Thursday 30 January 2020 8:55 am

Government's Huawei 5G cap will cost BT £500m

BT today warned the government’s decision to cap Huawei’s involvement in the UK’s 5G network will cost the telecoms giant £500m over the next five years.

BT welcomed the “clarity” provided by Prime Minister Boris Johnson’s decision to enforce a 35 per cent cap on Huawei’s 5G involvement.

But CEO Philip Jansen today warned of the financial hit the British telco will now suffer as a result.

“The security of our network is paramount for BT. We therefore welcome and are supportive of the clarity provided by government around the use of certain vendors in networks across the UK and agree that the priority should be the security of the UK’s communications infrastructure,” he said.

“We are in the process of reviewing the guidance in detail to determine the full impact on our plans and at this time estimate an impact of around £500m over the next five years.”

The bulk of BT’s costs will come from replacing Huawei 4G boxes from its 5G network to meet the 35 per cent government cap.

For 5G to work, 4G and 5G boxes must be from the same supplier. And BT warned its use of Huawei in its 4G network is over the 35 per cent cap the government has enforced.

“The way 4G and 5G work is at the moment when you put a 5G box in a mast it has to go on top of a 4G box and it has to be the same manufacturer,” Jansen said.

“We are going to have to take out some 4G Huawei boxes and there’s a cost to that. That’s probably the single biggest cost. In order to get 5G to work we have to replace the 4G boxes.”

It came as BT warned of drops in both profit and revenue in the last three months of 2019 as regulation and broadband investment costs mounted up.

BT’s share price fell 4.6 per cent in early trading to 167.3p as investors dealt with what one analyst termed a “double dose of disappointment”.

Jansen company’s stock enjoyed a boost after voters extinguished Labour’s renationalisation threat in December. But today he admitted the results were “slightly below our expectations”.

However, he added that BT is on track to hit its financial guidance for the full year.

The figures

Revenue slipped two per cent year on year to £17.25bn in the third quarter, which BT blamed on “ongoing headwinds” relating to regulation, competition and legacy product declines.

Profit before tax also fell three per cent year on year to £1.91bn. BT blamed that on higher costs of its broadband rollout arm Openreach and customer experience investment.

Cash flow sank 42 per cent to £1bn as BT spent on securing UEFA Champions League football rights and paid higher interest and tax.

But the telecoms giant stuck to its financial outlook for the year. It did issue a warning that cash flow will fall to the lower end of its guidance range of £1.9bn-£2.1bn.

Meanwhile net debt ballooned to more than £18.2bn – up £7.2bn from March 2019.

What BT said

Chief executive Philip Jansen said:

“BT delivered results slightly below our expectations for the third quarter of the year, but we remain on track to meet our outlook for the full year.

“We continue to invest in the business. During the quarter we launched Halo, the UK’s ultimate converged plan, which will give homes and businesses the best connection and service. We’ve continued to use our national scale and local presence across the UK to provide customers with the best possible experience, for example by meeting our promise to answer all customer calls in the UK and Ireland and bringing BT sales and service back to the high street in nearly 500 BT/EE stores.

“Underpinning the ongoing development of market-leading propositions, we continue to invest in the best converged network. We welcomed the direction of Ofcom’s recent consultation, which is an important step forward towards a widely-shared ambition to invest in fibre across the whole of the UK. We’re also investing in 5G, making it available in over 50 locations, with the first customers enjoying a great experience.

The security of our network is paramount for BT. We therefore welcome and are supportive of the clarity provided by Government around the use of certain vendors in networks across the UK and agree that the priority should be the security of the UK’s communications infrastructure. We are in the process of reviewing the guidance in detail to determine the full impact on our plans and at this time estimate an impact of around £500 million over the next 5 years.

I’m really excited about the long-term prospects for this great company and I‘m confident our plans will enable us to be bolder, smarter, and faster to ensure that we remain successful and create a better BT for the future.

Huawei decision

Earlier this week the Prime Minister decided to allow Huawei to keep its role in the UK’s 5G infrastructure.

The Chinese firm is the subject of repeated spying claims from US President Donald Trump’s administration.

But it will have a limited role in the UK’s 5G infrastructure – without accessing the more sensitive core of the 5G network.

The government also handed Huawei a 35 per cent cap on its infrastructure involvement to prevent a monopoly.

This will cost BT around £500m as it rips out existing Huawei kit to prevent an overreliance on the vendor.

But Jansen ruled out the cyber security fears surrounding Huawei that Trump’s administration has raised.

“The UK has investigated and scrutinised every bit of kit that comes into this country in a very detailed way. There’s no evidence whatsoever of any backdoors or anything like that,” he said.

Read more: Businesses welcome ‘compromise’ over Huawei’s role in UK 5G network

BT’s fundamentals worry investors

Analysts rushed to warn of uncertainty over BT’s future following the results.

“The weak earnings come as BT warns of a £500m cost over the next five years,” Nigel Frith, a senior market analyst at Ask Traders, said. “Needless to say, investors are concerned about the outlook of BT. Whilst the threat of nationalisation from a Labour government has gone, BT’ s outlook is far from rosy.”

Calling it a “mixed bag”, Brewin Dolphin investment manager Arlene Ewing added: “The significant drop in free cash flow is a particular concern. The business has made significant investments in recent years, leading to higher capital expenditure and increased debt.

“The hope remains that this will lead to better times ahead with BT reaping the benefits of its outlay over the longer term.”

Meanwhile, Markets.com’s chief market analyst, Neil Wilson, said BT’s debt pile is spiralling.

“The cost of investment in 5G and fibre is crippling, despite the cutbacks and cost savings,” he warned.

“How can BT justify paying over £1bn in dividends when it needs to sort this debt out, get a grip on the pension deficit and do the kind of capex needed for 5G and mass fibre rollout?”

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