1st Quarter Results

BT Group PLC 26 July 2007 July 26, 2007 FIRST QUARTER RESULTS TO JUNE 30, 2007 HIGHLIGHTS • Revenue of £5,033 million, up 3 per cent • New wave revenue of £1,815 million, up 11 percent • EBITDA before specific items(1) and leaver costs of £1,425 million, up 3 per cent • Profit before taxation, specific items(1) and leaver costs of £658 million, up 3 per cent • Earnings per share before specific items(1) and leaver costs of 6.0pence, up 3 percent, our twenty first consecutive quarter of growth • Broadband net additions(2) of 0.5 million to 11.2 million connections at June 30, 2007 • BT Retail's share of net additions was 38 per cent Chief Executive's statement Ben Verwaayen, Chief Executive, commenting on the first quarter results, said: "We have got the year off to a strong start with another robust all round performance. Revenue, EBITDA and earnings per share all continue to grow as BT builds on the achievements of last year. "There is success across the board. BT Retail's share of the broadband(2) net additions in the quarter was 38 per cent; contract wins in BT Global Services and BT Wholesale were £2 billion; outside the UK we gained more than 100 new customers. "We are keeping BT ahead of the game by delivering software driven services that will offer faster, more resilient and cost effective services to our customers wherever in the world they are." The income statement, cash flow statement and balance sheet from which this information is extracted are set out on pages 15 to 20. (1)Specific items are significant one off or unusual items as defined in note 4 on page 24. (2)Includes DSL and LLU connections. RESULTS FOR THE FIRST QUARTER ENDED JUNE 30, 2007 First quarter Year ended --------------------------------- March 31 2007 2006 Better (worse) 2007 £m £m % £m Revenue 5,033 4,864 3 20,223 EBITDA - before specific items and leaver costs 1,425 1,386 3 5,780 - before specific items 1,417 1,362 4 5,633 Profit before taxation - before specific items and leaver costs 658 639 3 2,642 - before specific items 650 615 6 2,495 - after specific items 600 615 (2) 2,484 Earnings per share - before specific items and leaver costs 6.0p 5.8p 3 23.9p - before specific items 5.9p 5.6p 5 22.7p - after specific items 7.4p 5.6p 32 34.4p Capital expenditure 903 715 (26) 3,247 Free cash flow (152) (17) n/m 1,354 Net debt 8,631 7,727 (12) 7,914 The commentary focuses on the results before specific items and leaver costs. This is consistent with the way that financial performance is measured by management and we believe allows a meaningful analysis to be made of the trading results of the group. Specific items are defined in note 4 on page 24. Leaver costs are shown in note 3 on page 24. The income statement, cash flow statement and balance sheet are provided on pages 15 to 20. A reconciliation of EBITDA before specific items to group operating profit is provided on page 29. A definition and reconciliation of free cash flow and net debt are provided on pages 26 to 28. GROUP RESULTS Revenue was 3.5 per cent higher at £5,033 million in the quarter with continued strong growth in new wave revenue. EBITDA before specific items and leaver costs grew by 2.8 per cent, the sixth consecutive quarter of growth. Earnings per share before specific items and leaver costs increased by 3 per cent to 6.0 pence, the twenty first quarter of year on year growth. The strong growth in new wave revenue continued and at £1,815 million was 11 per cent higher than last year. New wave revenue is mainly generated from networked IT services and broadband and accounted for 36 per cent of the group's revenue. Networked IT services revenue grew by 8 per cent to £1,061 million, and broadband revenue increased by 19 per cent to £540 million. Progress continues in our transformation into a truly global software driven services organisation. BT Global Services contract wins were £1.7 billion in the first quarter, with £9.2 billion achieved over the last twelve months. This includes the wholesale white label managed services contract with the Post Office, part of the Royal Mail Group which is a BT Global Services customer. In addition BT Wholesale won a five year contract to manage the T-Mobile access network in the UK. BT had 11.2 million wholesale broadband connections (DSL and LLU) at June 30, 2007, including 2.4 million local loop unbundled lines, an increase of 2.5 million connections year on year as the broadband market continued to show strong growth. There were 459,000 additional connections in the first quarter, which is seasonally the slowest quarter of the year. BT Retail's share of the net additions in the quarter was 38 per cent and it is expected to maintain its position as the UK's number one retail broadband provider. Revenue Revenue from the group's traditional businesses was maintained year on year. This performance reflects the robust defence of the traditional business despite price reductions arising from the highly competitive nature of our markets, regulatory intervention and migration of customers to new wave services. Major corporate (UK and international) revenue showed growth of 5 per cent. Migration from traditional voice only services to networked IT services continued with new wave revenue now representing over 60 per cent of all major corporate revenue. Revenue from smaller and medium sized UK businesses grew 2 per cent year on year, continuing the recent improving trend. New wave revenue grew by 12 per cent driven by growth in broadband and other new wave services. We continue to focus on innovative pricing plans and propositions that deliver value to our customer base by bringing together IT, broadband and communication services. Consumer revenue in the first quarter was 2 per cent lower year on year, compared to a 5 per cent reduction twelve months ago. In line with our strategy, growth in new wave revenue of 21 per cent continues to reduce our dependence on traditional revenue which has declined by 5 per cent. The 12 month rolling average revenue per consumer household increased by £4 to £266, the sixth consecutive quarter of growth. Increased penetration of broadband and the growth of value added propositions have more than offset the lower call revenues. Following a period of sustained growth, the proportion of contracted revenues remained at 68 per cent. Wholesale (UK and Global Carrier) revenue increased by 7 per cent driven by wholesale line rental (WLR) and local loop unbundling (LLU). New wave revenue now accounts for 25 per cent of wholesale revenue. Operating results Group operating costs before specific items increased by 3 per cent year on year to £4,392 million. Staff costs before leaver costs increased by 3 per cent to £1,299 million. The effect of increases in pay rates, the additional staff needed to support networked IT services contracts and increased levels of activity in the network and 21CN activities have been largely offset by improved efficiencies. Leaver costs before specific items were £8 million in the quarter (£24 million last year). Payments to other telecommunication operators increased by £56 million to £1,062 million. Other operating costs before specific items of £1,501 million increased by £64 million mainly due to increased costs of sales from growth in networked IT and other new wave services which were partly offset by cost savings from our efficiency programmes. Depreciation and amortisation increased by 1 per cent to £709 million. Group operating profit before specific items and leaver costs increased by 5 per cent to £716 million. Earnings Net finance costs were £55 million, an increase of £9 million against last year. This includes net finance income associated with the group's defined benefit pension scheme which was flat year on year at £105 million in the first quarter. The increase in net finance costs primarily reflects the higher net debt for the quarter. Profit before taxation, specific items and leaver costs of £658 million increased by 3 per cent. The effective tax rate on the profit before specific items was 24.8 per cent (24.5 per cent last year) compared to the UK statutory corporation tax rate of 30 per cent, reflecting the continued focus on tax efficiency within the group. Earnings per share before specific items and leaver costs increased by 3 per cent to 6.0 pence. Specific items Specific items are defined in note 4 on page 24. There was a total net credit after tax of £119 million (£nil last year). There was a net operating charge before tax of £50 million in the quarter (£nil last year). Restructuring costs of £49 million (£nil last year) relating to the group's transformation and reorganisation activities were incurred in the quarter. These mainly comprised leaver costs and property exit costs. We expect the total restructuring costs to be around £450 million which is expected to generate a payback within 2 to 3 years. We expect the majority of the costs to be incurred in 2007/08. In addition, a specific tax credit of £154 million (£nil last year) has been recognised for the re-measurement of deferred tax balances for the change in the UK statutory corporation tax rate to 28 per cent, which becomes effective in 2008/09. Earnings per share after specific items were 7.4 pence in the quarter (5.6 pence last year). Cash flow and net debt Net cash inflow from operating activities in the first quarter amounted to £848 million compared to £1,002 million last year. This was reflected in free cash flow which was a net outflow of £152 million in the first quarter compared to an outflow of £17 million last year. The main driver of the increased free cash outflow was the working capital outflow which was £334 million higher than last year and is expected to reverse later in the year. Pension deficiency contributions of £320 million were paid, being the final payment until the next triennial funding valuation as at December 31, 2008. Free cash flow also includes the final receipt of £504 million in relation to the settlement of the open tax years up to 2004/05 agreed with HMRC last year. The cash outflow from the purchase of fixed assets for the quarter amounted to £819 million, £17 million higher than last year. The net cash outflow on acquisition of subsidiaries, principally Comsat International and i2i Enterprise, in the first quarter amounted to £164 million compared to £35 million last year. The share buyback programme continued with the repurchase of 113 million shares for a total consideration of £365 million during the quarter, which compares to £50 million last year. During the quarter the group issued £1.5 billion of debt maturing in 2014, 2017 and 2037. Debt of £660 million matured and was repaid in the quarter. Net debt was £8,631 million at June 30, 2007. Free cash flow and net debt are defined and reconciled in notes 7 and 8 on pages 26 to 28. Pensions The IAS 19 net pension asset at June 30, 2007 was a surplus of £1.4 billion, net of tax, (£2.0 billion gross of tax) compared with a deficit of £1.6 billion at June 30, 2006 (£2.2 billion gross of tax), a turnaround of £3.0 billion. The BT Pension Scheme had assets of £39.5 billion at June 30, 2007. 21st Century Network During the quarter, BT continued the process of migrating customers to its 21st Century Network (21CN) in South Wales and equipment has now been installed to support the completion of the first phase of customer migrations this year. Following the successful migration of the first live customers onto BT's 21CN, BT completed its pioneering 21CN voice trials which carried the world's first phone calls over an all IP next generation infrastructure in 2005. The trial network, linking BT exchanges in central London, Woolwich and Cambridge, has carried over 160 million calls and provided valuable testing and learning that is now being deployed with live customers. The preparation for national rollout is also underway with equipment installed at hundreds of sites across the country. The rebuild of BT's core national network is also continuing and we are on track to launch next generation broadband services delivering up to 24Mb nationally in early 2008. Field trials started during the quarter with the participation of a range of internet service providers (ISPs). This follows the initial successful pilot of next generation broadband services in Cardiff earlier this year. The roll out of 21CN has resulted in an increased level of capital expenditure compared to the first quarter of last year. In addition, the expansion of the global MPLS network and the purchase of perpetual software licences has accelerated the recognition of capital expenditure in the quarter. Organisation structure During the first quarter BT announced a move to a new organisation structure that will help deliver faster, more resilient and cost effective services to customers wherever they are. The move is designed to accelerate BT's transformation to a networked IT services company, delivering software driven services over broadband and also allowing the acceleration of the achievement of cost savings. BT is bringing together its world class people from design, operations, IT and networks into two business units. BT Design will be responsible for the design and development of the platforms, systems and processes which will support our services while BT Operate will be responsible for their deployment and operation. The existing group structure has remained in place for management and reporting through the first quarter. Outlook Our performance underpins our confidence that we can continue to grow revenue, EBITDA before specific items and leaver costs, earnings per share before specific items and leaver costs, and dividends for the year. We are confident in our ability to improve shareholder returns and accelerate the strategic transformation of the business. _____________________________________________________________________________ BT's final dividend of 10.0 pence per share will be paid on September 17, 2007 to shareholders on the register on August 24, 2007. The ex-dividend date is August 22, 2007. The second quarter and half year's results are expected to be announced on November 8, 2007. LINE OF BUSINESS RESULTS BT Global Services First quarter ended June 30 Year ended ----------------------------------- March 31 2007 2006 Better (worse) 2007 £m £m £m % £m Revenue 2,256 2,155 101 5 9,106 Gross profit 643 628 15 2 2,673 SG&A before leaver costs 404 400 (4) (1) 1,653 ------ ------ ------ EBITDA before leaver costs 239 228 11 5 1,020 Depreciation and amortisation 164 148 (16) (11) 675 ------ ------ ------ Operating profit before leaver costs 75 80 (5) (6) 345 ====== ====== ====== Capital expenditure 186 149 (37) (25) 695 ====== ====== ====== BT Global Services revenue grew by 5 per cent to £2,256 million for the first quarter. New wave revenue rose by £163 million to £1,802 million, an increase of 10 per cent. MPLS revenue rose by 25 per cent to £145 million. Networked IT services contract orders were £0.9 billion in the quarter, taking contract orders for the last twelve months to £5.1 billion which is up £1.0 billion from the position to the first quarter of last year. This includes the wholesale white label managed services contract with the Post Office, part of the Royal Mail Group which is a BT Global Services customer. Other contracts ranged from the delivery and management of a global MPLS based virtual private network linking over 1,000 sites for Nestle, to assisting Carillion in the integration of its infrastructure with that of Mowlem, which it recently acquired, into a single seamless network, to the provision of network management, helpdesk support and other voice services to Allianz/Fujitsu in Germany. Total orders in the quarter amounted to £1.7 billion, bringing the value of total orders achieved over the last twelve months to £9.2 billion. A further 102 new corporate customers outside the UK signed orders with BT in the quarter. During the first quarter BT Global Services extended its global reach and capabilities with the completion of the acquisitions of Comsat International, a leading provider of data communications services for corporations and public sector organisations in Latin America, and i2i Enterprise, an enterprise services company specialising in internet protocol communications services for major Indian and global multi-nationals. These acquisitions underline our commitment to providing world class services to our customers wherever they do business. Gross profit grew by £15 million to £643 million driven by new wave revenue but still offset by declines in traditional telephony business, while SG&A costs increased by £4 million. EBITDA before leaver costs increased year on year by £11 million to £239 million, representing growth of 5 per cent. Depreciation and amortisation charges increased by £16 million to £164 million, mostly resulting from customer related capital expenditure in the course of last year. Overall, this brought operating profit before leaver costs to £75 million, a reduction of £5 million from the previous year. Capital expenditure in the quarter was £186 million, an increase of £37 million of which broadly half was customer contract driven following on from last year's order intake and half was infrastructure related as we expand the global MPLS network. On the National Programme for IT for the NHS (NPfIT) over 20,000 connections have been provided in England under the N3 contract, and the Scottish N3 network is more than two-thirds complete. BT has also voice-enabled the network. This will further reduce the cost of telephony services and bring enhanced communications between NHS sites. As London local service provider, BT is designing and installing new IT systems throughout the 74 Trusts in the capital. Capability includes IT systems for Acute, Mental Health, Community Health Trusts and over 1,600 General Practitioners. Significant capability has been delivered to 70 per cent of trusts, including more than half of London's Mental Health Trusts. There are plans to install three acute patient administration systems by the end of this year. The Spine is the central database and messaging system that BT is building and managing for the NPfIT. BT has completed the most complex and challenging software upgrade to date, creating the infrastructure and software to support the roll out of the NHS Summary Care Record. The programme has delivered all of the last 14 software releases since March 2005 on time or ahead of schedule. BT Retail First quarter ended June 30 Year ended ------------------------------- March 31 2007 2006 Better (worse) 2007 £m £m £m % £m Revenue 2,059 2,068 (9) - 8,414 ------ ------ ------ Gross margin 587 560 27 5 2,350 SG&A before leaver costs 389 378 (11) (3) 1,481 ------ ------ ------ EBITDA before leaver costs 198 182 16 9 869 Depreciation and amortisation 42 40 (2) (5) 171 ------ ------ ------ Operating profit before leaver costs 156 142 14 10 698 ====== ====== ====== Capital expenditure 46 40 (6) (15) 166 ====== ====== ====== BT Retail's EBITDA before leaver costs grew 9 per cent, the eighth consecutive quarter of growth. There has been an improvement in gross margin of over 1 percentage point arising from improved efficiency, reducing the cost base and innovative value based pricing plans. SG&A costs for the quarter increased 3 per cent reflecting increased investment in advertising and service. Traditional revenue declined 5 per cent and this was largely offset by new wave revenue growth of 16 per cent. Consumer customers benefited from a further round of significant price cuts on voice packages this quarter. Successive price cuts over the past year have reduced our Option 3 call package prices by almost half and our Option 2 package prices by over a third. Unlimited calls to UK landlines now cost less per day than the price of a first class stamp. In a competitive broadband market, BT Retail revenue has grown by 19 per cent. Net additions in the quarter of 38 per cent of DSL and LLU market additions, reflect the success of offering the most complete broadband package. 58 per cent of customers opted for the higher value Option 2 and 3 packages, with two thirds of these choosing the highest value Option 3 package. The growth in broadband will be further supported by the recent announcement to acquire Brightview, which currently has around 62,000 broadband customers and operates the ISP brands Madasafish and Global Internet, as well as the Which-award-winning Waitrose ISP. Our strategy of offering more than just access to our broadband customers is demonstrated by our BT Vision and VoIP propositions. The roll out of BT Vision continues as planned, supported by a national advertising campaign promoting BT Vision as the nation's most flexible digital television service and highlighting the extensive content on offer to our customers. We recently announced further enhancements to the service with BT Vision Sport providing wide coverage of football, golf and other sports, starting at less than £1 per week. Our advanced VoIP service grew strongly again this quarter with Broadband Talk and BT Softphone customers increasing 23 per cent to 1.7 million at the end of the quarter. Within the SME sector we launched BT Tradespace, a new range of web design, hosting and marketing services which allows businesses to build an on-line presence in minutes with more than 10,000 customers now signed up for the service. Our IT Manager proposition was supported with the launch of a major advertising campaign featuring Gordon Ramsay, which has significantly increased the awareness and understanding of our proposition in our target audience. We made further progress in our strategy to offer our customers flexible services in the home, office and on the move. More than a million customers can now take advantage of Wi-Fi as part of our Total Broadband package. We continue to grow our wireless broadband business with widespread access in the centre of 12 cities and Openzone hotspots in major public areas and business locations such as airports, railway stations and key hotels such as Hilton and Thistle. We also signed an agreement with Sony Computer Entertainment Europe (SCEE) to transform the PSP gaming device by adding wireless broadband communication features, allowing voice and video calling from your PSP. The Enterprises division has continued to deliver strong growth with revenues up 9 per cent and EBITDA up 58 per cent against the same quarter last year. As well as the strong growth in revenue and EBITDA, the Conferencing, Expedite and Redcare businesses have all secured significant new contracts in the quarter. BT Wholesale First quarter ended June 30 Year ended ------------------------------- March 31 2007 2006 Better (worse) 2007 £m £m £m % £m External revenue 999 997 2 - 4,057 Internal revenue 867 850 17 2 3,527 ------ ------ ------ Revenue 1,866 1,847 19 1 7,584 Variable cost of sales 950 920 (30) (3) 3,848 ------ ------ ------ Gross variable profit 916 927 (11) (1) 3,736 Network and SG&A before leaver costs 430 449 19 4 1,775 ------ ------ ------ EBITDA before leaver costs 486 478 8 2 1,961 Depreciation and amortisation 285 285 - - 1,198 ------ ------ ------ Operating profit before leaver costs 201 193 8 4 763 ====== ====== ====== Capital expenditure 272 200 (72) (36) 1,017 ====== ====== ====== BT Wholesale external revenue in the first quarter increased by £2 million to £999 million. Revenue from new wave services was £245 million. Internal revenue increased by 2 per cent to £867 million due to strong growth in broadband revenue from internal channels more than offsetting the impact of lower call volumes and lower regulatory prices being reflected in internal charges. Gross variable profit decreased by 1 per cent to £916 million. Network and SG&A costs performance was strong, with a 4 per cent decrease as a result of cost savings made through network efficiencies more than offsetting network costs on the roll-out of 21CN. EBITDA before leaver costs increased by 2 per cent to £486 million. Higher depreciation due to increased 21CN activity has been offset by a reduction in depreciation in areas of traditional technology. Operating profit before leaver costs increased by 4 per cent year on year. Capital expenditure was 36 per cent higher than last year driven by a significant increase in 21CN related investment this quarter. BT Wholesale had 8.8 million DSL broadband connections at June 30, 2007, an increase of 701,000 year on year. There was a net reduction in connections of 55,000 in the first quarter as wholesale customers migrated to LLU as the exchange roll out continues. BT Wholesale's new strategy of generating growth through the provision of managed network solutions to other communication providers is demonstrating solid early success with new multi year contracts signed in the first quarter. This includes a new five year managed network solutions agreement with T-Mobile to manage the access backhaul transmission network serving the majority of T-Mobile's base station sites across the UK. The contract will deliver T-Mobile a cost-efficient and flexible next generation service to support its growth plans and help avoid any investment risk in building its own capability. Openreach First quarter ended June 30 Year ended ------------------------------- March 31 2007 2006 Better (worse) 2007 £m £m £m % £m External revenue 211 130 81 62 685 Revenue from BT lines of business 1,099 1,129 (30) (3) 4,492 ------ ------ ------ Revenue 1,310 1,259 51 4 5,177 Operating costs before leaver costs 839 787 (52) (7) 3,289 ------ ------ ------ EBITDA before leaver costs 471 472 (1) - 1,888 ------ ------ ------ Depreciation and amortisation 181 175 (6) (3) 707 ------ ------ ------ Operating profit before leaver costs 290 297 (7) (2) 1,181 ====== ====== ====== Capital expenditure 277 271 (6) (2) 1,108 ====== ====== ====== Openreach's revenue in the first quarter was £1,310 million, a 4 per cent increase, driven by higher connections and increased broadband related rentals. External revenue increased by £81 million due to volume growth on all products, including broadband related connections. Revenues from other BT lines of business decreased by 3 per cent to £1,099 million, reflecting the volume shift of Wholesale Line Rental (WLR) to external revenues. At June 30, 2007 Openreach had over 2.4 million external LLU lines (with net additions of 514,000 in the quarter) and 8.8 million lines with other BT lines of business. Overall LLU revenue has increased by over a third year on year as exchange rollout continues and the broadband market expands. Openreach has over 4.2 million external WLR lines and channels and 23 million WLR lines and channels with other BT lines of business, with overall WLR revenues remaining flat year on year. Operating costs increased by £52 million to £839 million. Headcount has increased by 500 in the quarter to support the increase in operational volumes of over 20 per cent year on year. These volume increases, effects of inflationary rises and increased maintenance and support costs of the new systems have been partly offset by efficiency programme savings across the business to keep the overall increase in operating costs to 7 per cent. Overall this has resulted in a £1 million decrease in EBITDA before leaver costs. Depreciation and amortisation costs of £181 million have increased by £6 million because of the impact of depreciation on the Equivalence Management Platform and LLU assets from the large capital investment in prior periods. Operating profit before leaver costs decreased by £7 million to £290 million. Capital expenditure in the quarter was 2 per cent higher at £277 million. Increased customer driven spend on network infrastructure and 21CN work have been partially offset by lower but continued, committed spend on system development required under the Undertakings. Openreach has made significant investment in delivering the new Wholesale Line Rental product (WLR3) to the industry and ensuring that all Communications Providers, including BT Retail, can exploit the benefits of WLR3 by June 30, 2007. This has included training of service management centre agents and all of the Openreach field engineers. Openreach has now delivered this solution and is in the process of ramping up customer migrations, while continuing to make good progress towards the next milestones, including WLR Digital. GROUP INCOME STATEMENT for the three months ended June 30, 2007 ----------------------------------------------------------------------------- Before Specific items specific items (note 4) Total (unaudited) Notes £m £m £m ----------------------------------------------------------------------------- Revenue 2 5,033 - 5,033 Other operating income 67 (1) 66 Operating costs 3 (4,392) (49) (4,441) ------ ------ ------ Operating profit 708 (50) 658 Finance costs (680) - (680) Finance income 625 - 625 ------ ------ ------ Net finance costs 5 (55) - (55) Share of post tax losses of associates and joint ventures (3) - (3) ------ ------ ------ Profit before taxation 650 (50) 600 Taxation (161) 169 8 ------ ------ ------ Profit for the period 489 119 608 ====== ====== ====== Attributable to: Equity shareholders 488 119 607 Minority interest 1 - 1 ====== ====== ====== Earnings per share 6 - basic 5.9p 7.4p ====== ====== - diluted 5.8p 7.2p ====== ====== GROUP INCOME STATEMENT for the three months ended June 30, 2006 ----------------------------------------------------------------------------- Before Specific items specific items (note 4) Total (unaudited) Notes £m £m £m ----------------------------------------------------------------------------- Revenue 2 4,864 - 4,864 Other operating income 50 - 50 Operating costs 3 (4,255) - (4,255) ------ ------ ------ Operating profit 659 - 659 Finance costs (642) - (642) Finance income 596 - 596 ------ ------ ------ Net finance costs 5 (46) - (46) Share of post tax profits of associates and joint ventures 2 - 2 ------ ------ ------ Profit before taxation 615 - 615 Taxation (151) - (151) ------ ------ ------ Profit for the period attributable to equity shareholders 464 - 464 ====== ====== ====== Earnings per share 6 - basic 5.6p 5.6p ====== ====== - diluted 5.5p 5.5p ====== ====== GROUP INCOME STATEMENT for the year ended March 31, 2007 ----------------------------------------------------------------------------- Before specific Specific items items (note 4) Total Notes £m £m £m ----------------------------------------------------------------------------- Revenue 2 20,223 - 20,223 Other operating income 236 (3) 233 Operating costs 3 (17,746) (169) (17,915) ------ ------ ------ Operating profit 2,713 (172) 2,541 Finance costs (2,604) - (2,604) Finance income 2,371 139 2,510 ------ ------ ------ Net finance (costs) income 5 (233) 139 (94) Share of post tax profits of associates and joint ventures 15 - 15 Profit on disposal of associate - 22 22 ------ ------ ------ Profit before taxation 2,495 (11) 2,484 Taxation (611) 979 368 ------ ------ ------ Profit for the period 1,884 968 2,852 ====== ====== ====== Attributable to: Equity shareholders 1,882 968 2,850 Minority interest 2 - 2 ====== ====== ====== Earnings per share 6 - basic 22.7p 34.4p ====== ====== - diluted 22.2p 33.6p ====== ====== GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE for the three months ended June 30, 2007 --------------------------------------------------------------------------------- First quarter ended June 30 Year ended March 31 2007 2006 2007 (unaudited) £m £m £m --------------------------------------------------------------------------------- Profit for the period 608 464 2,852 ====== ====== ====== Actuarial gains on defined benefit pension schemes 2,012 305 1,409 Net gains (losses) on cash flow hedges 26 (24) 163 Exchange differences on translation of foreign operations (19) (54) (95) Tax on items taken directly to equity (684) (87) (486) ------ ------ ------ Net gains recognised directly in equity 1,335 140 991 ------ ------ ------ Total recognised income for the period 1,943 604 3,843 ====== ====== ====== Attributable to: Equity shareholders 1,942 604 3,843 Minority interests 1 - - ------ ------ ------ 1,943 604 3,843 ====== ====== ====== GROUP CASH FLOW STATEMENT for the three months ended June 30, 2007 --------------------------------------------------------------------------------- First quarter ended June 30 Year ended March 31 2007 2006 2007 (unaudited) £m £m £m --------------------------------------------------------------------------------- Cash flows from operating activities Cash generated from operations (note 7 (a)) 464 1,092 5,245 Income taxes received (paid) 384 (90) (35) ------ ------ ------ Net cash inflow from operating activities 848 1,002 5,210 Cash flow from investing activities Net acquisition of subsidiaries, associates and joint ventures (164) (38) (237) Net purchase of property, plant, equipment and software (819) (802) (3,209) Interest received 75 15 147 Dividends received from associates and joint ventures 1 3 6 Net (purchase) sale of short term investments and non current asset investments (79) (729) 258 ------ ------ ------ Net cash used in investing activities (986) (1,551) (3,035) Cash flows from financing activities Net repurchase of ordinary share capital (368) (62) (279) New borrowings 1,503 - 11 Repayments of borrowings (660) (22) (1,085) Net movement on commercial paper 642 304 309 Interest paid (257) (235) (797) Equity dividends paid (2) (5) (1,057) ------ ------ ------ Net cash received (used) in financing activities 858 (20) (2,898) Effects of exchange rate changes (3) - (37) ------ ------ ------ Net increase (decrease) in cash and cash equivalents 717 (569) (760) ====== ====== ====== Cash and cash equivalents at beginning of period 1,024 1,784 1,784 Cash and cash equivalents, net of bank overdrafts, at end of period (note 7 (c)) 1,741 1,215 1,024 ====== ====== ====== Free cash flow (note 7 (b)) (152) (17) 1,354 ====== ====== ====== Increase in net debt from cash flows (note 8) 686 122 219 ====== ====== ====== GROUP BALANCE SHEET at June 30, 2007 --------------------------------------------------------------------------------- June 30 June 30 March 31 2007 2006 2007 (unaudited) £m £m £m --------------------------------------------------------------------------------- Non current assets Goodwill and other intangible assets 2,807 1,819 2,584 Property, plant and equipment 15,124 15,329 14,997 Trade and other receivables 579 366 523 Retirement benefit assets of the BT Pension Scheme 2,070 - - Other non current assets 130 81 119 Deferred tax assets 27 667 117 ------ ------ ------ 20,737 18,262 18,340 ------ ------ ------ Current assets Inventories 140 138 133 Trade and other receivables 4,469 4,183 4,073 Current tax receivables - - 504 Other financial assets 85 1,052 30 Cash and cash equivalents 2,245 1,391 1,075 ------ ------ ------ 6,939 6,764 5,815 ------ ------ ------ Total assets 27,676 25,026 24,155 Current liabilities Loans and other borrowings 2,718 2,888 2,203 Trade and other payables 6,662 6,394 6,719 Other current liabilities 638 1,043 695 ------ ------ ------ 10,018 10,325 9,617 ------ ------ ------ Total assets less current liabilities 17,658 14,701 14,538 ====== ====== ====== Non current liabilities Loans and other borrowings 7,743 7,042 6,387 Deferred tax liabilities 2,128 1,498 1,683 Retirement benefit obligations 96 2,222 389 Other non current liabilities 1,878 1,755 1,807 ------ ------ ------ 11,845 12,517 10,266 ------ ------ ------ Capital and reserves Called up share capital 432 432 432 Reserves 5,347 1,701 3,806 ------ ------ ------ Total equity shareholders' funds 5,779 2,133 4,238 Minority interest 34 51 34 ------ ------ ------ Total equity 5,813 2,184 4,272 ------ ------ ------ 17,658 14,701 14,538 ====== ====== ====== NOTES 1 Basis of preparation and accounting policies These primary statements and selected notes comprise the unaudited interim consolidated financial results of BT Group plc for the quarters ended June 30, 2007 and 2006, together with the audited results for the year ended March 31, 2007. These interim financial results do not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985. Statutory accounts for the year ended March 31, 2007 were approved by the Board of Directors on May 16, 2007 and published on May 30, 2007. The report of the auditors on those accounts was unqualified and did not contain any statement under Section 237 of the Companies Act 1985. The accounting policies which have been applied to prepare the interim financial results are the same as those used for the preparation of the consolidated financial statements for the year ended March 31, 2007. Certain comparative balance sheet amounts have been reclassified as at June 30, 2006 to conform with the presentation adopted as at March 31, 2007 and June 30, 2007. 2 Results of businesses (a) Operating results External Internal Group EBITDA Group operating revenue revenue revenue (ii) profit (loss) (ii) £m £m £m £m £m First quarter ended June 30, 2007 BT Global Services 1,853 403 2,256 239 75 BT Retail 1,963 96 2,059 198 156 BT Wholesale 999 867 1,866 486 201 Openreach 211 1,099 1,310 471 290 Other 7 - 7 31 (6) Intra-group items(i) - (2,465) (2,465) - - ------- ------- ------- ------- ------- Total 5,033 - 5,033 1,425 716 ======= ======= ======= ======= ======= First quarter ended June 30, 2006 BT Global Services 1,754 401 2,155 228 80 BT Retail 1,977 91 2,068 182 142 BT Wholesale 997 850 1,847 478 193 Openreach 130 1,129 1,259 472 297 Other 6 - 6 26 (29) Intra-group items(i) - (2,471) (2,471) - - ------- ------- ------- ------- ------- Total 4,864 - 4,864 1,386 683 ======= ======= ======= ======= ======= Year ended March 31, 2007 BT Global Services 7,467 1,639 9,106 1,020 345 BT Retail 7,997 417 8,414 869 698 BT Wholesale 4,057 3,527 7,584 1,961 763 Openreach 685 4,492 5,177 1,888 1,181 Other 17 - 17 42 (127) Intra-group items(i) - (10,075) (10,075) - - ------- ------- ------- ------- ------- Total 20,223 - 20,223 5,780 2,860 ======= ======= ======= ======= ======= (i) Elimination of intra-group revenue between businesses, which is included in the total revenue of the originating business. (ii) Before specific items and leaver costs There is extensive trading between BT's lines of business and the line of business profitability is dependent on the transfer price levels. For regulated products and services those transfer prices are market based, whilst for other products and services, the transfer prices are agreed between the relevant lines of business on an arms length basis. These intra-group trading arrangements are subject to periodic review. (b) Revenue analysis First quarter ended June 30 Year ended ------------------------------------ March 31 2007 2006 Better (worse) 2007 £m £m £m % £m Traditional 3,218 3,223 (5) - 12,849 New wave 1,815 1,641 174 11 7,374 ------- ------- -------- 5,033 4,864 169 3 20,223 ======= ======= ======== Major Corporate 1,785 1,699 86 5 7,244 Business 601 588 13 2 2,353 Consumer 1,231 1,252 (21) (2) 5,124 Wholesale/Carrier 1,409 1,319 90 7 5,485 Other 7 6 1 17 17 ------- ------- -------- 5,033 4,864 169 3 20,223 ======= ======= ======== (c) New wave revenue analysis First quarter ended June 30 Year ended ------------------------------------ March 31 2007 2006 Better (worse) 2007 £m £m £m % £m Networked IT services 1,061 981 80 8 4,386 Broadband 540 454 86 19 2,016 Mobility 75 71 4 6 294 Other 139 135 4 3 678 ------- ------- -------- 1,815 1,641 174 11 7,374 ======= ======= ======== (d) Capital expenditure on property, plant, equipment, software and motor vehicles First quarter ended June 30 Year ended ------------------------------------ March 31 2007 2006 Better (worse) 2007 £m £m £m % £m BT Global Services 186 149 (37) (25) 695 BT Retail 46 40 (6) (15) 166 BT Wholesale 272 200 (72) (36) 1,017 Openreach 277 271 (6) (2) 1,108 Other (including fleet vehicles and property) 122 55 (67) n/m 261 ------- ------- -------- 903 715 (188) (26) 3,247 ======= ======= ======== Transmission equipment 289 297 8 3 1,209 Exchange equipment 31 14 (17) n/m 118 Other network equipment 260 160 (100) (63) 854 Computers and office equipment 34 28 (6) (21) 149 Software 257 180 (77) (43) 807 Motor vehicles and other 15 14 (1) (7) 49 Land and buildings 17 22 5 23 61 ------- ------- -------- 903 715 (188) (26) 3,247 ======= ======= ======== 3 (a) Operating costs First quarter ended Year ended June 30 March 31 2007 2006 2007 £m £m £m Staff costs before leaver costs 1,299 1,256 5,076 Leaver costs 8 24 147 ------- ------- -------- Staff costs 1,307 1,280 5,223 Own work capitalised (187) (171) (718) ------- ------- -------- Net staff costs 1,120 1,109 4,505 Depreciation and amortisation 709 703 2,920 Payments to telecommunication operators 1,062 1,006 4,162 Other operating costs 1,501 1,437 6,159 ------- ------- -------- Total before specific items 4,392 4,255 17,746 Specific items (note 4) 49 - 169 ------- ------- -------- Total 4,441 4,255 17,915 ======= ======= ======== (b) Leaver costs First quarter ended Year ended June 30 March 31 2007 2006 2007 £m £m £m BT Global Services 4 17 52 BT Retail - 2 24 BT Wholesale 3 1 39 Openreach - 2 4 Other 1 2 28 ------- ------- -------- Total before specific items 8 24 147 Specific items 25 - - ------- ------- -------- Total 33 24 147 ======= ======= ======== 4 Specific items BT separately identifies and discloses any significant one off or unusual items (termed "specific items"). This includes profit and losses on the disposal of investments and businesses, and asset impairment charges. This is consistent with the way that financial performance is measured by management and we believe assists in providing a meaningful analysis of the trading results of the group. Specific items may not be comparable to similarly titled measures used by other companies. First quarter ended Year ended June 30 March 31 2007 2006 2007 £m £m £m Restructuring costs 49 - - Creation of Openreach - - 30 Property rationalisation costs - - 64 Write off of circuit inventory and working capital balances - - 65 Cost associated with settlement of open tax years - - 10 ------- ------- -------- Specific operating costs 49 - 169 Loss (profit) on sale of non current asset investments 1 - (19) Interest on settlement of open tax years - - (139) ------- ------- -------- Net specific items charge before tax 50 - 11 Tax credit on specific items (15) - (41) Tax credit on re-measurement of deferred tax (154) - - Tax credit in respect of settlement of open tax years - - (938) ------- ------- -------- Net specific items credit after tax (119) - (968) ======= ======= ======== 5 Net finance costs First quarter ended Year ended June 30 March 31 2007 2006 2007 £m £m £m Finance costs(1) before pension interest 173 175 732 Interest on pension scheme liabilities 507 467 1,872 ------- ------- -------- Finance costs 680 642 2,604 ------- ------- -------- Finance income(2) before pension income (13) (24) (218) Expected return on pension scheme assets (612) (572) (2,292) ------- ------- -------- Finance income (625) (596) (2,510) ------- ------- -------- Net finance costs 55 46 94 ======= ======= ======== Net finance costs before pensions 160 151 514 Interest associated with pensions (105) (105) (420) ------- ------- -------- Net finance costs 55 46 94 ======= ======= ======== (1)Finance costs in the first quarter ended June 30, 2007 and June 30, 2006 and the year ended March 31, 2007 include a net credit of £6 million and £3 million and net charge of £4 million, respectively, arising from the re-measurement of financial instruments which under IAS 39 are not in hedging relationships on a fair value basis. (2)Finance income in the year ended March 31, 2007 includes £139 million of interest on settlement of open tax years. 6 Earnings per share The basic earnings per share are calculated by dividing the profit attributable to shareholders by the average number of shares in issue after deducting the company's shares held by employee share ownership trusts and treasury shares. In calculating the diluted earnings per share, share options outstanding and other potential ordinary shares have been taken into account. The average number of shares in the periods were: First quarter ended Year ended June 30 March 31 2007 2006 2007 millions of shares Basic 8,216 8,314 8,293 Diluted 8,461 8,455 8,479 7 (a) Reconciliation of profit before tax to cash generated from operations First quarter ended Year ended June 30 March 31 2007 2006 2007 £m £m £m Profit before tax 600 615 2,484 Depreciation and amortisation 709 703 2,920 Associates and joint ventures 3 (2) (15) Employee share scheme costs 17 20 93 Net finance costs 55 46 94 Profit on disposal of non current asset investments 1 - (19) Changes in working capital (691) (357) (52) Provisions movements, pensions and other (230) 67 (260) ------- ------- -------- Cash generated from operations 464 1,092 5,245 ======= ======= ======= (b) Free cash flow First quarter ended Year ended June 30 March 31 2007 2006 2007 £m £m £m Cash generated from operations 464 1,092 5,245 Income taxes repaid (paid) 384 (90) (35) ------- ------- -------- Net cash inflow from operating activities 848 1,002 5,210 Included in cash flows from investing activities Net purchase of property, plant, equipment and software (819) (802) (3,209) Net purchase of non current asset investments - - (3) Dividends received from associates 1 3 6 Interest received 75 15 147 Included in cash flows from financing activities Interest paid (257) (235) (797) ------- ------- -------- Free cash flow (152) (17) 1,354 ======= ======= ======= Free cash flow is defined as the net increase in cash and cash equivalents less cash flows from financing activities (except interest paid), less the acquisition or disposal of group undertakings and less the net sale of short term investments. It is not a measure recognised under IFRS but is a key indicator used by management in order to assess operational performance. (c) Cash and cash equivalents At June 30 At March 31 2007 2006 2007 £m £m £m Cash at bank and in hand 854 464 568 Short term deposits 1,391 927 507 ------- ------- -------- Cash and cash equivalents 2,245 1,391 1,075 Bank overdrafts (504) (176) (51) ------- ------- -------- 1,741 1,215 1,024 ======= ======= ======== 8 Net debt Net debt at June 30, 2007 was £8,631 million (June 30, 2006 - £7,727 million). Net debt consists of loans and other borrowings less current asset investments and cash and cash equivalents. Loans and other borrowings are measured at the net proceeds raised, adjusted to amortise any discount over the term of the debt. For the purpose of this analysis current asset investments and cash and cash equivalents are measured at the lower of cost and net realisable value. Currency denominated balances within net debt are translated to sterling at swapped rates where hedged. This definition of net debt measures balances at the expected value of future cash flows due to arise on maturity of financial instruments and removes the balance sheet adjustments made for the re-measurement of hedged risks under fair value hedges and the use of the amortised cost method as required by IAS 39. In addition, the gross balances are adjusted to take account of netting arrangements amounting to £502 million. Net debt is a non GAAP measure since it is not defined in IFRS but it is a key indicator used by management in order to assess operational performance. 8 (a) Analysis At June 30 At March 31 2007 2006 2007 £m £m £m Loans and other borrowings 10,461 9,930 8,590 Cash and cash equivalents (2,245) (1,391) (1,075) Other current financial assets(1) (84) (1,036) (3) ------- ------- -------- 8,132 7,503 7,512 Adjustments: To retranslate currency denominated balances at swapped rates where hedged 614 371 577 To recognise borrowings and investments at net proceeds and unamortised discount (115) (147) (175) ------- ------- -------- Net debt 8,631 7,727 7,914 ======= ======= ======== After allocating the element of the adjustments to net debt which impact loans and other borrowings, gross debt at June 30, 2007 was £10,456 million (June 30, 2006 - £9,975 million, March 31, 2007 - £8,943 million). 1Excluding derivative financial instruments of £nil, £16 million and £27 million at June 30, 2007 and 2006 and March 31, 2007, respectively. 8 (b) Reconciliation of movement in net debt First quarter ended Year ended June 30 March 31 2007 2006 2007 £m £m £m Net debt at beginning of period 7,914 7,534 7,534 Increase in net debt resulting from cash flows 686 122 219 Net debt assumed or issued on acquisitions 24 9 11 Currency movements 2 63 124 Other non cash movements 5 (1) 26 ------- ------- -------- Net debt at end of period 8,631 7,727 7,914 ======= ======= ======== 9 Statement of changes in equity First quarter ended Year ended June 30 March 31 2007 2006 2007 £m £m £m Shareholders' funds 4,238 1,555 1,555 Minority interest 34 52 52 ------- ------- -------- Equity at beginning of period 4,272 1,607 1,607 Total recognised income for the period 1,943 604 3,843 Share based payment (4) 20 71 Issues of shares 10 1 24 Tax on items taken directly to equity - - 82 Net purchase of treasury shares (407) (47) (284) Dividends on ordinary shares - - (1,053) Minority interest (1) (1) (18) ------- ------- -------- Net changes in equity for the period 1,541 577 2,665 Equity at end of period Shareholders' funds 5,779 2,133 4,238 Minority interest 34 51 34 ------- ------- -------- Total equity 5,813 2,184 4,272 ======= ======= ======== 10 Earnings before interest, taxation, depreciation and amortisation (EBITDA) First quarter Year ended ended June 30 March 31 2007 2006 2007 £m £m £m Operating profit 658 659 2,541 Specific items (note 4) 50 - 172 Depreciation and amortisation (note 3) 709 703 2,920 -------- -------- ------- EBITDA before specific items 1,417 1,362 5,633 ======= ======= ======= Earnings before interest, taxation, depreciation and amortisation (EBITDA) before specific items is not a measure recognised under IFRS, but it is a key indicator used by management in order to assess operational performance. Forward-looking statements - caution advised Certain statements in this results release are forward-looking and are made in reliance on the safe harbour provisions of the US Private Securities Litigation Reform Act of 1995. These statements include, without limitation, those concerning: continued growth in revenue, EBITDA and earnings per share; growth in new wave revenue, mainly from networked IT services and broadband; implementation of BT's 21st Century Network; roll out of next generation broadband services and the benefits of BT's new organisation structure including accelerated strategic transformation and achievement of cost savings. Although BT believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences between actual results and those implied by the forward-looking statements include, but are not limited to; material adverse changes in economic conditions in the markets served by BT; future regulatory actions and conditions in BT's operating areas, including competition from others; selection by BT and its lines of business of the appropriate trading and marketing models for its products and services; fluctuations in foreign currency exchange rates and interest rates; technological innovations, including the cost of developing new products, networks and solutions and the need to increase expenditures for improving the quality of service; prolonged adverse weather conditions resulting in a material increase in overtime, staff or other costs; developments in the convergence of technologies; the anticipated benefits and advantages of new technologies, products and services, including broadband and other new wave initiatives, not being realised; and general financial market conditions affecting BT's performance. BT undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. This information is provided by RNS The company news service from the London Stock Exchange END QRFUVVBRBVRBUAR

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