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UPDATE 3-C&W Worldwide warns as UK government cutbacks bite

* UK public spending slowed significantly since June budget

* Downgrades FY EBITDA expectations towards bottom of range

* CEO says cuts will hit gross margin by 30 mln stg

* Company will make additional cost savings of 10 mln stg

* Shares down 18 pct

(Adds CEO comments, updates shares)

By Paul Sandle

LONDON, July 20 (Reuters) - Cable & Wireless Worldwide CWP.L warned that trading had been hit by a slowdown in the UK public sector following the government's emergency budget in June, sending the telecoms firm's shares 18 percent lower.

The cuts in public-sector contracts would slow growth in core earnings, CWW said on Tuesday, and it cut its forecast for the year to end-March 2011 to the lower end of analysts’ expectations, ranging from 452 million to 484 million pounds.

“Following the new Government’s Emergency Budget in late June, non-contracted spending in the UK public sector has slowed very significantly,” said the company, which split from the former Cable & Wireless Group earlier this year.

“Given the nature of our public sector business, this reduction will adversely impact trading in the current year.”

Chief Executive Jim Marsh said although less than 2 percent of the company’s revenues were affected, the cuts would wipe 30 million pounds from its gross margin this year, although 10 million pounds would be clawed back through spending cuts.

Britain’s new Conservative-Liberal coalition government is cutting spending by 6.25 billion pounds this year and next in a bid to bring down the country’s record budget deficit, and it has already imposed a freeze on IT and communications projects worth over 1 million pounds. [ID:nLDE65L0CF] [ID:nLDE64N1B1]

Marsh said the freeze had a near-immediate impact. “It’s either that or the spirit of that is causing departments to look very hard at what they spend,” he said in a telephone interview with Reuters. “We are seeing work that’s in train stop.”

About 285 million pounds ($435.7 million) or 12 percent of CWW’s revenue came from the UK public sector customers such as the NHS and the Ministry of Justice in the year to end-March 2010.

Shares in CWW were 17.5 percent lower at 70.65 pence by 1057 GMT, the biggest faller in a 0.6 percent weaker index of leading UK companies .FTSE. Its larger rival BT Group BT.L was down 4.2 percent.

The trading update prompted Deutsche Bank to cut CWW’s earnings forecast by 6.5 percent for the full year and by 3.3 percent for the year to March 2012.

“Investors will have received a knock to confidence on news of exposure to UK Government discretionary spending,” they said in a note.

“Whilst much of the business is contracted, a significant about 20 percent portion is shorter-term, non-contracted project work which since the budget, has effectively dried up.”

The broker, however, said the public-sector spending moratorium related to existing business, and CWW should be well positioned to gain a greater share of future contracts which delivered efficiency gains. “The opportunity to grow public sector profits is delayed not cancelled,” it said.

SIX-MONTH HIATUS

CWW, which concentrates on the international corporate market and has a large presence in Britain, said it would cut costs in light of the downturn, and it expected total operating expenditure to fall year-on-year.

“We will look to save an addition 10 million pounds of operating costs this year,” Marsh said. Most of the savings would be in administration, he said, and the company would not be cutting any jobs because of the spending freeze.

Marsh said he expected the government not to grant any more significant IT and telecoms projects this year.

In the longer term, he was confident that CWW would win more government business as the state sought efficiency savings.

“We have a relatively low market share in government and we genuinely believe government is stimulating more competition and that will be good for us,” he said.

Analysts had expected CWW to report average core earnings of 470.1 million pounds in the year to end-March 2011, according to a Thomson Reuters I/B/E/S poll of 17 brokers. It posted core earnings of 431 million pounds in the year to end-March 2010. ($1=.6541 Pound) (Editing by Victoria Bryan and Samia Nakhoul)

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