BT confident in outlook, cost cuts boost profits

LONDON Thu Jul 28, 2011 3:43am EDT

LONDON (Reuters) - British telecoms provider BT (BT.L) lifted core profit by 3 percent in its first quarter as an efficiency drive offset declining sales, and said on Thursday the results gave it confidence in its new turnaround plan, lifting its shares.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were 1.44 billion pounds ($2.35 billion) on revenue that fell 3 percent on an underlying basis to 4.76 billion pounds for the quarter to end-June.

BT, which competes with Virgin Media VMED.LVMED.O and TalkTalk (TALK.L) in retail telephony and broadband and also sells wholesale to rivals, added 251,000 broadband customers in the quarter, more than half of them retail customers.

Shares in BT rose 2.2 percent to 195 pence by 0707 GMT, outperforming a slightly weaker wider market.

"In total they are slightly ahead of consensus expectations on EBITDA," said John Karidis, telecoms analyst at MF Global, who rates BT "conviction buy."

"The retail market in the UK will soon become much more competitive, in part because BT Retail is increasingly successful with fiber, and so BSkyB BSY.L and TalkTalk will be forced to start retailing fiber broadband in volume by Q4 2011 at the latest," he said.

TalkTalk said on Thursday it lost 27,000 broadband customers overall in the quarter but converted more to switch to its own network, making them less likely to leave.

It also said it had vastly improved customer service, cutting the number of technical support and general service calls by 40 percent.

Last quarter, BT set itself tougher-than-expected targets for a turnaround in the next two years after resolving a lingering concern with its pension scheme.

It now expects to return to underlying revenue growth by 2013 after a period of grinding out profit growth by cost cuts alone, and expects core earnings to be above 6 billion pounds by 2012/13.

"These results add to our confidence in delivering our outlook," BT said.

In the first quarter, BT's adjusted free cash flow fell to 308 million pounds by a third from a year earlier when it had a major customer contract worth about 200 million pounds.

Revenues fell at its IT services, retail and wholesale units but improved at its Openreach infrastructure division, where it is investing 2.5 billion pounds in a super-fast broadband network.

The network now reaches more than 5 million of Britain's roughly 25 million households. It is planned to reach 10 million UK premises by 2012 and two-thirds of UK premises by the end of 2015.

Virgin Media, which has Britain's fastest broadband, aims to offer broadband speeds of 100 megabits per second -- fast enough to download a music album in 5 seconds -- to all homes on its network by mid-2012. The network covers half of Britain.

Virgin Media reported quarterly results on Wednesday. BSkyB will report on Friday.

($1 = 0.612 British Pounds)

(Editing by Sophie Walker)