Trading update for the nine months to 31 December 2018

Key strategic developments:

• Ten quarters of successive improvement in Group NPS¹, up 5.3 points. Right First Time² up 3.2%
• Consumer launched the next version of its converged product BT Plus, guaranteeing wi-fi in every room
• EE demonstrated its 5G capability in London and will roll out to the busiest parts of 16 UK cities in 2019
• Openreach is currently deploying FTTP in 14 locations under its ‘Fibre First’ programme and has recently announced a further 11 locations, bringing the total to 25
• Initiatives to transform our operating model are on track; restructuring programme removed c.800 roles in the quarter
• Philip Jansen taking over as new Chief Executive from 1 February 2019

Operational:

• Openreach passed c.1.7m premises with Gfast and c.900,000 with FTTP meaning over 2.6m total ultrafast premises passed
• Consumer fixed ARPU up 5% to £39.6, with increased mix of SIM only reducing postpaid mobile ARPU by 0.9% to £21.4
• Fixed churn at 1.4% returning to lower levels. Mobile churn was 1.3%
• Revenue generating unit (RGU) KPI introduced at 2.37 products per household

Financial results for nine months to 31 December 2018:

• Reported revenue of £17,558m down 1%. Underlying³ revenue down 0.9%⁴ as growth in our Consumer business was offset by regulated price reductions in Openreach and declines in our enterprise businesses
• Adjusted³ EBITDA broadly flat⁴ at £5,553m mainly driven by revenue growth in our Consumer business and restructuring related cost savings, offset by the revenue decline in Openreach and Enterprise
• Reported profit before tax of £2,094m up 20%. Adjusted³ profit before tax down 1%⁴ at £2,487m
• Normalised free cash flow³ of £1,737m down 11% mainly driven by increased cash capital expenditure
• Reported capital expenditure up £239m at £2,810m primarily due to increased investment in FTTP and the increase in BDUK grant funding deferral announced last quarter
• Overall outlook reiterated notwithstanding significant market and regulatory pressures. We expect EBITDA to be around the top end of our guidance for FY 2018/19

Gavin Patterson, Chief Executive, commenting on the trading update, said

“We have continued to deliver consistently against our strategic objectives in a tough market, resulting in another sound quarter of operational and financial performance.

“In Consumer we launched the next version of our converged consumer offering, BT Plus with Complete Wi-Fi. Following successful trials in London we announced our plan to launch 5G in 16 UK cities in 2019. Openreach accelerated its FTTP commissioning and has now passed 890,000 premises. We are ready to expand our FTTP programme up to and beyond 10 million premises if the conditions are right.

“Our overall outlook for the full year remains unchanged, with EBITDA around the top end of our guidance for FY 2018/19. We continue to expect regulation, market dynamics, cost inflation and legacy product declines to impact in the short term before being more than offset by improved trading and cost transformation by our 2020/21 financial year.

“I am handing over the business with good momentum behind its ongoing transformation programme and wish my colleagues all the best for the future.”

Consumer

Revenue growth was driven by BT’s September 2018 price increase and the continued increase in handset costs for customers, partially offset by solus voice reductions. EBITDA growth was driven by the price increase for BT customers and a one-off accounting charge, on a pro forma basis in the prior year, due to a change in contract terms of Openreach FTTC connections. To improve pricing clarity for our customers, we recently announced a move to annual CPI increases for our BT fixed and mobile products starting in 2020, with no price rises for those products in 2019. While our mobile market share is broadly flat, trends in the high-end smartphone market continue to be challenging. We are seeing aggressive broadband price competition. In addition we will be impacted through the next year by a number of headwinds, in particular from regulation including increases in annual spectrum licence fees, mobile spend caps, international calls regulation and auto-compensation for fixed customers.

Enterprise

Revenue decline was mainly driven by the decline in the fixed voice market, where we are seeing a steeper than expected reduction in calls per fixed line, in part as usage moves to mobile and IP. We also saw continued declines in some of our other legacy products, for example private circuits, as well as lower equipment sales. These effects were partially offset by growth in networking and IP and good growth in messaging volumes in Ventures. However, as in the consumer market, the enterprise smartphone market continues to be challenging. EBITDA decline was driven by the lower revenue, partly offset by labour cost efficiencies and other cost transformation initiatives. Order intake for retail and wholesale declined on a rolling 12-month basis mainly reflecting a large contract in the prior year.

Global Services

Revenue decline was mainly driven by our strategic decision to reduce low margin business. Whilst the impact of divestments did not have a significant impact in the quarter, it will have a greater impact going forwards. EBITDA growth reflected lower operating costs including lower labour costs from our ongoing restructuring programme, partly offset by lower revenue. Order intake was down for the quarter and on a rolling 12-month basis reflecting a continued shift in buyer behaviour, including shorter contract lengths and increased usage-based terms. During the quarter we launched Cloud Connect for Google to provide organisations with simple, direct and fast access to Google Cloud Platform.

Openreach

Revenue decline was driven by around £180m of regulated price reductions on our FTTC and Ethernet products, the impact of the Openreach volume discount offer, and a decline in our physical line base amplified by the one-off accounting benefit, on a pro forma basis in the prior year, due to a change in contract terms of our FTTC connections. EBITDA decline reflected lower revenue, higher costs from recruitment and training of engineers to support our Fibre First programme and to deliver improved customer service, pay inflation and increased business rates, partly offset by efficiency savings. The Openreach volume discount offer continues to deliver strong upgrade volumes with 680,000 fibre broadband net additions during the quarter. We also had a strong quarter for Ethernet, with over 19,000 circuits ordered.

_{¹  See Glossary on page 5
²  Measured against IFRS 15 pro forma comparative period in the prior year
n/m = not meaningful}

About BT

BT’s purpose is to use the power of communications to make a better world. It is one of the world’s leading providers of communications services and solutions, serving customers in 180 countries. Its principal activities include the provision of networked IT services globally; local, national and international telecommunications services to its customers for use at home, at work and on the move; broadband, TV and internet products and services; and converged fixed-mobile products and services. BT consists of four customer-facing units: Consumer, Enterprise, Global Services and Openreach.

For the year ended 31 March 2018, BT Group’s reported revenue was £23,723m with reported profit before taxation of £2,616m.

British Telecommunications plc (BT) is a wholly-owned subsidiary of BT Group plc and encompasses virtually all businesses and assets of the BT Group. BT Group plc is listed on stock exchanges in London and New York.

For more information, visit www.btplc.com

Full results announcement: https://www.btplc.com/Sharesandperformance/Financialreportingandnews/Quarterlyresults/2018-2019/Q3/Downloads/Newsrelease/q319-release.pdf