BT Group plc
Q4 and preliminary 2007/8 full year results
BT Group plc
Sir Michael Rake - Chairman
Forward-looking statements - cautionCertain statements in this presentation 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: expectations of continuing growth in revenue, EBITDA, earnings per share and dividends per share; levels of free cash flow; continued growth in Global Services’ revenue and EBITDA margins; growth in new wave revenue, mainly from networked IT services and broadband; continued growth in the broadband market; cost efficiencies and reduced capital expenditure; investment in, and the delivery and benefits of, BT’s 21st Century Network and the expected cost savings; and the scope and delivery of next generation services.
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 of the appropriate trading and marketing models for its products and services; technological innovations, including the cost of developing new products, networks and solutions and the need to increase expenditures to improve the quality of service; the anticipated benefits and advantages of new technologies, products and services, including broadband and other new wave initiatives, not being realised; developments in the convergence of technologies; fluctuations in foreign currency exchange rates and interest rates; prolonged adverse weather conditions resulting in a material increase in overtime, staff or other costs; the timing of entry and profitability of BT in certain communications markets; and general financial market conditions affecting BT’s performance and ability to raise finance. BT undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
Consistent strategy …
– Improved service– Price innovation– Reduce costs /
improve margin– Aggressive & creative
marketing
– NetworkedIT services
– Broadband– Mobility solutions
21st Century Network
Long-term Partnership
with our customersDefend traditional
Grow new wave
… evolving to meet our customers needs
Earnings per share (1) 23.9p
Group revenue £20.7bn
EBITDA (1) £5.8bn
FY 2007/8 – Group financial headlines
(1) Before specific items
11%
3%
2%
5%
Free cash flow £1.5bn
5%Dividend 15.8p
0
2
4
6
8
10
12
14
16
2003/4 2004/5 2005/6 2006/7 2007/8
Interim Final
FY 2007/8 – final dividend 10.4p
pence
Full year dividend 15.8p up 5%
Customers
Globalisation
Investment & returns
People
Opportunities and priorities
Continue to deliver for customers and shareholders
BT Group plc
Ben Verwaayen - CEO
Earnings per share (1) 7.0p
Group revenue £5.4bn
EBITDA (1) £1.6bn
Operating profit (1) £0.8bn
Free cash flow £1.7bn
Q4 2007/8 – Group financial headlines
(1) Before specific items and leavers
11%
2%
2%
7%
9%
Q4 2007/8 – revenue by customer
40%
12%23%
25%
Corporate
Consumer Business
Carrier
Strength in mix of customers and businesses
Corporate
Q4• 28% growth in non-UK revenue
• Further improvement in Global Services EBITDA* margin,13.7%
• Order intake £2.8bn
Key business trends• Globalisation• Convergence• Right sourcing• Capabilities
Corporate revenue growth
0%
2%
4%
6%
8%
10%
Q1 06
/07
Q2 06
/07
Q3 06
/07
Q4 06
/07
Q1 07
/08
Q2 07
/08
Q3 07
/08
Q4 07
/08
0%
2%
4%
6%
8%
10%
Q1 06
/07
Q2 06
/07
Q3 06
/07
Q4 06
/07
Q1 07
/08
Q2 07
/08
Q3 07
/08
Q4 07
/08
Re
ute
rs
2005/62004/5 2006/7
£m
2007/8
DF
TS
BT Global Services – £2.8bn order intake in Q4
Other orders
Networked IT services
Rolling 12 months order intake £8bn
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
BT Global Services – customer diversity
Q4 2007/8 order intake
Business
Q4• Value packages
- 39% increase in take-up
• Continued strong revenue growth
– New wave up 33%– Basilica and Lynx boost
service portfolio
Developing our portfolio• Expansion of capabilities into
adjacent markets
• Niche business units complement overall strategy for SMEs
Business revenue growth
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
BT Group plc
Running VT
Consumer
Q4• Revenue down 4%
– Impact of free evening and weekend calls
– New wave up 19%
• Household ARPU £274 up £1
• UK’s No.1 retail broadband provider
– 4.4m connections– 30% of net adds*
Customers demand• Value packages• Innovative products• Converged services
Consumer household ARPU£
* DSL & LLU
200
220
240
260
280
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Traditional New wave
Gaming
Wireless Networks
Monitoring and Control
Home IT advisor
BT BroadbandTalk
BT ToGo
BT Total Broadband – work, rest and play
Security & Storage
“Go messenger”now has 300k users
250Kcustomers now
Openzone c.1m minutes
of usage per day
> 2m users
All calls to our Helpdesks
are now free
Entertainment
Launched May 7th
> 600k users
BT Group plc
Running VT
Gaming
Wireless Networks
Monitoring and Control
Home IT advisor
BT BroadbandTalk
BT ToGo
BT Total Broadband – work, rest and play
Security & Storage
“Go messenger”now has 300k users
250Kcustomers now
Openzone c.1m minutes
of usage per day
> 2m users
All calls to our Helpdesks
are now free
Entertainment
Launched May 7th
> 600k users
000sInstalled customer base Installed base
• 214k at the end of March• Now over 250k
Q4 net adds
94k 56k 37k
• 68% of new customers chose a subscription package at point of sale
Usage • 4,660hrs of VoD content now available
• The average number of views per subscriber, per month, was 29
– that’s entertainment
0
20
40
60
80
100
120
140
160
180
200
220
240
260
06
-Ap
r2
7-A
pr
18
-Ma
y0
8-J
un
29
-Ju
n2
0-J
ul
10
-Au
g3
1-A
ug
21
-Se
p1
2-O
ct0
2-N
ov
23
-No
v1
4-D
ec
04
-Ja
n2
5-J
an
15
-Fe
b0
7-M
ar
28
-Ma
r1
8-A
pr
09
-Ma
y
Carrier – BT Wholesale
Q4• £1bn of contracts signed• Operational trends continue as
expected– Low margin transit and PRS
revenue decline continues
– Ongoing migration from IPstream to LLU and price reductions
• Introduced family of 21CN ‘smart’ broadband services
– Higher speeds
– Flexible bandwidth
– Quality control for video
• Launch of next generation Ethernet
Growth• Continued success in long term
managed solutions – £750m of managed access on
next generation Ethernet signed in 2007/8
• Agreements signed during the quarter include
Carrier – Openreach
Q4
• External revenue up 22% driven by LLU growth
• Operating cost down 2% due to previous investment in service
– Average lead times on provision and repair improved by over 40%
Market fundamentals• LLU business model evolving
• Financial Framework Review due soon for public consultation
000’sADSL Broadband
0
2000
4000
6000
8000
10000
12000
14000
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08
external LLU
BT Wholesale (external sales)
BT Retail
0
2000
4000
6000
8000
10000
12000
14000
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08
external LLU
BT Wholesale (external sales)
BT Retail
14000
14500
15000
15500
FY 2006/7 Pay inflation Acquisitions Volumegrowth
CostEfficiencies
Re-investment FY 2007/8
Transforming the cost base – FY 2007/8
£304m
£625m£386m
£260m
£148m
£15,
152m
£m
Systems & processesGlobal propositions21CN programmesCustomer service
BT Vision£14,
679m
FY2008/9 target of £700m
£625m of cost efficiencies
21CN – objective remains unchanged
Legacy network 21CN platform
17 networks to ONE global platform
PSTN Migration Converged Core
EndUser
~5knodes
~100nodes
DSLIP-MPLS-WDM
Content ISP
WWW
Class 5 Call ServerFibre or
Copper
21CN – faster, better, cheaper services
21CN now customer led
Speed to Market
Power to Customers
Cost Transformation
Next Generation
Services
Scope extended to include• 21CN Ethernet• 21CN “Smart” Broadband• Software Development Kits (SDK)
21CN – progress to date
• 58% of UK national core infrastructure built
• 21CN “Smart” Broadband – Available from exchanges serving
1m homes and businesses
• 21CN Ethernet – Available to c. 20% of UK business market by the
end of May 2008, rising to 80% or more in 12 months
• 21CN Global Platform – Available in 172 countries
• BT’s Software Development Kits (SDK) now in use – 11,000 downloads
– 500 applications in production
– 5,000 in testing
21CN – SDK, what developers say
“We are very pleased with how rapidly we were able to add the voice and SMS capabilities into the BT BizBox solution…if it weren’t for BT’s SDK we would not have been able to do this so quickly.”
Sarah Laylock, COO of TierLinear
“BT says that it takes one line of code to add voice to an application and it’s true. This functionality is easily accessible and doesn’t require a large budget. Because we are leveraging the power of BT’s global network we know our applications can scale to handle high volumes if needed. This lets us focus on what we do best – building great applications.”
Miha Lesjak, co-founder of Inova IT and inventor of Click2Call.
21CN – forward view
• 21CN “Smart” Broadband– available to over 10m homes
and businesses by April 2009
• 21CN Gigabit Ethernet– rising to c600 nodes by April 2009 – Gigabit speeds will be available
• Converged broadband & voice – Trials 2008, launch 2009
… upcoming in 2008/9• Substantial cost savings
already delivered > £200m pa cost savings > £400m pa, legacy capex savings
• Total cash cost savings will exceed £1bn - Opex savings increase - Capex will be reduced over time
• Revenue opportunities available much earlier
… financials
Business case remains strongly NPV positive
The trends ARE your friends!
Revenue
* Before specific items and leavers
17th quarter of growth
EBITDA*9th quarter of growth
EPS*24th quarter of growth
Dividends
(1.5%)
(1.0%)
(0.5%)
0.0%
0.5%
1.0%
1.5%2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
3.0
4.0
5.0
6.0
7.0
Q1 Q2 Q3 Q4
2002/3 2003/4 2004/5 2005/6 2006/7 2007/80
2
4
6
8
10
12
14
16
2002/3 2003/4 2004/5 2005/6 2006/7 2007/8
Final
Interim
BT Group plc
Hanif Lalani – Group Finance Director
Q4 2007/8 – lines of business dashboard
* External revenue
(1) Before leavers
Global Retail Wholesale OpenreachGroup
13%EBITDA(1) 8% 14%2% 0%
10% 2% 12%2% 22%*Revenue
Global Retail Wholesale OpenreachGroup
BT Global Services
10%
Q4Revenue
13.7%
EBITDA
EBITDAmargin
13%
Revenue £2,226m• 19% growth in MPLS
EBITDA £304m with margin improving by 40bp
– Maturing contracts– Global sourcing– Process improvement– SG&A reduced by 1%
Delivered H2 margin expansion
Operating profit up 30%EBITDA margin progression
H1 9.6% 9.8%
H2 11.5% 12.4%
%
7
8
9
10
11
12
13
14
Q1 Q2 Q3 Q4
2006/7
2007/8
2%
8%
BT Retail
EBITDA
£m
Revenue £2,158m• New wave revenue up 24%
– 27% of total revenue
Gross profit up 4%• Margin improved 80bp to
36.5%
EBITDA £391m
Operating profit up 12%
Q4Revenue
EBITDA
200
250
300
350
400
Q1 Q2 Q3 Q4
2006/7
2007/8
BT Wholesale
External revenue mix
£m
Revenue £1,180m• Transit and PRS –
down £97m
• Broadband - down £54m (volume and price cuts)
• £1bn of orders signed in Q4
EBITDA £320m• SG&A reduced by 9%• Headcount reduced by 13%• Process improvements
helping to drive costs down
12%
Q4Revenue
EBITDA
14%
0
300
600
900
1200
Q106/07
Q206/07
Q306/07
Q406/07
Q107/08
Q207/08
Q307/08
Q407/08
Transit & InterconnectPCs & OtherBroadband
External volumes
1%
Q4Revenue
EBITDA
0%
Revenue £1,320m• External revenue up 22%
• Sales to other lines of business down 5%
EBITDA £496m• Operating costs reduced
by £15m
• Record levels of service improvement
Operating profit up 1%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
WLR
LLU
RevenuePOLOsRevenue (net)EBITDA (pre leavers)Depreciation & amortisationOperating profit (pre leavers)Operating margin
Leaver costs Finance costs (net)Profit before taxTax Profit for the period
Earnings per share (post leavers)Earnings per share (pre leavers)
5,4221,0984,3241,569(755)
81415.0%
(56)(97)658
(147)511
6.5p7.0p
Q4 2007/8 results Q4 2006/7Q4 2007/8 Change
5,2921,0714,2211,537(773)
76414.4%
(63)(70)632
(155)477
5.8p6.3p
Note: all numbers are before specific items. Q4 2007/8 specific charge £85m post tax.
2%
2%
7%
5%
11%
£m
3.0
4.0
5.0
6.0
7.0
Q1 Q2 Q3 Q4
2002/3 2003/4 2004/5 2005/6 2006/7 2007/8
Earnings per share
* before exceptional items and goodwill from continuing activities** before leavers and specific items
pence * * *** ****
1,537
212
(836)
713
(68)
1,558
7,914
1,569
(159)
(759)
1,195
(141)
1,705
9,460
Free cash flow
EBITDA*(post leavers)
Interest & Tax
Capex
Working capital
Other (incl specific items)
Free cash flow
Net debt
Q4 2007/8 £m
32
(371)
77
482
(73)
147
1,546
Change £m
* Before specific items
Q4 2006/7 £m
Pension
IAS 19 pre tax£bn
• BT Pension Scheme £2.9bn pre tax in surplus based on IAS19 valuation
• Next triennial funding valuation begins after 31/12/2008
• Pension scheme asset mix– 45% in equities
Pension interest credit • 2008/9 £313m v £420m 2007/8
– but EBITDA benefits from a lower pension scheme service charge-9.0
-7.5
-6.0
-4.5
-3.0
-1.5
0.0
1.5
3.0
2002
/3 Q
1
2002
/3 Q
2
2002
/3 Q
3
2002
/3 Q
4
2003
/4 Q
1
2003
/4 Q
2
2003
/4 Q
3
2003
/4 Q
4
2004
/5 Q
1
2004
/5 Q
2
2004
/5 Q
3
2004
/5 Q
4
2005
/6 Q
1
2005
/6 Q
2
2005
/6 Q
3
2005
/6 Q
4
2006
/7 Q
1
2006
/7 Q
2
2006
/7 Q
3
2006
/7 Q
4
2007
/8 Q
1
2007
/8 Q
2
2007
/8 Q
3
2007
/8 Q
4
2008/9 outlook
* Before leavers and specific items
Revenue, continued growth expected
Costs, £700m of efficiencies to be delivered
EBITDA*, growth underpinned by cost transformation
Earnings per share*, growth driven by operational performance
Capex, reduces to around £3.1bn
Free cash flow, similar level to 2007/8
Dividends per share, will also grow
Continue to deliver for shareholders and customers
BT Group plc
Ian Livingston
BT Group plc
15 May 2008