BT axes 13,000 jobs to cut £1.5bn costs as annual profits dip

The UK telecoms giant, which said the strategy rejig was needed as it launches 'converged' products and increases its full-fibre broadband network, also revealed a £11.3bn pension funding deficit and final results that were in line with City forecasts at the headline level.

Revenues in the year to 31 March fell 1% to £23.75bn, which was a little softer than expected amid a very weak end to the year for broadband net additions that led to a 3% revenue decline in the fourth quarter. Adjusted earnings before interest, tax, depreciation and amortisation of £7.51bn was slightly above average analyst forecasts. As was adjusted profit before tax, which fell 2% in the year to £3.4bn after a 1% improvement in the fourth quarter.

With just over £1bn of normalised free cash flow, 20% ahead of market expectations, the board declared a 10.55p final dividend making a full year payout of 15.4p, that was a little short of the 15.7p anticipated and will be kept flat in the coming couple of years.

Guidance for the new financial year was disappointing for the City, with BT pencilling in a 2% fall in underlying revenue, or down 1% on an ex-transit basis that the market had expected to be at least flat. Adjusted EBITDA is seen coming out at £7.3-7.4bn, roughly a 2.2% fall on this year, while capital expenditure of circa £3.7bn is more than analysts estimated and normalised free cash flow of £2.3-2.5bn is about 9% less than hoped.

The pension deficit recovery plan agreed with the trustee of the BT Pension Scheme will see a £11.3bn funding deficit met over a 13 year period with the same £2.1bn of payments within the three years to March 2020, a £2bn bond issue to be held by the scheme and then 10 annual payments of around £0.9bn a year from 2020.

PATTERSON'S NEW STRATEGY

Chief executive Gavin Patterson, who has been on an executive hiring spree of late, unveiled his new operating strategy with the declaration that BT "is uniquely positioned to be a leader in converged connectivity and services".

He said BT's "position of strength will enable us to build on the disciplined delivery and risk reduction of the last financial year, a period during which we delivered overall in-line with our financial and operational commitments whilst addressing many uncertainties".

The new organisational structure, which will include an exit from BT's headquarters in Central London and a consolidation to around 30 sites around the country, has been introduced as Patterson plans to launch converged product offerings combining mixes of broadband, mobile and TV to "deliver differentiated customer experiences, support customer loyalty and improve economic returns".

Openreach, the arms-length infrastructure arm, plans to deliver 10m fibre-to-the-premises by the mid-2020's, combined with investment in 4G and 5G mobile that will receive an annual capex allocation of around £3.7bn.

To help support network deployment and customer service, 6,000 hirings will be made to offset cutting 12% of the current workforce. Patterson aims to achieve the £1.5bn cost reduction by the end of 2020 at a cost of £800m to achieve with a "two year payback". These cost reductions are designed to help offset near term cost and revenue pressures, as well as provide capacity to invest in new projects and profit growth.

MARKET REACTION: UNIMPRESSED

Shares in BT fell to new five-year lows on Thursday morning, down almost 8% to 220.3p after an hour and a half of trading, adding to a 50%-plus fall in the since late 2015.

After declining in recent year over the market's concerns about the inevitable heavy spending needed to upgrade the fibre network, Lee Wild at broker Interactive Investor thought investors would be impressed as "it’s finally taken action which it clearly believes will signal a change in fortunes", with the shifting of the workforce to more relevant roles "common sense" and cutting costs and reshaping the property estate "is the kind of action BT shareholders have wanted to see for years".

But Wild said the market's grim response was to the weak fourth-quarter operational results and the pension review.

RBC Capital Markets summed up the operational results as "weak global services, strong EE, strong consumer but very weak broadband net adds". Analysts said the Q4 results were slightly better than the market consensus, but broadband net adds of +2k is "very weak", having added 35k and 22k in the preceding quarters and as much as 83k in 2017's Q3.

The dividend was also not a cut as some had predicted but "it is not growing either".

RBC, which has an 'outperform' rating and 400p price target on BT's shares, said the company "is strategically very well positioned and is addressing the overhang issues which have concerned investors over the last 18 months. We believe the company is likely to announce a large consumer facing convergence push within the next few weeks."

Analyst George Salmon at Hargreaves Lansdown said the job cuts and move out of central London "are drastic actions", but "they still aren’t going to be enough to dig BT out the hole it’s in".

"The dividend, which was rising 10% a year not so long ago, is set to freeze for the foreseeable future, and next year’s profits look likely to fall again.

"There are silver linings here and there, for example EE and the consumer businesses continue to grow. However, these improvements are being more than offset by challenging conditions elsewhere. Openreach terms are getting tougher, and the business-to-business and global divisions are having a torrid time. Gavin Patterson will have his work cut out if he’s to steady the ship.”