3rd Quarter Results

BT Group PLC 08 February 2007 February 8, 2007 THIRD QUARTER AND NINE MONTHS RESULTS TO DECEMBER 31, 2006 THIRD QUARTER HIGHLIGHTS • Revenue of £5,126 million, up 5 per cent • New wave revenue of £1,880 million, up 17 per cent, representing 37 per cent of total revenue • EBITDA before specific items1 and leaver costs of £1,439 million, up 2 per cent • Profit before taxation, specific items1 and leaver costs of £643 million, up 13 per cent • Earnings per share before specific items1 and leaver costs of 5.8 pence, up 14 per cent • Specific items include a net credit of £1,067 million relating to the settlement of ten open tax years • Continued strong broadband net additions2 of 697,000 of which BT Retail's share was 34 per cent The income statement, cash flow statement and balance sheet from which this information is extracted are set out on pages 16 to 22. Chief Executive's statement Ben Verwaayen, Chief Executive, commenting on the third quarter results, said: "This is another strong set of results; our strategy is delivering and the positive trends are gathering momentum. The revenue growth of 5 per cent reflects continued strong growth in new wave services and a robust defence of our traditional business, underpinned by growth in active consumer customers for the first time in four years. "There are now more than 10 million wholesale broadband connections2 and the market continues to grow strongly. In an intensely competitive market BT Retail's share of the net additions2 in the quarter was 34 per cent. Openreach has reached 1.5 million LLU connections this month. The sales orders won by BT Global Services in the quarter were £2.5 billion. "After nineteen consecutive quarters of earnings per share3 growth, our expectations are to continue to grow our revenue, EBITDA3, earnings per share3 and dividends for this financial year and next." 1 Before specific items which are significant one off or unusual items as defined in note 4 on pages 26 to 27. 2 DSL and LLU connections. 3 Before specific items and leaver costs. RESULTS FOR THE THIRD QUARTER AND NINE MONTHS TO DECEMBER 31, 2006 Third quarter Nine months ------------------------ ------------------------------ 2006 2005 Better 2006 2005 Better £m £m (worse) £m £m (worse) % % Revenue 5,126 4,882 5 14,931 14,380 4 EBITDA - before specific items and leaver costs 1,439 1,404 2 4,243 4,152 2 - before specific items 1,412 1,381 2 4,159 4,086 2 Profit before taxation - before specific items and leaver costs 643 568 13 1,947 1,681 16 - before specific items 616 545 13 1,863 1,615 15 - after specific items 639 545 17 1,883 1,533 23 Earnings per share - before specific items and leaver costs 5.8p 5.1p 14 17.6p 14.9p 18 - before specific items 5.6p 4.9p 14 16.9p 14.4p 17 - after specific items 17.6p 4.9p n/m 28.9p 13.7p n/m Capital expenditure 815 759 (7) 2,342 2,169 (8) Free cash flow (525)1 138 n/m (204)1 515 n/m Net debt 8,796 8,113 (8) =============================================================================== 1 Includes payment of deficiency pension contributions of £500 million 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 pages 26 to 27. The income statement, cash flow statement and balance sheet are provided on pages 16 to 22. A reconciliation of EBITDA before specific items to group operating profit is provided on page 31. A definition and reconciliation of free cash flow and net debt are provided on pages 28 to 30. GROUP RESULTS Revenue was 5 per cent higher at £5,126 million in the quarter with continued strong growth in new wave revenue more than offsetting the decline in traditional revenue. EBITDA before specific items and leaver costs grew by 2.5 per cent, the fourth consecutive quarter of growth. Earnings per share before specific items and leaver costs increased by 14 per cent to 5.8 pence, the nineteenth consecutive quarter of year on year growth. The strong growth in new wave revenue continued and at £1,880 million was 17 per cent higher than last year. New wave revenue accounted for 37 per cent of the group's revenue compared to 33 per cent in the third quarter of last year. New wave revenue is mainly generated from networked IT services and broadband. Networked IT services revenue grew by 8 per cent to £1,117 million, and broadband revenue increased by 39 per cent to £520 million. BT Global Services contract wins were £2.5 billion in the third quarter, with £8.2 billion achieved over the last twelve months. BT had 10 million wholesale broadband connections (DSL and LLU) at December 31, 2006, including 1.3 million local loop unbundled lines, an increase of 2.7 million connections year on year and 697,000 connections in the quarter. Over 50 per cent of all UK homes now subscribe to broadband services, comprising both DSL and cable services1. BT Retail's share of the net additions in the quarter was 34 per cent. Revenue Revenue from the group's traditional businesses declined by 1 per cent, an improvement on recent trends. This strong performance reflects a robust defence of the traditional business and is despite the regulatory intervention, competition and migration of customers to new wave services. Major corporate (UK and international) revenue showed growth of 6 per cent, with 8 per cent growth in new wave revenue and 3 per cent growth in traditional services. Migration from traditional voice only services to networked IT services continued with new wave revenue representing 61 per cent of all major corporate revenue. Revenue from smaller and medium sized (SME) UK businesses grew by 3 per cent year on year. New wave revenue grew by 31 per cent driven by continued growth in broadband and other new wave services. We continue to develop innovative pricing plans and a focus on propositions that bring together IT, broadband and communications to allow business people to concentrate on running their business. 1 Source: Point-topic.com, December 2006. Consumer revenue in the third quarter was 1 per cent lower, a significant improvement on recent trends. Growth in new wave revenue of 31 per cent continues to reduce our dependence on traditional revenue which has declined by 6 per cent with the strategic shift towards new wave products and services. The rate of decline in the traditional business is significantly lower than last quarter and for the first quarter in four years the number of active consumer voice customers has grown. New wave revenue now represents 16 per cent of the total consumer revenue. The 12 month rolling average revenue per consumer household increased by £4 in the quarter to £258. Increased penetration of broadband and the growth of value added propositions have more than offset the lower call revenues. Contracted revenues increased to 68 per cent, a year on year increase of 1 percentage point. Wholesale (UK and Global Carrier) revenue increased by 11 per cent driven by wholesale line rental (WLR) and LLU. Wholesale new wave revenue increased by 37 per cent to £364 million, mainly driven by broadband. New wave revenue now accounts for 26 per cent of wholesale revenue. Operating results Group operating costs before specific items increased by 6 per cent year on year to £4,508 million. Staff costs before leaver costs increased by £56 million to £1,282 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 £27 million in the quarter (£23 million last year). Payments to other telecommunication operators increased by £19 million to £1,051 million. Other operating costs before specific items of £1,593 million increased by £140 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 4 per cent year on year to £741 million. Group operating profit before specific items and leaver costs increased by 1 per cent to £698 million. Earnings Net finance costs before specific items were £62 million, an improvement of £67 million against last year. This includes net finance income associated with the group's defined benefit pension scheme which was £105 million in the third quarter, £41 million higher than last year, and the repayment of maturing debt last year which have contributed to the reduction in net finance costs. Profit before taxation, specific items and leaver costs of £643 million increased by 13 per cent. The effective tax rate on the profit before specific items was 24.4 per cent (24.6 per cent last year) reflecting the continued focus on tax efficiency within the group. Our effective tax rate is expected to be 24.5 per cent for the 2006/07 full year and between 25 and 26 per cent in 2007/08. Earnings per share before specific items and leaver costs increased by 14 per cent to 5.8 pence. Specific items Specific items are defined in note 4 on pages 26 to 27. There was a net credit of £992 million in the quarter (£nil last year). This principally relates to a net credit of £1,067 million arising as a result of the settlement of substantially all open matters relating to tax years up to and including 2004/05 with HM Revenue and Customs. The credit represents those elements of the tax charges previously recognised which were in excess of the final agreed liability, plus interest income. The cash due to BT of approximately £1 billion is expected to be received during the fourth quarter of 2006/07 and the first half of the next financial year. There was a charge of £61 million as a result of a review of circuit inventory and other working capital balances, a further charge of £30 million for incremental costs associated with complying with the Undertakings, a further charge of £17 million relating to the rationalisation of the group's office portfolio and a £2 million profit on disposal of investments. Earnings per share after specific items were 17.6 pence in the quarter (4.9 pence last year). Cash flow and net debt Net cash inflows from operating activities in the third quarter amounted to £604 million compared to £1,218 million last year, with the reduction being largely due to the payment of deficiency pension contributions of £500 million in December 2006. Free cash flow was a net outflow of £525 million in the third quarter compared to an inflow of £138 million last year mainly reflecting the deficiency pension contributions, higher working capital outflows and higher capital expenditure. Capital expenditure is expected to be about £3.2 billion for 2006/07 and 2007/08 before trending down towards the end of the decade. The share buyback programme continued with the repurchase of 33 million shares for a total consideration of £94 million during the quarter, a net cash outflow of £92 million. Net debt was £8,796 million at December 31, 2006. Free cash flow and net debt are defined and reconciled in notes 7 and 8 on pages 28 to 30. Pensions The IAS 19 net pension obligation at December 31, 2006 was a deficit of £1.1 billion, net of tax, being £1.8 billion lower than the level at December 31, 2005. The BT Pension Scheme had assets of £37.8 billion at December 31, 2006. The triennial funding valuation at December 31, 2005 was concluded in the quarter. BT will make deficit payments equivalent to £280 million per annum for 10 years with the first three years' instalments paid up front: £500 million in December 2006 and the remaining £340 million by April 30, 2007. 21st Century Network BT successfully upgraded the first end user customers to its 21CN infrastructure in the village of Wick in South Wales on November 28, 2006 as planned. The upgrade, which took place without the need for an engineer visit, new telephone or a new telephone number, is part of the first phase of the national roll-out of 21CN. To reach this important milestone BT had re-built around 10 per cent of the UK's core national communications infrastructure, installed 21CN equipment at over 100 sites across the UK, and laid more than 2,300 kilometres of new fibre optic cable in South Wales and invested more than 1,500 man years in developing new IT systems to support the new network. Reaching this major milestone has also been the result of pan-industry collaboration through Consult21, a forum which provides a regular open platform for all communications providers to understand and influence BT's plans for 21CN. On January 15, 2007 BT signed frame contract agreements with both Nortel and Siemens for the supply of carrier class Ethernet technology for implementation in BT's 21CN infrastructure. The implementation of Ethernet complements BT's existing 21CN strategy of deploying MPLS in its new network. During this quarter, BT will continue the process of migrating customers to its 21CN infrastructure in South Wales. Outlook After nineteen consecutive quarters of growth in earning per share before specific items and leaver costs, our expectations for 2006/07 and 2007/08 are to continue to grow our revenue, EBITDA before specific items and leaver costs, earning per share before specific items and leaver costs, and dividends. _____________________________________________________________________________ The fourth quarter and full year results are expected to be announced on May 17, 2007. 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 local network, and comprises a work force of approximately 30,000 people. Its primary products are wholesale line rental (WLR) and local loop unbundling (LLU). 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 Global Services =============================== ================= Third quarter ended December 31 Nine months ended December 31 --------------------------------------- ----------------- 2006 2005* Better (worse) 2006 2005* £m £m £m % £m £m Revenue 2,291 2,197 94 4 6,603 6,366 Gross profit 653 652 1 - 1,919 1,876 SG&A before leaver costs 415 425 10 2 1,224 1,208 ----- ----- ----- ----- EBITDA before leaver costs 238 227 11 5 695 668 Leaver costs 6 4 (2) (50) 28 28 ----- ----- ----- ----- EBITDA 232 223 9 4 667 640 Depreciation and amortisation 180 160 (20) (13) 485 470 ----- ----- ----- ----- Operating profit 52 63 (11) (17) 182 170 ===== ===== ===== ===== Capital 186 169 (17) (10) 511 482 expenditure =============== ===== ===== ===== ===== *Restated to reflect changes in intra-group trading arrangements. BT Global Services revenue grew in the third quarter by 4 per cent to £2,291 million. New wave revenue was £1,794 million, an increase of 8 per cent year on year. UK traditional revenues decreased 6 per cent year on year, with continuing falls experienced in voice related and dial IP revenues. MPLS revenue rose by 20 per cent to £127 million. Order intake for the quarter was strong with networked IT services contract orders of £1.5 billion, up £0.3 billion from the prior year, which included major contracts with the government, financial and IT service provider sectors. Total orders in the quarter amounted to £2.5 billion, £0.1 billion higher than last year and the highest since the first quarter of last year, taking the value of total orders achieved over the last twelve months to £8.2 billion. Over 25 per cent of the total order intake was generated outside the UK. This quarter 231 corporate customers from around the world chose BT for the first time. These successes stem from BT's practical experience of working in collaboration with existing customers to transform their businesses. This experience has provided Philips, for the first time, with a one stop global support desk for their networked IT services needs. Once fully operational it will provide services to their employees in 40 different countries. We are on track to migrate 80 per cent of voice and data traffic onto a single Internet Protocol Virtual Private Network (IPVPN) for Fiat. When the migration is completed, operations in 30 countries will share the benefits of MPLS technology. In South America we implemented a 35 site VoIP solution for Unilever who makes significant savings on call rates. In the UK we are in the fourth year of working with Connecting for Health to transform the networked IT services needs of the NHS. To date nearly 320,000 registered users have generated over 11 million prescriptions and 2.5 million "Choose & Book" appointments through one of the largest transactional databases and messaging systems in the world, known as the Spine. We have also connected over 18,000 sites to the N3 network ahead of schedule and provided 50 per cent of Trusts in the London LSP area with IT capabilities. EBITDA before leaver costs increased year on year by £11 million to £238 million, growth of 5 per cent year on year. Gross profit improved by £1 million to £653 million, while SG&A costs fell by £10 million as cost reduction initiatives gained momentum. Depreciation and amortisation charges increased by £20 million to £180 million, which included the impact of bringing the NHS London assets into use. Leaver costs were £2 million higher at £6 million. Overall, this brought operating profit to £52 million, a reduction of £11 million from last year. Capital expenditure in the quarter was £186 million, an increase of £17 million over last year reflecting increased investment in overseas infrastructure. BT Retail =============================== ================= Third quarter ended December 31 Nine months ended December 31 --------------------------------------- ----------------- 2006 2005* Better (worse) 2006 2005* £m £m £m % £m £m Revenue 2,131 2,116 15 1 6,276 6,372 ----- ----- ----- ----- Gross profit 594 556 38 7 1,746 1,647 SG&A before leaver costs 370 373 3 1 1,105 1,115 ----- ----- ----- ----- EBITDA before leaver costs 224 183 41 22 641 532 Leaver costs 5 8 3 38 14 13 ----- ----- ----- ----- EBITDA 219 175 44 25 627 519 Depreciation and amortisation 43 36 (7) (19) 122 109 ----- ----- ----- ----- Operating profit 176 139 37 27 505 410 ===== ===== ===== ===== Capital expenditure 34 32 (2) (6) 114 100 =============== ===== ===== ===== ===== *Restated to reflect changes in intra-group trading arrangements. BT Retail's revenue showed a growth of 1 per cent, this is the first quarter in nearly 4 years that has shown positive growth, reflecting the success of BT Retail's strategy of defending traditional and growing new wave revenues. Gross margin percentage increased by almost 2 percentage points reflecting an improved customer and product mix and the impact of cost transformation programmes. SG&A costs before leaver costs fell by 1 per cent reflecting our continued drive for improved efficiency. EBITDA before leaver costs was 22 per cent higher than last year, continuing the recent trend of growth. We continue to be on target for a full year EBITDA percentage growth in the teens. We also expect EBITDA growth in 2007/08. Operating profit improved by 27 per cent to £176 million. Traditional revenue declined by 5 per cent whilst new wave revenue grew by 31 per cent, driven primarily by broadband and other new wave services. New wave revenue was 21 per cent of total revenue in the quarter, up from 16 per cent last year. In the consumer market, the significant price cuts to inclusive call packages introduced last quarter have improved the product mix, with more customers moving towards higher value packages. After four years of decline, the number of active consumer voice customers grew by 37,000 in the quarter as customers recognised the all round value offered by BT. Broadband revenue grew by 24 per cent to £233 million with BT Retail connections exceeding 3.2 million by the end of the quarter, an increase in connections of 239,000 in the quarter. BT Retail's share of broadband net additions (DSL and LLU) in the fiercely competitive marketplace was 34 per cent in the quarter, the highest for over two years. Our share of the installed base was 32 per cent as at December 31, 2006. The proportion of customers opting for higher value Options 2 and 3 packages have been maintained at nearly 60 per cent in the quarter. We continue to add value to our broadband proposition with new services such as BT Vision, which combines the appeal of TV with the interactivity of broadband. Viewers will be able to watch programmes on demand without the need for a regular monthly subscription. The already compelling Vision content was further enriched with new deals in the quarter with Warner Bros, Walt Disney, Channel 4 and EMI Music (UK). From next season, in partnership with Setanta, Vision Sport will give customers access to three quarters of all FA Premiership games. As announced at launch, we will build up the customer base steadily to ensure an excellent customer experience. The advanced VoIP service with High-Definition sound grew strongly in the quarter. At the end of the quarter, registered consumer customers for our VoIP services, Broadband Talk and BT Softphone, exceeded 1 million, more than doubling in the quarter and representing more than a third of the consumer broadband base. We have reached this milestone more than 6 months earlier than targeted. In the SME market, we are using broadband as a core part of a simple and complete communication and IT solution for our customers. We recently launched BT Business Total Broadband, our most complete broadband package specifically designed for small businesses. Our SME customers now benefit from a free Broadband Voice additional line offer and our latest suite of security software. Options 2 and 3 customers will also enjoy the freedom of wireless internet with 250 free BT Openzone minutes per month. We have also launched BT Workspace, a new user-friendly, but powerful, web-based collaboration tool for business. The recommended offer for the acquisition of PlusNet plc was declared unconditional on January 24, 2007 and will be recognised during the fourth quarter. PlusNet has a strong reputation for both customer service and innovation; this fits perfectly with BT Retail's strategy of providing customers with the most broadband can offer. BT Business One Plan, designed for SMEs, brings together mobile, fixed and broadband communications and simplifies the customer experience, allowing businesses to squeeze more value from their existing broadband line. Our IT Manager Service provides support and expertise, allowing business managers to focus on their core business. The success of this approach has been reflected in strong market share and more than half of new business broadband customers have chosen to contract with us for more than one year. Wi-Fi Fusion for SMEs was launched in December, bringing together the benefits of fixed and mobile convergence on one mobile device, with seamless two-way handover between Wi-Fi and GSM. This brings a range of benefits to SMEs helping them to increase their productivity and performance. Wi-Fi Fusion for the consumer market was launched in January. The Enterprises segment achieved strong revenue and profit growth. Within this division, Conferencing continues to grow strongly with a 25 per cent year on year revenue increase. Dabs.com, which was acquired in April 2006, grew by 25 per cent year on year outpacing a competitive PC market. Among its service enhancement, Dabs.com launched a new 'virtual video library' showing its most popular computing and consumer electronic products in action. BT Wholesale =============================== ================= Third quarter ended December 31 Nine months ended December 31 --------------------------------------- ----------------- 2006 2005* Better (worse) 2006 2005* £m £m £m % £m £m ----- ----- ----- ----- External revenue 1,027 987 40 4 3,054 2,919 Internal revenue 895 861 34 4 2,600 2,556 ----- ----- ----- ----- Revenue 1,922 1,848 74 4 5,654 5,475 Variable cost of sales 981 932 (49) (5) 2,864 2,764 ----- ----- ----- ----- Gross variable profit 941 916 25 3 2,790 2,711 Network and SG& A before leaver costs 438 434 (4) (1) 1,325 1,291 ----- ----- ----- ----- EBITDA before leaver costs 503 482 21 4 1,465 1,420 Leaver costs 6 1 (5) n/m 22 7 ----- ----- ----- ----- EBITDA 497 481 16 3 1,443 1,413 Depreciation and amortisation 293 271 (22) (8) 869 816 ----- ----- ----- ----- Operating profit 204 210 (6) (3) 574 597 ===== ===== ===== ===== Capital expenditure 237 221 (16) (7) 703 649 =============== ===== ===== ===== ===== *Restated to reflect changes in intra-group trading arrangements. BT Wholesale external revenue in the third quarter of £1,027 million increased by 4 per cent with revenue from new wave services increasing to £278 million, now accounting for 27 per cent of external revenue, driven by broadband growth. Internal revenue increased by 4 per cent to £895 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 increased by 3 per cent to £941 million. Despite greater 21CN expenditure, network and SG&A costs have only increased marginally as a result of savings through network efficiencies. Efficiencies through headcount reductions have continued and leaver costs for the quarter were £6 million. EBITDA before leaver costs has increased by 4 per cent to £503 million. Higher depreciation, due to the shortening of the useful economic lives of legacy transmission assets to be replaced by 21CN assets, and higher leaver costs, has resulted in a 3 per cent decline in operating profit. Capital expenditure was 7 per cent higher than last year due to increased investment in 21CN whilst successfully managing the legacy infrastructure on a lower level of capital investment. BT Wholesale is underpinning Vodafone UK's recently announced 'Vodafone at Home' fixed line voice and broadband service, which went live on January 8, 2007, as part of a managed service. BT Wholesale also launched advanced broadband services allowing its services provider customers the ability to offer guaranteed bandwidth over the broadband network. 'BT IP Stream Advanced Services' have been designed to create new business opportunities for service providers in markets such as the delivery of IP television and content distribution which require consistent and guaranteed bandwidth throughout a user 'session'. An early customer for the service is BT Vision. A foundation trial for next generation broadband services based on ADSL2+ was launched during the quarter in Cardiff. The trial is an important step in the delivery of next generation broadband services at up to 24 Mbit/s to customers across the UK from 2008 as part of the rollout of 21CN. As part of the trial, editions of the BBC drama, Torchwood, which is filmed on location in Cardiff, is being broadcast in high definition at up to 24 Mbit/s. BT Wholesale has also announced that it has extended its 'renewables and green energy' contract, one of the largest in the world, with British Gas and npower for a further three years through to 2010. The contract, part of BT's strategy to continue to reduce carbon emissions, will see the company saving the equivalent carbon as that resulting from the electricity consumption of more than 300,000 households - roughly the population of Liverpool and Cardiff combined - every year. Openreach =============================== ================= Third quarter ended December 31 Nine months ended December 31 --------------------------------------- ----------------- 2006 2005* Better (worse) 2006 2005* £m £m £m % £m £m ----- ----- ----- ----- External revenue 189 83 106 n/m 481 196 Revenue from other BT lines of business 1,125 1,195 (70) (6) 3,371 3,647 ----- ----- ----- ----- Revenue 1,314 1,278 36 3 3,852 3,843 Operating costs before leaver costs 845 790 (55) (7) 2,451 2,366 ----- ----- ----- ----- EBITDA before leaver costs 469 488 (19) (4) 1,401 1,477 Leaver costs 1 1 - - 3 1 ----- ----- ----- ----- EBITDA 468 487 (19) (4) 1,398 1,476 Depreciation and amortisation 177 196 19 10 530 570 ----- ----- ----- ----- Operating profit 291 291 - - 868 906 ===== ===== ===== ===== Capital expenditure 297 270 (27) (10) 847 773 =============== ===== ===== ===== ===== *Restated to reflect changes in intra-group trading arrangements. Openreach's revenue in the third quarter was £1,314 million, a 3 per cent increase, driven by strong market volume growth which has more than offset WLR price reductions made in prior periods. External revenue increased by £106 million due to volume growth on all products, including broadband related connections. Revenues from other BT lines of business decreased by 6 per cent to £1,125 million reflecting the volume shift to external revenues and the regulatory price reductions made in prior periods. Operating costs increased by 7 per cent to £845 million due to increased volumes, inflationary pressures and investment in service levels. However, these increases have been partially offset by cost savings from efficiency programmes across the business. Overall this has resulted in a £19 million decrease in EBITDA before leaver costs. However, this has been offset by the decrease in depreciation and amortisation costs of £19 million. This is due to the lengthening of the useful economic life of copper, consistent with Ofcom's review, partially offset by increased LLU and dropwire depreciation. Operating profit was flat at £291 million. Capital expenditure in the quarter was 10 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. At December 31, 2006 Openreach had 1.3 million external LLU lines and 4.2 million external WLR lines and channels. These have grown significantly with net additions in the quarter of 457,000 LLU connections and 190,000 WLR connections. Openreach has reached 1.5 million LLU connections this month. On December 22, 2006, Openreach achieved a significant milestone by placing the first live order of Wholesale Line Rental Analogue (WLR3) on an equivalent basis through the Equivalence Management Platform (EMP). From January 2, 2007, WLR3 is available for Communications Provider product establishment and order processing. GROUP INCOME STATEMENT for the three months ended December 31, 2006 ---------------------- ------ -------------- ------------- ------- Before Specific Total specific items items (note 4) (unaudited) Notes £m £m £m ---------------------- ------ -------------- ------------- ------- Revenue 2 5,126 - 5,126 Other operating income 53 2 55 Operating costs 3 (4,508) (118) (4,626) ------- ------- ------- Operating profit 2 671 (116) 555 Finance costs (656) - (656) Finance income 594 139 733 ------- ------- ------- Net finance (costs) income 5 (62) 139 77 Share of post tax profits of associates and joint ventures 7 - 7 ------- ------- ------- Profit before taxation 616 23 639 Taxation (150) 969 819 ------- ------- ------- Profit for the period 466 992 1,458 ======= ======= ======= Attributable to: Equity shareholders 465 992 1,457 Minority interest 1 - 1 ======= ======= ======= Earnings per share 6 - basic 5.6p 17.6p ======= ======= - diluted 5.5p 17.1p ======= ======= GROUP INCOME STATEMENT for the three months ended December 31, 2005 ---------------------- ------ -------------- ------------- ------- Before Specific Total specific items items (note 4) (unaudited) Notes £m £m £m ---------------------- ------ -------------- ------------- ------- Revenue 2 4,882 - 4,882 Other operating income 54 - 54 Operating costs 3 (4,265) - (4,265) ------- ------- ------- Operating profit 2 671 - 671 Finance costs (693) - (693) Finance income 564 - 564 ------- ------- ------- Net finance costs 5 (129) - (129) Share of post tax profits of associates and joint ventures 3 - 3 ------- ------- ------- Profit before taxation 545 - 545 Taxation (134) - (134) ------- ------- ------- Profit for the period attributable to equity shareholders 411 - 411 ======= ======= ======= Earnings per share 6 - basic 4.9p 4.9p ======= ======= - diluted 4.8p 4.8p ======= ======= GROUP INCOME STATEMENT for the nine months ended December 31, 2006 ---------------------- ------ -------------- ------------- ------- Before Specific Total specific items items (note 4) (unaudited) Notes £m £m £m ---------------------- ------ -------------- ------------- ------- Revenue 2 14,931 - 14,931 Other operating income 155 2 157 Operating costs 3 (13,074) (141) (13,215) ------- ------- ------- Operating profit 2 2,012 (139) 1,873 Finance costs (1,949) - (1,949) Finance income 1,786 139 1,925 ------- ------- ------- Net finance costs 5 (163) 139 (24) Share of post tax profits of associates and joint ventures 14 - 14 Profit on disposal of associate - 20 20 ------- ------- ------- Profit before taxation 1,863 20 1,883 Taxation (456) 970 514 ------- ------- ------- Profit for the period 1,407 990 2,397 ======= ======= ======= Attributable to: Equity shareholders 1,406 990 2,396 Minority interest 1 - 1 ======= ======= ======= Earnings per share 6 - basic 16.9p 28.9p ======= ======= - diluted 16.6p 28.2p ======= ======= GROUP INCOME STATEMENT for the nine months ended December 31, 2005 ---------------------- ------ -------------- ------------- ------- Before Specific Total specific items items (note 4) (unaudited) Notes £m £m £m ---------------------- ------ -------------- ------------- ------- Revenue 2 14,380 - 14,380 Other operating income 149 - 149 Operating costs 3 (12,554) (82) (12,636) ------- ------- ------- Operating profit 2 1,975 (82) 1,893 Finance costs (2,085) - (2,085) Finance income 1,714 - 1,714 ------- ------- ------- Net finance costs 5 (371) - (371) Share of post tax profits of associates and joint ventures 11 - 11 ------- ------- ------- Profit before taxation 1,615 (82) 1,533 Taxation (402) 25 (377) ------- ------- ------- Profit for the period attributable to equity shareholders 1,213 (57) 1,156 ======= ======= ======= Earnings per share 6 - basic 14.4p 13.7p ======= ======= - diluted 14.2p 13.5p ======= ======= GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE for the nine months ended December 31, 2006 ------------------------------------------------- --------------------------- Nine months ended December 31 2006 2005 (unaudited) £m £m ------------------------------------------------- ------- ------- Profit for the period 2,397 1,156 ======= ======= Actuarial gains on defined benefit pension schemes 360 625 Net gains (losses) on cash flow hedges 70 (117) Exchange differences on translation of foreign operations (102) 23 Tax on items taken directly to equity (150) (153) ------- ------- Net gains recognised directly in equity 178 378 Total recognised income for the period 2,575 1,534 ======= ======= Attributable to: Equity shareholders 2,576 1,534 Minority interest (1) - ------- ------- 2,575 1,534 ------- ------- GROUP CASH FLOW STATEMENT for the three months and nine months ended December 31, 2006 -------------------------- --------------------- ---------------------- Third quarter Nine months ended December 31 ended December 31 2006 2005 2006 2005 (unaudited) £m £m £m £m -------------------------- ------ ------ ------- ------ Cash flow from operating activities Cash generated from operations (note 7 (a)) 704 1,293 3,077 3,639 Income taxes paid (100) (75) (280) (317) ------ ------ ------- ------ Net cash inflow from operating activities 604 1,218 2,797 3,322 Cash flow from investing activities Net acquisition of subsidiaries, associates and joint ventures (49) (24) (74) (112) Net purchase of property, plant, equipment and software (777) (725) (2,373) (2,082) Interest received 26 70 63 166 Dividends received from associates and joint ventures 1 1 6 1 Net sale of short term investments and non current asset investments 547 1,705 67 2,287 ------ ------ ------- ------ Net cash (used) received in investing activities (252) 1,027 (2,311) 260 Cash flows from financing activities Net repurchase of ordinary share capital (92) (124) (206) (233) Net repayments of borrowings (759) (2,182) (921) (2,206) Net movement on commercial paper 805 - 1,032 - Interest paid (362) (426) (680) (891) Equity dividends paid (8) (9) (638) (549) ------ ------ ------- ------ Net cash used in financing activities (416) (2,741) (1,413) (3,879) Effects of exchange rate changes (28) (23) (28) - ------ ------ ------- ------ Net decrease in cash and cash equivalents (92) (519) (955) (297) ====== ====== ======= ====== Cash and cash equivalents at beginning of period 921 1,532 1,784 1,310 Cash and cash equivalents, net of bank overdrafts, at end of period (note 7 (c)) 829 1,013 829 1,013 ====== ====== ======= ====== Free cash flow 1 (note 7 (b)) (525) 138 (204) 515 ====== ====== ======= ====== Increase in net debt from cash flows (note 8 (b)) 674 19 1,122 379 ====== ====== ======= ====== ---------------------------------------------------------------------------------- 1 Net of deficiency pension contributions (500) - (500) - GROUP BALANCE SHEET at December 31, 2006 ------------------------------------- ----------- ----------- ---------- December 31 December 31 March 31 2006 2005 2006 (unaudited) £m £m £m ------------------------------------- ----------- ----------- ---------- Non current assets Goodwill and other intangible assets 1,983 1,518 1,641 Property, plant and equipment 15,288 15,347 15,489 Other non current assets 123 116 84 Deferred tax assets 467 1,222 764 -------- -------- -------- 17,861 18,203 17,978 -------- -------- -------- Current assets Inventories 127 125 124 Trade and other receivables 6,013 4,640 4,199 Other financial assets 208 1,548 434 Cash and cash equivalents 946 1,247 1,965 -------- -------- -------- 7,294 7,560 6,722 -------- -------- -------- Total assets 25,155 25,763 24,700 Current liabilities Loans and other borrowings 3,014 3,471 1,940 Trade and other payables 6,431 6,102 6,540 Other current liabilities 869 1,137 1,000 -------- -------- -------- 10,314 10,710 9,480 -------- -------- -------- Total assets less current liabilities 14,841 15,053 15,220 ======== ======== ======== Non current liabilities Loans and other borrowings 6,451 7,493 7,995 Deferred tax liabilities 1,544 1,392 1,505 Retirement benefit obligations 1,558 4,074 2,547 Other non current liabilities 1,872 1,404 1,566 -------- -------- -------- 11,425 14,363 13,613 -------- -------- -------- Capital and reserves Called up share capital 432 432 432 Reserves 2,937 208 1,123 -------- -------- -------- Total equity shareholders' funds 3,369 640 1,555 Minority interest 47 50 52 -------- -------- -------- Total equity 3,416 690 1,607 -------- -------- -------- 14,841 15,053 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 quarter and nine months ended December 31, 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, published on May 31, 2006 and delivered to the Registrar of Companies. 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, 2006. In order to assist readers in understanding the year on year performance, we have restated the comparative line of business results to reflect the creation of Openreach which is now reported as a separate line of business. These restatements also reflect the impact of the new internal trading arrangements that have been implemented. There is no change to the overall group reported results. 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 Third quarter ended December 31, 2006 BT Global Services 1,885 406 2,291 232 52 BT Retail 2,023 108 2,131 219 176 BT Wholesale 1,027 895 1,922 497 204 Openreach 189 1,125 1,314 468 291 Other 2 - 2 (4) (52) Intra-group items (i) - (2,534) (2,534) - - ------- ------- ------- ------- ------- Total 5,126 - 5,126 1,412 671 ======= ======= ======= ======= ======= Third quarter ended December 31, 2005 (restated - note 1) BT Global Services 1,792 405 2,197 223 63 BT Retail 2,017 99 2,116 175 139 BT Wholesale 987 861 1,848 481 210 Openreach 83 1,195 1,278 487 291 Other 3 - 3 15 (32) Intra-group items (i) - (2,560) (2,560) - - ------- ------- ------- ------- ------- Total 4,882 - 4,882 1,381 671 ======= ======= ======= ======= ======= Nine months ended December 31, 2006 BT Global Services 5,402 1,201 6,603 667 182 BT Retail 5,982 294 6,276 627 505 BT Wholesale 3,054 2,600 5,654 1,443 574 Openreach 481 3,371 3,852 1,398 868 Other 12 - 12 24 (117) Intra-group items (i) - (7,466) (7,466) - - ------- ------- ------- ------- ------- Total 14,931 - 14,931 4,159 2,012 ======= ======= ======= ======= ======= Nine months ended December 31, 2005 (restated - see note 1) BT Global Services 5,176 1190 6,366 640 170 BT Retail 6,076 296 6,372 519 410 BT Wholesale 2,919 2,556 5,475 1,413 597 Openreach 196 3,647 3,843 1,476 906 Other 13 - 13 38 (108) Intra-group items (i) - (7,689) (7,689) - - ------- ------- ------- ------- ------- Total 14,380 - 14,380 4,086 1,975 ======= ======= ======= ======= ======= (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. 2 Results of businesses continued (b) Revenue analysis Third quarter ended Nine months ended December 31 December 31 ------------------------------- --------------------- 2006 2005 Better (worse) 2006 2005 £m £m £m % £m £m Traditional 3,246 3,275 (29) (1) 9,674 9,949 New wave 1,880 1,607 273 17 5,257 4,431 ------ ------ ------ ------ ------ ------ 5,126 4,882 244 5 14,931 14,380 ====== ====== ====== ====== ====== ====== Major corporate 1,833 1,732 101 6 5,235 4,958 Business 584 568 16 3 1,765 1,737 Consumer 1,310 1,324 (14) (1) 3,819 3,984 Wholesale/ Carrier 1,397 1,255 142 11 4,100 3,688 Other 2 3 (1) (33) 12 13 ------ ------ ------ ------ ------ ------ 5,126 4,882 244 5 14,931 14,380 ------ ------ ------ ------ ------ ------ (c) New wave revenue analysis Third quarter ended Nine months ended December 31 December 31 ------------------------------- -------------------- 2006 2005 Better (worse) 2006 2005 £m £m £m % £m £m Networked IT services 1,117 1,038 79 8 3,099 2,851 Broadband 520 374 146 39 1,460 1,038 Mobility 73 75 (2) (3) 216 210 Other 170 120 50 42 482 332 ------ ------ ------ ------ ------ ------ 1,880 1,607 273 17 5,257 4,431 ------ ------ ------ ------ ------ ------ (d) Capital expenditure on property, plant, equipment, software and motor vehicles Third quarter ended Nine months ended December 31 December 31 ------------------------------- --------------------- 2006 2005 Better (worse) 2006 2005 £m £m £m % £m £m BT Global Services 186 169 (17) (10) 511 482 BT Retail 34 32 (2) (6) 114 100 BT Wholesale 237 221 (16) (7) 703 649 Openreach 297 270 (27) (10) 847 773 Other (including fleet vehicles and property) 61 67 6 9 167 165 ------ ------ ------ ------ ------ ------ 815 759 (56) (7) 2,342 2,169 ====== ====== ====== ====== ====== ====== Transmission equipment 303 356 53 15 897 1,076 Exchange equipment 24 21 (3) (14) 77 57 Other network equipment 214 134 (80) (60) 603 444 Computers and office equipment 70 64 (6) (9) 204 174 Software 179 136 (43) (32) 477 302 Motor vehicles and other 8 29 21 72 35 74 Land and buildings 17 19 2 11 49 42 ------ ------ ------ ------ ------ ------ 815 759 (56) (7) 2,342 2,169 ------ ------ ------ ------ ------ ------ 3 (a) Operating costs Third quarter ended Nine months ended December 31 December 31 2006 2005 2006 2005 £m £m £m £m Staff costs before leaver costs 1,282 1,226 3,812 3,592 Leaver costs 27 23 84 66 ------- ------- ------- ------- Staff costs 1,309 1,249 3,896 3,658 Own work capitalised1 (186) (179) (532) (499) ------- ------- ------- ------- Net staff costs 1,123 1,070 3,364 3,159 Depreciation and amortisation 741 710 2,147 2,111 Payments to telecommunication operators 1,051 1,032 3,091 3,030 Other operating costs 1,593 1,453 4,472 4,254 ------- ------- ------- ------- Total before specific items 4,508 4,265 13,074 12,554 Specific items (note 4) 118 - 141 82 ------- ------- ------- ------- Total 4,626 4,265 13,215 12,636 ------- ------- ------- ------- 1 Own work capitalised has been restated to exclude third party costs. This has no effect on the total costs. (b) Leaver costs Third quarter ended Nine months ended December 31 December 31 2006 2005 2006 2005 £m £m £m £m BT Global Services 6 4 28 28 BT Retail 5 8 14 13 BT Wholesale 6 1 22 7 Openreach 1 1 3 1 Other 9 9 17 17 ------- ------- ------- ------- Total 27 23 84 66 ------- ------- ------- ------- 4 Specific items BT separately identifies and discloses any significant one off or unusual items (termed "specific items"). This includes profits 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. 4 Specific items continued Third quarter ended Nine months ended December 31 December 31 2006 2005 2006 2005 £m £m £m £m Creation of Openreach 30 - 30 70 Property rationalisation costs 17 - 40 12 Write off of circuit inventory and working capital balances 61 - 61 - Cost associated with settlement of open tax years 10 - 10 - ------ ------ ------ ------ Specific operating costs 118 - 141 82 Profit on sale of non current asset investments (2) - (22) - Interest on settlement of open tax years (139) - (139) - Tax credit (969) - (970) (25) ------ ------ ------ ------ Total specific (income) costs (992) - (990) 57 ------ ------ ------ ------ 5 Net finance costs Third quarter ended Nine months ended December 31 December 31 2006 2005 2006 2005 £m £m £m £m Finance costs1 before pension interest 188 239 545 723 Interest on pension scheme liabilities 468 454 1,404 1,362 ------- ------- ------- ------- Finance costs 656 693 1,949 2,085 ------- ------- ------- ------- Finance income2 before pension income (160) (46) (206) (161) Expected return on pension scheme assets (573) (518) (1,719) (1,553) ------- ------- ------- ------- Finance income (733) (564) (1,925) (1,714) ------- ------- ------- ------- Net finance (income) costs (77) 129 24 371 ======= ======= ======= ======= Net finance costs before pensions 28 193 339 562 Interest associated with pensions (105) (64) (315) (191) ------- ------- ------- ------- Net finance (income) costs (77) 129 24 371 ------- ------- ------- ------- 1 Finance costs in the third quarter and nine months ended December 31, 2006 include £nil and £1million 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. Finance costs in the third quarter and nine months ended December 31, 2005 included a £1 million charge and £6 million net credit respectively, arising from the re-measurement of financial instruments which were not in hedging relationships on a fair value basis. A component of these net credits was the fair value movement in, and realised gain arising from, the early redemption of the US dollar 2008 LG Telecom convertible bond amounting to £27 million. 2 Finance income in the third quarter and nine months ended December 31, 2006 include £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: Third quarter Nine months ended December 31 ended December 31 2006 2005 2006 2005 millions of shares millions of shares Basic 8,284 8,407 8,302 8,444 Diluted 8,512 8,523 8,488 8,560 7 (a) Reconciliation of profit before tax to cash generated from operations Third quarter Nine months ended December 31 ended December 31 2006 2005 2006 2005 £m £m £m £m Profit before tax 639 545 1,883 1,533 Depreciation and amortisation 741 710 2,147 2,111 Associates and joint ventures (7) (3) (14) (11) Employee share scheme costs 23 22 70 59 Net finance (income) costs (77) 129 24 371 Profit on disposal of property assets and non current asset investments (2) - (22) - Changes in working capital (212) (124) (765) (585) Provisions movements, pensions and other (401) 14 (246) 161 ------- ------- ------- ------- Cash generated from operations 704 1,293 3,077 3,639 ------- ------- ------- ------- (b) Free cash flow Third quarter Nine months ended December 31 ended December 31 2006 2005 2006 2005 £m £m £m £m Cash generated from operations 704 1,293 3,077 3,639 Income taxes paid (100) (75) (280) (317) ------- ------- ------- ------- Net cash inflow from operating activities 604 1,218 2,797 3,322 Included in cash flows from investing activities Net purchase of property, plant, equipment and software (777) (725) (2,373) (2,082) Net purchase of non current asset investments (17) - (17) (1) Dividends received from associates 1 1 6 1 Interest received 26 70 63 166 Included in cash flows from financing activities Interest paid (362) (426) (680) (891) ------- ------- ------- ------- Free cash flow (525) 138 (204) 515 ------- ------- ------- ------- (b) Free cash flow continued 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 December 31 At March 31 2006 2005 2006 £m £m £m Cash at bank and in hand 387 502 511 Short term deposits 559 745 1,454 ------ ------ ------ Cash and cash equivalents 946 1,247 1,965 Bank overdrafts (117) (234) (181) ------ ------ ------ 829 1,013 1,784 ------ ------ ------ 8 Net debt Net debt at December 31, 2006 was £8,796 million (December 31, 2005 - £8,113 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 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, 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 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 £114 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 December 31 At March 31 2006 2005 2006 £m £m £m Loans and other borrowings 9,465 10,964 9,935 Cash and cash equivalents (946) (1,247) (1,965) Other current financial assets1 (183) (1,289) (365) ------- ------- ------- 8,336 8,428 7,605 Adjustments: To retranslate currency denominated balances at swapped rates where hedged 594 (40) 121 To recognise borrowings at net proceeds and unamortised discount (134) (287) (192) Other - 12 - ------- ------- ------- Net debt 8,796 8,113 7,534 ------- ------- ------- After allocating the element of the adjustments which impact loans and other borrowings, gross debt at December 31, 2006 was £9,809 million (December 31, 2005 - £10,420 million, March 31, 2006 - £9,686 million). 1 Excluding derivative financial instruments of £25 million, £259 million and £69 million at December 31, 2006 and 2005 and March 31, 2006, respectively. 8 (b) Reconciliation of net cash flow to movement in net debt Third quarter ended Nine months December 31 ended December 31 2006 2005 2006 2005 £m £m £m £m Net debt at beginning of period 8,079 8,133 7,534 7,893 Increase in net debt resulting from cash flows 674 19 1,122 379 Net debt assumed or issued on - - 9 1 acquisitions Currency movements 15 (41) 114 (65) Other non-cash movements 28 2 17 (95) ------- ------- ------- ------- Net debt at end of period 8,796 8,113 8,796 8,113 ------- ------- ------- ------- 9 Statement of changes in equity Nine months Year ended ended December 31 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 IAS 39 - (209) (209) ------- ------- ------- Fund (deficit) at beginning of period 1,607 (114) (114) Total recognised income for the period 2,575 1,534 2,906 Share based payment 47 48 65 Issues of shares 16 4 4 Net purchase of treasury shares (194) (231) (344) Dividends on ordinary shares (631) (551) (912) Minority interest (4) - 2 ------- ------- ------- Net changes in equity for the financial period 1,809 804 1,721 Equity at end of period Shareholders' funds 3,369 640 1,555 Minority interest 47 50 52 ------- ------- ------- Total equity 3,416 690 1,607 ------- ------- ------- 10 Earnings before interest, taxation, depreciation and amortisation (EBITDA) Third quarter ended Nine months December 31 ended December 31 2006 2005 2006 2005 £m £m £m £m Operating profit 555 671 1,873 1,893 Specific items (note 4) 116 - 139 82 Depreciation and amortisation (note 3) 741 710 2,147 2,111 ------- ------- ------- ------- EBITDA before specific items 1,412 1,381 4,159 4,086 ------- ------- ------- ------- 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 Dividends The directors declared an interim dividend of 5.1 pence per share (4.3 pence last year) on November 9, 2006. This will be paid on February 12, 2007 to the shareholders on the register at the close of business on December 29, 2006. This interim dividend, amounting to £423 million, has not been included as a liability as at December 31, 2006. It will be recognised as an appropriation of retained earnings within shareholders' equity in the quarter ended March 31, 2007. 12 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. Third quarter ended Nine months December 31 ended December 31 2006 2005 2006 2005 Net income attributable to 1,448 253 2,371 836 shareholders (£m) Earnings per ADS (£) - basic 1.75 0.30 2.86 0.99 - diluted 1.70 0.30 2.79 0.98 Each American Depositary Share (ADS) represents 10 ordinary shares of BT Group plc. Shareholders' equity, calculated in accordance with US GAAP, is £897 million at December 31, 2006 (December 31, 2005 - £652 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: continuing growth in revenue, EBITDA, earnings per share and dividends; growth in new wave revenue, mainly from networked IT services and broadband; continued growth in the broadband market; implementation of BT's 21st Century Network; the introduction of next generation services; and adding value to BT's broadband proposition. 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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