The share price of pan-European business services provider Colt Telecom Group plc (Nasdaq: COLT; London: CTM.L) plummeted by a third today after it warned of weaker than expected business for its second quarter and the rest of the year (see Colt Warns on Outlook).

The operator's warning that it would fail to "meet market expectations" for the quarter that ended June 30, and for the full year to December 31, sent its share price crashing on the London Stock Exchange by 27.25 pence, or 34 percent, to 53 pence, less than half the price it commanded in March this year.

Colt noted that due to "tougher than expected trading conditions" its margins were being squeezed to the point where its EBITDA figures for the year might be lower than 2003's £163.4 million (US$297 million). Financial analysts had been expecting 2004 EBITDA in excess of £200 million ($364 million). The operator will publish its second-quarter numbers on July 21.

Colt did not respond to questions about particular weaknesses, but did note in its statement that there "has been slower than anticipated uptake of data products and the performance of some higher margin voice products has been disappointing."

The telecom team at Lehman Brothers believes this is a bad sign for other operators in the corporate services sector, specifically Cable & Wireless plc (NYSE: CWP) and BT Group plc (NYSE: BTY; London: BTA). In a research note they noted a fiercely competitive environment and the increasing migration to VOIP services that are hitting business voice service revenues.

Sector analyst Rob Pritchard of benchmark-it says this comes as no surprise. He says Colt is always talking about building success from expanding its network, "yet it has cut back dramatically on its capex. It's hard to see where the growth could come from."

He also says Colt's slowdown is the result "of an overcrowded market, where the natural tendency is to compete on price. These carriers, and there's plenty of them, are pretty much targeting the same markets with the same technology."

Pritchard says there's little growth in the lucrative multinational and large corporate user sector, and that most opportunities now are in the medium and small business sector, where the pickings are slimmer. "It's a natural process. There's only so much of the cake to eat. These carriers can't just grow all the time. The key moment will be when consolidation starts."

The emergence of new competitors, such as Cogent Communications Group Inc. (Amex: COI) and Interoute Telecommunications, in Europe's VPN and access markets is just forcing prices down even further (see Cogent Adds to Euro Empire, Interoute Launches IP VPN Service, and Interoute Lands IP VPN Deal).

And then there's the reemergence of the carriers that have a new lease on life after troubled times (see MCI Europe to Invest in Ethernet, Global Crossing Leans on Loans, and Viatel Grabs $60M, Aims to Cut Bull).

Pritchard says today's announcement doesn't make Colt any more of an acquisition target. He notes that all the players constantly state that mergers and acquisitions are inevitable, yet refuse to accept that they might be involved in such actions in any way.

Colt has been rumored as Cable & Wireless's next takeover target, but its future lies solely in the hands of majority stakeholder Fidelity Ventures, and it has a lot of cash to tough out the market.

That cash balance was also noted by Standard & Poor’s, which says its ratings and outlook on Colt are unaffected by today's statement (see S&P Calm About Colt Profit Warning). S&P's telecom team noted the "persistent weak demand and strong competition in Colt's key markets," but that "near-term risk... is mitigated by its sound liquidity position. At March 31, 2004, the company had cash of £786 million and gross debt of £1.1 billion with the earliest maturity of £109 million due in August 2005."

— Ray Le Maistre, International Editor, Boardwatch