Thursday 12 November 2009 7:00 pm

BT sees slide in profits but lifts cost cuts

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BT GROUP yesterday reported a 45 per cent drop in first-half profits, but upped its full-year guidance and said it had seen improvements at its troubled Global Services (GS) division.

The telecoms giants said that cost cutting measures had enabled it to report a two per cent increase in second-quarter earnings to £1.43bn, and free cash flow up by £336m at £705m.

But pre-tax profit dropped to £547m in the first six months of the year, driven by redundancy costs and continued losses at GS.

Revenues were down three per cent year-on-year at GS – which provides IT services to government departments and multinational companies – but earnings of £95m were up 53 per cent on the first half of the year.

“There has been reasonable progress at GS, but there is still lots and lots to do,” said chief executive Ian Livingston, adding that BT had no plans to sell the business.

For the full year, the group increased its cost cutting forecast of over £1bn to at least £1.5bn. It expects its revenue decline to narrow to four  per cent and capital expenditure to be lower than anticipated at £2.6bn.

The group’s pension deficit grew to £6.8bn before tax, compared to £2.9bn at the end of March, on the volatile IAS 19 measure. But Livingston reiterated that BT and its trustees had agreed a deficit payment of £525m per year. The pensions regulator will report its conclusions of a review of BT’s pension in March.

Generally the figures were extremely positive. Management has clearly got on top of sorting out Global Services and the increased free cash flow guidance is quite dramatic. The only issue that people are a bit concerned over is that there may be bad news from the pension regulator.

BT has delivered a solid, if not wholly convincing, performance. Cost cutting initiatives, as opposed to sales, lie at the heart of the group’s delivery, with measures running ahead of schedule. But management remains in defensive mode, believing that ‘the worst is not yet over’.

The issue is that the financial improvement is down to taking costs out of the business and not a surge in demand for BT’s services. They are racing to balance a revenue decline with operational cost cutting, but it is a race they can’t win. They have to find a way to support growth.