Tough quarter and worse outlook for BT

Alan Burkitt-Gray
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Forecast for BT Global Services and other divisions are gloomy as rating agency Moody’s says outlook is negative

BT has reported revenue up 8% in its Global Services division, which includes international wholesale and corporate enterprise markets, but the underlying situation is down 7%.

In its latest quarterly results, revenue for the division went up from £1.3 billion in the third quarter of 2015 to £1.4 billion in the same quarter of 2016, but ebitda dropped drastically from £131 million to only £40 million – largely because of its Italian financial scandal, reported earlier this week.

But BT also reported: “Global Services’ underlying revenue, excluding transit adjusted for the acquisition of EE, was down 7% which includes a reduction following the investigation into our Italian business, as well as challenging international corporate markets.”

Meanwhile the Moody’s credit rating agency, whose ratings affect the interest rates companies pay, has changed the outlook on BT from stable to negative, though it has not changed BT’s credit rating from Baa1, its eighth highest level.

“The reductions reflect the conclusion of the independent review in the Italian business and pressures in UK public sector and international services,” said Moody’s.

BT CEO Gavin Patterson said: “The good progress we’re making across most of the business has unfortunately been overshadowed by the results of our investigation into our Italian operations and our outlook.”

He added: “We’ve undertaken extensive investigations into our Italian business, including an independent review by KPMG, and I am deeply disappointed with the unacceptable practices by some that we’ve found. This has no place at BT, and it undermines the good work we’re doing elsewhere in the group. We are committed to ensuring the highest standards across the whole of BT.”

Laura Pérez, vice president-senior analyst at Moody’s, and lead analyst for BT, said: “Changing BT’s outlook to negative reflects the company’s weaker expectations for operating performance over the medium term, which further weighs on BT’s financial profile from an already stretched level for the Baa1 rating, following the surge in the company’s reported pension deficit in the first half of 2016.”

She added: “So far, we tolerated a higher pension deficit because it was balanced against our expectation of BT’s improving operating performance. However, the profit warning will further delay the deleveraging that we had anticipated in a context of relatively high leverage ratios for the current Baa1 rating.”

Within the UK market, BT reported that last-mile division Openreach had revenue down 1%, “with the impact of regulatory price reductions offsetting the continued growth in fibre”. In addition underlying revenue for Wholesale and Ventures – which covers enterprise markets – “excluding transit adjusted for the acquisition of EE was down 3%, as a result of the continuing decline in partial private circuits and call volumes”, said BT.

Underlying revenue from business and the public sector was down 6%, “due to the decline in UK public sector revenue”, said the company.