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November 10, 2005

BT profit falls after earnings hit by openreach charges

BT Group Plc has revealed a drop in profits for the second quarter, as the former UK incumbent telecoms operator was hit by a charge to comply with Ofcom's regulatory changes and a further fall in sales from its traditional fixed-line telephone services.

By CBR Staff Writer

For the second quarter ending September 30, the carrier posted net income of 371m pounds ($647m), down from 429m pounds ($748m) in the year ago quarter. The decline came after BT was hit with a charge of 70m pounds ($122m) for the costs of setting up the new business unit openreach.

The creation of openreach was revealed in late September, and was part of the compromise reached with the UK regulator Ofcom in June. BT had been under a very real threat of being broken up, as rivals felt that BT’s ownership of the last mile of copper wires into homes and business, the so-called local loop, gave BT’s customer-facing arm BT Retail an inherent advantage in the provision of voice calls and internet access services to businesses and households.

The new unit is to work alongside BT’s existing retail, wholesale, and global services units, but will principally operates BT’s local loop, and aims to improve the access of rival telephone companies to the BT network. The new division will be operational from January 2006.

Meanwhile, second quarter sales rose 4.8% to 4.82bn pounds ($8.51bn) from 4.60bn pounds ($8.03bn). This rise came despite a 5% decline from the group’s traditional fixed-line businesses. BT also revealed that average yearly revenues from households fell by 1 pound ($1.74) to 253 pounds ($441).

The BT Global Services division reported a 37% decline in operating profit to 57m pounds ($100m) in the second quarter, which it blamed on higher depreciation costs relating to acquisitions and higher leaver costs of 17m pounds ($30m). Revenue grew 16% to 2.1bn pounds ($3.7bn), with organic growth of 5%.

Yet it is not all doom and gloom for the carrier. Revenue from its new wave services (broadband, networked IT services, and mobility) rose 39% to 1.44bn pounds ($2.52bn) and accounted for 30% of revenue, compared to 22% in the second quarter of last year. Admittedly, BT is highly reliant on new wave activities to counter the declining fixed-line business, its lack of a mobile arm, increased competition, falling prices, and tough regulatory pressures.

Indeed, over the past few years BT has transformed itself from a lumbering carrier into an innovative and proactive telecoms operator. The 21CN project is just one of a number of strategies the UK telecom operator is implementing to take up the slack from its declining legacy business.

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BT has been through an incredibly busy period lately. In June, it unveiled its Fusion service, which blends landlines with mobile phones and lets consumers use one phone at home and out and about. It has also been active on the acquisition front, buying UK-based network integrators Total Network Solutions and Cara Group. Prior to that, it acquired network services group Infonet Services Corp in November 2004 and Italian telecoms group Albacom in December 2004.

Unlike several of its European competitors, BT relatively unencumbered with a massive debt pile, as it own net debt declined to a respectable 8.13bn pounds ($14.19bn).

Yet BT still faces significant challenges. It will have noted the move by UK satellite broadcaster, British Sky Broadcasting Group Plc, which in late October agreed to purchase broadband service provider, Easynet Plc, for 211m pounds ($373m), as part of its triple play (telephone, broadband, and pay TV) expansion strategy. The worry caused by yet another broadband provider will be tempered with the knowledge that the acquisition will dramatically increase the pressure of cable operators such as NTL Inc and Telewest Global Inc.

Another deal BT that will have noted was the recent 17.7bn pounds ($31.3bn) acquisition of BT’s former mobile arm, O2 plc (formerly known as BT Cellnet), by Spanish telecoms giant Telefonica SA. BT has no doubt spent years regretting the decision by the then management team in 2001, which fell victim to the prevailing financial wisdom of the time and spun out BT Cellnet to pay off debts. This deprived BT of a growing revenue stream that could have been used to offset the decline in its voice services business.

This potentially disastrous decision forced BT to become an incredibly agile operator compared to its European rivals. For the six-month period, BT posted a net profit of 745m pounds ($1.30bn), up from 731m pounds ($1.27bn) in the same year-ago period. Sales increased to 9.60bn pounds ($16.75bn) from 9.17bn pounds ($15.99bn).

The transformation of BT is right on track with the delivery of another successful quarter, said Chief Executive Ben Verwaayen in a statement.

Yet the market didn’t seem to share Verwaayen’s optimism and shares in the carrier fell 2.56% to 209.00p ($3.64) on the London Stock Exchange, as of 3pm GMT Thursday.

BT also set an interim dividend of 4.3p ($0.07) a share, up 10% on a year earlier.

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