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25-07-2012 12:43:00

BT's Weak Sales Marr Financial Performance

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By Lilly Vitorovich

LONDON--BT Group PLC (BT.A.LN) reported Wednesday a bigger-than-expected fall in sales as companies stung by the economic slowdown in Europe and beyond, held back on expensive communications upgrades.

Customers in the global services division, which provides telecom and Internet services for corporate clients, are reluctant to sign contracts, and the contracts signed were smaller than in previous quarters, Chief Executive Ian Livingston said.

"With the uncertainty, people aren't doing big transformational deals," he added.

The global services unit--which provided telecom services to nearly half of all trading floors at banks across the world last year--is also hurting from the difficulties in the financial services sector due to lackluster demand for its products, Livingston said.

Global services' order intake dropped 31% in the first quarter ended June 30 to GBP1.1 billion ($1.7 billion), while the division's earnings before interest, tax, depreciation and amortization, or Ebitda, dipped 14%.

It's not the first time the corporate business has hurt BT's results. The company issued a surprise profit warning four years ago because of mismanagement at the unit. The profit miss unleashed a round of stringent cost cutting, which has since underpinned the company's earnings.

The woes at global services, plus disappointing cash generation, triggered a sharp share sell-off. At 1019 GMT, BT shares were down 11 pence, or 5%, at 207 pence, making it the biggest faller on the U.K's blue-chip FTSE 100 index.

Overall, group revenue fell 6% to GBP4.48 billion in the first quarter, hurt by a 9% drop at global services. Customers are also making fewer landline calls in favor of mobile phones, eroding fixed-line revenue, a problem it shares with fixed-line operators across much of the developed world. Analysts had forecast a 4.3% fall in revenue.

BT's continued cost cutting delivered a better-than-expected 17% rise in net profit to GBP451 million, despite the revenue decline.

In search of new revenue streams, BT last month moved to strengthen its pay-television offering, BT Vision, by securing exclusive U.K. broadcasting rights to some of England's Premier League soccer matches, starting from 2013.

The company is also backing YouView Ltd., a U.K.-based Internet TV project, in a bid to attract more customers. YouView is set for launch at the end of the month and is backed by a consortium of investors including media companies BBC, ITV PLC (ITV.LN), Channel Five and Channel 4.

The U.K. operator is also investing GBP2.50 billion pounds ($3.88 billion) in rolling out a fiber broadband network across the U.K. and introduced a super-fast fiber-optic broadband service, BT Infinity, in 2010, looking to deliver high-definition television.

Write to Lilly Vitorovich at lilly.vitorovich@dowjones.com; Twitter: @LillyVitorovich

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

July 25, 2012 06:43 ET (10:43 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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