BT reported a 4% drop in third-quarter underlying revenue to £5.0bn. Declines in the Consumer, Business and International segments were steadied by a flat performance from Openreach, with higher prices in the latter helping to offset line losses of 210,000 (238,000 expected).
Underling cash profits (EBITDA) fell at a slower pace of 1% to £2.1bn (£2.1bn expected), due to continued cost-saving measures.
Full-year guidance was unchanged, with BT expecting underlying revenue of around £20bn and EBITDA in the £8.2–8.3bn range. Free cash flow is expected to land at around £1.5bn.
The shares were broadly flat in early trading.
Our view
BT delivered a mixed third quarter, with revenue held back by recent disposals. But the outlook for line losses in legacy broadband has improved. Alongside ongoing cost-cutting efforts, the full-year profit outlook remains on track.
The wider strategy involves significantly modernising and simplifying operations and product lines. That includes moving all mobile products under the EE brand and migrating customers to the new 5G and fibre broadband networks, which have lower running costs than legacy infrastructure. Fewer repairs have also helped boost profits.
Cost cuts remain a long-term focus, with a further benefit coming from reduced investment now that peak spending on the massive infrastructure buildout has passed. That’s good news for future cash flows, once the infrastructure is built and widely adopted, a much leaner operation is needed to drive long-term growth.
The asset we’re most excited about is Openreach, which is responsible for maintaining and building the new fibre networks. It hopes to reach 25mn premises by the end of 2026 and looks well on track.
This technical-heavy business is unique and higher margin. New fibre connections are growing nicely, but legacy broadband lines still make up the bulk of its connections and increased competition from alternative networks, along with a softer market, are causing Openreach to lose customers. At current rates, fibre customer numbers won’t catch up to legacy broadband until 2029, so the old tech is still key.
The Business division has been a drag for some time. Structural changes, rising costs, and a tough competitive landscape make it a difficult area to operate in. Cash flow margins also lag well behind those of the Consumer and Openreach units. We’d like to see BT explore options to exit some of the underperforming operations outside the UK - one to watch.
A major drain on cash is BT's large pension deficit. The current payment plan, which aims to remove the deficit by 2030, costing around £800mn a year. Add to that the debt and lease pile, which cost another £1.7bn to service last year, and the total drags on cash are hefty.
BT’s future relies heavily on getting through this major buildout phase, and to its credit, progress looks good. We think BT is one of the better-placed names in the sector, but earnings growth is expected to be hard to find for the next few years, and we think upside could be limited.
Environmental, social and governance (ESG) risk
The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.
According to Sustainalytics, BT’s overall management of material ESG issues is strong.
BT follows strict security measures to protect personal data and has 3,600 cybersecurity employees. Greenhouse gas reduction policies are strong, including net zero alignment, emissions reduction coverage, audits and verification. BT scores well on board structure, shareholder rights, remuneration, audit and financial systems, and stakeholder governance.
BT key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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