SOURCE: BT Group plc

November 09, 2006 02:02 ET

BT Group PLC announces Interim Results

London, UK -- (MARKET WIRE) -- November 9, 2006 --

November 9, 2006



- Revenue of GBP4,941 million, up 4 per cent

- New wave revenue of GBP1,736 million, up 21 per cent, 
  representing 35 per cent of total revenue compared
  with 30 per cent last year

- EBITDA before specific items(1) and leaver costs of
  GBP1,418 million, up 2 per cent

- Profit before taxation, specific items(1) and leaver
  costs of GBP665 million, up 12 per cent

- Earnings per share before specific items(1) and 
  leaver costs of 6.0 pence, up 13 per cent

- Continued strong broadband net additions(2) of
  626,000 of which BT Retail's share was 25 per cent


- Revenue of GBP9,805 million, up 3 per cent

- New wave revenue of GBP3,377 million, up 20 per cent

- EBITDA before specific items(1) of GBP2,747 million,
  up 2 per cent

- Profit before taxation and specific items(1) of 
  GBP1,247 million, up 17 per cent

- Earnings per share before specific items(1) of 
  11.3 pence, up 19 per cent

- Interim dividend of 5.1 pence per share, up 
  19 per cent

- Broadband end users(2) of 9.3 million at 
  September 30, 2006 of which BT Retail now has
  3 million customers

The income statement, cash flow statement and balance
sheet from which this information is extracted are
set out on pages 16 to 22.

(1) Before specific items which are material one off 
    or unusual items as defined in note 4 on page 26.

(2) DSL and LLU connections.

Chairman's statement

Sir Christopher Bland, Chairman, commenting on the half year results said:

"These strong half year results show sustained momentum across the business with revenues up 3 per cent and earnings per share before specific items up 19 per cent.

"I am pleased to report that we will be paying an interim dividend of 5.1 pence, up 19 per cent on last year, showing our continued commitment to improving shareholder returns and our confidence for the future."

Chief Executive's statement

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

"These second quarter results show another strong team performance with every part of the business playing its part. We have announced today that BT Retail has passed 3 million broadband connections in a fast growing market. We have now reached 1 million LLU connections. 21CN is going live in the Cardiff area this month. The business continues to win major transformational contracts, including PepsiCo and Vodafone.

"Revenue has increased for eleven consecutive quarters and earnings per share(1) were up 13 per cent, the eighteenth consecutive quarter of growth. EBITDA(1) continues to grow and was up 2.4 per cent.

"These results underpin our confidence in our ability to grow our revenue, EBITDA, earnings per share and dividends this year."

(1)Before specific items and leaver costs.

                               TO SEPTEMBER 30, 2006

                            Second quarter             Half year
                      ______________________    ______________________
                                       Better                    Better
                      2006     2005   (worse)   2006     2005   (worse)
                      GBPm     GBPm        %    GBPm     GBPm        %
Revenue              4,941    4,767       4     9,805    9,498       3

- before specific
  items and leaver
  costs              1,418    1,385       2     2,804    2,748       2
- before specific
  items              1,385    1,348       3     2,747    2,705       2

Profit before
- before specific
  items and leaver
  costs                665      596      12     1,304    1,113      17
- before specific
  items                632      559      13     1,247    1,070      17
- after specific
  items                629      489      29     1,244      988      26

Earnings per share
- before specific
  items and leaver
  costs                6.0p     5.3p     13      11.8p     9.8p     20
- before specific
  items                5.7p     5.0p     14      11.3p     9.5p     19
- after specific
  items                5.7p     4.4p     30      11.3p     8.8p     28

Capital expenditure    812      694     (17)    1,527    1,410      (8)

Free cash flow         338      503     (33)      321      377     (15)

Interim dividend                                  5.1p     4.3p     19

Net debt                                        8,079    8,133       1

The commentary focuses on the results before specific items and leaver costs. This is consistent with the way that financial performance is measured by management and we believe allows a meaningful analysis to be made of the trading results of the group. Specific items are defined in note 4 on page 26.

The income statement, cash flow statement and balance sheet are provided on pages 16 to 22. A reconciliation of EBITDA before specific items to group operating profit is provided on page 31. A definition and reconciliation of free cash flow and net debt are provided on pages 28 to 30.


Revenue was 4 per cent higher at GBP4,941 million in the quarter with continued strong growth in new wave revenue more than offsetting the decline in traditional revenue. EBITDA before specific items and leaver costs grew by 2.4 per cent. This is the third quarter of growth and builds on the 1.7 per cent growth reported last quarter. Earnings per share before specific items and leaver costs increased by 13 per cent to 6.0 pence, the eighteenth consecutive quarter of year on year growth.

The strong growth in new wave revenue continued and at GBP1,736 million was 21 per cent higher than last year. New wave revenue accounted for 35 per cent of the group's revenue compared to 30 per cent in the second quarter of last year. New wave revenue is mainly generated from networked IT services, broadband and mobility. Networked IT services revenue grew by 10 per cent to GBP1,001 million, broadband revenue increased by 39 per cent to GBP486 million and mobility revenue increased by 4 per cent to GBP72 million.

Networked IT services contract wins were GBP0.7 billion in the second quarter, with GBP4.0 billion achieved over the last twelve months.

BT had 9.3 million wholesale broadband connections at September 30, 2006, including 838,000 local loop unbundled lines, an increase of 2.8 million connections year on year and 626,000 connections in the quarter. Over 46 per cent of all UK homes now subscribe to broadband services, comprising both DSL and cable services (Source: Informa, Telecoms Market, September 2006).


Revenue from the group's traditional businesses declined by 4 per cent continuing recent trends. This reflects regulatory intervention, competition, price reductions and also technological changes that we are using to drive customers from traditional services to new wave services.

Major corporate (UK and international) revenue showed growth of 5 per cent, with 11 per cent growth in new wave revenue more than offsetting the decline in traditional services. Migration from traditional voice only services to networked IT services continued with new wave revenue representing 60 per cent of all major corporate revenue.

Revenue from smaller and medium sized (SME) UK businesses grew by 2 per cent year on year. New wave revenue grew by 23 per cent driven by continued growth in broadband and other new wave services. In the declining UK calls market, BT has gained market share in the SME sector through innovative pricing plans and a focus on propositions that bring together IT, broadband and communications to allow business people to concentrate on running their business.

Consumer revenue in the second quarter was 6 per cent lower, primarily due to wholesale line rental (WLR) substitution. Growth in new wave revenue of 44 per cent continues to reduce our dependence on traditional revenue which has declined by 12 per cent with the strategic shift towards new wave products and services. New wave revenue now represents 17 per cent of the total consumer revenue.

The 12 month rolling average revenue per consumer household (net of mobile termination charges) of GBP254 increased by GBP1 compared to last quarter, the third successive quarter of growth. Improvements in the proportion of customers upgrading from the basic broadband package and more new customers subscribing for higher value packages has more than offset the lower call revenues. BT Total Broadband reflects our strategy to drive value into the broadband market and we reached 3 million BT Retail broadband connections in October. Contracted revenues increased by 1 percentage point to 69 per cent compared to last quarter, 3 percentage points higher than last year.

Wholesale (UK and Global Carrier) revenue increased by 14 per cent driven by WLR and LLU. UK Wholesale new wave revenue increased by 41 per cent to GBP339 million, mainly driven by broadband.

Operating results

Group operating costs before specific items increased by 4 per cent year on year to GBP4,311 million. Staff costs before leaver costs increased by GBP64 million to GBP1,274 million due mainly to the additional staff needed to support networked IT services contracts, increased levels of activity in the network and 21CN activities (including capital work) as well as cost inflation. Leaver costs were GBP33 million in the quarter (GBP37 million last year). Payments to other telecommunication operators increased by GBP45 million to GBP1,034 million. Other operating costs before specific items of GBP1,442 million increased by GBP47 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 2 per cent year on year to GBP703 million.

Group operating profit before specific items and leaver costs increased by 3 per cent to GBP715 million. Operating profit margin before specific items remained flat year on year at 14 per cent.


Net finance costs were GBP55 million, an improvement of GBP45 million against last year. This includes net finance income associated with the group's defined benefit pension scheme which was GBP105 million in the second quarter, GBP41 million higher than last year. Repayment of maturing debt last year, fair value movements on derivatives that are economic hedges but are not fully effective hedges under the IAS 39 definitions and lower average net debt have also contributed to the reduction in net finance costs. This reduction was offset by a GBP31 million net gain last year on the early redemption of the US dollar 2008 LG Telecom convertible bond.

Profit before taxation, specific items and leaver costs of GBP665 million increased by 12 per cent.

The effective tax rate on the profit before specific items was 24.5 per cent (24.9 per cent last year) reflecting the continued focus on tax efficiency within the group.

Earnings per share before specific items and leaver costs increased by 13 per cent to 6.0 pence.

Specific items

Specific items are defined in note 4 on page 26. There was a net charge before taxation of GBP3 million in the quarter (GBP70 million charge last year). Costs of GBP23 million relating to the further rationalisation of the group's office portfolio were incurred in the quarter (GBPnil last year). This was partly offset by a profit of GBP20 million arising from the group's disposal of 6 per cent of its equity interest in Tech Mahindra Limited, an associated undertaking, reducing the group's holding to 36 per cent. In the prior year, a provision of GBP70 million was recognised relating to the incremental and directly attributable costs in connection with creating the Openreach line of business.

Earnings per share after specific items were 5.7 pence in the quarter (4.4 pence last year).

Cash flow and net debt

Net cash inflows from operating activities in the second quarter amounted to GBP1,191 million compared to GBP1,263 million last year, largely due to higher working capital outflows.

Free cash flow was a net inflow of GBP338 million in the second quarter compared to GBP503 million last year mainly reflecting the higher working capital outflows and increased capital expenditure. The year on year deterioration reflects the timing of receipts and payments and is expected to reverse in the second half of the year. The share buyback programme continued with the repurchase of 48 million shares for GBP102 million during the quarter. Net debt was GBP8,079 million at September 30, 2006, GBP54 million below the level at September 30, 2005. Free cash flow and net debt are defined and reconciled in notes 8 and 9 on pages 28 to 30.


The IAS 19 net pension obligation at September 30, 2006 was a deficit of GBP2.0 billion, net of tax, being GBP0.6 billion lower than the level at September 30, 2005. The BT Pension Scheme had assets of GBP35.9 billion at September 30, 2006. The triennial funding valuation as at December 31, 2005 is currently being performed and we expect this exercise to conclude by December 31, 2006.

21st Century Network

BT's 21st Century Network programme made significant progress during the quarter. The construction of 10 per cent of the UK's core communications infrastructure is in place and fully operational. Site planning and preparation has been completed in all core and metro nodes in South Wales, and at a further 100 sites across the country. Nine new fibre rings, totalling 2,100 kilometres, have been installed in South Wales and 1,500 man years of IT systems development work has been carried out. All of this preparatory work is required to support the migration of the first end user customers to 21CN. This is scheduled to take place near Cardiff at the end of November.

Readiness testing of the network, systems, services and customer premises equipment (CPE) is well advanced. A test facility in Swansea, where other communications providers can test their services, was opened on October 25, 2006. Live voice calls have already been carried over the new 21CN network, built using 21CN hardware and software, in South Wales.

BT and representatives from across industry have agreed a single end user communications programme to help consumers and single site small and medium enterprises understand better what next generation networks are and to provide a single source of detail and further information. The programme, which launched in October, operates under a single independent brand - "Switched-On".

Shareholder distributions

An interim dividend of 5.1 pence per share, an increase of 19 per cent on last year, will be paid on February 12, 2007 to shareholders on the register on December 29, 2006. The ex dividend date is December 27, 2006. During the first half year 69 million shares were repurchased for GBP167 million under the group's share buyback programme.


Our performance underpins our confidence that we will continue to grow revenue, EBITDA, earnings per share and dividends this financial year. Revenue growth will continue to be fuelled by new wave services; the EBITDA improvement will be driven by the continued growth in BT Retail's profitability and an acceleration through the year of the EBITDA growth in BT Global Services.

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


The half year report, which contains the independent review report of the auditors, will be published in The Times on November 10, 2006.

The third quarter results are expected to be announced on February 8, 2007.

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