BT Revenue Down, Profit Up

LONDON -- BT has today issued its third quarter and nine month results to 31 December 2003.

The results highlights are:

Commenting on the results, chief executive Ben Verwaayen said: "The transformation of our marketplace is accelerating and BT is driving that change by providing our customers with new technology and services with greater capabilities and lower cost.

"Our new wave revenues grew by 31 per cent in the quarter, our highest rate of growth yet. This has offset much of the impact of the six per cent decline in our traditional business.

"The momentum of this transformation is building with broadband volumes now approaching two million lines and we are still taking orders of over 45,000 per week. In addition, we are becoming a major international ICT solutions provider with well over £2 billion of orders in this quarter alone."

Group finance director Ian Livingston said that BT remains committed to growing long term shareholder value by transforming its revenue streams to new wave products and services; driving more than £1 billion of cost savings over the next three years; investing for the future and managing the group's balance sheet more effectively.

He said: "Earnings per share before goodwill amortisation and exceptional items increased by seven per cent over last year to 4.4 pence in the quarter, and by 26 per cent to 13.0 pence per share in the nine months which is more than twice the level of two years ago.

"Profit before tax, goodwill amortisation and exceptional items increased by one per cent despite the challenges faced by our business as the pace of transformation quickens. This has been achieved through the success of our continued cost efficiency programmes and lower interest charges."

Total earnings per share and profit before tax, after goodwill amortisation and exceptional items, for the third quarter are 4.5 pence (2002 - 5.2 pence) and £519 million (2002 - £567 million) respectively. For the nine months they are 12.9 pence (2002 - 12.0 pence) and £1,525 million (2002 - £1,440 million).

GROUP RESULTS

Whilst driving a significant transformation in our business, BT continued to make further progress in the quarter with earnings per share before goodwill amortisation and exceptional items 7 per cent ahead of the same quarter last year and 26 per cent ahead in the nine months to date.

The acceleration of this transformation is demonstrated by the 31 per cent growth of new wave turnover to £838 million compared to a 25 per cent increase in the second quarter. New wave turnover represented 18 per cent of total turnover in the quarter, compared to 14 per cent in the third quarter of last year. New wave turnover is mainly generated from Information and Communications Technology (ICT) solutions, broadband, mobility and managed services. Performance in the quarter was driven by particularly strong growth in broadband and our solutions businesses. However, this was more than offset by an 8 per cent decline in turnover from the group's traditional businesses. This decline reflects regulatory intervention, price reductions and technological changes that we are using to drive customers from traditional services to better value and more flexible new wave services, such as broadband and IPVPN's. The decline in traditional turnover is 6 per cent after excluding the impact of regulatory reductions to mobile termination rates. These reductions are passed on to BT customers resulting in lower charges but are profit neutral.

The pace of this change means it has continued to be a challenging quarter in which total group turnover decreased by 2.6 per cent year on year to £4,578 million. Excluding the regulatory reductions on mobile termination rates underlying turnover fell by 1.4 per cent, which compares to the 0.6 per cent decline last quarter.

Consumer revenues in the third quarter were 3 per cent lower (2 per cent lower excluding the impact of reductions to mobile termination rates) year on year. BT Together packages provide an important element in defending traditional turnover with an increase of 73,000 customers over last year. In the consumer fixed voice market, Carrier Pre Selection (CPS) has had some impact on our business with BT's consumer market share, as measured by volume of fixed to fixed voice minutes, declining by 0.2 percentage points to an estimated 72.2 per cent compared to last quarter. The underlying average revenue per customer household (net of mobile termination charges) of £269 was broadly in line with the level achieved in the third quarter of last year. Contracted revenues have increased to 59 per cent compared to 56 per cent last year.

The aggregate Business and Major Corporate revenues also declined by 3 per cent year on year. BT's business market share of fixed to fixed voice minutes declined by only 0.2 percentage points to an estimated 41.0 per cent compared to last quarter despite the effect of CPS. This compares to a quarterly decline of around 0.9 percentage points over the previous four quarters.

Revenues from smaller and medium sized businesses reduced by 6 per cent (£41 million) from the third quarter last year, showing the net impact of call volume reductions in our traditional telephony services as customers switch into new wave services such as broadband. However, BT Business Plan, launched in January 2003, had successfully attracted more than 216,000 business locations (147,000 customers) by December 31, 2003, helping to stem the rate of market share decline.

Major Corporate (UK and international) revenues reduced by 2 per cent (£31 million) with the growing new wave turnover not fully offsetting the decline in traditional UK services. There is a continued migration of traditional voice only services to managed ICT contracts. Contract wins from the Solutions and BT Syntegra businesses amounted to more than £2 billion in the third quarter. Within this are two contracts that BT Syntegra won against multi-national IT competitors from the Department of Health as part of the NHS National Programme for IT, worth an expected £1.6 billion over the next 10 years. Group ICT turnover grew by 18 per cent to £0.6 billion in the quarter confirming BT's status as a major provider in this market.

Wholesale (UK and international) revenue fell by 1 per cent (2 per cent increase excluding impact of reductions to mobile termination rates). We achieved 52 per cent growth in new wave turnover from our UK Wholesale business which partly compensated for the decline in our UK Wholesale prices. The international carrier business turnover grew by 16 per cent in the third quarter, of which 5 percentage points were due to currency movements.

Group operating costs before goodwill amortisation and exceptional items reduced by 3 per cent compared to the third quarter of last year reflecting the group's continued focus on operational efficiency and effectiveness initiatives offset by investment in new wave initiatives and the adverse impact of currency movements of £25 million. Net staff costs, excluding leaver costs of £26 million, increased by £34 million to £865 million due to the impact of increases in pay rates, national insurance (£8 million) and the SSAP24 pension charge (£28 million), offset by improved efficiency. Payments to other telecommunication operators were £68 million (7 per cent) lower than last year mainly reflecting a reduction in UK payments, primarily due to the lower mobile termination rates. Other operating costs before goodwill amortisation and exceptional items were reduced by 6 per cent largely due to efficiency cost savings offset by the adverse impact of currency movements.

Depreciation was £23 million lower than the third quarter of last year at £731 million reflecting more efficient capital expenditure over recent years.

As a result of these cost savings the group operating profit margin before leaver costs was 16.8 per cent, an increase of 0.4 percentage points on the level achieved in the third quarter of last year. We have cost transformation programmes in place to deliver further savings of more than £1 billion over the next 3 years.

Group operating profit before goodwill amortisation, exceptional items and leaver costs was flat compared to the third quarter of last year. The £14 million increase in leaver costs this year means that the group operating profit after leaver costs was 2 per cent lower than the third quarter of last year. This performance reflects lower profits in the group's UK wholesale and retail businesses partially offset by the £62 million improvement in BT Global Services.

BT's share of associates and joint ventures operating profits before goodwill amortisation and exceptional items was £5 million in the quarter (£47 million last year). The prior year included the results of our interest in Cegetel which was sold in January 2003.

Net interest payable before exceptional items was £223 million for the quarter, an improvement of £62 million against last year as a result of the significant reduction in the level of net debt. Profit before taxation, goodwill amortisation and exceptional items of £526 million in the quarter increased by 1 per cent.

The taxation rate on the profit before exceptional items and goodwill amortisation was 27.4 per cent in the quarter (32.1 per cent last year) and 28.6 per cent for the year to date (32.8 per cent last year). The lower effective tax rate reflects reduced overseas losses for which relief is not available and greater tax efficiency in the group.

Earnings per share before goodwill amortisation and exceptional items were 4.4 pence for the quarter (4.1 pence last year), an increase of 7 per cent and were 13.0 pence for the nine months to December 31, 2003, an increase of 26 per cent over last year.

BT Group plc