1st Quarter Results

BT Group PLC 27 July 2006 July 27, 2006 FIRST QUARTER RESULTS TO JUNE 30, 2006 HIGHLIGHTS • Revenue of £4,864 million, up 3 per cent • New wave revenue of £1,641 million, up 18 per cent, represents 34 per cent of total revenue • EBITDA before specific items (1) and leaver costs of £1,386 million, up 2 per cent • Profit before taxation, specific items (1) and leaver costs of £639 million, up 24 per cent • Earnings per share before specific items (1) and leaver costs of 5.8 pence, up 26 per cent • BT Retail's share of broadband net additions was 30 per cent • Broadband end users (2) of 8.7 million at June 30, 2006 Chief Executive's statement Ben Verwaayen, Chief Executive, commenting on the first quarter results, said: "This is a strong all round performance to start the financial year, with the momentum we saw in recent quarters continuing. Revenue has increased for ten consecutive quarters; EBITDA (3) was up 2 per cent, an improvement on the rate of growth we achieved last quarter; and earnings per share3 was up 26 per cent, the seventeenth consecutive quarter of growth. "Our international business is expanding strongly and we won more than 200 new customer accounts outside the UK in the quarter. "Our first quarter results underpin our confidence in our ability to continue to grow our revenue, EBITDA, earnings per share and dividends this year." The income statement, cash flow statement and balance sheet from which this information is extracted are set out on pages 14 to 19. (1) Before specific items which are material one off or unusual items as defined in note 4 on page 23. (2) DSL and LLU connections as restated to include BT own use and test lines as sourced from equivalent BT Wholesale systems. (3) Before specific items and leaver costs. RESULTS FOR THE FIRST QUARTER ENDED JUNE 30, 2006 First quarter Year ended ---------------------------------- March 31 2006 2005 Better (worse) 2006 £m £m % £m Revenue 4,864 4,731 3 19,514 EBITDA - before specific items and leaver costs 1,386 1,363 2 5,650 - before specific items 1,362 1,357 - 5,517 Profit before taxation - before specific items and leaver costs 639 517 24 2,310 - before specific items 615 511 20 2,177 - after specific items 615 499 23 2,040 Earnings per share - before specific items and leaver costs 5.8p 4.6p 26 20.6p - before specific items 5.6p 4.5p 24 19.5p - after specific items 5.6p 4.4p 27 18.4p Capital expenditure 715 716 - 3,142 Free cash flow (17) (126) 87 1,612 Net debt 7,727 8,121 5 7,534 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 23. The income statement, cash flow statement and balance sheet are provided on pages 14 to 19. A reconciliation of EBITDA before specific items to group operating profit is provided on page 28. A definition and reconciliation of free cash flow and net debt are provided on pages 24 to 27. GROUP RESULTS Revenue was 3 per cent higher at £4,864 million in the quarter with strong growth in new wave revenue more than offsetting the decline in traditional revenue. EBITDA before specific items and leaver costs grew by 1.7 per cent. This is the second quarter of growth and builds on the 0.9 per cent growth reported last quarter. Earnings per share before specific items and leaver costs increased by 26 per cent to 5.8 pence, the seventeenth consecutive quarter of year on year growth. The strong growth in new wave revenue continued and at £1,641 million was 18 per cent higher than last year. New wave revenue accounted for 34 per cent of the group's revenue compared to 29 per cent in the first quarter of last year. New wave revenue is mainly generated from networked IT services, broadband and mobility. Networked IT services revenue grew by 9 per cent to £981 million, broadband revenue increased by 45 per cent to £454 million and mobility revenue increased by 8 per cent to £71 million. Networked IT services contract wins were £1.0 billion in the first quarter, and the value of total orders achieved over the last twelve months was £4.1 billion. Of this total, more than 20 per cent of the order value was generated outside the UK. BT had 8.7 million wholesale broadband connections at June 30, 2006, including 580,000 local loop unbundled lines, an increase of 2.9 million connections year on year and 535,000 connections in the quarter. The definition of broadband connections has been adjusted to include BT own use and test lines as sourced from equivalent BT Wholesale systems on which a data cleanse has also been performed and the statistics above are quoted on a consistent basis. Over 40 per cent of all UK homes now subscribe to broadband services. Revenue from the group's traditional businesses declined by 4 per cent continuing recent trends. This reflects regulatory intervention, competition, price reductions and also technological changes that we are using to drive customers from traditional services to new wave services. Major corporate (UK and international) revenue showed growth of 6 per cent, with 10 per cent growth in new wave revenue more than offsetting the decline in traditional services. Migration from traditional voice only services to networked IT services continued with new wave revenue representing 58 per cent of all major corporate revenue. Revenue from smaller and medium sized (SME) UK businesses was maintained year on year. New wave revenue grew by 25 per cent driven by continued growth in broadband and other new wave services. In the declining UK calls market, BT has continued to use BT Business Plan to defend revenues through delivering value to its customer base. Consumer revenue in the first quarter was 5 per cent lower. Growth in new wave revenue of 37 per cent continues to reduce our dependence on traditional revenue which has declined by 10 per cent with the strategic shift towards new wave products and services. New wave revenue now represents 14 per cent of the total consumer revenue. The 12 month rolling average revenue per consumer household (net of mobile termination charges) of £253 increased by £2 compared to last quarter, the second successive quarter of growth. Improvements in the proportion of customers upgrading from the basic broadband package and more new customers subscribing for higher value packages more than offset the lower call revenues. BT Total Broadband reflects our strategy to drive value into the broadband market. Contracted revenues increased by 1 percentage point to 68 per cent compared to last quarter, 3 percentage points higher than last year. Wholesale (UK and Global Carrier) revenue increased by 8 per cent. UK Wholesale new wave revenue increased by 21 per cent to £265 million, mainly driven by broadband. Group operating costs before specific items increased by 3 per cent year on year at £4,255 million. Staff costs before leaver costs increased by £100 million to £1,256 million due mainly to the additional staff needed to support networked IT services contracts, increased levels of activity in the network and 21CN activities (including capital work) as well as cost inflation. Leaver costs were £24 million in the quarter (£6 million last year). Payments to other telecommunication operators were flat year on year at £1,006 million. Other operating costs before specific items increased by £83 million mainly due to increased costs of sales from growth in networked IT and other new wave services. These were partly offset by cost savings from our efficiency programmes. Depreciation and amortisation decreased by 1 per cent year on year to £703 million. Group operating profit before specific items and leaver costs increased by 4 per cent to £683 million. Operating profit margins before specific items and leaver costs increased by 0.2 percentage points to 14.0 per cent. Net finance costs were £46 million, an improvement of £96 million against last year. Net finance income associated with the group's defined benefit pension scheme was £105 million in the first quarter, £42 million higher than last year. Repayment of maturing debt last year, fair value movements on derivatives that are economic hedges but are not fully effective hedges under the IAS 39 definitions and lower net debt have also contributed to the reduction in net finance costs. Profit before taxation, specific items and leaver costs of £639 million increased by 24 per cent. The effective tax rate on the profit before specific items was 24.5 per cent (25.2 per cent last year). The effective tax rate reflects the continued focus on tax efficiency within the group. Earnings per share before specific items and leaver costs increased by 26 per cent to 5.8 pence. Specific items Specific items are defined in note 4 on page 23. There were no specific items in the first quarter. The charge of £12 million in the first quarter of last year arose from the rationalisation of the group's provincial office portfolio. Cash flow and net debt Net cash from operating activities in the first quarter amounted to £1,002 million compared to £841 million last year, largely due to lower working capital outflows. Cash flows from investing activities were a net cash outflow of £1,551 million in the first quarter compared to £887 million last year. This mainly reflects the higher surplus funds in the quarter compared to the prior year, which were invested in short term investments. Cash flows from financing activities were a net outflow of £20 million in the first quarter compared to a net outflow of £353 million last year. This mainly reflects the issue of commercial paper in the current quarter to support funding requirements which were financed through operational flows in the prior year and lower net interest payments following the maturity of bonds in the prior year. Free cash flow was a net outflow of £17 million in the first quarter compared to a net outflow of £126 million last year mainly reflecting the lower working capital outflows. The share buyback programme continued with the repurchase of 22 million shares for £50 million during the quarter. Net debt was £7,727 million at June 30, 2006, £394 million below the level at June 30, 2005. Free cash flow and net debt are defined and reconciled in notes 7 and 8 on pages 24 to 27. Pensions The IAS 19 net pension obligation at June 30, 2006 was a deficit of £1.6 billion, net of tax, being £1.8 billion lower than the level at June 30, 2005. The BT Pension Scheme had assets of £35 billion at June 30, 2006. The triennial funding valuation at December 31, 2005 is currently being performed and reviewed in the context of recent regulatory developments and the impact of the Crown Guarantee granted on privatisation in 1984. 21st Century Network In response to industry feedback, BT presented a detailed 21st Century Network (21CN) proposal in May 2006, and since then has been actively consulting with industry and Ofcom on these revised proposals. These consultation streams are due to close over the coming weeks. Upon conclusion, BT expects to have an industry-agreed rollout plan for 21CN. This will cover the migration of existing voice and IPStream broadband services and the introduction of next generation wholesale broadband services in a planned national upgrade. These new services, including backhaul support for LLU, next generation IP Connect and up to 24 Mbit/s broadband, are scheduled to be offered from January 2008 as part of the 21CN UK national rollout programme. The delivery of 21CN will make BT the first incumbent operator in the world to switch off the PSTN and migrate all of its voice customers onto an all-IP network. Since May this year almost 23 million end-to-end calls have been successfully carried over this network, using equipment from the 21CN preferred suppliers. In addition, BT staff are currently testing services across the IP network between Multi-Service Access Nodes (MSANs). This is part of the comprehensive 21CN testing programme during which more than half a million tests will be conducted in the countdown to the first end user lines being migrated in the Cardiff area in November 2006, as the first stage of the 21CN migration plan commences. This initial migration phase will conclude in June 2007 and will be followed by a period of industry review and testing ahead of national migration, currently scheduled to begin in January 2008. The exchange preparation programme, to ensure readiness for all premises required for the delivery of the first stage of the 21CN migration plan, is nearing completion in 90 locations across the country and the build of the IP/ MPLS (Multi-Protocol Label Switching) core network is also underway. An estimated 3,000 people within BT are working full time on the programme and this number is expected to rise as the programme moves towards national migration. Line of business results Openreach, a new line of business created in accordance with the regulatory framework agreed with Ofcom (the Undertakings), was launched on January 21, 2006. It is responsible for ensuring that all communications providers have transparent and equivalent access to the BT network, and comprises a work force of approximately 30,000 people. As at March 31, 2006 Openreach had net operating assets of £7.7 billion. Its primary products are wholesale line rental (WLR) and local loop unbundling (LLU). As required by the timetable set out in the Undertakings the separation of the financial and operating systems to facilitate the reporting of Openreach as a separate line of business has been completed and the Openreach results are reported separately in this quarter's results. In order to assist readers in understanding the year on year performance, we have restated the comparative line of business results. These restatements also reflect the impact of the new internal trading arrangements that have been implemented due to the creation of Openreach. There is no change to the overall group reported results. _____________________________________________________________________________ BT's final dividend of 7.6 pence per share will be paid on September 11, 2006 to shareholders on the register on August 18, 2006. The ex-dividend date is August 16, 2006. The second quarter and half year's results are expected to be announced on November 9, 2006. BT Global Services First quarter ended June 30 Year ended ----------------------------------- March 31 2006 2005* Better (worse) 2006* £m £m £m % £m Revenue 2,155 2,067 88 4 8,772 EBITDA before leaver costs 228 221 7 3 975 Leaver costs 17 2 (15) n/m 49 ------ ------ ------ EBITDA 211 219 (8) (4) 926 Depreciation and amortisation 148 152 4 3 638 ------ ------ ------ Operating profit 63 67 (4) (6) 288 ====== ====== ====== Capital expenditure 149 142 (7) (5) 702 ====== ====== ====== *Restated to reflect changes in intra-group trading arrangements. BT Global Services grew revenue in the first quarter by 4 per cent to £2,155 million. This was achieved despite absorbing the impact of further declines in UK traditional and carrier revenues. Order intake remained firm with networked IT services contract orders of £1.0 billion, which included Unilever and Philips, resulting in orders of £4.1 billion over the last twelve months. More than 20 per cent of the order intake was again generated outside the UK. EBITDA before leaver costs increased year on year by £7 million to £228 million. Further growth in new wave profitability, together with rationalisations in network related and indirect costs, more than offset the decline in EBITDA experienced in UK traditional products, including migration to IPVPNs sold to UK corporates and further reductions in dial IP due to broadband substitution. Depreciation charges were £4 million lower but leaver costs were £15 million higher following a further headcount reduction programme which took approximately 250 people from the support cost base and this has led to a fall in operating profit after leaver costs of £4 million. Capital expenditure in the quarter rose by £7 million to £149 million due to extra network investment outside the UK. BT has achieved some notable successes on its NHS National Programme for IT contracts. On N3, the NHS broadband network in England, it has installed 15,000 connections - ahead of schedule for its target of 18,000 by March 2007. In an extension to this contract, BT has completed over half of the NHS Scotland broadband network. N3 is the largest virtual private network in Europe. As the London service provider, BT will have delivered some capability to more than 50 per cent of trusts by the end of the year. It has already delivered 50 per cent of its Picture Archiving and Communications Systems (PACS) to trusts serving over two million people. PACS enables X-rays and scans to be stored, displayed, and transmitted electronically, rather than being printed onto film. The programme has also delivered systems for GPs, pathology and pharmacy. The BT delivered Spine, one of the world's largest transactional database and messaging services, has enabled national services such as electronic prescriptions, (over 2 million prescriptions issued) and the "Choose and Book" service (more than 700,000 appointments). Spine has 250,000 registered users. BT Retail First quarter ended June 30 Year ended ---------------------------------- March 31 2006 2005* Better (worse) 2006* £m £m £m % £m Revenue 2,068 2,120 (52) (2) 8,507 ------ ------ ------ Gross margin 560 536 24 4 2,229 SG&A before leaver costs 378 378 - - 1,491 ------ ------ ------ EBITDA before leaver costs 182 158 24 15 738 Leaver costs 2 3 1 33 22 ------ ------ ------ EBITDA 180 155 25 16 716 Depreciation and amortisation 40 34 (6) (18) 147 ------ ------ ------ Operating profit 140 121 19 16 569 ====== ====== ====== Capital expenditure 40 35 (5) (14) 153 ====== ====== ====== *Restated to reflect changes in intra-group trading arrangements. BT Retail's EBITDA before leaver costs was 15 per cent higher than last year, the fourth consecutive quarter of growth. Gross margins increased by 1.8 percentage points compared to the prior year helped by increased consumer broadband margins. Improved gross margin management more than compensated for the 2 per cent decline in revenues. Selling, general and administration costs were held flat year on year. Operating profit improved by 16 per cent to £140 million. Traditional revenue declined by 8 per cent whilst new wave revenue grew by 31 per cent, driven primarily by broadband and other new wave services. New wave revenue was 19 per cent of total revenue in the quarter, up from 14 per cent last year. Broadband revenue grew by 37 per cent to £220 million with BT Retail connections at 30 June growing to 2,826,000 an increase of 6 per cent in the quarter. We achieved a 30 per cent market share of broadband net additions (DSL plus LLU) in the quarter. The launch of BT Total Broadband during the quarter allows customers to enjoy a comprehensive set of cutting-edge features as standard, powered by up to 8 Mbit/ s download speeds. Value for money is enhanced by free evening and weekend calls, and free video calls when made over the broadband connection, along with a suite of security software. These are all brought together through the revolutionary BT Home Hub, providing wireless connectivity to all wireless broadband-enabled devices and services. BT Total Broadband also includes 250 free BT Openzone (public Wi-Fi Service) minutes per month and is enhanced with 24/7 helpdesk support which includes remote diagnostics. BT Broadband Talk suite of Voice over Internet Protocol (VoIP) products have been upgraded and is one of the most advanced VoIP services on the market, now available with high-definition sound for delivering crystal clear internet voice and video calls. We have also launched BT Broadband Talk Video where customers equipped with the BT Videophone can see the person they are talking to. The acquisition of dabs.com, one of the UK's leading internet retailers of IT and technology products was completed on April 28, 2006. dabs.com strengthens BT Retail's online sales and service capabilities particularly for the SME market - enhancing its position as a leading retailer of converged IT and communications products and services. We continue to launch new propositions to the SME market, including switches such as BT Micro (office in a box) and converged options and upgrades such as the Broadband Voice Module to facilitate voice and data convergence. These propositions allow our customers to have one system to manage their voice calls, data network, share of broadband access and exploit VoIP technology. BT Vision, due to launch in Autumn, yesterday announced a major download-to-own and video-on-demand agreement with NBC Universal. BT Vision has also won the rights to carry 242 'near-live' FA Premier League football matches per season covering the 2007-8, 2008-9 and 2009-10 seasons. This will allow fans to watch full Premiership matches on their televisions on a pay per view basis without the need for an up-front subscription. This added to the existing BT Vision content from well-known names including Paramount, DreamWorks, National Geographic and Warner Music will give viewers one of the most compelling entertainment offers in the UK. Agreements are now in place with 12 cities, including Westminster, Cardiff, Birmingham and Glasgow, which are set to become pioneers of the BT Wireless Cities initiative across the UK. In addition, our customers currently have access to over 8,500 public Wi-Fi hotspots in the UK and Ireland and over 30,000 globally allowing them access to information and services to work, talk and play. BT Openzone the public Wi-Fi service was recently awarded the Best Service Provider accolade at the 2006 Global Wireless Broadband Innovation Awards. BT Wholesale First quarter ended June 30 Year ended ---------------------------------- March 31 2006 2005* Better (worse) 2006* £m £m £m % £m External revenue 997 968 29 3 3,908 Internal revenue 850 846 4 - 3,435 ------ ------ ------ Revenue 1,847 1,814 33 2 7,343 Variable cost of sales 920 931 11 1 3,720 ------ ------ ------ Gross variable profit 927 883 44 5 3,623 Network and SG&A before leaver costs 449 415 (34) (8) 1,731 ------ ------ ------ EBITDA before leaver costs 478 468 10 2 1,892 Leaver costs 1 - (1) n/m 31 ------ ------ ------ EBITDA 477 468 9 2 1,861 Depreciation and amortisation 285 271 (14) (5) 1,102 ------ ------ ------ Operating profit 192 197 (5) (3) 759 ====== ====== ====== Capital expenditure 200 230 30 13 974 ====== ====== ====== *Restated to reflect changes in intra-group trading arrangements. BT Wholesale revenue in the first quarter of £1,847 million increased by 2 per cent, driven by external revenue growth of 3 per cent, reflecting strong growth in broadband. External revenue from new wave services increased by 21 per cent to £265 million and accounts for 27 per cent of external revenue. Internal revenue increased marginally to £850 million due to strong growth in internal broadband revenue more than offsetting the impact of lower call volumes and lower regulatory prices being reflected in internal charges. Gross variable profit at £927 million increased by 5 per cent as a result of revenue growth and a change in sales mix towards more profitable products such as broadband. Cost savings through network efficiencies have been more than offset by higher 21CN expenditure and increasing network and customer service costs from growth in broadband. Overall, EBITDA before leaver costs has increased by £10 million to £478 million. Higher depreciation due to the shortening of the useful economic lives of legacy transmission assets to be replaced by the 21CN and leaver costs of £1 million has resulted in a 3 per cent decline in operating profit. Capital expenditure in the quarter was 13 per cent lower than last year reflecting the increased investment in the 21CN being more than offset by significantly decreased investment in legacy network technologies. BT Wholesale will launch BT Movio, Europe's first national broadcast digital TV and Radio Service to a mobile handset, later this summer. Virgin Mobile will be the first retail partner to take the service to market. BT Wholesale launched broadband max services in March 2006, providing the UK market with the highest stable speed broadband service across the widest national footprint in the world. Service providers are currently migrating broadband subscribers to BT Wholesale's IPMax services, which deliver services at speeds of up to 8 Mbit/s. To date, more than 750,000 subscribers have been migrated to max services, aided by the availability of a new automated mass customer migration tool. BT Wholesale has also launched beta trials of a range of advanced services, including application driven quality of service, which will ensure high performance for business critical broadband applications. BT Wholesale recently launched Virtual Interconnect Circuits (VIC), a product designed to provide commercial stability as the industry moves towards next generation networks. VIC will allow service providers to continue to benefit from local exchange segment (LES) rates while BT closes digital line exchanges as part of the 21CN upgrade programme. Openreach First quarter ended June 30 Year ended --------------------------------- March 31 2006 2005* Better (worse) 2006* £m £m £m % £m External revenue 130 53 77 145 318 Internal revenue 1,129 1,241 (112) (9) 4,824 ------ ------ ------ Revenue 1,259 1,294 (35) (3) 5,142 Operating costs 787 787 - - 3,156 ------ ------ ------ EBITDA before leaver costs 472 507 (35) (7) 1,986 Leaver costs 2 - (2) n/m 3 ------ ------ ------ EBITDA 470 507 (37) (7) 1,983 Depreciation and amortisation 175 186 11 6 800 ------ ------ ------ Operating profit 295 321 (26) (8) 1,183 ====== ====== ====== Capital expenditure 271 257 (14) (5) 1,039 ====== ====== ====== *Restated to reflect changes in intra-group trading arrangements. Openreach's revenue in the first quarter was £1,259 million, a decrease of 3 per cent driven by regulatory price reductions partially offset by market volume growth. Recent price reductions have stimulated the market resulting in an increase in external revenues of 145 per cent to £130 million. Internal revenue has decreased by 9 per cent to £1,129 million reflecting the regulatory price cuts and the volume shift from internal to external revenues. At the end of June, Openreach had over 580,000 external LLU lines and 3.5 million external WLR lines. These have grown significantly from March 31, 2006 with net additions being 224,000 LLU connections and 683,000 WLR connections on last quarter. On June 30, 2006, in line with the Undertakings, Openreach successfully provided Metallic Path Facility (MPF) and shared MPF products on an equivalent basis. This was achieved by the development and delivery of the Equivalence Management Platform (EMP). The EMP is an automated system designed to cope with higher volumes of orders for unbundled lines to meet increasing demand. Operating costs at £787 million were held flat despite the increased infrastructure costs incurred to support Openreach, volume increases and inflationary rises. These increases have been offset by various cost savings across the business. Overall this has delivered a £35 million decrease in EBITDA before leaver costs. Decreased depreciation and amortisation costs of £11 million is due to the lengthening of the useful economic life of copper, consistent with Ofcom's review. This is partially offset by higher systems depreciation. Capital expenditure in the quarter was 5 per cent higher than last year reflecting increased investment in new systems to ensure compliance with the Undertakings and increased network infrastructure spend to meet LLU demand. GROUP INCOME STATEMENT for the three months ended June 30, 2006 Before specific Specific items 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 2 659 - 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 three months ended June 30, 2005 Before specific Specific items items (note 4) Total (unaudited) Notes £m £m £m ----------------------- ------ ---------- ----------- --------- Revenue 2 4,731 - 4,731 Other operating income 42 - 42 Operating costs 3 (4,125) (12) (4,137) ---------- ----------- --------- Operating profit 2 648 (12) 636 Finance costs (716) - (716) Finance income 574 - 574 ---------- ----------- --------- Net finance costs 5 (142) - (142) Share of post tax profits of associates and joint ventures 5 - 5 ---------- ----------- --------- Profit before taxation 511 (12) 499 Taxation (129) 4 (125) ---------- ----------- --------- Profit for the period attributable to equity shareholders 382 (8) 374 ========== =========== ========= Earnings per share 6 - basic 4.5p 4.4p - diluted 4.5p 4.4p ========== =========== ========= GROUP INCOME STATEMENT for the year ended March 31, 2006 Before specific Specific items items (note 4) Total Notes £m £m £m ----------------------- ------ ---------- ----------- --------- Revenue 2 19,514 - 19,514 Other operating income 227 - 227 Operating costs 3 (17,108) (138) (17,246) ---------- ----------- --------- Operating profit 2 2,633 (138) 2,495 Finance costs (2,740) - (2,740) Finance income 2,268 - 2,268 ---------- ----------- --------- Net finance costs 5 (472) - (472) Share of post tax profits of associates and joint ventures 16 - 16 Profit on disposal of joint venture - 1 1 ---------- ----------- --------- Profit before taxation 2,177 (137) 2,040 Taxation (533) 41 (492) ---------- ----------- --------- Profit for the year 1,644 (96) 1,548 ========== =========== ========= Attributable to: Equity shareholders 1,643 (96) 1,547 Minority interest 1 - 1 ========== =========== ========= Earnings per share 6 - basic 19.5p 18.4p - diluted 19.2p 18.1p ========== =========== ========= GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE for the three months ended June 30, 2006 First quarter ended Year ended June 30 March 31 2006 2005 2006 (unaudited) £m £m £m --------------------------------------- ------- ------- ------- Profit for the period 464 374 1,548 ======= ======= ======= Actuarial gains (losses) on defined benefit pension obligations 305 (80) 2,122 Net movement on cash flow hedges (24) 64 (200) Exchange differences on translation of foreign operations (54) 10 24 Tax on items taken directly to equity (87) 10 (588) ------- ------- ------- Net gains recognised directly in equity 140 4 1,358 ------- ------- ------- Total recognised income for the period 604 378 2,906 ======= ======= ======= Attributable to: Equity shareholders 604 378 2,905 Minority interests - - 1 ------- ------- ------- 604 378 2,906 ======= ======= ======= GROUP CASH FLOW STATEMENT for the three months ended June 30, 2006 First quarter ended Year ended June 30 March 31 2006 2005 2006 (unaudited) £m £m £m --------------------------------------- ------- ------- ------- Cash flows from operating activities Cash generated from operations (note 7 (a)) 1,092 972 5,777 Income taxes paid (90) (131) (390) ------- ------- ------- Net cash inflow from operating activities 1,002 841 5,387 Cash flows from investing activities Acquisition of subsidiaries (net of cash acquired) (38) (88) (167) Net purchase of property, plant, equipment and software (802) (686) (2,874) Interest received 18 37 185 Net (purchase) sale of short term investments and non current asset investments (729) (150) 3,221 ------- ------- ------- Net cash used in investing activities (1,551) (887) 365 Cash flows from financing activities Repurchase of ordinary share capital (62) (21) (339) Net proceeds from (repayments of) borrowings 282 (14) (2,946) Interest paid (235) (318) (1,086) Equity dividends paid (5) - (907) ------- ------- ------- Net cash used in financing activities (20) (353) (5,278) Effects of exchange rate changes - 29 - ------- ------- ------- Net (decrease) increase in cash and cash equivalents (569) (370) 474 ======= ======= ======= Cash and cash equivalents at beginning of period 1,784 1,310 1,310 Cash and cash equivalents, net of bank overdrafts, at end of period (note 7 (c)) 1,215 940 1,784 ======= ======= ======= Free cash flow (note 7 (b)) (17) (126) 1,612 ======= ======= ======= Increase (decrease) in net debt from cash flows (note 8) 122 235 (199) ======= ======= ======= GROUP BALANCE SHEET at June 30, 2006 June 30 June 30 March 31 2006 2005 2006 (unaudited) £m £m £m ------------------------------------- --------- --------- --------- Non current assets Goodwill and other intangible assets 1,773 1,343 1,641 Property, plant and equipment 15,375 15,431 15,489 Other non current assets 81 184 84 Deferred tax assets 667 1,460 764 --------- --------- --------- 17,896 18,418 17,978 --------- --------- --------- Current assets Inventories 138 124 124 Trade and other receivables 4,549 4,210 4,199 Other financial assets 1,052 3,866 434 Cash and cash equivalents 1,391 1,177 1,965 --------- --------- --------- 7,130 9,377 6,722 --------- --------- --------- Total assets 25,026 27,795 24,700 Current liabilities Loans and other borrowings 2,888 4,626 1,940 Trade and other payables 6,394 5,722 6,540 Other current liabilities 1,043 1,284 1,000 --------- --------- --------- 10,325 11,632 9,480 --------- --------- --------- Total assets less current liabilities 14,701 16,163 15,220 ========= ========= ========= Non current liabilities Loans and other borrowings 7,042 8,094 7,995 Deferred tax liabilities 1,498 1,458 1,505 Retirement benefit obligations 2,222 4,867 2,547 Other non current liabilities 1,755 1,489 1,566 --------- --------- --------- 12,517 15,908 13,613 --------- --------- --------- Capital and reserves Called up share capital 432 432 432 Reserves 1,701 (226) 1,123 --------- --------- --------- Total equity shareholders' funds 2,133 206 1,555 Minority interest 51 49 52 --------- --------- --------- Total equity 2,184 255 1,607 --------- --------- --------- 14,701 16,163 15,220 ========= ========= ========= NOTES (unaudited) 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, 2006 and 2005, together with the audited results for the year ended March 31, 2006. 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, 2006 were approved by the Board of Directors on May 17, 2006 and published on May 31, 2006. 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 financial information set out in these interim financial results has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union (EU). The accounting polices 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, 2006. As permitted, the group has chosen not to adopt IAS 34 "Interim Financial Statements", and therefore these interim financial results are not in full compliance with IFRS. As required by the timetable set out in the Undertakings the separation of the financial and operating systems to facilitate the reporting of Openreach as a separate line of business has been completed and the Openreach results are reported separately in this quarter's results. In order to assist readers in understanding the year on year performance, we have restated the comparative line of business results. These restatements also reflect the impact of the new internal trading arrangements that have been implemented due to the creation of Openreach. There is no change to the overall group reported results. 2 Results of businesses (a) Operating results Group operating External Internal Group EBITDA profit (loss) revenue revenue revenue (ii) (ii) £m £m £m £m £m First quarter ended June 30, 2006 BT Global Services 1,754 401 2,155 211 63 BT Retail 1,977 91 2,068 180 140 BT Wholesale 997 850 1,847 477 192 Openreach 130 1,129 1,259 470 295 Other 6 - 6 24 (31) Intra-group items (i) - (2,471) (2,471) - - ------- ------- ------- ------- ------- Total 4,864 - 4,864 1,362 659 ======= ======= ======= ======= ======= First quarter ended June 30, 2005 (restated - note 1) BT Global Services 1,681 386 2,067 219 67 BT Retail 2,023 97 2,120 155 121 BT Wholesale 968 846 1,814 468 197 Openreach 53 1,241 1,294 507 321 Other 6 - 6 8 (58) Intra-group items (i) - (2,570) (2,570) - - ------- ------- ------- ------- ------- Total 4,731 - 4,731 1,357 648 ======= ======= ======= ======= ======= Year ended March 31, 2006 (restated - see note 1) BT Global Services 7,168 1,604 8,772 926 288 BT Retail 8,102 405 8,507 716 569 BT Wholesale 3,908 3,435 7,343 1,861 759 Openreach 318 4,824 5,142 1,983 1,183 Other 18 - 18 31 (166) Intra-group items (i) - (10,268) (10,268) - - ------- ------- ------- ------- ------- Total 19,514 - 19,514 5,517 2,633 ======= ======= ======= ======= ======= (i) Elimination of intra-group revenue between businesses, which is included in the total revenue of the originating business. (ii) Before specific items. 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. These intra-group trading arrangements are subject to periodic review. (b) Revenue analysis Year ended First quarter ended June 30 March 31 2006 2005 Better (worse) 2006 £m £m £m % £m Traditional 3,223 3,346 (123) (4) 13,232 New wave 1,641 1,385 256 18 6,282 ------- ------- ------- 4,864 4,731 133 3 19,514 ======= ======= ======= Major Corporate 1,699 1,597 102 6 6,880 Business 588 586 2 - 2,324 Consumer 1,252 1,324 (72) (5) 5,296 Wholesale/Carrier 1,319 1,218 101 8 4,996 Other 6 6 - - 18 ------- ------- ------- 4,864 4,731 133 3 19,514 ======= ======= ======= (c) New wave revenue analysis Year ended First quarter ended June 30 March 31 2006 2005 Better (worse) 2006 £m £m £m % £m Networked IT services 981 899 82 9 4,065 Broadband 454 314 140 45 1,459 Mobility 71 66 5 8 292 Other 135 106 29 27 466 ------- ------- ------- 1,641 1,385 256 18 6,282 ======= ======= ======= (d) Capital expenditure on property, plant, equipment, software and motor vehicles: Year ended First quarter ended June 30 March 31 2006 2005 Better (worse) 2006 £m £m £m % £m BT Global Services 149 142 (7) (5) 702 BT Retail 40 35 (5) (14) 153 BT Wholesale 200 230 30 13 974 Openreach 271 257 (14) (5) 1,039 Other (including fleet vehicles and property) 55 52 (3) (6) 274 ------- ------- ------- 715 716 1 - 3,142 ======= ======= ======= Transmission equipment 297 373 76 20 1,429 Exchange equipment 14 18 4 22 80 Other network equipment 160 162 2 1 727 Computers and office equipment 74 56 (18) (32) 281 Software 134 65 (69) (106) 449 Motor vehicles and other 14 31 17 55 108 Land and buildings 22 11 (11) (100) 68 ------- ------- ------- 715 716 1 - 3,142 ======= ======= ======= 3 Operating costs Year ended First quarter ended June 30 March 31 2006 2005 2006 £m £m £m Staff costs before leaver costs 1,256 1,156 4,833 Leaver costs 24 6 133 ------- ------- ------- Staff costs 1,280 1,162 4,966 Depreciation and amortisation 703 709 2,884 Payments to telecommunication operators 1,006 1,009 4,045 Other operating costs 1,519 1,436 6,113 Own work capitalised (253) (191) (900) ------- ------- ------- Total before specific items 4,255 4,125 17,108 Specific items (note 4) - 12 138 ------- ------- ------- Total 4,255 4,137 17,246 ======= ======= ======= 4 Specific items BT separately identifies and discloses any material one off or unusual items (termed "specific items"). 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. Specific items were previously referred to as exceptional items under UK GAAP. Year ended First quarter ended June 30 March 31 2006 2005 2006 £m £m £m Operating costs Creation of Openreach - - 70 Property rationalisation costs - 12 68 ------- ------- ------- Specific operating costs - 12 138 Profit on sale of joint ventures - - (1) ------- ------- ------- Total specific items before taxation - 12 (137) ======= ======= ======= 5 Net finance costs Year ended First quarter ended June 30 March 31 2006 2005 2006 £m £m £m Finance costs1 before pension interest 175 262 924 Interest on pension scheme liabilities 467 454 1,816 ------- ------- ------- Finance costs 642 716 2,740 Finance costs before pension income (24) (57) (198) Expected return on pension scheme assets (572) (517) (2,070) ------- ------- ------- Finance income (596) (574) (2,268) ------- ------- ------- Net finance costs 46 142 472 ======= ======= ======= Net finance costs before pensions 151 205 726 Interest associated with pensions (105) (63) (254) ------- ------- ------- Net finance costs 46 142 472 ======= ======= ======= 1Finance costs in the first quarter ended June 30, 2006 and June 30, 2005 include a £3 million net credit and £12 million net charge, respectively, arising from the re-measurement of financial instruments which under IAS 39 are not in hedging relationships on a fair value basis. 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: Year ended First quarter ended June 30 March 31 2006 2005 2006 millions of shares Basic 8,314 8,471 8,422 Diluted 8,455 8,556 8,537 7 (a) Reconciliation of profit before tax to cash generated from operations Year ended First quarter ended June 30 March 31 2006 2005 2006 £m £m £m Profit before tax 615 499 2,040 Depreciation and amortisation 703 709 2,884 Associates and joint ventures (2) (5) (16) Net finance costs 46 142 472 Changes in working capital (357) (453) 120 Provision movements, pensions and other 87 80 277 ------ ------ ------ Cash generated from operations 1,092 972 5,777 ====== ====== ====== 7 (b) Free cash flow Year ended First quarter ended June 30 March 31 2006 2005 2006 £m £m £m Cash generated from operations 1,092 972 5,777 Income taxes paid (90) (131) (390) ------ ------ ------ Net cash inflow from operating activities 1,002 841 5,387 Included in cash flows from investing activities Net purchase of property, plant, equipment and software (802) (686) (2,874) Net purchase of non current asset investments - - (1) Dividends received from associates 3 - 1 Interest received 15 37 185 Included in cash flows from financing activities Interest paid (235) (318) (1,086) ------ ------ ------ Free cash flow (17) (126) 1,612 ====== ====== ====== Free cash flow is defined as the net increase in cash and cash equivalents less cash flows from financing activities (except interest paid) and less the acquisition or disposal of group undertakings. 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 2006 2005 2006 £m £m £m Cash at bank and in hand 464 438 511 Short term deposits 927 739 1,454 ------ ------ ------ Cash and cash equivalents 1,391 1,177 1,965 Bank overdrafts (176) (237) (181) ------ ------ ------ 1,215 940 1,784 ====== ====== ====== 8 Net debt Net debt at June 30, 2006 was £7,727 million (June 30, 2005 - £8,121 million, March 31, 2006 - £7,534 million). Net debt consists of loans and other borrowings less current asset investments and cash and cash equivalents. Loans and other borrowings are measured as 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 future cash flows due to arise on maturity of financial instruments and removes the balance sheet adjustments made from 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 £173 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. (a) Analysis At June 30 At March 31 2006 2005 2006 £m £m £m Loans and other borrowings 9,930 12,720 9,935 Cash and cash equivalents (1,391) (1,177) (1,965) Other current financial assets(1) (1,036) (3,704) (365) ------ ------ ------ 7,503 7,839 7,605 Adjustments: To retranslate currency denominated balances at swapped rates where hedged 371 486 121 To recognise borrowings at net proceeds and unamortised discount (147) (212) (192) Other - 8 - ------ ------ ------ Net debt 7,727 8,121 7,534 ====== ====== ====== After allocating the element of the adjustments which impact loans and other borrowings, gross debt at June 30, 2006 was £9,975 million (June 30, 2005 - £12,686 million, March 31, 2006 - £9,686 million). (1) Excluding derivative financial instruments of £16 million, £162 million and £69 million at June 30, 2006 and 2005 and March 31, 2006, respectively. (b) Reconciliation of net cash flow to movement in net debt Year ended First quarter ended June 30 March 31 2006 2005 2006 £m £m £m Net debt at beginning of period 7,534 7,893 7,893 Increase (decrease) in net debt resulting from cash flows 122 235 (199) Net debt assumed or issued on acquisitions - 1 - Currency movements 63 (14) (75) Other non-cash movements 8 6 (85) ------ ------ ------ Net debt at end of period 7,727 8,121 7,534 ====== ====== ====== 9 Statement of changes in equity Year ended First quarter ended June 30 March 31 2006 2005 2006 £m £m £m Shareholders' funds 1,555 45 45 Minority interest 52 50 50 ------ ------ ------ 1,607 95 95 Effect of adoption of IAS 32 and 39 - (209) (209) ------ ------ ------ Fund (deficit) at beginning of period 1,607 (114) (114) Total recognised income for the period 604 378 2,906 Share based payment 20 2 65 Issues of shares 1 2 4 Net purchase of treasury shares (47) (12) (344) Dividends on ordinary shares - - (912) Minority interest (1) (1) 2 ------ ------ ------ Net changes in equity for the financial period 577 369 1,721 Equity at end of period Shareholders' funds 2,133 206 1,555 Minority interest 51 49 52 ------ ------ ------ 2,184 255 1,607 ====== ====== ====== 10 Earnings before interest, taxation, depreciation and amortisation (EBITDA) Year ended First quarter ended June 30 March 31 2006 2005 2006 £m £m £m Operating profit 659 636 2,495 Specific items (note 4) - 12 138 Depreciation and amortisation (note 3) 703 709 2,884 ------ ------ ------ EBITDA before specific items 1,362 1,357 5,517 ====== ====== ====== 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. 11 United States Generally Accepted Accounting Principles (US GAAP) The results set out above have been prepared in accordance with the basis of preparation as set out in note 1. The table below sets out the results calculated in accordance with US GAAP. Year ended First quarter ended June 30 March 31 2006 2005 2006 Net income attributable to Shareholders (£m) 414 393 1,063 Earnings per ADS (£) - basic 0.50 0.46 1.26 - diluted 0.49 0.46 1.25 Each American Depositary Share (ADS) represents 10 ordinary shares of BT Group plc. Shareholders' equity, calculated in accordance with US GAAP, is £159 million at June 30, 2006 (June 30, 2005 - £231 million deficit, March 31, 2006 - £158 million deficit). 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, earnings per share and dividends; growth in new wave revenue, mainly from networked IT services, broadband and mobility growth; expanding international business; implementation of BT's 21st Century Network and the rollout programme, and the introduction of next generation services; and 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

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