BT layoffs show it is prioritising cash flow over growth

Higher interest rates are weighing on the telecom giants, at least those that are saddled by debt accumulated when capital could be had for a trice – cost cuts are now the order of the day. First, Vodafone (VOD) announced it would cut its workforce by 11,000 over the next few years. Then it was BT’s (BT.A) turn, as it said that it intends to reduce its headcount from 130,000 to around 80,000 by 2030. AI will take up some of the slack, as well as engineers no longer required once the rollout of full-fibre broadband completes.

Stalling revenue growth and growing capital expenditure (capex) costs have been the issue in the past two years. Group revenue fell 1 per cent in FY2023 while the £5.1bn of capex was slightly above expectations. Together, this contributed to normalised free cash flow of £1.3bn, which was at the lower end of the guidance range.

This trend isn’t expected to change soon. Next year, management said capex will stay between £5bn and £5.1bn but normalised free cash flow is forecast to drop to between £1bn and £1.2bn. This would mean a 30 per cent drop in cash flow in the past four years.

The consumer segment may not have been growing, but it has become more profitable. Revenue fell 1 per cent because of the disposal of BT Sport. However, the cost savings from the disposal combined with price rises pushed up cash profit by 16 per cent to £2.6bn while normalised free cash in this segment rose 25 per cent.

The enterprise division is struggling, with revenue falling and costs growing. Revenue here fell 4 per cent due to the loss of large customers and a number of legacy contracts not renewing. At the same time, capex costs continue to rise, driven by digital investment, which meant free cash flow was down 34 per cent.

Openreach’s revenue increased 4 per cent and cash profit was up 8 per cent. But capex costs rose 10 per cent, which meant free cash flow was less than half what it was last year.  Management pointed to a 19 per cent increase in full-fibre customer connections in the year, with the total now standing at 3.1mn, and 10.2mn households and businesses now able to be reached by the faster broadband service.

The business is heading in the wrong direction and the UK market isn’t about to start growing in double digits. Total staff costs are £4.9bn, which is 28 per cent of its £17.5bn operating costs. Halving staff costs alone would treble the normalised free cash flow, but this does feel more desperate than strategic. Yet the investment case is supported by FactSet’s forward free cash flow yield projection, so we hold firm on that basis. Buy.

Last IC View: Buy, 118p, 03 Nov 2022