Underlying revenue excluding transit decreased by 3.2% reflecting the tough conditions in Europe and the financial services sector, the impact of regulatory price reductions and lower revenue from calls and lines. Revenue was down 6% at £4,484m with transit revenue down by £67m (including mobile termination rate reductions of £60m), a £56m negative impact from foreign exchange movements, largely due to the weakening of the Euro, and a £13m impact from disposals.
Underlying operating costs were down 8%. Total operating costs before depreciation and amortisation and specific items decreased by £317m, or 9%, to £3,109m.
Net labour costs decreased by 2% to £1,190m. Payments to telecommunications operators were down 16%, reflecting lower mobile termination rates and reduced transit and wholesale call volumes. We saw further reductions across our other cost categories reflecting the lower revenue and the impact of efficiency improvements.
Adjusted EBITDA increased by 2% to £1,463m. Excluding a £7m negative impact from foreign exchange movements and a £3m impact from disposals, underlying EBITDA increased by 3%.
Depreciation and amortisation of £723m was down 2%, in line with the previous quarter. Capital expenditure was £622m, up 7%, principally due to increased investment in fibre broadband.
Ian Livingston, Chief Executive, commenting on the results, said:
“We have delivered another quarter of profit growth and the 11th consecutive quarter of double-digit earnings per share growth, although our quarterly cash flow was impacted by the timing of working capital movements. There were good performances in BT Retail, BT Wholesale and Openreach while BT Global Services was impacted by the tough conditions in Europe and the financial services sector.
“Our financial performance allows us to keep investing for the future. Our engineers are rolling out fibre at pace bringing fibre broadband to over 2m more homes and businesses in the quarter and it’s now available to over 11m premises. Our investment plans are creating around 2,000 jobs in 2012 by recruiting engineers to support our fibre plans and opening four new UK call centres. We continue to make good progress with our investments in the faster growing economies.”
Our group outlook for 2013 remains unchanged with an improving trend in underlying revenue excluding transit, growth in adjusted EBITDA and normalised free cash flow broadly level compared with last year. Due to the timing of contract milestones highlighted last year, we expect the decline in underlying revenue excluding transit to be larger in the second quarter than in the first, with the improvement in revenue trend coming in the second half of the year. We expect normalised free cash flow in the second quarter to be lower than last year due to working capital movements before returning to growth in the second half of the year. We continue to expect that BT Global Services will grow its EBITDA in 2013 but that its cash flow will be lower due to working capital movements.
In 2014 we expect an improving trend in underlying revenue excluding transit. As announced on 13 June 2012, our investment in Premier League football broadcast rights is expected to reduce adjusted EBITDA by around £100m and normalised free cash flow by around £200m in 2014. This means in 2014 we now expect adjusted EBITDA to be broadly level with 2013 and normalised free cash flow to be above £2.2bn. As previously stated, we expect normalised free cash flow to be around £2.5bn in 2015.