Interim Results

BT Group PLC 09 November 2006 November 9, 2006 SECOND QUARTER AND HALF YEAR RESULTS TO SEPTEMBER 30, 2006 SECOND QUARTER HIGHLIGHTS â€¢ Revenue of Â£4,941 million, up 4 per cent â€¢ New wave revenue of Â£1,736 million, up 21 per cent, representing 35 per cent of total revenue compared with 30 per cent last year â€¢ EBITDA before specific items(1) and leaver costs of Â£1,418 million, up 2 per cent â€¢ Profit before taxation, specific items(1) and leaver costs of Â£665 million, up 12 per cent â€¢ Earnings per share before specific items(1) and leaver costs of 6.0 pence, up 13 per cent â€¢ Continued strong broadband net additions(2) of 626,000 of which BT Retail's share was 25 per cent HALF YEAR HIGHLIGHTS â€¢ Revenue of Â£9,805 million, up 3 per cent â€¢ New wave revenue of Â£3,377 million, up 20 per cent â€¢ EBITDA before specific items(1) of Â£2,747 million, up 2 per cent â€¢ Profit before taxation and specific items(1) of Â£1,247 million, up 17 per cent â€¢ Earnings per share before specific items(1) of 11.3 pence, up 19 per cent â€¢ Interim dividend of 5.1 pence per share, up 19 per cent â€¢ Broadband end users(2) of 9.3 million at September 30, 2006 of which BT Retail now has 3 million customers The income statement, cash flow statement and balance sheet from which this information is extracted are set out on pages 16 to 22. (1) Before specific items which are material one off or unusual items as defined in note 4 on page 26. (2) DSL and LLU connections. Chairman's statement Sir Christopher Bland, Chairman, commenting on the half year results said: "These strong half year results show sustained momentum across the business with revenues up 3 per cent and earnings per share before specific items up 19 per cent. "I am pleased to report that we will be paying an interim dividend of 5.1 pence, up 19 per cent on last year, showing our continued commitment to improving shareholder returns and our confidence for the future." Chief Executive's statement Ben Verwaayen, Chief Executive, commenting on the second quarter results, said: "These second quarter results show another strong team performance with every part of the business playing its part. We have announced today that BT Retail has passed 3 million broadband connections in a fast growing market. We have now reached 1 million LLU connections. 21CN is going live in the Cardiff area this month. The business continues to win major transformational contracts, including PepsiCo and Vodafone. "Revenue has increased for eleven consecutive quarters and earnings per share(1) were up 13 per cent, the eighteenth consecutive quarter of growth. EBITDA(1) continues to grow and was up 2.4 per cent. "These results underpin our confidence in our ability to grow our revenue, EBITDA, earnings per share and dividends this year." (1)Before specific items and leaver costs. RESULTS FOR THE SECOND QUARTER AND HALF YEAR TO SEPTEMBER 30, 2006 Second quarter Half year ___________________________ ___________________________ Better Better 2006 2005 (worse) 2006 2005 (worse) Â£m Â£m % Â£m Â£m % Revenue 4,941 4,767 4 9,805 9,498 3 EBITDA - before specific items and leaver costs 1,418 1,385 2 2,804 2,748 2 - before specific items 1,385 1,348 3 2,747 2,705 2 Profit before taxation - before specific items and leaver costs 665 596 12 1,304 1,113 17 - before specific items 632 559 13 1,247 1,070 17 - after specific items 629 489 29 1,244 988 26 Earnings per share - before specific items and leaver costs 6.0p 5.3p 13 11.8p 9.8p 20 - before specific items 5.7p 5.0p 14 11.3p 9.5p 19 - after specific items 5.7p 4.4p 30 11.3p 8.8p 28 Capital expenditure 812 694 (17) 1,527 1,410 (8) Free cash flow 338 503 (33) 321 377 (15) Interim dividend 5.1p 4.3p 19 Net debt 8,079 8,133 1 The commentary focuses on the results before specific items and leaver costs. This is consistent with the way that financial performance is measured by management and we believe allows a meaningful analysis to be made of the trading results of the group. Specific items are defined in note 4 on page 26. The income statement, cash flow statement and balance sheet are provided on pages 16 to 22. A reconciliation of EBITDA before specific items to group operating profit is provided on page 31. A definition and reconciliation of free cash flow and net debt are provided on pages 28 to 30. GROUP RESULTS Revenue was 4 per cent higher at Â£4,941 million in the quarter with continued strong growth in new wave revenue more than offsetting the decline in traditional revenue. EBITDA before specific items and leaver costs grew by 2.4 per cent. This is the third quarter of growth and builds on the 1.7 per cent growth reported last quarter. Earnings per share before specific items and leaver costs increased by 13 per cent to 6.0 pence, the eighteenth consecutive quarter of year on year growth. The strong growth in new wave revenue continued and at Â£1,736 million was 21 per cent higher than last year. New wave revenue accounted for 35 per cent of the group's revenue compared to 30 per cent in the second quarter of last year. New wave revenue is mainly generated from networked IT services, broadband and mobility. Networked IT services revenue grew by 10 per cent to Â£1,001 million, broadband revenue increased by 39 per cent to Â£486 million and mobility revenue increased by 4 per cent to Â£72 million. Networked IT services contract wins were Â£0.7 billion in the second quarter, with Â£4.0 billion achieved over the last twelve months. BT had 9.3 million wholesale broadband connections at September 30, 2006, including 838,000 local loop unbundled lines, an increase of 2.8 million connections year on year and 626,000 connections in the quarter. Over 46 per cent of all UK homes now subscribe to broadband services, comprising both DSL and cable services (Source: Informa, Telecoms Market, September 2006). Revenue Revenue from the group's traditional businesses declined by 4 per cent continuing recent trends. This reflects regulatory intervention, competition, price reductions and also technological changes that we are using to drive customers from traditional services to new wave services. Major corporate (UK and international) revenue showed growth of 5 per cent, with 11 per cent growth in new wave revenue more than offsetting the decline in traditional services. Migration from traditional voice only services to networked IT services continued with new wave revenue representing 60 per cent of all major corporate revenue. Revenue from smaller and medium sized (SME) UK businesses grew by 2 per cent year on year. New wave revenue grew by 23 per cent driven by continued growth in broadband and other new wave services. In the declining UK calls market, BT has gained market share in the SME sector through innovative pricing plans and a focus on propositions that bring together IT, broadband and communications to allow business people to concentrate on running their business. Consumer revenue in the second quarter was 6 per cent lower, primarily due to wholesale line rental (WLR) substitution. Growth in new wave revenue of 44 per cent continues to reduce our dependence on traditional revenue which has declined by 12 per cent with the strategic shift towards new wave products and services. New wave revenue now represents 17 per cent of the total consumer revenue. The 12 month rolling average revenue per consumer household (net of mobile termination charges) of Â£254 increased by Â£1 compared to last quarter, the third successive quarter of growth. Improvements in the proportion of customers upgrading from the basic broadband package and more new customers subscribing for higher value packages has more than offset the lower call revenues. BT Total Broadband reflects our strategy to drive value into the broadband market and we reached 3 million BT Retail broadband connections in October. Contracted revenues increased by 1 percentage point to 69 per cent compared to last quarter, 3 percentage points higher than last year. Wholesale (UK and Global Carrier) revenue increased by 14 per cent driven by WLR and LLU. UK Wholesale new wave revenue increased by 41 per cent to Â£339 million, mainly driven by broadband. Operating results Group operating costs before specific items increased by 4 per cent year on year to Â£4,311 million. Staff costs before leaver costs increased by Â£64 million to Â£1,274 million due mainly to the additional staff needed to support networked IT services contracts, increased levels of activity in the network and 21CN activities (including capital work) as well as cost inflation. Leaver costs were Â£33 million in the quarter (Â£37 million last year). Payments to other telecommunication operators increased by Â£45 million to Â£1,034 million. Other operating costs before specific items of Â£1,442 million increased by Â£47 million mainly due to increased costs of sales from growth in networked IT and other new wave services which were partly offset by cost savings from our efficiency programmes. Depreciation and amortisation increased by 2 per cent year on year to Â£703 million. Group operating profit before specific items and leaver costs increased by 3 per cent to Â£715 million. Operating profit margin before specific items remained flat year on year at 14 per cent. Earnings Net finance costs were Â£55 million, an improvement of Â£45 million against last year. This includes net finance income associated with the group's defined benefit pension scheme which was Â£105 million in the second quarter, Â£41 million higher than last year. Repayment of maturing debt last year, fair value movements on derivatives that are economic hedges but are not fully effective hedges under the IAS 39 definitions and lower average net debt have also contributed to the reduction in net finance costs. This reduction was offset by a Â£31 million net gain last year on the early redemption of the US dollar 2008 LG Telecom convertible bond. Profit before taxation, specific items and leaver costs of Â£665 million increased by 12 per cent. The effective tax rate on the profit before specific items was 24.5 per cent (24.9 per cent last year) reflecting the continued focus on tax efficiency within the group. Earnings per share before specific items and leaver costs increased by 13 per cent to 6.0 pence. Specific items Specific items are defined in note 4 on page 26. There was a net charge before taxation of Â£3 million in the quarter (Â£70 million charge last year). Costs of Â£23 million relating to the further rationalisation of the group's office portfolio were incurred in the quarter (Â£nil last year). This was partly offset by a profit of Â£20 million arising from the group's disposal of 6 per cent of its equity interest in Tech Mahindra Limited, an associated undertaking, reducing the group's holding to 36 per cent. In the prior year, a provision of Â£70 million was recognised relating to the incremental and directly attributable costs in connection with creating the Openreach line of business. Earnings per share after specific items were 5.7 pence in the quarter (4.4 pence last year). Cash flow and net debt Net cash inflows from operating activities in the second quarter amounted to Â£1,191 million compared to Â£1,263 million last year, largely due to higher working capital outflows. Free cash flow was a net inflow of Â£338 million in the second quarter compared to Â£503 million last year mainly reflecting the higher working capital outflows and increased capital expenditure. The year on year deterioration reflects the timing of receipts and payments and is expected to reverse in the second half of the year. The share buyback programme continued with the repurchase of 48 million shares for Â£102 million during the quarter. Net debt was Â£8,079 million at September 30, 2006, Â£54 million below the level at September 30, 2005. Free cash flow and net debt are defined and reconciled in notes 8 and 9 on pages 28 to 30. Pensions The IAS 19 net pension obligation at September 30, 2006 was a deficit of Â£2.0 billion, net of tax, being Â£0.6 billion lower than the level at September 30, 2005. The BT Pension Scheme had assets of Â£35.9 billion at September 30, 2006. The triennial funding valuation as at December 31, 2005 is currently being performed and we expect this exercise to conclude by December 31, 2006. 21st Century Network BT's 21st Century Network programme made significant progress during the quarter. The construction of 10 per cent of the UK's core communications infrastructure is in place and fully operational. Site planning and preparation has been completed in all core and metro nodes in South Wales, and at a further 100 sites across the country. Nine new fibre rings, totalling 2,100 kilometres, have been installed in South Wales and 1,500 man years of IT systems development work has been carried out. All of this preparatory work is required to support the migration of the first end user customers to 21CN. This is scheduled to take place near Cardiff at the end of November. Readiness testing of the network, systems, services and customer premises equipment (CPE) is well advanced. A test facility in Swansea, where other communications providers can test their services, was opened on October 25, 2006. Live voice calls have already been carried over the new 21CN network, built using 21CN hardware and software, in South Wales. BT and representatives from across industry have agreed a single end user communications programme to help consumers and single site small and medium enterprises understand better what next generation networks are and to provide a single source of detail and further information. The programme, which launched in October, operates under a single independent brand - "Switched-On". Shareholder distributions An interim dividend of 5.1 pence per share, an increase of 19 per cent on last year, will be paid on February 12, 2007 to shareholders on the register on December 29, 2006. The ex dividend date is December 27, 2006. During the first half year 69 million shares were repurchased for Â£167 million under the group's share buyback programme. Prospects Our performance underpins our confidence that we will continue to grow revenue, EBITDA, earnings per share and dividends this financial year. Revenue growth will continue to be fuelled by new wave services; the EBITDA improvement will be driven by the continued growth in BT Retail's profitability and an acceleration through the year of the EBITDA growth in BT Global Services. We are confident in our ability to improve shareholder returns and accelerate the strategic transformation of the business. _____________________________________________________________________________ The half year report, which contains the independent review report of the auditors, will be published in The Times on November 10, 2006. The third quarter results are expected to be announced on February 8, 2007. LINE OF BUSINESS RESULTS Openreach, a new line of business created in accordance with the regulatory framework agreed with Ofcom (the Undertakings), was launched on January 21, 2006. It is responsible for ensuring that all communications providers have transparent and equivalent access to the BT local network, and comprises a work force of approximately 30,000 people. Its primary products are wholesale line rental (WLR) and local loop unbundling (LLU). In order to assist readers in understanding the year on year performance, we have restated the comparative line of business results. These restatements also reflect the impact of the new internal trading arrangements that have been implemented due to the creation of Openreach. There is no change to the overall group reported results. BT Global Services Half year Second quarter ended September 30 ended September 30 2006 2005* Better (worse) 2006 2005* Â£m Â£m Â£m % Â£m Â£m Revenue 2,157 2,102 55 3 4,312 4,169 Gross profit 638 612 26 4 1,266 1,224 SG&A before leaver costs 409 392 (17) (4) 809 783 _____ _____ _____ _____ EBITDA before leaver costs 229 220 9 4 457 441 Leaver costs 5 22 17 77 22 24 _____ _____ _____ _____ EBITDA 224 198 26 13 435 417 Depreciation and amortisation 157 158 1 1 305 310 _____ _____ _____ _____ Operating profit 67 40 27 68 130 107 ===== ===== ===== ===== Capital expenditure 176 171 (5) (3) 325 313 ===== ===== ===== ===== *Restated to reflect changes in intra-group trading arrangements. BT Global Services revenue grew in the second quarter by 3 per cent to Â£2,157 million. New wave and non UK revenue was Â£1,661 million, an increase of 6 per cent year on year. UK traditional revenues decreased 8 per cent year on year, with continuing falls experienced in voice related and dial IP revenues. MPLS revenue rose by 33 per cent to Â£134 million, with the growth split evenly between the UK and overseas. Our IP network infrastructure currently extends to 128 countries. Order intake remained firm with networked IT services contract orders of Â£0.7 billion, which included a 7 year agreement with PepsiCo to provide and manage an integrated portfolio of services for their international division. Total orders in the quarter amounted to Â£1.6 billion, Â£0.1 billion higher than last year, taking the value of total orders achieved over the last twelve months to Â£8.1 billion. Over 40 per cent of the total order intake was generated outside the UK. During the quarter 223 new customers were signed, bringing the total for the year to 453. EBITDA before leaver costs increased year on year by Â£9 million to Â£229 million, growth of 4 per cent year on year. Gross profit improved by Â£26 million to Â£638 million, an increase of 4 per cent, while gross profit margin improved by 0.5 percentage points to 30 per cent. SG&A costs rose 4 per cent reflecting pay inflation, increased IP networking costs and also transformation costs incurred in creating a single global services organisation. Depreciation charges fell by Â£1 million compared with the previous year to Â£157 million while leaver costs were Â£17 million lower at Â£5 million. Overall, this contributed to operating profit of Â£67 million, 68 per cent higher than last year. BT continues to make good progress on its NHS National Programme for Information Technology contracts. For N3, the broadband network that underpins the programme, we have installed more than 15,500 connections and are on schedule to complete the 18,000 rollout by March 2007. BT now has more than 287,000 registered users on Spine, one of the world's largest transactional database and messaging services. In London, where we are the Local Service Provider, BT has delivered capability to 40 per cent of trusts. BT Retail Half year Second quarter ended September 30 ended September 30 2006 2005* Better (worse) 2006 2005* Â£m Â£m Â£m % Â£m Â£m ______________________________________ ___________________ Revenue 2,077 2,136 (59) (3) 4,145 4,256 _____ _____ _____ _____ Gross profit 592 555 37 7 1,152 1,091 SG&A before leaver costs 357 364 7 2 735 742 _____ _____ _____ _____ EBITDA before leaver costs 235 191 44 23 417 349 Leaver costs 7 2 (5) n/m 9 5 _____ _____ _____ _____ EBITDA 228 189 39 21 408 344 Depreciation and amortisation 39 39 - - 79 73 _____ _____ _____ _____ Operating profit 189 150 39 26 329 271 ===== ===== ===== ===== Capital expenditure 40 33 (7) (21) 80 68 ===== ===== ===== ===== *Restated to reflect changes in intra-group trading arrangements. BT Retail's EBITDA before leaver costs was 23 per cent higher than last year, continuing our recent trend of growth. Gross profit increased by 7 percentage points reflecting the improved consumer broadband margins, the impact of cost efficiency programmes, lower input costs and an improved product mix. This more than compensated for the 3 per cent decline in revenues. SG&A costs before leaver costs fell by 2 per cent driven by the increased effectiveness in serving our customers. Operating profit improved by 26 per cent to Â£189 million. Traditional revenue declined by 9 per cent whilst new wave revenue grew by 34 per cent, driven primarily by broadband and other new wave services. New wave revenue was 21 per cent of total revenue in the quarter, up from 15 per cent last year. During the quarter, following the relaxation of the regulatory environment, we introduced the biggest ever cuts to our inclusive call packages, maximising value to our customers. In the consumer market, BT Together Options 2 and 3 have reduced prices by almost one third and we have seen a significant increase in the proportion of customers moving up to higher value packages. In the SME market, BT Business Plan is now available with mobile and BT Assurance Plus bringing SMEs a high level of care, attention and quick response and includes calls answered 24/7, access to a qualified team of experts and immediate diagnosis of faults at no extra cost. In line with our strategy to simplify the customer experience and eliminate the hassle for SMEs, in October we launched Business Manager and Business One Plan. With Business Manager, an SME can choose from a range of options to get the level of service that suits their business and Business One Plan combines landline, mobile and broadband services into one package, giving customers a wide range of benefits by delivering cost and time savings. Broadband revenue grew by 28 per cent to Â£229 million with BT Retail connections at September 30, 2006 growing to 2,980,000 an increase of 5 per cent in the quarter, and in October we exceeded 3 million connections. BT Retail's share of broadband net additions (DSL and LLU) was 25 per cent in the quarter and BT Retail's share of the installed base was 32 per cent at September 30, 2006. BT Total Broadband, launched towards the end of the first quarter, reflects our strategy to drive value into the Broadband market. The proportion of customers opting for higher value Options 2 and 3 packages increased by 29 per cent in the quarter and almost 60 per cent of orders are for these higher value packages. These customers benefit from increased security, wireless hubs and inclusive IP calls. The BT Home Hub brings together the BT Total Broadband experience and at September 30, 2006 over 250,000 Hubs had been installed, providing the platform for a range of new services. Our strategy of adding value in the broadband arena continues with the announcement made in September of our partnership with US media entrepreneurs Podshow to launch BT Podshow. This enables UK internet users and independent media producers to create and share their content with an audience of millions in the UK and around the world. In October we launched BT Digital Vault, an innovative new online storage service which enables BT Total Broadband customers to securely store online, back-up, share and remotely access their digital content such as photos, music and video via broadband. Enjoying the broadband revolution is now easier than ever with the launch in August of the competitively priced BT Home IT Visit and BT Total Broadband installation services. Specially trained engineers can set up customers' broadband, a wireless home network or help resolve IT problems including PC viruses. This follows the pilot in March of BT Home IT Advisor, offering remote helpdesk support for a range of home IT issues, which was being purchased by one in ten new broadband customers, via our call centres, at the end of the quarter. The advanced VoIP service with high-definition sound is reflected in the increased net additions and installed base. At the end of the quarter the installed base was about 400,000 customers reflecting strong growth of Broadband Talk customers. BT Vision remains on track for launch this autumn. This service will offer a compelling line-up of entertainment programming as well as interactive services, all available on-demand and with no compulsory subscription. To date a wide range of content deals have been announced with partners including NBC Universal, Paramount, Dream Works, BBC Worldwide, MTV, History Channel, Nickelodeon, Sony BMG and many others. BT Wholesale Half year Second quarter ended September 30 ended September 30 2006 2005* Better (worse) 2006 2005* Â£m Â£m Â£m % Â£m Â£m ______________________________________ ___________________ External revenue 1,030 964 66 7 2,027 1,932 Internal revenue 855 849 6 1 1,705 1,695 _____ _____ _____ _____ Revenue 1,885 1,813 72 4 3,732 3,627 Variable cost of sales 963 901 (62) (7) 1,883 1,832 _____ _____ _____ _____ Gross variable profit 922 912 10 1 1,849 1,795 Network and SG&A before leaver costs 438 442 4 1 887 857 _____ _____ _____ _____ EBITDA before leaver costs 484 470 14 3 962 938 Leaver costs 15 6 (9) n/m 16 6 _____ _____ _____ _____ EBITDA 469 464 5 1 946 932 Depreciation and amortisation 291 274 (17) (6) 576 545 _____ _____ _____ _____ Operating profit 178 190 (12) (6) 370 387 ===== ===== ===== ===== Capital expenditure 266 198 (68) (34) 466 428 ===== ===== ===== ===== *Restated to reflect changes in intra-group trading arrangements. BT Wholesale external revenue in the second quarter of Â£1,030 million increased by 7 per cent reflecting strong growth in broadband, transit and other traditional revenue. External revenue from new wave services increased to Â£268 million and now accounts for 26 per cent of external revenue. Internal revenue increased marginally to Â£855 million due to strong growth in internal broadband revenue more than offsetting the impact of lower call volumes and lower regulatory prices being reflected in internal charges. Gross variable profit increased Â£10 million although gross variable profit margin decreased by 1 percentage point to 49 per cent due to a changing sales mix. Despite greater 21CN expenditure, network and SG&A costs have decreased as a result of savings through network efficiencies. These efficiencies have yielded headcount reductions of over 1,100 employees since the prior year and these reductions are partly reflected in leaver costs of Â£15 million in the quarter. Overall, EBITDA before leaver costs has increased 3 per cent to Â£484 million. Higher depreciation due to the shortening of the useful economic lives of legacy transmission assets to be replaced by 21CN and higher leaver costs has resulted in a 6 per cent decline in operating profit. Capital expenditure in the quarter was 34 per cent higher than last year due to increased investment in 21CN whilst BT Wholesale has been successful in managing its legacy infrastructure on a lower level of capital investment. In September, Vodafone UK announced it had signed Heads of Terms with BT Wholesale to provide its UK customers with Vodafone branded, consumer fixed-line broadband services. BT Wholesale and Vodafone UK have been making excellent progress and details of the service will be announced shortly. In September, BT Wholesale also launched the UK's first broadcast mobile TV service, BT Movio, with Virgin Mobile as the initial customer. BT Movio's service line-up includes live versions of TV channels from the BBC, ITV and Channel 4, as well as all the UK's DAB Digital Radio stations, a 7 day programme guide and 'red button' interactivity. BT Movio also announced an agreement with ZTE, a leading global provider of telecommunications equipment and network solutions, to develop the world's first 3G mobile handset compatible with the BT Movio service. When available, the new handset will enable 3G operators to offer the Movio service. Openreach Half year Second quarter ended September 30 ended September 30 2006 2005* Better (worse) 2006 2005* Â£m Â£m Â£m % Â£m Â£m ______________________________________ ___________________ External revenue 162 60 102 170 292 113 Revenue from other BT lines of business 1,117 1,211 (94) (8) 2,246 2,452 _____ _____ _____ _____ Revenue 1,279 1,271 8 1 2,538 2,565 Operating costs before leaver costs 819 789 (30) (4) 1,606 1,576 _____ _____ _____ _____ EBITDA before leaver costs 460 482 (22) (5) 932 989 Leaver costs - - - - 2 - _____ _____ _____ _____ EBITDA 460 482 (22) (5) 930 989 Depreciation and amortisation 178 188 10 5 353 374 _____ _____ _____ _____ Operating profit 282 294 (12) (4) 577 615 ===== ===== ===== ===== Capital expenditure 279 246 (33) (13) 550 503 ===== ===== ===== ===== *Restated to reflect changes in intra-group trading arrangements. Openreach's revenue in the second quarter was Â£1,279 million, a 1 per cent increase from the prior year driven by market volume growth. External revenue has increased by Â£102 million predominantly due to WLR and LLU volume growth which has more than offset the price reductions. Revenues from other BT lines of business decreased by 8 per cent to Â£1,117 million reflecting the volume shift to external revenues and also the regulatory LLU and WLR prices reductions in prior periods. At September 30, 2006 Openreach had over 838,000 external LLU lines and 4.0 million external WLR lines. These have grown significantly from June 30, 2006 with net additions being 258,000 LLU connections and 446,000 WLR connections in the quarter. During the quarter, Openreach launched a number of products to enhance the fully unbundled Metallic Path Facilities (MPF), the most significant being the Mass Migration product which enables Openreach to project manage multiple migrations of a Communications Provider's customer base on to MPF. On September 30, 2006, a key milestone in the Undertakings was achieved as Openreach successfully started to provide Wholesale Extension Services (WES) and Backhaul Extension Services (BES) on an equivalent basis. At the same time, a number of new Ethernet products were launched. These include Wholesale End to End Ethernet Services (WEES) which are high speed, permanently connected, point-to-point data circuits that are available 24 hours a day, 365 days per year. Operating costs increased by 4 per cent to Â£819 million due to increased volumes, inflationary pressures and focus on service levels. However these have been partially offset by cost savings from efficiency programmes across the business. Overall this has resulted in a Â£22 million decrease in EBITDA before leaver costs. The decrease in depreciation and amortisation costs of Â£10 million is due to the lengthening of the useful economic life of copper, consistent with Ofcom's review, which is partially offset by higher systems depreciation. Capital expenditure in the quarter was 13 per cent higher than last year reflecting increased investment in new systems to ensure compliance with the Undertakings and increased network infrastructure spend to meet LLU demand. GROUP INCOME STATEMENT for the three months ended September 30, 2006 ______________________________________________________________________________ Before specific Specific items items (note 4) Total (unaudited) Notes Â£m Â£m Â£m ______________________________________________________________________________ Revenue 2 4,941 - 4,941 Other operating income 52 - 52 Operating costs 3 (4,311) (23) (4,334) _______ _______ _______ Operating profit 2 682 (23) 659 Finance costs (651) - (651) Finance income 596 - 596 _______ _______ _______ Net finance costs 5 (55) - (55) Share of post tax profits of associates and joint ventures 5 - 5 Profit on disposal of associate - 20 20 _______ _______ _______ Profit before taxation 632 (3) 629 Taxation (155) 1 (154) _______ _______ _______ Profit for the period attributable to equity shareholders 477 (2) 475 ======= ======= ======= Earnings per share 7 - basic 5.7p 5.7p - diluted 5.6p 5.6p ======= ======= GROUP INCOME STATEMENT for the three months ended September 30, 2005 ______________________________________________________________________________ Before specific Specific items items (note 4) Total (unaudited) Notes Â£m Â£m Â£m ______________________________________________________________________________ Revenue 2 4,767 - 4,767 Other operating income 53 - 53 Operating costs 3 (4,164) (70) (4,234) _______ _______ _______ Operating profit 2 656 (70) 586 Finance costs (676) - (676) Finance income 576 - 576 _______ _______ _______ Net finance costs 5 (100) - (100) Share of post tax profits of associates and joint ventures 3 - 3 _______ _______ _______ Profit before taxation 559 (70) 489 Taxation (139) 21 (118) _______ _______ _______ Profit for the period attributable to equity shareholders 420 (49) 371 ======= ======= ======= Earnings per share 7 - basic 5.0p 4.4p - diluted 4.9p 4.3p ======= ======= GROUP INCOME STATEMENT for the six months ended September 30, 2006 ____________________________________________________________________________ Before specific Specific items items (note 4) Total (unaudited) Notes Â£m Â£m Â£m ____________________________________________________________________________ Revenue 2 9,805 - 9,805 Other operating income 102 - 102 Operating costs 3 (8,566) (23) (8,589) _______ _______ _______ Operating profit 2 1,341 (23) 1,318 Finance costs (1,293) - (1,293) Finance income 1,192 - 1,192 _______ _______ _______ Net finance costs 5 (101) - (101) Share of post tax profits of associates and joint ventures 7 - 7 Profit on disposal of associate - 20 20 _______ _______ _______ Profit before taxation 1,247 (3) 1,244 Taxation (306) 1 (305) _______ _______ _______ Profit for the period attributable to equity shareholders 941 (2) 939 ======= ======= ======= Earnings per share 7 - basic 11.3p 11.3p - diluted 11.1p 11.1p ======= ======= GROUP INCOME STATEMENT for the six months ended September 30, 2005 ____________________________________________________________________________ Before specific Specific items items (note 4) Total (unaudited) Notes Â£m Â£m Â£m ____________________________________________________________________________ Revenue 2 9,498 - 9,498 Other operating income 95 - 95 Operating costs 3 (8,289) (82) (8,371) _______ _______ _______ Operating profit 2 1,304 (82) 1,222 Finance costs (1,392) - (1,392) Finance income 1,150 - 1,150 _______ _______ _______ Net finance costs 5 (242) - (242) Share of post tax profits of associates and joint ventures 8 - 8 _______ _______ _______ Profit before taxation 1,070 (82) 988 Taxation (268) 25 (243) _______ _______ _______ Profit for the period attributable to equity shareholders 802 (57) 745 ======= ======= ======= Earnings per share 7 - basic 9.5p 8.8p - diluted 9.3p 8.7p ======= ======= ======= GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE for the six months ended September 30, 2006 _____________________________________________________________________________ Half year ended September 30 2006 2005 (unaudited) Â£m Â£m _____________________________________________________________________________ Profit for the period 939 745 ===== ===== Actuarial (losses) gains on defined benefit pension schemes (369) 1,090 Net gains on revaluation of available-for-sale investments - 1 Net gains (losses) on cash flow hedges 61 (5) Exchange differences on translation of foreign operations (72) (4) Tax on items taken directly to equity 82 (327) _____ _____ Net (losses) gains recognised directly in equity (298) 755 _____ _____ Total recognised income for the period attributable to equity shareholders 641 1,500 ===== ===== GROUP CASH FLOW STATEMENT for the three months and six months ended September 30, 2006 ______________________________________________________________________________ Second quarter Half year ended September 30 ended September 30 2006 2005 2006 2005 (unaudited) Â£m Â£m Â£m Â£m ______________________________________________________________________________ Cash flow from operating activities Cash generated from operations (note 8 (a)) 1,281 1,374 2,373 2,346 Income taxes paid (90) (111) (180) (242) ______ ______ ______ ______ Net cash inflow from operating activities 1,191 1,263 2,193 2,104 Cash flow from investing activities Net sale (acquisition) of subsidiaries, associates and joint ventures 13 - (25) (88) Net purchase of property, plant, equipment and software (794) (671) (1,596) (1,357) Interest received 22 59 37 96 Dividends received from associates and joint ventures 2 - 5 - Net sale (purchase) of short term investments and non current asset investments 249 732 (480) 582 ______ ______ ______ ______ Net cash (used) received in investing activities (508) 120 (2,059) (767) Cash flows from financing activities Repurchase of ordinary share capital (52) (88) (114) (109) Net repayments of borrowings (140) (10) (162) (24) Net movement on commercial paper (77) - 227 - Interest paid (83) (147) (318) (465) Equity dividends paid (625) (540) (630) (540) ______ ______ ______ ______ Net cash used in financing activities (977) (785) (997) (1,138) Effects of exchange rate changes - (6) - 23 ______ ______ ______ ______ Net (decrease) increase in cash and cash equivalents (294) 592 (863) 222 ====== ====== ====== ====== Cash and cash equivalents at beginning of period 1,215 940 1,784 1,310 Cash and cash equivalents, net of bank overdrafts, at end of period (note 8 (c)) 921 1,532 921 1,532 ====== ====== ====== ====== Free cash flow (note 8 (b)) 338 503 321 377 ====== ====== ====== ====== Increase in net debt from cash flows (note 9 (b)) 326 125 448 360 ====== ====== ====== ====== GROUP BALANCE SHEET at September 30, 2006 _____________________________________________________________________________ September 30 September 30 March 31 2006 2005 2006 (unaudited) Â£m Â£m Â£m _____________________________________________________________________________ Non current assets Goodwill and other intangible assets 1,861 1,385 1,641 Property, plant and equipment 15,350 15,386 15,489 Other non current assets 100 101 84 Deferred tax assets 853 1,105 764 _______ _______ _______ 18,164 17,977 17,978 _______ _______ _______ Current assets Inventories 131 126 124 Trade and other receivables 4,684 4,060 4,199 Other financial assets 778 3,217 434 Cash and cash equivalents 993 1,727 1,965 _______ _______ _______ 6,586 9,130 6,722 _______ _______ _______ Total assets 24,750 27,107 24,700 Current liabilities Loans and other borrowings 2,729 4,667 1,940 Trade and other payables 6,343 5,552 6,540 Other current liabilities 981 1,377 1,000 _______ _______ _______ 10,053 11,596 9,480 _______ _______ _______ Total assets less current liabilities 14,697 15,511 15,220 ======= ======= ======= Non current liabilities Loans and other borrowings 6,948 8,171 7,995 Deferred tax liabilities 1,547 1,453 1,505 Retirement benefit obligations 2,842 3,682 2,547 Other non current liabilities 1,819 1,449 1,566 _______ _______ _______ 13,156 14,755 13,613 _______ _______ _______ Capital and reserves Called up share capital 432 432 432 Reserves 1,062 275 1,123 _______ _______ _______ Total equity shareholders' funds 1,494 707 1,555 Minority interest 47 49 52 _______ _______ _______ Total equity 1,541 756 1,607 _______ _______ _______ 14,697 15,511 15,220 ======= ======= ======= NOTES (unaudited) 1 Basis of preparation and accounting policies These primary statements and selected notes comprise the unaudited interim consolidated financial results of BT Group plc for the quarters and half years ended September 30, 2006 and 2005, together with the audited results for the year ended March 31, 2006. These interim financial results do not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985. Statutory accounts for the year ended March 31, 2006 were approved by the Board of Directors on May 17, 2006, published on May 31, 2006 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain any statement under Section 237 of the Companies Act 1985. The financial information set out in these interim financial results has been prepared in accordance with the Listing Rules of the Financial Services Authority. The accounting policies which have been applied to prepare the interim financial results are the same as those used for the preparation of the consolidated financial statements for the year ended March 31, 2006. In order to assist readers in understanding the year on year performance, we have restated the comparative line of business results to reflect the creation of Openreach which is now reported as a separate line of business. These restatements also reflect the impact of the new internal trading arrangements that have been implemented. There is no change to the overall group reported results. 2 Results of businesses (a) Operating results External Internal Group EBITDA Group operating revenue revenue revenue (ii) profit (loss) (ii) Â£m Â£m Â£m Â£m Â£m Second quarter ended September 30, 2006 BT Global Services 1,763 394 2,157 224 67 BT Retail 1,982 95 2,077 228 189 BT Wholesale 1,030 855 1,885 469 178 Openreach 162 1,117 1,279 460 282 Other 4 - 4 4 (34) Intra-group items (i) - (2,461) (2,461) - - ______ ______ ______ ______ ______ Total 4,941 - 4,941 1,385 682 ====== ====== ====== ====== ====== Second quarter ended September 30, 2005 (restated - note 1) BT Global Services 1,703 399 2,102 198 40 BT Retail 2,036 100 2,136 189 150 BT Wholesale 964 849 1,813 464 190 Openreach 60 1,211 1,271 482 294 Other 4 - 4 15 (18) Intra-group items (i) - (2,559) (2,559) - - ______ ______ ______ ______ ______ Total 4,767 - 4,767 1,348 656 ====== ====== ====== ====== ====== Half year ended September 30, 2006 BT Global Services 3,517 795 4,312 435 130 BT Retail 3,959 186 4,145 408 329 BT Wholesale 2,027 1,705 3,732 946 370 Openreach 292 2,246 2,538 930 577 Other 10 - 10 28 (65) Intra-group items (i) - (4,932) (4,932) - - ______ ______ ______ ______ ______ Total 9,805 - 9,805 2,747 1,341 ====== ====== ====== ====== ====== Half year ended September 30, 2005 (restated - see note 1) BT Global Services 3,384 785 4,169 417 107 BT Retail 4,059 197 4,256 344 271 BT Wholesale 1,932 1,695 3,627 932 387 Openreach 113 2,452 2,565 989 615 Other 10 - 10 23 (76) Intra-group items (i) - (5,129) (5,129) - - ______ ______ ______ ______ ______ Total 9,498 - 9,498 2,705 1,304 ====== ====== ====== ====== ====== (i) Elimination of intra-group revenue between businesses, which is included in the total revenue of the originating business. (ii) Before specific items. There is extensive trading between BT's lines of business and the line of business profitability is dependent on the transfer price levels. For regulated products and services those transfer prices are market based whilst for other products and services the transfer prices are agreed between the relevant lines of business. These intra-group trading arrangements are subject to periodic review. 2 Results of businesses continued (b) Revenue analysis Second quarter ended Half year ended September 30 September 30 __________________________________ _________________________ 2006 2005 Better (worse) 2006 2005 Â£m Â£m Â£m % Â£m Â£m Traditional 3,205 3,328 (123) (4) 6,428 6,674 New wave 1,736 1,439 297 21 3,377 2,824 ______ ______ ______ ______ 4,941 4,767 174 4 9,805 9,498 ====== ====== ====== ====== Major corporate 1,703 1,629 74 5 3,402 3,226 Business 593 583 10 2 1,181 1,169 Consumer 1,257 1,336 (79) (6) 2,509 2,660 Wholesale/ Carrier 1,384 1,215 169 14 2,703 2,433 Other 4 4 - - 10 10 ______ ______ ______ ______ 4,941 4,767 174 4 9,805 9,498 ====== ====== ====== ====== (c) New wave revenue analysis Second quarter ended Half year ended September 30 September 30 __________________________________ _________________________ 2006 2005 Better (worse) 2006 2005 Â£m Â£m Â£m % Â£m Â£m Networked IT 1,001 914 87 10 1,982 1,813 services Broadband 486 350 136 39 940 664 Mobility 72 69 3 4 143 135 Other 177 106 71 67 312 212 ______ ______ ______ ______ 1,736 1,439 297 21 3,377 2,824 ====== ====== ====== ====== (d) Capital expenditure on property, plant, equipment, software and motor vehicles Second quarter ended Half year ended September 30 September 30 __________________________________ _________________________ 2006 2005 Better (worse) 2006 2005 Â£m Â£m Â£m % Â£m Â£m BT Global Services 176 171 (5) (3) 325 313 BT Retail 40 33 (7) (21) 80 68 BT Wholesale 266 198 (68) (34) 466 428 Openreach 279 246 (33) (13) 550 503 Other (including fleet vehicles and property) 51 46 (5) (11) 106 98 ______ ______ ______ ______ 812 694 (118) (17) 1,527 1,410 ====== ====== ====== ====== Transmission equipment 297 347 50 14 594 720 Exchange equipment 39 18 (21) n/m 53 36 Other network equipment 229 148 (81) (55) 389 310 Computers and office equipment 60 54 (6) (11) 134 110 Software 164 101 (63) (62) 298 166 Motor vehicles and other 13 14 1 7 27 45 Land and buildings 10 12 2 17 32 23 ______ ______ ______ ______ 812 694 (118) (17) 1,527 1,410 ====== ====== ====== ====== 3 (a) Operating costs Second quarter ended Half year ended September 30 September 30 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Staff costs before leaver costs 1,274 1,210 2,530 2,366 Leaver costs 33 37 57 43 ______ ______ ______ ______ Staff costs 1,307 1,247 2,587 2,409 Own work capitalised(1) (175) (159) (346) (320) ______ ______ ______ ______ Net staff costs 1,132 1,088 2,241 2,089 Depreciation and amortisation 703 692 1,406 1,401 Payments to telecommunication operators 1,034 989 2,040 1,998 Other operating costs 1,442 1,395 2,879 2,801 ______ ______ ______ ______ Total before specific items 4,311 4,164 8,566 8,289 Specific items (note 4) 23 70 23 82 ______ ______ ______ ______ Total 4,334 4,234 8,589 8,371 ====== ====== ====== ====== (1) Own work capitalised has been restated to exclude third party costs. This has no effect on the total costs. (b) Leaver costs Second quarter ended Half year ended September 30 September 30 2006 2005 2006 2005 Â£m Â£m Â£m Â£m BT Global Services 5 22 22 24 BT Retail 7 2 9 5 BT Wholesale 15 6 16 6 Openreach - - 2 - Other 6 7 8 8 ______ ______ ______ ______ Total 33 37 57 43 ______ ______ ______ ______ 4 Specific items BT separately identifies and discloses any significant one off or unusual items (termed "specific items"). This is consistent with the way that financial performance is measured by management and we believe assists in providing a meaningful analysis of the trading results of the group. Specific items may not be comparable to similarly titled measures used by other companies. Specific items were previously referred to as exceptional items under UK GAAP. Second quarter ended Half year ended September 30 September 30 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Operating costs Creation of Openreach - 70 - 70 Property rationalisation costs 23 - 23 12 ______ ______ ______ ______ Specific operating costs 23 70 23 82 Profit on partial disposal of associate (20) - (20) - ______ ______ ______ ______ Total specific items 3 70 3 82 ====== ====== ====== ====== 5 Net finance costs Second quarter ended Half year ended September 30 September 30 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Finance costs1 before pension interest 182 222 357 484 Interest on pension scheme liabilities 469 454 936 908 ______ ______ ______ ______ Finance costs 651 676 1,293 1,392 ______ ______ ______ ______ Finance income before pension income (22) (58) (46) (115) Expected return on pension scheme assets (574) (518) (1,146) (1,035) ______ ______ ______ ______ Finance income (596) (576) (1,192) (1,150) ______ ______ ______ ______ Net finance costs 55 100 101 242 ====== ====== ====== ====== Net finance costs before pensions 160 164 311 369 Interest associated with pensions (105) (64) (210) (127) ______ ______ ______ ______ Net finance costs 55 100 101 242 ====== ====== ====== ====== 1Finance costs in the second quarter and half year ended September 30, 2006 include a Â£4 million and Â£1 million net charge, respectively, arising from the re-measurement of financial instruments which under IAS 39 are not in hedging relationships on a fair value basis. Finance costs in the second quarter and half year ended September 30, 2005 included a Â£19 million and Â£7 million net credit respectively, arising from the re-measurement of financial instruments which were not in hedging relationships on a fair value basis. A component of these net credits was the fair value movement in, and realised gain arising from, the early redemption of the US dollar 2008 LG Telecom convertible bond amounting to Â£31 million for the second quarter and Â£27 million for the half year. 6 Dividends Half year Half year ended September 30 ended September 30 2006 2005 2006 2005 Pence per share Â£m Â£m Amounts recognised as distributions to equity holders in the period 7.6 6.5 633 551 ==== ==== ==== ==== The directors have declared an interim dividend of 5.1 pence per share (4.3 pence last year), payable on February 12, 2007 to the shareholders on the register at the close of business on December 29, 2006. This interim dividend, amounting to Â£423 million, has not been included as a liability as at September 30, 2006 (Â£361 million as at September 30, 2005). The final dividend for the year ended March 31, 2006 of 7.6 pence per share was approved at the Annual General Meeting on July 12, 2006. 7 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 and treasury shares. 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: Second quarter Half year ended September 30 ended September 30 2006 2005 2006 2005 millions of shares millions of shares Basic 8,308 8,456 8,311 8,463 Diluted 8,483 8,589 8,466 8,579 8 (a) Reconciliation of profit before tax to cash generated from operations Second quarter Half year ended September 30 ended September 30 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Profit before tax 629 489 1,244 988 Depreciation and amortisation 703 692 1,406 1,401 Associates and joint ventures (5) (3) (7) (8) Employee share scheme costs 27 25 47 37 Net finance costs 55 100 101 242 Profit on disposal of property assets and non current asset investments (20) - (20) - Changes in working capital (196) (8) (553) (461) Provisions movements, pensions and other 88 79 155 147 ______ ______ ______ ______ Cash generated from operations 1,281 1,374 2,373 2,346 ====== ====== ====== ====== (b) Free cash flow Second quarter Half year ended September 30 ended September 30 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Cash generated from operations 1,281 1,374 2,373 2,346 Income taxes paid (90) (111) (180) (242) ______ ______ ______ ______ Net cash inflow from operating activities 1,191 1,263 2,193 2,104 Included in cash flows from investing activities Net purchase of property, plant, equipment and software (794) (671) (1,596) (1,357) Net sale of non current asset investments - (1) - (1) Dividends received from associates 2 - 5 - Interest received 22 59 37 96 Included in cash flows from financing activities Interest paid (83) (147) (318) (465) ______ ______ ______ ______ Free cash flow 338 503 321 377 ====== ====== ====== ====== 8 (b) Free cash flow continued Free cash flow is defined as the net increase in cash and cash equivalents less cash flows from financing activities (except interest paid), less the acquisition or disposal of group undertakings and less the net sale of short term investments. It is not a measure recognised under IFRS but is a key indicator used by management in order to assess operational performance. (c) Cash and cash equivalents At September 30 At March 31 2006 2005 2006 Â£m Â£m Â£m Cash at bank and in hand 397 475 511 Short term deposits 596 1,252 1,454 _____ _____ _____ Cash and cash equivalents 993 1,727 1,965 Bank overdrafts (72) (195) (181) _____ _____ _____ 921 1,532 1,784 ===== ===== ===== 9 Net debt Net debt at September 30, 2006 was Â£8,079 million (September 30, 2005 - Â£8,133 million, March 31, 2006 - Â£7,534 million). Net debt consists of loans and other borrowings less current asset investments and cash and cash equivalents. Loans and other borrowings are measured at the net proceeds raised, adjusted to amortise any discount over the term of the debt. For the purpose of this analysis current asset investments, cash and cash equivalents are measured at the lower of cost and net realisable value. Currency denominated balances within net debt are translated to sterling at swapped rates where hedged. This definition of net debt measures balances at the future cash flows due to arise on maturity of financial instruments and removes the balance sheet adjustments made for the re-measurement of hedged risks under fair value hedges and the use of the amortised cost method as required by IAS 39. In addition, the gross balances are adjusted to take account of netting arrangements amounting to Â£67 million. Net debt is a non GAAP measure since it is not defined in IFRS but it is a key indicator used by management in order to assess operational performance. 9 (a) Analysis At September 30 At March 31 2006 2005 2006 Â£m Â£m Â£m Loans and other borrowings 9,677 12,838 9,935 Cash and cash equivalents (993) (1,727) (1,965) Other current financial assets(1) (768) (2,996) (365) ______ ______ ______ 7,916 8,115 7,605 Adjustments: To retranslate currency denominated balances at swapped rates where hedged 437 399 121 To recognise borrowings at net proceeds and unamortised discount (274) (383) (192) Other - 2 - ______ ______ ______ Net debt 8,079 8,133 7,534 ====== ====== ====== After allocating the element of the adjustments which impact loans and other borrowings, gross debt at September 30, 2006 was Â£9,760 million (September 30, 2005 - Â£12,586 million, March 31, 2006 - Â£9,686 million). (1) Excluding derivative financial instruments of Â£10 million, Â£221 million and Â£69 million at September 30, 2006 and 2005 and March 31, 2006, respectively. (b) Reconciliation of net cash flow to movement in net debt Second quarter ended Half year September 30 ended September 30 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Net debt at beginning of period 7,727 8,121 7,534 7,893 Increase in net debt resulting from cash flows 326 125 448 360 Net debt assumed or issued on acquisitions - - 9 1 Currency movements 36 (10) 99 (24) Other non-cash movements (10) (103) (11) (97) ______ ______ ______ ______ Net debt at end of period 8,079 8,133 8,079 8,133 ====== ====== ====== ====== 10 Statement of changes in equity Year ended Half year ended September 30 March 31 2006 2005 2006 Â£m Â£m Â£m Shareholders' funds 1,555 45 45 Minority interest 52 50 50 ______ ______ ______ 1,607 95 95 Effect of adoption of IAS 32 and IAS 39 - (209) (209) ______ ______ ______ Fund (deficit) at beginning of period 1,607 (114) (114) Total recognised income for the period 641 1,500 2,906 Share based payment 27 26 65 Issues of shares 12 4 4 Net purchase of treasury shares (108) (108) (344) Dividends on ordinary shares (633) (551) (912) Minority interest (5) (1) 2 ______ ______ ______ Net changes in equity for the financial period (66) 870 1,721 Equity at end of period Shareholders' funds 1,494 707 1,555 Minority interest 47 49 52 ______ ______ ______ 1,541 756 1,607 ====== ====== ====== 11 Earnings before interest, taxation, depreciation and amortisation (EBITDA) Second quarter ended Half year September 30 ended September 30 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Operating profit 659 586 1,318 1,222 Specific items (note 4) 23 70 23 82 Depreciation and amortisation (note 3) 703 692 1,406 1,401 ______ ______ ______ ______ EBITDA before specific items 1,385 1,348 2,747 2,705 ====== ====== ====== ====== Earnings before interest, taxation, depreciation and amortisation (EBITDA) before specific items is not a measure recognised under IFRS, but it is a key indicator used by management in order to assess operational performance. 12 United States Generally Accepted Accounting Principles (US GAAP) The results set out above have been prepared in accordance with the basis of preparation as set out in note 1. The table below sets out the results calculated in accordance with US GAAP. Second quarter ended Half year September 30 ended September 30 2006 2005 2006 2005 Net income attributable to 509 191 923 583 shareholders (Â£m) Earnings per ADS (Â£) - basic 0.61 0.23 1.11 0.69 - diluted 0.60 0.22 1.09 0.68 Each American Depositary Share (ADS) represents 10 ordinary shares of BT Group plc. Shareholders' equity, calculated in accordance with US GAAP, is a Â£52 million deficit at September 30, 2006 (September 30, 2005 - Â£615 million deficit, March 31, 2006 - Â£158 million deficit). 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: continued growth in revenue, EBITDA, earnings per share and dividends; growth in new wave revenue, mainly from networked IT services, broadband and mobility growth; implementation of BT's 21st Century Network; the introduction of next generation services: and improving shareholder returns. Although BT 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; future regulatory actions and conditions in BT's operating areas, including competition from others; 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, networks and solutions 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; and general financial market conditions affecting BT's performance. BT 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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