Outlook
Next Generation AccessAs part of our wider strategy of delivering next generation broadband services nationwide, we recently announced plans to invest £1.5 billion to make fibre-based, super-fast broadband available to as many as 10 million homes in the UK by 2012. A supportive and enduring regulatory environment is essential if this investment is to take place. Therefore we will be discussing with Ofcom the conditions that would be necessary to enable this programme to progress. These include removing current barriers to investment and making sure that anyone who chooses to invest in fibre can earn a fair rate of return for their shareholders.
BT plans to invest around £1.5 billion in total in the programme, of which around £1 billion is incremental to BT’s existing capital expenditure plans. We expect the initial investment in the programme will result in around £100 million of incremental capital expenditure in each of the 2008/9 and 2009/10 financial years, taking the total expected capital expenditure in those years to around £3.2 billion and £3.1 billion, respectively. The remaining £800 million incremental spend will be spread over the following three financial years.
Given the strategic priority of this investment, the board is suspending the current share buyback programme with effect from July 31, 2008. As of this date, we have returned in excess of £1.8 billion of the planned £2.5 billion buyback programme.
21st Century Network
The rollout of our 21st Century Network (21CN) continued during the quarter in line with the deployment approach outlined in the fourth quarter, with a focus on the implementation of new services ahead of replicating legacy services.
We introduced next generation broadband to the wholesale market on April 30, 2008 from 21CN enabled exchanges, supporting an addressable market of some one million UK homes. Availability of the service will rise progressively during the rest of this financial year to reach an addressable market of 10 million homes by April 2009.
BT also launched 21CN Ethernet during the fourth quarter, available from over 100 nodes across the UK. This footprint will rise progressively to over 600 nodes by April 2009, providing BT with the widest national Ethernet footprint in the UK.
The national infrastructure rebuild of metro and core sites in the UK is now complete. For the remainder of this year, the focus will be on the completion of the necessary UK transmission infrastructure.
On July 29, 2008 we announced the acquisition of Ribbit Corporation, a software development company based in the US, for $105 million. The acquisition supports our transformational strategy and will accelerate the evolution of our industry-leading 21CN software development kits by providing an established, easy-to-use network based platform that allows third party developers to create new and innovative voice-enabled applications and services.
Outlook
We expect to see continued strong revenue growth in BT Global Services but EBITDA margins may fall slightly in 2008/9 in part due to currency movements. However, we remain committed to achieving the 15 per cent EBITDA margin target and are creating the foundations this year for future margin expansion. In BT Retail we expect to see solid EBITDA growth this year. In BT Wholesale we expect the trends in the second and third quarters to be similar to those seen in the first quarter, but improving in the last quarter of the year. We expect a stable performance in Openreach for the year.
For the year, we expect the group to continue to deliver revenue growth as we continue our transformation from a fixed-line business into a software-driven communications services company. We remain focused on driving efficiencies across the group and have increased our gross cost savings target from £700 million to some £800 million, which will contribute towards growth in EBITDA before specific items and leaver costs. We expect to continue to increase our earnings per share before specific items and leaver costs, despite the year on year reduction in net finance income associated with the pension scheme.
As a result of our additional investment in a fibre-based next generation access network, we expect capital expenditure to be about £100 million higher than our previous targets in each of the 2008/9 and 2009/10 financial years, taking the total expected capital expenditure in those years to around £3.2 billion and £3.1 billion, respectively. The remaining incremental spend of £800 million will be spread over the following three financial years. As announced on July 15, 2008 with our investment in Next Generation Access, free cash flow in 2008/9 will reflect the £100 million incremental capital expenditure and is expected to out turn at around £1.4 billion.
We remain committed to delivering value for shareholders and expect to increase dividends per share in 2008/9.
