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Story from guradian.co.uk by Richard Wray (link at bottom of story)
Shares in BT plunged 11% as the company spooked investors by announcing a dramatic drop in first quarter cashflow, admitting that margins at its closely watched IT services business have gone backwards and its pension fund has gone into the red.
The news came as Carphone Warehouse signalled a serious slowdown in the UK broadband market, almost halving its forecast for new customers this year because of the tough economic environment in the UK.
Orange, owned by France Telecom, admitted that it actually lost residential broadband users in the Three months to the end of June.
On a day of telecoms and media news, however, BSkyB actually beat analysts' expectations by adding 200,000 new broadband customers. That is still the lowest number of new sign-ups it has gained in a quarter since it launched itself into the broadband market. Sky now has 1.628 million customers, making it the UK's fourth largest ISP.
Sky's chief executive, Jeremy Darroch, said the firm has continued to grow in "a more difficult consumer environment", adding that "while there is much uncertainty around the consumer environment, there remains good headroom for profitable growth in our core sectors."
In stark contrast, however, Carphone Warehouse – whose TalkTalk operation revolutionised the UK broadband market with the introduction of 'free' services two years ago - saw its share of new customers dwindle to just 41,000 in the Three months to the end of June. In the same quarter last year it added 126,000. The company now has 2.8 million broadband customers.
The UK's third largest ISP – behind BT and Virgin Media – warned back in June that the UK broadband market was slowing because of the economic climate and the drop in house sales. Many customers use the opportunity of moving house to switch broadband supplier.
The company said the market remains hard and it now expects to add 200,000-250,000 broadband customers this year, with revenue growth broadly flat. It had previously predicted 400,000 new users in 2008 with revenue growth in its fixed-line business at 4% to 5%.
Orange, the UK's sixth largest ISP, meanwhile, actually lost 44,000 broadband customers in the Three months to end June, its third consecutive quarter of negative growth. It now has just over 1 million broadband users.
BT, meanwhile, added 103,000 new broadband customers in the Three months to end June – which it reckons is about 31% of the market in the quarter – but that is still well down on the 150,000 added in the previous quarter and 126,000 in the same period last year. BT now has 4.5 million broadband customers.
But BT has worries over its cashflow, pensions and the state of its Global Services unit, which pushed shares in the company down 21.6p to 176p by 10am.
The company actually had a net cash outflow in the Three months to end June – its first quarter – of £734m. The company still forecasts that it will generate £1.4bn of cash this year, but analysts are becoming increasingly annoyed at the apparent 'lumpiness' of the group's cashflow.
BT also admitted that its pension scheme – one of the biggest in the UK - is now £600m in the red, compared with a £1.4bn surplus last year.
There will also be questions raised at today's analysts' meeting about the apparent reversal of BT Global Service's fortunes. The company has long maintained that as its IT business matures its margins will improve and it will make substantial profits.
In the Three months to end June, however, BT Global Service's margins actually contracted – to 9.5% from 9.8% last year – due to the strength of the euro, and margins may decline for the year as a whole. BT Global Service's revenues were up 13% at just over £2bn.
For the group as a whole, BT made a first quarter profit of £613m, down 7%, on revenues of £5.17bn.
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