3rd Quarter Results

BT Group PLC 13 February 2003 February 13, 2003 THIRD QUARTER AND NINE MONTHS RESULTS TO DECEMBER 31, 2002 Chief Executive's statement Ben Verwaayen, Chief Executive, commenting on the third quarter results, said: "These are excellent results. We are achieving our key goals of improving cash flow, earnings per share and customer satisfaction. These results demonstrate a substantial increase in profitability, with earnings per share* growth of 71 per cent. Revenue growth has been challenging, but we gained real momentum in the corporate sector, winning a number of major new contracts and our solutions business achieved record sales orders in the quarter. We generated our highest ever broadband sales, with in excess of 25,000 per week in January, launched a major market awareness campaign, reduced wholesale and retail connection charges and lowered the exchange upgrade trigger levels, demonstrating our strong commitment to broadband Britain." THIRD QUARTER HIGHLIGHTS â€¢ Earnings per share* of 4.1 pence, up 71 per cent â€¢ Profit before taxation* of Â£521 million, up 37 per cent â€¢ Group turnover* of Â£4,701 million, up 1 per cent â€¢ Net debt reduced by Â£195 million to Â£12.9 billion â€¢ In January 2003, we received proceeds of Â£2.6 billion from the sale of our shareholding in Cegetel to further reduce net debt â€¢ Record broadband sales in January, in excess of 25,000 per week; end users of over 650,000 at February 7, 2003 â€¢ Further improvements in customer satisfaction *from continuing activities before goodwill amortisation and exceptional items Group Finance Director's statement Ian Livingston, Group Finance Director, commenting on the third quarter results, said: "BT's financial position continues to strengthen. Net debt was reduced by Â£195 million to Â£12.9 billion. In January net debt has further reduced with the receipt of the Â£2.6 billion proceeds from the sale of our shareholding in Cegetel. Underlying operating performance is strong with earnings per share* increasing by 71 per cent over last year to 4.1 pence in the quarter and by 66 per cent to 10.3 pence in the nine months." RESULTS FOR THE THIRD QUARTER AND NINE MONTHS TO DECEMBER 31, 2002* Third quarter Nine months 2002 2001 Better (worse) 2002 2001 Better (worse) Â£m Â£m % Â£m Â£m % Group turnover 4,701 4,657 1 13,949 13,712 2 EBITDA before leaver costs 1,525 1,543 (1) 4,499 4,368 3 EBITDA after leaver costs 1,513 1,509 - 4,294 4,317 (1) Group operating profit 758 771 (2) 2,057 2,121 (3) Net interest charge 285 318 10 880 1,116 21 Profit before taxation 521 381 37 1,339 902 48 Profit after taxation 354 209 69 900 509 77 Earnings per share 4.1p 2.4p 71 10.3p 6.2p 66 Capital expenditure 613 753 19 1,721 2,118 19 Net debt 12,917 13,636 5 *BT Group's continuing activities before goodwill amortisation and exceptional items GROUP RESULTS Group turnover increased year on year by one per cent to Â£4,701 million in the third quarter. The core business has performed well in what remains a difficult market. We gained real momentum in the corporate sector with a number of major contract wins and our solutions business achieved record sales orders in the quarter. Group operating profit before goodwill amortisation and exceptional items at Â£758 million for the quarter was Â£13 million lower than the third quarter of last year. This is wholly attributable to the negative operating profit effects of unwinding the Concert global venture and the Telereal property sale and leaseback: these negative operating profit effects are offset by improvements in the results from associates and joint ventures and net interest payable. Leaver costs were Â£12 million (Â£34 million last year). BT's share of associates and joint ventures operating profits before goodwill amortisation and exceptional items was Â£47 million (Â£82 million loss last year) in the quarter, mainly reflecting the unwind of the Concert joint venture. Net interest payable was Â£285 million for the quarter, an improvement of Â£33 million against last year as a result of the reduction in the level of net debt. Profit before taxation of Â£521 million in the quarter increased by 37 per cent reflecting the underlying operating performance of the group, improved results from associates and joint ventures and lower net interest costs. The taxation charge for the quarter was Â£167 million; this represents an effective rate of 32.1 per cent (45.1 per cent last year) on the profit before exceptional items and goodwill amortisation. Last year's high effective rate was mainly due to the impact of loss making subsidiaries outside the UK for which tax relief was not immediately available. Earnings per share before goodwill amortisation and exceptional items were 4.1 pence for the quarter (2.4 pence last year), an increase of 71 per cent; 10.3 pence for the nine months, an increase of 66 per cent. Net exceptional items contributed Â£102 million to profit after taxation. Goodwill amortisation at Â£5 million for the quarter was Â£36 million lower than last year. This reduction reflects the disposals and goodwill impairment write downs made last year. Earnings per share after goodwill amortisation and exceptional items were 5.2 pence compared to 9.6 pence last year. In the third quarter of last year we recognised net exceptional profits before tax of Â£606 million, relating principally to the sale of property assets. Underlying performance In the line of business commentaries that follow, references to "underlying performance" are to trading performance before exceptional items and after adjusting for the estimated impact of the Concert unwind and business acquisitions and disposals on the line of business results. Trends in the results of the lines of business are described by reference to the underlying performance. The group results have not been adjusted for the pro forma impact of the Concert unwind. OPERATING PERFORMANCE BY LINE OF BUSINESS Group EBITDA Group operating profit Capital expenditure on Third quarter ended December 31, turnover Before exceptional (loss) before goodwill plant, equipment and 2002 (i) Â£m items amortisation and property additions Â£m exceptional items Â£m Â£m BT Retail 3,322 425 379 23 BT Wholesale 2,857 1,014 526 430 BT Ignite 1,256 61 (90) 102 BT Openworld 75 (4) (8) 2 Other 103 17 (49) 56 Intra-group items (ii) (2,912) - - - Total 4,701 1,513 758 613 Group EBITDA Group operating profit Nine months ended turnover before exceptional (loss) before goodwill Capital expenditure on December 31, 2002 (i) Â£m items amortisation and plant, equipment and Â£m exceptional items property additions Â£m Â£m BT Retail 9,785 1,283 1,137 69 BT Wholesale 8,440 2,849 1,411 1,174 BT Ignite 3,769 105 (335) 289 BT Openworld 207 (42) (54) 4 Other 271 99 (102) 185 Intra-group items (ii) (8,523) - - - Total 13,949 4,294 2,057 1,721 (i) See note 2 Results of businesses for prior year figures (ii) Includes elimination of turnover between businesses, which is included in the turnover of the originating business BT Retail Third quarter ended December 31 Nine months ended December 31 Better 2002 2001 Actual Underlying 2002 2001 Â£m Â£m % (b) Â£m Â£m % Group turnover 3,322 3,187 (a) 4 2 9,785 9,502 (a) Gross margin 957 865 11 6 2,863 2,588 Sales, general 532 532 - 6 1,580 1,579 and administration costs EBITDA 425 333 28 26 1,283 1,009 Depreciation 46 47 2 2 146 138 Operating profit 379 286 33 31 1,137 871 Capital expenditure 23 46 50 50 69 94 Operating free 402 287 40 39 1,214 915 cash flow BT Retail increased turnover by Â£73 million (2 per cent), operating profits by Â£90 million (31 per cent) and operating free cash flow by Â£112 million (39 per cent) compared to the third quarter of last year. This is the result of continued focus on margin improvements, cost efficiencies and new wave initiatives. Third quarter ended December 31 Nine months ended December 31 Better (worse) BT Retail turnover 2002 2001 Actual Underlying 2002 2001 (a) (b) (a) Â£m Â£m % % Â£m Â£m Voice Services 2,425 2,401 1 (1) 7,208 7,147 Intermediate Products 701 630 11 8 2,033 1,916 Core 3,126 3,031 3 1 9,241 9,063 New Wave 196 156 26 26 544 439 Total 3,322 3,187 4 2 9,785 9,502 Sales to other BT 514 507 1 10 1,398 1,545 businesses incl. above (a) Internal turnover restated to reflect changes in intra-group trading arrangements (b) Adjusting for the effect of the Concert unwind and the transfer of major accounts to BT Wholesale Overall turnover from voice services was 1 per cent lower than the third quarter of last year driven primarily by lower revenues from fixed network calls reflecting a reduction in call volumes, partly offset by higher analogue line revenues and other services. Fixed network call revenues were 2 per cent lower than the third quarter of last year at Â£1,180 million as a result of a reduction in call volumes. In the residential voice market BT Retail has maintained market share at around 73 per cent and in the business voice market BT Retail's market share is slightly lower than last quarter at around 44 per cent. BT Retail call volumes declined year on year by 5 per cent in the quarter, with the decline in geographic calls of 3 per cent slowing from 4 per cent last quarter. Non geographic calls declined by 6 per cent reflecting the switch of internet related calls to FRIACO based products. Residential geographic call volumes are slightly ahead of the third quarter last year, with national calls up following the continued success of the BT Together package. Residential international call volumes fell slightly and are being targeted through new highly attractive packages, launched in the third quarter, to which over 100,000 customers have already signed up. Business geographic call volumes fell, driven by a combination of customers switching out of traditional telephony and pressure from the implementation of Carrier Pre-Selection. BT Business Plan was launched on January 14, 2003 and this highly competitive package places a ceiling of 10 pence on national and local business calls, rewards loyalty and provides a single BT customer contact. Turnover from analogue exchange lines of Â£770 million increased by 1 per cent compared to the third quarter of last year due to continued rebalancing of tariff charges. The total number of BT Retail lines increased by 1 per cent to 29.3 million, with a 1 per cent increase in both residential and business lines. However, business voice lines fell by 3.5 per cent, being offset by growth in digital lines of 8 per cent. Turnover from intermediate products of Â£701 million increased by 8 per cent compared to the third quarter of last year. ISDN lines continue to grow and at 3.8 million are 9 per cent higher than last year. New wave revenue grew by 26 per cent in the quarter with the continued focus on the information, communications and technology ("ICT"), broadband and mobility products. During the quarter, significant momentum was gained in the ICT order book. Unilever and Bradford & Bingley chose BT to be their outsourcing partner. The NHS Information Authority announced that BT would upgrade the existing NHSnet infrastructure to a broadband platform. In one of the largest network upgrades within the public sector, BT will connect more than 7,000 sites throughout England, including GP practices and NHS Trusts. These contracts, which will also be recognised within Ignite Solutions, alone will contribute almost Â£1 billion to BT Group revenues over the life of the contracts. BT Retail's Broadband Direct showed good growth with weekly sales orders now exceeding 7,500. Strong marketing activities are planned to further stimulate demand next quarter. BT continues to build on existing relationships and acquire new business partners, bringing the total number of business partners to over seventy. The increase in gross margin of Â£56 million (1 percentage point to 28.8 per cent) compared to the third quarter of last year is driven by the success of the BT Together packages, improved product mix and lower wholesale prices which more than offset the impact of call volume declines. Cost transformation programmes have generated a 6 per cent saving in sales, general and administration costs of Â£33 million against the third quarter of last year. These savings have been driven by the reduction in people related expenses such as travel, accommodation and communications, lower service costs resulting from improvements in service quality, billing initiatives and other similar cost transformation programmes. On a full year basis these programmes are expected to deliver at least Â£200 million savings in the core business, although new wave costs will increase as revenues grow. EBITDA in the third quarter was Â£89 million (26 per cent) higher than the prior year which enabled BT Retail to contribute an operating free cash flow (EBITDA less capital expenditure) of Â£402 million in the quarter; Â£112 million better than the third quarter of last year. The third quarter saw further improvements in customer satisfaction with Consumer, Business and Major Business all showing substantial reductions in dissatisfaction levels. In order to improve the level of satisfaction in Business and building on the success of BT Together, BT Business Plan was launched to enhance value and service levels. BT Wholesale Third quarter ended December 31 Nine months ended December 31 Better (worse) 2002 2001 Actual Underlying* 2002 2001 Â£m Â£m % % Â£m Â£m External turnover 878 987 (11) (1) 2,583 2,868 Internal turnover 1,979 2,086 (5) (2) 5,857 6,221 Group turnover 2,857 3,073 (7) (2) 8,440 9,089 Total operating costs 1,877 2,071 9 - 5,685 6,256 before depreciation Other operating income 34 62 (45) 13 94 182 EBITDA 1,014 1,064 (5) (5) 2,849 3,015 Depreciation 488 474 (3) (3) 1,438 1,415 Operating profit 526 590 (11) (11) 1,411 1,600 Capital expenditure 430 453 5 5 1,174 1,337 Operating free 584 611 (4) (4) 1,675 1,678 cash flow *Adjusting for the effect of the Concert unwind and transfer of major accounts from other BT businesses BT Wholesale's turnover for the quarter of Â£2,857 million, was 2 per cent lower and operating profit of Â£526 million was 11 per cent lower than the third quarter of last year. However, the comparative period last year included a Â£38 million out of period revenue benefit, the effect of which resulted in a Â£10 million (1 per cent) year on year decrease in external turnover in the quarter to Â£878 million. New wave external revenues at Â£54 million showed strong growth. The 108 per cent increase over the third quarter of last year reflected gains being made in internet connectivity, content and applications. Wholesale ADSL lines had an installed base of over 650,000 at February 7, 2003 and in January achieved record weekly orders in excess of 25,000 compared to 4,000 at the end of the third quarter last year. Within traditional products, the impact of price reductions - due to flat rate price packages, new Network Charge Control (NCC) pricing formulae and Oftel determinations - coupled with unfavourable market conditions have continued to slow turnover growth. FRIACO revenues continue to grow but are partly offset by the slow down in the conveyance revenues they replace. Also, revenues from retail private circuits have reduced, due to the migration of customers to lower priced partial private circuits. Internal turnover in the quarter of Â£1,979 million showed a decrease of Â£48 million (2 per cent) due to price reductions, partly offset by an increase in volumes. Despite an increase in network volumes, BT Wholesale's operating costs, excluding depreciation, of Â£1,877 million were broadly flat against the third quarter of last year. Full time equivalent staff numbers have reduced by 7 per cent since the third quarter of last year, reflecting the continued drive towards improved operational efficiencies. Depreciation at Â£488 million increased by Â£14 million (3 per cent) mainly due to the move towards shorter asset lives as BT continues its programme of network investment. Operating profit decreased by Â£65 million (11 per cent) reflecting the lower revenues. The operating profit margin of 18 per cent remains flat against the second quarter. Capital expenditure at Â£430 million decreased by Â£23 million (5 per cent) reflecting continued cost control, tight governance and alignment of capital spend with the development of the future network strategy. BT Wholesale has maintained its focus on managed cash costs (defined as operating costs excluding payments to other network operators and depreciation, plus capital expenditure). Managed cash costs at Â£1,480 million decreased by 2 per cent despite the 5 per cent increase in network volumes. Cash cost savings are Â£175 million, year to date, and BT Wholesale is ahead of schedule to achieve its full year target savings of Â£200 million. BT Ignite Third quarter ended December 31 Nine months ended December 31 Better (worse) 2002 2001 Actual Underlying* 2002 2001 Â£m Â£m % % Â£m Â£m Group turnover 1,256 1,114 13 (1) 3,769 3,260 EBITDA 61 46 33 771 105 116 Group operating loss (90) (80) (13) 34 (335) (245) Capital expenditure 102 149 32 46 289 395 Operating free cash flow (41) (103) 60 77 (184) (279) *Adjusting for the effect of the Concert unwind, acquisitions and disposals and the transfer of a major account to BT Wholesale BT Ignite continued to generate a significant improvement in underlying profitability and cash flow despite the continuing difficult trading conditions in the corporate sector and reduced carrier revenues. Underlying operating losses for the quarter were reduced by 34 per cent on last year. Underlying turnover for the quarter fell by 1 per cent to Â£1,256 million. This includes the impact of a 23 per cent fall in Global Carrier turnover as a result of the decline in trade with AT&T and Worldcom following the unwind of the Concert global venture. Excluding Global Carrier, BT Ignite's turnover grew by more than 6 per cent with Global Products and Solutions both growing by 11 per cent. Syntegra has outperformed the declining systems integration market, holding turnover at around last year's level. European Connectivity turnover increased by 2 per cent to Â£250 million, however excluding the impact of exiting non profitable elements of the SME and consumer markets in Europe, growth in core European Connectivity revenues was 7 per cent compared to the third quarter of last year. We gained real momentum in the corporate sector with a number of major contract wins and Solutions achieved record sales orders of Â£1.6 billion in the quarter. Cost efficiencies continue to be delivered with EBITDA improving by Â£54 million over the third quarter of last year. All businesses generated an improvement in EBITDA compared to the third quarter of last year. European operations have made excellent progress towards their targeted EBITDA break even run rate by March 31, 2003 with their combined EBITDA improving by Â£40 million to a loss of Â£1 million. During the third quarter, the Netherlands became EBITDA positive, following Ireland and Spain earlier in the year. The operating loss was Â£83 million in the quarter before early leaver costs of Â£7 million (Â£11 million last year), a Â£43 million underlying improvement from the third quarter of last year. Capital expenditure was Â£102 million in the quarter, Â£86 million lower than the third quarter of last year (including Concert). As a result, the operating free cash outflow (EBITDA less capital expenditure) of Â£41 million was an improvement of 77 per cent over the third quarter of last year. BT Openworld Third quarter ended December 31 Nine months ended December 31 2002 2001 Better (worse) 2002 2001 Â£m Â£m % Â£m Â£m Group turnover 75 59 27 207 161 EBITDA (4) (23) 83 (42) (86) Group operating loss (8) (23) 65 (54) (100) Capital expenditure 2 - n/m 4 5 Operating free cash flow (6) (23) 74 (46) (91) BT Openworld made continued improvements in turnover, profitability and cash flow. Turnover for the third quarter was Â£75 million, an increase of Â£16 million (27 per cent) on the third quarter of last year. The improvement is mainly due to growth in the new broadband products and continued revenue growth in the core narrowband product range. EBITDA loss for the third quarter was Â£4 million, an improvement of Â£19 million (83 per cent) on the third quarter last year. The reduced losses reflect economies of scale, in particular in the narrowband business, which was EBITDA positive last quarter and is now profitable. With effect from January 1, 2003, BT Openworld is under the management responsibility of BT Retail and will report its results as part of BT Retail. This decision reflects the maturity of BT Openworld's services and will allow the realisation of synergies, particularly in administration and back-office costs. EXCEPTIONAL ITEMS The net profit on sale of fixed asset investments and group undertakings amounted to Â£99 million. Of this amount, Â£61 million relates to the sale of the final tranche of BSkyB shares. An exceptional property rationalisation charge of Â£198 million was recognised in the quarter in relation to the rationalisation of the group's London offices. This is at the upper end of the previously indicated scale as the conditions in the London property market have deteriorated. The exit from Blu was successfully completed on more favourable financial terms than anticipated, with an exceptional gain of Â£169 million. PENSIONS The triennial BT Pension Scheme funding valuation ("Funding Valuation") exercise is under way. The Funding Valuation is determined by the pension scheme's actuary and approved by the pension scheme's trustees and will not be available until May 2003. At that time we shall also determine a final valuation for accounting purposes ("SSAP 24 Valuation") to be applied from April 1, 2003. However, based on a preliminary view, the company's actuary believes that the SSAP 24 Valuation deficit based on the position at December 31, 2002 would have been in the range Â£1 billion to Â£1.5 billion, compared to Â£0.2 billion at March 31, 2000 following the previous valuation. The SSAP 24 Valuation determines the profit and loss account charge whilst the Funding Valuation determines the cash contribution requirements. By their nature, the Funding Valuation assumptions are more conservative than the expected outcomes used for the SSAP 24 Valuation. At the time of the last triennial Funding Valuation the more conservative funding assumptions gave a deficit Â£0.8 billion higher than the SSAP 24 Valuation. CASH FLOW AND NET DEBT Cash inflow from operating activities amounted to Â£1,041 million in the quarter. This is after making special and annual deficiency contributions to the BT Pension Scheme of Â£329 million (Â£600 million last year). The reported cash inflow last year of Â£1,074 million in the quarter was generated from both the continuing and discontinued activities of the group. The cash outflow on fixed asset purchases was Â£635 million in the quarter which compares to Â£743 million from the continuing activities last year reflecting the continued management focus and control over capital expenditure. This year's capital expenditure is now expected to be around Â£2.6 billion. Free cash flow (before acquisitions and disposals, dividends and financing but after the special and deficiency contributions to the BT Pension Scheme) was Â£19 million in the quarter. Net debt at December 31, 2002 was Â£12.9 billion, a reduction of Â£195 million in the quarter. In January 2003, net debt was further reduced with the receipt of the Â£2.6 billion sale proceeds on completion of the sale of our shareholding in Cegetel, further strengthening the group's financial position. POST BALANCE SHEET EVENTS Regulatory cost reductions on fixed to mobile calls are expected to reduce BT Group costs in the year to March 31, 2004 by approximately Â£350 million. However, BT Group revenues will reduce by an equivalent amount, subject to volume changes, with the benefit of lower termination costs from mobile operators being passed on to BT Group customers. In December, Vivendi exercised its pre-emption right in respect of our 26 per cent stake in Cegetel. This transaction became unconditional and completed in January 2003 when consideration of â‚¬4 billion (Â£2.6 billion) was received in cash. An exceptional profit on sale of around Â£1.4 billion will be recognised in the fourth quarter. ____________________________________________________________________ The fourth quarter and preliminary results of BT Group are expected to be announced on May 22, 2003. GROUP PROFIT AND LOSS ACCOUNT for the three months ended December 31, 2002 Continuing activities Before goodwill Goodwill Total amortisation and amortisation and exceptional items except-ional items (note 8) (unaudited) Notes Â£m Â£m Â£m Total turnover 5,124 - 5,124 Group's share of associates and joint ventures (423) - (423) turnover Group turnover 2 4,701 - 4,701 Other operating income 52 - 52 Operating costs 4 (3,995) (203) (4,198) Group operating profit (loss) 2 758 (203) 555 Group's share of operating profits of 5 47 150 197 associates and joint ventures Total operating profit (loss) 805 (53) 752 Profit on sale of fixed asset investments and 6 - 99 99 group undertakings Profit on sale of property fixed assets 1 - 1 Net interest payable 7 (285) - (285) Profit before taxation 521 46 567 Taxation (167) 51 (116) Profit after taxation 354 97 451 Minority interests 1 (7) (6) Profit attributable to shareholders 355 90 445 Earnings per share 9 - basic 4.1p 5.2p - diluted 4.1p 5.1p GROUP PROFIT AND LOSS ACCOUNT for the three months ended December 31, 2001 Continuing activities Before goodwill Goodwill Discontinued Total amortisation and amortisation and activities and exceptional items except-ional eliminations items (note 1) (note 8) (unaudited) Notes Â£m Â£m Â£m Â£m Total turnover 5,383 - 433 5,816 Group's share of associates and joint (929) - (24) (953) ventures turnover Trading between group and principal 203 - - 203 joint venture Group turnover 2 4,657 - 409 5,066 Other operating income 3 91 - - 91 Operating costs 4 (3,977) (78) (502) (4,557) Group operating profit (loss) 2 771 (78) (93) 600 Group's share of operating losses of 5 (82) (92) - (174) associates and joint ventures Total operating profit (loss) 689 (170) (93) 426 Profit (loss) on sale of fixed asset - (165) 2 (163) investments and group undertakings Profit on sale of property fixed 10 1,062 - 1,072 assets Net interest payable 7 (318) (162) (5) (485) Profit (loss) before taxation 381 565 (96) 850 Taxation (172) 48 (5) (129) Profit (loss) after taxation 209 613 (101) 721 Minority interests - - - - Profit (loss) attributable to 209 613 (101) 721 shareholders Earnings per share 9 - basic 2.4p 8.4p - diluted 2.4p 8.3p GROUP PROFIT AND LOSS ACCOUNT for the nine months ended December 31, 2002 Continuing activities Before goodwill Goodwill Total amortisation and amortisation and exceptional items except-ional items (note 8) (unaudited) Notes Â£m Â£m Â£m Total turnover 15,216 - 15,216 Group's share of associates and joint (1,267) - (1,267) ventures turnover Group turnover 2 13,949 - 13,949 Other operating income 148 - 148 Operating costs 4 (12,040) (214) (12,254) Group operating profit (loss) 2 2,057 (214) 1,843 Group's share of operating profits of 5 162 150 312 associates and joint ventures Total operating profit (loss) 2,219 (64) 2,155 Profit on sale of fixed asset investments 6 - 165 165 and group undertakings Profit on sale of property fixed assets 7 - 7 Amounts written off investments (7) - (7) Net interest payable 7 (880) - (880) Profit before taxation 1,339 101 1,440 Taxation (439) 51 (388) Profit after taxation 900 152 1,052 Minority interests (10) (7) (17) Profit attributable to shareholders 890 145 1,035 Dividends (194) - (194) Retained profit for the period 696 145 841 Earnings per share 9 - basic 10.3p 12.0p - diluted 10.3p 12.0p GROUP PROFIT AND LOSS ACCOUNT for the nine months ended December 31, 2001 Continuing activities Before goodwill Goodwill Discontinued Total amortisation and amortisation and activities and exceptional items except-ional eliminations items (note 1) (note 8) (unaudited) Notes Â£m Â£m Â£m Â£m Total turnover 16,304 - 2,827 19,131 Group's share of associates and joint (3,117) - (715) (3,832) ventures turnover Trading between group and principal 525 - - 525 joint venture Group turnover 2 13,712 - 2,112 15,824 Other operating income 3 258 - 1 259 Operating costs 4 (11,849) (244) (2,546) (14,639) Group operating profit (loss) 2 2,121 (244) (433) 1,444 Group's share of operating profits 5 (125) (935) 62 (998) (losses) of associates and joint ventures Total operating profit (loss) 1,996 (1,179) (371) 446 Profit (loss) on sale of fixed asset - (36) 4,368 4,332 investments and group undertakings Profit on sale of property fixed 22 1,062 - 1,084 assets Amounts written off investments - (535) - (535) Net interest payable 7 (1,116) (162) (43) (1,321) Profit (loss) before taxation 902 (850) 3,954 4,006 Taxation (393) 50 (58) (401) Profit (loss) after taxation 509 (800) 3,896 3,605 Minority interests (1) - (13) (14) Profit (loss) attributable to 508 (800) 3,883 3,591 shareholders Earnings per share 9 - basic 6.2p 43.7p - diluted 6.1p 43.2p GROUP CASH FLOW STATEMENT for the three months and nine months ended December 31, 2002 Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 (unaudited) Â£m Â£m Â£m Â£m Net cash inflow from operating 1,041 1,074 3,776 3,761 activities* (note 10) Dividends from associates and joint 3 1 4 2 ventures Net cash outflow for returns on (372) (649) (978) (1,328) investments and servicing of finance Taxation paid (130) (45) (276) (283) Purchase of tangible fixed assets (635) (948) (1,904) (3,188) Net sale of fixed asset investments 87 - 88 70 Sale of tangible fixed assets 25 2,488 67 2,626 Net cash inflow (outflow) for capital (523) 1,540 (1,749) (492) expenditure and financial investments Acquisitions (12) (47) (139) (1,021) Disposals 210 470 338 6,863 Net cash inflow for acquisitions and 198 423 199 5,842 disposals Equity dividends paid - - (173) - Cash inflow before use of liquid 217 2,344 803 7,502 resources and financing Management of liquid resources (467) 708 650 (3,251) Issue of ordinary share capital - 58 42 6,041 Inflow on demerger of mmO2 - 440 - 440 New loans - 4 20 6 Repayment of loans (46) (199) (1,513) (988) Net movement on short-term borrowings - (3,236) (64) (9,533) Net cash outflow from financing (46) (2,933) (1,515) (4,034) Increase (decrease) in cash (296) 119 (62) 217 Decrease in net debt from cash flows 217 2,842 845 13,983 (note 11) *Net of deficiency and special pension 329 600 329 600 contributions Free cash flow before acquisitions and 19 1,921 777 1,660 disposals, dividends and financing GROUP BALANCE SHEET at December 31, 2002 December 31 March 31 2002 2001 2002 (unaudited) (note 1) Â£m Â£m Â£m Fixed assets Intangible assets 219 2,248 252 Tangible assets 15,829 16,173 16,078 Investments 754 1,424 1,221 16,802 19,845 17,551 Current assets Stocks 92 129 111 Debtors 5,473 5,003 5,272 Investments 3,951 5,996 4,581 Cash at bank and in hand 88 231 158 9,604 11,359 10,122 Creditors: amounts falling due within one year Loans and other borrowings 2,326 2,644 2,195 Other creditors 6,484 6,534 7,195 8,810 9,178 9,390 Net current assets 794 2,181 732 Total assets less current liabilities 17,596 22,026 18,283 Creditors: amounts falling due after more than one year Loans and other borrowings 14,630 17,219 16,245 Provisions for liabilities and charges (note 12) 2,507 2,287 2,324 Minority interests 70 73 72 Capital and reserves (note 13) Called up share capital 434 434 434 Reserves (45) 2,013 (792) Total equity shareholders' funds (deficiency) 389 2,447 (358) 17,596 22,026 18,283 NOTES 1 Basis of preparation The unaudited interim results of BT Group, which are not statutory accounts, have been prepared on the basis of the accounting policies as set out in the report and accounts of BT Group plc for the year ended March 31, 2002. Figures for the year ended March 31, 2002 are extracts from the group accounts for that year. The group accounts for the year ended March 31, 2002, on which the auditors issued an unqualified report which did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985, have been delivered to the Registrar of Companies. The activities of mmO2, Japan Telecom, J-Phone Communications, Airtel and Yell were disposed of in the year ended March 31, 2002, and are shown as discontinued operations in the profit and loss account for the comparative periods. The eliminations are intra-group eliminations. 2 Results of businesses The tables below show the results of BT's lines of business. There is extensive trading between many of the business units and profitability is dependent on the transfer price levels. These intra-group trading arrangements are subject to review and have changed in certain instances. Comparative figures have been restated for these changes. 2 Results of businesses continued (a) Operating results Group turnover EBITDA before Group operating exceptional items profit (loss) before goodwill amortisation and exceptional items Â£m Â£m Â£m Third quarter ended December 31, 2002 BT Retail 3,322 425 379 BT Wholesale 2,857 1,014 526 BT Ignite 1,256 61 (90) BT Openworld 75 (4) (8) Other 103 17 (49) Intra-group items (ii) (2,912) - - Total before exceptional items 4,701 1,513 758 Third quarter ended December 31, 2001 (i) BT Retail 3,187 333 286 BT Wholesale 3,073 1,064 590 BT Ignite 1,114 46 (80) BT Openworld 59 (23) (23) Other 97 89 (2) Intra-group items (ii) (2,873) - - Total continuing activities before exceptional items 4,657 1,509 771 Discontinued activities 566 58 (39) Intra-group items (ii) (157) - - Total before exceptional items 5,066 1,567 732 i. The results of the lines of business for the quarter ended December 31, 2001 and the nine months ended December 31, 2001 have been restated to reflect changes to intra-group trading arrangements. ii Includes elimination of intra-group turnover between businesses which is included in the total turnover of the originating business. 2 Results of businesses continued a. Operating results continued Group turnover EBITDA before Group operating exceptional items profit (loss) before goodwill amortisation and exceptional items Â£m Â£m Â£m Nine months ended December 31, 2002 BT Retail 9,785 1,283 1,137 BT Wholesale 8,440 2,849 1,411 BT Ignite 3,769 105 (335) BT Openworld 207 (42) (54) Other 271 99 (102) Intra-group items (ii) (8,523) - - Total before exceptional items 13,949 4,294 2,057 Nine months ended December 31, 2001 (i) BT Retail 9,502 1,009 871 BT Wholesale 9,089 3,015 1,600 BT Ignite 3,260 116 (245) BT Openworld 161 (86) (100) Other 270 263 (5) Intra-group items (ii) (8,570) - - Total continuing activities before exceptional items 13,712 4,317 2,121 Discontinued activities 2,836 234 (191) Intra-group items (ii) (724) - - Total before exceptional items 15,824 4,551 1,930 (i) The results of the lines of business for the quarter ended December 31, 2001 and the nine months ended December 31, 2001 have been restated to reflect changes to intra-group trading arrangements. (ii) Includes elimination of intra-group turnover between businesses which is included in the total turnover of the originating business. 2 Results of businesses continued BT Ignite analysis Third quarter ended December 31 Nine months ended December 31 Better (worse) Before goodwill amortisation 2002 2001 Actual Underlying (i) 2002 2001 and exceptional items Â£m Â£m % % Â£m Â£m Group turnover Solutions 504 454 11 11 1,423 1,298 Syntegra 146 146 - - 431 434 Global Products 479 426 12 11 1,378 1,163 Global Carrier 232 73 218 (23) 731 197 Other and eliminations (105) 15 (194) 168 1,256 1,114 13 (1) 3,769 3,260 European connectivity included 250 252 (1) 2 740 725 above EBITDA Solutions 47 41 130 110 Syntegra 11 10 19 15 Global Products (19) 2 (83) (4) Global Carrier 29 2 105 6 Other (ii) (7) (9) (66) (11) 61 46 33 771 105 116 European connectivity included (1) (41) 98 98 (20) (94) above Group operating profit (loss) Solutions 29 23 76 52 Syntegra 9 7 12 7 Global Products (117) (77) (370) (192) Global Carrier 7 (4) 39 (33) Other (ii) (18) (29) (92) (79) (90) (80) (13) 34 (335) (245) European connectivity included (42) (89) 53 53 (143) (220) above Capital expenditure 102 149 32 46 289 395 Operating free cash flow (41) (103) 60 (184) (279) 77 i. Adjusted for the effect of the Concert unwind, acquisitions and disposals and the transfer of a major account to BT Wholesale. ii. Other is after charging leaver costs of Â£7m in the third quarter (Â£11m last year) and Â£46m (Â£16m last year) in the nine months ended December 31, 2002. BT Ignite's comparative figures for the segmental results have been reclassified to reflect the new internal financial reporting lines that were introduced with effect from March 31, 2002. 2 Results of businesses continued b. Capital expenditure on plant, equipment and motor vehicle additions Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Â£m Â£m Â£m Â£m BT Retail 23 46 69 94 BT Wholesale 430 453 1,174 1,337 BT Ignite 102 149 289 395 BT Openworld 2 - 4 5 Other 56 105 185 287 Total continuing activities 613 753 1,721 2,118 Discontinued activities - 184 - 808 Total 613 937 1,721 2,926 (c) Net operating assets (liabilities) December 31 March 31 2002 2002 Â£m Â£m BT Retail (21) (187) BT Wholesale 12,213 12,163 BT Ignite 1,497 1,486 BT Openworld (22) (28) Other 1,101 900 Total 14,768 14,334 Note: Net operating assets (liabilities) comprise tangible and intangible fixed assets, stocks, debtors less creditors (excluding loans and other borrowings) and provisions for liabilities and charges (excluding deferred tax). The March 31, 2002 comparatives have been restated to reflect changes to the method of allocating central balances to the lines of business. 3 Other operating income In the quarter and nine months ended December 31, 2001 other operating income included income from the provision of administration services to the Concert global venture of Â£32m and Â£102m, respectively. 4 Other operating costs Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Â£m Â£m Â£m Â£m Before goodwill amortisation and exceptional items Net staff costs 843 887 2,738 2,661 Depreciation 754 737 2,234 2,195 Payments to telecommunication operators 973 1,102 2,952 3,207 Other operating costs 1,425 1,251 4,116 3,786 Total continuing activities 3,995 3,977 12,040 11,849 Goodwill amortisation 5 30 16 91 Exceptional items 198 48 198 153 Discontinued activities - 502 - 2,546 Total 4,198 4,557 12,254 14,639 5. Group's share of profits (losses) of associates and joint ventures Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Â£m Â£m Â£m Â£m Share of operating profits (losses) before 47 (82) 162 (125) goodwill amortisation and exceptional items Provision for impairment of Concert - (55) - (861) tangible fixed assets and goodwill, and share of redundancy and unwind costs Impairment of other associates and joint 150 (26) 150 (36) ventures and release (charge) for related costs Amortisation of goodwill - (11) - (38) Share of operating profits (losses) of 197 (174) 312 (1,060) continuing associates and joint ventures Discontinued activities - - - 62 Total share of operating profits (losses) 197 (174) 312 (998) of associates and joint ventures 6 Profit on sale of fixed asset investments and group undertakings The profit in the third quarter ended December 31, 2002 of Â£99m is mainly attributable to the profit on sale of BSkyB shares of Â£61m. Other disposals include our shareholdings in Blu, Mediaset and SmarTone. The profit in the nine months ended December 31, 2002 of Â£165m is mainly attributable to the profit on sale of BSkyB shares of Â£131m. 7 Net interest payable Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Â£m Â£m Â£m Â£m Group 322 546 1,000 1,521 Joint ventures and associates 5 13 21 90 Total interest payable 327 559 1,021 1,611 Interest receivable (42) (74) (141) (290) Net interest payable 285 485 880 1,321 Analysed: Continuing activities, before exceptional 285 318 880 1,116 items Exceptional items - 162 - 162 Discontinued activities - 5 - 43 285 485 880 1,321 8 Exceptional items and goodwill amortisation Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Â£m Â£m Â£m Â£m Attributable to continuing activities: Property rationalisation costs (198) - (198) - Impairment of Concert and AT&T Canada - - - (1,153) investments Impairment of other investments and release 150 (55) 150 (276) (charge) for related costs Costs related to mmO2 demerger - (16) - (98) Concert unwind transaction costs - (58) - (58) Profit (loss) on sale of group undertakings 99 (165) 165 (36) and fixed asset investments Profit on sale of property fixed assets - 1,062 - 1,062 Finance cost of novating interest rate - (162) - (162) swaps Goodwill amortisation (5) (41) (16) (129) Net credit (charge) before tax and minority 46 565 101 (850) interests Attributable to discontinued activities: Profit on sale of group undertakings and - 2 - 4,368 fixed asset investments mmO2 demerger costs - (5) - (11) Goodwill amortisation - (49) - (243) Net credit (charge) before tax and minority - (52) - 4,114 interests Total exceptional items and goodwill 46 513 101 3,264 amortisation 9 Earnings per share The basic earnings per share are calculated by dividing the profit attributable to shareholders by the average number of shares in issue after deducting the company's shares held by employee share ownership trusts. In calculating the diluted earnings per share, share options outstanding and other potential ordinary shares have been taken into account. The average number of shares in the periods were: Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 million of shares million of shares Basic 8,623 8,585 8,614 8,213 Diluted 8,656 8,652 8,653 8,320 10 Reconciliation of operating profit to operating cash flow Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Â£m Â£m Â£m Â£m Group operating profit 555 600 1,843 1,444 Depreciation and amortisation 760 943 2,253 2,988 Changes in working capital (147) 172 (313) (40) Provision, pension movements and other (127) (641) (7) (631) Net cash inflow from operating activities 1,041 1,074 3,776 3,761 11 Net debt a. Analysis At December 31 At March 31 2002 2001 2002 Â£m Â£m Â£m Long-term loans and other borrowings falling due 14,630 17,219 16,245 after more than one year Short-term borrowings and long-term loans and other 2,326 2,644 2,195 borrowings falling due within one year Total debt 16,956 19,863 18,440 Short-term investments (3,951) (5,996) (4,581) Cash at bank (88) (231) (158) Net debt at end of period 12,917 13,636 13,701 11 Net debt continued a Reconciliation of net cash flow to movement in net debt Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Â£m Â£m Â£m Â£m Net debt at beginning of period 13,112 16,529 13,701 27,942 Decrease in net debt resulting from cash (217) (2,842) (845) (13,983) flows Debt assumed by demerger and disposal of - (60) (13) (75) undertakings Currency and other movements 15 10 32 37 Other non-cash movements 7 (1) 42 (285) Net debt at end of period 12,917 13,636 12,917 13,636 12 Provisions for liabilities and charges At December 31 At March 31 2002 2001 2002 Â£m Â£m Â£m Deferred taxation 2,146 2,084 2,140 Pension provisions (a) 33 26 29 Other provisions 328 177 155 2,507 2,287 2,324 (a) The pension prepayment relating to the BT Pension Scheme of Â£560m at December 31, 2002 (Â£228m last year) is included in debtors. 13 Share capital and reserves Share capital Reserves Total Â£m Â£m Â£m Balances at April 1, 2002 434 (792) (358) Profit for the nine months ended December 31, 2002 - 1,035 1,035 Dividend - (194) (194) Goodwill written back on disposals - 7 7 Currency movements (a) - (101) (101) Balances at December 31, 2002 434 (45) 389 a. Includes Â£16m movement on the retranslation of foreign borrowings and other hedging instruments in the nine months ended December 31, 2002. 14 Earnings before interest, taxation, depreciation and amortisation (EBITDA) Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Â£m Â£m Â£m Â£m Group operating profit before exceptional 753 653 2,041 1,608 items Depreciation and intangible amortisation 755 835 2,237 2,621 Goodwill amortisation 5 79 16 322 EBITDA before exceptional items 1,513 1,567 4,294 4,551 Analysed: Continuing activities 1,513 1,509 4,294 4,317 Discontinued activities - 58 - 234 Total before exceptional items 1,513 1,567 4,294 4,551 15 United States Generally Accepted Accounting Principles The results set out above have been prepared in accordance with accounting principles generally accepted in the United Kingdom. The table below sets out the results calculated in accordance with United States Generally Accepted Accounting Principles. Third quarter Nine months ended December 31 ended December 31 2002 2001 2002 2001 Net income (loss) attributable to 422 (563) 1,147 2,142 shareholders (Â£ million) including discontinued activities and exceptional items Earnings (loss) per ADS (Â£) - basic 0.49 (0.66) 1.33 2.61 - diluted 0.49 (0.66) 1.33 2.57 Each American Depositary Share (ADS) represents 10 ordinary shares of BT Group plc. Shareholders' equity, calculated in accordance with United States Generally Accepted Accounting Principles, is Â£3,601m deficit at December 31, 2002 (December 31, 2001 - Â£1,630m deficit, March 31, 2002 - Â£4,247m deficit). Non-financial statistics December 31, 2002 December 31, 2001 BT Group Exchange lines: Business, including wholesale (000s) 9,084 9,031 Residential, including service providers (000s) 20,224 20,063 BT Wholesale Optical fibre in network (km millions) 6.4 5.7 SDH nodes 2,123 2,123 Next generation trunk switches 71 70 ADSL enabled exchanges 1,129 1,010 ADSL lines provided (000s) 555 124 BT Ignite Inter-city fibre network (kms) (a) 57,000 55,000 Large towns/cities with Metropolitan Area Networks 22 n/a Web hosting centres 19 21 Dial access ports (000s) 626 630 (a) Of which over 43,300 route kilometres are held through our wholly owned businesses in Europe and 10,500 route kilometres are held through our interest in Cegetel. BT Openworld Narrowband PAYG (000s) 621 610 Narrowband unmetered (000s) 857 946 Broadband (000s) 244 84 Total customer base (000s) 1,722 1,640 Forward-looking statements - caution advised Certain statements in this results release are forward-looking and are made in reliance on the safe harbour provisions of the US Private Securities Litigation Reform Act of 1995. These statements include, without limitation, those concerning: expectations regarding broadband growth and the benefits of other new wave initiatives; the possible or assumed future results of operations of BT and/or its lines of business; expectations regarding revenue growth, capital expenditure, investment plans, cost reductions, return on capital employed and pension deficit and funding. Although BT Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences between actual results and those implied by the forward-looking statements include, but are not limited to: material adverse changes in economic conditions in the markets served by BT and its lines of business; future regulatory actions and conditions in BT's operating areas, including competition from others in the UK and other international communications markets; selection by BT and its lines of business of the appropriate trading and marketing models for its products and services; fluctuations in foreign currency exchange rates and interest rates; technological innovations, including the cost of developing new products and the need to increase expenditures for improving the quality of service; prolonged adverse weather conditions resulting in a material increase in overtime, staff or other costs; developments in the convergence of technologies; the anticipated benefits and advantages of new technologies, products and services, including broadband and other new wave initiatives, not being realised; the timing of entry and profitability of BT and its lines of business in certain communication markets; significant changes in market shares for BT and its principal products and services; to the extent that BT chooses to sell assets or minority interests in its subsidiaries, prevailing market levels for such sales; general financial market conditions affecting BT's performance; the reintegration of Concert; and the outcome of the actuarial pension funding valuation as at December 31, 2002. BT Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. This information is provided by RNS The company news service from the London Stock Exchange

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