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BT reports better-than-expected third quarter earnings but warns of challenges ahead

Outgoing chief executive, Gavin Patterson, said he believes he is handing over the business to new boss Phil Jansen with “good momentum behind its ongoing transformation programme”
Openreach
The Openreach network arm was hit by regulated price cuts

BT Group PLC (LON:BT.A) said it continues to expect full-year earnings to reach the top end of its guidance range after third-quarter results beat market forecasts.

However, shares fell 4.7% to 222.8p in morning trading as the company warned that it faces potential headwinds, such as tighter regulation and competition in the consumer division. 

The telecoms giant reported adjusted earnings (EBITDA) of £1.88bn for the quarter ended December 31, down 3% from £1.94bn a year ago but better than the consensus estimate of £1.82bn, on the back of costs savings delivered through a restructuring plan. 

Revenue fell 1% to £5.98bn from £6.07bn last year, beating expectations of £5.93bn, as growth in the consumer division was offset by declines in the enterprise, Global Services and Openreach businesses.  

READ: BT to post weaker third quarter earnings as investors wait to hear from new boss

Consumer revenue rose 4% to £2.8bn and adjusted EBITDA gained 15% to £643mln, led by a price increase in September and growth in handset costs.

BT hopes its plan to launch 5G data in 16 UK cities this year along with its newly converged consumer offering of packages that combine broadband, mobile and pay-TV as a single service and bill will draw in more customers going forward.

In the Openreach network, revenue dropped 9% to £1.26bn after the regulator imposed price reductions for the services it provides. Openreach is currently rolling out superfast fibre broadband to homes and businesses. BT has now brought fibre to 2.6mln premises.

READ: BT shares surge despite dividend cut as it expects earnings to hit top end of guidance

The costs involved in the fibre to the premises (FTTP) programme, combined with weaker revenues, led to a 19% drop in Openreach EBITDA to £603mln in the quarter.

BT has spent £1.51bn on FTTP in the year to date, accounting for a large chunk of the total £2.81bn in capital expenditure, which was up 9% from a year ago.

Newly created enterprise arm hit by switch to online 

The newly created enterprise division saw revenue drop 6% to £1.56bn in the quarter and EBITDA fall 2% to £501mln, reflecting a decline in the fixed phone calls as more businesses move online. It was the first time BT has reported numbers from the enterprise division, created following the merger of the business and public sector division, as a single entity.

The international arm, Global Services, continued to struggle with revenue down 6% to £1.20bn due to the decision to divest in low margin business. EBITA in the business was up 4% to £147mln thanks to cost savings delivered from job cuts as part of a restructuring.

BT confirms full-year guidance 

BT expects EBITDA for the 2019 financial year to reach to the upper end of its guidance of £7.3bn to £7.4bn.

Outgoing chief executive, Gavin Patterson, said he believes he is handing over the business to new boss Phil Jansen with “good momentum behind its ongoing transformation programme”.

However, he warned: “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”. 

CEO leaves on upbeat note but BT not out of the woods yet, says analyst

George Salmon, equity analyst at Hargreaves Lansdown, said Gavin Patterson has had his critics in recent years but the quarterly results mean he’s leaving on an upbeat note.

Salmon said highlights this quarter included a strong performance in the consumer business, cost savings and improvements in the Global Services arm. 

"That’s not to say BT is out of the woods though," he added.

"Competition is fierce in mobile and broadband, and falling profits at Openreach are a timely reminder that regulation has the potential to limit progress at any time.

"With the combined pension and net debt position a rather daunting £16.1bn, it’s hard to see the new CEO raising the dividend in May’s full years.”



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