BT results: ploddingly unspectacular is no bad thing

Posted by Julian Herbert Thursday, November 12th, 2009

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Gone are the days when the tabloid press could proclaim with not a little veiled snarling, that BT was announcing super-profits equating to x million pounds a second. Today results showed that it amounted to about 70 quid a second over the first six months of BT’s financial year. I did a brief slot on BBC Breakfast this morning before the results were announced and I was asked if I thought BT’s problems are now behind them. I said that I thought they were and on the whole, and on the evidence of these results, they are.

Grim headlines like “BT cuts jobs to pay for IT losses” or “NHS contract leaves BT with painful results” have been replaced by “BT Group reports strong recovery in Global Services unit“.

At least, the spectacular losses and write downs of recent quarters appeared, as so often, to have been a turning point. Global Services which has been the focus of so much attention since late 2008, made a marginal operating loss, but BT’s mantra “to execute cost savings” has resulted in improving EBITDA (relative to last quarter, though down on the same period last year), and a big improvement in free cash flow, which has, as some analysts predicted resulted in a 5% increase to the interim dividend. Significantly, Global Services’ revenue for the half year was up on the first half of 2008. So, Hanif Lalani will doubtless have taken a quick sigh of relief before being reminded by Ian Livingston that there is “still a lot more to do”.

The other bits of BT (Retail, Wholesale, Openreach) were again, solid and unspectacular, though it’s worth noting that Retail provided the one scintilla in an otherwise dull set of results, by demonstrating EBITDA improvement of 11%, operating profits up 9% (both vs the same period in 2008) and operating cash flow improvements of 79%. This came about largely thanks to operating cost savings of £146m, attributed to “cost transformation programmes focused on labour productivity, systems rationalisation and supplier management across the business.”

Profitability aside, Wholesale actually grew the number of DSL lines it provides on a wholesale basis to ISPs (including BT Retail) for the first time in 12 quarters, though lines to external ISPs fell for the 13th consecutive quarter by 67,000. Openreach picked up the slack, adding 164,000 lines, though this was the lowest quarter for LLU net adds since 1Q 06, the quarter during which the LLU project in the UK began in earnest.

I was asked whether I thought BT regretted selling its mobile arm, mmO2. I answered that I thought not, since at the time BT was saddled with over £6 billion of debt, a mobile operator which was far from being the market leader and plenty of uncertainty about whether mobile phones were a viable way of accessing the internet. With the benefit of hindsight, I suspect there are actually regrets, but what is done, is done.

Certainly, with a domestic fixed broadband market that is close to saturation, fixed telephony in continued decline and a TV business which amounts to not much more than a modestly successful experiment, I bet BT secretly wishes it could ride the crest of the mobile broadband wave to reignite growth. BT has a mobile business - the MVNO BT Mobile - but it doesn’t even warrant a mention in dispatches, so without this to fall back on, sorting out Global Services, its former engine of growth, maintaining broadband market share and efficiently managing the domestic businesses is critical.

I was not a little terrified that I’d be asked about BT’s pension deficit. Billions of pounds and the word “deficit” always manage to get people agitated, even if the concepts behind them are mind-bogglingly complex and the money isn’t actually cash. My actuarial knowledge is scant, so I defer to an excellent piece written by Professor David Hillier on the subject for the Yorkshire Post.

The market seemed pleased with the results. At noon, BT shares were trading up 7.3% at 149.3p.