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BT Group (NYSE:BT)

Q1 2013 Earnings Call

July 25, 2012 4:00 am ET

Executives

Catherine Nash

Ian Paul Livingston - Chief Executive Officer, Executive Director, Chairman of Operating Committee and Member of Pension Scheme Performance Review Group Committee

Anthony Everard Ashiantha Chanmugam - Principal Financial Officer, Group Finance Director, Director and Member of Operating Committee

Jeff Kelly - Member of Operating Committee and Chief Executive Officer of BT Global Services Division

Gavin E. Patterson - Executive Director, Member of Committee for Sustainable & Responsible Business, Member of Operating Committee and Chief Executive of BT Retail

Olivia Garfield - Chief Executive of Openreach

Analysts

Andrew Lee - Goldman Sachs Group Inc., Research Division

Nick Delfas - Morgan Stanley, Research Division

Robert Grindle - Deutsche Bank AG, Research Division

Paul Sidney - Crédit Suisse AG, Research Division

Nick Lyall - UBS Investment Bank, Research Division

Carl Murdock-Smith - JPMorgan Cazenove Limited, Research Division

James Britton - Nomura Securities Co. Ltd., Research Division

Simon Weeden - Citigroup Inc, Research Division

Michael Bishop - Barclays Capital, Research Division

Jeremy A. Dellis - Jefferies & Company, Inc., Research Division

Stephen Paul Malcolm - Arete Research Services LLP

James Ratzer - New Street Research LLP

Darren Ward - Echelon Research & Advisory LLP

Louis-Clément Azais d'uhart - Day By Day

Stephen Howard - HSBC, Research Division

Guy R. Peddy - Macquarie Research

Stuart Gordon - Berenberg Bank, Research Division

Operator

Hello, ladies and gentlemen, and welcome to BT's results conference call for the first quarter ended 30th June 2012. My name is Bupendra. I'm your coordinator for today. [Operator Instructions] I would like to advise all parties, this conference is being recorded today. I'll now hand you over to the company.

Catherine Nash

Thank you, Bupendra, and welcome, everyone. It's Catherine Nash here from BT IR. On our call today, we have Ian Livingston, Chief Executive; and Tony Chanmugam, Group Finance Director. Ian's going to talk to you on the headline results and then go through the lines of business. Tony will then go through the financials in more detail, and then we'll hand over to you at the end of the session for questions. In the room with us today, we also have the COOs of all our lines of business.

Before we start, I'd just like to draw your attention to the usual caution on forward-looking statements. Please see this slide that accompanies today's call and our latest annual report on Form 20-F for examples of the factors that could cause actual results to differ from any forward-looking statements we may make. Both the slide and the annual report can be found on our website. I'll now hand over to Ian.

Ian Paul Livingston

Thank you, Catherine, and good morning to everyone. Thank you very much for coming on the call. I'll go straight into our overall results, if you would like to turn to Slide 4. Overall group results, revenue was down 6%. However, on an underlying basis, and to be clear, underlying is excluding any M&A activity, exchange movements, specific items, excluding that and excluding transit, it was down 3.2%. This clearly reflects, on one side, lower revenue from Global Services but actually, a good improvement in Retail, Wholesale and Openreach's trends. And actually, Global Services, down about 1.2% on underlying ex transit basis, which is progress. EBITDA continues to be solid, up 2% in the quarter and normalized free cash flow. As we've said quarter-after-quarter, it is volatile, but clearly, this number was a bit lower than you'd expect it. And there's really some unusual factors in that, and Tony will talk through what's happened and with the reversal, some of these items come in later.

So from that, let's go to the individual lines of business on Slide 5, Global Services. Global Services revenue was down 9% headline basis, was at down 6% excluding transit. If you look on the right-hand side, I think you see the key movements. And over half of the underlying ex transit revenue decline came from tough conditions in Continental Europe and financial services sector, and we do show that in the numbers. I don't think that's a huge surprise. Certainly, the market has not got better. It's got worse, I think, recently, and we saw, for instance, double-digit declines in Spain even in constant currency, and in addition to that, with the currency movements, it's significant declines.

Underlying operating costs I think have started to go in the right direction. They're down 6%, and I would stress that's excluding foreign exchange, so it will be down more than that on a -- including foreign exchange. And that's meant that the underlying EBITDA is down 8%. However, actually, a big part of that was the fact we had more leavers cost charged to P&L this year than last year in this quarter, and leaver costs have been volatile. And as you know -- remember, those of you who have been around a while, that we used to show ex leavers as a key measure. And actually, ex leavers were down 3% in Global Services, and we're still committed to growth in EBITDA in Global Services for the year as a whole. So I think just to put it in context, it is a tough market. But with the right cost program, and I think there's a lot more to be done there, we still believe Global Services can grow its EBITDA.

Cash flow. We said that cash flow would be lower this year, and it was down in the quarter. Some of the things that we thought would happen, and we can talk in more detail of it, and Tony will do, there's lower contract-related receipts, some delays in debt receipts and time and supply payments. We did see in Q4 that you would expect Q1 and Q2 to be lower due to working capital in Global Services, so that -- a lot of that we expected.

And in terms of order intake, order intake was GBP 1.1 billion. We had a good Q4. This was obviously a weaker Q1. Again, it's the same story we said in Q4, which is the absence of the very largest deals. We're doing lots of deals with lots of people. We had good deals, for instance, with Tesco, with Caixa Economica in Brazil, with Rolls-Royce, really good deals. But we didn't have -- for instance, this time last year, we had, last year, Camden Council, which is GBP 400 million. That being said, GBP 1.1 billion is lower and I think does reflect the fact that people are holding off and deals are more difficult, but that's very much something we raised at Q4.

Now turning to Slide 6. I thought it's useful just to put in context, because Global Services was been tough conditions just now. It's come a long way over the last few years, and you see that in the chart to the left in terms of EBITDA and free cash flow growth. And just if I look at the key things that we are focusing on in Global Services, I think we've seen a huge improvement in the risk profile of the contracts we do. We, the management, is substantially better in them, and the profile is really much less. This is not the business of a number of years ago.

We've also seen customer service improving in Global Services, and that's important. It's actually important for the overall contracts. We're providing customers want they want. It doesn't mean we never have any problems, but again, a huge improvement is recognized by external industry analysts as well. We've also spent time and effort and money in enhancing our product range, particularly globalizing it, making sure we have a consistent product range, well explained, and I think that's going to produce a good position going forward, as is our investment in faster-growing economies. We're still seeing a strong growth, for instance, in places like Asia, which we started in an investment this year, and it's going to be focused in Middle East and Africa. But we expect to grow -- to add about GBP 500 million of revenue in the medium term from these fast-growing economies, so that's good.

What isn't so good is the macroeconomic environment. Unquestionably worse than we thought a while back, and it's got -- it's a bit worse than Continental Europe, Southern Europe in particular. But if you just look overall, external industry analysts call it, all of them are saying they're seeing the lowest level of contract volume in the decade. In that environment, we can sit there and moan about it, or we can do something about it, and we prefer to go for the "do something about it" route. And what we -- and clearly, we got to do a lot more in cost transformation in that environment. I think this was an improved quarter in cost transformation. I think I said it at the tail end of last year. We probably -- we hadn't done as much in Global Services as we want to do. And I think the economic environment has just meant we've got to do more, and we've got to improve our process, improve our services to reduce our overall cost base, and that is why that is going to be the key area of focus. What we are not going to rely upon is a sudden upturn in European markets. I think that would be unrealistic, and what we will look to is really focusing on efficiency and effectiveness to deliver the sort of Global Services business we expect in the future. That said, this is very, very, very different business from the one of a number of years ago.

Now turning to our Retail business. Revenue down 3%. Actually, on an underlying basis, because it is affected actually by FX because we've got consumer business in also Ireland, it should be better than that. But actually, excluding trade sales, which as I talked about in BT Business. I mentioned this last quarter. Actually, decline was 1%, and that's a pretty good performance. And I think we see that in our consumer business. Revenue, down 2%, but if you look at the chart on the right, that's a continuation I think of the improvement we saw, first of all, in Q4 in terms of year-on-year performance. Business revenue down 6%. 2/3 of that is from what I mentioned the IT hardware sales. This is something we decided to withdraw from Q2 last year, very, very low margin. It's not business we felt particularly that we should be in, and that accounts, as I said, for 2/3 of that decline. We've got one more quarter of it, and then in Q3 and Q4, we're no longer anniversary-ing it. And that's one of the reasons that we expect to see a better second half in our Retail business in terms of overall revenue trends. Retail continues to deliver on operating cost. Net operating cost, down 6%, and this has now been going 7 years plus. And that's the reason we've been able to grow our EBITDA 7%, and that's a good financial performance.

Looking at some of the operational metrics, on Slide 8 in our consumer business. Consumer ARPU is up 6%. The vast majority of that come from greater broadband sales and of course, a lot of that being fiber just now. We got back to 50% share of broadband net adds, which we've had for most quarters in the last few years, did 85,000 out of 170,000 broadband adds. And I will say something about the volume in the market later when we talk about Openreach. Fiber is going really well, very pleased. Net adds over 150,000, now over 700,000 fiber customers. BT Vision as well, and I think contrasting with some other announcements recently, at net adds of 21,000 in BT Vision. YouView is going to launch a bundle service in the autumn. YouView is one of a number of things that we'll be doing over the course of the next year, and that's, as I said, for a number of quarters. But BT Vision is continuing to show solid growth.

Obviously, one of the things that we'll be doing over the course of the next or -- year or just over a year is Premier League rights. Really nothing to -- particularly to add from a few weeks ago when we announced it. You know the 38 games, 18 first picks we've got, and we've done what we've -- sort of part of what we need to do, paid the deposit, which is affecting the cash flow number. And also, just going through the process you have to go through of negotiating a long-term contract with FAPL. So we're doing all of that and whilst doing the preparations and setting up the channel. But there's nothing to add from a few weeks ago, and I think we will tend to say a lot more nearer the event rather than doing that well, well in advance.

One thing is worth mentioning when we're talking about things like fiber is the demand for bandwidth in the marketplace. And we're seeing a huge demand for bandwidth, and WiFi hotspots are an important part of that. We actually rebranded BT Openzone and BT Fon to BT Wi-fi this year to create a far more unified proposition. Over 4 million WiFi hotspots, and I think this -- a big number. The minutes actually used in these hotspots are up 80% year-on-year, 1.7 billion minutes, and I think that shows the value of that asset but also, the way that people with smartphones and tablets are looking to fixed line bandwidth to deliver what they need.

Now turning over to Wholesale. Wholesale, underlying revenue down 2%. That's pretty consistent. We've been for -- we've been there or thereabouts for a number of quarters and then with the same basic reasons for it. And net operating cost, down 1%. That's the improvement, basically, because the impact on network migration costs are a lot lower, and that was the thing that was keeping the cost base up despite the revenue decline. And that's actually led to a significant improvement in the EBITDA performance, and I think that's something we indicated to look to see towards the end of the year. We said that about a year ago, and that's the case.

Order intake, GBP 500 million, some very big orders for the mobile companies for these net circuits, and that contributes a lot. And also, something which we've mentioned before, an approach that's been why we mentioned it, IP Exchange minutes up 90%. Now today, it's a reasonably small revenue but growing at a very fast rate. But we actually believe our IP Exchange, that we've invested in this. We've invested both in the U.K., but increasingly, we're investing globally. We've created a very good base for exchanging IP traffic, and we think that's going to be a very big opportunity for us, worth many hundreds of millions of pounds in revenue to the group over the course of the medium term. So it's the reason we mentioned it, and I probably was remiss in not saying earlier, but I think it's one of the areas of growth for us.

Now turning over to another, Openreach. Revenue in Openreach was flat, which given that impacted directly price reductions which we told you about, which was at GBP 40 million. That's a pretty reasonable performance. I think it shows the growth in Ethernet and fiber. Net operating costs were down 2%. Now that's despite increased repair activity, and that's carried on into this quarter. We've seen repair demand up by 40% in a number of weeks in the quarter, really because we've had the dreadful weather, the wettest I think May and June for 100 years. So it's -- that's meant we've been doing a lot more repairs. And despite all that, EBITDA up 3%.

And the operational side of things, first time for a while, the reduction in physical lines. Now in part, that is due to normal seasonality I referred to as June's closing down, going back from university, that sort of things, it's always a weaker quarter. But there was also another reason which is related to this repair. We did divert resource from provision into repair. So it did have an impact in terms of the overall physical lines and also, actually impacted the broadband net adds, although probably at a slightly lesser extent. That being said, I think probably -- despite seasonality, despite that impact, probably, broadband growth is a bit weaker. It's still remarkably strong given the environment, but I think that's probably a little bit weaker than it has been in the quarter, but these things can move around. No question about it.

Turning over to the next slide, fiber rollout. It's a really good quarter in terms of delivery of fiber, over 2 million premises delivered in the quarter with now -- as we speak today, now passed over 11 million premises, 750,000 now connected and 170,000 connected in Q1. So these are all really good numbers. And we've got a lot more to go in fiber. It's not just about the commercial rollout we talked about. Actually, there's a lot of innovations going around, speed and reach and innovations that will help lift up some of the slower speeds in fiber but also increase the reach that you can now do with fiber to the cabinet products and also, things that can be done to deliver higher speeds from copper-fiber mix. Now I won't go into a lot detail but just to say, actually, those innovations, I think, will make the ongoing fiber story and capability, I think, get better as time goes on.

And also, a number of them will help us in BDUK. BDUK, obviously, is the government's program to deliver fiber to let's call it the final third. There was a national framework, and basically, ourselves and Fujitsu signed up to that. Since the 1st of April, i.e. the start of the financial year, we're delighted to have won 4 contracts: Lancashire and Rutland, we've mentioned before, North -- but even in the course of last week, 10 days, North Yorkshire and Wales. Wales is the largest contract today. It's GBP 425 million contract. Obviously, BT only puts in a portion of that. The rest is provided by government. But that's going to deliver fiber-based services in 96% of premises in Wales, and it shows, I think, what can be done in terms of working together with local government, national government and actually, European government. And we see that, actually, even in the projects on delivery. And in Northern Ireland, we've got over 90% coverage.

There's a double-digit takeup already in Northern Ireland. And it's not that many years ago we signed the Northern Ireland deal, and I think it shows we've gone from signature to actually delivery and customers using it on a very large scale in a very short space of time. And we're seeing exactly the same in Cornwall. Already, over 40% coverage in Cornwall, and it's not being long ago that it was -- that we signed the contract. And I think in contrast to some other people who have been involved in trying to provide fiber capability, who certainly talked a lot about what they can do, actually, we're delivering that. And it can be seen we -- the Cornwall project, one project of the year from the World Communication Awards, so at least people outside the U.K. I think appreciate some of what's been done. But I think pretty good news on BDUK, lots more to still to be done and working, I think, together with Europe and on the ground but lots of good things there.

And so in summary, the fundamentals of this quarter is profit and EPS have grown and continues to grow double-digit growth in EPS again. It has been a volatile quarter for cash. We did expect to impact about our working capital, but it's been impacted more, and we've talked about and Tony will talk more about some of the specific things that happened. It has been a good performance in BT Retail, Wholesale and Openreach. They were all moving in the right direction. They occasionally will zigzag a little bit about these things, but actually, fundamentally, we're pleased about our performance.

Global Services is more challenged. It's challenged by the tough market conditions which we're operating in both in Europe and the financial services sector, which means it has to work harder, do better to offset these. That is the hand that we're dealt, and that will certainly be a really key focus for us in terms of the cost-reduction program to deliver the overall financial results.

So overall, without self-help, we believe we're on track for the year as a whole, and that's the important thing. Quarters can be volatile, but we remain committed to full year expectations. And also, we're looking forward to -- with great delight, to the sunny weather and to an excellent Olympics of which BT will be a key part of that.

And with that thought, I'm going to pass you to our CFO, Tony.

Anthony Everard Ashiantha Chanmugam

Thanks, Ian, and good morning, everyone. I'll take you through the first quarter financials in a bit more detail starting with revenue on Slide 14. Headline revenue was down 6% in the quarter, which includes the impact of the GBP 67 million decline in transit revenue. There was also a GBP 56 million negative impact from FX as a result of the weaker euro and a GBP 13 million impact from disposals. Our main measure, underlying revenue excluding transit, was down 3.2%.

We delivered another quarter of growth in EBITDA, which was up 2%. Excluding FX and disposals, underlying EBITDA grew by 3% as we lowered our underlying cost base by 8%. Depreciation was down 2%, which contributed to operating profit growing 6%. Interest was broadly flat, leading to profit before tax growing by 8%. This grew our 10% increase in our adjusted EPS to 5.7p, making this the 11th consecutive quarter of double-digit growth in earnings.

Turning to free cash flow on Slide 15. Normalized free cash flow was an outflow GBP 124 million in the quarter, which was GBP 325 million down on last year. The year-on-year decline in cash flow was partly due to CapEx. Remember, we said that quarter 4 CapEx have benefited by around GBP 40 million of timing benefits, and these reversed in quarter 1. The decrease also reflects the increase in tax due to our higher taxable profits.

But our cash flow was lower than we expected, and this was mainly driven by working capital. There are a few reasons for this. Firstly, we have around GBP 150 million of late payments. Around GBP 100 million of this was from a few of our customers in the sector who decided to pay us later than contracted. However, this cash came in right at the start of July. The remaining circa GBP 50 million relates to Global Services and reflects the current conditions in Europe. Its 's cash was also impacted by the timing of supplier payments, which tend to bounce around from one quarter to the next. And finally, you'll remember we had to pay a deposit for the Premier League rights, which was worth around GBP 27 million.

Below normalized free cash flow, the GBP 2 billion payment in the pension scheme resulted in a tax benefit of GBP 162 million in the quarter. We expect a similar sized benefit next quarter and for the full year, cash tax benefit from pension deficit payments to still be around GBP 560 million. After specific items of GBP 33 million relating to the Global Services network and property rationalization cost, reported cash flow was close to 0 in the quarter. Net debt of GBP 9.1 billion was up year-on-year, reflecting the GBP 2 billion pension payment in March which is partly offset by our cash flow generation over the last 12 months.

Turning to Slide 16 on cost transformation. During the quarter, we cut out cost by GBP 317 million. On an underlying basis, excluding FX and disposals, costs were down 8% with reductions across all our cost categories. We continue to focus on process transformation programs that cross the boundaries of individual lines of business with the aim of improving the customer experience by reducing the cost of failure. On our volume lead to cash process, we have a cost base of circa GBP 330 million, which we're targeting to reduce by around 20% and of which we've already delivered annualized savings of over GBP 35 million over the last 9 months.

On the more traditional areas of continued comprehensive cost focus, there still remains opportunities. For example, in travel and subsistence, we reduced our cost by 4% last year. This year, we've focused on reducing the need to travel by using alternative ways of communicating, such as conferencing. We already use conferencing extensively, and we intend to increase this even further. Together with improving the way we procure using advance purchasing, for example, we expect to take a further 10% out of our travel and subsistence cost base this year.

We have a small team dedicated to bringing back jobs into the company. The aim is to reduce the cost of services provided as well as ensuring we find roles for our staff who are freed up through the efficiency programs, all of which I mentioned earlier. This year, we'll bring back well over 3,000 jobs within the company, a reasonable proportion of which will utilize existing staff. So these are just a few examples of the types of things we're doing. We're making good progress, but as Ian said, there's still much more that we can do.

Turning to Slide 17, there are a few more items I'd like to pick out. As you know, we announced a GBP 300 million buyback at the quarter 4 results. And during quarter 1, we bought back 40 million shares at a cost of GBP 82 million. The buyback is aimed at offsetting the dilutive impact of share option plans this year, and they're around 114 million options which become excisable from the 1st of August for a period of 6 months.

In June, we issued the equivalent of GBP 795 million in U.S. dollar bonds. This serves a number of purposes. Firstly, it gives us more flexibility, and it means we're now fully funded for the GBP 2.4 billion of term debt and short-term borrowings that is really payable this financial year. Secondly, market conditions were favorable, and we've been able to raise debt at an average rate of around 2%. This lowers our average cost of debt and our cost of carry. As always, we'll continue to see if there are any other opportunities in the market to better manage our debt and our interest cost. Moving on to the pension, there's very little to say. The IAS 19 net deficit came in at GBP 1.9 billion, which is unchanged from March.

Turning to our outlook on Slide 18. There is no change to our group outlook for the year. On revenue, we expect underlying revenue excluding transit to show an improving trend relative to last year. You may remember that last year, we called out around GBP 60 million of contract milestones that we're recognizing quarter 2 rather than quarter 3. Because of these, we expect underlying revenue excluding transit to show a larger decline in the second quarter than we have seen in the first. However, we expect a material improvement in the second half of the year, partly as we anniversary the withdrawal from trade sales in Q2 last year and partly because of an improved performance. We continue to expect EBITDA to grow this year and that normalized free cash flow will be broadly level even with the payment of the Premier League rights deposit.

It's worth noting that because of the last day of the quarter 2 falls on a weekend this year, this will have an impact on when cash payments from some of our major customers come in. So largely, for this reason, we expect second quarter free cash flow to be below last year before returning to growth in the second half.

Turning to Slide 19. We've continued to expect underlying revenue excluding transit in 2014 to show an improving trend. But when we announced the Premier League rights in June, we gave you a view of what the impact would be on our 2014 EBITDA and cash flow. Given the circa GBP 100 million impact we said we would see on EBITDA, we now expect group EBITDA to be broadly level compared with 2013.

On free cash flow, we previously said that we expected this to be above GBP 2.4 billion in 2014. After the circa GBP 200 million cash impact due to the Premier League announcement, we now expect our normalized free cash flow to be above GBP 2.2 billion. For 2015, our outlook for normalized free cash flow remains at GBP 2.5 billion.

With that, we'll be happy to take your questions.

Ian Paul Livingston

Bupendra, do you want to give them the -- how to ask questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Andrew Lee from Goldman Sachs.

Andrew Lee - Goldman Sachs Group Inc., Research Division

A question on Global Services and then a second question. Firstly, on Global Services, the domestic trading environment, how is the competitive intensity here at the moment? Have you seen any shift in the competitive pressure from Cable & Wireless on the bigger contracts or from the rest of your competitors in SME? And then the second question was on the fact that Ofcom highlighted their reserve spectrum for a fourth national wholesaler. I just thought I'd give you the opportunity to say you're still not interested in owning a mobile network or to see if there's any change there.

Ian Paul Livingston

The answer to the second one, yes, confirmed. There's no change there to that question, and probably, it will be 13 questions that will now drop off the list. In terms of domestic, I was -- I assume when you say domestic, you mean domestic U.K., because of course, we've got domestic businesses in a lot of countries. In terms of that competitive intensity, I'd see if Jeff wants to add anything, but it remains a competitive market. We've had some good wins, and we're -- which we're pleased with. I think same in SME business. We're -- we've done well in what's been a difficult marketplace. But maybe, Jeff, you want to talk about the corporate side and if Gavin wants to add anything on SMEs.

Jeff Kelly

I would say it's about the same intensity as we've seen in the past. I wouldn't say we'd see Cable & Wireless any more aggressive on our existing accounts. We're both very aggressive on accounts that we both own, but I wouldn't say it's any more intense.

Gavin E. Patterson

Let me start on SME space. I think we're seeing the market contractors, a number of customers are looking to consolidate their state, for want of a better word, where we're operating, where we are actually growing market share.

Operator

It's from the line of Nick Delfas from Morgan Stanley.

Nick Delfas - Morgan Stanley, Research Division

So with 2 questions. First of all, on H2 revenue recovery, I calculate roughly your IT hardware points will give you a following wind of 60 basis points compared to the first half. But given that one I guess shouldn't expect any change in the European economic environment, maybe you could say a little bit more about where you expect the rest of the recovery to come, calculate what you need to get that flat revenues in H2 to reach your revenue guidance. And secondly, what else can you tell us about Global Services to reassure us? I mean, if you look at EBITDA minus CapEx versus cash flow, we're starting to see a gap opening up again in the quarter and also, as you said, a full year in the year. What reassurance can you give that, that's not a problem of profit recognition?

Ian Paul Livingston

All right. I'll let Tony answer in a second. But yes, I mean we had -- I think it's about a GBP 20 million hit in Q1 from that point about the -- what was going on with the -- with trade sales, and that would drop out. It's a bit less in Q2, but it will drop in Q3 and Q4. And also, of course, we've got anniversary if you recall I think from recollection. Q2 last year, actually, our revenue was up because of the GBP 60 million benchmark -- the GBP 60 million stage payment we had that we've highlighted numerous times, so no great surprise there. I think also it's the buildup to the investments. As we add more fiber, as we improve on Vision and the other actions we're taking is the reasons we expect to see materially better position overall in revenue in the second half. In terms of Global Services, I'll pass to Tony. I mean we said there would be working capital movements this year, and that was -- that's why we expected a lower cash flow. I think Tony can give you some reassurance on some of the key numbers that show that this is a very different, and in May, we expected issue on cash flow but -- and that's also different from the fact that we have a more difficult economic environment. But Tony?

Anthony Everard Ashiantha Chanmugam

Nick, the first thing is the working capital is going to bounce around quarter-on-quarter. That's always going to happen based on things like supplier payments, contract payments, et cetera. If I looked at the previous 2 years, we have positive working capital, you can't have positive working capital every single year. This year, we're into the situation, as we indicated previously, we'll have negative working capital. In terms of your concern, putting it bluntly, what you're saying is that we're deferring cost on the balance sheet to improve profitability. If I look at the quarter 4 to quarter 1 movements, there is no movement in terms of deferred cost. If I look at the quarter 1 movement to quarter 1 last year, we've actually got about GBP 150 million reduction in deferred cost. So effectively, the balance sheet is materially stronger than the same time last year. And if I took it back a further year, you'll see same results of reductions. So this is not a situation where you've got a overhang on the balance sheet that could lead to potential issues.

Operator

Next question is from the line of Robert Grindle from Deutsche Bank.

Robert Grindle - Deutsche Bank AG, Research Division

As you flagged in the presentation, you've been very successful in winning a large number of BDUK contracts. Is the CapEx and EBITDA associated with these fully in the guidance? And was it accretive the free cash flow over the next couple of years? And then secondly, the U.K. government appears to have made some progress in re-contracting some of its business or at least shortlisting suppliers. Is there any change in your expectation due to all of that? It seems very impenetrable. And when -- would the process if -- have an impact if any at all?

Ian Paul Livingston

I'll ask Jeff to talk to you about the U.K. government. BDUK, given these are long-term investments, it will not -- when we're spending the money, it will not be accretive to free cash flow when we start spending it. It will be -- the expectations in terms of cash flow and profitability include the BDUK bids we've got. I think a comment I made before about BDUK, when we talked about the GBP 2.5 billion that we were spending, we contain that within the overall guidance, about GBP 2.6 million of CapEx. If we hadn't been involved in BDUK when we finished about 2/3 of the U.K., that number would drop quite materially. Because we're doing BDUK, it's less likely to do so and so carry on for some more years. Probably, if we won all of the BDUK bids, it's around about GBP 1 billion of our overall money. And providing over a 3-year period or something, isn't that different to the sort of rate to expenditure we've had? It's a shade less than we're spending on fiber at the moment. It may change the profile of exactly what we do, but it's contained within the numbers. It will just mean that the -- as we look to some outer years, that we've got a lot more fiber in the U.K., which gives us some really good EBITDA opportunities, because of course, once you spend the capital, the EBITDA is there. And I think you see both in the results in Ireland, for instance, where our EBITDA has grown and also in Openreach, starting to see some of the impact of that coming through. But within the overall forecast, we can manage that very nicely. On U.K. government renegotiation, Jeff, anything?

Jeff Kelly

Well, I think just a general comment in our -- our revenues are stable year-over-year in our government business. If you're referencing PSN, I think we've been very robust and proactive with Camden office. I think we're positioned very well. In March, we were successful in 8 of 12 lots there, which positions us well in our core business. Yet had to be seen on those contracts. But even in our existing contracts, as we do in most of these, we gain PSN compliance agreements and then move our customers closer to PSN requirements. So net-net, it shouldn't change drastically. We normally compete in this market previously, we will continue to do so.

Operator

Next question is from the line of Paul Sidney from Credit Suisse.

Paul Sidney - Crédit Suisse AG, Research Division

Just 2 quick questions, please. Could you remind us, in Global Services, the number of large contracts that will be renegotiated in the next 3 years. I think you've given us this information in the past. And maybe just sort of big picture and give us the potential impacts of those renegotiation in the past both on the revenue and the cost side? And the second question, could you just give us a bit more information on the adverse impacts from the weather in the quarter. Have you seen a lot of pent-up demand coming through for broadband and the line trend reversing in the quarter so far?

Ian Paul Livingston

What? In this quarter that we are now in, pent-up demand?

Paul Sidney - Crédit Suisse AG, Research Division

Yes, indeed. Have you seen some pent-up demand?

Ian Paul Livingston

I'm not going to get you through the 3 weeks of Q2 we're now in -- talk about that. In terms of GS contracts, as we said, there's less than the normal of the existing contracts of the very largest contracts coming up for renewal. But one of the things we need is -- that's about renewal date. But you go out, on top of that is, we may decide to try and renegotiate some of these earlier. And it will so -- and I think we would look in a couple of places to do that and at the same time, to lend to them as well. So I think whilst we don't have a huge number of contracts absolutely end, what we were actually trying to do, I know, with a couple of large contracts, proactively extend them well before. Because a lot of these things, they take a couple of years to change over, so it's a good time to negotiate earlier. But we are comparatively right in contracts to end over the next couple of years and that it comes up a little bit more in a -- in a sort of year after that. But we'll probably do a bit more in terms of that in terms of bringing things forward. So that's -- and that will -- and not alter the mix between renewals and existing. If we don't renew them, the contract volume will be lower than if we do renew them, but the mix will be towards -- more towards new and say -- and we'll try and give you that idea as the numbers come through quarter-by-quarter.

Operator

Next question is from the line of Nick Lyall from UBS.

Nick Lyall - UBS Investment Bank, Research Division

Two questions, please. Firstly, on the Global Services cost that you mentioned. I mean, is that enough to actually start to increase margins slightly or is this just enough to contain the weaker revenue outlook, do you think? And then secondly, on the overall group cash flows, you've maintained the GBP 2.3 billion for the year. Is there any change in the working capital assumptions within the overall GBP 2.3 billion guidance, please?

Ian Paul Livingston

Well, I don't think we gave you working capital assumptions in the GBP 2.3 billion guidance. So, no. There's not change in terms of us not giving you guidance within that. I think we gave you the overall number and...

Nick Lyall - UBS Investment Bank, Research Division

I'm just trying to get to where that GBP 2.3 billion was more risky because there was no change of issuance. I mean, we don't know what the actual number is.

Ian Paul Livingston

No, no. And so -- we said there'd be challenges in working capital in Global Services. I mean, we've -- that's what we said. That was the movement. So -- but after, we commented on the rest of the business. On GS and EBITDA, I mean, yes, margins will increase in -- EBITDA margins will increase de facto that we're saying that EBITDA will increase and obviously, there's revenue pressures and we need one heck of a turnaround in revenue for the margins not to be increasing Global Services. So I think you can take from that EBITDA margins to expect to increase. It's not -- long term, of course, it's about creating a business that generates the sort of free cash flow a market leader should do, but we still expect -- we will have fluctuations annually and that's why we highlighted in Q4 that we'd expect the working capital to be an outflow and therefore bring the free cash flow down for this year.

Operator

Next question is from the line of Carl Murdock-Smith from JPMorgan Cazenove.

Carl Murdock-Smith - JPMorgan Cazenove Limited, Research Division

Most of the question for Gavin in that space and just from the mix between Infinity packages. I was just wondering what proportion of Infinity net adds you're seeing taking the 80 megabit products?

Gavin E. Patterson

I mean, the majority take the high tier. So I don't know whether we've given any -- I'm getting a shake to the head from my friend. So it is the majority.

Carl Murdock-Smith - JPMorgan Cazenove Limited, Research Division

On YouView offerings, obviously, you talked to launching that offering tomorrow. When you do come to launching the bundles in the autumn, are you minded to at the same time to launch YouView within Plusnet bundles?

Ian Paul Livingston

I don't expect Plusnet to launch in the autumn, but I do expect YouView to be available over the Plusnet network in the next 12 months. I'll say that.

Operator

Next question is from the line of James Britton from Nomura.

James Britton - Nomura Securities Co. Ltd., Research Division

Two questions, please. Firstly on regulation, how do you interpret the issue statement on NGN and broadband costing methodologies? Should we assume a flat or increasing on bundling prices in the future? And does it make sense to you to do fiber any differently if you're guaranteed full cost recovery on these investments? And then secondly, can you just perhaps give us some color on any lumpiness in revenues or costs associated with the Olympics for Q2? And would you be able to strip out from an Olympics related cost to improve Openreach margins in the second half?

Ian Paul Livingston

All right. And in terms of the lumpiness -- and there is some additional costs due with the Olympics. It shouldn't be dramatically material, but there will be some additional costs we've got incurred and I think some focus in there. And certainly -- but it won't be an enormous but it will be -- we will be able to notice it. In terms of our regulation, I think the thing about answering your question right, the EU announcement on regulation was actually, we were really encouraged about it because what it did is it very much brought it into line with what the U.K. position is and I think that's a big movement from where the EU started, which they start in a very different place and now, they've come up and said, "Actually, what we look at is cost orientation, nondiscrimination, equal access," which is a U.K. model. And the reason they came up with that, I believe, is because the U.K. is succeeding and whilst clearly, it wouldn't be mentioned in the U.K. like this, Europe floats around Europe, and to say the U.K. model works really well in terms of delivering to customers what's required and encouraging investment. And that's exactly what's happened. So I think it really -- we were very pleased with that. I don't know, Liv, is there anything you want to add to that?

Olivia Garfield

The only thing -- I guess, you asked specifically about cost orientation. So I guess as we've said previously, it was a wholly cost-oriented model, prices could go up or could, I guess, stay the same globally. The interesting thing, I think, that came out of the E1 wasn't a guaranteed cost orientation will be fully recovered. It was the direction of travel. So I think you just view it's our previous commercial case and it's now got a strong support across Europe.

Ian Paul Livingston

Was there another question, James to it?

James Britton - Nomura Securities Co. Ltd., Research Division

No, on the Olympic side, I guess, I was just wondering whether or not cost will fall out after the Olympics, and actually, you'll be able to reach margins having a lift?

Ian Paul Livingston

No, no, no. No, Liv will resume her normal cost reduction plans and -- her reasonable reduction plans. But no, it won't be -- you won't see an impact in terms of the -- in Openreach in that terms. I think, actually more a limp there, it might be you see a bit -- things like advertising and marketing and things like that. It's not going to be an Openreach thing.

Olivia Garfield

We'll be delivering it in 2 years, so it's an ongoing delivery.

Ian Paul Livingston

Yes, believe me, if the seconds aren't in now, we are a little bit in trouble given the Olympic, things starts today and women's Football I think in Cardiff, Hampden and somewhere else, say, Coventry apparently as well.

Operator

Moving on to our next question is from the line of Simon Weeden from Citigroup.

Simon Weeden - Citigroup Inc, Research Division

Just one question if I may and that is on the impact of the MTR cuts during the quarter. Could you give us a view or a number or a rough number for the impact in the cost base as the latest set of MTR reductions? And whether or not you think in due course you will be obliged to pass some or all of that on?

Ian Paul Livingston

Well, I'll ask Gavin about passing on. I think we are looking to use it to -- we have, up to now, passed the cost straight on. And I think now we look more and more to put it in the packages to really encourage people to make more calls from the fixed line to the mobile and I think that's the way. We do give a number of course for our x transit and MTRs. And within that, we give the MTR number and that -- and so big number in the quarter. But Gavin, do you want to talk about pass them on and outstandingly keen prices you have?

Gavin E. Patterson

I mean, we pass them on to date, as Ian says. And going forward, I think the lower MTRs give us the scope to introduce more innovative proposition, particularly on unlimited-type packages or capped-type packages. So I'm not going to announce it today, but that's the sort of direction we're looking at going forward.

Operator

It's from the line of Michael Bishop from Barclays.

Michael Bishop - Barclays Capital, Research Division

Just 2 questions, please. Firstly, on TV. It seems like you have 2 solutions coming up, obviously, YouView and the new Vision2 box. So I was just keen to get your thoughts around how will you decide which ones to promote and when and into which customer base? And then I guess another question on the retail following up from Carl's. Just on the fiber gross adds, Vmed yesterday were trying to essentially imply that most of your fiber gross adds were just up-sell as opposed to new retail subs, so I'd like to get your thoughts on that given the strong adds in the quarter?

Ian Paul Livingston

Well, I think you just said and answered the second question. I think you almost asked and answered it yourself, which is, look, I mean, I know Vmed in their presentations do like to talk about how well they're doing and how people providing it through on the BT Network aren't doing well. Looking at the net numbers, I mean, that's -- I mean, we can debate about how much we're adding in markets through areas which is we're doing very well. We've got fiber. We see much higher growth and it's a comment I've made a number of times where we've got much higher broadband growth where we've got fiber than where we don't. And the net result which you see, we've added 85,000 broadband customers. I think Vmed lost net 10,000 of their -- of net customers. So I mean, to be honest, that's really -- they're not really the discussion point in terms of market growth as has been for a number of quarters. I don't think it's going to be change that Sky and BT have accounted for over 100% of the market. And let Sky come out with their numbers, but certainly, that's been the position for a number of quarters. And I think that's where the intensity of the battle is. And the rest of the market have been net contributors to there. And we are fighting very hard in the marketplace. But Gavin, you want to add?

Gavin E. Patterson

Just a comment on the 2 platforms YouView and Vision2.0. Of course, the Vision2.0 portal will feature within our YouView proposition. And ultimately, the 2 will completely converge in a single proposition later next year. The key for us is getting IP channels, linear channels, available on YouView, and we're working with the bench to make sure that's part of the proposition next year and I think that's the point they we'll come to go.

Operator

The next question is from the line of Jerry Dellis from Jefferies.

Jeremy A. Dellis - Jefferies & Company, Inc., Research Division

Two questions, please. Firstly on Global Services, I think you've got quite a lot of capital invested in the large businesses in Southern Europe, particularly in Italy. Given that the Southern European outlook could be depressed for quite a long time, I wondered if you could talk about the rationale for keeping capital tied up here. Is there a scope perhaps to sort of reinvest in high-growth markets? Or is there a strong business reason for maintaining that Southern European presence? And then the second question has just to do with the second half revenue outlook. Given that, I guess, things look a little bit harder at the H1 stage, is hitting your guidance now I guess putting more pressure on retail perhaps to deliver in the second half than was previously the case?

Ian Paul Livingston

Well, I can tell you as I look around the table, when you said put more pressure on retail, we've got Wholesale, GS and Openreach, immediately I smiled and pointed to Gavin. So no, they all have lots of pressure on them to deliver, that's not going to change. I mean, look, the economic conditions do make it more difficult. There's no question about that. I think, look, we didn't expect any massive upturn. I think we didn't expect Europe to sort of be effectively lurching from crisis to crisis. That's not good for decision-making. Decision-making is the key thing, for instance, for large contracts. And people are, frankly, just taking us -- let's not do anything for the meantime, particularly, whether it's about technology refreshes, large transformational things, people are just uncertain. And that's not good for the economy. In terms of the capital -- I mean, there's 2 reasons why the answer to the question is, no. We are not going to withdraw in capital. One is that we make money there. It might be a more difficult market but we've got to step up and we do better, we make money. And also, the customers, a lot of these are both servicing global customers and if you look at some of, like for instance, Fiat in Italy,, they are doing really well on a global basis. South America is growing very strongly forward [audio gap] them, and we have a number of these very large global customers that we do service from these markets. And economies turned down for a little time but we're not in this market for the 3 months or 6 months or a couple of years, we're in there very much long term. So now what we've got to do is -- and it's true across our Global Services business, is effectively do to sort of transformation we've done in some of the other parts of business because of the environment we're in. And yes, of course, our investment will be focused more in the fast-growing economies. That does make sense. And that absolutely makes sense. And we're not -- the nature of our businesses across Europe isn't particularly capital intensive. We're not putting in massive amounts of new network and things like that. We've got networks there. We're operating them. We're -- if we see something that's going to give us a much better result, we are prepared to put in some additional funds, but they're not hugely capital intensive in the scheme of things.

Operator

Our next question is from the line of Steve Malcolm from Arete Research.

Stephen Paul Malcolm - Arete Research Services LLP

I've got a couple. First on the Infinity uptake, can you just give me an idea both how much it did on what contribution from the improved provisioning was and what the contribution from increased demand was in sort of picking up from 100,000 to 250,000 in the quarter? And then second on BDUK, it looks like you had a pretty good success there. I know you've always had in the past year, you don't expect to win all the contracts and I'm sure you won't. But this is one of the potential upshots, the weak economy that you're seeing, a little less competition in some of these tenders and you may have won a few more than you'd originally anticipated? Or are you very much where you thought you'd be at this stage?

Ian Paul Livingston

Well, I think on the tenders, I mean, to be honest, I don't think it's the economy, I think there's been a number of people who made bold statements and we're left now with Fujitsu and BT. And if you look back, if I had a pound for every time I hear that there's someone who's going to transform the U.K. environment for fiber through massive investment and then never turns out when it comes to buying their round, it just -- people just don't follow through because they realize, when they look at it, actually, this is quite difficult. You need to have -- it's a long-term investment. They haven't got -- to actually industrialize this, takes a long time. We started this in 2008. And the fact, it took us a year to plan it, a year to test it and a year to industrialize it. And where people are from a standing start, makes it very difficult. And we've got -- and it's not just -- a lot of people think it is the physical putting the fiber, which is difficult enough, it's the systems particularly that go around it, getting the base of wholesale customers and selling to a wide range of people, and that's something that we are expert in. So we're very pleased with how we've done so far. We're competing very hard for these contracts. I still don't believe we'll win all of them. And -- but I believe, where we win, we'll do a really good job. And I think, proof of the pudding is just how well we're doing. In terms of the uptick in Infinity and net adds, actually, it's quite the opposite. It's actually we've provisioned and we've actually had provision resource moving to repair. So actually, it would've been a bit better had that not happened. So compared to -- we came out of Q4 just generally, this isn't just for Infinity because it applies all across our business with actually our repair book is in really good shape. Our provision lead times are in really good shape. And what happened during the course of this quarter, and particularly in May, June and even now, is we've had huge number of repairs demand because of very, very wet weather and also quite a lot of wind as well. And that, and we just had to divert resources, so we've actually got a bigger backlog and provision going into -- going out this quarter than we started.

Stephen Paul Malcolm - Arete Research Services LLP

I mean, on that point then, can you just give us an idea where you think you can get to in sort of maximum provisioning capability. I guess it's going to take some time for fiber to meet DSL volumes and what you can deliver because it's a self installed. Where are you on the journey in the moment in terms of reaching maximum?

Ian Paul Livingston

Well, we are recruiting more -- I mean, I think importantly, we're recruiting more staff. We have recruited more staff already to help do that and that's something we would look to do more of and we're getting more efficient at it. But Liv, you want to talk about that?

Olivia Garfield

To self installed, specifically, we're working on trials of industry at the moment and that will look to go live next summer and then the summer after the industry ambition share between us all will be to have a single CPE, so that's kind of like the time windows on that part. And certainly to some customers, I think the self-install is potentially a big volume opportunity gain. I think for all of my large scale customers, combined CPE has got to be an ambition because of course, it makes it more attractive financially across the market. So that's the time windows for those product developments. I think in terms of demand, demand has followed a steady curve of growth over the last while. I think that will continue. There's more footprint coming out. There's more ambition across the market, there's more customers wanting the product and there's really good speed. So the actual speed is fantastic. So I think demand will continue and we'll make sure that we're resourced in line to manage that demand. And let's hope the good weather stays because this is the best chance of that. Is less of the monsoon season and more of the sunny season, so this is very good news for us all.

Stephen Paul Malcolm - Arete Research Services LLP

But Liv, let me play just on that provisioning stuff. I mean, on the Openreach cost base, was the 2% reduction we saw in quarter kind of a normal number given all the weather stuff and the repairs you had to do that we expect for the rest of the year?

Olivia Garfield

So, I guess, couldn't give individual guidance by course over the rest of the year because no mystic ball in terms of what will happen. But I think we did a good job to cope with the weather extra and deliver those financials and I think we've set ourselves up with some good savings in the earlier part of the year, some of which will flow through.

Operator

It's from the line of James Ratzer from New Street Research.

James Ratzer - New Street Research LLP

I've got 2 questions, please. The first one was just regarding the overall pricing environment in the U.K. There's a bit of debate about whether the market pricing is inflationary or not at the moment. I mean, clearly, you're pushing up line rental pricing, but other parts of the bundle, there seems to be promotions on. You hinted that maybe tweaks around how fixed the mobile callings inclusive in bundle. So be interested to just get your feel on whether blended pricing across the base can start to potentially go up from here. And secondly, now Infinity is becoming quite a meaningful part of your customer base, be interested to get some thoughts about quantifying the impact of that on revenue growth. You're mentioning quite a high percentage of customers to taking higher tier, roughly in pound sterling how much an upgrade you're seeing those customers increase their spend by Infinity? How much of the net adds are coming as new customers? Just help us to quantify the impact of Infinity on the top line, please?

Ian Paul Livingston

All right, lots of questions there. I'm probably not going to give you the exact dynamics of Infinity, I think we'll keep that close at hand. Except, I think a couple of points I would say about it is that because of -- whilst we are pricing Infinity effectively, the same prices option 2 and 3 broadband, and we're seeing a good spin up from people going from option 1 broadband to option 2 or 3 Infinity effectively, or the top 2 tiers to Infinity. And all the way through, we're seeing actually -- so the ARPU, despite pricing effective on a consistent level, we do get a good ARPU increase and it contributes a very large part to the offsetting the extra cost of Infinity and that's before you start looking at -- look at the buying cost, that's before you start looking at churn and other opportunities to sell more. So it makes -- it's a good economic model for our retail businesses as it looks just now. I'll ask Gavin to comment about the detailed price environment, but it is really important to see that the U.K. has among the cheapest prices of any Western country for telecoms. And that reflects the competition and regularly in surveys, pricing is 30% lower than the U.S. and Germany, Spain, Italy, France, et cetera. And I think that maintains and we've certainly put in a price freeze this year on key things, as well as having taken down, for instance, our fixed mobile well cost. But Gavin, you want to talk?

Gavin E. Patterson

Not much to add, Ian. I think it is a very competitive marketplace. I think our customers are -- they're searching for value and we've got to make sure we're continuing to deliver that. So I don't see huge scope for price rises and I think we will remain extremely competitive, particularly on bundles and promotions going forward. So I think that's probably as much as I'm prepared to share.

James Ratzer - New Street Research LLP

And I'll say one follow-up around that Infinity point, on the number you're seeing on ARPU and increase there. I mean, is that, say, more than GBP 5 a month you're seeing as ARPU increase or is it below that level?

Ian Paul Livingston

I'm seeing -- I'm not going to give you that exact number. What I said, it contributes a very large part of the -- to offsetting the increased cost of Infinity in terms of fiber and that's as much as you're going to get at the moment in terms of that, is that number.

Operator

Next question is from the line of Darren Ward for Echelon Research.

Darren Ward - Echelon Research & Advisory LLP

It's just a question about the Ethernet and wholesale lease lines issue that you flag in this morning's release. Assuming that you can't get the drafts overturned and determination is in line with the drafts, you've got to repay GBP 145 million. Could you just sort of tell me who those parties are that will be receiving that? And over what kind of timescale is you'll have to be paying out? And I also noticed that you say will be a specific item. Over what period of time does that sort of overcharge build up, if you like? Could we please get the information to strip out the historic?

Ian Paul Livingston

In that view, it's not an overcharge. It's actually an oddity in the way the regulation was drafted. And I think, actually, it was quite unintentional in the Ofcom -- in the way Ofcom drafted the things that the -- as they ended up with this issue. I think it was very unexpected. So -- and it goes from -- it's been over last, I think, about 3 years or probably since Ethernet prices were agreed with Ofcom. And bear in mind, Ethernet prices were agreed with Ofcom but they had some cost orientation regulations that I think had some unexpected consequences. I think unexpected, frankly, to Ofcom, certainly unexpected to us. And we -- it will -- in fact, anyone who's bought Ethernet and I'm not going go through what our exact sales are to various people in Ethernet, but I'll just ask any of the team lead to...

Darren Ward - Echelon Research & Advisory LLP

Is it other industry players and e-customers?

Ian Paul Livingston

Yes, other industry players. Yes, other industry players.

Louis-Clément Azais d'uhart - Day By Day

Maybe the timescale of the repayment?

Ian Paul Livingston

I think we have to pay that pretty quickly. Once the decision is made, I think it's a reasonably short period. Tony?

Anthony Everard Ashiantha Chanmugam

Yes, and that's a reasonably short period out there. So it'd be in this year.

Operator

Next question is from the line of Stephen Howard from HSBC.

Stephen Howard - HSBC, Research Division

Two sets of questions, please. Firstly, just following on from the earlier question about the latest regulatory developments from the European Commission. I mean, presumably, this gives you a lot more visibility on the Infinity business case and I guess, it would help you address some of the calls made by one of your major wholesale customers that your fiber product should be price-regulated from about 2015 onwards. So I just like your observations on that. And secondly, your result statement trumpets a series of Global Services contract wins, included, I note additional branches of Caixa Econômica Federal, the Brazilian Development Bank. I mean, just, if you could help me understand why this is a core competency for BT and why you are the right person to be providing additional connectivity to extra branches of a Brazilian development bank?

Ian Paul Livingston

All right. And as the second one, because we have a great expertise in -- we've got quite Ethernet capability in Brazil. We've got great expertise in VSAT technology. If you want particularly to understand why we do -- we also do the Brazilian Post Office as well. So the customers in Brazil certainly recognize our core competency in providing -- Brazil is a different market from others because of the way the fixed line network and the sheer size of the -- it's a big country. And that's why we can provide that. As well as we've got great expertise in financial services sector and it's also bringing that expertise and knowledge to national players as well as international players. Jeff, anything I should be adding to the sales pitch?

Jeff Kelly

I actually would add to that. I think, if anything, we're probably too quiet about our assets in technology down there. I think we're doing well in the market. As Ian suggested, we won our largest transaction last year with the Post Office down there. But I am hearing from some of the industry analysts that we're not as aggressive letting our customer know our asset base down there, so we're going to work on that.

Ian Paul Livingston

And you referred to Infinity business case, I'm not quite sure if you meant the fiber business case. Can I just be clear? Because of course they are 2 different things.

Stephen Howard - HSBC, Research Division

I beg your pardon, it is to the fiber investment case that I was referring. Just we had to -- I think we discussed this at the last results. There was an interesting interview in the press in which one of your competitors said you should be price regulated?

Ian Paul Livingston

Yes, well, look. It doesn't affect our business case because basically what the EU staff said, what we expected. What -- we follow the U.K. model. As when we've been asked about, I think, this price regulation in fiber, if anything, you can maybe looking to prices going up so long, very long-term investment. And we're driving this for volume and I think, you'll have to ask the person who may have said it to clarify exactly what we said, which might have been a slight misquote. But either way, I think Ofcom has been pretty clear about they didn't see any need for revisiting that issue of regulation. And given that the U.K. enjoys one of the cheapest fiber prices anywhere in the West, actually, I think we're in a pretty good shape on this one.

Operator

Next question is from the line of Guy Peddy from Macquarie.

Guy R. Peddy - Macquarie Research

Just a couple of quick questions. Firstly, on Infinity. Virgin Media managed to outsell you 3 times on high-speed broadband in the quarter. I was just wondering, is there anything that's underlying that? Is it just a question that you haven't marketed your product to as many customers? And I'm thinking now that your customer base or your number of lines that are covered by Infinity are broadly similar to Virgin Media's footprint. And secondly on Global Services, you've had 2 years of been operating cash flow positive. We're now going to go operating cash flow negative. I know that's not new. But given the outlook for revenues is probably under more stress than originally perceived, do we think actually that it could be operating cash flow negative for another 2 to 3 years because you have to make these investments in geographies that you previously haven't been occupied in?

Ian Paul Livingston

Certainly not our intent or expectation. Look, if we look at our Retail business, its revenues declined and its profits and cash flow thing increased. We said to people that we knew this was going to be difficult year in terms of -- because of the way the working capital was moving. We saw that in advance and we said the following year it would improve. That still remains our expectation. And the investments we're talking about in these new fast-growing economy have actually either have made or are making most of them in the current financial year. So that's really not the issue. And we haven't actually said to be cash flow negative this year either. So I think, there's sort of a presumption and then many questions. So no, we -- what's happening in Global Services, from a working capital point of view, as we expected, overlaid, when I think the economics are worse, and that's made the importance of self-help even more in Global Services, and that's exactly what they're working on. In terms of the somewhat bizarre question about the outselling by Virgin, and I think they had a forced migration of their customers up to higher speeds. And I was delighted to be outsold by a company who lost 10,000 broadband customers in a quarter that we gained 85,000 and we gained 150,000 at fiber -- Infinity fiber customers. It's remarkable question, really. I don't quite see how any -- we are -- our performance on any metric in terms of how we're doing on Infinity and actually fiber, generally, is a multiple better than Virgin have done and we're really pleased with the performance. So a long way, may we be outsold when we -- I can't even say how many times we've had more net adds because when they are negative, we are positive, we can't really do the math, but I don't really call that being outsold. So strange question but thank you for it. Next, last question.

Operator

Is from the line of Stuart Gordon from Berenberg.

Stuart Gordon - Berenberg Bank, Research Division

On -- a couple for you. On revenue guidance for next year, I'm assuming that this includes the revenue that you expect to get then from the football rights from the second half. And clearly to hit guidance for this year, we're looking at kind of flat revenue for the second half of this year. I'm just curious, are you baking in sort of continued worries about the economy, when you're just suggesting that improvement in the trend for next year, are you expecting quite a significant step change in the revenue trend next year? Secondly, can you cut the cost transformation slide a slightly different way and comment on what was the cost-cutting magnitude x the cost associated with lost revenues? And last one, and this is really for Ian, I know you share my passion for Scottish football. I just wondered if you'd any interest in helping out the current situation by bidding for either the new Rangers football rights or a Sky walkaway of the full Scottish football rights?

Ian Paul Livingston

For the last one, I felt for horrible you could ask me if I'm going to bid for Rangers. I'd like to confirm whilst we traditionally do not never confirm or deny acquisition rumors. That is one. I am only too happy to deny, but [indiscernible] see what they can do.

Stuart Gordon - Berenberg Bank, Research Division

If you charge here GBP 10 for everyone that asked more than one question, we'll probably have enough.

Ian Paul Livingston

Or indeed ask one question. And Scottish football, I have to say, in terms of Scottish football rights, I am completely out of this. So it's actually not, I'm the last person to ask because I'm not so involved in any bidding for -- or any thought about Scottish football for the reason I'm actually in the board of Celtics. So I don't -- I defer to leave that very much with Gavin and his team. I don't get involve. So I'm actually -- I can honestly answer and say I have no idea and let me remain that way. And also, in terms of the cost-cutting in the second, we didn't -- just clear -- I mean, you have to calculate your analysis as to what exactly that means in revenue in the second half of the year. But when we then say of improving trend, improving trend does not exclude positive. It is -- it can also mean positive in the year after. And so that's not altered. And we think, as the number of the football rights is only just one bit of it, I think we -- I talked about IP exchange for instance before. We've got the building up of fiber because actually, we've only just got to GBP 11 million. By the time we speak to you next year, that will be a lot higher and we'll have had that base to sell into. So there's a lot of good things happening in that area. And if you look, excluding the Global Services, actually, we are making -- that improving trend is coming through in our businesses. It's hard work in this environment, but actually, the hard work is paying off. But Tony, do you want to talk about the final thing about cost and cutting it different in a way?

Anthony Everard Ashiantha Chanmugam

Yes, sure. If you actually look at the slide, what we try and do is subdivide the components. So if you look at the element, GBP 123 million, which relates to transit in polos. Two components, transit, which is a straight flow through. The rest of that bulk relates to movements in the margins associated with the revenue streams and you've got some pluses, you've got some minuses, the margin mix changes. The other GBP 124 million is really outside the revenue streams. So effectively, you've got transit flow through, mixes and changes in the margins captured the GBP 123 million. The other GBP 124 million is straight base cost savings.

Ian Paul Livingston

Okay, thank you very much, and thank you, everyone, for the call. For those of you who are going off in summer holidays, have a really good one. For those of you staying here and going to be enjoying the Olympics, we hope it's a great show. And we'll speak to you in a few months' time. Thank you very much, everyone.

Operator

Ladies and gentlemen, that concludes your call for today. Thank you for joining. You may now disconnect.

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