BT's Profit Warning Spooks Market, Shares Tank

Britain's BT Group warned it would miss earnings forecasts due to the poor performance of its unit which provides network services to multinational companies, sending its shares crashing to a more than 20-year low.

BT's Global Services unit had been a strong driver of growth in recent years and BT said the problems were linked to operational failures and not the wider financial turmoil. It said the boss of the division, Francois Barrault, had resigned.

"The stock has just seen its engine of growth (Global Services) go into contraction, and its earning and cashflow are set to deteriorate," said analyst Saeed Baradar at Societe Generale.

"It is now hard to see any bottom for this stock." Group Chief Executive Ian Livingston said the results in the Global Services unit had been particularly disappointing.

"We acknowledge that the performance in this part of the group is unsatisfactory and are committed to taking decisive action to rectify the situation," he said.

BT shares were down 19 percent to 115.10 at the close, having slumped to a more than 20-year low of 100.2p. At its peak in late 1999 the stock was worth over 1,050p, since when it has demerged its mobile unit, now known as O2.

BT said it expected to report group revenue ahead of forecasts when it announces second-quarter results on Nov. 13, but earnings per share and earnings before interest, tax, depreciation and amortisation (EBITDA) would be slightly below expectations.

Global Services, where Group Finance Director Hanif Lalani will replace Barrault as head, will report EBITDA of around 120 million pounds compared with a consensus of 200 million.

For the full year, it expects group EBITDA to show a small decline compared with last year, with the consequent impact on earnings per share and free cash flow. "We expect revenue growth in this division will remain strong, up 15 per cent year on year, but EBITDA of around 120 million pounds ($198.2 million) will be significantly below expectations," the group said.

In a note, analysts at Cazenove said investors were likely to be concerned that a rapidly deteriorating UK economy could hit BT's future operational performance.

In addition, the pension scheme's funding position looks to have deteriorated sharply in recent months, it said.

"Taken together, these issues present significant risks to BT's future cash flows and hence are likely to outweigh any debate regarding attractive headline valuation metrics."

Testing Times

BT said Global Services was now expected to produce an earnings margin in the range of 7 percent to 8 percent for the current financial year, compared with its closely-watched medium term target of 15 percent.

In the first quarter Global Services had an EBITDA margin of 9.5 percent and said it expected the margin to be slightly lower in 2008/09 than the previous year when it was 11.2 percent.

During a conference call with analysts, Livingston said it would no longer be appropriate to discuss the 15 percent target as no-one could predict what the markets would be doing in future years.

Livingston said Global Services customers had received a good service and that there had been no slowdown on the order book, but it had failed to improve its profitability.

He said there would be no major strategy change for the unit.

BT said it intends to pay an interim dividend of 5.4 pence per share, in line with last year, and will consider its options for the full year during the fourth quarter.

Some analysts said it might make sense for BT to reset its dividend at a lower level.

"Most of BT's European peers have cash cover of dividends (in the) 1.5 times to 2 times range -- Vodafone being the only other laggard at 1.3 times," Collins Stewart analyst Mark James said.

"If BT were to bite the bullet and reduce the dividend to 2/3 of free cashflow, that would imply a dividend of 10 pence a share, compared to current 16.1p expectations." Livingston said BT was in a strong financial position having tapped debt markets in the summer and would not need to return for two years.

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