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Crisis-hit BT rules out Italy exit as profits dive

? 37% decline in year-on-year pretax profit

? Business and public sector revenue down 6%, with underlying EBITDA down 8%

? BT Group CEO says 90% of business "growing and strong"

British Telecom has ruled out an exit of its Italian business, in the wake of a scandal that cost the telecoms giant a £530 million write-down.

Speaking during a Jan. 27 earnings, the company's CEO Gavin Patterson said he is "angry" that wrongdoing in Italy had "undermined the integrity" of BT, but vowed to get the Italian business back on track and said BT will not give up its Italian unit due to the unit's core demand and large multinational contracts.

Hit by historical accounting errors uncovered at its Italian business, the British telecoms giant saw a 37% decline in year-on-year pretax profit to £526 million during the fiscal third quarter, ending Dec. 31, 2016.

"As a management team we're very angry about [Italy] because we have been misled," Patterson said. "[But] 90% of our business is growing and strong," he stressed.

BT's results came just a few days after BT issued a profit warning and announced the extent of accounting errors previously highlighted were far greater than initially identified, Patterson explained.

The group's finance director, Simon Lowth, admitted that restructuring the Italian operations would be a lengthy process, saying it would likely carry over into 2018.

"We are confident that we can get [the Italian business] into a profitable situation," said Lowth. "If we can't we will look at all options," he added.

BT said that its investigation into its Italian operations had thus far revealed a set of improper accounting practices and transactions, alongside a "considerable" range of activities disguised to cover up discrepancies in financial reports to the group and its auditors.

Lowth added that BT management has addressed the key issues in Italy, including replacements of "large elements" of the finance organization.

BT is said to have appointed Luis Alvarez, the head of BT's multinational corporate division, to lead the firm's European business, Reuters reported Jan. 26, citing a source.

Nonetheless, CCS Insight analyst Kester Mann believes the disclosure continues to raise questions about the future of BT’s Global Services division.

"A merger with T-Systems, the IT arm of Germany's Deutsche Telekom AG, which itself owns a 12% stake in BT, has been mooted by investors in the past," Mann said in an interview.

As the fallout from the scandal in Italy deepens, BT's business and public sector division is having its own difficulties.

Business and public sector revenue was down 6%, with underlying EBITDA down 8%. The group said this was due to a sharp slow-down in the U.K. public sector and even weaker outlook in international corporate market spending.

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In a Jan. 24 statement, BT said this slowdown in business would lead to a double-digit year-on-year percentage decline in fiscal fourth-quarter underlying EBITDA for its business and public sector division.

On its earnings call, the company nonetheless maintained there is further growth in market, adding core demand underpins its confidence in long-term growth.

Accepting this view, 451 Research Vice President Declan Lonergan insisted the division remains of huge strategic importance to BT.

"Up until now, the company has generally been on solid footing," Lonergan said.

In all this, results in the consumer division are a bright spot for the FTSE 100-listed firm. Consumer revenue increased 4%, with broadband and TV revenue up 8%. Underlying revenue at EE was up 2% on the back of its "more for more" pricing strategy. This delivered growth for the first time in the company's history.

Overall the group reported revenue for the fiscal third quarter, ending Dec. 31, 2016, was up 32% to £6.13 billion, while adjusted EBITDA of £1.8 billion was up 18% in the nine months ending Dec. 31, 2016.