BT Slammed by Weak Results

Investors drove BT shares to the lowest level in five years on an unexpectedly large drop in wholesale revenues

BT's share price collapsed to its lowest level for nearly five years yesterday, after its first-quarter results showed narrowing margins and an unexpectedly large drop in revenues from its wholesale business.

The shares closed off a massive 11.99 per cent at 173.9p, their lowest level since late 2003, after the company reported that its overall revenues for the period edged up 3 per cent to £5.18bn but group operating profit was down 7 per cent at £613m.

Ian Livingston, the BT chief executive who took over two months ago, remained upbeat yesterday. "BT has continued to grow revenue, earnings (Ebitda) and earnings per share in the first quarter," he said. "Our full-year guidance remains unchanged — we continue to expect to deliver growth in revenue, Ebitda, earnings per share and dividends per share in this financial year."

The market was spooked nonetheless. Part of the problem is BT's international technology services division. Global Services contributed around 30 per cent, or £7.3bn, to the group's revenues in 2007, and signed £1.9bn-worth of new deals in the first quarter. Operating profit in the period was also up 29 per cent year-on-year to £9m. But the target of hitting a 15 per cent earnings margin by 2009-2010 — long a subject of analysts' scepticism — is looking increasingly shaky, in spite of the company's assertions to the contrary. In the first quarter, the margin slid from 9.9 per cent to 9.5 per cent, largely due to currency movements, and BT is predicting a continued slide for the rest of the year.

But the biggest scare yesterday was BT Wholesale, which supplies other network providers with both telephony and broadband products. The division has been in decline for some time, faced with increased competition from the local loop unbundling process, but the fall-off is accelerating faster than anticipated. Revenue at the division dropped 12 per cent in the three months to the end of June. Mike Grant, a partner at Analysys Mason, said: "Wholesale has been under pressure for some time but such a big drop in one quarter is pretty dramatic."

The wholesale division accounts for around 25 per cent of BT Group's overall value, and less of its profits. "The major reduction in share price is disproportionate," Mr Grant said. "The scale of fall in value is more of a market response to being surprised than a reflection of what is happening in the business."

BT's Openreach, responsible for local loop infrastructure, saw revenues ease 1 per cent to £1.3bn due to the housing slowdown. Revenue at BT Retail grew 3 per cent to £2.1bn and operating profit was up 17 per cent at £259m. Broadband revenue grew 17 per cent, adding 103,000 customers to a total of 4.5 million.

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