The UK operator first announced last October the problems in Italy and said it expected the matter to cost around GBP 145 million. An investigation since then found that "the extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified", BT said. It found improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions. This resulted in the overstatement of earnings at the Italian business over a number of years.
BT now expects accounting adjustments totaling GBP 540 million from the Italian problems. It's unclear yet whether these will be treated as prior-year errors or taken in the current year.
In addition, the problems will affect its fiscal Q3 and full-year results. Quarterly adjusted EBITDA is expected to be around GBP 120 million less and Q3 normalised free cash flow down by around GBP 100 million. For the fiscal year to March as a whole, BT now expects GBP 200 million less revenue than previously forecast, a drop of GBP 175 million in adjusted EBITDA and as much as GBP 500 million less free cash flow due to the EBITDA impact and the one-off effect of unwinding the inappropriate working capital transactions. For the following fiscal year, the impact on results will be similar.
In the fiscal year to March 2016, Italy contributed around 1 percent of BT's EBITDA. The company said it has suspended a number of senior managers at the Italian operations, who have since left the business. A new CEO for Italy will also start work on 01 February. He will work with BT Group Ethics and Compliance to improve the governance, compliance and financial safeguards in the Italian business, and BT Group will also conduct a wider assessment of its practices.
Excluding the Italian impact, BT said it expects to report results for the December quarter in line with market expectations. The consumer business grew revenue, helped by EE achieving revenue growth for the first time and increases in volume and ARPU. Within Business and Public Sector, Corporate and SME continue to benefit from the integration of EE and strong mobile demand, while Wholesale and Ventures is seeing an improving underlying revenue trend. Openreach is expected to report its highest ever fibre broadband connections, BT said.
However, the outlook for the UK public sector and international corporate markets has deteriorated, and BT said it now expects a double-digit percentage decline in Q4 underlying EBITDA (adjusted for the acquisition of EE) at the Business and Public Sector unit. Along with the BT Italy investigation, this means underlying revenue, excluding transit and adjusted for the acquisition of EE, will be broadly flat in the year to March and adjusted EBITDA will be around GBP 7.6 billion, down from a previous forecast of GBP 7.9 billion. Normalised free cash flow is now expected to be around GBP 2.5 billion, versus an earlier outlook of GBP 3.1-3.2 billion.
For the next fiscal year, BT expects both underlying revenue excluding transit and adjusted EBITDA to be broadly flat year on year and normalised free cash flow of GBP 3.0-3.2 billion. The dividend is still expected to increase by at least 10 percent both this year and next.
