IDC Telecom and Networks

BT GS: More with Less Seems to Indicate the Turnaround is Continuing

On July 28, 2011, BT announced the results for its first quarter in FY12 ending June 30. Although revenue was down 5% to £4,764 million for the last three months (revenue excluding transit was down 3%), reflecting the company’s difficulty to gain traction in a slow growing market (at least for services), we were pleased to see the profit line (EBITDA) was up 3% for the group including BT Global Services, Retail, Wholesale, and Openreach.

Indeed, CEO Ian Livingston unveiled that total operating costs were down 6% to £4,165 million. Total labor costs were also down 3%, reflecting the continued effort from BT to become more streamlined since the poor set of results announced two years ago.

In terms of BT Global Services, the story is pretty much the same: revenue down 5% to £1,905 million, (revenue excluding transit was down 2%) but EBITDA up 6% (£138 million). BT GS remains the largest line of business of the BT group — it is vital to the overall success of the company.

BT also claimed that “depreciation and amortization reduced by 5% as a result of lower capital expenditure over the last two years. This contributed to a 31% reduction in the operating loss.” Finally, another line item worth noting is the increase in BT GS’s capital expenditure (up 14%) which is due to “investment in network infrastructure.”

Overall, IDC believes this set of results represents a “game of two halves”. While it is disappointing to see BT GS post decreasing revenue (IDC’s forecast for the U.K. IT services market is 0.23% growth for 2011 over 2010), the profit trend is encouraging. Indeed, two years ago we criticized BT GS’s performance heavily, and mentioned the company would have to focus on profits before trying to gain back market traction. Based on this morning’s results, this is what seems to be happening.

Looking to the future, BT GS will at some point need to turn back to revenue growth — and the trick will be to do so in a way that does not erode margins. The investment in the network is crucial in that respect. It will be the foundation for future success as SLAs and QoS will be vital if BT GS is to succeed in regaining market share. For now, BT GS is doing more [profit] with less [revenue], but increasing profits on declining revenues cannot be a long-term strategy. BT GS will need to expand market share, turning itself into the provider of choice for high value, network-centric, and innovative services such as unified communications and cloud services.

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