BT quarterly earnings down as it deals with Italian accounting scandal

BT’s third quarter revenue increased but earnings were down as the telecoms giant deals with an accounting scandal at its Italian business, while it also faces a more challenging outlook in the UK.

For the quarter ended 31 December 2016, revenue was up 32% to £6.12bn, compared to the previous year, while pre-tax profit fell 37% to £526m and basic earnings per share were down 59% to 3.8p.

On Tuesday, BT cut its profit guidance for the next two years after an investigation into accounting blunders at its Italian business forced it to increase its expected write-downs to £530m from £145m, while the UK business has also seen a deterioration in its outlook.

An investigation alongside accountants from KPMG, which was first announced in October, discovered earnings in the country found to have been overstated for several years.

Its outlook for the 2016 financial year, for adjusted revenue by around £200m, in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) by around £175m, and by £500m for normalised free cash flow due to the EBITDA impact and the one-off unwind of the effects of inappropriate working capital transactions.

For the UK business revenues for the 2016 and 2017 financial years are both expected to be flat. Normalised free cash flow is now predicted to be around £2.5bn this year and in a range of £3.0-3.2bn in 2017.

Total adjustments relating to the investigation of the Italian business amount to £268m and an item charge of £245m for changes in accounting estimates for previous years.

For the quarter, adjusted EBITDA increased 18% to £1.87bn, with underlying EDITDA adjusted for the acquisition of EE, which it bought in February last year for £12.5bn, was down 8%.

While, net cash flow from operating activities was £1.51bn, down £178m and normalised free cash flow was £606m, down £298m in the quarter.

Chief executive Gavin Petterson said: "The good progress we're making across most of the business has unfortunately been overshadowed by the results of our investigation into our Italian operations and our outlook. We've undertaken extensive investigations into our Italian business, including an independent review by KPMG, and I am deeply disappointed with the unacceptable practices by some that we've found. This has no place at BT, and it undermines the good work we're doing elsewhere in the group. We are committed to ensuring the highest standards across the whole of BT."

He said that BT faces a “more challenging outlook” in the UK public sector and international corporate markets but there was record growth at EE, strong momentum in consumer, and its highest ever fibre net connections in Openreach.

Petterson added that the company is “pushing ahead with reforms at Openreach”, particularly on governance and customer service. He believes that an agreement can be reached with Ofcom on its Digital Communications Review as EE is now answering 100% of its customers’ calls in the UK and Ireland and in Openreach, missed appointments have halved year-on-year.

BT had mobile pay monthly net additions of 276,000, with low churn of 1.1% and retail broadband net additions at 83,000, with retail fibre broadband net additions at 260,000.

In the quarter there was a record 498,000 Openreach fibre broadband net connections, including 48% from external service provider.