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BT - revenue and profits held back by ongoing disruption

Underlying revenue fell 3% to 15.7bn pounds in the first nine months of the year, due to delayed Covid recovery and supply chain issues

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Underlying revenue fell 3% to £15.7bn in the first nine months of the year, due to delayed Covid recovery and supply chain issues - Global and Enterprise revenues were the main drivers of the decline. Cost control meant underlying cash profits (EBITDA) rose 2% to £5.7bn.

The ongoing issues mean BT expects full year revenue to fall 2%, with all other guidance unchanged.

The shares fell 3.6% following the announcement.

View the latest BT share price and how to deal

Our View

The internet is an essential service, so even during a pandemic most of BT's revenue engines kept humming. However, the dividend was suspended, and even though it's back up and running, it's smaller than it was.

BT Sport is recovering now that pubs are pouring pints again, but BT is holding talks ''to explore ways to generate investment'' in the division, which may mean a sale is on the cards. Covid also impacted a lot of BT's smaller corporate customers. The speed of recovery in this area is uncertain, and is taking longer than we'd have liked.

It's not pleasing to see revenue go backwards, but we're also mindful these declines could be a lot worse. That has everything to do with BT's biggest asset: the reliability of demand. But while the traditional businesses rumble on, it's important to look to future growth plans. These focus on BT's plans to profit from the rollout of fibre broadband and 5G.

The current plan involves significantly modernising and simplifying BT's operations and product line. This includes digitising customer journeys and moving customers onto the new 5G and fibre broadband networks, which have lower running costs than legacy infrastructure. Management were aiming to reduce costs by £1bn a year by 2023, but BT's smashed this target a massive 18 months ahead of schedule. The next phase, delivering annualised savings of £2bn, is now expected to be achieved by 2024, not 2025.

However, substantial improvements aren't free. Constant investment is one of the realities of the telecoms business, as infrastructure needs to be maintained and upgraded. We worry that despite the progress, BT will have to keep shelling out to keep itself on the cutting edge. It doesn't help that telecoms is an inherently difficult sector in which to deliver attractive margins. Both regulators and customers will always want more for less.

Another drain on cash is BT's large pension deficit, and the latest Triennial Review makes for sobering reading. The new payment plan is going to cost hundreds of millions of pounds every year for most of the next decade. Add to that the debt pile, which cost £770m in interest payments last year, and the demands on cash are considerable.

BT has its attractions. Its mobile networks are broad and generally high quality, while Openreach is unique and higher margin. Meanwhile BT Sport offers something that customers can't get elsewhere. But while BT is a strong player, it's in a really tough industry. It needs to leverage all of its advantages if it's to satisfy the never-ending investment demands and return to meaningful dividend growth.

BT key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Third quarter results (figures are underlying)

Revenue fell 1% to £2.6bn in the Consumer business, while cash profits (EBITDA) rose 17% to £628m. Revenue was held back by continued declines for older-fashioned products, as well as the ongoing shift away from buying handsets in place of SIM only contracts. This was partially offset by higher demand for BT Sport and broadband. Fewer indirect commissions and cost control stopped profits from declining.

Continued declines in older products and contracts meant Enterprise revenue fell 6% to £1.3bn. Well controlled costs, good performance from Emergency Services Network, plus some Wholesale disposal proceeds weren't enough to stop EBITDA falling 8% to £400m.

There was reduced customer business activity in Global, with project-based spending taking a hit. EBITDA fell 25% to £114m.

Openreach revenue was helped by higher rental bases of fibre products and Ethernet. Revenue rose 4% to £1.4bn, with EBITDA rising 6% to £807m.

BT announced it's "reached agreement in principle with Sky for a new longer-term reciprocal channel supply deal to beyond 2030". It's also entered exclusive discussions with Discovery to create a joint venture with BT Sport and Eurosport UK.

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 Refinitiv. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 3rd February 2022