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Morningstar | BT Reports In-Line 2Q Results; Firm Continues to Increase EBITDA; Shares Undervalued

BT reported in-line fiscal second-quarter results, and we expect to maintain our GBX 360 per local share fair value estimate and narrow moat rating. Despite the local shares being up over 8% on the news, we believe the stock remains significantly undervalued. The firm reported revenue fell 2% year over year versus our full-year projection of a decline of 1.9%.

Once again, the consumer sector, which generates about 45% of net firmwide revenue, is driving revenue growth. We were particularly pleased that segment revenue growth accelerated to 4% after a more muted performance the first quarter. BT continues with its “more for more” strategy, where it raises prices, but offers additional services or faster speeds. This continues to be well received. Its newly launched BT Plus converged product is off to a good start and already has about 500,000 customers. We expect consumer will remain the main revenue growth driver, but it will be unable to offset revenue declines elsewhere this year.

While the other segments showed revenue that was flat to negative year over year, most of them declined less than in the first quarter. This trend provides hope that the other divisions can continue to shrink their losses, such that consumer will be able to lead the entire firm to revenue growth next year.

Importantly, despite revenue declines, most of the other segments cut costs sufficiently to improve their EBITDA. Overall, BT generated an adjusted EBITDA margin of 31.6% versus our full-year projection of 31.4%. With this improved result, management raised its EBITDA guidance to the high end of its range of GBP 7.3 billion to GBP 7.4 billion. We have been near the bottom of the range. However, updating our margin will likely just offset the higher pension deficit, which came in at GBP 4.5 billion, GBP 600 million higher than at the end of the first quarter.

More specifically, the business segment’s revenue declined 3%, primarily due to a 9% drop in fixed-line voice revenue, but its EBITDA increased 1%. The global services division’s revenue fell 6% as it continues to de-emphasize low margin services. This strategy appears to be working as its EBITDA jumped 40%. While Openreach’s revenue was flat, its EBITDA declined 3% as it hires and trains additional engineers to help it speed up its fiber rollout plan. These are costs that will benefit the company long term, so we are happy to see them. Only in the wholesale and ventures division was revenue unimproved from the first quarter as it remained down 8% due to lower voice usage and the movement to newer technologies with lower prices. In general, we expect these trends to continue.