Meet the new boss, same as the old boss, sang The Who in 1971. Years later, it seems a fair description of Allison Kirkby, who succeeded Philip Jansen as CEO of BT, the UK's oldest and largest telco, in February. Their management styles may differ, but anyone hoping she would quickly overhaul her predecessor's strategy will be disappointed. The priorities remain fiber rollout, network and IT upgrades, cost reduction and attendant job cuts. Lots and lots of job cuts, in fact.
During his final months in charge, Jansen had reckoned BT, with its workforce including contractors of about 130,000 people, would probably be able to lose up to 55,000 employees by 2030. And Kirkby evidently agrees. Having cut about 10,000 jobs in the past year, BT will have a workforce of between 75,000 and 90,000 people by the end of the decade, the operator said in its latest financial report. All this will help BT find another £3 billion (US3.8 billion) in gross annual cost savings, said Kirkby, in addition to the £3 billion it has already saved.
Figures illustrate why all this is necessary. BT's sales remain stubbornly resistant to growth, edging up 1%, to about £20.8 billion ($26.4 billion), for the last fiscal year. This is £3.3 billion ($4.2 billion) less than BT made in 2016, when it completed its takeover of mobile operator EE. A huge £4.9 billion ($6.2 billion) was pumped into capital expenditure, putting capital intensity at an ear-popping 24% (for most operators it ranges between 15% and 20%).
At £19.5 billion ($24.7 billion), net debt looks monstrous and has grown by £620 million ($785 million) in the last year. Then there is the very small matter of pretax profit, which dropped 31%, to less than £1.2 billion ($1.5 billion). The explanation for that was a £488 million ($618 million) impairment charge against the long-suffering BT Business unit, which new technologies like 5G have failed to re-energize.
Formed from an earlier combination of BT's Global and Enterprise business units, BT Business could soon be waving goodbye to the Global part, too. While there was nothing concrete in BT's report about divestment, there was no shortage of euphemisms. "Looking forward, BT Group will focus on the UK; we will explore all options to optimize our global business" was the key one.
The axewoman cometh
Operationally, though, much of BT looks in good shape. Its fiber rollout is on track and has now passed more than 14 million of the 25 million homes it aims to reach by December 2026. This means BT is over "peak capex," as Kirkby put it, and on the descent. Fewer contractors will be needed to roll out those fiber lines. Profitability should naturally improve.
But it seems like there is a long slog ahead, with BT guiding for revenue growth of 1%, at most, for the current fiscal year, capex of £4.8 billion ($6.1 billion) and earnings (before interest, tax, depreciation and amortization) of £8.2 billion ($10.4 billion), just £100 million ($127 million) more than it logged in the previous year.
By 2027, nevertheless, normalized free cash flow should hit £2 billion ($2.5 billion), up from £1.3 billion ($1.7 billion) last year, as capex and operating costs are slashed. By 2030, BT hopes for £3 billion ($3.8 billion). Based on this expected growth, Kirkby also delighted investors by increasing the dividend for the last fiscal year by 3.9%, to 8 pence per share. BT's share price was up nearly 11% on the London Stock Exchange this morning, recovering the value it had lost since the start of the year. Even so, it is worth just a quarter of its value back in early 2016.
The fiber threat
On the sales side, perhaps the biggest threat to all this is a loss of market share to competitors building their own fiber networks. In the old days of copper broadband, BT rented capacity on its lines and space in its exchanges to rivals, giving Openreach, its networks unit, a dominant role in the market. What BT calls its "superfast" network covers about 30 million premises, with the operator boasting nearly 21 million total broadband connections. But the fiber take-up rate is just 34%.
While that puts Openreach ahead of others, there is the obvious danger of customers decamping from its copper services to fiber rivals. And BT's figures show Openreach lost 491,000 broadband connections last year after a decline of 210,000 the year before. Blaming the weakness of the overall market, BT expects another 500,000 losses this year. Steady erosion could be very damaging.
But Kirkby downplays the threat. "We have a significant 74% market share of the UK's fixed wholesale broadband lines and, as outlined in the Openreach business briefing of December 2021, we always assumed we would lose some lines – roughly 2% per year – and we have. We did however expect market growth to offset some of those losses but in fact the market has declined on the back of a downturn in housebuilding and cost of living crisis hitting broadband adoption," she told analysts today. "But just to be clear we are not seeing any meaningful acceleration in competitor losses as they have been broadly flat in recent quarters."
BT could also face a more muscular rival in mobile if watchdogs greenlight a proposed merger between Vodafone and Three. Without action by the regulator, this would hold licenses for about half the UK's midband spectrum, critical to 5G, and have a footprint of about 26,000 sites, against BT's roughly 19,000.
It would also be active in both the UK's network-sharing joint ventures (MBNL and Cornerstone), potentially giving it knowledge of rivals' plans and the means to thwart them. This week, Vodafone boss Margherita Della Valle repeated calls for the merger to be allowed without any remedies at all. Whatever regulators do, someone is going to be unhappy.