BT revs slip on tough marker conditions, order intake decline; TV rights & pensions remain a worry

BT says it is still confident in the outlook for the full year but a slide in revenues and depressed orders means there are doubts and investors have punished the stock with a 5% decline on Friday (February 2nd).

Third quarter revenues slipped by 3%, down to challenging market conditions for Global Services; while profits before tax rose 25% but this was mainly due to some one-off items in the year-ago period. In the nine months to the end of December, profits are down 9% on a 1% drop in revenues. Group adjusted EBITDA is still seen at £7.5bn-£7.6bn.

Adjusted EBITDA decreased 2% to £1.826bn, which reflected investment in customer experience – resulting in fewer faults, fewer service calls and a higher group NPS – as well as higher pension costs and business rates. Adjusted operating costs were down 2% as these investments were offset by the decline in revenues and some cost savings.

Market conditions look increasingly tough. A red flag is the order intake stats - on a rolling 12-month basis, it is up 12% to c£3.6bn for Business and Public Sector, but down 38% to £1.25bn for Wholesale and Ventures and down 25% to £3.7bn for Global Services. Deteriorating market conditions may once again raise fears that the progressive dividend is under threat.

Average BT Sport viewing increased 23% year-on-year; which BT hailed as the best quarterly performance since launch. But BT actually lost 5,000 TV customers in the quarter, which is not a good sign. Net additions has been slowing rapidly over the last year, in the last quarter net adds of 7,000 compared with 63,000 a year before. Sports TV packages are the kind of things struggling households ditch first.

As we have noted on many occasions, BT needs to get new customers to help pay for expensive rights packages. Mounting sports rights costs are a problem with competition driving up the cost of winning rights. BT and Sky inked a deal last year to share rights but there is a new threat on the horizon – the arrival of cord-cutters in the sports broadcasting sector could spark further rights inflation – consensus estimates suggest Sky will have to pay about £600m a year more, £1.8bn in total over three years, for the right to show the Premier League.

Amazon has just entered the UK market by outbidding Sky for ATP tour tennis rights, which is a sign of things to come. It took a £1.2bn bid from BT - £300m more than in 2013 – to see off Sky for the Champions League rights. We’ve seen what happens when Amazon appears on the scene. Ultimately losing TV rights may not be such a bad thing. BT may be happy to be a ‘number two’ to Sky, but it could fall further down the pecking order if Amazon and co muscle in. Bidding for the live English Premier League rights kicks off next week.

Going forward, the triennial review of the pension scheme is ongoing. The £14bn black hole remains perhaps the biggest risk for BT at present. The High Court has rejected BT’s wish to link the pension with the CPI rather than the RPI – a move that could have saved BT more than £1bn. But rising gilt yields could be the saviour. BT is appealing the decision.

Recently announced investment to roll out faster broadband appears less of a concern than the pension deficit, although regulatory pressures remain and are likely to crimp the ability of BT (and peers) to raise prices.

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