Wednesday, May 12, 2010

BT Reduces Costs as Revenue Decline 2%

For its recently concluded FY 2010, BT's revenues fell 2% to £20,911 million, ahead of expectations, largely due to the early delivery of around £100 million of revenue, primarily due to significant contract milestones in BT Global Services, without which revenue was down 3%. During the year, BT's total underlying operating costs and capital expenditure were reduced by £1,752 million, a reduction of 9%, ahead of its goal of cutting at least £1.5 billion.

Total labour costs, on an underlying basis, decreased by 16%, reflecting reductions in direct and indirect labour and lower pensions charges. Capital expenditure reduced by £555m to £2,533m, in line with our outlook of around £2.5bn. Free cash flow more than doubled to an inflow of £1,933m, compared with £737m last year, reflecting improved profitability and working capital and lower capital expenditure. Adjusted EPS increased by 16% to 18.6p due to the improved operating profit, partially offset by the higher net finance expense. Reported EPS was 13.3p

BT Retail revenue declined by 4% in the quarter and the year largely due to a continued reduction in our calls and lines revenue, driven by the challenging market conditions, particularly in the business market. Annual consumer ARPU increased to £309, up £8 over the previous quarter.

BT's retail market share of the DSL and LLU installed base remained at 35%. Net additions were 123,000 in the quarter, the highest in two years, and BT's retail market share was 44%, having now remained above 40% for five consecutive quarters.

BT Wholesale revenue declined by 5% in the quarter and 4% in the year largely as a result of the impact of low margin transit revenue declines of £51m in the quarter and £156m for the year, primarily due to mobile termination rate reductions, which has no impact on EBITDA.

Future Plans and Fibre Rollout

BT announced an additional investment of around £200m within our EBITDA outlook for 2010/11: mainly in the areas of enhancing our TV offering, introducing other new consumer propositions, fibre roll out and building on opportunities in BT Global Services, particularly in the Asia Pacific region. Depending on "favourable" investment conditions, BT will extend its current fibre roll out to around two-thirds of UK premises by 2015 for an incremental cost of around £1bn, while maintaining annual capital expenditure levels at around £2.6bn. The roll-out is already under way with four million homes due to have access to fibre broadband by the end of 2010.

BT also announced a commercial partnership with OnLive, a Silicon Valley based cloud gaming business, to provide online gaming services in the UK. In conjunction with this commercial partnership, we have taken a 2.6% shareholding in OnLive Inc. Based on the last audited accounts of OnLive Inc., at 31 March 2009, the proportionate value of gross assets that are the subject of this transaction is US$0.5m.

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