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BT's quarterly revenues fall but earnings rise after slashing costs

BT's earnings grew in the first quarter as the group cut costs as part of an overhaul of the business
BT's shares rose 3% in morning trading

BT Group plc (LON:BT.A) reported a 2% drop in first-quarter revenue, reflecting another weak performance in its enterprise businesses and tighter price controls by the regulator.

Under new IFRS 15 accounting standards, adjusted revenue fell to £5.72bn in the quarter to June 30 from £5.84bn the same period a year ago.

READ: BT expects “adverse impact” from adoption of new accounting standards

The telecoms group said regulated price reductions in its Openreach network and declines in the enterprise businesses offset growth in its consumer division.

Ofcom price controls

Ofcom earlier this year announced plans to reduce the monthly wholesale charge on existing copper lines, meaning Openreach had to cut the prices it charges broadband providers to use its network.

However, the price controls were not as bad as many had feared as Ofcom responded to calls to encourage investment in upgrading the existing broadband infrastructure.

'Improved cost performance' boosts earnings

Despite the tighter regulation, BT’s adjusted profit before tax on an IFRS 15 basis rose to £816mln in the quarter from £791mln a year ago as the company slashed costs as part of its restructuring. 

"Initiatives to transform our operating model have seen a gross reduction in around 900 roles across the group and improved cost performance," said outgoing chief executive Gavin Patterson.

Shares rose 3.3% to 232.35p in morning trading. 

In the business and public sector segment, mobile customers rose 4% but external broadband lines fell 3%. In wholesale and ventures, external broadband lines dropped 6%.

Average revenue per user (APRU) for monthly fixed mobile contracts increased 1% to £37.9 and postpaid mobile APRU also rose 1% to £21.7 while churn stood at 1.2%.

BT left its outlook for the year unchanged.

BT launches new services

In a bid to attract more customers, BT has launched new packages that combine its broadband, mobile and pay-TV as a single service and bill. The new converged services were branded BT Plus, which became available in May. 

BT has also started its 4G Assure service, which automatically switches business customers over to 4G if their fixed broadband service is interrupted.

In October, the group’s EE mobile network plans to launch the UK’s first live 5G trial in East London.

Fibre broadband roll-out

The Openreach division also plans to replace the ageing copper lines with fibre optics to bring ultrafast broadband to three million homes and businesses by 2020.

Patterson said the group is building to 10,000 premises per week.

BT’s investment in the upgrade pushed up capital expenditure in the first quarter, sending normalised free cash flow down 9% to £507mln.

On Tuesday, BT said it expects Openreach to take a hit to earnings and revenue this year around the “high tens of millions of pounds” on plans to offer wholesale customers discounts on superfast broadband products.  

READ: BT expects hit to Openreach earnings as it offers discounts for faster broadband

Telecoms companies that use the Openreach network will receive discounts on fibre broadband to encourage them to switch customers over to the new network.

Government encourages investment in broadband upgrade

The announcement came a day after the UK’s Department for Digital Culture, Media and Sport posted its Future Telecoms Infrastructure Review (FTIR), saying full-fibre broadband should be available to all UK homes by 2033. The department said it would support investment in the most difficult-to-reach areas.

Analysts saw the review as a positive for BT since the government has put the priority on getting ultrafast broadband up and running over interventions to further reduce retail prices.

“We welcome the initial outcome of DCMS' Future Telecoms Infrastructure Review and Ofcom's approach to future regulation and look forward to further engagement with all our key stakeholders to ensure greater clarity, certainty and support as we look to realise our broader investment ambitions,” Patterson said in the quarterly results statement.

'Little visibility' on BT's future, doubts on dividend

Patterson is due to step down late this year but the company is yet to appoint a successor.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said this makes BT "somewhat rudderless at a time when it is undergoing a major restructuring."

"New Chief Execs like to stamp their authority on a business too, so there is little visibility on the future of BT right now," he said.

He added that BT's shares have slipped to a six-year low and expectations for 10% annual dividend increases have been banished. 

"Indeed the stock yields almost 7%, which suggests the market has some doubts the dividend can be maintained. Investment in BT right now is a long-term recovery play, and as ever with this sort of strategy, things can get worse before they get better."

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