Cost problems and contractual issues are plaguing BT's Global Services unit, resulting in hefty charges and a sinking share price

January 22, 2009

2 Min Read
BT's Numbers Hit by Rogue Unit

Like a lingering bad smell, the cost control problems at BT Group plc (NYSE: BT; London: BTA)'s Global Services business unit just won't go away.

The British carrier identified issues with the division in October last year, and refreshed the management team to sort out the issues. (See BT Under Pressure, BT's Barrault Bolts, and BT Issues Profits Warning.)

But BT had clearly uncovered the problem earlier, as an operating loss at Global Services dragged down the carrier's results for the second quarter, which ended Sept. 30, 2008. (See BT Adds to Headcount Cull and BT Reports Q2.)

Now the British incumbent has revealed the extent of the issues at Global Services, which provides business users with voice, IT, and data services, such as Ethernet connectivity and IP VPNs. (See BT Updates on GS, Q3.)

In a trading update issued Thursday morning, BT said a review of Global Services's finances, contracts, and operations is ongoing, but as a result of what has been uncovered so far, the carrier expects to record a one-off, non-cash charge during its fiscal third quarter (to Dec. 31, 2008) of £340 million ($470 million).

Worse still, the operator admits "there may be further one-off charges in the third quarter results dependent on the outcome of the ongoing financial and contract reviews," and, potentially, "further substantial one-off non-cash charges in the current financial year," depending on the outcome of discussions with some major customers.

Not surprisingly, BT's stock took a hefty whack. By mid-morning its shares were trading at 107.8 pence, down nearly 12.4 percent.

BT notes, though, that the division is still signing up a lot of new business as it competes for large corporate services accounts against the likes of AT&T Inc. (NYSE: T), Orange Business Services , Verizon Enterprise Solutions , and now even Telefónica SA (NYSE: TEF). (See Telefónica's New Battleground.)

The carrier says Global Services signed deals worth about £1.8 billion ($2.5 billion) in the last three months of 2008, and that the division is set to report revenue growth of 15 percent for the third quarter. BT also noted that its other divisions, BT Retail, BT Wholesale, and Openreach, are "all expected to deliver results ahead of expectations for the third quarter."

BT will present its full third quarter results on Feb. 12.

— Ray Le Maistre, International News Editor, Light Reading

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