BT reported a 3% drop in third-quarter underlying revenue to £5.2bn. Both the Consumer and Business segments declined by 2%, impacted by challenging non-UK markets and weaker handset trading. Openreach was the only segment to grow revenue, driven by higher prices and ongoing fibre buildout.
Underlying cash profit (EBITDA) rose 4% to £2.1bn. That was driven by reduced costs due to lower headcount, energy usage and repair volumes, which more than offset the impact of the revenue decline.
Full-year guidance has been reiterated, with BT expecting revenue to fall 1-2%, and underlying cash profit of around £8.2bn.
The shares fell 3.4% in early trading.
Our view
BT’s third-quarter update didn’t send any shocks through the airwaves. The group has continued to see tough broadband and mobile market, specifically in areas where it doesn’t yet have a presence with the next-gen technology. But there are signs that the future could get brighter.
The wider strategy involves significantly modernising and simplifying operations and product lines. This includes switching all mobile products under the EE brand and moving customers onto the new 5G and fibre broadband networks, which have lower running costs than legacy infrastructure. Alongside fewer numbers of repairs, that’s helped benefit the profit line.
Cost cuts remain a long-term focus, and there’ll also be a benefit from reduced investment as the peak spending for the massive infrastructure buildout has now passed. That’s good news for future cash flow and the valuation, which has been under pressure for some time. Once the infrastructure is built and adopted, a much leaner operation is needed to generate long-term growth.
The asset we’re most excited about is Openreach, which is responsible for maintaining and building the new fibre networks. It hopes to reach 25mn premises by 2026 and looks well on track. This technical-heavy business is unique and higher margin. For now, though, legacy broadband lines still make up the bulk of its connections, and increased competition from alternative networks along with a softer market are causing Openreach to lose customers.
The Business division continues to be the problem child. A combination of structural changes, higher costs, and a tough competitive landscape are making it a tricky place to operate. Cash flow margins are also a good clip lower than those of the Consumer and Openreach units. We’d like to see BT explore options to get rid of some of the worse-performing areas outside the UK – one to watch.
A major drain on cash is BT's large pension deficit. The current payment plan, which aims to remove the deficit by 2030, cost c.£800mn in the first half of its financial year. Add to that the debt and lease pile, which cost another c.£800mn to service over the half, and the total drags on cash are hefty.
BT’s future relies heavily on getting through this major buildout phase, and to its credit, progress looks good. We think BT is one of the better-placed names, especially with a great asset like Openreach on the books. The question yet to be answered is whether all that spending is going to generate enough top-line growth to materially offset the decline of legacy products, a challenge for the entire sector to battle with.
Environmental, social and governance (ESG) risk
The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.
According to Sustainalytics, BT’s overall management of material ESG issues is strong.
BT follows strict security measures to protect personal data and has 3,000 cybersecurity employees. Greenhouse gas reduction policies are strong, including net zero alignment, emissions reduction coverage, audits and verification. BT scores well on board structure, shareholder rights, remuneration, audit and financial systems, and stakeholder governance.
BT key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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