BT Preliminary Results - Year To March 31, 2006 Fourth Quarter Highlights

    LONDON, May 18 /PRNewswire-FirstCall/ --
 
     -- Revenue of 5,134 million Pounds Sterling, up 7 per cent (5 per cent
        excluding acquisitions)
 
     -- New wave revenue of 1,851 million pounds, up 28 per cent, represents 36
        per cent of total revenue
 
     -- EBITDA before specific items(1) and leaver costs of 1,498 million
        pounds, up 1 per cent
 
     -- Profit before taxation, specific items(1) and leaver costs of 629
        million pounds, up 4 per cent
 
     -- Earnings per share before specific items(1) and leaver costs of 5.7
        pence, up 8 per cent, the sixteenth consecutive quarter of year on year
        growth
 
     -- Broadband net additions(2) of 0.8 million, of which BT Retail's share
        was 31 per cent
 
     FULL YEAR HIGHLIGHTS
 
     -- Revenue of 19,514 million pounds, up 6 per cent  (3 per cent excluding
        the impact of reductions to mobile termination rates and acquisitions)
 
     -- New wave revenue of 6,282 million pounds, up 38 per cent, represents 32
        per cent of total revenue
 
     -- Profit before taxation and specific items(1) of 2,177 million pounds,
        up 5 per cent
 
     -- Earnings per share before specific items(1) of 19.5 pence, up 8 per
        cent
 
     -- Free cash flow of 1,612 million pounds and net debt reduced to
        7.5 billion pounds
 
     -- Full year dividend of 11.9 pence per share, up 14 per cent
 
     -- Broadband end users(2) of 7.9 million, at 31 March 2006, up 58 per cent
     The income statement, cash flow statement and balance sheet, drawn up
 in accordance with IFRS, from which this information is extracted are set
 out on pages 16 to 22.
     (PLEASE CONTACT BT FOR THE FULL VERSION OF THIS DOCUMENT).
 
     (1) Specific items are material one off or unusual items as defined in
         note 4 on page 26.
     (2) Includes DSL and LLU connections.
 
     Chairman's statement
     Sir Christopher Bland, Chairman, commenting on the full year results,
 said:
     "This is an excellent set of full year results delivered in a
 competitive and fast-changing environment. Revenues for the full year have
 grown by 6 per cent; new wave revenues, which grew by 38 per cent to 6.3
 billion pounds, now represent around one third of the group's business. We
 have continued to transform the business at a fast pace whilst growing our
 earnings per share before specific items by 8 per cent to 19.5 pence.
     "I am pleased to announce a full year dividend of 11.9 pence per share,
 14 per cent higher than last year. We are confident in our ability to
 improve shareholder returns and accelerate the strategic transformation of
 the business."
     Chief Executive's statement
     Ben Verwaayen, Chief Executive, commenting on the fourth quarter
 results, said:
     "This quarter's results are a terrific set of numbers. They show BT
 firing on all cylinders, with EBITDA*, revenue and earnings per share* all
 growing. These results provide further evidence that our strategy of
 embracing change is working. We have now delivered sixteen consecutive
 quarters of growth in earnings per share*.
     "BT is now a truly global company, delivering services to more than 170
 countries with more than 20 per cent of our networked IT services contract
 wins outside the UK. BT lines now carry 8 million broadband connections and
 we have started rolling out speeds of up to 8 Mbit/s.
     "BT has changed very significantly from 4 years ago, and the
 transformation is accelerating."
     * before specific items and leaver costs
 
 
                 RESULTS FOR THE FOURTH QUARTER AND YEAR ENDED
                                 MARCH 31, 2006
 
                           Fourth quarter              Year
                         2006     2005      Better  2006      2005       Better
                       pounds m  pounds m  (worse)  pounds m  pounds m  (worse)
                                              %                            %
 
     Revenue             5,134   4,820        7     19,514    18,429       6
 
     EBITDA
      - before specific
         items and leaver
         costs           1,498   1,484        1      5,650     5,703       (1)
      - before specific
         items           1,431   1,440       (1)     5,517     5,537        -
 
     Profit before taxation
      - before specific
         items and leaver
         costs             629     604        4      2,310     2,246        3
      - before specific
         items             562     560        -      2,177     2,080        5
      - after specific
         items             507     577      (12)     2,040     2,354      (13)
 
     Earnings per share
      - before specific
         items and leaver
         costs             5.7p    5.3p       8       20.6p     19.4p       6
      - before specific
         items             5.1p    4.9p       4       19.5p     18.1p       8
      - after specific
         items             4.7p    5.2p     (10)      18.4p     21.5p     (14)
 
     Capital expenditure   973     744      (31)     3,142     3,011       (4)
 
     Free cash flow      1,097   1,144       (4)     1,612     2,282(i)   (29)
 
     Net debt                                        7,534     7,893        5
 
 
     (i) Includes disposal proceeds of 537 million pounds mainly from the sale
         of the Eutelsat, Intelsat and Starhub investments.
     The commentary on the fourth quarter results 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 comparative results have been restated to reflect the requirements
 of IFRS which the group has adopted (see note 1).
     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 30. A definition and
 reconciliation of free cash flow and net debt are provided on pages 27 to
 29.
     GROUP RESULTS
     Fourth quarter ended March 31, 2006
     Revenue was 7 per cent higher at 5,134 million pounds in the quarter
 with the continued strong growth of new wave revenue more than offsetting
 the decline in traditional revenue. Underlying revenue, adjusted for the
 acquisitions of Albacom and Infonet, was 5 per cent higher than last year.
 EBITDA before specific items and leaver costs showed growth of 0.9 per
 cent, compared to the decline of 0.6 per cent last quarter. This is the
 first quarter in the last eleven that has shown positive year on year
 growth and continues the improving trend of recent quarters. Earnings per
 share before specific items and leaver costs increased by 8 per cent to 5.7
 pence, the sixteenth consecutive quarter of year on year growth.
     The strong growth in new wave business has continued and at 1,851
 million pounds new wave revenue was 28 per cent higher than last year. New
 wave revenue is mainly generated from networked IT services, broadband and
 mobility. Networked IT services revenue grew by 22 per cent to 1,214
 million pounds, broadband revenue increased by 44 per cent to 421 million
 pounds and mobility revenue increased by 41 per cent to 82 million pounds.
 Excluding Albacom and Infonet, the organic growth in new wave revenue was
 23 per cent.
     Networked IT services contract wins were 1.1 billion pounds in the
 fourth quarter and the value of total orders achieved over the last twelve
 months was 5.4 billion pounds. Of this total more than 20 per cent of the
 order value was achieved outside the UK.
     BT had 7.9 million wholesale broadband connections at March 31, 2006,
 including 356,000 local loop unbundled lines, an increase of 2.9 million
 connections year on year, with these connections available at up to
 2Mbit/s. Continuing BT's commitment to delivering higher speed broadband,
 DSL Max, which offers speeds of up to 8Mbit/s across the UK, was launched
 on 31 March. BT is offering its wholesale customers DSL Max at no extra
 cost to the existing 2Mbit/s service. In upgrading more than 5,300
 exchanges to support this service, BT is providing the UK market with the
 highest stable speed broadband service across the widest national footprint
 in the world.
     Revenue from the group's traditional businesses declined by 3 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 continued strong
 growth of 14 per cent, with growth in new wave revenue of 24 per cent more
 than offsetting the decline in traditional services. Excluding the impact
 of Albacom and Infonet, revenue grew by 9 per cent. There is a continued
 migration from traditional voice only services to networked IT services and
 an increase in mobility and broadband revenue. New wave revenue now
 represents 63 per cent of major corporate revenues.
     Revenue from smaller and medium sized (SME) UK businesses declined by 2
 per cent. New wave revenue grew by 12 per cent driven by continued growth
 in broadband and networked IT services. The number of BT Business Plan
 locations increased by 15 per cent to 513,000 by March 31, 2006. BT
 Business Plan now covers over 57 per cent of SME call revenues.
     Consumer revenue in the fourth quarter was 4 per cent lower, although
 traditional consumer revenue declined by 10 per cent year on year. This
 demonstrates a strategic shift towards new wave products with an increase
 in revenue of 45 per cent in the quarter. New wave revenue now represents
 15 per cent of the total.
     The underlying 12 month rolling average revenue per consumer household
 (net of mobile termination charges) of 251 pounds increased by 1 pound
 compared to last quarter, with increased broadband volumes more than
 offsetting lower call revenues. Contracted revenues were 67 per cent of the
 total, which is 4 percentage points higher than last year.
     Wholesale (UK and Global Carrier) revenue increased by 14 per cent. UK
 Wholesale new wave revenue increased by 44 per cent to 298 million pounds,
 mainly driven by broadband and managed services.
     Group operating costs before specific items increased by 9 per cent
 year on year to 4,554 pounds million, including the costs from Albacom and
 Infonet. Net staff costs before leaver costs, and net of own work
 capitalised, increased by 6 million pounds to 986 million pounds,
 reflecting higher capital expenditure in the quarter. Leaver costs were 67
 million pounds in the quarter (44 million pounds last year). Payments to
 other telecommunication operators increased by 14 per cent year on year at
 1,015 million pounds mainly due to the impact of Albacom and Infonet. Other
 operating costs before specific items increased by 211 million pounds
 mainly due to increased costs of sales from both organic and inorganic
 growth in networked IT services, partly offset by cost savings from our
 efficiency programmes. Depreciation and amortisation increased by 4 per
 cent year on year to 773 million pounds.
     EBITDA before specific items and leaver costs increased by 0.9 per
 cent, compared to the decline of 0.6 per cent last quarter, continuing the
 improving trend seen during the year. Group operating profit before
 specific items and leaver costs decreased by 2 per cent to 725 million
 pounds mainly as a result of the higher depreciation and amortisation.
     Net finance costs were 101 million pounds, an improvement of 40 million
 pounds against last year. The net finance income associated with the
 group's defined benefit pension obligation of 63 million pounds was 14
 million pounds higher than last year, which along with the reduction in the
 level of net debt and the lower implied interest rate as a result of the
 bond repayments in December and February have all contributed to the
 decrease in net finance costs.
     Profit before taxation, specific items and leaver costs increased by 4
 per cent to 629 million pounds with the reduction in net finance costs and
 an increase in the share of profits of associates and joint ventures
 offsetting the reduction in group operating profit.
     The effective tax rate on the profit before specific items was 23.3 per
 cent (25.9 per cent last year). The effective tax rate reflects the
 continued focus on tax efficiency within the group.
     Specific items
     Specific items are defined in note 4 on page 26. There was a net charge
 before taxation of 55 million pounds in the quarter (17 million pounds
 credit last year). Costs of 56 million pounds relating to the
 rationalisation of the group's provincial office portfolio were incurred in
 the quarter (29 million pounds last year). This rationalisation programme
 is expected to continue throughout the next financial year giving rise to
 additional rationalisation costs. Also included in prior year specific
 items was a 46 million pounds profit on disposal of the non current asset
 investment in Intelsat.
     Specific items in the full year were a net charge before taxation of
 137 million pounds (274 million pounds net credit last year). This includes
 a 70 million pound provision relating to the incremental and directly
 attributable costs to create the new line of business, Openreach, required
 under the Undertakings agreed with Ofcom. Openreach will be reported as a
 separate line of business from the first quarter of next year. Property
 rationalisation costs for the full year were 68 million pounds (59 million
 pounds last year). Also included in prior year specific items was a 358
 million pound profit on disposal, mainly in respect of the sale of the non
 current asset investments in Eutelsat, Starhub and Intelsat.
     Earnings per share after specific items were 4.7 pence in the quarter
 (5.2 pence last year) and 18.4 pence for the full year (21.5 pence last
 year).
     Full year ended March 31, 2006
     Revenue increased by 6 per cent in the year to 19,514 million pounds
 (up 3 per cent excluding the impact of reductions in mobile termination
 rates and the acquisitions of Albacom and Infonet). The strong growth in
 new wave business has continued and at 6,282 million pounds new wave
 revenue was 38 per cent higher than last year. This strong growth more than
 offset the decline in traditional revenue of 5 per cent.
     We remain focused on financial discipline and our cost efficiency
 programmes achieved savings of over 400 million pounds in the full year.
 This has enabled us to invest in further growing our new wave activities.
 We aim to deliver savings of at least 400 million pounds in each of the
 next three years.
     EBITDA before specific items was 5,517 million pounds, which was flat
 compared to the prior year. Group operating profit before specific items at
 2,633 million pounds was 2 per cent lower than the prior year as a result
 of higher depreciation and amortisation.
     Our share of profits of associates and joint ventures before specific
 items was 16 million pounds (14 million pounds of losses last year).
     Net finance costs were 472 million pounds, an improvement of 127
 million pounds against last year. The net finance income associated with
 the group's defined benefit pension obligation of 254 million pounds was 56
 million pounds higher than last year. Also included in the current year is
 a 27 million pounds net gain arising from the fair value movements in, and
 realised gain arising from the early redemption of the US dollar 2008 LG
 Telecom convertible bond. The reduction in the level of debt compared to
 the prior year has also contributed to the decrease in net finance costs.
     The group achieved a profit before taxation and specific items of 2,177
 million pounds, a 5 per cent increase, reflecting lower net finance costs
 and an increased share of profits from joint ventures and associates.
     Earnings per share before specific items increased by 4 per cent to 5.1
 pence.
     The taxation charge for the year was 533 million pounds on the profit
 before specific items, an effective tax rate of 24.5 per cent (26.0 per
 cent last year).
     Earnings per share before specific items were 8 per cent higher at 19.5
 pence for the year.
     Cash flow and net debt
     Net cash from operating activities in the fourth quarter amounted to
 2,065 million pounds, an increase of 146 million pounds primarily as a
 result of a strong working capital performance and lower tax payments in
 the quarter. Free cash flow was a net inflow of 1,097 million pounds in the
 fourth quarter compared to 1,144 million pounds last year which included
 disposal proceeds of 62 million pounds relating to the sale of the non
 current asset investment in Intelsat. The free cash flow for the full year
 amounted to 1,612 million pounds compared to 2,282 million pounds last year
 which included 537 million pounds proceeds from the disposal of
 investments, mainly being Eutelsat, Intelsat and Starhub. Working capital
 improved by a further 120 million pounds in the year following last years
 strong performance.
     Cash flows from investing activities were a net cash inflow of 105
 million pounds in the fourth quarter compared to an outflow of 387 million
 pounds last year. Net cash outflow relating to the acquisition of
 subsidiaries in the quarter was 55 million pounds principally relating to
 the acquisition of Atlanet. This compares to an outflow of 418 million
 pounds in the prior year which included the acquisitions of Infonet and
 Albacom. Interest received was 220 million pounds lower principally due to
 the impact of swap restructuring in the prior year. The net proceeds of 933
 million pounds arising on the sale of investments was used to fund partly
 the repayment of maturing debt and the interim dividend. The net cash
 outflow from capital expenditure, net of disposal proceeds, amounted to 792
 million pounds in the quarter compared to 735 million pounds last year.
     Cash flows from financing activities were a net outflow of 1,399
 million pounds in the fourth quarter compared to 856 million pounds last
 year. Interest paid was 147 million pounds lower than last year due to the
 impact of swap restructuring in the prior year. In addition there was an
 increase of 619 million pounds in net repayments of borrowings compared to
 the prior year. This is due to the repayment of maturing debt offset by the
 issue of an additional 1 billion pounds of debt in the quarter.
     The share buyback programme continued with the repurchase of 53 million
 shares in the quarter, taking the total value of shares repurchased in the
 year to 348 million pounds. Net debt was 7,534 million pounds at March 31,
 2006, a reduction of 579 million pounds in the quarter. Free cash flow and
 net debt are defined and reconciled in notes 7 and 8 on pages 27 to 29.
     Dividends
     The board recommends a final dividend of 7.6 pence per share to
 shareholders, amounting to 632 million pounds. This will be paid, subject
 to shareholder approval, on September 11, 2006 to shareholders on the
 register on August 18, 2006. The ex-dividend date is August 16, 2006.
     The full year proposed dividend has increased by 14 per cent to 11.9
 pence per share, compared to 10.4 pence last year. This year's dividend pay
 out ratio is 61 per cent of earnings before specific items, compared to 57
 per cent last year.
     We continue with our progressive dividend policy. We expect our payout
 ratio to rise to around two thirds of underlying earnings in 2007/08.
     Pensions
     The IAS 19 net pension obligation at March 31, 2006 was a deficit of
 1.8 billion pounds, net of tax, being half the level at March 31, 2005.
 This reflects strong asset growth offset by the impact of longer life
 expectancy and lower discount rates. The BT Pension Scheme had assets of 36
 billion pounds at March 31, 2006. Detailed IAS 19 disclosures are provided
 in note 13 on pages 32 to 36.
     The triennial funding valuation at December 31, 2005 is currently being
 performed and reviewed in the context of recent regulatory developments and
 the impact of the Crown Guarantee granted on privatisation in 1984.
     21st Century Network
     Contracts have been signed with the eight 21CN preferred suppliers and
 the first equipment orders have been placed against these contracts.
 Building on the successful conclusion to the second phase of 21CN voice
 transformation trials on strategic equipment in December 2005, the next
 phase, the trial of telephone services over the IP network is scheduled to
 start before the end of May 2006.
     Operational planning to migrate customers to the 21CN in Cardiff, which
 will see the first live operation of 21CN in November 2006, is well
 advanced. Following successful implementation in Cardiff, and following a
 comprehensive industry review, BT will proceed to a national migration
 programme. Through the communication forum Consult 21, BT, in close
 consultation with industry and Ofcom, is agreeing detailed migration plans
 for the entirety of the migration period.
     Line of business results
     We reviewed our internal trading arrangements and with effect from
 April 1, 2005 have made changes to simplify our internal trading and drive
 synergies. We have restated the comparative line of business results to
 assist readers in understanding the year on year performance. There is no
 change to the overall group reported results.
     The main changes are the transfer of BT's UK Major Business operations
 into BT Global Services from BT Retail and Field Services being moved from
 BT Retail to BT Wholesale, in anticipation of the creation of Openreach.
     Openreach
     Openreach was launched on January 21, 2006. We will have completed the
 separation, configuration and implementation of financial reporting and
 operational systems to facilitate the reporting of the results of Openreach
 by the first quarter of the year ending March 31, 2007. This is in
 accordance with the timetable specified by the Undertakings.
     On May 31, 2006 the Equality of Access Board, a board committee
 established by BT as required by the undertakings to Ofcom, will publish
 its first annual report on BT's compliance with and delivery of its
 Undertakings.
     Outlook
     Our performance underpins our confidence that we can continue to grow
 revenue, EBITDA, earnings per share and dividends over the coming 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 Annual Report and Form 20-F is expected to be published on May 31,
 2006. The Annual General Meeting of BT Group plc will be held at Barbican
 Centre, London on July 12, 2006.
     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: continued growth in earnings per share and
 dividends; growth in new wave revenue, mainly from networked IT services,
 broadband and mobility growth; EBITDA improvement, and acceleration of
 EBITDA growth in BT Global Services; implementation of BT's 21st Century
 Network and the national migration programme; expectations regarding
 progressive dividend policy, dividend payout ratio and cost savings;
 improving shareholder returns; and accelerating transformation of the
 business.
     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, including
 broadband and other new wave initiatives, not being realised; and 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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