BT Q3 FY11–12 results: BT Retail sees signs of better trends, but top-line still weak
20 February 2012
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At the BT Group results for the quarter to the end of December 2011, BT Retail reported another period of declining revenue, with EBITDA marginally better than flat, on continued reductions in costs. While strong broadband performance was flagged again, overall, the core Consumer business looks shaky, and BT Business appears to still be searching for a new direction.
BT Retail, financial highlights, Q3 and 9m FY11-12
| Q3 FY10–11 |
Q3 FY11–12 |
Change | 9m FY10–11 |
9m FY11–12 |
Change | |
| . | ||||||
| Revenue | £1,954m | £1,849m | -5.4% | £5,784m | £5,532m | -4.4% |
| Net operating costs | -£1,502m | -£1,396m | 7.1% | -£4,476m | -£4,188m | 6.4% |
| EBITDA | £452m | £453m | 0.2% | £1,308m | £1,344m | 2.8% |
| Depreciation, amortisation | -£110m | -£101m | 8.2% | -£332m | -£305m | 8.1% |
| Operating profit | £342m | £352m | 2.9% | £976m | £1,039m | 6.5% |
| Capital investment | £115m | £108m | -6.1% | £299m | £311m | 4.0% |
| Operating cash flow | £324m | £284m | -12.3% | £950m | £922m | -2.9%. |
| . |
Source: BT and BTwatch.
BT looks for comfort in trends
As BT Retail continues to see its Consumer customer base shrink, the division said that trends were improving on line loss, although this is perhaps a sign of straws being clutched.
While the rate of active BT consumer lines lost on a quarterly basis saw an improvement — in that it dropped below 1% for the first time in at least seven quarters, and was described by the company as the lowest decline in more than five years — the loss remains significant. The ongoing shedding of revenue is not showing much sign of improvement either for the Consumer business — a 6% drop was recorded year-on-year.
BT Business looked to have taken a step back in its unsteady recovery, with an identical 6% revenue drop. The revenue decline was placed firmly at the door of BT Engage IT, BT Retail’s evolving IT services unit, which is in a state of flux (BTwatch, #228, #229) due to a reorganisation and restructuring. Ian Livingston noted it was primarily declines in IT hardware sales that accounted for the weaker BT Business performance, which is the responsibility of the Engage IT business. The difficult economic headwinds in the UK were also said to be affecting spending among BT Business customers, with investments in new equipment being among the kind of financial investment decisions being put off in the present climate. The changes at BT Engage IT are expected to move BT Retail away from the low-margin end of IT sales, but the negative impact on turnover is likely to be seen for several quarters to come.
BT Retail noted that average revenue per customer continues to rise, and was up 4.7% year-on-year to £337. BT attributed increased revenue to more bundling of services, including BT Vision. However, several price increases have been implemented by the telco in the year, which will also have supported a squeeze on the remaining customer base.
BT Retail, revenue by product type, Q3 and 9m FY11-12
| Q3 FY10–11 | Q3 FY11–12 | Change | 9m FY10–11 | 9m FY11–12 | Change | |
| . | ||||||
| Calls and lines | £1,141m | £1,031m | -9.6% | £3,407m | £3,105m | -8.9% |
| Broadband and convergence | £329m | £351m | 6.7% | £980m | £1,034m | 5.5% |
| Transit, conveyance, other* | £235m | £217m | -7.7% | £678m | £652m | -3.8% |
| Internal revenue | £114m | £127m | 11.4% | £328m | £373m | 13.7% |
| Managed solutions | £135m | £123m | -8.9% | £391m | £368m | -5.9% |
| Total | £1,954m | £1,849m | -5.4% | £5,784m | £5,532m | -4.4% |
| . |
Notes: * Transit, conveyance, interconnect circuits, Wholesale Line Rental, global carrier, and other wholesale products.
Source: BT and BTwatch.
Broadband base passes six million, fibre draws in customers
BT Retail added 146, 000 retail broadband customers in the quarter, representing a claimed 56% of the UK broadband market’s net additions for the three months (although BSkyB was able to claim a higher number of net adds in the same period). The adds boosted the retail broadband customer base to 6.1 million, and the incumbent appears to be continuing to benefit from customers abandoning TalkTalk, which is in the midst of customer service problems. The altnet has indicated that dissatisfied departing customers are often inclined towards re-joining the ‘safe pair of hands’ of the BT Retail business rather than trying another alternative provider.
BT Retail also added 95, 000 BT Infinity fibre broadband customers in the quarter, taking the customer base to more than 400, 000. This marks an increase of more than a quarter of a million from the base at the end of the past financial year, when the total stood at 144, 000.
BT noted that its fibre offering is supporting its ongoing growth in the broadband market by reducing churn among customers, and also helping it to achieve a higher share of customer acquisitions on fibre-enabled exchanges. Gavin Patterson, BT Retail’s Chief Executive, said that, in the quarter, around half of the BT Infinity adds were new customers to BT Broadband, and 20% were new to BT fixed-line services. At the end of the previous financial year, around 30% of Infinity customers were said to be new to BT Broadband.
Fibre demand draws more competition to market
BT’s performance appears to emphasise that demand for fibre is certainly present within the consumer market, but BT may not have it all its own way in future quarters, as rivals begin to introduce services. BSkyB, increasingly the main competitor to the incumbent as TalkTalk falters, is launching fibre at £20-per-month — echoing BT’s Infinity pricing.
At the risk of appearing begrudging, net adds for Infinity could also be said to be slightly underwhelming, in that the total compared to the preceding quarter, which included traditionally quiet summer months, is just 7, 000 higher (albeit on total net adds 20, 000 lower).
Broadband customer numbers (’000), Q3 FY11-12
| Q3 FY10–11 | Q3 FY11–12 | Net quarterly adds | |
| . | |||
| BT Retail | 5,529 | 6,144 | 146 |
| Virgin Media | 4,287 | 4,351 | 44 |
| TalkTalk | 4,224 | 4,079 | -50 |
| BSkyB | 3,006 | 3,651 | 166 |
| . |
Source: BT; other companies; and BTwatch.
Rivals continue to strip BT’s calls and lines business
On fixed-line voice, BT is continuing to see heavy losses in calls and lines customers, as both BSkyB and TalkTalk shift more customers onto their fully managed services.
With regards to the number of fixed lines in the UK, BT looks set to drop below 50%, in terms of controlling the line rental relationship, within a handful of quarters, should its rivals continue to attract new customers at current rates, and the incumbent fail to stem losses.
Calls and lines, customer numbers (’000), Q3 FY11-12
| Q3 FY10–11 | Q3 FY11–12 | Net quarterly adds | |
| . | |||
| BT Retail * | 12,041 | 11,138 | -185 |
| Virgin Media | 4,331 | 4,296 | 9 |
| TalkTalk ** | 2,751 | 2,966 | 56 |
| BSkyB *** | 2,215 | 3,106 | 214 |
| . |
Notes: * Total consumer lines sold by BT Retail, including Northern Ireland and Plusnet. Includes analogue and ISDN.
** MPF fully unbundled lines.
*** Line rental customer base.
Source: BT; other companies; and BTwatch.
BT Vision finally coming into its own
BT Vision is continuing its modest but noticeable improvement in customer acquisition, as the major players in the market see uptake stall from their traditional higher levels. After out-performing BSkyB in Q2 FY11-12, BT managed to match the satellite broadcaster’s numbers for the third quarter, taking around 40, 000 new customers (although its total customer base of 679, 000 is still leagues below rivals).
Pay-TV, customer numbers (’000), Q3 FY11-12
| Q3 FY10–11 | Q3 FY11–12 | Net quarterly adds | |
| . | |||
| BT Retail | 545 | 679 | 40 |
| BSkyB | 10,096 | 10,253 | 40 |
| Virgin Media | 4,331 | 4,296 | 12 |
| . |
Source: BT; other companies; and BTwatch
2012: the year smart and internet TV disrupt UK pay-TV?
BSkyB has said there are signs of reluctance to commit to long-term contracts among consumers, which could play into the hands of BT, with its more value-oriented TV packages and minimal contract commitments — although BT still manages to shoot itself in the foot by mandating that Vision customers have relatively-pricey BT Broadband services, which also invariably entail a twelve month or longer lock-in.
The challenge for BT is to build its base more aggressively, and increase associated revenue, through a new generation of higher value services, such as BT Vision 2.0, which is expected to feature live-streaming elements. YouView-based offerings may also play a part, but BT remains guarded around the subject of this latter platform, adding to the recent impression given by the telco (BTwatch, #229) that it is distancing itself from the YouView venture.
Problematically for BT, the UK pay-TV market is entering an interesting new phase, triggered by arrival of leading US internet-streamed service Netflix (see seperate report). This has already kicked off a £4.99-per-month price war with Amazon-backed incumbent Lovefilm. It has also elicited rapid competitive response from BSkyB, which, within the first half of 2012, will extend its internet-delivered video-on-demand service beyond customers of its own satellite TV and internet services, and introduce new tariffs.
A related development that could help drive adoption of disruptive new rival services is the advent of affordable smart TV, which is seeing easy access to free and paid internet TV (and other digital content) leap beyond personal computers onto a myriad of device formats, with support now being embedded into television sets, media players, gaming consoles, mobile devices, and a new generation of consumer set-top boxes from the likes of Apple TV, Boxee and Roku (just launched in the UK).
Should over-the-top internet-based pay-TV take off in the UK the way it already has in a few other developed markets, BT’s currently challenged Vision offering could quickly start coming under intense pressure, as, to a lesser extent, could its wholesale and retail broadband arms (should consumer demand become more vocal in calling for expanded 21CN and fibre connectivity, better QoS, and five- or ten-fold increases in usage caps).
BSkyB and Virgin could also feel the heat, with both having higher core ARPU to defend than BT, and a key factor could prove to be the strength of their ties to content rights holders, particularly for sports and movies. Historically, BSkyB has had these markets cornered, through a combination of wealth and long contracts, but, in recent years, rights holders have looked both cannier and more assertive. Notable is ESPN, a leading US sports network controlled by Disney (also a Hollywood major), which has built a strong UK rival to Sky Sports that is already licenced to BT Vision and elsewhere.
[Further reference: Results for the third quarter and nine months to 31 December 2011 -- BT, 3 February 2012.]
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