BT (BT.A) and Vodafone (VOD) – Britain’s two telecoms juggernauts – rarely excel at the same time: a trend kept up in the first quarter of both groups 2018 financial years. Where Vodafone seems to have overcome recent concerns about revenue and profit growth, BT is in the midst of a period of heavy spending, which has had a bad impact on the bottom line.
At the latter, numbers were again marred by repercussions from the Italian accounting scandal. The revelations of complex fraud within BT’s Global Services division and its subsequent profit warning has caused shares to slump by almost a fifth since the start of the year. As a result, the group was obliged to pay £225m to two of its largest shareholders, T-Mobile and Orange. The pair were issued warranties protecting them from any major share price decline when they took stakes in BT in 2015. First quarter pre-tax profits dropped 42 per cent to £418m, as a result of the payment.
BT’s underlying numbers were mixed. Weakened demand in the business and wholesale divisions constrained overall revenue growth to just 1 per cent, despite a strong performance in the consumer facing subsidiaries. But it's television content spending that is proving the most pressing problem for the group. Exorbitant sports rights costs sent adjusted cash profits down 2 per cent to £1.8bn, but growth in television customer numbers fell to 8,000 from 59,000 during the same period last year. In contrast, Vodafone seems to have emerged from its period of heavy spending, with its £19bn Project Spring investment programme now complete and the debt-laden Indian subsidiary side-lined.
Where BT and Vodafone converge is in managements' desire to keep expectations in check. At Vodafone, chief executive Vittorio Colao refused to display excitement about smashing revenue expectations, while Gavin Patterson at BT steered clear of broadcasting the likely second half profit growth from EE’s Emergency Services Network contract. Perhaps this muted enthusiasm is due to the fact that both bosses know the biggest spending requirements of 2017 are yet to come. Later this year 4G and 5G spectrum is being put up for auction and Vodafone and BT are very likely to be the biggest bidders. In the past, mobile network expansion has been a big drain on both groups' cash position – something to watch when it comes to judging the investment case of these two income players.
