C&W: Not Just a 'Pretty Network'

Profits at (NYSE: CWP) were down 48 percent during the first half of the financial year, but investors seem to have taken heart that it wasn't as bad as expected. (See C&W Reports H1.)

Net income at the U.K.'s second largest operator dropped from £239 million (US$417 million) last year to £125 million ($218 million). Pre-tax profit slid by 23 percent to £134 million ($233.80 million), but it was above analysts' estimates of £127 million ($221.59 million).

Combined with the group resuming its share buyback program, that was enough to push C&W's share price up by 4.5 pence, 3.79 percent, to 123.25 pence ($2.15) in midday trading on the London Stock Exchange.

As chairman Richard Lapthorne put it on a conference call with analysts, "We're not making the greatest thing since sliced bread, but it's not a loss."

The £250 million ($436.2 million) stock buyback had been put on hold when the operator announced its acquisition of Energis plc (OTC: ENGSY), but it said the Office of Fair Trading's decision to approve the deal last week gave it the confidence to restart the program. (See C&W OK to Buy Energis .)

The approval also means Cable & Wireless can go ahead with its plans and begin integrating the rival service provider on November 14.

On the sales front, revenues of £1.18 billion ($2.06 billion) were up by 1 percent compared with the previous year, with growth in national telcos in the Caribbean and Asia offset by decline in the U.K. business, where revenues were down by 5 percent. Cable & Wireless retains those telcos from its days as the communications arm of the British Empire.

Francesco Caio, C&W's chief executive, pointed to three elements the operator is building its business around -- scale, IP, and access. The Energis buy provides scale; its work-in-progress NGN takes care of the IP; and the Bulldog Communications Ltd. local loop unbundling operations are building out its access network.

The hope is that strategy will help C&W navigate the market's migration from legacy to IP services, which has been affecting gross margins through price erosion and customer churn. The company issued a profit warning in its October trading update, noting the shift of its revenue mix from retail to lower-margin carrier services -- an announcement that sent its shares south by 16 percent. (See C&W Shares Plunge.) Only 10 percent of its retail and wholesale business is IP-based, its justification for splashing out £190 million on its very own version of BT’s 21CN. (See C&W Plans Its Own 21CN.)

"It's not about building a pretty network," Caio told analysts. "This is the name of the game -- focusing on profitable revenue." He added that "the rationale for the NGN is fairly straightforward" -- to move from five different platforms, six including Energis, to a single network. The target for the new network is to bring in annual revenues of more than £2 billion ($3.49 billion) and a double-digit operating margin.

Energis, which also released its first-half results today, is "further down the road to us" in turning its business around, reporting a 4 percent increase in revenues to £361 million ($426.27 million). Revenues from its retail division grew by 18 percent while C&W's fell by 13 percent. (See Energis Reports H1 Figures.)

If, as Caio says, the Energis transaction will reduce the risk of the U.K. strategy, the operator's Bulldog consumer business poses more of a risk. Bulldog reported a £49 million ($85.49 million) operating loss during the first half and has experienced widely publicized problems with provisioning and customer service that led to an investigation by the Office of the Telecoms Adjudicator.

But Caio said that, compared with its competitors, the operator is "still ahead of the game" on local loop unbundling and "over the last few weeks we've seen an encouraging enhancement of performance." Due to network investment, Bulldog isn't expected to turn a profit until 2007.

— Nicole Willing, Reporter, Light Reading

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