IHS Global Insight Perspective | |
Significance | BT has promised "decisive action to improve performance" at its Global Services division—leading to speculation of further job cuts or even a divestment of the unit. |
Implications | IHS Global Insight believes that BT expects too much of its ailing unit, which is struggling to meet expectations in a crowded market, during a severe economic downturn. |
Outlook | As the company sees continuing stagnation in its traditional U.K. retail markets, BT may need to overhaul more than its struggling Global Services division if it hopes to turn around its performance through 2009. |
BT Group has announced its fourth-quarter earnings (EBITDA) before one-off charges dropped 9% to £1.34 billion (US$1.93 billion), from £1.47 billion in the fourth quarter of 2007, year-on-year (y/y). The U.K. operator reported a revenue rise of 5% in the quarter to £5.44 billion, up from £5.15 billion in the fourth quarter of 2007 y/y, helped by favourable currency fluctuations, but pre-tax profits plunged 81% in the fourth quarter of 2008 to £113 million, from £601 million in the same quarter of 2007 y/y, chiefly due to a £340 million charge to overhaul its Global Services division.
Finance Chief Tony Chanmugam told Bloomberg that its fourth-quarter financials were "in line with expectations" so far, but hinted that contract and operational reviews may result in "further substantial one-off charges" in the first quarter of this year. The group is now aiming to hit free cash flow, before any pension deficit payments, of over £1 billion next year, due to its focus on improving Global Services, cost savings and control on capex.
Meanwhile, BT has been told it may have to repay pension liabilities to the U.K. government, after the European Union (EU) ruled that the operator's exemption from these levies was partially illegal. The European Commission has ordered the government to recover the liabilities due since 2005, saying that the exemption gave BT an unfair competitive advantage and effectively constituted state aid.
Outlook and Implications
- BT Continues to Point the Finger at Global Services: Discounting the one-off charge of £340 million which dragged down BT's profit margin in the quarter, the group is still largely blaming underperformance at its Global Services unit for this most recent drop in earnings. At the end of the third quarter of 2008, BT announced a profit slump of 11%, leading to massive job cuts and the announcement of sweeping re-organisation at Global Services, which provides IT services for corporate customers (see United Kingdom: 13 November 2008: BT to Cut 10,000 Jobs as Pre-Tax Profits Slump 11%). The operator continues to hold the unit responsible for this quarter's poor performance, with BT Chief Executive Ian Livingston said: "Three of our businesses performed ahead of expectations in the quarter and the group, excluding Global Services, delivered the best year-on-year profit growth for five years. However, as previously announced, the group results have been severely impacted by the performance of our Global Services division." However, BT admits that order intake at Global Services has remained steady over the last year and the unit saw a 15% rise in revenues in the last quarter, compared to a 0.6% drop at its BT Retail division and a 2% drop at its Wholesale unit. BT has said it may need to book further charges to overhaul the Global Services division, promising "decisive action to improve performance"—leading to speculation of further job cuts or even a divestment of the unit. However, IHS Global Insight believes that BT expects too much of its ailing unit, which is struggling to meet expectations in a crowded market, during a severe economic downturn.
- Traditional Domestic Markets See Further Stagnation: Although BT’s retail share of the DSL and LLU installed base fixed-line market remained steady at 34%, the company has failed to register any significant growth in these areas, with expansion in broadband services being largely negated by declines in fixed-line voice. However, BT says all its divisions except Global Services beat their targets for the last quarter, and has forecast earnings (excluding Global Services) will continue to grow at about 3% in the first quarter of 2009. However, it cannot be denied that BT is seeing anything like the growth of its key rivals in the UK (see United Kingdom: 29 January 2009: BSkyB Announces 1,000 New Jobs as Profits Shoot Up). Continuing rumours of a re-entry into the U.K. mobile market seem unfounded (see United Kingdom: 26 January 2009: BT Announces Line Rental Increase amid Rumours of Return to Mobile Market), and may not be a good move for the company, as the market has become significantly more crowded and competitive since BT demerged its Cellnet unit back in 2001. As the company sees stagnation in its traditional U.K. retail markets, it may need to overhaul more than its struggling Global Services division if it hopes to turn around its performance through 2009.