BT Group results: Q3 earnings preview
Philip Jansen will formally take over as chief executive of BT Group after the firm releases its Q3 results. But will he be able to reinstall confidence following a tumultuous few years for the world’s oldest telecoms company?
When is BT’s earnings date?
BT Group will report third quarter (Q3) results on Thursday 31 January. This will cover the three months to the end of December 2018.
Who is BT Group’s new chief executive Philip Jansen?
The results mark the end of Gavin Patterson’s two year tenure as CEO of BT as he hands over the reins to his replacement, Philip Jansen, who is leaving his role running Worldpay to join the business.
He was at the payment processing company when it was spun out of the Royal Bank of Scotland (RBS) and went on to manage Worldpay’s floatation in London. His appointment swiftly follows the completion of Vantiv’s $10 billion acquisition of Worldpay earlier this month, paving the way for Jansen to exit on a high and take on a new challenge.
And a big challenge it is. His priority will be convincing investors that he has the ability and, more importantly, the freedom to turn the business around. A vast three-year restructuring programme has only just got underway, leading many to believe the change at the top will do little to change the company’s direction, and chairman Jan du Plessis has already drawn some firm red lines before his arrival: such as ruling out a sale of Openreach.
BT’s determination to push into new and costly areas where it has no competitive edge, such as media through the billions sunk into TV sporting rights, has drawn criticism for stealing investment in BT’s core competencies such as rolling out faster broadband and 5G. Jansen has vowed to 'pursue the right technology investments to help grow the business'. But the subsequent slide in BT’s share price in the wake of his appointment suggests he has much more to do to convince shareholders he’s the man to get the company back on track.
BT results preview: What does the City expect?
It is an expensive time for BT. Huge sums are needed to upgrade its broadband network to faster speeds and to prepare for the game-changing move from 4G to 5G. In addition, the slow response to structural changes in the market has exacerbated the need to not only fade out legacy systems but prepare the business for the modern era. For BT, this means fading out legacy telecom services supplied to business customers and replacing them with new offerings built around cloud computing. Moreover, BT has a vast pension deficit to fill and a high dividend yield to cover.
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Something has to give, and in this case it is the staff bill and other costs. Around 13,000 jobs will have been cut by the end of the three year restructuring in the first half (H1) of 2021 (excluding 6000 new roles being created), saving the business £1.5 billion that can be funnelled into other cash demanding channels.
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Against this backdrop, the focus of BT’s Q3 results is not so much on growth but how the restructuring is feeding through to the bottom line. For example, the dramatic downsizing of its Global Services division that serves thousands of international business customers saw revenue plunge 7% in the first half of the current financial year but earnings before interest, tax, depreciation and amortisation (EBITDA) still jumped 52%. For now, it’s not about growing revenue and sales but about cutting costs, improving efficiencies and raising returns.
Revenue, EBITDA and cashflow are all expected to fall in Q3 compared to a year earlier, when they amounted to £5.94 billion, £1.94 billion and £702 million, respectively. Capex will also hit its highest quarterly level in Q3 for at least two-and-a-half years and net debt is expected to continue trending upward for the fourth consecutive quarter.
BT Group Q3 Earnings Consensus: What to Expect
|BT division||BT Revenue (£, m)||BT Ebitda (£, m)|
|Business & Public Sector||1,093||352|
|Wholesale & Ventures||747||166|
|BT Capex||BT normalised free cashflow||BT net debt|
(Source: BT Group compiled consensus, as of January 17, 2019)
What to watch out for in BT’s Q3 results
It’s busy at BT and there is quite a lot of activity that investors should look out for in the Q3 and other forthcoming results:
- Change in outlook or dividend: BT raised hopes when it released its H1 results and stated EBITDA for the full year would be at the upper end of its £7.3 billion to £7.4 billion guidance range. No surprises are expected in terms of dividends after the company vowed to at least maintain its annual payout this year and next.
- Change in strategy: Although Jansen is expected to pick up the restructuring programme where his predecessor left off, investors will be eagerly awaiting to hear some specifics about how the new CEO will take the company forward and put his own stamp on the business. Numerous big ideas are being bandied about, spinning off EE’s mast business and/or Openreach or cutting the annual £1 billion budget on sports rights, for example, but investors will have to wait and see whether it will remain ‘business as usual’.
- Restructuring progress: BT was quick to start making cuts after launching its plan to overhaul the business by cutting 2000 jobs in the first six months. With costs ultimately deciding whether earnings rise or fall, this progress will be vital to its overall earnings in Q3 and subsequent quarters.
- Global Services division: BT’s international business is bloated and out of date. Still, the current overhaul to the unit was only prompted by the severe accounting scandal that was uncovered in BT Italia three years ago. The unit, focused on growing returns rather than revenue, is taking its 5000-plus business customers and cutting it down to the most profitable 800 clients. While businesses used to outsource all communication services, phone lines, computers, internet, to firms like BT, now the demand from telecoms firms comes down to providing the cloud computing infrastructure needed to let businesses develop their own apps or digital services. As Bas Burger, head of Global Services, explained: 'It’s about delivering the availability of those apps'. News that rival Vodafone has secured the assistance of IBM to offer cloud services to business customers later this year will place pressure on BT to discover a fast-track way to market.
- Openreach and broadband rollout: Investors were pleased to hear that Openreach was laying full-fibre broadband networks to 13,000 homes and businesses per week by the end of the first half. But there was concern about the lag between the full-fibre being laid and it becoming available to customers, with just 4000 actual connections being made per week. The fact the gap widened in Q2 versus Q1 amplified those fears but the company said this would narrow quickly from Q3 onwards, so investors should expect an improvement.
- Pension deficit: BT is responsible for one of the UK’s largest private sector pension schemes, which was running a deficit of £4.5 billion at the end of September. It is a major hole to plug and anxieties are getting worse after BT’s attempts to save billions by changing the way it calculated pension rises for 80,000 people was thwarted by the UK High Court. Some believe BT could challenge the decision at the Supreme Court considering the potential reward on offer. However, others are concerned BT’s pension liabilities could swell further after a separate court case last year ruled Lloyds Banking Group had to stump up substantial equalising payments to female members of its pension programme. The latest consensus estimates BT will have made something of a dent in its pension deficit by the end of the financial year to the end of March, but only down to £4.2 billion. Analysts expect the deficit to narrow to £3.1 billion by the end of the 2020 financial year and then to £2.4 billion the year after.
- M&A: The appointment of Jansen, the restructuring plans and high expenditure requirements means any major M&A over the shorter-term is unlikely, but it is certainly something investors should keep an eye on. Some analysts have suggested the new CEO could look to turnaround the business through a transformational acquisition of a tech firm that could bring the business up to speed, but BT could opt to pay a tech firm (most likely from the US) like Vodafone has. Plus, selling off Global Services further down the line once it is overhauled and more attractive to potential buyers is still a possibility and, although both have been ruled out, some investors are still hoping for Openreach or EE’s mast business to be spun out or sold off.
- Brexit: BT Group is not a fan of Brexit and set to see significant disruption in the event of a so called ‘no deal’. The current political chaos in the UK means BT and its peers are even less certain about the UK-EU position after March 29 than ever before. EU legislation plays a major role in UK telecoms, ultimately governing the entire industry and overseeing proposed mergers and acquisitions (the EU was the body to block the proposed merger between Telefonica’s mobile unit O2 and rival Three in 2016). Du Plessis is an advocate for prime minister Theresa May’s withdrawal deal to minimise potential disorder. BT has 13,000 staff in the EU and earns 12% of overall revenue from the bloc and has warned that the imposition of tariffs would 'largely wipe out' it’s already thin profit margin in Europe. BT also fears losing any competitive edge it has over European rivals like Deutsche Telekom, Orange SA and Telefonica because none of them operate in the UK to the extent that BT does in Europe. The Guardian also recently reported that BT risks losing EU contracts because of Brexit, including a £24 million deal with the European Parliament. BT has earned over £150 million from these types of deals over the past decade. BT’s Q3 results will be the last scheduled event before the Brexit deadline passes so investors should expect further news on how the business is preparing itself, even if BT itself will have a hard time understanding what to do. BT already said at the end of the first half that it was stockpiling products in the event of a no deal.
How to trade BT’s Q3 results
It has been a volatile period for BT Group shares since it announced its restructuring programme in May 2018, when shares were trading at around 237.95p. Shares collapsed by more than 15% over the following week to a low of 201.82p before steadily climbing to a high of 266p in the days following its H1 results in early November.
Those results were well received by investors. After hours trading the night before the H1 earnings were released pushed BT shares 4.3% higher and they banked another 4.9% gain on the day of publication (1 November), rising another 1.7% to that 266p peak the day after (2 November). Shares have since fallen more than 10%.
BT shares: broker recommendations
|Recommendation||Number of brokers|
A Thomson Reuters poll of 22 analysts shows there is a long-term average Buy rating (as of 24 January 2019), however the number of analysts backing a Buy or Strong Buy rating only narrowly outnumbers those recommending investors Hold.
BT share price analysis
BT’s share price has, it seems, finally turned a corner. The 2016-2018 downtrend has finally ended, with the shares bottoming out in May and forming higher lows and higher highs since then. While the price has dropped back from 260p, it has since formed a higher low at 225p. Above 240p the price heads on towards 265p.
BT earnings: does a new CEO mean a new era?
It will be a special set of quarterly results as BT’s new CEO takes over and investors will be keen to see whether he will lead the business in a new direction or simply persist with the major restructuring launched not that long ago by his predecessor.
Any earnings growth will come from cost-cutting rather than higher sales and investors will be hoping BT will deliver even better progress than that delivered over the first six months.
The long-term consensus broker rating for BT stock remains a Buy but, while that is reinforced by the lack of analysts recommending Sell, there is a clear divide between those that believe BT is undervalued and those that think the price is just right. Still, the mood clearly swings in favour of the potential upside.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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