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Hello, ladies and gentlemen, and welcome to BT's Results Conference Call for the Third Quarter Ended 31st December 2017. My name is Adrian, and I'm your coordinator for today. [Operator Instructions] I'd like to advise all parties, this conference is being recorded today.I'll now hand over to you, Mark.
Thanks, Adrian, and welcome, everyone.My name is Mark Lidiard from the Investor Relations team. Presenting on today's call is Gavin Patterson, Group Chief Executive of BT. Also on the call for Q&A are Simon Lowth, Group CFO; and the CEOs of our customer-facing units.Before we start, I'd like to draw your attention to the usual forward-looking statements on Slide 2 and our latest annual report for examples of the factors that could cause actual results to differ from any forward-looking statements we may make. Both the slides and the annual report can be found on our website.With that, I'll now hand over to Gavin.
Good morning, and thank you for joining us today at our Q3 results presentation. I'd like to start by giving you some key headlines for the quarter on Slide 4.Overall, the results are broadly in line with our expectations and we're delivering on our strategy and have reiterated guidance for the year. We continue to improve our customer experience metrics across the group, which is critical to our success.We're making significant investments in U.K. infrastructure and, just yesterday, increased our FTTP plans to 3 million premises by 2020. And subject to achieving a fair economic return on investment, our ambition is to pass 10 million premises by the mid-2020s.Alongside this, we've now launched retail products that will deliver ultrafast speeds at competitive prices. We announced our TV deal with Sky, which will deliver more premium sports and entertainment options to our customers and make our sports content available to Sky customers.The triennial valuation of the BT Pension Scheme is proceeding and constructive discussions continue with the BTPS Trustee. We still expect to complete the valuation in the first half of the 2018 calendar year. We are appealing the decision against our case to change the indexation away from RPI to Section C members of our final salary pension scheme. And following the consultation with employees over the last 2 months, we are continuing discussions to see how we might change the pension scheme going forward. Our overall aim remains to deliver fair, flexible and affordable pensions to all of our employees.While we won't go into detail in today's presentation, our cost transformation programs remain firmly on track. We are delivering against our strategy. With a robust set of actions to take advantage of market opportunities and respond to challenges, we are improving the performance of BT for all our stakeholders.Moving to the Q3 results on Slide 5. Revenue was down 2% on last year to GBP 6 billion as another strong quarter from EE was offset by declines in our enterprise businesses, partly due to legacy product declines and decisions to move away from lower-margin businesses.Adjusted EBITDA was down 2% to GBP 1.8 billion. This was due to the revenue decline, together with increased customer investment, particularly in handsets in EE, higher business rates and pension costs, partly offset by cost savings.CapEx of GBP 878 million was up 3%, with the increase of GBP 26 million primarily due to investment in our fixed and mobile networks. We do expect a modest step up in CapEx in Q4 given our ongoing network investment.Normalized free cash flow was strong at GBP 702 million mainly due to working capital phasing.Based on the year-to-date results, we are confirming there is no change to our outlook for the year, so underlying revenue broadly flat on last year, EBITDA between GBP 7.5 billion and GBP 7.6 billion and normalized free cash flow of GBP 2.7 billion to GBP 2.9 billion.Moving to Slide 6. Our investments in customer experience continue to have a positive impact across the group. Group Net Promoter Score continues to improve, up for the sixth quarter in a row, and our Right First Time metric was up 3.6% versus our '16/'17 baseline.In Openreach, copper network faults were down 4.1% compared with last year as a result of our proactive maintenance plans and we are ahead on all 60 copper service level metrics. On-time repair performance remains over 80%, with improved winter planning allowing us to deal more effectively with some challenging weather conditions.We're seeing fewer service calls into our contact centers, down 8% on last year, and our customers continue to increase their use of digital channels such as My BT, My EE and online chat. Those who do call are rating their experience better than last year and call waiting times are down. In BT Consumer, for example, wait times are under a minute, down nearly 2 minutes on last year. And we continue to invest in our multichannel distribution strategy, including more than 600 EE stores.Finally, we're starting to see some external validation of our progress with customer experience. Ofcom complaints data released in January showed 31% fewer complaints for BT Consumer broadband compared to last year and the best ever results on the EE. In addition, the Institute of Customer Service ranked BT within the top 20 most improved organizations across all sectors for customer satisfaction over the last year. We know we still have a lot to do, but our customer experience is moving in the right direction.The regulatory agenda continues to be busy as you can see on Slide 7. We remain engaged with Ofcom on the issue of earning an acceptable return on our investments and we expect to see a statement from Ofcom on the WLA process during the current quarter.On the BCMR, we are pleased with the CAT's judgment that found in our favor. We were therefore surprised by Ofcom's decision to use their emergency powers to introduce a dark fiber product. Given the importance of business connectivity to the U.K. economy, it's important that Ofcom conducts a fair, robust and evidence-based review. We continue to be of the view that a dark fiber remedy is not required and Openreach is launching a new alternate product, OSA Filter Connect, which we believe can meet the demand for very high bandwidth data services.In Mobile, we were successful in our Court of Appeal challenge to Ofcom's decision that tripled our annual license fees for our 18-megahertz spectrum, a challenge which was supported by the other mobile network operators. The outcome reflects our view that, in revising the annual license fees, Ofcom should consider the impact of excessive fees on network investment.We felt that Three's legal challenge to the upcoming spectrum auction obliged us to launch our own legal challenge. The case was heard in December and neither we nor Three were successful so Ofcom's decision on the spectrum cap stands. Three has now appealed that ruling to the Court of Appeal. We are continuing to believe -- we continue to believe that spectrum caps are not justified for the auction of 2.3 and 3.4-gigahertz spectrum, but we're now looking ahead to bidding in the auction and will continue to invest to deliver the best mobile experience across the U.K.We want to get on with the job of making faster broadband available to the last 5% of the U.K., so we'll continue to explore the commercial options for bringing faster speeds to those parts of the country, which are the hardest to reach. Alongside this, we'll work closely with government, Ofcom and industry to help deliver the regulatory USO. We look forward to receiving more details from government, outlining its approach to defining that -- the USO, including the proposed funding mechanism.And finally, we welcome the government's call for evidence in relation to the future telecoms infrastructure review. It is imperative that the market structure supports and incentivizes telecoms infrastructure investment to maintain the U.K.'s position as a leading digital economy. We see this as an important opportunity to shape the future landscape of our industry.Moving on now to the performance of our customer-facing units. Looking at BT Consumer on Slide 9. Revenue was flat on last year as increased ARPU was offset by voice line losses. 12-month ARPU was up 4.8% with RGU per subscriber, the other key value driver, up 3.1%. Operating costs were up 1% driven by investment in customer experience and broadband speed upgrades ahead of the price increases that were introduced earlier in January. This led to EBITDA of GBP 250 million, down 4% on last year.Our superfast broadband growth continued during the quarter. And in January, we launched our ultrafast products at 152 and 314 megabits per second with minimum speed guarantees. These are important products as they give us headroom to expand ARPU as coverage grows.BT Sport viewing was up 23% year-on-year, our best quarter yet, and that is with all customers now on a pay-for-sport tariff. We also announced a very important deal with Sky to enable us to sell Sky's premium sports and entertainment channels through the BT TV platform. This will further differentiate our TV offering when it is introduced in early 2019. It also allows Sky to sell BT Sport to its customers, further widening our sport distribution.Moving on to EE on Slide 10. Revenue grew 4% as postpaid mobile and fixed broadband growth outweighed the expected decline in prepaid and a decline in equipment revenues. This is the fifth consecutive quarter of revenue expansion in EE.Postpaid mobile ARPU was down 1.9% mainly due to increased SIM-only mix together with EU roaming and a decline in business ARPU. Churn remained very low at 1.2%. Operating costs increased 6%, reflecting higher customer investment costs in premium handsets and watches where sales, particularly on Apple products, exceeded expectations.This led to a reduction in EBITDA of 6% to GBP 259 million. We expect EBITDA to recover strongly in Q4 as seasonal customer behavior reduces device investment volumes.Our 4G geographic coverage continues to expand and we now cover 90% of the U.K.'s landmass. EE was recognized once again, coming first or joint first in all 16 RootMetrics customer experience metro reports in the second half of 2017.Looking at Business and Public Sector on Slide 11. Revenue was down 5% with continued declines in traditional voice products as the market moves to data and IP and following our decision to move away from low-margin equipment sales. This is partly offset by continued growth in mobile. Operating costs were 4% lower due to lower voice product input costs and lower legacy contract costs. EBITDA of GBP 362 million was down 8% on last year against a strong prior year comparator. Order intake was down 22% this quarter, but this was -- but was up 12% on a 12-month rolling basis at GBP 3.6 billion. Encouragingly, as public sector procurement moves into the regions, we signed new public sector contracts in both Scotland and Wales during the quarter. This helps offset the loss from the legacy contracts.Turning to Global Services on Slide 12. Global Services revenues were down in all regions. In part, this was due to the actions we are taking to move away from low-margin business such as IP Exchange, but this also reflects weaker market conditions.We are restructuring Global Services to provide more digital solutions for our customers and we continue to launch more products and services with our key partners. We've recently added a cooperation with IBM to our cloud services offering and launched our Agile Connect SD-WAN product with Nuage Networks.The weaker market conditions are reflected in the order intake, which was down 11% in the quarter and down 25% to GBP 3.7 billion on a rolling 12-month basis. Our contract win rate remains broadly stable, but we are seeing both the size and duration of new contracts reduce.One area to call out is our security services where we continue to see strong growth. Security is increasingly important for our customers, particularly as they move away from dedicated MPLS networks to a hybrid approach that has traffic moving across secure networks and the Internet. Our differentiated offering built on our experience of protecting our own operations and our work with the critical national infrastructure around the world is being well-received in the market and is well-regarded by leading industry analysts. And I am confident that we can continue to build from our current position.Our operating costs were down, reflecting the impact of the Italian investigation last year and lower revenue, notably the loss of lower-margin IP Exchange and equipment sales.EBITDA was up strongly on last year, but this includes a number of one-off items in both years. Excluding these items, EBITDA was broadly in line with the comparable EBITDA of last year of around GBP 120 million. While we expect some seasonal uplift in Q4, this will be less pronounced than normal due to current market conditions.Turning now to Wholesale and Ventures on Slide 13. Revenue fell 4% with continuing weakness in Data and Broadband, Voice and Managed Solutions. These declines were partially offset by an improving performance in Ventures where we saw good growth in bulk messaging and Fleet Solutions.With flat operating costs, EBITDA was down 10% to GBP 189 million. Q3 order intake was down 61% and down 38% on a rolling 12-month basis to GBP 1.3 billion due to an unusual Q3 last year, which benefited from 2 particularly large contracts.At the end of Q3, we had 86 InLinkUK units in operation, up 60 from the end of Q2. These new units are replacing some of our legacy telephone kiosks, providing a service to the community through free calls, Wi-Fi and other services. Although currently small in scale, they also provide income through the advertising yields that they generate.Onto Openreach on Slide 14. Revenue was flat on last year as we saw continued growth in fiber broadband, up 23%, offset by regulatory and commercial price changes. Increased business rates and pension operating charges led to a decline in EBITDA of 5% to GBP 641 million.Fiber broadband is now available to around 27.4 million premises, which contributed to meeting the government's target of 95% superfast broadband coverage. We now have around 9.2 million customers connected. But our plans don't stop with superfast as we are now accelerating our ultrafast rollout.Openreach yesterday announced a revised plan to pass 3 million premises with FTTP by the end of 2020. We've announced the first 8 major cities where deployment of FTTP will start in 2018. In partnership with government, we will also continue to make sure that some of the hardest to reach communities in the U.K. get access to FTTP networks.This is the first stage of our ambition to take FTTP to 10 million premises by the mid-2020s, subject, of course, to achieving a fair economic return. Openreach will be working with government, Ofcom and all of its CP customers to ensure a successful outcome of this program.So to summarize. Today, we've shown that we are continuing to deliver against our strategy and we are taking advantage of market opportunities and responding to challenges with a robust set of actions. The experience we are offering to our customers is improving. We are investing in maintaining fixed and open mobile network leadership. We are investing to expand and enhance our customer offering. We're taking actions to manage our pension liabilities to ensure fair, flexible and affordable pensions to all of our employees. And all of our cost-transformation programs remain firmly on track. We are confident in the steps we are taking to improve the performance of BT.And with that, thank you. We will now open for questions.
[Operator Instructions] Your first question comes from the line of Paul Sidney from Crédit Suisse.
Just a couple of quick questions, please. Just on the FTTP build announcement yesterday. Just a question on process. The 3 million commitment so far, is that a 3 million premises which make economic sense currently in terms of your view of the first 8 cities? Or is it sort of a more wider-ranging review of what makes sense across the whole of U.K.?And then, just secondly, is there any update of when you'll be looking to launch fixed mobile converged office in the U.K.
Okay. Apologies for my cough here.In terms of the FTTP rollout that was announced yesterday, in terms of why we've chosen to do it now and what we're trying to achieve here, you need to keep this in context. This is a long-term project. It's going to take of an order of certainly around 20 years to do it. And we want to deliver a trajectory that gets us to our ambition of 10 million as a milestone by the mid-2020s.What we announced yesterday was the first stage of that. It gets us on the right trajectory to hit that number, and it's 3 million by the end of 2020. And that is an increase from the 2 million that we already had in our plan. So to -- it's a 50% increase in the 2020 staging post along the way.As we've previously said, the 2 million included both new builds and completing the BDUK contracts and the first 1 million -- on top of that, clearly, we've chosen to pick the most commercially attractive parts of the network to upgrade first. So we're confident in making a return, but we've decided that the best thing to do is to get on with this.There are things we need to learn along the way. There are things we need to work with government and Ofcom around, particularly around ensuring that the fair bet falls into place properly and that we can get access to street works are 2 examples of that. We need to build commitment across the whole of the CP community. But it is our view that it's better done from starting this process, showing some intent and being able to start from a position of strength, and that's exactly why we've done it this way.
Just to follow-up, Gavin, when should we expect further releases going forward, as is when you decide more premises are commercially viable?
Well, look, I think this is a first step. There's no question about that. And I think Clive and the team will continue to learn as we roll out. And we'll update you as we -- as there's more news as we go forward.Yes, converged office. My apologies. I missed that question. In terms of converged office, we are working on these. I think we've talked about them before on the call. We are going to be making some changes to our proposition in terms of the consumer offer in particular across the year so expect us to update you on this around May.
Your next question comes from the line of Dhananjay Mirchandani of Bernstein.
In the Consumer business, went x growth in this quarter and this despite your investments into fiber for FTTP and BT TV and Sport. And we're now 4 weeks into your Q4 broadband and TV price increase. How are your customers responding to this increase this time around? And I guess, the more broader question is what does this tell you or us about the residential pricing environment in the U.K.?
Very good. I'll ask Marc to comment on this.
Yes. I mean, there's no doubt it's a very competitive market that we're seeing right now. Our strategy and my focus, rather than focus on net adds, is very much on focusing on value and upgrading as many customers as possible to the higher ARPU products that we have, including the ultrafast launch that we announced recently, but also focusing on RGU growth as well. And I think that's really important and that continues to be a focus for us as we focus on selling more products and services into our customer base as well as improving customer experience and brand performance.So we've got a -- announcements coming up, as Gavin says, in May where we'll clarify our consumer strategy. But right now, the focus is very much in a slower market is focusing on value, upgrading customers to the new higher-value products, which have a high MPS and good ARPU, and increasing the focus on RGU as we sell more products and services into the customer base.With regard to the question on price rise, I think that's landed reasonably well for us. And when I look at the operational metrics and the service metrics and the volume of calls we get and how the customer base is reacting to that, I'd say it's going reasonably well so far and we'll be able to update you in May how the quarter has gone.
The next question comes from Maurice [indiscernible] of [indiscernible] .
It's Maurice from Barclays. So just question on the fiber-to-the-home rollout. So [indiscernible] by 2 million to 3 million. [indiscernible] with any subsidy. How much of that is due to the lower cost that you're seeing, the cost of rollout of that? Do you have [indiscernible] in terms of how many homes could be done on a pure commercial basis rather than regulatory support?
Clive, do you want to talk about what you've learned in terms of cost of deployment and just the commercial or the first 3 million?
Yes. So Maurice, you see in our announcement that we've revised our target build cost in urban areas to GBP 300 to GBP 400. And we've done that on the back of basically practicing deployment, albeit on a smaller scale in urban areas using revised techniques and revised componentry. So we are now targeting ourselves to build at a lower price per home passed. And so we are getting better at this and we will get better still is my prediction.As Gavin said to an earlier question, we will learn lessons as we do it and I expect to sharpen the build price as we do it. And of course, that means that more of the build will be commercially viable over time as a consequence, but we're not going to quantify that. We're going to learn as we go.
Next question comes from the line of Carl Murdock-Smith from Berenberg.
Three questions for me. Firstly, consensus EBITDA is what we see at the bottom of your guidance range and today's results leave you needing EBITDA growth in Q4. Thinking about your options [indiscernible] within the guidance range, I just wanted to ask about bonus provisions. I wouldn't expect any forward-looking comments [indiscernible] sensitivity to your employees and given the year-end bonuses weren't yet to be decided. But can you confirm whether the bonus provisions has been included 100% in year-to-date EBITDA?And then, secondly, I just want to ask on this [indiscernible] planning or in-sourcing its contract on Managed Services network, well, I also understand that BT [indiscernible] is about to lose a contract with [indiscernible]. I was wondering if you could help us when the scale and financial impact of those 2 contract losses going into next year and how much of a drag those will be?
Carl, I'm not going to answer your first question. I mean, that's -- we don't comment on bonus provisions. So I won't be commenting one way or another on that. Gerry, do you want to talk about the K-Com contract and...
Yes. In summary, we don't expect either of those to have a material impact going forward, K-Com probably the most significant relationship of the 2 there. We have a broad relationship with K-Com. We deal with K-Com on a number of fronts. We [indiscernible] managed service, we don't expect that to have any significant impact going forward.
Next question comes from the line of Nick Delfas from Redburn.
So question on BT Business and Public Sector. The trends [indiscernible] again. Previously that was ascribed to public sector contract losses. Can you say whether this is something now that we should expect several years to continue? And following up on that, as we look into FY '19, which of the main areas where you feel confidently in the improvement of trends given obviously consensus looking for a flatter outlook and continue to climb in FY '19.
Very good. I'll let Graham answer this question.
Yes. Okay. Our BPS revenue is down 5%. It's largely due to roughly 50/50 between fixed voice, calls and lines and IT product. The IT product is low margin, does not have a material impact on our business and the fixed voice is largely in line with market trends as we've been seeing.In terms of EBITDA, obviously a softer quarter at 8%. Sequentially, last year, we had quite a large Q3 number relative to the other first Q1 and Q2. So it's a tougher comparator. Embedded within the minus 8%, our trading is materially better than the minus 8%. And my expectation, as I've said in previous quarters, is you should see an improving trend on the EBITDA position as we exit this year and move into next year.
Thank you.
And looking into FY '19 for the group?
When you said a question about the group, I thought it was a question about business and public sector.
No [indiscernible] it was a follow-up on the group. Obviously, all the divisions are declining at the moment, but how we -- where we -- should we expect improvements for financing? Or should we expect that to continue?
Look, we've not issued guidance on '19 yet, but I'd say some sort of broad comments. Look, we're confident we're investing in the things that will provide long-term sustainable growth in the business. So the Mobile business, particularly EE, had a strong quarter. And the EBITDA decline in that part of the business was down to customer investment predominantly. So that's a positive engine for growth in Business and Public Sector. The new products and services around IP and Mobile are going to lead to a change of trajectory in that business, as Graham mentioned.We are restructuring Global Services as you know, putting more focus on digital products going forward and reshaping that business. And as I've said previously, there are going to be some parts of the Global Services business that are going to be de-prioritized as we focus on multinationals in particular.And Openreach has us -- I think I called out yesterday, a strong plan for investing in the next generation of broadband access. We're proud of the contribution we've made to the 95% coverage that the government set out as an objective for superfast. And now, we're starting on the journey to go a long way on ultrafast and I think yesterday's announcement really is the first stage of that.
Next question is from the line of Robert Grindle from Deutsche Bank.
Yes. First question is on your appeal on the CPI RPI decision. It seems like the Bank of England supports the CPI viewpoint. Would you get an appeal in before the negotiations of the pension trustees for the current review is achieved? So basically, will it make any difference this time around or would any benefits come into the next time around shall we say?And then, just a second question, I think you have some sort of relationship with a subsidiary of [indiscernible] outsourcing and network rollout. Is there any impact at all on you guys from their distress at the moment?
Simon, on pension.
No. We are appealing the RPI indexation decision. It will not have a bearing on this valuation given that we're now in an appeal process.
Good. Clive, do you want to talk about CT? And then Graham, [indiscernible] as a customer?
Yes, so [indiscernible] are a partner from the -- in the deployment of network. We do a lot of that, of course, in the U.K. as we've been discussing on the call earlier. The good news is that it's a ring-fenced JV. It really hasn't been materially damaged in its performance for us through the issues at [indiscernible]. So I'm confident that we'll ride that one and there will be little or no impact.
Yes. And on the Business and Public Sector side, [indiscernible] is one of our larger customers. Clearly, we will have an element of bad debt, but we will have no material impact on our Q4 results. And we're working closely with a liquidator to help them through this process and make sure there's a continuity of service into the breakup of the contracts and moving to other providers. And so we're actively involved in that process.
Next question comes from the line of Jerry Dellis of Jefferies.
Two questions, please. Firstly, if you look across the divisions within BT, which are the ones that you feel most confident that you're going to be capable of really delivering sustainable EBITDA growth going forward? And then secondly, in terms of the FTTP announcement from yesterday, I think you had previously argued that it was necessary to have a clearer visibility on the regulatory [ framework ] before putting shareholder capital at risk. Obviously, accepting what you say about the lower build costs, there is still shareholder capital at risk, and the ultimate return will depend on the regulatory framework within which you operate. So what do you now know about that regulatory framework that you didn't know prior to Christmas?
Well, I'll make some comments on -- to the first question, and then I'll ask Simon just to answer the second one, if that's okay. Look, we're not -- we're at Q3 results. We're not giving guidance for next year at this point. And indeed, we never give guidance division by division, so I'm not going to be calling out some -- anything specific about any of the divisions. What I will say is we faced headwinds across the business as customers move from traditional-type products, particularly around calls and lines, increasingly towards IP, where some of these services ultimately are being used less or are free services. We faced headwinds from changing market conditions in the enterprise businesses, particularly within -- in Global Services, where contracts are getting smaller and shorter tenure. And we faced, obviously, regulatory headwinds, which we do every year, but increasingly, what, with pricing, but also things like business rates needing to be factored into our business and our ability to grow. But offset against that, we're extremely well-placed as a business. We're the one operator in the U.K. that can really exploit the trend that is happening all over Europe around creating converged services for consumer and business customers. We have a very, very strong fixed network, of course, which is available for all CPs, but it has now a 95% superfast coverage across the U.K. As we've talked earlier, we're now going to make that an ultrafast network over the next few years. But building on top of that, we have, through the acquisition of EE, the best 4G network in the U.K. by some way. We are -- and the combination of the 2 together allow us to provide converged office and services across 3 brands: BT, EE and Plusnet. And I think that in itself, as you navigate the changing market conditions -- or as we navigate that change, it really allows us to, I think, set ourselves up well to grow across multiple market segments. So yes, it is, they -- some of these trends and some of these headwinds are a little fierce at the moment, but I'm confident, as a business, we will be able to navigate our way through it and at the same time, transform our cost base to ensure that we're able to take full advantage of the digital transformation opportunities that I think exist across our own operating model as well as those that our customers are going through. Simon, do you want to just reference the -- answer the question on returns on FTTP?
Most certainly. I mean, we are -- I think we announced this week we're extending the FTTP program for 2 million to 3 million. We're doing so because we're confident in delivering an acceptable return on that increased footprint through to 2020. And we believe it's really important to prove out through delivery, our ability to deliver the build costs, the connection costs. Indeed, we hope to bring those down over time. We also think that it's right to engage with our CPs to really gauge and engage with them in order to tick up in the revenue that will be needed to deliver an acceptable return and great customer value for all of us. Beyond that, the pace and extent of continuing that investment will be made clear, actually, in our release, requires us to continue to gain an acceptable return, and to ensure that, we will need constructive engagement with regulators and policymakers on the WLA outcome to ensure that we can earn acceptable return on investments we've already made and therefore, cash to continue to fund further investment. We need to be clearer on what constitutes a fair bet. We need support with cumulative rates, and we also need some other support around things like railings and street works. And that's all part of the active constructive engagement that we'll be continuing alongside delivering this rollout.
Sorry, so just to clarify -- thank you, Simon, on that last point. There's no -- there's been no incremental assurances from Ofcom received in recent months around how the additional 1 million FTTP would be treated by them that led you to the decision? You're essentially taking a view on how the regulatory framework might evolve for that additional 1 million homes, but Ofcom hasn't provided any guarantees as such?
Not a specific guarantee on additional 1 million. We're all engaged, I think, together in creating an environment in which this can be a success, Openreach as well as Ofcom.
Next question is from the line of Simon Weeden of Citigroup.
So my first question is on Slide 11. Can you help me understand the charts? Because it seems to be implying you have mobile market share there of about 34%, which I just thought was about right for your consumer business operation combined. But it's on the business slide, so I just wanted to check that, that's not necessarily the case for the business market. How much for upside there might be through your mobile market share if you just looked at the business market alone? And the other question was, with respect to yesterday's announcements from Openreach, can we assume there's at least, at this stage, you didn't have a queue of competitors wanting to sign up to the GBP 7 premium and a switchover guarantee? And were you -- perhaps you could just update us a bit on where you stand vis-Ã -vis the competition, particularly given your retail prices for ultrafast are quite a bit above the superfast's next levels down. The wholesale price is certainly high as well.
Okay. Well, Simon, I would ask Graham just to talk about mobile market share and the business market, and then Clive to answer the second question on customer interest.
Yes. We've obviously seen a significant growth in net adds in a relatively flat market over the last couple of years. And yes, we've grown our share conservatively over that period, so that is the Business and Public Sector market share relative to its addressable market in the U.K.
And on the pricing of ultrafast products, you referenced the GBP 7. I just need to clarify that the GBP 7 is value, not wholesale pricing. So we see 3 components that deliver the value. One is definitely an increased wholesale price for a much better ISP, more reliable product. But there was also value in our ability to reduce churn on our customer base and indeed, to win a bigger customer base through having a superior network. And the third source of value is operational cost savings that fall both to Openreach and to the CPs. There is, for example, very clear evidence and that evidence is from our existing FTTP footprint as well as from learnings from other areas around the world. The full weight on FTTP network is considerably lower than it is on the network that we operate today. So we expect to get cost savings. And I expect the CPs, who operate over Openreach, equal to get cost savings. They will have fewer calls into their contact centers. They will have a lower cost of ownership off their customer base when it is on our FTTP network. So it's very important to get the context there. So the GBP 7 is value. It is not comprised only of pricing.
Thanks, Simon.
Next question is from Nick Lyall of SocGen.
Let me ask 2, please. And then on Marc's comments on the consumer broadband [ reliability ], given it sort of [indiscernible] with higher ARPU and margin use in the forecast [indiscernible] it seems to be pretty much flat despite the obvious price rises. So could you just describe what's going on with that, please? Was there some heavy discounts and promotions you overspent on that you see but you didn't expect? And then just secondly, [ product cost builds ] there were GBP 300 to GBP 400 per home pass you were talking about to the 3 million. Can you try to [indiscernible] how many of the 10 million will have roughly the same topology and you'd expect the same sort of build costs, for what proportion of the [ 10 million ], please?
Okay. Marc, do you want to comment on the ARPU? And then Clive on the build.
Yes. I mean, I think on ARPU, I think it's important not to look at that quarter-by-quarter but take a 12-month view because that gives a much better indication as to the performance of the products. So our 12-month rolling ARPU is up to 4.8% year-on-year, and our quarterly ARPU is up as well. So I think that's the best focus, I think. And we will -- you will expect to see the impacts of the price change coming through as we execute that during the month of January and February as that starts to impact through to customers' bills. So that's some clarity on that. I think, again, you'll see coming through in May. So I'd encourage you to look and take a 12-month view, not just look at the quarter-by-quarter swings.
Clive?
And on the costings for deployment, think about -- I think about it this way. Where we do rural FTTP builds, and we are doing rural FTTP builds, we do it through the BDUK program, where the government in its various forms, national and local government, pays a portion of the cost and I pay a portion of the cost. The actual cost is very much a per contract issue, but it's public funding, and they are funding. Much of the 10 million will be urban, and the GBP 300 to GBP 400 cost point for build is the target that we are aiming at for the aggregate of all the urban builds, central, urban areas and suburban areas, and that will dominate the 10 million.
Next question comes from Polo Tang of UBS.
Just a question, really, around BT Sports. Can you talk through how the Sky content deal will impact BT? And can you talk to why you decided to do the wholesale deal now? It also relates to BT Sport, can you talk about how important the Premier League rights are for the channel? And can you live without them?
Marc, do you want to talk to that?
Yes. Look, I think our strategy with BT Sport is to get the product viewed by as many customers as possible, irrespective of the platform that they're watching on. So we've been encouraged by the viewing figures being up, and this deal we have with Sky will hopefully increase the distribution and the number of customers watching the product. So that continues to be a focus for us. And we're also pleased that all of our customers now are paying for that product. So having the viewing up, north of 20% with all of our customers paying for that, I think, is encouraging. So that's what I'll say about the Sport. With regards to the auction, so that's imminent. We know the value of the rights. We'll be very disciplined going into that auction.
Can I just follow-up on that in terms of why now, in terms of this content swap deal with Sky?
I think we've talked about it as many times over the years. We've been in discussions with them for many years and finding the right time to do the deal is always tricky because you need -- there are only certain windows between rights auctions that you can do it without the auction itself giving a conflict of interest. What we've found over the last year was that, I think, a realization from both sides that this was the right time to do the deal and broaden the offering to both sets of customers of each other's content. So it's -- why now? It's been something we've been talking about for a few years. It just came together at the right moment now. And this, I think, is going to be good for -- ultimately, good for customers because I think they will be able to get a full set of content on each other's platform. And I think that's got to be good for customers ultimately.
Next question comes from the line of Sam McHugh of Exane.
Kind of one question really, kind of maybe 2 parts. Adjusted group EBITDA declined about 2.5% in the quarter. I mean, if I adjust for NGA last year and the positive NGA this year, it looks like like-for-like EBITDA declined 7% to 8%. And so we should clearly see a deteriorating trend in the year. So number one, can you just confirm that, that kind of math is right on the EBITDA? And then number two, I think Carl said to get EBITDA growth, I think he's also right in saying you need to grow in Q4 to meet the bottom end of guidance. Maybe less on the bottom specifically, but what are the moving parts to get you there? And can you tell us what the bonus figure was for last year? I mean, no comp churn this year, but just for the absolute million pound figure was last year?
Simon, would you like to answer that?
Well, I'm not going to sort of disentangle individual components of EBITDA. It's true that -- it's certainly true that we had EBITDA last year impacted by the -- by the Italian investigation. And it's also true that we've had some one-offs in this year. I think the main area where that's had an impact on the [indiscernible] EBITDA is in GS. And we made that pretty clear in our analysis of the GS trends, where we explained that the overall business is sort of flat year-on-year, if you adjust for the one-offs in the 2 years. I'm not going to comment on the bonuses other than that we explained there was a bonus release in GS in the fourth quarter, and we were pretty clear on that in the fourth quarter of '16, '17. But I wouldn't draw that out as an issue in Q3 to Q3. So that was on the EBITDA. I think the only -- perhaps, the only other point clearly is that, in this quarter, we've had significant movement in the EE EBITDA, where we've made conscious investment in order to support the upgrade of customers and indeed, acquisition of customers, and that's impacted the comparators in EE meaningfully that will lead through to better value in future years.
Next question is from Steve Malcolm from Arete Research.
I'll go for the traditional 3. First one, just a quick one on the FTTP announcement yesterday. Is the extra 1 million FTTP on top of the 12 million aggregate that you had originally forecasted for 2020? So is that still 10 million G.fast and now 3 million FTTP or some G.fast cannibalization, that 3 million number? That's question one. Now question two, just coming back to the EE EBITDA, and that's -- I think we're -- I think it ran in the year pretty much the only major U.K. operator now that doesn't do split contracts, which if you had done, obviously you would have to have the benefit of making the EBITDA, the additional a lot less, I mean, which clearly highlights -- emphasizes EBITDA as well. But can we just focus through why you haven't gone there in that reach so far with IRFS 15, I guess, you'll probably have to anyway. Where do you think it gives you a competitive advantage? Do you get both a turn? Even Virgin and Three, they're doing it. And then slightly just on the overall sort of market, your DSL sort of market net adds declined was less that this quarter. It was only about 17% and running at sort of 30%, 40%. Should we kind of assume from that, that with Ericsson taking a price rise in November that maybe -- and the physical line numbers you put as well, there will be a -- did the market share shift a little bit away from cable through network in Q4?
Okay, I'll quickly answer the first one, which is -- and then ask Marc to comment on handset financing and things like that. Yes, the bottom line is the -- and I think we've made this reference in the Openreach release yesterday, the G.fast number will come down, and we won't build FTTP over G.fast. I think that's quite sensible. So we haven't put out a specific number for that, but it will be something that ultimately will be part of the Openreach plan. In terms of financing with -- of handsets, do you just want to make a comment on that?
Yes. I mean, it's -- look, it is something as a proposition we are considering. I don't think the fact that we don't offer it at the moment gives us an advantage or disadvantage relative to peers. And we focus a lot on what customers want and understand, and there are a number of different models out there in the marketplace. I don't believe, for example, that customers do understand on certain operators that they're signing up to 30-month financing agreements when the actual airtime contracts are of different lengths. So we're having a good look at what works well for customers, what works well for us. And if we evolve our proposition, we'll update you as we go.
Then just a comment on the broadband market. Yes, the broadband market is pretty mature now. So that the market growth is really beginning to slow down. It does ebb and flow between the CPs. We can see that and the interaction with cable, in particular. When they are putting through price changes on Virgin, it has an impact. So it is increasingly, we believe, the right strategy to focus on value and particularly on the BT and EE brands and use Plusnet to compete for value-seeking customers. And then we do see some seasonality in the business. So within the Openreach numbers, we saw some modest growth in the overall network size over the quarter, which we've seen in previous Q3s. That may not sustain itself into Q4 because, generally, you see in the historical trends that Q4 is a quarter, which is a wee bit quieter in that respect. I think for us, the key is to -- from leveraging the strength in the converged network offering that we have, particularly around the propositions in consumer and business and really driving more for more, increasing RGUs per customers and moving customers from dual to triple play and ultimately to quad play.
Okay. Just coming back to that question on handsets. Do you think the 30-month handset contracts are potentially dangerous? And do you see an opportunity longer term with customers coming out of those contracts, churn market, churn will increase?
I think there are a number of different models out there. Some of them are relatively new. My comment on that is, we need to be, as an industry, really clear to what customers are signing up to. And there are certain models out there, whilst they may be getting -- releasing some short-term cash for operator. I think from a customer point of view, there's a risk that there's some confusion. So with our focus on customer experience and our improvement in those metrics, we will be very considerate about what we launch and when, like, we will do any proposition.
Next question is from the line of Stephen Howard of HSBC.
So I have 2 questions. Firstly, do you think we might be able to expect a more rational, positive outcome to the WLA? You are obviously interacting with Ofcom to input the actual costs of your superfast investment. And I was wondering where that was yielding any feedback that might indicate that they were coming to understand the actual costs of that substantial investment that you've made. And then secondly, just on the BCMR, I quite hear one of your infrastructure rivals, you described Ofcom as doubling down and having a fixation with dark fiber. Is this one going straight back to court?
In terms of the WLA itself, we'll know more in the next few weeks. So Ofcom have said they're going to be making a statement within the next few weeks. We've had good engagement around the costs, and in particular, on -- not just the broadband network going forward, but also the cost of service, the cost of pensions, the [indiscernible] rates impact on this. So that there has been a very good engagement over the last 6 months. Hopefully, it will have an input -- have an effect on the results, but we'll see shortly. Clive, do you want to comment on the second question at all?
What we are fixed on is coming up with products that offer customers a superior option to dark fiber. So we're offering a managed product that allows them to scale very cost-effectively but get all the advantages of Openreach managing the product, which includes managed installation and incredibly fast fix times on the relocations when there is an outage. We think we can deliver a tremendous value through those OSA Filter Connect portfolio products. We plan to launch those next quarter, and we are out there with customers now, testing their appetite and getting them excited about the launch.
Very good.
Can I just follow up on that quickly? Is there any indication from the CPs who were agitating to get dark fiber that the OSA Filter Connect will address their requirements?
So we've got strong engagement from the CPs and from the mobile network operators. And we will see, in the next few months, their appetite translate into orders. That's my hope. That's my expectation. But you're going to have to ask them, really.
Next question is from the line of James Ratzer from New Street Research.
I have 2 questions, please, The first one I want to start to kind of stress test please your confidence in the reiteration of guidance for the full year. So on Q4, can you say how much financial data you've seen so far from January? And also, relative to just where consensus is, does seem to imply a very big swing back in EBITDA at EE? So I'm just wondering if you can give us a kind of scale of confidence in the magnitude of swing backs you're seeing particularly in that division in the fourth quarter. And then the secondary question please is just around some more numbers around the commercial payback you're looking for the new FTTP build. And I think in your first-stage consultation, you had mentioned if you adopt this commercial model, you would be looking for a GBP 25 valued needed per customer per month, assuming 30% take-up after 10 years. I mean, are those the assumptions you're still working with on this new build announcement? And if so, can you help to give us some more breakdown between the cost uplift per line to get to that value and the ARPU needed per line?
I'll ask Simon to comment on the first one, and then Clive on the second one.
Yes, certainly. So we are very confident on our full year guidance, and we've reiterated it today, both at the revenue, the EBITDA and the free cash flow. I think you're seeing strong cash flow performance again for this quarter. We've talked about some of the revenue trends in particular, our decision, quite explicit decision to move away from low to no-margin products, particularly equipment sales and wholesale products. Specifically on EBITDA, which I think was where your question was going, yes, we do expect the fourth quarter in EE to be a strong quarter for us and a recovery back from a big investment quarter in Q3. I know this has been a seasonal trend in the past, but it's been particularly pronounced in this year. So yes, we expect to see strong recovery in the EE and absolutely reiterate our guidance for the year. Clive, do you want to take that further?
Yes. I mean, really, I just want to reiterate 2 points. One is that building a full fiber to the premise network is a long-term investment, and I will expect us to be achieving the terms on it for decades and decades. So the payback period is not short term. You are correct. And I just want to reiterate that the number that we put out there last year, the GBP 7 of value, is not all about price increment. It includes banking operational savings. We have a much lower foot rate on our existing fiber to the premise platform than we have on our VDSL platform. That is -- that's fact. It's a matter of fact today. And we also expect to be able to compete harder in the market to retain customers and win new customers with a superior full fiber network. So all of those 3 components, not just price, contribute to the way we achieve the value necessary for the commercial return.
I guess, Clive, the only thing I'll add is in terms of return, we need to think about this as a return on a risk-adjusted cost of capital. That's a far more important metric. We've got a live return on fiber between 9% to 10% on a pretax basis. Yes, we think that's a reasonable return. Clearly, we were taking some commercial risks, we've got a bit of spread in that. Hence, desire for a fair bet in terms of payback. These are payback period, these are long-term infrastructure assets that will be here. And in terms of the specific discounted cash flow payback, it typically does move into double digits, but you'd expect that with a long-term asset that's going to generate returns for many years to come.
And could you please [indiscernible] now what you're seeing in terms of cost saving per line moving to FTTP?
Well, the indicator of cost saving is that, on the existing platform, our foot rate is half of our foot rate on the VDSL platform, right? So that translates to considerably fewer truck rolls, if you project forward when we got a large base on FTTP.
Very good. We need to keep moving.
Yes, we've got a few people.
Next question is from the line of Guy Peddy from Macquarie.
Just 3 points of clarity. Firstly, when in the Consumer business, you highlight broadband speed upgrade costs. I was quite surprised you flagged this because you've been upgrading customers for a long time now. So just firstly, was there anything specific in the quarter? Secondly, you highlight pension charges within Openreach as well. Is that reflective of the movement of employees to Openreach, i.e., an accounting shift? Or is there something specific going on? And thirdly, on EE SAC costs, which you've obviously highlighted to be very big in the quarter, can you actually tell us what the content change was year-on-year in those cumulative SAC costs?
Simon, do you want to answer the second question? Because I'm...
So on pensions, no, this has not to do with the transfer of employees into Openreach. As you know, we have a defined benefit pension scheme. Because of the changes in actuarial assumptions, the service cost of that pension scheme has increased significantly. We explained that at the beginning of the year. And many of our defined-benefit employees actually work within the Openreach business area. And so it is a particularly pronounced impact on the Openreach costs, and that's what we were calling out.
Guys -- Marc, the answer just on...
Question 1 and 3, I'll take them. So nothing specific in the quarter in terms of the cost. It's just a flag of a consistent expense that we believe is a good investment to move customers up the product here as has been consistent with our commentary over the last few quarters. And on 3 -- on this third question, we don't split out the SAC costs. As we've been alluding to though, this has been a, I would call it, exceptional quarter. With Apple products in particular, you would normally get 1 device launch. We actually had 3, there were 2 high-end smartphones in the X and the 8. In addition, there was a watch that we had exclusively as well. And you have seen for Apple's results yesterday, their average selling price was $796 versus around $700 the prior year. And obviously, we've experienced something similar, which I think on my slide, we've highlighted the increase in the price points there. But we believe the investments for our existing and new customers will bear fruit, and that was a good quarter of trading for us, generating long-term value.
Marc, and just -- one quick, very quick point on -- I think, Guy said SAC across acquisition costs. Because just to really emphasize, it's also retention costs as well. So the step-up in the investment is not directly correlated to the net adds figure. You've also got significant retention and upgrade within the current customer base, which has been absolutely [indiscernible]
Next question is from John Karidis of Numis.
I need to ask questions around yesterday's FTTP announcement, please. Can I just ask Clive? So we're talking up to 3 million by the end of 2020. You built 0.5 million. You said 800,000 will be in rural areas. And so that leaves about 1.7 million in urban areas. Roughly, what proportion of that is likely to be in Virgin Media territories, given that you say that one of the sources of value is winning more lines? And then can I ask Simon on this issue? What do you expect to happen to consensus CapEx as a consequence of this announcement? And do you think that the progressive dividend policy is -- it looks a little bit more perilous, as a consequence or not?
Clive, do you want to...
Yes, I think it's really simple. The 1.7 million in urban areas were very significantly overlap with Virgin Media because that is where they have deployed historically.
Very good. You answered that one? In terms of CapEx impact on short [indiscernible] and confidence around our progressive dividend policy.
Sure. So on CapEx, probably the simplest way of framing this is that we had, in our existing CapEx plans, as you know, a rollout of ultrafast, 10 million in G.fast to [indiscernible] FTTP. We've expanded the FTTP program by 1 million over the same time period. And as Clive has indicated on the call, we would anticipate a build cost of that in the GBP 300 to GBP 400 range. There will be connection costs as we progressively connect customers to that infrastructure. On the other hand, we've also emphasized that we will not be overbuilding G.fast with FTTP. So there'll be some mitigation, for example, on the connection charge. So 1 million FTTP, additional 300 to 400 builds over that 3-year period. My mental arithmetic gets me to 100, 120 a year, something like that, relative to our existing capital plans. I think, just in final point, our sense was some of this had been picked up in some of sort of analyst forecasts. So I would certainly expect, relative to our current plans, it to increase by that amount. I'm not going to prejudge how many people have already factored it into their particular views of CapEx. We'll see that, I'm sure, as you all digest the release. And then finally, no, this doesn't change our capital allocation policy, our view on our dividend policy, which remains fairly one of progressive. And we are generating strong cash flow, sufficient to fund this investment. And then to meet the needs, both of the dividend policy, the pension fund and maintaining a strong balance sheet.
Very good. Thanks, John.
Next question is from Michael Bishop of Goldman Sachs.
I'll keep it to one given we're running over a bit. It's just on Global Services, and I was just wondering how much of your strategy to run off nonprofitable contracts is already in progress? I've been combing through numbers. And then secondly, is there any update on the [indiscernible] review of Global Services?
Okay. Bas, do you want to pick these up?
Yes. Thank you, Michael. I think all of the areas that we think we have quick wins with regard to low-margin products, we have addressed. And I think you see those reflected in the decline of revenue. I think there's some long-term perspective as well, particularly once we start focusing on multinational clients, and we start transforming our products into global digital platforms that we will run into some other portfolio areas that we will see some decline in. But that will be in the course of the next 2 years. To your other question on how the transformation is going, it's in full progress, and it's running on plan. As we said last time, it's going to take a few years to make this happen, but transformation is in progress, and we're making good strides on it.
Very good.
Next question comes from the line of Wilton Fry of Royal Bank of Canada.
Just one question, please, on pensions. I couldn't let you get away without a question on pensions. Can you clarify your remarks on pensions, specifically discussing about -- [ raising ] with your asset top half as part of the Brexit reduction move while you're looking at some sort of charge over the assets without the actual ownership of the assets moving into the pension?
Simon?
Yes, thanks. No, we have been working with the trustee on a range of funding contribution mechanisms, including asset-backed arrangements. And I'm not going to be more specific on it, on the exact structure of that. Suffice to say, we are looking at a number of different options as part of that process, which is I think, Gavin indicated, we expect to complete in the first half of this year, as planned.
Very good. And I think this is our last question.
Next -- and last question is from Matthew Bloxham from Bloomberg.
Just a couple quick follow-ups on the FTTP stuff. So the first, which is on the UFC mentioned with enablers yesterday. If you get all of the enablers in place, so in the next 6 to 12 months, is there scope to accelerate the 3 million within that time frame you even mentioned? Or is 3 million essentially what make kind of financially -- I guess, logistically, you can achieve them in that time frame? And then linked to that, I'm hearing loud and clear but yes, the GBP 7 and just about wholesale price increases, but I know Ofcom made some kind of very unenthusiastic noises about wholesale price increases, I think, in December. Was that more about the GBP 7? Or was it about the principle itself of wholesale prices across the broadband base to help fund fiber?
Clive?
I think you answered your own question on the first one. We are going to escalate very significantly our per annum delivery of fiber-to-the-premise infrastructure. So I think 3 million is a bold target, and we will hit that. I'm confident we will hit that, but I do not expect the number, even if all the enablers fell in place very quickly, to be significantly above that. What it does do well is give us the potential to accelerate beyond 2020 if all the enablers fall into place, as you've said.
And just on pricing, I think Clive has, I think, made very clear, and he'd indicated [indiscernible]. The source of additional value that we need comes from pricing. Pricing for our customers for what is a better product that delivers more value. It comes from market share benefits. It comes from operational cost savings. I think that everyone involved in the sector would understand that if you deliver customers a substantially better product, faster speeds, more reliable, there will be a price to be paid for that. And you can see that across every single market that has implemented FTTP to large coverage, prices are higher.
Thank you very much. I think that's says done for today. Thanks for joining, and we'll see you in Q4.
Thank you, ladies and gentlemen. That concludes the conference today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.