Great cost cutting – but show me the growth

IAN Livingston is incredibly good at cost cutting, which is just as well. The no-nonsense Scot has removed some £2.8bn of costs in the last two years alone. That is exactly what the firm needed after former chief executive Ben Verwaayen, who won a huge amount of business at the expense of margins and profits.

Livingston’s relentless focus on the bottom line has been good for BT’s investors, about that there is no doubt. But some shareholders are starting to ask for more detail on how BT expects to grow its top line in the future. Yesterday, the shares lost 1.4 per cent after its fourth-quarter revenue of £5.06bn missed consensus.

BT blamed the miss on lower “transit” revenues, telecoms-speak for the income it gets from other carriers who piggy back on its network. BT claims that this kind of revenue is low margin, and so can be lost without much cause for concern. Similarly, its IT services arm is focused on winning fewer contracts with higher profitability.

But analysts at Investec expect revenue to fall next year, from £20.9bn in 2010 to £20.1bn, and again in 2012 to £19.9bn. On Investec’s top line numbers, which are under review after yesterday’s miss, shareholders will have to wait until 2013 before revenue starts picking up, to £19.9bn.

So where’s the growth? Some argue that there is none, that BT is essentially a utility company facing a protracted but terminal decline.

Such an argument is probably too malthusian, because the future for fixed line operators is starting to brighten. The huge explosion in data usage will benefit the likes of BT, which is investing billions in its super-fast fibre-optic network. Eventually, it could charge the likes of Google and the BBC a fee to distribute their content using its infrastructure.

That is why we think yesterday’s sell-off was likely overdone, providing a buying opportunity for those who think Livingston can do more than cut costs.

david.crow@cityam.com