When it made the announcement in May, BT envisaged that its Global Services and Retail divisions would drive growth, and it made investments in both accordingly.
At the time of the announcement, we agreed that there was potential in BT Global Services, but were more skeptical on BT Retail’s outlook. However, while the decline in 2Q10 revenues marked a continuation of recent trends, the positive performance of its two key divisions, in particular BT Global Services, have exceeded our expectations.
The 2009/10 financial year saw revenues decline across each of its four divisions, and this continued for its Global Services, Retail, and Wholesale divisions during 2Q10, contributing to a top-line decline of 3% (adjusted for specific items). While the company continued to improve its profitability and cash flow by cutting costs (opex before specific items fell by 4.7% year-on-year during 2Q10), there was a danger that its focus on the bottom-line would come at the expense of initiatives to drive top-line growth.
Its focus on a return to growth was therefore a welcome statement, both to investors and BT’s employees. However, with the recovery of the UK economy uncertain, and the government’s spending review due in October, we anticipated that 2010 would be a difficult year for BT.
Despite the drop in revenues, BT’s 2Q10 results were impressive. While BT Global Services recorded a 2% drop in revenues in 2Q10, the division’s sales performance was impressive, with £2.1bn worth of orders signed.
This was a considerable increase on the same period in 2009, as well as on the previous quarter. A significant part of this growth appears to have come from the financial services sector, with banks in particular looking to invest in their networks following cutbacks during 2009.
BT’s global deal with UBS for voice and data services was its flagship deal of the quarter, and this, as well as a deal with Nationwide, provided evidence of this growing trend in the financial services sector.
We anticipated that BT would suffer as a result of the UK government’s spending review, having estimated that public sector contracts made up approximately 8% of BT’s revenues during FY 2009/10.
However, BT has moved swiftly to minimize any adverse impact, signing a MoU with the UK government in October to ensure that that all of its central government contracts remain intact, albeit with provisions to reduce the cost of delivery. A three-year extension to its deal with the Ministry of Defence is further evidence of BT’s proactive approach.
BT Retail also saw its revenues continue on a downward trend during 2Q10. However, as with Global Services, there are a number of positive signs. BT Retail continues to add broadband subscribers at a healthy rate, maintaining a 45% market share of net DSL and LLU additions in 2Q10.
While BT Retail’s cost base fell year-on-year, it was offset by an increase in customer acquisition, marketing, and product development costs, which have gone into attracting new customers to two of BT Retail’s flagship products: Infinity and Vision.
It is still early days for BT Infinity, with only 38,000 customers currently using the service. However, orders have been rising steadily, with approximately 4,000 received each week.
With a pricing policy designed to attract customers from its rivals and encourage BT’s existing DSL customers to migrate to fiber, we expect this figure to continue to increase. Growth will also increase as BT Infinity’s potential customer base rises. BT Openreach’s fiber infrastructure currently passes 3 million premises, and it is aiming to pass 7 million with its current rollout plans.
While BT’s broadband results were impressive, BT Vision’s performance was disappointing in 2Q10. The service was only able to add 5% to its customer base, despite the much-hyped addition of Sky Sports to its programming range.
BT plans to further enhance its offering with the addition of services such as BBC iPlayer during 2H10, but we think that this is too late to market to make a significant difference to its overall subscriber base.
The launch of the YouView platform in 1H11 may increase the chances of IPTV platforms taking more market share from satellite and cable providers, but until then it looks as though BT will remain a small-scale player in the TV market.