'New Wave' Drives BT

(NYSE: BT; London: BTA) announced second-quarter revenues of £4.82 billion (US$8.43 billion) today, up 5 percent year on year and in line with expectations. It also boasted of continued progress in "new wave" services (IT, broadband, mobility), which now account for nearly one third of the carrier's quarterly total. (See BT Reports Q2.)

Ovum Ltd. analyst Mike Cansfield reckons that boosting sales by 5 percent is an impressive performance, particularly since BT doesn't have its own mobile operations to drive revenue growth, as other European incumbents do. (See DT, TI Set to Spend Big.)

But BT's earnings per share (EPS) were hit by a one-off provision of £70 million ($122 million) for the creation of its new access business, Openreach, which was formed following an agreement with the U.K. regulator. That cost took the EPS from 5 pence to 4.4 pence, a 12 percent dip from last year's figure. (See BT Opens Up Access.)

And the financial metric that BT's management believes is critical, EBITDA (earnings before interest, tax, depreciation, and amortization), fell short of analysts' expectations. Second-quarter EBITDA (before specific items) was £1.348 billion ($2.36 billion), just less than the £1.36 billion ($2.38 billion) that City analysts were expecting.

The result was a dip in BT's share price in morning trading on the London Stock Exchange. It fell 4.5 pence, more than 2 percent, to £2.10.

While investors picked through the details, BT's head honchos gave an upbeat assessment of progress with its next-generation network (21CN) plans, and talked up the contribution of its new wave services.

21CN: on course, of course
As ever, the operator says it's on course to meet its aggressive next-gen network buildout timetable. It's deploying its first transition region around the city of Cardiff in South Wales, and has assembled and integrated enough technology from its chosen hardware and software suppliers to make all-IP voice calls, said BT's CEO Ben Verwaayen at the operator's results conference. (See Wales to Get 21CN First, BT Puts Ethernet at Heart of 21CN, and BT's 21CN Meets Its Skeptics.)

"We're doing Cardiff as we said we would, and it's all going extremely well. We're on time, we have had products delivered on time by vendors, and the testing we are doing now [in Cardiff] is absolutely critical," said the CEO.

The first live switch from the current PSTN to 21CN systems is due to take place in Wales in the second half of 2006.

Having seen plans to build fiber to the curb by Deutsche Telekom AG (NYSE: DT), analysts were keen to know if BT has any FTTx aspirations. BT Wholesale CEO Paul Reynolds said BT is examining the "economics of fiber to the cabinet," and that some fiber was being deployed in greenfield sites where laying fiber, he noted, is just as cheap as copper.

New wave, old spin
As ever, BT's management gave an upbeat presentation, picking on specific items and applying significant spin to areas of analyst concern. There's no doubt, though, that sales are growing in BT's new-wave target markets. Of the quarter's revenues, £1.44 billion ($2.52 billion), or 30 percent of the total, came from new-wave services. In the same period a year earlier, such revenues accounted for 22 percent of the total.

BT continues to win managed IT services contracts from large companies, and generated £918 million ($1.6 billion) in revenues in the quarter, up 31 percent compared with a year earlier. And the carrier has won new contracts worth more than £8 billion ($14 billion) during the past 12 months. Andy Green, head of BT Global Services, stressed that it takes a few years before such deals -- many of which are worth hundreds of millions of pounds over their lifecycles -- feed through as profitable revenues and generate cashflow. (See HP, BT Serve Hertz Europe and BT Unit Targets Finance Firms.)

Broadband revenues are also booming, up 76 percent at £350 million ($611 million). But while BT had 6.2 million wholesale broadband connections at the end of September, most of those DSL lines have been sold by other broadband service providers. BT's Retail business has 2.1 million customers, or nearly 34 percent, but in the second quarter its net additions were just 171,000, or 27 percent of BT Wholesale's increase of 633,000 DSL connections.

This low market share concerns analysts, but Verwaayen told them it wasn't that important. "The real story is not about having the pipe, it's what you do with it," he argued, spinning so hard that he nearly experienced vertical takeoff. "We are building an environment that brings value to the broadband proposition."

The CEO cited BT's VOIP service, called BT Communicator, as an example. "We embraced VOIP early," he claimed. "It's an opportunity, not a threat. VOIP is an instrument for growth," he added, citing the very low per minute international rates on offer, where BT has been pitching itself squarely against Skype Technologies SA. (See BT Lowers VOIP Rates .)

"We're taking things on early, and if we have to cannibalize ourselves, we will."

But so far only 62,000 customers have signed up for the VOIP service, which is available only to BT's broadband customers.

The carrier is also bolstering its DSL speed capabilities so it can deliver multiple multimedia services to homes. Its 8-Mbit/s trials are set to start later this month, with a view to commercial availability in the first half of 2006. BT Retail CEO Ian Livingston said such high-speed lines would allow two or three video streams as well as VOIP and gaming over a single line simultaneously. "We're squeezing much more out of our copper than we ever imagined possible three years ago," stated Livingston. (See BT Touts 8-Mbit/s Plans.)

In terms of its mobility capabilities, BT is very focused on talking up Fusion, its fixed/mobile convergence service, also known as BluePhone. (See BT Goes Blue and Pyramid Assesses BT Fusion.)

More than 20,000 people have registered for the service, though it's not generating any revenues as yet. "We said all along this is where we would make the difference," boasted Verwaayen. This is convergence in real life."

But unlike in other quarters, the CEO neglected to talk about BT's efforts in signing up regular mobile customers, where the carrier resells services from Vodafone Group plc (NYSE: VOD).

While mobility revenues, at £65 million, are up 33 percent on last year, it was up only a few million sequentially, and the number of connections fell to 350,000 from 370,000 at the end of the first quarter.

— Ray Le Maistre, International News Editor, Light Reading

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