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Openreach reports 26% fibre take-up in latest BT Group results
Thursday 27 October 2016 10:45:08 by Andrew Ferguson

The Ofcom Digital Market Review has not lead to any changes yet, so the financials of Openreach are still part of the BT Group where in second quarter to end of September 2016 Openreach was the largest generator of free cash flow in the group.

The GEA-FTTC and GEA-FTTP products are growing with an extra 300,000 premises passed during the last quarter by Openreach (around 1% of the UK) and the net additions for fibre customers was 440,000 connections, and once combined with the existing connections gives a take-up rate of 26%. Interestingly while one would expect profits to be rising with such large increases in actual connections, profit dipped by £20m to £297m, due to the negative impact of regulatory price reductions amounting to around £60m. Cap-ex was by by £9m to £357m compared to the same quarter last year.

Capital expenditure was £357m, up £9m or 3%. This was after gross grant funding of £34m (Q2 2015/16: £87m) directly related to our activity on the Broadband Delivery UK (BDUK) programme build in the quarter. This was offset by the deferral of £21m of the total grant funding (Q2 15/16: £26m). We continue to expect gross capital expenditure in 2016/17 to be higher than in the previous year."

Extract from results on Openreach Capital Expenditure

The base case for take-up used in the gain share calculations is remaining at 33%, and means a total of £292m has been deferred. A quick word on the 500,000 ultrafast connections delivered by April 2017 mentioned in the results, this does include the existing GEA-FTTP footprint, which is growing in cabinet sized chunks in Wales and Herefordshire, but we are increasingly finding in-fill delivery in North Yorkshire to address lines where a VDSL2 cabinet gave no speed uplift above 10 Mbps due to distance from the cabinet.

BT Consumer (or as many still refer to them BT Retail) had a 36% increase in profits to £200m reflecting the increased ARPU which is attributed to the higher take-up of fibre broadband, BT Sport and BT Mobile revenues. The consumer arm grew by 76,000 broadband connections thus making the largest retailer of broadband in the UK even bigger and accounted for 216,000 fibre based product additions (49% of Openreach total). The call centres for customer calls continue to move back to the UK with the aim of 90% of calls being answered in the UK by end of March 2017 and an extra 1,000 UK based customer service agents. There results include a warning that these extra staff will 'impact costs in the second half of the year', and while no-one enjoys the price rises that have been seen in line rental, costs of improved support and other things like the improved voice fault SLA (reduced by a day) have to be paid somewhere.

Obviously the countdown to an absolute final decision by Ofcom on the future of Openreach in the BT Group is getting ever closer to zero and the BT Group remains firm in holding to the position that its proposals can deliver the benefits Ofcom wants without a messy divorce.

"On 4 October 2016, we and other stakeholders submitted responses to Ofcom's proposals for strengthening Openreach’s strategic and operational independence. We remain of the view that our own proposals for significant governance change provide every benefit that Ofcom is seeking while avoiding extensive, disproportionate costs. We will continue to engage with Ofcom over the coming months.

The current charge controls set by Ofcom for the fixed access markets will expire on 31 March 2017. Ofcom is currently undertaking a review of these markets, but does not expect this to be complete by that date. In order to provide certainty to our customers and the wider industry, on 4 August 2016 we provided Ofcom with a commitment to maintain a cap on the relevant price baskets of CPI-CPI until 31 December 2017, or the conclusion of Ofcom's review if earlier."

BT Group on Ofcom Digital Market Review

While we know the Leave/Remain EU vote earlier in 2016 was a very different matter and no matter which way you voted the mess now is disappointing. We sincerely hope that no matter what Ofcom decides with the Digital Market Review that the path ahead has been explored much than is the case with Brexit, where it appears no plans for how to handle a leave vote were even explored and promises were worth less than the posters they were printed on. Or put bluntly, Ofcom needs to ensure that if Openreach remains in the BT Group that investment and service levels are stepped up a gear or alternatively that if Openreach is split that the independent group will have sufficient bodies willing to invest billions in the long term to deliver the FTTP rich roll-out that those saying broadband in the UK is totally broken needs stop sweating the copper and deliver pure fibre to all in as short a time frame as possible.


Posted by TheEulerID 3 months ago
It should be no surprise that OR profits are flat or even slightly declining. By that I mean real profits and not EBITDA, which is wholly misleading on a capital-intensive business.

Extra Capex inevitably means incurring increased financing, depreciation and (sometimes) operational costs. OR's business is heavily regulated, and the scope for revenue increase is very limited.
Posted by TheEulerID 3 months ago
nb. the idea that there are large numbers of investors willing to pump many billions into a 100% fibre coverage is dubious, to put it mildly. Those investors will seek a return, and with OR as a heavily regulated business, barred from entering downstream markets, where will the revenue come from? Will customers pay significant increases in rental costs to finance this? Wouldn't OR just lose massive market share to VM?

In some other countries (USA, Spain etc.) incumbents had much lighter regulation on NGAs.
Posted by ValueforMoney 3 months ago
Good to see the Capital Deferral for rural climbing to £292m. This is now more than the clawback and is beginning to reflect some of the capital owed being added.
Posted by ValueforMoney 3 months ago
@EulerID When you say capital-intensive business, it is a business where its own labour and development is intensely capitalised. The actual cash outlays are a smaller proportion of the total.

The regulated business is very profitable. The cost recovery on copper is based on replacement cost and BT is not replacing that much.
Posted by Somerset 3 months ago
@VFM - Cotwalton quote ready?

Actual cash paid to contractors who do most of the work.
Posted by TheEulerID 3 months ago

So, somehow, you've come up with the idea that capitalised staff costs don't involve cash outlay? These people don't work for free as far as I'm aware. There are wages, NI, pension contributions plus all the other costs related to costs.

If those costs were put straight into the current account as you seem to wish it would simply depress the EBITDA by that amount (albeit it would balance out as, eventually, depreciation would eventually be lower).

You can't have it both ways.
Posted by TheEulerID 3 months ago

Additionally, you ought to familiarise yourself with auditing rules. Companies which hide, as you would wish, the employment costs of those engaged on capital projects as operational costs would be in real trouble. Also, explain an accounting regime whereby when work on a capital project performed by contractors is capitalised yet if done by internal staff it's considered as current account? That's simply madness.

nb. the money mentioned is not "beyond" clawback.
Posted by TheEulerID 3 months ago

Also, as far as the copper network is concerned, if you bothered to familiarise with the principles Ofcom used, it's based on "efficient" operational costs (including depreciation) plus a regulated return. That's based on what Ofcom deems the copper network to be worth and their estimate of the cost of money to BT on the, not unreasonable idea, that if investors aren't allowed a return, they'll cease to invest.

Note that any reduction in copper capes leads automatically to reduced wholesale prices over time (as we've seen net of inflation).
Posted by jumpmum 3 months ago
The vast majority of the FTTC/FTTP capacity provision is done be contractors, only the final connection ( paid by set-up fees) is done by BT (even then many are contractors).

All that contractual manpower spend is capital and leaves the business. Your ignorance of simple 'how is it done' leaves doubt about all your other theories.
Posted by jumpmum 3 months ago
The EuleriD
I too fail to see how any investor would want to pump billions into a firm that makes less profit the more it spends. This suggests that the latest investment is actually loss making (at present) and justifies the BDUK subsidy. Along with the added risk of 'Fixed access market reviews' that have only ever led to price decreases would make this a toxic investment in my view.
Posted by andrew (Favicon staff member) 3 months ago
With 6.7m GEA connections and picking mid 40/10 product you get revenue £147m (plus ~£20m activation fees) in last quarter, so yes it looks very like cap-ex is still exceeding the revenue that the fibre products generate.
Posted by TheEulerID 3 months ago

In the growth phases of capital intensive products, that's the absolute norm. The issue is whether a return can be made over the lifetime of the product before it is outmoded. Rumours are BT planned VDSL2 on a 12 year payback (15 on BDUK), albeit on conservative take-up assumptions.

The lifetime can be extended (maybe) with and take-up will be greater, but political pressure to push for FTTH might imperil that payback period.
Posted by TheEulerID 3 months ago
It would be also interesting to know what payback period the LLU operators worked on for their exchange equipment, but I'm sure that they won't tell us. If fibre and/or hybrid becomes the norm, they may have a lot of stranded assets and write-offs (and surely BTW must be hit by that too with their increasingly redundant ADSL2 kit).
Posted by andrew (Favicon staff member) 3 months ago
Fully aware its the norm, and just throwing it out there to highlight that FTTC is not a massive money spinner yet. There will be some cabinets that are, but overall it does not look that way yet.
Posted by ValueforMoney 3 months ago
@jumpmum &Co. You seem to ignore Ofcom DCR take on the excess returns on regulated assets which is driving Ofcom current review.
The comment on Capitalised BT Labour is the subsequent impact on cash flow, and the nature of depreciation of that capital.
The Capital Deferrals for BDUK paint a different picture on the costs and returns on FTTC. The concept of an efficient operator has not really been tested. It is an abstract term, useful in establishing a right to recover costs. You need to have faith in customers ability to fill that 10Tbps core.
Posted by ValueforMoney 3 months ago
@Jumpmum & CO .. fill and pay for more data. I definitely think my TV licence money needs to be split and now pay for capacity in some form.
Posted by ValueforMoney 3 months ago
@Somerset -Fibre extensions costs. Not complete but assuming per 1km - Tree trimming, pole replacement, fibre attachment, - £2,500-£5,000 a km plus £250 per customer for drop wire and splitter. Will refine with assumptions on amount of tree trimming and poles. This includes PMO and road closures.
Posted by WWWombat 3 months ago
This quarter shows a distinct slowdown in the rate of passing homes - only 300k in the quarter. That's well below the peak of 2m in a quarter, and probably the lowest since the early days of the pilots in 2009.

However, the takeup figures are good. The 440k is the third-highest month so far (about 50k below the best).

Taken together, they help this to be the first month that the percentage takeup has jumped by 2% - from 24% of homes passed to 26%. Over a quarter now...
Posted by Kebabselector 3 months ago
Maybe rather than investing in the speed crown they could start to look at areas they've missed. Large area's of Birmingham, Bristol, Manchester, London are stuck with ADSL despite the exchange fibre enabled.
Posted by andrew (Favicon staff member) 3 months ago
@Kebabselector - while the PR focus is on rural UK areas, we are seeing commercial cabinets going live in various urban areas, and also the effects of roll-outs from other operators like Virgin Media. Even some self funded cabinets are popping up too.
Posted by Kebabselector 3 months ago
I did look at self funding, but 18k is a lot to ask for an area that already can get Virgin. There's around 30% of the postcodes served by our fibre exchange that they've skipped. Mainly because the cabinets are the smaller type. Double cabs got upgraded, singles didn't.

I get that they are uneconomically viable currency - but there's a fairly good change customers would switch back to an Openreach connected Fibre if it was there. Competition is good.
Posted by Kebabselector 3 months ago
**uneconomically viable currently **
Posted by fastman 3 months ago
kebak when was the last time you looked -- some different take up on community funded cabs now
gap is based on payback of 15 years -- so how many of your community were interested in cofounding of it just you
Posted by fastman 3 months ago
and how many did you ask in your community ?
Posted by Kebabselector 3 months ago
In our cul-de-sac (of 12 properties) there isn't much interest because Virgin is available. I've asked our local councillor about putting something in the local news letter, but nothing has come of it. I've asked a local Openreach PR person on twitter for info - still waiting on her.

Posted by fastman 3 months ago
bkebab you cab must be greater than 12 properties so use the wholesale checker via addresses to see who else is connected to your cab -- community fibre partnership works when Community does some ground work and galvanises a community via social media / campaign
Posted by Kebabselector 3 months ago
There are around 200 properties connected to the cab - hence why I was trying the get the local Councillor to help out.

Looks like it's down to me to get it done
Posted by fastman 2 months ago
gap for that cab would now be significantly less -- suggest you re ask ?
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