BT's half year results showed underlying revenue down 2% on last year to £11.5bn, reflecting moves away from lower margin businesses and the impact of regulation. Cash profits fell 3% to £3.9bn on increased spectrum fees, content costs and investments.
The interim dividend was unchanged at 4.62p.
The shares were broadly flat on the news.
BT's not only the UK's leading communications company, it's got a significant global presence too. It operates through four main business units: Consumer, Enterprise, Global and Openreach.
The largest segment, Consumer, sells mobile and broadband directly to nearly 30 million people through the BT, EE and PlusNet brands. Enterprise does something similar for businesses, and Global is (unsurprisingly) BT's international segment. Openreach (a legally separate but wholly owned company) looks after the copper wires and fibre cables that connect our homes and businesses.
BT's CEO, Philip Jansen, has made expanding 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.
Tough smartphone and broadband markets are hitting the Consumer division, and Enterprise and Global 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 is soaking up funds.
Still there are some reasons for optimism.
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 mitigate the intense price competition and heavy investment requirements that plague the sector. That's been paired with an ambitious cost cutting programme.
But there's only so far cost reduction and marketing can take you, and there's no guarantee BT will be able to simultaneously; 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 the extensive to-do list explains why the shares currently trade on 8.2 times expected earnings and offer a dividend yield of 7%. A turnaround could deliver significant gains, but it would be no small feat, and we'll need to see signs of progress before turning more positive.
Half Year Results
Half year Consumer revenue declined 1% to £5.2bn as regulatory limits on international calling and mobile spend caps continued to bite. Excluding these impacts revenue actually increased. Cash profits fell 5% to £1.2bn thanks to increased spectrum and content costs. Capital expenditure increased 22% as BT continues to invest in their broadband and 5G networks.
Enterprise revenue fell 5% to £3.1bn as customers used less of BT's fixed phone lines. However, this was offset by lower operating costs, which fell 6%. As a result cash profits only dropped 3% to £968m.
BT's Global business continued to move away from lower margin and legacy products, resulting in 6% lower revenue of £2.2bn, but 19% higher cash profits of £304m (although this was helped by some one-offs).
Regulated price reductions and BT's own strategic discounts offset underlying growth in Openreach's fibre and Ethernet rental bases, with revenues flat at £2.5bn as a result. Higher costs saw cash profits fall 4% £1.4bn.
Underlying net debt was £1.2bn higher than at the start of the year, at £18.3bn, reflecting payments to the pension scheme, capital expenditure and dividend payments.
Full year guidance is unchanged.
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