BT impresses with first quarter despite weaker revenue, pensions gaffe

BT said its independent actuaries, Willis Towers Watson, miscalculated the accounting deficit in March, with an "isolated human error" underestimating its size by £0.5bn, meaning the restated pension deficit stands at £3.9bn as at the end of June.

The FTSE 100 telecoms giant's net debt rose £2.4bn to £11.2bn, thanks to a £2bn bond issue that was used to plug the pension deficit ahead of a further £1.25bn that needs to be paid in the next year.

BT directors said the error has had no impact on the company’s profits, cashflow, or the triennial valuation of its pension deficit conducted last year.

For the first quarter of the year, the group posted a 1% gain in adjusted EBITDA to £1.8bn, beating the average analyst forecasts, as adjusted revenue fell to £5.72bn despite a 2% rise in adjusted revenues from the consumer division.

Adjusted profit before tax rose 3% to £816m thanks to stronger handset margins and restructuring-related cost savings.

Normalised free cash flow shrank 9% to £507m, again better than the market expected, mainly driven by increased cash capital expenditure, partly offset by the timing of working capital movements. Capital expenditure was broadly flat at £839m.

On the operational front, BT launched its new converged products including BT Plus and 4G Assure during the period, and announced plans for its EE division to launch the UK's first live 5G trial network in East London in October.

It said the conclusion of the Future Telecoms Infrastructure Review, and Ofcom's approach to future regulation, provide “positive progress” towards enabling fair returns for infrastructure investment. Openreach announced new wholesale pricing discounts during the period to accelerate superfast and ultrafast broadband uptake.

More than 1.7m total premises were now supplied by BT’s ‘ultrafast’ broadband infrastructure, with the company building fibre-to-the-premises to around 10,000 premises per week.

BT said it made "continued improvements" in its customer experience metrics during the quarter, though some analysts have bemoaned that these new KPIs, which do not include standard industry measures such as broadband or mobile net adds, are perhaps obfuscating the true performance of the business. The group’s net promoter score up 1.9 points and ‘right first time’ up 3.1%. Customer churn remained low at 1.2%.

Mobile customers were ahead 4% in the business and public sector groups. External broadband lines were down 6% in wholesale and ventures, and 3% in business and public sector. Monthly fixed average revenue per user rose 1% to £37.90, with an increased mix of SIM-only reducing postpaid mobile average revenue per user by 1% to £21.70.

The board said initiatives to transform its operating model were “on track”, with a new enterprise senior leadership team in place.

POSITIVE PROGRESS, PENSIONS PROCEDURES

“We've made a good start to the year,” said BT chief executive Gavin Patterson, who is due to stand down later in the year. “We are making positive progress against our strategy.

“Our customer experience metrics continue to improve and we have seen the successful launch of new converged products including BT Plus, our first consumer converged offering and 4G Assure, for business customers.”

Patterson said initiatives to transform the company’s operating model had seen a gross reduction in around 900 roles across the group, and improved cost performance. He added that EE was continuing to maintain its "network leadership", and would switch on the UK's first live 5G network trial in October.

“New Openreach wholesale pricing will incentivise communications providers to encourage more of their customers onto better services and ultimately move the vast majority of Britain's homes and businesses onto superfast and ultrafast platforms.”

“Our outlook for the year remains unchanged.”

On the pensions deficit error, finance chief Simon Lowth said: “We have received assurances from Willis Towers Watson that there are no other errors.”

“As you would expect we are undertaking further review procedures around that calculation. We spent a lot of time with WTW making sure we understand what created the error. It was an isolated human error that they identified. We are also working on what they need to do to strengthen their controls.”

Lowth said the error has no impact on the company’s profits, cashflow, the triennial valuation of its pension deficit conducted last year, or on any members of the BT pension scheme. Nevertheless, following the Italian scandal, another financial error was the last thing BT needed.

POSITIVE MARKET REACTION

BT shares rose almost 4% to 233.35p on Friday morning.

Analysts at RBC Capital Markets said it was a "decent" set of results with revenue in line with City expectations and EBIDTA circa 3% ahead of consensus, with capex also 3% better, normalised free cash flow circa 2% better.

RBC noted that BT’s new KPIs do not give fixed and mobile subscribers. Based on disclosed fixed line revenue and ARPU analysts estimated a loss of circa 66k subs. "This is likely to be a mixture of fixed line losses and broadband losses."

Laith Khalaf, senior analyst at broker Hargreaves Lansdown, said "times are still tough" for the formerly monopoly, as the consumer business was "keeping the whole ship moving forward" as regulatory pressures hit Openreach, with revenues from business and the public sector in decline and the pension scheme taking up significant cash.

On the pensions miscalculation, he said: "The accounting deficit tells us more about bond yields than it does pension obligations, and has no effect on cash flows, but clearly this slip doesn’t exactly help to inspire confidence."

On the group's operational progress, Khalaf said BT was "banging up against the side of the fish tank" with the potential for further broadband penetration, "so further revenue expansion will be led by pushing through price increases, and getting its customers to sign up to more services" via quad-play packages that bundle up fixed line, broadband, mobile and TV, which increases sales and makes for stickier customers.

"CEO Gavin Patterson is on the way out, which makes BT somewhat rudderless at a time when it is undergoing a major restructuring. New chief execs like to stamp their authority on a business too, so there is little visibility on the future of BT right now."

BT shares recently slipped to a 6 year low and expectations of 10% annual dividend increases have been banished. Indeed the stock yields almost 7%, whichsuggests the market has some doubts the dividend can be maintained. Investment in BT right now is a long term recovery play, and as ever with this sort of strategy, things can get worse before they get better.’