BT Results - First Quarter to June 30, 2008 - Key Points

LONDON, July 31 /PRNewswire-FirstCall/ --

-- Revenue of 5,177 million pounds, up 3 per cent

-- EBITDA before specific items(1) and leaver costs of 1,433 million
pounds, up 1 per cent

-- Operating profit before specific items(1) and leaver costs of 742
million pounds, up 4 per cent

-- Profit before taxation, specific items(1) and leaver costs of 613
million pounds, down 7 per cent

-- Earnings per share before specific items(1) and leaver costs of 6.1
pence, up 2 per cent

-- Free cash outflow of 734 million pounds

-- 13.0 million broadband end users(2) of which BT's retail share was 35
per cent, with 31 per cent of net additions in the quarter

The income statement, cash flow statement and balance sheet from which
this information is extracted are set out on pages 17 to 22.(*)
[NOTE: FULL TEXT OF ANNOUNCEMENT IS AVAILABLE FROM BT PUBLIC RELATIONS].
Chief Executive's statement
Ian Livingston, Chief Executive of BT (NYSE: BT), commenting on the first
quarter results, said:
"BT has continued to grow revenue, EBITDA(3) and earnings per share(3) in
the first quarter.
BT Global Services has increased revenue by 13 per cent with strong growth
of 33 per cent outside the UK. We achieved total contract wins of 8.2 billion
pounds over the last twelve months, and the pipeline of new business remains
strong.
BT Retail performed well with revenue growth of 3 per cent and double
digit profit growth. BT Wholesale has won managed network solutions contracts
of 1.2 billion pounds over the last twelve months.
We are committed to delivering long term shareholder value and will
continue to invest in the future growth of our business. We have announced
plans to invest 1.5 billion pounds to make fibre-based, super-fast broadband
available to as many as 10 million homes in the UK by 2012, dependent upon an
appropriate regulatory environment.
Our full year guidance remains unchanged -- we continue to expect to
deliver growth in revenue, EBITDA(3), earnings per share(3) and dividends per
share in this financial year."
(1) Specific items are significant one off or unusual items as defined in
note 4 on pages 26 to 27. (2) DSL and LLU connections.
(3) Before specific items and leaver costs.

RESULTS FOR THE FIRST QUARTER ENDED JUNE 30, 2008

First quarter
Year
ended
Better March 31
2008 2007 (worse) 2008
pounds m pounds m % pounds m

Revenue 5,177 5,033 3 20,704

EBITDA
- before specific items and
leaver costs 1,433 1,425 1 5,911
- before specific items 1,360 1,417 (4) 5,784

Operating profit
- before specific items and
leaver costs 742 716 4 3,022
- before specific items 669 708 (6) 2,895
- after specific items 642 658 (2) 2,356

Profit before taxation
- before specific items and
leaver costs 613 658 (7) 2,633
- before specific items 540 650 (17) 2,506
- after specific items 513 600 (15) 1,976

Earnings per share
- before specific items and
leaver costs 6.1p 6.0p 2 25.0p
- before specific items 5.4p 5.9p (8) 23.9p
- after specific items 5.1p 7.4p (31) 21.5p

Capital expenditure 802 903 11 3,339

Free cash flow (734) (152)(1) - 1,503(1)

Net debt 10,581 8,631 (23) 9,460

(1) Includes tax receipts of 504 million pounds and payment of pension
deficiency contributions of 320 million pounds.
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 pages 26
to 27.
The income statement, cash flow statement and balance sheet are provided
on pages 17 to 22. A reconciliation of EBITDA before specific items and
leaver costs 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.
GROUP RESULTS
First quarter ended June 30, 2008
Revenue was 3 per cent higher at 5,177 million pounds in the quarter with
continued growth in managed solutions and broadband and convergence revenue.
EBITDA before specific items and leaver costs increased by 1 per cent year on
year. Earnings per share before specific items and leaver costs increased by 2
per cent to 6.1 pence.
Our BT Global Services business achieved contract wins of 1.9 billion
pounds in the first quarter, with 8.2 billion pounds achieved over the last
twelve months.
We had 13.0 million wholesale broadband connections (DSL and LLU) at June
30, 2008, including 4.8 million local loop unbundled lines. This represents an
increase of 1.8 million wholesale broadband connections year on year. There
were 338,000 net additional broadband connections in the quarter. Our retail
share of those net additions was 103,000, being 31 per cent, and we remain the
UK's number one retail broadband provider with a customer base of 4.5 million
at June 30, 2008, which represents a market share of 35 per cent.
Our BT Wholesale managed network solutions business achieved contract wins
of 490 million pounds in the first quarter, with 1.2 billion pounds achieved
over the last twelve months.
Revenue
Revenue was 3 per cent higher than last year, including a 93 million
pounds favourable exchange rate movement. Managed solutions revenue grew by 21
per cent to 1,408 million pounds, and broadband and convergence revenue
increased by 4 per cent to 640 million pounds. Managed solutions includes
revenue from our networked IT services, managed network solutions and MPLS.
Broadband and convergence revenue includes revenue from broadband, LLU,
mobility and convergence solutions. The growth in managed solutions was mainly
due to 17 per cent growth in networked IT services and 36 per cent growth in
MPLS revenue. This revenue growth in the quarter was partially offset by a 6
per cent decline in revenue from calls and lines to 1,647 million pounds,
together with a 7 per cent decline in revenue from transit, conveyance,
interconnect circuits, WLR, global carrier and other wholesale products to 827
million pounds.
Revenue from our Major corporate customer segment increased by 12 per cent
to 1,961 million pounds, reflecting the increased take up of our networked IT
services, the impact of foreign exchange and recent acquisitions by BT Global
Services.
Revenue from our Business customer segment (comprising smaller and medium
sized UK businesses) grew by 5 per cent to 661 million pounds, continuing the
recent trend. This reflects both organic growth in the UK as well as the
contribution from our acquisitions of Lynx and Basilica last year.
Revenue from our Consumer customer segment of 1,228 million pounds was
broadly flat year on year, with the impact of call package price reductions
and a decline in calls revenue being offset by growth in broadband revenue.
The 12 month rolling average revenue per consumer household increased by 4
pounds in the quarter to 278 pounds, reflecting the increasing number of
customers taking multiple services from BT. Increased broadband revenue and
the growth of value added propositions per household, have more than offset
the lower call package prices in the quarter.
Wholesale (UK and global carrier) customer revenue decreased by 7 per cent
to 1,320 million pounds as a result of the impact of volume and price
reductions on DSL broadband and the decrease in low margin transit revenue and
conveyance volumes, which was partially offset by growth in managed network
solutions revenue, migrations to local loop unbundling (LLU) arrangements, and
growth in global carrier revenue of 19 per cent.
Operating results
Group operating costs before specific items and leaver costs increased by
3 per cent to 4,525 million pounds, partly due to exchange rate movements.
Staff costs before leaver costs increased by 5 per cent to 1,370 million
pounds, largely due to acquisitions made in the past year, with the impact of
pay inflation being largely offset by efficiency savings. Leaver costs before
specific items were 73 million pounds in the quarter (8 million pounds last
year), mainly due to the earlier timing of leaver programmes this year.
Payments to other telecommunication operators decreased by 2 per cent to 1,037
million pounds, with the growth in BT Global Services being more than offset
by the decline in transit volumes and prices. Other operating costs before
specific items of 1,585 million pounds increased by 6 per cent, reflecting
increased costs of sales due to growth in the networked IT services business,
as well as the impact of acquisitions and higher energy and fuel costs, and
have been partially offset by cost efficiency savings. Efficiency savings were
145 million pounds in the quarter and we have increased our full year target
by 100 million pounds to achieve total savings of about 800 million pounds in
the year. Depreciation and amortisation decreased by 3 per cent year on year
to 691 million pounds, largely as the result of some legacy assets becoming
fully depreciated. Other operating income before specific items increased by
23 million pounds to 90 million pounds in the quarter, which included some up
front benefits from the transformation of our operational cost base through
global sourcing and process improvement, together with income from the sale of
scrap materials and cable recoveries.
Group operating profit before specific items and leaver costs increased by
4 per cent to 742 million pounds. Group operating profit margin before
specific items and leaver costs increased to 14.3 per cent compared with 14.2
per cent last year, the sixth consecutive quarter of year on year margin
expansion.
Earnings
Net finance expense before specific items was 130 million pounds, an
increase of 75 million pounds against last year. The increase in net finance
expense primarily reflects the higher average net debt, due mainly to the
share buyback programme, together with a reduction in finance income
associated with our defined benefit pension scheme to 78 million pounds (105
million pounds last year).
The effective tax rate on the profit before specific items was 22.8 per
cent (24.8 per cent last year) compared with the UK statutory rate of 28 per
cent (30 per cent last year), reflecting the continued focus on tax efficiency
within the group.
Profit before taxation, specific items and leaver costs of 613 million
pounds decreased by 7 per cent.
Earnings per share before specific items and leaver costs increased by 2
per cent to 6.1 pence. This is based on average shares in issue of 7,731
million (8,216 million last year) with the reduction due to the shares
repurchased under the buyback programme.
Specific items
Specific items are defined in note 4 on pages 26 to 27. Specific items
were a net charge before tax of 27 million pounds (50 million pounds last
year) and a net charge after tax of 19 million pounds (119 million pounds
credit last year). Specific items before tax wholly relate to restructuring
costs (49 million pounds last year) incurred on our transformation and
reorganisation activities in the quarter which mainly comprised manager leaver
costs and transformation programme costs. Last year specific tax items
included a 154 million pounds tax credit relating to the re-measurement of
deferred tax balances for the change in the UK statutory corporation tax rate
to 28 per cent.
Earnings per share after specific items was 5.1 pence in the quarter (7.4
pence last year).
Cash flow and net debt
Net cash inflow from our operating activities in the first quarter
decreased to 387 million pounds compared with 848 million pounds last year.
This was reflected in free cash flow which was an outflow of 734 million
pounds compared with an outflow of 152 million pounds last year. The higher
free cash outflow is primarily the result of a higher working capital outflow
of 962 million pounds (691 million pounds last year), which is expected to
largely reverse in the second half of the year. In addition there was a higher
net cash outflow in respect of net interest paid of 285 million pounds (182
million pounds last year) as a result of the timing of interest coupon dates
on new debt raised in the last year and a one off interest receipt from HMRC
last year. In addition, last year free cash flow benefited from the receipt of
504 million pounds from the settlement of open tax years up to and including
2004/5 agreed with HMRC, offset by pension deficiency contributions of 320
million pounds, both of which are non recurring in the current financial year.
Net cash outflow for the purchase of property, plant and equipment and
software was marginally up at 836 million pounds (819 million pounds last
year). The net cash outflow on acquisition of subsidiaries in the quarter was
94 million pounds (164 million pounds last year) and related principally to
the acquisition of Wire One Holdings Inc, a video conferencing company based
in the US. During the quarter we raised new long term borrowings of 794
million pounds at an average annualised interest rate of 7.7 per cent. We
repurchased 118 million shares (113 million last year) for a total
consideration of 257 million pounds (365 million pounds last year), resulting
in a net cash outflow of 271 million pounds (382 million pounds last year). As
announced earlier this month, the share buyback programme is being suspended
with effect from July 31, 2008 as a result of our strategic investment in
fibre deployment.
Net debt was 10,581 million pounds at June 30, 2008 compared with 8,631
million pounds at June 30, 2007 and 9,460 million pounds at March 31, 2008.
Free cash flow and net debt are defined and reconciled in notes 7 and 8 on
pages 28 to 30.
Pensions
The BT Pension Scheme IAS 19 valuation deficit at June 30, 2008 was 0.6
billion pounds, net of tax (0.8 billion pounds gross of tax), compared with a
surplus of 1.4 billion pounds at June 30, 2007 (2.0 billion pounds gross of
tax). The BT Pension Scheme had assets of 36.8 billion pounds at June 30, 2008
(39.5 billion pounds at June 30, 2007).
Next Generation Access
As part of our wider strategy of delivering next generation broadband
services nationwide, we recently announced plans to invest 1.5 billion pounds
to make fibre-based, super-fast broadband available to as many as 10 million
homes in the UK by 2012. A supportive and enduring regulatory environment is
essential if this investment is to take place. Therefore we will be discussing
with Ofcom the conditions that would be necessary to enable this programme to
progress. These include removing current barriers to investment and making
sure that anyone who chooses to invest in fibre can earn a fair rate of return
for their shareholders.
BT plans to invest around 1.5 billion pounds in total in the programme, of
which around 1 billion pounds is incremental to BT's existing capital
expenditure plans. We expect the initial investment in the programme will
result in around 100 million pounds of incremental capital expenditure in each
of the 2008/9 and 2009/10 financial years, taking the total expected capital
expenditure in those years to around 3.2 billion pounds and 3.1 billion
pounds, respectively. The remaining 800 million pounds incremental spend will
be spread over the following three financial years.
Given the strategic priority of this investment, the board is suspending
the current share buyback programme with effect from July 31, 2008. As of this
date, we have returned in excess of 1.8 billion pounds of the planned 2.5
billion pounds buyback programme.
21st Century Network
The rollout of our 21st Century Network (21CN) continued during the
quarter in line with the deployment approach outlined in the fourth quarter,
with a focus on the implementation of new services ahead of replicating legacy
services.
We introduced next generation broadband to the wholesale market on April
30, 2008 from 21CN enabled exchanges, supporting an addressable market of some
one million UK homes. Availability of the service will rise progressively
during the rest of this financial year to reach an addressable market of 10
million homes by April 2009.
BT also launched 21CN Ethernet during the fourth quarter, available from
over 100 nodes across the UK. This footprint will rise progressively to over
600 nodes by April 2009, providing BT with the widest national Ethernet
footprint in the UK.
The national infrastructure rebuild of metro and core sites in the UK is
now complete. For the remainder of this year, the focus will be on the
completion of the necessary UK transmission infrastructure.
On July 29, 2008 we announced the acquisition of Ribbit Corporation, a
software development company based in the U.S., for $105 million. The
acquisition supports our transformational strategy and will accelerate the
evolution of our industry-leading 21CN software development kits by providing
an established, easy-to-use network based platform that allows third party
developers to create new and innovative voice-enabled applications and
services.
Outlook
We expect to see continued strong revenue growth in BT Global Services but
EBITDA margins may fall slightly in 2008/9 in part due to currency movements.
However, we remain committed to achieving the 15 per cent EBITDA margin target
and are creating the foundations this year for future margin expansion. In BT
Retail we expect to see solid EBITDA growth this year. In BT Wholesale we
expect the trends in the second and third quarters to be similar to those seen
in the first quarter, but improving in the last quarter of the year. We expect
a stable performance in Openreach for the year.
For the year, we expect the group to continue to deliver revenue growth as
we continue our transformation from a fixed-line business into a
software-driven communications services company. We remain focused on driving
efficiencies across the group and have increased our gross cost savings target
from 700 million pounds to some 800 million pounds, which will contribute
towards growth in EBITDA before specific items and leaver costs. We expect to
continue to increase our earnings per share before specific items and leaver
costs, despite the year on year reduction in net finance income associated
with the pension scheme.
As a result of our additional investment in a fibre-based next generation
access network, we expect capital expenditure to be about 100 million pounds
higher than our previous targets in each of the 2008/9 and 2009/10 financial
years, taking the total expected capital expenditure in those years to around
3.2 billion pounds and 3.1 billion pounds, respectively. The remaining
incremental spend of 800 million pounds will be spread over the following
three financial years. As announced on July 15, 2008 with our investment in
Next Generation Access, free cash flow in 2008/9 will reflect the 100 million
pounds incremental capital expenditure and is expected to out turn at around
1.4 billion pounds.
We remain committed to delivering value for shareholders and expect to
increase dividends per share in 2008/9.
BT's final dividend of 10.4 pence per share will be paid on September 15,
2008 to shareholders on the register on August 22, 2008. The ex-dividend date
is August 20, 2008.
The second quarter results for 2008/9 are expected to be announced on
November 13, 2008.
Forward-looking statements -- caution advised
Certain statements in this results release are forward-looking and are
made in reliance on the safe harbour provisions of the US Private Securities
Litigation Reform Act of 1995. These statements include, without limitation,
those concerning: expectations of continued growth in revenue, EBITDA,
earnings per share and dividends per share; growth in Global Services'
revenue, and EBITDA margin expansion; BT Retail EBITDA growth and improving
trends in BT Wholesale; continued growth in the broadband market; further
gross cost savings; expectations regarding capital expenditure, and levels of
free cash flow; planned investment in fibre-based super-fast broadband;
investment in, and the delivery and benefits of, BT's 21st Century Network and
growth of the 21CN Ethernet footprint; and the scope and delivery of next
generation services and applications.
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:
material adverse changes in economic conditions in the markets served by BT;
future regulatory actions and conditions in BT's operating areas, including
competition from others; selection by BT and its lines of business of the
appropriate trading and marketing models for its products and services;
fluctuations in foreign currency exchange rates and interest rates;
technological innovations, including the cost of developing new products,
networks and solutions and the need to increase expenditures for improving the
quality of service; prolonged adverse weather conditions resulting in a
material increase in overtime, staff or other costs; developments in the
convergence of technologies; the anticipated benefits and advantages of new
technologies, products and services not being realised; and general financial
market conditions affecting BT's performance and ability to raise finance. BT
undertakes no obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.
SOURCE BT

Diane Noe of BT, +1-703-622-3143, or diane.noe@bt.com