BT's first quarter results show adjusted revenues and cash profits, as measured by EBITDA, (earnings before interest, tax, depreciation and amortisation) both fell 1%, to £5.6bn and £2bn respectively.
The shares moved 1.4% lower on the news.
BT's full year outlook is maintained. The group expects to deliver adjusted EBITDA of £7.9-£8bn and free cash flow of £1.9-£2bn.
New CEO Philip Jansen has made improving Openreach's reach his first priority.
Openreach is an attractive, high-margin business, but the regulator will always want more for less. More high speed internet connections at lower prices is great for the consumer, but limits the returns available for investors.
While there's likely to be a fair bit of wrangling with the regulator over the terms of expansion, the new CEO has said spending on the asset base will remain stubbornly high, at around £3.7bn to £3.9bn a year. That's likely to prevent the dividend rising in the short-term.
But that's not as bad as it might seem. The shares offer a prospective yield of 7.6%, so BT doesn't need to offer much dividend growth. The question is, can it sustain that payment these next few years, and then find a route to growth down the line?
In truth, finding growth is a particularly challenging brief because almost every part of BT is facing challenges.
Tough smartphone and broadband markets are hitting the Consumer division, and Enterprise and Global Services are having to adapt to rapidly-changing environments. Customers are also increasingly plumping for more up to date means of communication. All the while, the group's multi-billion pound pension deficit will soak up funds.
Still there are some reasons for optimism. Cost-cutting should provide another way to boost performance. Outgoing CEO Gavin Patterson described the group as 'too complex and overweight'. £1.5bn of annual cost savings will hopefully see BT emerge as a leaner, more joined up business.
While it will take investment, Openreach has a chance to profit from providing the fibre infrastructure the UK needs. There's potential for the Consumer businesses too. BT has proven adept at bundling home, TV and broadband, together, and successful marketing could help overcome the intense price competition and heavy investment requirements that plague the sector.
But there's only so far cost reduction can take you, and there's no guarantee BT will be able bring its B2B units up to speed, effectively navigate the tricky world of mobile and broadband provision and strike good terms with the regulators.
We think that extensive to-do list explains why the shares currently trade on 7.8 times expected earnings, well below their recent average. That rating means a turnaround would open up recovery potential, but we'll need to see signs of progress before turning more positive.
First quarter results
In the Consumer division, headwinds around new charging limits on international calls proved a headwind, dragging revenue down 1% to £2.6bn. This drop in revenue, plus increased spectrum and content costs, saw EBITDA fall 5% to £588m. Churn fell to just 1.3% in fixed and remains low at 1.1% in mobile.
Enterprise revenues (down 5% to £1.5bn) and EBITDA (down 3% to £471m) continue to fall, as customers shift away from traditional fixed voice and line services. Gains in IP and networking only partially offset the drops. BT sold marketing and operational rights to 220 towers for £100m.
Openreachs higher asset base enabled revenue to rise 1% to £1.3bn, despite price reductions. EBITDA was flat at £717m. The regulator is pleased with BT's actions to make Openreach more independent.
BT Global Services revenue fell 5% to £1.1bn, as the group shifts away from lower margin business. One off benefits and a lower cost base helped EBITDA rise 18% to £140m.
As BT steps up investment in fibre and 5G, capital expenditure rose 11% to £931m. This includes network investment of £494m, up 15%. Together with higher interest and tax payments, this saw adjusted free cash flow dip 36% to £323m.
Net debt rose £6.8bn to £17.8bn during the quarter. This primarily reflects accounting rule changes around leasing liabilities now being classified as debt, but there was an underlying increase of £607m during the quarter as a result of the group's extra pension deficit funding payment.
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