BT Group PLC (LON:BT.A) shares reversed intial gains as the rising costs of securing sports rights and investing in customer services dragged on second quarter profits.
In a trading statement for the second quarter to 30 September, the telecoms giant posted adjusted underlying earnings (EBITDA) of £1.8bn, down 4% on the same period a year ago.
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BT said the EBITA decline reflected its investments in sports rights, customer services, higher pension costs, business rates and a weak performance in its enterprise businesses, including Global Services.
Sports broadcasting rights for the Premier League, Box Nation and a Cricket Australia contributed to an increase in costs.
"As has been noted before, mounting sports rights costs are a problem with competition driving up the cost of winning rights. It’s not good for BT or Sky and you have to wonder if this is good for the consumer either," said Neil Wilson, senior market analyst at ETX Capital.
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Wilson added that more customers are required to pay for sports rights but net adds in the second quarter were "very weak" compared to the year-ago period. The TV customer base rose by 7,000 to 1.8mln following a 63,000 net adds last year.
Global Service challenges weigh
Adjusted revenue dipped 2% to £5.9bn and adjusted pre-tax profit dropped 10% to £789bn as a strong performance in consumer businesses, including the EE mobile unit, failed to offset the decline in its enterprise divisions.
Global Services revenue fell 10% with BT blaming ongoing challenging market conditions, lower IP exchange volumes and equipment sales in line with its strategy to reduce low margin business.
In an effort to address the struggles in its enterprise businesses, BT is undergoing a restructuring programme.
Chief executive Gavin Patterson said the restructuring remains on track to deliver run-rate savings of £250mln and £150mln respectively by the end of this year.
Restructuring costs of £104mln were incurred in the first half.
BT maintains progressive dividend policy
Patterson also said the first half results were in line with the company’s expectations and BT is maintaining its outlook for the year.
First half adjusted revenue was flat at £11.8bn, adjusted EBITDA fell 3% to £3.5bn and adjusted pre-tax profit declined 6% to £1.5bn.
The interim dividend was left at 4.85p per share and the group's progressive dividend policy remains unchanged.
The dividend will be adjusted from next year so that the interim payment would be fixed at 30% of the previous year’s total.
“As the UK’s leading converged telecommunications provider we continue to make positive progress on all our strategic priorities," said Patterson.
"Improving customer experience is critical to our success and we have seen continued positive progress underpinned by investments in operational improvements, increased network quality and customer-centric product development."
Plans for ultra-fast broadband
Patterson said BT is working closely with the UK government, Ofcom and communications provider partners to implement its plans to invest in broadband network upgrades to deliver ultrafast speeds to 12 million premises by the end of 2020.
Ofcom is currently consulting on cutting the wholesale prices BT’s network subsidiary Openreach charges telecoms operators. The regulator has proposed reducing the wholesale prices on the cheapest 40Mbs packages by 40%.
BT has said the network upgrade will likely cost between £3bn and £6bn and would need to be able to claw back the costs from customers.
"The negatives are that the cost of sports rights is increasing, while the group is facing a bigger bill to maintain and expand its physical assets," said George Salmon, equity analyst at Hargreaves Lansdown.
"This may go some way to explaining why BT wants clarification on how the costs of the nationwide roll-out of superfast broadband can be recovered."
The government has intervened by asking Ofcom to rethink the charge controls on worries it could discourage investment in the network.
BT said Ofcom’s proposed caps on the amount of spectrum any one operator can buy would mean it would be unable to bid for spectrum in the 2.3 gigahertz (GHz) band, and would be restricted to no more than 85 megahertz (MHz) in the 3.4GHz band.
Italian accounting scandal
In July, BT was also forced to pay £225mln to avoid a court battle with Deutsche Telekom and Orange over an accounting scandal in Italy. Deutsche Telekom and Orange are among BT’s largest shareholders, having accepted shares in part exchange for the mobile operator EE last year.
The group recognised a £6mln charge in the first half for its investigation into its financial irregularities at BT Italy that led to a £540mln writedown on the value of the business in January.
Pension scheme liabilities
BT is also overhauling its pension scheme to reduce liabilities with a number of measures. The company is expected to put a proposed plan to unions and its members within weeks.
As part of its measures, the company revealed in September that it would seek approval to switch the rate used to calculate its pension increases for about 80,000 members from the retail price index (RPI) to the lower consumer price index (CPI) in a High Court hearing later this year.