per cent lower year on year, compared to a 5 per cent reduction twelve months ago. In line with our strategy, growth in new wave revenue of 21 per cent continues to reduce our dependence on traditional revenue which has declined by 5 per cent.

The 12 month rolling average revenue per consumer household increased by £4 to £266, the sixth consecutive quarter of growth. Increased penetration of broadband and the growth of value added propositions have more than offset the lower call revenues. Following a period of sustained growth, the proportion of contracted revenues remained at 68 per cent.

Wholesale (UK and Global Carrier) revenue increased by 7 per cent driven by wholesale line rental (WLR) and local loop unbundling (LLU). New wave revenue now accounts for 25 per cent of wholesale revenue.

Operating results

Group operating costs before specific items increased by 3 per cent year on year to £4,392 million. Staff costs before leaver costs increased by 3 per cent to £1,299 million. The effect of increases in pay rates, the additional staff needed to support networked IT services contracts and increased levels of activity in the network and 21CN activities have been largely offset by improved efficiencies. Leaver costs before specific items were £8 million in the quarter (£24 million last year). Payments to other telecommunication operators increased by £56 million to £1,062 million. Other operating costs before specific items of £1,501 million increased by £64 million mainly due to increased costs of sales from growth in networked IT and other new wave services which were partly offset by cost savings from our efficiency programmes. Depreciation and amortisation increased by 1 per cent to £709 million.

Group operating profit before specific items and leaver costs increased by 5 per cent to £716 million.

Earnings

Net finance costs were £55 million, an increase of £9 million against last year. This includes net finance income associated with the group’s defined benefit pension scheme which was flat year on year at £105 million in the first quarter. The increase in net finance costs primarily reflects the higher net debt for the quarter.

Profit before taxation, specific items and leaver costs of £658 million increased by 3 per cent.

The effective tax rate on the profit before specific items was 24.8 per cent (24.5 per cent last year) compared to the UK statutory corporation tax rate of 30 per cent, reflecting the continued focus on tax efficiency within the group.

Earnings per share before specific items and leaver costs increased by 3 per cent to 6.0 pence.

Specific items

Specific items are defined in note 4 on page 24. There was a total net credit after tax of £119 million (£nil last year). There was a net operating charge before tax of £50 million in the quarter (£nil last year). Restructuring costs of £49 million (£nil last year) relating to the group’s transformation and reorganisation activities were incurred in the quarter. These mainly comprised leaver costs and property exit costs. We expect the total restructuring costs to be around £450 million which is expected to generate a payback within 2 to 3 years. We expect the majority of the costs to be incurred in 2007/08. In addition, a specific tax credit of £154 million (£nil last year) has been recognised for the re-measurement of deferred tax balances for the change in the UK statutory corporation tax rate to 28 per cent, which becomes effective in 2008/09.

Earnings per share after specific items were 7.4 pence in the quarter (5.6 pence last year).

Cash flow and net debt

Net cash inflow from operating activities in the first quarter amounted to £848 million compared to £1,002 million last year. This was reflected in free cash flow which was a net outflow of £152 million in the first quarter compared to an outflow of £17 million last year. The main driver of the increased free cash outflow was the working capital outflow which was £334 million higher than last year and is expected to reverse later in the year. Pension deficiency contributions of £320 million were paid, being the final payment until the next triennial funding valuation as at December 31, 2008. Free cash flow also includes the final receipt of £504 million in relation to the settlement of the open tax years up to 2004/05 agreed with HMRC last year. The cash outflow from the purchase of fixed assets for the quarter amounted to £819 million, £17 million higher than last year.

The net cash outflow on acquisition of subsidiaries, principally Comsat International and i2i Enterprise, in the first quarter amounted to £164 million compared to £35 million last year. The share buyback programme continued with the repurchase of 113 million shares for a total consideration of £365 million during the quarter, which compares to £50 million last year. During the quarter the group issued £1.5 billion of debt maturing in 2014, 2017 and 2037. Debt of £660 million matured and was repaid in the quarter. Net debt was £8,631 million at June 30, 2007. Free cash flow and net debt are defined and reconciled in notes 7 and 8 on pages 26 to 28.

Pensions

The IAS 19 net pension asset at June 30, 2007 was a surplus of £1.4 billion, net of tax, (£2.0 billion gross of tax) compared with a deficit of £1.6 billion at June 30, 2006 (£2.2 billion gross of tax), a turnaround of £3.0 billion. The BT Pension Scheme had assets of £39.5 billion at June 30, 2007.

21st Century Network

During the quarter, BT continued the process of migrating customers to its 21st Century Network (21CN) in South Wales and equipment has now been installed to support the completion of the first phase of customer migrations this year.

Following the successful migration of the first live customers onto BT’s 21CN, BT completed its pioneering 21CN voice trials which carried the world’s first phone calls over an all IP next generation infrastructure in 2005. The trial network, linking BT exchanges in central London, Woolwich and Cambridge, has carried over 160 million calls and provided valuable testing and learning that is now being deployed with live customers.

The preparation for national rollout is also underway with equipment installed at hundreds of sites across the country.

The rebuild of BT's core national network is also continuing and we are on track to launch next generation broadband services delivering up to 24Mb nationally in early 2008. Field trials started during the quarter with the participation of a range of internet service providers (ISPs). This follows the initial successful pilot of next generation broadband services in Cardiff earlier this year.

The roll out of 21CN has resulted in an increased level of capital expenditure compared to the first quarter of last year. In addition, the expansion of the global MPLS network and the purchase of perpetual software licences has accelerated the recognition of capital expenditure in the quarter.

Organisation structure

During the first quarter BT announced a move to a new organisation structure that will help deliver faster, more resilient and cost effective services to customers wherever they are. The move is designed to accelerate BT’s transformation to a networked IT services company, delivering software driven services over broadband and also allowing the acceleration of the achievement of cost savings. BT is bringing together its world class people from design, operations, IT and networks into two business units. BT Design will be responsible for the design and development of the platforms, systems and processes which will support our services while BT Operate will be responsible for their deployment and operation.

The existing group structure has remained in place for management and reporting through the first quarter.

Outlook

Our performance underpins our confidence that we can continue to grow revenue, EBITDA before specific items and leaver costs, earnings per share before specific items and leaver costs, and dividends for the year.

We are confident in our ability to improve shareholder returns and accelerate the strategic transformation of the business.

BT Group plc (NYSE: BT; London: BTA)