BT's profit breakdown: how did they do it?

News Analysis

BT's profit breakdown: how did they do it?

Ian Grant

Price cuts due to competition and regulatory change have rippled through BT's operating division to hold down revenues, but cost-cutting has helped to maintain margins.BT Global Services

Revenue at BT's international outsourcing division was down by 2% in Q4 2Q09 and by 1% for the year, helped by favourable currency movements. Without them revenue was flat in the quarter and down 4% for the year.

Sales were helped by about £100m from the early delivery of some big contract milestones. The revenue decline reflected the impact of imposed cuts to mobile termination rates, lower wholesale call volumes in continental Europe, and declines in UK calls and lines revenue. Total order intake was £2.2bn, bringing annual orders to £6.6bn.

The division cut operational costs 6% in both the quarter and the year. Head-count dropped by 840 in the quarter and 5,900 on the year. Global Services also negotiated better prices with its major suppliers.

BT Retail

Sales at BT Retail, BT's consumer division, dropped 4% in both the quarter and the year, due largely to a continued reduction in call and line revenue, driven by the recession, particularly in the business market. Revenue from the Consumer and Business divisions was down 2% and 6% respectively in the quarter, which was less than the previous quarter.

Bad weather in January helped call volumes, and the decline in business calls and lines revenue was partially offset by higher ICT services revenue.

Annual consumer average revenue per user (ARPU) rose £8 to £309, as customers bought more bundled services.

BT's retail market share of the maturing broadband digital subscriber link (DSL) and local loop unbundled (LLU) (or shared and dedicated lines respectively) installed base remained at 35%.

During the quarter BT launched BT Infinity, a new 40Mbps fibre-based broadband service starting at less than £20 per month. Nearly one million customers now have broadband access at up to 20Mbps through the upgrade to BT's ADSL2+ service.

Customers for BT's pay-TV service, BT Vision, rose to 467,000. The average number of downloads per month per user rose 37% to 40. BT said Ofcom's decision that rival broadcaster Sky should provide wholesale access to Sky Sports 1 and 2 at regulated prices meant BT would introduce them before the new Premiership football season at lower prices than now.

Operating costs that were lower by 7% pushed up EBITDA by 6%, helping to raise operating profits 10% to £364m. Annual operating cash flow was more than doubled at £1.7bn.

 

BT Wholesale

BT Wholesale sales were down 5% in the quarter and 4% in the year, due largely to low margin transit revenue declines caused by lower mobile termination rates. Excluding this, revenues were 1% lower compared with last year.

Sales of broadband, circuits and international direct dial dropped £39m in the quarter and £188m in the year. But sales of managed network services (MNS) were higher at £188m, representing 24% of external revenue in the quarter (Q4 2008/09: 19%) and 22% for the year (2008-09: 15%): 42% of the division's external revenue is now on long-term contracts, including MNS contracts.

The division signed MNS contracts worth £300m. These included an extension of existing mobile Ethernet access agreements with both O2 and Vodafone to build additional IP-based capacity into their networks. It also re-signed a "white label" managed services contract with Scottish and Southern Energy for three more years. This has contributed to a rough total MNS contract value for the year to £1.8bn, 45% up on last year.

After year-end the division signed a major MNS deal with Orange UK, now part of Everything Everywhere, to take on the management and development of its UK fixed-line broadband infrastructure for consumers and SMEs. Over the next 15 months BT will migrate Orange UK's LLU-based customers to the BT Wholesale broadband platform.

The revenue drop was offset by a 7% cut in net operating costs due to staff cuts and lower mobile termination rates. EBITDA remained broadly flat, as was operating profit at £148m.

At the end of March, 14 million, or 55%, of UK premises could access Wholesale Broadband Connect (WBC), BT's next generation broadband (shared) service, based on ADSL2+ technology. So far 1.1 million end users have signed up. Wholesale Ethernet (dedicated service) is currently available from more than 800 nodes. BT said it would increase the availability of WBC to bring it within reach of around 20 million or 75% of UK premises by March 2011, and will continue to expand its Ethernet footprint.

Openreach

The continued growth of end-customers using other communication providers' infrastructure contributed to an 18% rise in external revenue and a 6% drop in revenue from other BT lines of business. Total revenue slid 1% in both quarter and year, following a cut in Ethernet rental prices from January 2010 and continued migration from wireline rental (WLR) services to cheaper Metallic Path Facility (MPF) was partially offset by Ethernet volume growth.

Net operating costs rose 1% due to an earlier one-off tax rebate and the rapid expansion of Ethernet and fibre services. As a result, EBITDA dropped 4% cutting operating profit 7%.

Capital expenditure increased by 12% as the fibre roll-out more than offset capex cuts elsewhere.

BT said it aimed to make its fibre services available to four million UK premises by the end of 2010 and to be available to at least 40% of UK premises in 2012.

BT Global Services highlights

Business was looking up at Global Services, BT's problem child, which has seen three CEOs in the past two years. Contracts signed in the quarter included:

  • An extension with the UK Department for Work and Pensions to provide voice, data and contact centre solutions
  • A deal with Wolverhampton City Council to provide Ethernet services
  • Another with British Airways to provide contact centre services
  • A contract with J Sainsbury to provide data and voice services.

Overseas orders included:

  • The Spanish Ministry of Foreign Affairs, to deliver the telecommunications infrastructure and services for Spain's diplomatic centres around the world
  • Deutsche Post DHL, to provide a managed services solution for its telecommunications infrastructure in 15 countries in Asia
  • PacificCommerzbank, one of Germany's biggest banks, for the management of local and wide area networks.

However BT group CEO Ian Livingston said the cost of restructuring Global Services would be higher than expected, at £475m rather than £420m.


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