Several positives in BT results

OvumOne could be forgiven for thinking that BT’s performance for the financial year 2010/11 has been a little underwhelming, with revenues declining across the board.
However, there were a number of positives to take from its annual results, including a further year-on-year increase in free cash flow (indeed, our most recent KPI analysis shows that BT cut its operating expenditure faster than its peers during 2010); BTGS’s return to positive operating cash flow a year ahead of schedule; and continued strong DSL broadband net additions for BT Retail.
BT’s free cash flow has now nearly trebled over the last two years, and this is providing it with the stable platform that it has perhaps lacked in the past, allowing it to focus on creating a more stable and predictable business. BT has committed to a progressive dividend (its declared dividend was up 7% year-on-year), has reduced its net debt (and plans to do so further in order to target an improved credit rating), is continuing to make payments to support its pension scheme, and is investing in the areas of its business that it hopes will return it to top-line growth.
BT’s capital expenditure for the financial year was £2.6 billion (€2.9 billion), of which Openreach accounted for a significant proportion (44%). Much of Openreach’s investment will be in BT’s rollout of FTTC, with which it is making good progress, with 80,000 new premises passed each week, bringing its total footprint to almost five million. Interestingly, during the results presentation, CFO Tony Chanmugam indicated that he expected capital spending to remain at its current run rate in the future.
It is here where BT’s anticipated return to growth by 2013 doesn’t seem to stack up. Fiber clearly forms a large part of its growth strategy, but according to BT the pay-back period for fiber is “in double digits”. BT Retail’s pricing strategy bears this out, with pricing for BT Infinity, its fiber service, equivalent to its existing DSL pricing (for all but the cheapest DSL subscriptions), and during the presentation it was indicated that of BT Infinity net adds (currently running at 5,000 per week), approximately 70% are for existing customers.
BT is clearly sacrificing revenue growth here in order to capture market share, and will attempt to continue the steady growth in ARPU it has achieved over the past five years. Whilst this was been achieved through increased sales of broadband and inclusive calling packages in the past, BT may well struggle to maintain this trend in the future, with net adds for key service BT Vision dropping back from the 40,000 achieved in the third quarter, to 30,000 in fourth quarter, and with online gaming service OnLive, announced back in May 2010, still to launch.
Performance at BT Global Services continued to improve, with a 7% reduction in net operating costs contributing to a 30% increase in EBITDA last year. This helped the division’s EBITDA margin reach 8.9% in the last quarter. BTGS’s order intake rose to £7.3 billion from £6.6 billion. But for a division that provides 40% of group revenue today, that margin is likely to be a strong focus of attention for the group management for a while yet.
BT has done a fantastic job getting the different bits of the business to pull together. It still has an underlying problem with market growth. It will not have much control of this until FTTC/H is fully rolled out and is operational, and/or the company gets a mobile arm.