Gfast map

gfast map copy


In 2016, looked very promising.
Thousands worked at developing and deploying.
It wasn't enough. 
Most carriers are investing
in fiber or 5G instead.


Dark Blue: Firm commitments from incumbent: BT (10M), Belgacom, Australian NBN, Swisscom,  Austria, Bezeq Israel, Chunghwa Taiwan, Telus Canada, Telekom South Africa, SK Korea, (U.S.) AT&T, Century, Frontier, Windstream, Belgium, Omantel

Mid Blue: Smaller carriers in Germany, Norway, Finland, Japan

Light Blue: Incumbent likely:  France, Germany, Italy

gavin patterson

BT cuts back on speeds, deployment. 150-400 down is still a big improvement over BT's current network but it will typically be half the speed originally planned. BT was going to deliver 500-800 megabit to most of 4,000,000  distribution points on light poles, in basements and in very small dug in enclosures.  

Instead, they would deploy to existing cabinets (10,000's of thousands,) avoiding the cost of running fiber so many places.  That saves billions but reduces typical download speed from 400-700 megabits to 150-400 megabits. In either case, 5-15% or so of homes will run even slower.

The biggest story in DSL this year is that is proving to work, although the gigabit promises were press release puffery. The second biggest story is that the same techniques can provide strong performance at 300-400 meters, further than originally expected. That emerged from early testing and is not absolutely confirmed.

Gavin Patterson’s team is taking a gamble these speeds will do fine against cable, soon to offer a shared gigabit. Cable across Europe is now often 200-500 megabits shared. Both Broadcom and Intel are now making the cable chips for a gigabit. 3 megabit DSL is clobbered where cable exists but upgraded DSL at 15-50 megabits often beats faster cable. It's quite possible that spending more for football is more effective than spending the same money on better networks.

The impact of this on other telcos - Sky and Vodafone - is a separate story, playing out currently in the NICC standards group. BT wants a monopoly on all spectrum above 17 MHz where they provide The cutoff is actually the natural way to deploy but has the unfortunate side effect of eviscerating and possibly destroying landline competition in a few years. If Vodafone, Sky and the others are limited to 17 MHz, they be limited to 25-70 megabits when both cable and BT are over 200 megabits. The slower speed will cost almost as much to operate. 
Selling low speeds in a few years will be somewhere between difficult and impossible.






BT Group plc (NYSE:BT)

Q4 2015 Earnings Conference Call

May 07, 2015 3:00 AM ET


Michael Rake – Chairman

Tony Chanmugam – Group Finance Director

Gavin Patterson – Chief Executive Officer

John Petter – Chief Executive Officer of BT Consumer

Graham Sutherland – Chief Executive Officer of BT Business


Paul Sidney – Credit Suisse

James Ratzer – New Street Research

Nick Lyall – Societe Generale

Sunil Patel – Bank of America

Steve Malcolm – Arete Research

Stephen Howard – HSBC

John Karidis – Stifel

Thibault de Coincy – Raymond James

Jerry Dellis – Jefferies

Michael Bishop – RBC

Simon Weeden – Citigroup

Lawrence Sugarman – UBS

Andrew Lee – Goldman Sachs

Maurice Patrick – Barclays

James Britton – Nomura

David Molony – Ovum

Michael Rake - Chairman

Good morning, everyone, and welcome to our full year results presentation. I think we have delivered another strong performance this year, with good growth in profit and cash flow. And the Board is, actually, really pleased with the progress the company has made this year, both in terms of financial performance, but also the major milestones that have been achieved.

We have agreed a pension valuation; we have secured more top sports content; and we have announced the acquisition of EE. And the most significant overall investment we have made over the last several years has been in fiber broadband. This investment is transforming the UK and has been a real success story for both the country and BT. Our superfast network is now available to more than three quarters of the country. We are expanding into rural areas, and are working with government to help take fiber coverage to 95% of the country. We have been able to commit to this investment by exercising strong financial and operational discipline.

We are on budget, and ahead of schedule. This is a multi year program and it will still be a number of years before Openreach recovers its costs. Being part of a larger group gave Openreach the confidence in the future to demand to start the significant investment at a time when the UK was in the depths of recession. We will continue to invest, as we announced in January. We will be upgrading broadband speeds from superfast to ultrafast, but we can only do this if we have the right investment and regulatory environment. There have been suggestions that Openreach should be separated from the rest of BT.

This is shortsighted and would be highly disruptive for the UK market. It would stifle investment in both networks and service, and it would risk the UK being left behind, destabilizing what is a buoyant Internet economy. It is absolutely critical that we continue with the current structure, which has stimulated investment and competition, with consumers benefiting from high speeds and low prices. The UK now has the highest coverage of fiber broadband than any of the major European countries, and countries, and well above the European average of 62%.

And Ofcom itself has found Britain to have the lowest broadband prices amongst the major western economies. We welcome Ofcom's review into digital communications, and will be making these points very clearly. This review provides a great opportunity to modernize the regulatory regime to make sure that the industry can rise to the needs of the customers, and drive economic growth, and support social progress for the whole country. Ofcom needs to remove regulations where competition is effective and make long-term commitments so that communications providers can invest with confidence. And we continue to push for a push for a more level regulatory playing field, within the European Union, and across the world, so that we can compete more effectively.

Another major investment that we announced this year is our proposed acquisition of EE. I'm pleased that our shareholders voted overwhelmingly in favor of the deal last week. Combining EE with BT will allow us to secure and accelerate our mobile strategy, offering new and innovative services for UK consumers and businesses, and delivering value for customers and shareholders. We've continued to invest in customer service, and we are seeing the benefits. We're providing our services faster, and repairing them quicker when they go wrong. But there is still much to do, and this will remain a priority. In the UK, we are one of the largest investors in research and development.

Globally, we continue to invest in our networks to support large multi-national companies. We have also invested in our people; they contribute in many ways. And I'm proud that we have a strong volunteering ethos throughout the Company. More than one-in-four BT people volunteered this year, giving a combined 53,000 days of their time, and helping almost 4,000 charities in total. And we raised more than £80 for good causes. And importantly, of course, we have also looked to reward our shareholders. The Board is recommending a final dividend of 8.5p. This gives a full year dividend of 12.4p, up 14%. This growth rate is towards the top end of our guided range, reflecting the strong cash we generated this year. We are very confident in our plans and our future cash flow growth. As such, we are maintaining our guidance to 10% to 15% growth in the dividend per share for next year, and we will continue to pay a progressive dividend beyond that.

This year, we spent £320 million on our share buyback. And we will continue to buy back shares this coming year, again, spending around £300 million, to help offset the dilution from employee share options. In summary, it's has been a very important year for BT. Our results show that our investments are delivering for the business. We will continue to invest to grow the Company and deliver for our customer, communities, and our shareholders. I'll now hand over to Tony, who'll take you through the financials, before Gavin goes through the lines of business and an update on our strategy. Thank you.

Tony Chanmugam - Group Finance Director

Thanks, Mike. And good morning, everyone. Our results for the year were in line with, or ahead of, the outlook that we announced at the start of the year. We made further progress with our cost transformation, and there's more to come. We've delivered strong growth in profit and cash flow, and, as a result of the strong performance, our free cash flow outlook for next year has increased. First of all, slide nine, this shows how the full year results compared with the outlook we gave.

Underlying revenue, excluding transit, declined 0.4%, which is in line with our outlook, or broadly level with 2013, 2014. On EBITDA, we said, at the start of the year, that we expected to be between £6.2 million and £6.3 billion, and we came in towards the upper end of that range. Normalized free cash flow of £2.83 billion has materially exceeded our outlook of above £2.6 billion. I'll explain shortly some of the moving parts. Lastly, as Mike said, our dividend came in towards the top end of our 10% to 15% outlook. So, it's a good set of numbers, right the way across the board.

Moving on now to a brief overview of the quarter four results on slide 10. Underlying revenue, excluding transit, was down 1.3%. This mainly reflects decline in UK public sector revenues in global services, which more than offset the benefit of circa £30 million from ladder pricing revenues, which wholesale recognized in quarter four. EBITDA was up 7%, our best performance in a number of quarters, as ladder revenues, and the benefit of our cost transformation programs, offset the pressure on the top line.

Underlying operating costs, excluding transit, reduced by 6%. This compares well with the 3% decline last quarter. Below EBITDA, we continue to see the benefits of our focus in recent years on debt reduction. This has led to lower interest charges, which contributed to an 11% increase in our EPS. Normalized free cash flow was down £79 million. This was mainly driven by higher cash CapEx and working capital movements, which offset the growth in EBITDA. Net debt is now £1.9 billion lower than a year ago, reflecting both the cash generation of the business, and the £1 billion share placing we did in February.

Slide 11 gives a breakdown of specific items. Excluding pension interest and tax, the overall charge in the year was £235 million; and this was broadly in line with consensus. But within that, there were a number of moving parts. Firstly, we recognized a net credit of around £50 million from various regulatory rulings and decisions. These all relate to previous years, and include £128 million benefit from ladder pricing, following the Supreme Court judgment in July in our favor, and commercial negotiations also with the mobile operators. We've also sold a large property in London. This was an old international exchange which we no longer need, and which we sold to a property developer, making a profit of £67 million. This was partly offset by a £45 million increase to onerous lease provisions.

Our total restructuring costs came in at £315 million for the year. This was higher than our plans at the start of the year, mainly because of our restructuring program was more successful than we anticipated with more people taking leaver packages, particularly in quarter four. This helped our cost base a bit in the year, and will have a bigger impact next year. The main elements of our Group wide restructuring program have come to an end, and we don't expect to recognize any restructuring costs through specific items next year. Our cost transformation programs will continue, and we expect to incur around £100 million of leaver cost in 2015, 2016. However, we will now be taking this through EBITDA and absorbing it in our guidance, as I will show shortly.

Turning to slide 12. Looking at our revenue trend for the last five years, we've made strong progress towards the goal of delivering sustainable and profitable revenue growth. This has been driven by the investments we've been making, particularly in fiber and sport.

Slide 13 shows a walk from last year's revenue to this. Regulation in wholesale and Openreach continue to a significant pressure on our business. As we flagged at the start of the year, we'd expected to see declines in UK public sector revenue this year, due to fewer milestones; the ending of our two local government contracts; and lower government spending in general. This accounted for most of the decline within global services.

The termination of the Post Office contract within wholesale has been a headwind throughout the year, but will have no further impact from quarter one, onwards. These three disclosed headwinds account for most of the pressures on our top line in the year. Offsetting these declines, consumer delivered strong revenue growth, driven by higher broadband and TV revenue, reflecting the benefit of BT Sport. Excluding the impacts of regulation, Openreach has also seen strong growth, driven by increased demand for both fiber and Ethernet.

As you can see on slide 14, we continue to deliver on our cost transformation program. Operating costs, in total, were down £600 million, a 5% reduction. Underlying operating costs, excluding transit, reduced by 4%. The restructuring program I referred to previously was one of the key enablers in reducing our gross labor costs by 3% in the year, despite the impact of in-sourcing around 2,000 jobs during the course of last year.

Moving onto slide 15, I'd like to give you some examples of our transformation activity over the year. We have continued to be successful in improving the effectiveness of our contact centers, partly by improving the effectiveness of our processes, and partly through rationalization to critical mass within each center. In fact, we still have over 100 centers which are our subscale. I believe we'll be able to generate around £70 million of savings next year in this area. It's worth noting that we continue to invest in improving customer service and we have created 500 new jobs in this area this year.

Next, we have a major program of improving sales effectiveness across the business. This is targeted at reducing the level of support staff; refocusing and incentivizing sales teams on high margin activities; and replicating top quartile performance across the sales base. We would expect £45 million of future benefit from this program, some of which will be reinvested in increasing sales resource.

Lastly, on a number of occasions I've given you an update on our travel and subsistence. By continuing to take a forensic approach in this area, we've been able to reduce our cost base from £102 million to £87 million this year, a saving of £15 million, and with more to come next. These are just a few examples. We have a lot more opportunities for cost savings over the next few years. Our success in cost transformation and margin improvement can be seen clearly on slide 16. This shows our EBITDA performance over the last five years. While underlying revenue, excluding transit, was broadly flat this year, cost transformation has allowed us to grow EBITDA by 3%. EBITDA was £50 million above consensus, and reflects both an improved trading performance, as well as the benefit of around £30 million of ladder pricing.

This EBITDA growth has contributed to very strong cash flow, and you can see this on slide 17. This year is nearly £400 million higher than last year, and £750 million higher than four years ago. Slide 18 shows the driver of this year's free cash flow growth. Cash flow was up £380 million year on year, of which £155 million was due to growth in EBITDA. A further £246 million was driven by favorable movements in working capital and other, partly reflecting both the timing of sports rights payments, and as well as lower ordering pension payments. We also benefited from lower tax and interest payments. These positives affect the offset that we had on higher cash CapEx, due to the timing of receiving the BDUK grant funding. This is only received after each network milestone is completed and, therefore, is going to be variable in timing.

Turning now to debt, on slide 19. Net debt is down £1.9 billion in the year. This reflects both the strong cash generation of the business, and the £1 billion equity placing as part of the financing for the EE transaction. At March 2015, the Group had cash and current investment balances of £3.9 billion. We have also committed – we also have committed undrawn facilities of over £5 billion, which includes a committed acquisition facility for the EE transaction. As I've said before, we'll continue to target a BBB plus rating.

Now, moving onto the pension, on slide 20. In January, we announced the result of the triennial valuation. We have agreed a 16-year payment plan, with £2 billion being paid over the first three years, of which we have already paid £1.5 billion. We will pay in £250 million in each of 2015, 2016 and 2016, 2017. The IS19 deficit was £6.1 billion net of tax, compared with the £5.6 billion the year before. The increase in the deficit principally reflects the fall in the real discount rate, partly offset by higher investment returns, and also the deficit payment we made in March.

However, since the year end, the deficit's improved to around £5.3 billion, as at April 30, reflecting the payment we made in April, and reduced liabilities, due to an increase in the real discount rate. Lastly, the three quick things for your models. Because of the fall in the discount rate in 2015, 2016, the pension operating charge will increase by around £20 million next year. The net pension interest expense in specific items will reduce from £292 million to around £225 million. And lastly, due to the timing of payments, and to reflect the latest funding agreement, the cash ordering contributions will be around £90 million higher next year.

Moving on to our outlook, I'm going to walk you through our EBITDA and then cash flow for next year, as there are a number of moving parts. So, starting with EBITDA on slide 21, firstly, we'll have a lower benefit from ladder pricing. All ladder pricing will cease from the end of June, so in 2015, 2016 we expect to recognize only one half of what we recognized this year. As I mentioned, the pension operating charge will increase by around £20 million. This is not a cash item. This year, we had another £29 million benefit from selling redundant copper from our core network, but we don't expect any further benefit from this next year.

And finally, there will also be the £100 million impact from leaver cost coming above the line. These four effects will have a combined impact of around £170 million on our EBITDA. And this summer, we'll also be launching our Champion Leagues coverage, for which we'll have launch costs and begin expensing the rights. However, offsetting these headwinds, we expect to benefit from the acceleration of our cost transformation programs, which has been helped by the extra restructuring we did in 2014, 2015. We also expect our investments to drive revenue growth, which will support our EBITDA performance. Excluding the £170 million, this would imply that the EBITDA growth will be in the 3% range. Overall, we expect to deliver modest EBITDA growth for 2015, 2016 versus 2014, 2015.

Next, let me walk through next year's free cash flow outlook, on slide 22. We'll have the same impact from ladder pricing, copper sales, and leavers, as I just mentioned. Our ordinary pension contributions will be around £90 million higher. However, interest payments will be lower, due to lower net debt. Overall, the after-tax impact of these effects combined is a headwind of around £170 million. Offsetting this will be a net improvement in the other elements of cash flow, principally from trading. So, overall, we expect our cash next year to be around £2.8 billion. While we were previously guiding for growth, this was off a much lower base.

Overall, our expectation for cash in 2015, 2015 has gone up materially. It's also worth noting that consensus for 2015, 2016 cash flow is around £2.7 billion. So, the new outlook we've got now would imply an upgrade of around 4%. Finally, slide 23 summarizes our overall outlook; and note, that this is for standalone BT, excluding EE. It's worth saying that even if we start consolidating EE before the year end, we'll also report performance against outlook on this basis, so you'll have like-for-like performance. I've spoken about EBITDA and cash flow.

On revenue, our goal is to drive sustainable profitable revenue growth. And we continue to expect growth in underlying revenue, excluding transit, in 2015, 2016. Gavin will update you on the investments we're making to achieve that goal. So, over to you now Gavin.

Gavin Patterson - Chief Executive Officer

Thank you, Tony. Good morning. As usual, I'm going to take you through the line of business performance line by line. But, given it's the full year, I'll also want to give you an update on how we're doing against our strategic priorities. But overall, I wanted to give you some highlights for the year to start with. It has been a ground breaking year for BT, there's no question about that. We've delivered on the numbers, particularly on the free cash flow. And it's this strong financial discipline that has allowed us to make the investment decisions that are giving us the platform for growth.

In particular, there are three that I'd like to call out. The planned acquisition of EE is clearly going to be transformational for the Group. And subject to getting merger control, clearance, which we're confident it will do, it will allow us to create the leading converged UK communications player. Secondly, the new Premier League rights that we acquired earlier in the year. We're very happy with the outcome there. We were financially disciplined in terms of what we went for, and that gives us clarity going forwards.

And then finally, our vision for the next generation of broadband, the ultrafast broadband vision that we set out earlier in the year as well. This has allowed us to really set a roadmap to meet the demand for broadband, not just over the next couple of years, but over the next decade. So that's, I guess, the highlights of the year. In terms of the lines of business performance, the overall take away is EBITDA growth in each line of business, driven by a strong cost transformation performance, and giving us that platform for growth.

As usual, I'll start with global services. At a headline level, revenues, and on an underlying basis, ex transit, are down 3%. I think it's fair to say the public sector headwinds that we called out at the beginning of the year were stronger than we anticipated, and they weren't fully offset by the growth in Asia, the Middle East, and Africa, which is up 9%. Very healthy, but not enough to compensate. In terms of the EBITDA performance, that's strong, up 13% ex FX. And that reflects a really strong performance in terms of our cost transformation, which is up, in terms of delivery, 10% year on year.

From a cash perspective, cash flow was £349 million for the year. That's down, but it reflects £120 million in terms of the payments that we called out this time last year, and early receipt in Q4. So that was the main component of the £150 million difference than this time last year. And then in terms of the order intake, a pretty strong year overall. Down marginally overall at 7%, but the mix was stronger in terms of new and growth within that. There are fewer renewals and so we're pretty pleased with that overall. I’m seeing pretty big deals in the last quarter, including a big deal with Dixons Carphone for the whole of their UK network; another deal with Kimberly Clark around cloud computing; and, of course, the recently announced ABB deal to give them the network coverage across over 100 countries across the world for them.

Moving on to BT business, the take away here is continued EBITDA growth, driven by strong cost discipline. In terms of the revenues, the trends are pretty similar to previous quarters. Revenues, ex transit, are down 1% on an underlying basis. And this trend in the market of customers moving away from traditional voice to VoIP is continuing; and you can see that in the voice numbers, down 9% year on year. But we're seeing the other side of the equation. Our data and networking revenues are up 5%, and fiber up; in particular, adds up 58% year on year. EBITDA is up 6% across the year.

Again, this is due to strong cost discipline across the business, with underlying costs down 4% Cash flow was strong; overall, up 9% across the year. And the order intake was pretty good as well. So, it's broadly level across the level across the year at £2.1 billion. And some strong deals to announce in Q4, particularly, a deal with Primark; and one with Sure Trust, in the charitable sector. Moving on to consumer, the take away here is consumer is continuing to deliver top- and bottom-line growth, and this is the fifth consecutive quarter that we've been able to do that.

Revenues are up 3% in the quarter, driven by particularly strong performance on broadband and TV, behind our investment in BT Sport, as was mentioned earlier. Coupled with strong cost transformation, this means that EBITDA for the year is up 24%. But, probably more importantly, it's up against two years ago, which was the year before the BT Sport investment; we're up 2% versus two years ago. So I think that demonstrates that investment in sport has worked for us, and it has driven the top and bottom line.

In terms of cash flow, a very strong cash flow performance in the consumer business, up 72% year on year. That's in spite of making the UEFA deposit for Champions League, which obviously comes in this year, driven by the strong EBITDA performance. But I think it demonstrates that the consumer business is more than capable of paying for its own investment in terms of mobility and rights to fund its business model. Operationally, you can still see the benefit of Sport. Line losses, 61,000 within the quarter, in line with Q3. And a very strong performance in terms of broadband with share at almost 50% of the market, just shy of that, within the quarter.

Number one in terms of market net adds for the seventh consecutive quarter. And a real standout performance on fiber. A record quarter in fiber in the business, 266,000 fiber adds. The majority of them taking our higher priced options, so we're seeing the mix get a little richer in that area. And it is worth noting that now 39% of our customer base, our broadband customer base, are on fiber, so it is really becoming much more of a mass market product. Moving on to BT wholesale.

And the summary here is we can see the headwinds easing, even if you take out the impact of the ladder pricing. So, a top line, underlying revenues were up 3%. If you back out that impact of ladder pricing that Tony talked about earlier, we can see that the underlying picture is improving; it's around 3% to 4% down year on year, improvement on the trend of the previous few quarters. We're continuing to see growth in IP services, up services, up 25% year on year. And that is the real growth engine for wholesale, moving forwards. Underlying operating costs are down 2%. SG&A, in particular, is worth calling out. That's down 28% in BT wholesale. Which leaves us with EBITDA up 14% in the quarter; again, reflecting the impact of ladder pricing.

The order intake is good. Again, across the year I think is very strong. We had a big re- sign within the quarter. So, if you look at the year as a whole, the order book is roughly what it was 12 months ago. So we're pretty pleased with that progress. And then finally, Openreach. In summary, the real standout performance here is the fiber performance. Within the operating, the financial metrics is a very stable performance.

Revenues flat. If you take out the effect of regulation, that would be up 3% year on year. Fiber in itself is up 43% year on year. At a cost level, our costs are down 2%. That reflects the efficiencies we're driving through the business. But it also takes account of the 2,000 extra engineers that we've hired over the last 12 months to meet the demand. It also reflects, of course, the impact of smaller benefits from redundant copper that Tony talked about earlier.

In terms of EBITDA, that leaves us up 1% within the year. Looking at the operating metrics, it was, as I say, a terrific quarter in terms of fiber. 455,000 fiber adds within the quarter, which obviously is a record for us; that's up 31% year on year. The physical line base in total was very strong, both within the quarter, but, importantly, across the year as a whole. 215,000 physical lines added to the network across the year, which, from what we can see, is a record, and reflects the growth in new housing. And, we're also, we're also seeing the growth on the business side behind Ethernet and Ethernet sites increasing across the year as a whole.

So, that was a whistle stop tour through the line of business performance. I want to move on and talk more about the strategic priorities we have across the business. This is a slide that I talked about last year, and I refer to in most of our presentations. It sets out our strategy on one slide. I'm going to talk about the five growth areas in more detail, but I wanted to start with an update on service. As I made the point this time last year, getting to superior customer service is a key priority for us across the business. And we recognize we're not there today, but we're absolutely determined to get there.

In terms of RFT, which is the key metric we use to define how much progress we're making on service, there's been a significant improvement across the board in all lines of business in the last 12 months; and across the Group, it improved 4.7 percentage points. That's over 3 times what it did last year. And you can see the benefit coming through in a number of the operating metrics, as well. Of course, we've hired more people to work on the business to be able to serve customers in a more timely way, both in terms of engineers contact center advisors. We're much faster at bringing products to our customers, so we've seen the speed of delivery improve significantly in global services. Complaints are down, both in business and consumer.

And, as I mentioned earlier, Ofcom met every single one of its 60 service standards that were defined as part of the fixed access market review. We're not satisfied with that. We're going to be continuing to focus on this going forwards. And we're beginning to see the investments that we've been putting down in the last year begin to bear fruit. And they focus on five key areas. First of all, acting on insight. And this is things like journey analytics, where we can track customers as they go through the business, regardless of where they touch the organization, so that if something is going wrong we can make an intervention earlier in the process.

Keeping customers connected, so we've been proactively investing in proactive repairs across the network to ensure there are fewer faults. We've been investing in systems and tools, things like where, as a customer you can track where your engineer is so you can anticipate their arrival. But also, investments on the consumer side, where we can track – customers can track their order on our systems. Improving our working end to end, as I mentioned earlier. And it's important, I think, just to mention supporting our people, as well.

We've put a lot of investment into training and new operating models to get better single point accountability and ownership for the customer issue. And we're beginning to see that coming through in the operating metrics, particularly, one contact resolution, which is up significantly across the board. One thing we talk about with service is service and cost transformation for us work hand in hand. It is not a comprise between the two. And there is one thing I wanted to just give you a quick demonstration of that is this, which is a cabinet, in case you didn't recognize it; on the left hand side, a legacy cabinet; and on the right hand side, our next generation cabinet. And it won't be a huge surprise to you to realize that the one on the right hand side has fewer faults.

And typically, 35,000 faults are going to be saved this year on this type of cabinet alone. But it's easier to install, there are fewer components. And, of course, it's going to be – it's something that costs less, at the same time, but it will mean that service is better at the same time. And this is perfect example of the sort of thing we look for across the business, so that you can combine service and cost transformation at the same time. I want to move on and talk about the growth priorities, starting with fiber. As Mike said, this is the single most important investment we've made across the business over the last five years. And it is going well. We've now passed 22 million premises across the UK; that's over three quarters of the UK in total.

And we're working with government to get to reach 95% of the UK. And that's making good progress through the bespoke BDUK, and, increasingly, the SEP contracts, which we're signing up. In terms of the number of premises connected, there are 4.2 million Openreach premises connected; that's up 50% year on year. It's 19% of homes passed. And, importantly, 1.2 million of those are CP providers, apart from BT consumer, Plusnet, and BT business. And that has doubled year on year. So, it's doing what we wanted it to do as an investment. It is an investment for the whole of the market. We designed this so all service providers would pick it up and sell it. Looking ahead, the trials that we've talked about start in the summer. We've announced a trial in Gosforth, in the north east, and in Cambridgeshire, Huntington.

And if those are successful, we'll be rolling out across 2016, 2017. We set out a vision where we believe we can get in speeds of up to 0.5 gigabit to the vast majority of the UK within the next 10 years. And if customers want more than that, we'll be offering a service that offers up to 1 gigabit on a fiber-to-the-premise on-demand basis. TV and content complement fiber beautifully. What we see is that customers who take BT Infinity from us and BT TV from us are twice as likely to recommend our services, as those who take our copper services. So they work beautifully together. We've made good progress on BT TV over the last 12 months. We've added 52,000 customers in the last quarter.

Growth across the year is 14%. We added a number of new services over the last 12 months. We added Netflix, which we've bundled into our proposition; two new set top boxes, one with a hard drive, one without. Both more responsive, and with faster channel change, which is one of the key things customers look for. We added TV Everywhere capabilities, so customers can watch it on multiple devices and in multi rooms. And we were first to market with buy-to-keep on movies, and then with box sets. So we're really innovating on the content layer as well. And of course, after a lot of trying, we've got Sky Sports 1 and 2 on YouView, which is an important part of the overall proposition.

Then, on the sports side of things, Sport has continued, as we mentioned earlier, to be a key driver in the consumer business. The base has grown quarter after quarter on every single platform. We've now got 3.3 million direct customers; 5.2 million if you include the wholesale deals that we have in place. The viewing figures are good, and improving. The average daily audience over the last 12 months is up 15%. Across Premier League games, it's up 10%. The FA Cup has been extremely successful; viewing is up 35% year on year. And, in summary, we've had over 26 matches, with over 1 million viewers at peak. And that was 18 this time last year. We're not stopping there.

As you know, we've got a number of new initiatives in the content arena coming through over the next few months, particularly the exclusive right to broadcast Champions League and Europa League from this summer. That will significantly add to the overall number of Premier League games – or games featuring Premier League teams that we're able to offer on the channel, as the chart can demonstrate. We were very happy with the outcome of the Premier League auction. We got four more games; we've gone from 38 to 42. But we got it at a very sensible price. It works out at around 6% a year inflation, which is very manageable.

And importantly, I think we got a much better slot to broadcast to. So the audience you can broadcast at the evening slot on a Saturday, which is the one we got, is around twice that you can shoot for at the lunchtime slot, which is what we've got at the moment. So we're very happy about that. Finally, we announced an extension of our rugby deal with the Aviva Premiership Rugby competition, and that's been extended now until 2021. So we've got real certainty on our key sports, moving forwards. Moving on to talk about mobility and future voice, this has been, in many ways, probably the biggest news of the last 12 months.

I want to start, first of all, talking about our existing organic plans; and they have progressed, both on the business and consumer side. On business, we've added 4G plans to our business propositions. We are now available across all the top 20 handsets in the business market. And, of course, we launched One Phone. Then, in the consumer space, in the last few weeks we launched our first propositions. It's our first step in the journey. There are three SIM-only propositions. You get a discount if you're a BT broadband customer. And they are selling very well. With very limited marketing behind them, we've already got 50,000 customers signed up for them. There's clearly a demand for this.

The EE acquisition is going to be the big change. I was delighted that the shareholders gave us a strong endorsement last week. We're moving onto the CMA and the merger control process. And we step forward into this very confident that this is a very good deal, both in terms of what's in it for shareholders, but also in terms of customers and competition. We're very confident in terms of being able to get to an agreement. If it's a Phase I agreement. It'll pass, hopefully, and will complete by September 30. That is our intention. But if it goes Phase II it will be March 31, next year. What it will give us is real capability. It will allow us to combine the best fixed network with the best mobile network; give us real scale; and give us the capability to create seamless propositions that work across fixed and mobile.

And we think that's what the market really wants. Moving on to UK business markets. And we believe this is a real source of growth going forwards, in spite of some of the difficult conditions at the moment. In terms of what we've got, we've got strength in connectivity, be that we've got around 40% share of the lines base; about 30% share of broadband; and an increasing share of data and networking. That's what we've got to build from. The market is increasingly moving to VoIP. And we've launched a number of VoIP products over the last 12 months: BT Cloud Phone; BT Cloud Voice; and if you want mobility with it, BT One Phone; all of which are really strengthening our offer to the customer. We'll be adding bundling capability to our systems this year, because we see that as a key trend in this market as well.

Customers are looking for integrated solutions, rather than point-to-point propositions from us. And we'll be increasingly adding our IT services capability to that same stack. That's really important as well. That is a market where we've got 6% market share. We're increasingly moving that business towards services away from hardware, where the margins are better. But it's fundamental to our proposition, going forwards. Then finally, in leading global companies.

As you can see from the logos on the right-hand side of the slide here, BT is the company that's trusted by many of the world's biggest brands to manage their networks, in particular. Growth, in the high growth regions that we've talked about, has been good across the last 12 months, up 9% year on year. And we've been adding – extending our existing capabilities to ensure that customers don't get a compromised service, as they move and grow in these markets. In addition, we've been extending our network, adding Ethernet Connect points over the year. 10 new countries and we've been adding 10 new IP Connect points of presence, as well.

On top of that, we've been launching new products, particularly in the security and conferencing space. We've also been looking at improving our proposition in the financial markets area, which is one the verticals we're focused on. So we've got a new turret, a touchscreen turret that we've launched in the last 12 months, which is very important given that one-in-three of the world's traders use a BT turret. We've got to make sure that those products remain competitive, going forwards.

In summary, we've delivered the outlook. We've delivered the numbers, particularly in terms of our cash flow. We've made good progress on cost transformation. We're seeing an improving picture in terms of customer service. And it is this financial strength that allows us to invest in the things that are going to drive growth in the future of the business. In particular, we believe that the EE acquisition will put us in a position to create the leading UK converge communications provider. And that, we believe, is a very strong platform for growth. I'm now going to open up for questions. Usual rules apply; nd introduce yourself, and one question each, please.

Question-and-Answer Session

Q - Paul Sidney

Thank you. It’s Paul Sidney, Credit Suisse. You saw a material pick up in both retail and wholesale fiber adds in the quarter. I was just wondering, what's really driving this pick up? Is there any change in household behavior that's meaning that customers need higher speeds? Thank you.

Tony Chanmugam - Group Finance Director

I'm going to add some of my – some help from my beautiful assistants in the front row, and then, perhaps, I'll add a comment at the end. John, do you want to talk about the downstream part of the business, first?

John Petter - Chief Executive Officer of BT Consumer

Yes. What we can see is that the BDUK program in, particular, is taking fiber to rural parts of the UK. Typically, the copper speeds there tend to be slightly slower, and the demand for our services is very strong, in fact. That's certainly a factor. I think also, the government's advertising campaign probably had some impact in the quarter as well. That started just before quarter – just before Christmas. Generally, this is part of an ongoing and consistent trend for consumers to want faster broadband more and more. You can see that in the bandwidth and the usage trends as well.

Gavin Patterson - Chief Executive Officer

Yes. The only thing I'd add to that is that it's underlying consumer demand. But then we're seeing increased competition among our CPs as well, so there's a sort of layer on top of that. And I think when you play those both in together, that's what's driven the acceleration in the quarter.

Paul Sidney - Credit Suisse

Sorry, just a very quick follow on. Are most of the customers still going on the higher end fiber products?

Gavin Patterson - Chief Executive Officer

Yes, Yes. So they are choosing the higher speed options that we offer.

Paul Sidney - Credit Suisse

Thank you.

Gavin Patterson - Chief Executive Officer


James Ratzer - New Street Research

Hi, James Ratzer from New Street Research. I have just one question, probably for Tony, was just on the – one of the big changes that seemed to occur in the financials in the fourth quarter was the change in capitalized labor that seemed to move up by around £100 million. Could you give us guidance on what's included in the 2015, 2016 guidance for that? Are you expecting the £350 million run rate to – for each quarter to continue for this upcoming year, or does that drop back again? Thank you.

Tony Chanmugam - Group Finance Director

Okay, it's worth probably reflecting on what's happened on own work capitalize. If I look at it in terms of the overall capital spend, it's broadly flat, it's within £20 million increase in the year. The own work capitalized in the year has gone up by about £148 million. And when you look at that increase, you've got to understand, it's actually gone up more in the second half of the year than the first half of the year. So, the important point is the level of capitalization is probably the same. This mix of what is getting capitalized has change.

With the increase of the level of insourcing we do, the increased amount of BDUK activity we have, which is more complex, I think the important point here is the capital costs of that work gets shown, the gross costs get shown under own work capitalized. The rebate we get back from BDUK gets shown elsewhere. So, effectively, you've got an inflation in relation to the own work capitalized. I think it's also worth reflecting the Q4 numbers include an adjustment compared with Q3, which means the half year is intact. But the Q4 number is slightly inflated, when compared to Q3, because of that. And the other side of that entry appears on other.

James Ratzer - New Street Research

So, in summary, it should fall next year?

Tony Chanmugam - Group Finance Director

Well, I think it depends on, very much – we're not going to give guidance on individual lines, but I think what you should reflect is the fact that the more BDUK work we get the more inflated that number is. The more insourcing activity we do, the bigger that number becomes. The more we do in terms of new sites and Ethernet rollout, where the mix is different, the bigger that number becomes.

Nick Lyall - Societe Generale

Good morning, this is Nick Lyall from SocGen. Can I ask, on fiber regulation, please, Gavin, firstly, any progress on you investigating your options on the margin squeeze test, after Ofcom's comments? And also, with, you talked about trials starting, so any progress on regulation as well? Thanks.

Gavin Patterson - Chief Executive Officer

We are continuing to consider our options on the margin squeeze test. We believe it is unjust, as I've made the point in this venue before. We think it is wrong, and it doesn't really reflect the fact that we're the challenger in the sport market, trying to invest, and that this is going to really restrict that going forwards. Which is not a good outcome for the market, and it's not, I think, the intended outcome that Ofcom are trying to create. So we remain very, very unhappy about it. We're considering our options. We've got a few more weeks before we would have to make an appeal. We'll take that time, but – and we'll announce it at the time, obviously. In terms of, the point we've made all along, it was very much part of Mike's opening, we're prepared to make these big investments as a Company.

The investment in superfast, back in 2009, was a big call. Putting down £2.5 billion in the middle of what was going to be a pretty nasty, nobody else putting that sort of money down. And fast forward to today, and we still haven't recovered the money. As we've made the point here many times, it's a double-digit year payback. And while it has been absolutely right for the business, I think it's been great for the country as a whole, we need to ensure that shareholders get a fair return as well. And that was very much part of the principle that we agreed with Ofcom in 2009. It was the fair-bet principle, that in order to encourage private investment there had to be the availability to make a fair return going forwards.

In discussing this next generation of investment with Ofcom, and, indeed, with politicians as well, we've been reiterating that point. We need a stable regulatory environment; we need the confidence that we will be able to make a fair return on it. But if we do get those sorts of conditions, we're prepared to go again and invest on behalf, not just of our own downstream customers, but invest in an open way, that all service providers can benefit from. And that's exactly what the country needs to stay ahead in a digital world. We are a very digitally evolved economy, arguably the highest in the world, and that really demands an infrastructure that can keep up with that. And we believe the best way of doing that is through the model we have around functional separation today, because it allows us to make these big investment decisions, which, I think, in a structurally separated world you wouldn't. Okay, next is Sunil.

Sunil Patel - Bank of America

Hi, it’s Sunil from Bank of America. Just on mobile, your slide showed the launch of the MVNO. Tariffs have certainly got quite a lot of attention, and your initial adds have been very strong. How do you balance that very fast start with the potential spin down of customers on EE, when they eventually look at the quad play offering, and potentially getting a much lower price on and the 25 million-odd customers that you're about to acquire.

Gavin Patterson - Chief Executive Officer

John, do you want to say anything on this one?

John Petter - Chief Executive Officer of BT Consumer

Yes. So far, these adds are encouraging. But the marketing hasn't really started. And a key bit of feedback that we've taken on board from our customers is they expect to hear first from us about the best offers, and as existing customers they expect to get the best deals. And that's what we've done what we've done, to give our existing customers some kind of bonus for being loyal to us. In terms of pricing in the marketplace, the price for a 4G service that contains a relatively modest amount of data is, broadly, very similar in terms of the tariff that EE currently offer to our standard deal. They're basically the same, so the figures are it's £9.99 for 250 megabits from EE and it’s £10 for our bottom tariff for non-BT customers, so it's pretty much the same. Therefore, I think it's quite right for us to give a discount to existing customers.

Gavin Patterson - Chief Executive Officer

I think we're alive to the issue. Clearly, we're – our approach to the market, with the prospect of owning EE, is going to be different from the way we would have tackled it if we hadn't. So we recognize that. But we don't set the pricing in the market; the market sets it. And we must remain competitive. And it's clear that other players are going to come into this market, be it Sky, be it Vodafone in terms of their entry into TV, and we've got to make sure that we're able to compete.

Steve Malcolm - Arete Research

Hi, it’s Steve Malcolm from Arete Research. I guess, since we last spoke we've had the news from Virgin that they're going to expand past 4 million homes. Now, you and John have a lot of cable experience. Those 4 million homes are exclusively – well, they take either broadband or telephony BT home, so they're on a wholesale or retail level. You over index there, obviously, on a retail level. Can you just share some thoughts on your thoughts on the credibility of their plans, getting to 40% within three years; how you maybe change your strategy around price, around product, accelerating possibly, if you’re allowed to, to defend yourself against the incursion; and just generally, why you think it won't have a big impact on your business? Thanks.

Gavin Patterson - Chief Executive Officer

We do have a lot of cable experience. It's not just John and me, but, of course, Graham has a lot of cable experience as well. And we'll be using that, bringing that to bear in terms of how we defend our business against this. It is an ambitious plan, I have to admire that, there's no question about that. 4 million homes in five years, 40% penetration, that is bullish, I would say. But we will take it extremely – in fact, we're already taking it very seriously.

The reason I think it will be challenging is, if I go back to my own experience in cable, cable built up its customer base in the 1990s franchise by franchise when the deal was cheap phone calls versus BT. It was 25% saving versus BT, and throw in some analog TV at the same time, and you're up against an analog satellite proposition from Sky. There was then the big clean up of all the franchises, the consolidation into two players, then one player, and then the move to upgrade with broadband, and – in particular. The base itself has not grown dramatically since then. It's nipped and tucked a little bit, but it hasn't had a huge change. So, in terms of the day-to-day competitiveness of what they offer today, I think they will find it a much harder market to go in and win 40% market share than they did in the 1990s.

Clearly, we're going to fight hard in terms of superfast broadband and ultrafast broadband. That's where we will point our early deployment of, to make sure we've got our best products there. We'll continue to upgrade on the TV front. But to make the economics work they'll need a lot of Sky customers with Apus of £500, £600 a year to make the economics work, and so it's not just us that will in a defensive mode. I think there are a number of different challenges, and we're prepared for the fight. I don't whether, John, do you want to any comment?

John Petter - Chief Executive Officer of BT Consumer

The only point I would point is just, in terms of the actual dynamics in the market today, Virgin have been consistently – have pretty much consistently out competed for the last several quarters in terms of the superfast marketplace. And so, I think that reflects the relative strength of our proposition.

Tony Chanmugam - Group Finance Director

The numbers are we outsell them at a retail level 4 to 1; wholesale level, 6 to 1 last quarter.

Unidentified Analyst

One slight follow up. You've got a meaningful base of fiber customers now. What's the churn profile of fiber customer versus copper customers? I guess, what are the defenses you have if your fiber you have [indiscernible].

Gavin Patterson - Chief Executive Officer

It’s true, we don't declare it. But it is significantly lower for a fiber customer than it is a copper customer, significantly lower.

Stephen Howard - HSBC

Stephen Howard, HSBC. Another question on regulation. We've, obviously, heard some interesting ideas from some of your rivals about structural separation of late, and, to my mind, pretty much how to shutdown UK network investment for five years. But do you feel that some of your rivals have stolen the agenda here? I just invite you to use this platform to lay out what Ofcom's review should actually focus on; what it should be looking at in terms of deregulation; and whether, for instance, given this vibrant infrastructure- based competitive market that you've just been discussing, should you be regulated when you're competing down the same street with Virgin Media, 200 megabit per second plus fiber-based platforms? Thanks.

Gavin Patterson - Chief Executive Officer

I think Mike has some strong views he'd like to share.

Michael Rake - Chairman

In a mild way. No, look, I think, firstly, this is a very complex area. And we are very, very convinced of what we've done, why we've done it, the benefits to the country, the benefits to competition, and the benefits to our shareholders, and we believe that's a very, very strong proposition. It is complex, and we are paying a lot of attention to the noise that's in the system that is there. And we can't ignore that noise because you always have the risk of a political reaction to this. Therefore, I think, we think a lot of the statements that have been are ill-informed, shortsighted, and self-serving. In fact, are probably not self-serving, they don't quite realize that.

So, we need to engage in this debate very strongly. We're very much engaged in simplifying the reasons why we invested: the benefits to the country, the benefits to competition. And we'll continue to do that because the arguments are very strong, indeed, as to what we've done, for the reasons I mentioned, and Gavin has mentioned in his presentation. We're confident about what we're doing, why we're doing it, and the implications. We're very engaged, not just at, if you will, the technical level, but we're also engaged at the political level, to ensure there's a clear understanding of what this is about. And we continue to invest. And we must not forget that, in terms of competition for the UK, the low productivity we're facing, the problem of domination of London, actually, the rollout of what we're doing in superfast broadband is critical.

And, in a way, we're also very concerned that we must make these investments because people – it's a political issue that people aren't getting it quickly enough, fast enough. And there's only so fast that we can go. And we've done a lot already. So we've got to work on these issues to make sure that the total proposition is seen as something that's very important for the country, as well as for our shareholders. That's – I think we're very, very alert to that. On Ofcom, I would say two things.

Compared with some other regulators I've dealt with, Ofcom is very professional. We've had a very good relationship with Ofcom. We don't always agree with them, they don't always agree with us, but it's been a sensible relationship with Ofcom. Therefore, we continue to make the arguments with them. We expect them to live up to the commitments they made to us in 2009, and we expect that to go on in a constructive and sensible way. And we'll be engaged there in making these points very strongly, and we have no reason to believe that our arguments would fail. That's where I…

Gavin Patterson - Chief Executive Officer

No, you make your points very well, Mike. It should be remembered that Ofcom, I think, deserve a lot of credit for where we have got to today. We've got the highest coverage in Europe; lowest prices, both at a wholesale and a retail level. We've got the widest, as I said, coverage. And that is – we've gone from being the laggard to the leader across Europe, based on Ofcom's own figures. I think the case is the model is working, don't break it would be our argument. If you go back to 2009, and look at the choice we faced as a Board back then, if we had been a structurally separated business and we'd been making the decision for Openreach, the investment decision would be based on a 20-year payback.

I just don't honestly think we would have made the call in those conditions. What you benefit from, if you have the functionally separated model, is that you can take investments, if you regulate if properly, you can take investments and look at it across the whole. And that means an investment which would have not got out of the blocks otherwise had something that, a degree of reasonableness about it. And as we've said, it's double-digit, but it's just about doable, and it's proven to be the right thing to do. I think the case is very strong. And, indeed, the case of full structural separation is, at best, unproven; and certainly, the one example that has gone that far has not been a run away success.

Stephen Howard - HSBC

But you've got a wish list beyond this?

Gavin Patterson - Chief Executive Officer

Well, I think to your point, there is a case, and it's in the brief from Ofcom, which is they should be looking at ways of reducing regulation. The point you make around Virgin being a very credible competitor that feels confident that it can extend its network in the UK and make a £3 billion investment does not suggest a market that has somehow been starved of competition.

Michael Rake - Chairman

I think it's worth making the point, too, that we are 10 years, or so, in. There are 179 undertakings. The market is dramatically more competitive. Just look at the unbundled lines, what, 7 million, or something compared with the 1.5 million target. And look at the things that we've had to do. We had one hand tied behind our backs for several years, including not being able to bundle, not being able get access to Sky Sports content, so a number of things that we've had to really fight through in order to create a much more competitive environment for everybody.

That has required a lot of courage and investment from us to do that. And we've got to make those arguments. And I hope that Ofcom will stand back, as they've said, and look at the 179 undertakings to say, well, actually, how can we simplify this in everyone's interest today, because so much has changed since – and, frankly, to Ofcom's credit, much stronger and to the benefit of the UK plc than they would have expected 10 years ago.

John Karidis - Stifel

John Karidis from Stifel and good morning. A number of questions, probably for Tony. I'm trying to understand what the main constituents of the £180 million regulatory headwinds for Openreach were in FY2015, and how that total number is likely to change in FY2016, please?

Tony Chanmugam - Group Finance Director

I think, John, in generic terms, we will expect to see materially less regulation in Openreach next year, why don’t we give you the breakdown after the results? We can give you the analyses of that £180 million in terms of what we've already declared.

John Karidis - Stifel

Do you mind adding something more to the word material, so that we can understand a little bit more what that means?

Tony Chanmugam - Group Finance Director

It will be less than half that. Roughly speaking, it about one-third of that impact, roughly.

John Karidis - Stifel

Thank you.

Thibault de Coincy - Raymond James

Yes, good morning. Thibault de Coincy from Raymond James. Two questions from my side. First, on cost savings, if I remember well, you previously notified a further £1 billion of cost savings. Could you update us on what has been achieved so far, and what is left to expect in the future? Second, on CapEx, looking at other telecomm companies, we have seen an increase in CapEx in order to support and accelerate the fiber growth. My question is should we expect a similar move from BT in the future? Thank you.

Tony Chanmugam - Group Finance Director

Yes, sure. First of all, in terms of cost transformation, we gave a guidance of saying that they will over £1 billion, despite what we've done this year. I expect to see material savings both next year, and the year after. In relation to the capital guidance, what I'm saying now is no different to what I said last quarter. We have – if you look at the run rate of where we are in terms of capital, broadly speaking, that run rate will stay the same. It might oscillate a little bit year on year if we choose to, for example, accelerate what we do in, some may come down, but it will even itself out if I look over the period, over the next five, six years. The key though, is if we want to accelerate something it might get up a little bit more in that particular year, or two years.

Jerry Dellis - Jefferies

Good morning, it’s Jerry Dellis from Jefferies. A question on revenue trends, please. The underlying revenue trend at Group level was a little bit softer in the second half of the year, but you are confidently guiding for a return to growth this year. How rapidly do you expect to return to growth through the quarters? And what do you think will be the main drivers playing through in the course of next year?

Gavin Patterson - Chief Executive Officer

Do you want to say anything, or – the key drivers are going to be the Champions League launch in consumer, our organic plans in mobile, both of which are going to be positive effects, going forwards. And the headwinds will reduce year on year. I've talked, for example, about the change in buying in the public sector, and that, year on year, we believe, is going to be less. For example, regulation, the impact of regulation is going to be less going forward. So, it's a combination of the two. In terms of the timing, we don't give sort of quarter by quarter guidance on it, but, clearly, we need the trend to improve.

Michael Bishop - RBC

Good morning, it’s Michael Bishop from RBC. Following on from that, slightly, when you consider the raft of price increases we've seen from your competitors, it feels like they've almost lapped you now. And a lot of those price increases are focused on TV. Your proposition looks very good value, and you're adding more value to the bundle with mobile. How much of your revenue guidance assumes further price inflation across the bundle? And leading on from that, do you think there's scope to potentially increase TV pricing outside of the Champions League proposition? Thanks.

Gavin Patterson - Chief Executive Officer

I think, on pricing, we need to be cautious, going forward. Getting pricing – accelerating pricing too far ahead of inflation is not a great place to be. Our model is increasingly focused on growing RGUs per customer as opposed to depending on pricing. So there is some pricing in the plan going forwards, but we want to ensure that our products are competitively priced and that we – I'd rather see the growth coming out of RGUs. I don't know whether there's anything you wanted to add, John, or…

John Petter - Chief Executive Officer of BT Consumer

I'd like to sign you up, first of all. And then second, I would say that in terms of our prospects for TV, as Gavin said, a relatively small proportion of our overall customer base currently subscribe to the TV service that we have today. So the big opportunity is in volume. Having said that, it's extremely good value, and extremely cheap, actually. And as the service gets better and better, as you saw in the chart there, through the innovations that we've launched, I think there is a chance to grow the ARPU as well. So I think there are opportunities in both directions, but first it's volume.

Gavin Patterson - Chief Executive Officer

Thank you, Michael. Simon?

Simon Weeden - Citigroup

Thank you very much. It’s Simon Weeden from Citigroup. My question's on BDUK and how the income receipts from them is reflected in the accounts. And also if you could comment on – I believe that if you trigger certain market share thresholds in the subsidized areas in stages you become liable to rebate some of the subsidy. I wondered how much that could be, when you might start to see that happen, how it would be reflected in the accounts, and where it's triggered, I guess.

Tony Chanmugam - Group Finance Director

Where we are now, Simon, is that we've got an estimate in the accounts in relation to the level of take up that we take. We're constantly reviewing that, and when we review it next time round it may well be that we need to make a change. But we have a provision in the accounts associated with what we think the likely take up is going to be. Effectively, we're providing, if the take up materially exceeds that we'll need to make a provision associated with that. I don't expect – from where we are now, this is not a number like hundreds of millions of pounds. If we need to do something, it may be tens of millions of pounds. But contrary to that, remember, is the take up will be in excess of what we're expecting, which will benefit us in terms of revenue, cash, and EBITDA. In relation to where we show this rebate, it's not shown underneath the traditional expenditure heading of where it's incurred, which is under our labor costs; we show it as a special – a single item. I think it's under operating income, other income, Glynn?

Unidentified Company Representative

The receipts are being netted through the CapEx, presumably, if you have to pay the provision, that, therefore, gets netted out of CapEx?

Tony Chanmugam - Group Finance Director

It will do, because that's where the provision is held. But, as I said, the key to remember is the take up would have increased; and if the take up has increased, our revenue's up, our EBITDA is up, and our cash is up.

Gavin Patterson - Chief Executive Officer

And it's also fair to say that it's not necessarily – comes back in the form of a rebate. It can be, in some examples, and Cornwall is an example of this, invested back into the network. And so it's not necessarily – they don't necessarily want the money back; they might want the money reinvested to extend, or upgrade.

Tony Chanmugam - Group Finance Director

But the net impact is you'll still see that number appearing in the CapEx number.

Lawrence Sugarman - UBS

Thanks, Lawrence Sugarman from UBS. Could you just give a little bit of detail in terms of cash tax, going forward, it looks like it was a little bit lower than we might have expected, and what the drivers going forward relative to P&L charge will be?

Tony Chanmugam - Group Finance Director

Sure. The overall profit will be increasing, the overall rate of tax is going to be moving downwards slightly. What we've got, though, is we would expect that number to drift up slightly from where we ended up this year.

Andrew Lee - Goldman Sachs

Thank you. It’s Andrew Lee from Goldman Sachs. Actually, just following on from Paul's question, right at the start of the Q&A, talking about the strong KPIs you've had in retail, and he was thinking about the usage element. I just wondered if you could talk about the UK consumer environment in general, if you're seeing that as a tailwind to your business; and if we're seeing any kind of further signs of consumers maybe allocating more of their discretionary income into telcos. And then, just secondly, in terms of competition, we saw quite a lot of promotional pricing activity at the back end of last calendar year, and just if you could update us on any changes following Sky's Premier League auction activity and their subsequent price rise.

Gavin Patterson - Chief Executive Officer


John Petter - Chief Executive Officer of BT Consumer

In terms of the tailwind, I would not want to overstate that. Clearly, there are more people who have got jobs at the moment, and the economy is doing relatively well. Having said that, the growth is hard fought for, and the marketplace is extremely competitive, and I don't really expect that to change. I think – the one other point of context I would give is that it's true that our services are increasingly vital to customer's lives, and they expect to be connected for more of the time.

And the standards that they have, the speed of that connection continue to rise, too, and their usage continues to increase very markedly, too. That's very true of broadband. But in terms of the growth area for us, in some ways, on top of that is around TV. And the proposition that we offer very much taps into the growth segment in TV, and that's people coming across from Freeview, from free to air, seeking to pay not £50, £60, £70 per month, but seeking to pay, perhaps, a few pounds more for much more choice. And that's what we offer.

Andrew Lee - Goldman Sachs

In terms of promotional activity, it's pretty strong still, isn't it? You can…

John Petter - Chief Executive Officer of BT Consumer

It's very strong. The stance that we take is very rational and driven by consumer insight. For us, it's about sustainability. We don't see the same behaviors from all of my competitors. One of them, that shall remain nameless, is giving away 32-inch color TVs for people that sign up, at the moment. I would strongly advise you not to take their offer, however, because our products are far better.

Maurice Patrick - Barclays

Hi, guys. It’s Maurice Patrick from Barclays. A question on the long-term penetration of fiber potential. Fiber net adds continue to exceed I think your, but also our, expectations. You've, in the past, talked about the split of fiber adds which are coming from the new areas, but also the growth you're seeing in some of the older areas. What's the penetration like now in some of the early fiber areas deployed? And, hazard a guess, where do you think the fiber penetration could be in five years? Could we be at 10 million homes in five years time.

Gavin Patterson - Chief Executive Officer

Tony's keen to make a point here.

Tony Chanmugam - Group Finance Director

Yes, I think it's a couple of points. The first is, if you look at where we are now, on the areas such as Northern Ireland, and in terms of Cornwall, where we really started rolling out 2009, 2010, we reached penetration levels of around about 25%. And that's 25% in total. If you look at the areas where we've got since then, we've got, I think, 1,600 exchanges, over 20%. So the levels of take up is materially better. And we're almost, if you look, at 19%, at the business case level we set when we set up this investment. And I think it's an indication that we will exceed where we said on that business case. But the piece to remember, though, is we're going to have to upgrade the network, and we're going to have to spend money on, which wasn't in that original business case.

Gavin Patterson - Chief Executive Officer

I think there's clearly more demand for it than we envisaged in 2009, because it wasn't – it's easy to look at the 20% number and think that seems fairly conservative. But it was against the benchmarks in terms of what we could look at around the world, and the time to market, it was a reasonably challenging assumption. It's – we're clearly going to get beyond that, and there's no question about that. A thing I reference in my presentation was that 39% of our BT consumer base now has fiber. So that gives you a measure that if all service providers get behind us and it becomes the standard product, I think it could go a lot further.

Tony Chanmugam - Group Finance Director

Yes, it's worth reemphasizing that when you look back, historically, there was a concern that we were going to spend a lot more money on capital because we were rolling out BDUK. This Company, in 2007 and 2008, 2009 was spending £3.2 billion. We're spending around about £2.3 billion of service. And we’ve covered the fiber investment. That's why I'm very confident we can cover the investment in relation to what we do, moving forward.

Gavin Patterson - Chief Executive Officer

Pretty good, thank you. James?

James Britton - Nomura

Thanks, James Britton from Nomura. A question on the broadband experience for the consumer. I think Ofcom recently released research that suggested that broadband speed, actually, is not important for the broadband experience at speeds above 10 megabits per second today. So just wanted to – I think they're looking to expand the range of KPIs as well on broadband experience. Just wanted to get your latest view on [indiscernible] speed is as a driver of the purchasing decision; and also, how you are able to differentiate if at all on the other key bottlenecks that they've sighted, which is inhome equipment, interconnection with content providers, and so on.

Gavin Patterson - Chief Executive Officer

Very good. John, do you want to answer this.

John Petter - Chief Executive Officer of BT Consumer

Yes, just to take that point, I think there's no, one consumer. Consumers have different habits and preferences. If you are someone who's very, very into online gaming, speed probably matters more to you than someone of whom that's not true. But it's very much the case that more than one factor can affect customers experience. And I would call out the upload speed in particular in terms of being something that's increasingly important to consumers, given the changes in habits that we are seeing. The other points are things like jitter, packet loss, the overall quality of experience.

And the marketing claims that we see from our competitors are very much just in terms of those top line speeds. But I think you're quite right in saying that it's the overall experience that really counts, and that's what we're massively focused on optimizing and getting right for our customers. And so what we can see, it's taking the basket of measures and the service that we offer are significantly better. It's worth saying that for some of the firms they're very much stressed and straightforward download speeds, a factor they don't talk about is contention of peak times. And for cable networks, in particular, they do contend at peak times, very much.

The point you make in terms of the equipment in home is also true. That's where the BT Home hub contains the latest format of Wi-Fi, and smart technology to move between channels to give customers the best experience, and to protect against Wi-Fi interference. And it's the combination of all of these things give you the best experience in total.

But it is clear, to John's point, the headline speed on a cable network drops in peak times 39%, that's Ofcom's own conclusion, so customers feel that. But the one thing I would add to it is we have to build a network that is relevant to how demand is growing in the future. I think we're very competitive at the moment. But we're also conscious of the fact that history shows that bandwidth demand grows consistently 30% or 40% a year, year after year, which is why we're putting the investment into and fiber-to-the-premise, on demand.

James Britton - Nomura

Can I ask a follow up for Tony, actually? On working capital, is there any reason why, structurally, you should be in a negative working capital position for the medium term? Or should we expect this year's, I think it was, £20 million drag to drop away at some point?

Tony Chanmugam - Group Finance Director

Yes, there's no reason why we should continue to be on a negative. It's going to bounce around year on year. If I look at overall where we are, and if I look at cash CapEx, and I look at the working capital, I look at the other movements, actually it's been (inaudible) to contribute to the cash flow growth we’ve had this year.

Gavin Patterson - Chief Executive Officer


Unidentified Analyst

Thanks very much. Just a few number checks, really. Obviously, on revenues there's a slight miss against consensus, but EBITDA was a bit better. And you've got ladder pricing for £30 million. You've got the capitalization that we already talked about for about £100 million. You’ve also got more specific items and I think historically specific items were – leaver costs, rather, were taken into EBITDA in 2012; I'm not sure when they went back out again. And you've got some copper sales as well. If you add all that together, it's somewhere in excess of £200 million just for Q4 versus where consensus was. And then, on another number, if you look at –

Gavin Patterson - Chief Executive Officer

Don't worry, we will answer that question, even though it wasn't a question.

Unidentified Analyst

And if I also look at the investments of £2.5 billion in fiber, if I take that off the Openreach CapEx for the last five or six years, which has been roughly flat, that would imply that you should be earning £2.5 billion of EBITDA off a regulated utility, with only about £500 million of CapEx. So that just seems a very, very high return for an S&P utility?

Gavin Patterson - Chief Executive Officer


Tony Chanmugam - Group Finance Director

Well, sorry, I didn’t understand the first part in terms of the question. But in terms of the statement that you made, and the accuracy of the statement you made, some points. In the first instance, the level of copper instance, the level of copper rebate we got in 2014, 2015 in terms of recoveries was materially less than 2013, 2014. The key point, I think, to understand is that the consensus number, like for like, we beat consensus by £50 million; ladder pricing was £30 million; roughly speaking, 1% of a beat in the quarter was down to trading. So, I don't see any issues in terms of that. In terms of the leaver costs, the leaver costs payments that we have made in relation to the original has been around about £100 million higher.

The reason it's been £100 million higher is we've let more people leave the company. The overall labor costs in the Company are 4% less they were last year. And what that means is that the throughput that we will get into this year allows us to be in a position to make an underlying growth of 3%, after taking into account the fact that now we’re going to be putting leaver costs above the line. From an analyst's perspective, what you've got here is you've got a 4% beat for next year in terms of our outlook. And, just to be clear, for 25 quarters we've met, or delivered, or exceeded the outlook numbers in relation to our EBITDA. So you got a 4% up lift in terms of cash growth. And we're also putting in £100 million or so above the line from below the line, which, therefore, should filter through into your numbers.

Unidentified Analyst

Just a follow-up on the leaver costs? Because I think certainly in FY2012, the leaver cost went back above the line, so when did they go below the line again?

Tony Chanmugam - Group Finance Director

The leaver costs have been classified as part of the restructuring program since we announced the restructuring program, which is going back a couple of years. I think the key point here is a number of you have said, as far as leaver costs are concerned, show the leaver costs clearly. You might as well take it above the line and, therefore, you don't get involved in the discussions that we're having now about what's below and what's above. Where taking it above the line. Effectively, it means an upgrade in the numbers because you should have had your leaver costs in your specific items, I presume.

Unidentified Analyst

In terms of Openreach, underlying CapEx, ex-fiber, is only £500 million, £600 million?

Tony Chanmugam - Group Finance Director

I think what you've got is you've going to have a mix of capital expenditure in a number of different categories over the year. So you'll have influx in relation to what's regulated. But the question between what's regulated and what's not regulated is going to vary, as regulation rules change in time. I think the key is you look at overall investment, and the overall drivers of the investment, we will be spending more money on Openreach capital, both in terms of BDUK and outside UK.

Gavin Patterson - Chief Executive Officer

Okay. Thanks, Nick.

David Molony - Ovum

David Molony from Ovum. What are the current numbers for One Phone and Cloud Phone?

Gavin Patterson - Chief Executive Officer

We don't give specifics but I don't know whether, Graham, you'd like to give a little bit of color on the demand.

Graham Sutherland - Chief Executive Officer of BT Business

Yes. No, we obviously don't disclose specific numbers but we are pretty encouraged on all the new propositions we've launched in the last 12 months. It's still relatively early days, but we're seeing quite sizeable demand; and actually, across a wider segmentation than we had though when we rolled out some of these products. We definitely seeing encouraging signs. We have a much wider and broader portfolio than we had 12 months ago. We're looking forward to driving that forward over next 12 months quite a positive start.

Gavin Patterson - Chief Executive Officer

Robert, we'll take as the last question.

Unidentified Analyst

It's on pricing, actually; it's a circle back to a previous question. There's a lot of uncertainty about convergence and what that would do to the – whether there'd be a convergence discount, and you're already offering one to your customers; TalkTalk's followed suit with theirs. So there's a lot of uncertainty. But on the fixed line side it sounds like you're cautious on tariffs. Is that what's baked into Tony's guidance on the growth? If we saw you raise line rental, for example, would that be a better outcome than a cautious statement would suggest?

Gavin Patterson - Chief Executive Officer

I don't know how to answer that exactly. All I can is we need to remain competitive in the marketplace. We're very conscious of that. We're also conscious of the political environment and the fact that inflation is very low. We've been able to raise prices, at the same time, improve the amount of value we've offered customers, over the last number of years. That is a formula that works for us. I think this isn't the time to necessarily break away from that. We don’t give guidance in terms of how much pricing we've baked into the outlook, but some – as I say the key drivers for us is RGU growth; that's where we want to drive the volume, fundamentally. Tony, did you want to?

Tony Chanmugam - Group Finance Director

Robert, I think it's fair to say we have baked in a degree of price inflation, but obviously we're not going to declare what that is.

Unidentified Analyst

Like what you've seen in the last year, for example.

Gavin Patterson - Chief Executive Officer

I couldn't possibly comment.

Tony Chanmugam - Group Finance Director

All I'd say is that the level of price inflation we put in, so if we look at retail in terms of lines, what we put in is not materially different to what any of our competition has put in.

Unidentified Analyst

Okay. Since I’ve got the mic, individually, you might not care – or you might have lots of care, actually, about who wins the election tomorrow. But as a corporate, could you divide the political parties, who ever is in charge in the…

Michael Rake - Chairman

I’ll give you the CBI view, and tonight might be an interesting night. If we want to look at it one way we got one party who doesn't like Europe, and one party doesn't like business, so it feels like a great time. On balance, business thinks it can manage more the Europe issue than we issue. I think the CBI have been saying, for the last 18 months, the biggest risk to our recovery, in all seriousness, which is a low wage, low productivity recovery, which requires much more investment in order to improve productivity for sustainable increase in wages, requires an environment that gives that. The biggest risk has been political uncertainty, and that's what we're seeing. I think business is very concerned. Markets seem very stable right now, but we are very concerned about the uncertainty of the outcome of today, actually.

Gavin Patterson - Chief Executive Officer

If I could add, just in terms of the BT perspective on it, we're neutral. We've got a good relationship with the conservatives and the investment on BDUK and the progress we've made on BDUK, I think, have demonstrated that. But we've also got a good relationship with the front bench, as well. There are number of ideas that they're proposing that I think would be very good for the country as a whole. We’re absolutely neutral; we're happy to work with anybody.

On that note, thank you very much.

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Peter Bell BT

250 megabit goal for (talk


5,600 CO

90,000 cabinets 350 meters 350 homes

4M DP 35 meters (huge logistics project)


“scaled, ubiquitous deployment”

Cabinet often 350