BT (BTGOF) 6-K1ST Quarter Results

 

BT Group plc (BT.L) today announced its trading update for the three months to 30 June 2020.

Key strategic developments:

Operational:

Financial:

Revenue was down primarily due to ongoing declines in legacy products and sharply reduced business activity across Enterprise as a result of Covid-19. In particular, our SME segment has seen lower call volumes, and fewer sales and upgrades across both fixed and mobile. Our Wholesale business has been similarly affected. Excluding the divestments of Fleet and Tikit in the prior year our revenue was down 6% and EBITDA was down 12%. The decline in profit was mainly as a result of Covid-19, partly offset by lower costs from our transformation programme. Our order intake in the quarter declined, in part driven by contract delays as a result of the pandemic. This contributed to the 12-month rolling Wholesale order intake declining 15% to £1.0bn. By contrast, the Retail order intake was up 14% at £3.4bn on a 12-month rolling basis following a strong fourth quarter. We have been working hard to support our customers during the pandemic, including flexible payment terms to support SMEs and recently announced the BT Small Business Support Scheme. However, we expect to see a further impact from Covid-19 in future quarters as a result of business insolvency, slower decision making by our larger customers, and lower usage across our SME and Wholesale businesses.

Covid-19 negatively impacted revenue in the quarter but did not materially impact EBITDA as lower non-contracted business and milestone slippage were offset by higher conferencing volumes and cost mitigation. Revenue decline was driven by the impact of Covid-19, divestments, our strategic decisions on low margin business and legacy portfolio declines partly offset by a £6m positive impact from foreign exchange movements. EBITDA was up 1% as lower revenue and the impact of divestments were more than offset by lower operating costs reflecting ongoing transformation, certain one-offs, Covid-19 mitigation actions including reducing discretionary spend, optimising resourcing and working with external suppliers to drive additional cost efficiencies, and a £3m positive impact from foreign exchange movements. At the end of May we completed the sale of our domestic business in Spain. Excluding this divestment our revenue was down 7% and EBITDA was up 4%. Order intake in the quarter was £0.8bn, up 57% benefiting from a number of renewals including Bristol-Myers Squibb. On a rolling 12-month basis it was £4.6bn, up 46% year on year. Looking forward, due to the impact of Covid-19 we are seeing a reduction in spending and a more cautious approach from our multinational customers resulting in cancellations and delays to purchasing cycles that will negatively impact revenue and EBITDA. In July we agreed the sale of our domestic operations in France which we expect to complete by the end of 2020. 

Reported revenue was £5,248m, down 7%, due primarily to the impact of Covid-19, including reduced BT Sport revenue and a reduction in business activity in our enterprise units, particularly within SME and Wholesale. The decline in revenue was also driven by ongoing legacy product declines in our enterprise businesses but partially offset by higher rental bases of fibre-enabled products and Ethernet in Openreach.

Reported profit before tax was £561m, down 13% or £81m. This reduction was driven by the reduced EBITDA and higher interest expense, and higher depreciation and amortisation charges, partly offset by a specific item gain in the quarter of £11m. This compares to a specific item loss of £107m in the prior year. The gain includes profit of £82m recognised on completion of the disposal of our Spanish operations in the quarter. There are no changes to the Covid-19 adjustments recognised in relation to various balance sheet items in Q4 last year.

Capital expenditure was £927m (2019/20: £931m). Network investment was £526m, up 2%. This reflects continued investment in FTTP deployment. Other capital expenditure components were down 3% with £204m spent on customer-driven investments, £170m on systems and IT, and £27m spent on non-network infrastructure.

Although uncertainties remain, we are now able to provide an outlook for this financial year.

Beyond this year and based on current expectations, we expect to return the business to sustainable adjusted EBITDA growth, driven in part by the recovery from Covid-19. This recovery will be enhanced by the existing drivers of near-term growth in our business, with sales of our converged and growth products and savings from our modernisation programme starting to offset regulatory headwinds and legacy product declines.

Ofcom has responded positively to the work BT has done for the country during the Covid-19 pandemic. We continue to brief them regularly on our response to the situation, our plans to "unwind" some initiatives at the right time, and our learnings from the initial lockdown period.

Some elements of the contractual MBORC (Matters Beyond Our (Openreach's) Reasonable Control) declared in Q4 last year remain in place. This position is under regular review, with Ofcom fully informed of developments.  

In May, we submitted our response to Ofcom's WFTMR. The full response is published on Ofcom's website alongside all communications providers' (CPs') responses. We still expect Ofcom to finalise its proposals prior to April 2021.

In July, Ofcom published a follow up consultation on the approach to investment in Area 3 and Openreach's commitment to build in Area 3 in the next five years. Ofcom proposes to extend the fibre "regulatory enablers" into Area 3.  We will review the proposals in detail and provide our response by the deadline in September. Further follow up consultations are likely.

We have now started to send out letters to potentially eligible customers in areas where Openreach streetworks have not been affected by Covid-19. In May, Ofcom confirmed that they will establish an industry fund for providers that can demonstrate the costs incurred are an unfair burden. For the fund to be triggered, BT will need to submit detailed costs demonstrating the net burden of delivering the USO. 

Ofcom has indicated that bidding in the upcoming auction of 700MHz and 3.6GHz spectrum in the UK will be in November 2020 at the earliest, taking into account the impact of the Covid-19 pandemic and other considerations. BT expects to participate in the auction to support its 5G leadership position.

We will formally report to Ofcom on our adherence to its Fairness for Customers Commitments in the autumn. From Q1 EE mobile handset customers now benefit from a percentage discount 3 months after contract end, and prices have now been reduced for non-fibre-eligible out of contract (OOC) consumers remaining on copper broadband, and for OOC vulnerable broadband customers who were previously paying more than the standard OOC price.

In July, the Competition and Markets Authority (CMA) provided their latest update on the 'loyalty penalty', noting that vulnerable customers have been disproportionately affected by Covid-19 and continuing to make the case for additional powers to tackle harmful pricing practices. The CMA will continue to monitor Ofcom's work in this area and the impact of CPs' commitments on  prices.

In July, Ofcom published their latest Broadband Pricing Report stating that they have secured additional pricing commitments from all the main CPs since the last update, but that there is room for providers to do more to protect their vulnerable customers from high out-of-contract prices.

Ofcom has agreed with the Government to keep the implementation date of the EECC consistent with the EU date of 21 December 2020. As CPs will need additional time to make the necessary changes in their systems and processes to comply with the new rules, Ofcom will allow providers at least 12 months from the date of their statement to make the new rights available to customers.

In July, the Department for Digital, Culture, Media & Sport (DCMS) announced a revised set of proposals to remove Huawei equipment from 5G communication networks in the UK by the end of 2027, and consult on the future use of Huawei in FTTP networks.

BT currently estimates that full compliance with these revised proposals would require additional activity, both in removing and replacing Huawei equipment from our existing mobile network, and in excluding Huawei from the 5G network that we continue to build. It is estimated that these costs can be absorbed within the initial estimated implementation cost of £500m, as reported in our Q3 2019/20 trading update.

We will continue to work with relevant authorities as they consult on the future procurement strategy for fixed networks.

In May, Openreach announced that, in 117 exchange areas across the UK, it's planning to stop selling legacy analogue services and instead focus on providing people with a modern, future-proof full fibre connection. This is in addition to the Salisbury exchange area, in which stop sell was announced in December 2019.

 

BT Group today announced the appointment of Rob Shuter as CEO of its Enterprise unit and as a member of BT's Executive Committee. Rob is currently Group President and CEO at MTN Group, Africa's leading mobile telecommunications company. Prior to joining MTN he served as CEO of Vodafone's European Cluster. Rob is expected to join BT by the end of the 2020/21 financial year.

Gerry McQuade the current CEO of BT Enterprise, has announced he will be retiring from BT. Gerry has spent more than 12 years at EE and then BT, initially joining BT as the CEO of Wholesale and Ventures before moving on to lead the integration of that unit with Business and Public Sector to form the combined Enterprise business in 2018. Gerry is expected to leave BT around the end of the 2020/21 financial year. See related press release dated 31 July 2020.

There have been no material updates relating to the legal proceedings and regulatory matters as disclosed in the Annual Report 2020.

Our commentary focuses on the trading results on an adjusted basis, which is a non-GAAP measure, being before specific items. The directors believe that presentation of the group's results in this way is relevant to an 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. This is consistent with the way that financial performance is measured by management and reported to the Board and the Executive Committee and assists in providing a meaningful analysis of the trading results of the group. 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. Reported revenue, reported operating costs, reported operating profit and reported profit before tax are the equivalent unadjusted or statutory measures.

We are scheduled to announce the half year results for 2020/21 on 29 October 2020.

Although BT believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences between actual results and those implied by the forward-looking statements include, but are not limited to: the duration and severity of Covid-19 impacts on our people, operations, suppliers and customers; failure to respond effectively to intensifying competition and technology developments; failure to address the lingering perception of slow pace and connectivity in broadband and mobile coverage, which continues to be raised at a UK parliamentary level; undermining of our strategy and investor confidence caused by an adversarial political environment; challenges presented by Covid-19 around network resilience, support for staff and customers, data sharing and cyber security defence; unfavourable regulatory changes; attacks on our infrastructure and assets by people inside BT or by external sources like hacktivists, criminals, terrorists or nation states; a failure in the supplier selection process or in the ongoing management of a third-party supplier in our supply chain, including failures arising as a result of Covid-19; risks relating to our BT transformation plan; failure to successfully manage our large, complex and high-value national and multinational customer contracts (including the Emergency Services Network and the Building Digital UK (BDUK) programme) and deliver the anticipated benefits; changes to our customers' needs, budgets or strategies that adversely affect our ability to meet contractual commitments or realise expected revenues, profitability or cash generation; customer experiences that are not brand enhancing nor drive sustainable profitable revenue growth; pandemics, natural perils, network and system faults, malicious acts, supply chain failure, software changes or infrastructure outages that could cause disruptions or otherwise damage the continuity of end to end customer services including network connectivity, network performance, IT systems and service platforms; insufficient engagement from our people; adverse developments in respect of our defined benefit pension schemes; risks related to funding and liquidity, interest rates, foreign exchange, counterparties and tax,; failures in the protection of the health, safety and wellbeing of our employees or members of the public or breaches of health and safety law and regulations; financial controls that may not prevent or detect fraud, financial misstatement or other financial loss; security breaches relating to our customers' and employees' data or breaches of data privacy laws; failure to recognise or promptly report wrongdoing by our people or those working for us or on our behalf (including a failure to comply with our internal policies and procedures or the laws to which we are subject); and the potential impacts of climate change on our business.

BT undertakes no obligation to update any forward-looking statements whether written or oral that may be made from time to time, whether as a result of new information, future events or otherwise.

BT Group is the UK's leading telecommunications and network provider and a leading provider of global communications services and solutions, serving customers in 180 countries. Its principal activities in the UK include the provision of fixed voice, mobile, broadband and TV (including Sport) and a range of products and services over converged fixed and mobile networks to consumer, business and public sector customers. For its global customers, BT provides managed services, security and network and IT infrastructure services to support their operations all over the world. BT consists of four customer-facing units: Consumer, Enterprise, Global and its wholly-owned subsidiary, Openreach, which provides access network services to over 650 communications provider customers who sell phone, broadband and Ethernet services to homes and businesses across the UK.

For the year ended 31 March 2020, BT Group's reported revenue was £22,905m with reported profit before taxation of £2,353m.

British Telecommunications plc is a wholly-owned subsidiary of BT Group plc and encompasses virtually all businesses and assets of the BT Group.  BT Group plc is listed on the London Stock Exchange.