BT suffered a dip in sales for its fiscal third quarter due to setbacks at its embattled global services division, with underlying profits down slightly following rising investments at its consumer business and higher pension costs.
And in what could be a sign the wheels are coming off its glamorous consumer business, the operator also recorded the first sales decline at that unit since 2013 -- when Gavin Patterson replaced Ian Livingston as CEO -- and lost 5,000 TV customers.
The UK operator insisted that results were broadly in line with expectations, recording a 3% fall in revenues, to £5.97 billion ($7.1 billion), and a 2% drop in adjusted earnings (before interest, tax, depreciation and amortization), to £1.83 billion ($2.6 billion), compared with the year-earlier quarter.
Pre-tax profits were up 25%, to £660 million ($938 million), because of one-off items that affected results in the year-earlier quarter.
CEO Gavin Patterson said he was confident BT Group plc (NYSE: BT; London: BTA) would meet full-year guidance of "broadly flat" sales, excluding transit revenues, and between £7.5 billion ($10.7 billion) and £7.6 billion ($10.8 billion) in EBITDA.
But investors were not so sure: BT's share price fell in early-morning trading and was down 4.5%, at about £2.44 ($3.47), at the time of publication.
The operator had to lower its outlook this time last year after indicating that an accounting scandal at the Italian arm of its global services unit would cost it more than previously expected. It also warned of tough conditions in some of its corporate and public sector markets. (See Dodgy Italian Job Savages BT Earnings, Share Price Tanks.)
BT has also been under pressure from rivals and authorities in its mainstream UK broadband market. Its Openreach networks division -- now operated as a legally separate entity -- yesterday promised to extend full-fiber networks to around 3 million UK premises, up from a previous target of 2 million, if regulatory conditions were acceptable. (See Eurobites: Openreach Finally Puts 'Fibre First'.)
But the plans have already met with a backlash from competitors after Openreach said it wanted to be able to force customers off its old copper network and onto the new fiber lines. Controversially, it also hopes to build the network without battery back-up, as a measure to lower costs, and increase charges for its wholesale customers. (See Vodafone UK Boss Slams Openreach 'Stranglehold'.)
Fiber operator CityFibre was reported to have lashed out at the plans in the UK's Daily Telegraph newspaper, describing them as "anticompetitive" and evidence of "monopoly thinking."
Another fiber rival, Hyperoptic, also warned regulators not to let "Fibre First" -- the name BT has given to its plans -- become "Fibre Monopoly."
BT has estimated that building the network would cost between £300 ($426) and £400 ($569) per building passed. It puts "connection costs" at between £150 ($213) and £175 ($249) per building if it is allowed to roll out services without battery back-up.
The overall cost, then, would equal between £1.35 billion ($1.92 billion) and £1.73 billion ($2.46 billion), although BT has not given any indication of how this project will affect overall capital expenditure in the next three years.
The scheme also raises questions about the operator's commitment to Gfast, a technology it is using to boost speeds over last-mile copper connections. Under existing plans, it has said it will use Gfast to improve broadband services for about 10 million UK premises in the next few years. Yet if the regulatory framework proves acceptable, it has talked of extending full-fiber networks to about the same number of premises by the mid-2020s. (See Long-Range, High-Speed Gfast Is Coming – BT.)
Any such rollout would probably make Gfast a very short-lived phenomenon. (See The Clock Ticks for Gfast in Europe.)
Running out of steam
Investments in both higher-speed networks and sports content have paid off handsomely for BT in recent years, but there are signs that its consumer business is running out of steam.
Revenues there edged down just £1 million ($1.42 million) in the third quarter, to £1.261 billion ($1.79 billion), but the decline represented the first since Gavin Patterson took charge of BT in September 2013, since when the consumer division has been an engine of growth for the company.
Operating profits at the consumer unit were down 10%, to £198 million ($281 million). BT added just 35,000 new broadband customers in the third quarter, down from 83,000 a year earlier, and lost 5,000 TV customers, having gained 52,000 in the same quarter of 2016.
It serves about 9.3 million broadband customers in total, with 1.76 million using its TV service.
BT also ended the third quarter with fewer mobile customers than a year earlier -- down from 30.2 million to 29.8 million -- because of prepaid losses.
But it was global services that really felt the pinch, with sales down 9%, to £1.27 billion ($1.81 billion) because of challenging conditions. BT has been cutting thousands of jobs at the unit and recorded a 17% drop in operating costs. After the Italian accounting scandal triggered an operating loss of £55 million ($78 million) a year earlier, it managed a modest operating profit of £45 million ($64 million).
As expected, there was also a decline at the business and public sector unit, which registered a 5% fall in sales, to £1.13 billion ($1.61 billion), and a 30% fall in operating profit, to £275 million ($391 million). The smaller wholesale outfit reported a 4% fall in revenues, to £506 million ($719 million).
Openreach, BT's large and controversial networks business, recorded flat revenues of about £1.29 billion ($1.83 billion) but said operating profits fell 22%, to £305 million ($433 million). It typically blamed regulatory changes to pricing for its difficulties and saw capital expenditure rise 17%, to £477 million ($678 million), because of broadband investments.
BT's overall capital expenditure rose 3%, to £878 million ($1.25 billion).
— Iain Morris, News Editor, Light Reading