BT (BTY) Third Quarter and Nine Months Results to December 31, 2003
Third Quarter Highlights
LONDON, Feb. 12 /PRNewswire-FirstCall/ -- -- Earnings per share* of 4.4 pence, up 7 per cent -- Profit before taxation* of 526 million pounds sterling, up 1 per cent -- Group turnover of 4,578 million pounds, down 2.6 per cent (down 1.4 per cent excluding the impact of mobile termination rate reductions) -- New wave turnover of 838 million pounds, up 31 per cent -- Net debt of 8,795 million pounds, 32 per cent lower than previous year -- Contract wins of over 2 billion pounds in the quarter -- Broadband end users approaching 2 million *Before goodwill amortisation and exceptional items. Chief Executive's statement Ben Verwaayen, Chief Executive, commenting on the third quarter results, said: "The transformation of our marketplace is accelerating and BT is driving that change by providing our customers with new technology and services with greater capabilities and lower cost. "Our new wave revenues grew by 31 per cent in the quarter, our highest rate of growth yet. This has offset much of the impact of the 6 per cent* decline in our traditional business. "The momentum of this transformation is building with broadband volumes now approaching 2 million lines and we are now taking orders of over 45,000 per week. In addition, we are becoming a major international ICT solutions provider with well over 2 billion pounds of orders in this quarter alone." Group Finance Director's statement Ian Livingston, Group Finance Director, commenting on the third quarter results, said: "Earnings per share before goodwill amortisation and exceptional items increased by 7 per cent over last year to 4.4 pence in the quarter, and by 26 per cent to 13.0 pence per share in the nine months which is more than twice the level of two years ago. "Profit before tax, goodwill amortisation and exceptional items increased by 1 per cent despite the challenges faced by our business as the pace of transformation quickens. This has been achieved through the success of our continued cost efficiency programmes and lower interest charges. "We remain committed to growing long term shareholder value by transforming our revenue streams to new wave products and services; driving more than 1 billion pounds of cost savings over the next 3 years; investing for the future; and managing the group's balance sheet more effectively." *After adjusting for the impact of regulatory reductions to mobile termination rates. RESULTS FOR THE THIRD QUARTER AND NINE MONTHS TO DECEMBER 31, 2003 BT Group's results before goodwill amortisation and exceptional items Third quarter Nine months Better Better 2003 2002 (worse) 2003 2002 (worse) m pounds m pounds % m pounds m pounds % Group turnover 4,578 4,701 (3) 13,732 13,949 (2) EBITDA 1,474 1,513 (3) 4,404 4,294 3 EBITDA before leaver costs 1,500 1,525 (2) 4,457 4,499 (1) Group operating profit 743 758 (2) 2,221 2,057 8 Net interest charge 223 285 22 664 880 25 Profit before taxation 526 521 1 1,557 1,339 16 Profit after taxation 382 354 8 1,112 900 24 Earnings per share 4.4p 4.1p 7 13.0p 10.3p 26 Capital expenditure 699 613 (14) 1,829 1,721 (6) Free cash flow (68) 19 n/m 1,135 777 46 Net debt 8,795 12,917 32 The results in the table above and the commentary focus on the results before goodwill amortisation and exceptional items. Total earnings per share and profit before tax, after goodwill amortisation and exceptional items, for the third quarter are 4.5 pence (2002 - 5.2 pence) and 519 million pounds (2002 - 567 million pounds) respectively. For the nine months they are 12.9 pence (2002 - 12.0 pence) and 1,525 million pounds (2002 - 1,440 million pounds). The full profit and loss account, cash flow statement and balance sheet are provided on pages 15 to 20. GROUP RESULTS Whilst driving a significant transformation in our business, BT continued to make further progress in the quarter with earnings per share before goodwill amortisation and exceptional items 7 per cent ahead of the same quarter last year and 26 per cent ahead in the nine months to date. The acceleration of this transformation is demonstrated by the 31 per cent growth of new wave turnover to 838 million pounds compared to a 25 per cent increase in the second quarter. New wave turnover represented 18 per cent of total turnover in the quarter, compared to 14 per cent in the third quarter of last year. New wave turnover is mainly generated from Information and Communications Technology (ICT) solutions, broadband, mobility and managed services. Performance in the quarter was driven by particularly strong growth in broadband and our solutions businesses. However, this was more than offset by an 8 per cent decline in turnover from the group's traditional businesses. This decline reflects regulatory intervention, price reductions and technological changes that we are using to drive customers from traditional services to better value and more flexible new wave services, such as broadband and IPVPN's. The decline in traditional turnover is 6 per cent after excluding the impact of regulatory reductions to mobile termination rates. These reductions are passed on to BT customers resulting in lower charges but are profit neutral. The pace of this change means it has continued to be a challenging quarter in which total group turnover decreased by 2.6 per cent year on year to 4,578 million pounds. Excluding the regulatory reductions on mobile termination rates underlying turnover fell by 1.4 per cent, which compares to the 0.6 per cent decline last quarter. Consumer revenues in the third quarter were 3 per cent lower (2 per cent lower excluding the impact of reductions to mobile termination rates) year on year. BT Together packages provide an important element in defending traditional turnover with an increase of 73,000 customers over last year. In the consumer fixed voice market, Carrier Pre Selection (CPS) has had some impact on our business with BT's consumer market share, as measured by volume of fixed to fixed voice minutes, declining by 0.2 percentage points to an estimated 72.2 per cent compared to last quarter. The underlying average revenue per customer household (net of mobile termination charges) of 269 pounds was broadly in line with the level achieved in the third quarter of last year. Contracted revenues have increased to 59 per cent compared to 56 per cent last year. The aggregate Business and Major Corporate revenues also declined by 3 per cent year on year. BT's business market share of fixed to fixed voice minutes declined by only 0.2 percentage points to an estimated 41.0 per cent compared to last quarter despite the effect of CPS. This compares to a quarterly decline of around 0.9 percentage points over the previous four quarters. Revenues from smaller and medium sized businesses reduced by 6 per cent (41 million pounds) from the third quarter last year, showing the net impact of call volume reductions in our traditional telephony services as customers switch into new wave services such as broadband. However, BT Business Plan, launched in January 2003, had successfully attracted more than 216,000 business locations (147,000 customers) by December 31, 2003, helping to stem the rate of market share decline. Major Corporate (UK and international) revenues reduced by 2 per cent (31 million pounds) with the growing new wave turnover not fully offsetting the decline in traditional UK services. There is a continued migration of traditional voice only services to managed ICT contracts. Contract wins from the Solutions and BT Syntegra businesses amounted to more than 2 billion pounds in the third quarter. Within this are two contracts that BT Syntegra won against multi-national IT competitors from the Department of Health as part of the NHS National Programme for IT, worth an expected 1.6 billion pounds over the next 10 years. Group ICT turnover grew by 18 per cent to 0.6 billion pounds in the quarter confirming BT's status as a major provider in this market. Wholesale (UK and international) revenue fell by 1 per cent (2 per cent increase excluding impact of reductions to mobile termination rates). We achieved 52 per cent growth in new wave turnover from our UK Wholesale business which partly compensated for the decline in our UK Wholesale prices. The international carrier business turnover grew by 16 per cent in the third quarter, of which 5 percentage points were due to currency movements. Group operating costs before goodwill amortisation and exceptional items reduced by 3 per cent compared to the third quarter of last year reflecting the group's continued focus on operational efficiency and effectiveness initiatives offset by investment in new wave initiatives and the adverse impact of currency movements of 25 million pounds. Net staff costs, excluding leaver costs of 26 million pounds, increased by 34 million pounds to 865 million pounds due to the impact of increases in pay rates, national insurance (8 million pounds) and the SSAP24 pension charge (28 million pounds), offset by improved efficiency. Payments to other telecommunication operators were 68 million pounds (7 per cent) lower than last year mainly reflecting a reduction in UK payments, primarily due to the lower mobile termination rates. Other operating costs before goodwill amortisation and exceptional items were reduced by 6 per cent largely due to efficiency cost savings offset by the adverse impact of currency movements. Depreciation was 23 million pounds lower than the third quarter of last year at 731 million pounds reflecting more efficient capital expenditure over recent years. As a result of these cost savings the group operating profit margin before leaver costs was 16.8 per cent, an increase of 0.4 percentage points on the level achieved in the third quarter of last year. We have cost transformation programmes in place to deliver further savings of more than 1 billion pounds over the next 3 years. Group operating profit before goodwill amortisation, exceptional items and leaver costs was flat compared to the third quarter of last year. The 14 million pounds increase in leaver costs this year means that the group operating profit after leaver costs was 2 per cent lower than the third quarter of last year. This performance reflects lower profits in the group's UK wholesale and retail businesses partially offset by the 62 million pounds improvement in BT Global Services. BT's share of associates and joint ventures operating profits before goodwill amortisation and exceptional items was 5 million pounds in the quarter (47 million last year pounds). The prior year included the results of our interest in Cegetel which was sold in January 2003. Net interest payable before exceptional items was 223 million pounds for the quarter, an improvement of 62 million pounds against last year as a result of the significant reduction in the level of net debt. Profit before taxation, goodwill amortisation and exceptional items of 526 million pounds in the quarter increased by 1 per cent. The taxation rate on the profit before exceptional items and goodwill amortisation was 27.4 per cent in the quarter (32.1 per cent last year) and 28.6 per cent for the year to date (32.8 per cent last year). The lower effective tax rate reflects reduced overseas losses for which relief is not available and greater tax efficiency in the group. Earnings per share before goodwill amortisation and exceptional items were 4.4 pence for the quarter (4.1 pence last year), an increase of 7 per cent and were 13.0 pence for the nine months to December 31, 2003, an increase of 26 per cent over last year. Exceptional items and goodwill There was a net exceptional charge before taxation of 4 million pounds in the quarter. During the quarter the group's main disposal was its 7.8 per cent interest in Inmarsat which was sold for US $118 million (67 million pounds) realising an exceptional profit on disposal of 32 million pounds. An exceptional net interest charge of 37 million pounds was incurred in the quarter, being the premium on buying back US $195 million (135 million pounds) of the group's US dollar bonds. Goodwill amortisation was 3 million pounds for the quarter (5 million pounds last year). Earnings per share after goodwill amortisation and exceptional items were 4.5 pence compared to 5.2 pence last year reflecting the net exceptional credit in 2002/03 relating to the sale of fixed asset investments and group undertakings and the exit from Blu. Net debt and cash flow Net debt at December 31, 2003 was 8,795 million pounds, 32 per cent below the third quarter last year. Cash inflow from operating activities amounted to 1,038 million pounds in the quarter. This is after making special and annual deficiency contributions to the BT Pension Scheme of 362 million pounds (329 million pounds last year). The net cash outflow on fixed asset purchases and sales was 599 million pounds in the quarter which compares to 523 million pounds last year reflecting the rising investment in our network transformation programme. The cash generation in the third quarter is usually lower than the other quarters due to the annual special and deficiency pension payment and interest payment dates in December. Free cash flow (before acquisitions and disposals, dividends and financing) was a net outflow of 68 million pounds in the quarter compared to an inflow of 19 million pounds last year reflecting the higher capital expenditure and the premium on the bond buy back. The group commenced its share buyback programme in the quarter with 33 million shares repurchased for 58 million pounds. This programme is expected to continue in the next quarter. The group's swap portfolio which hedges foreign exchange and interest rate exposures is being restructured. During the quarter this resulted in a 117 million pounds reduction in net debt and this restructuring activity is expected to continue in the next quarter. Although net debt was not impacted, the group issued a US $172 million 0.75 per cent exchangeable bond due in 2008, exchangeable into ordinary shares of LG Telecom, BT's Korean based associate. The group also undertook a sale and leaseback of circuit switches which had no effect on net debt but increased both gross debt and cash by around 1 billion pounds. The liability will effectively be repaid over four years. Customer satisfaction BT has an extensive market research programme conducted by external agencies which focuses on the level and causes of customer dissatisfaction. The group achieved a further 8 percentage point improvement in the level of customer dissatisfaction in the quarter to 18 per cent in the year to date. Broadband During the third quarter, additional investment enabled broadband services to be available in exchanges serving 85 per cent of UK homes and we have plans to increase broadband coverage to 90 per cent of UK communities by this summer. We aim to reach a target of 100 per cent broadband coverage of every UK community during 2005. There was an installed base of 1.93 million Wholesale broadband lines by February 6, 2004, three times the number of connections 12 months ago, with net additions growing at more than 33,000 per week. The increasing base is reflected in a 129 per cent increase in broadband revenues to 128 million pounds in the quarter. The fourth quarter and preliminary results of BT Group are expected to be announced on May 20, 2004. 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: cash flow, earnings per share and customer satisfaction targets; expectations regarding broadband growth, provision of new technology and services with greater capabilities and lower costs, and revenues from new wave products and services; the possible or assumed future results of operations of BT and/or its lines of business; expectations regarding revenue growth, debt reduction and growing shareholder value by investing for the future and more effectively managing the balance sheet; and cost efficiencies and delivery of sustainable cash savings. 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 and its lines of business; future regulatory actions and conditions in BT's operating areas, including competition from others in the UK and other international communications markets; 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 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, including broadband and other new wave initiatives, not being realised; the timing of entry and profitability of BT and its lines of business in certain communication markets; significant changes in market shares for BT and its principal products and services; to the extent that BT chooses to sell assets or minority interests in its subsidiaries, prevailing market levels for such sales; general financial market conditions affecting BT's performance. BT undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
SOURCE BT Group PLC
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