Cost transformation chart

BT fibre-optic broadband profits boost

A big jump in superfast broadband customers and aggressive cost-cutting push up BT profits despite falling revenues in a polarised market.

Bucking the general gloom that pervades the telecoms sector, BT Group unveiled better than expected results for the first quarter of 2011. Riding on the back of its high-speed fibre-optic broadband service, Infinity, it grabbed 59 per cent of new broadband sign ups in the first quarter.Those quarter-million new users boosted profits by 20 per cent and Ian Livingston, chief executive, was in an upbeat mood when addressing the media. “We continue to make progress towards delivering our financial, operational and growth goals,” he said. “We grew profit before tax by 20 per cent at the same time as investing in the future of the business.

“Our share of DSL broadband net additions was 56 per cent. Our super-fast broadband network has now passed over five million premises and the customer base has almost trebled in the last six months. BT Global Services is making further progress in high-growth economies and secured its largest ever contract in Latin America.”

BT’s surge in broadband sees it, along with BskyB, dominating the market. “BT has benefited from the turmoil at TalkTalk,” said Mark James at broker Liberum Capital. But he cautioned: “As the market continues to grow, Sky will take share off BT and Virgin Media. And as TalkTalk gets its act together, we will see people making their decision based on price. BT’s copper is pretty expensive.”

Around the same time that BT was unveiling its Q1 results, TalkTalk admitted that its rate of client losses increased and Virgin Media, which is rolling out its 100Mbit/s broadband service, confirmed that it had lost 36,000 net customers in the three months to June as it pushed subscribers to take faster, more expensive broadband offerings. Revenue climbed 3.9 per cent in the period.

This goes to confirm that the UK market is segmenting into premium customers who are willing to pay for premium content and connectivity, and those who are more price-sensitive.

“We are doing better and our profitability is increasing in the UK,” Livingston added. “A few years ago we weren’t as good as we could and should have been. We lost some business but now we are starting to do a better job. We are going after revenue and growth and gaining back some of the share that we have lost.”

Global Services, which includes the UK, is only one strand of BT Group’s portfolio, the others being BT Retail, BT Wholesale and Openreach. Overall revenue was down 5 per cent at £4.7bn, while underlying revenue excluding transit was down 3 per cent, with transit revenue down by £109m to £300m, including mobile termination rate reductions of £79m.

“We saw continued decline in line revenue in both domestic and retail use,” Tony Chanmugam, BT Group chief financial officer, explained. “We expect the existing trends to continue.”

The results are a vindication of the group’s aggressive cost-cutting regime that continues to demonstrate that further gains can be made. “We are seven years into the programme and that means that despite some significant costs in the business in terms of marketing, we are still looking strong,” Livingston pointed out.

Total operating costs before specific items decreased by 6 per cent to £4.2bn, while “we reduced operating cost by 7 per cent in the quarter”, Chanmugam added. “There has been a significant reduction in POLO costs [payments to other licensed operators] driven in the main by transit decline.

“Including transit our operating costs declined 5 per cent and net labour costs reduced by 5 per cent, which will help us deliver sustainable reductions of our labour costs in the future. Other costs also reduced as we continue to drive efficiencies across the group.

“We expect to deliver further reductions in the cost base driven by productivity improvements, process re-engineering and a continued focus on driving value from our suppliers.” *

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