BT results: broadband does well but any cause for optimism?

Posted by Julian Herbert Thursday, May 14th, 2009

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As ever, BT’s annual results gave rise to a swathe of coverage in the UK media today. This led mainly with the news of deeper job cuts and the woes at BT Global Services, but some reports flagged the modest success of BT Retail and of consumer broadband within that. The fact is that broadband overall (Retail + Wholesale + openreach) accounts for a shrinking percentage (10.42% vs 10.72% in 07/08) of a revenue base which grew overall by 3%.

The stellar performers in terms of revenue growth were (in order) Managed Network Solutions (75.6%) and Mobility/Convergence (17.5%). Most other sectors declined, though Broadband (inc LLU) grew fractionally. Within BT Retail, Broadband grew revenues by 9% and for openreach, LLU grew by nearly 12%. For the first time since structural separation, revenue from openreach LLU exceeded broadband revenue from BT Wholesale (£501m vs £482m), though LLU revenue has some way to go before matching the levels enjoyed by Wholesale’s broadband revenues of the previous two years. Whilst BT Wholesale has not yet succeeded in winning back share from LLU, it has begun to offset the loss of broadband revenue with its focus on managed networks.

So, where does this leave BT’s consumer broadband assets? BT Retail has marginally outperformed the sector in the last year, growing its customer base by over 8% against a market average of 7.7%. Notably, last quarter, it has substantially outperformed the market, growing in terms of total subscriptions by over 2% against a market average of about 1%. In a slowing market which now has 65% penetration of households, BT Retail’s share of net new broadband subscriptions in the last quarter was an impressive 35% (BT’s earnings statement says 42%, but this excludes Virgin Media’s additional 47k cable broadband subs). This is the highest share of net new additions since 2Q 05.

This has been achieved, one suspects, through improved churn figures and a definite shift away from the big LLUOs, all of which with the exception of Sky, recorded declines in their LLU numbers. It has certainly happened without there being sharp reductions in price on BT Retail’s part.

Overall, BT Retail has clearly had some success at trimming costs, so flat revenues have yielded much improved EBITDA numbers (up 11%) and OP (up 19% to £324m). Hurrah for BT Retail then. But in a saturating market, the success of one division will necessarily come at the expense of another: BT Retail’s broadband growth comes at the expense of LLU, merely translating to less lines and lower revenues for openreach and BT Wholesale’s broadband recovery still looks to be some way over the horizon.  

The upshot of all this is that it is hard to see where, in a saturating market, BT takes broadband; marginal year-on-year growth (0.4%) proves that BT Retail’s and openreach’s meat is BT Wholesale’s poison. The flight to next generation access looks no more likely to drive overall revenue growth for the same reasons, though of course there may be improved margins from lower opex and bits of incremental revenue from things like BT Vision, DABS, directory enquiries etc etc. This then, looks like the way forward: improve margins, add value, reduce churn. The futures of a strong retail arm and infrastructure operation look assured. The role of BT Wholesale as a provider of managed services to consumer ISPs does not.