UK's largest phone company BT Group Plc (BT-A, BT, BTGOF.PK) said Thursday that it would incur a substantial one-off non-cash charge of around GBP 340 million to date in the third quarter, as a result of the ongoing BTGS review. In addition, the company forecast third-quarter revenue growth for BTGS to be around 15%, with the rest of the group expected to deliver results for the quarter above expectations.
In its trading update, the company said that the financial, contract, and operational reviews of BT Global Services, or BTGS, is in progress. The review within this division was initiated pursuant to its disappointing second-quarter financial performance and the appointment of the new BTGS management team.
The company noted that the financial review covers the financial performance of the business and balance sheet position as of December 31, 2008, whereas the contract reviews cover reassessment of the estimates and assumptions related with certain major contracts.
The company further noted that it is also undertaking a detailed review of the division's operations, aiming to simplify its operating model to enhance ability and create a cost base to deliver positive cash flow.
Also, as noted earlier, the company has identified a number of cost savings opportunities, results of which are expected in the financial year 2009-2010 and beyond.
BT Group expects to incur the substantial one-off non-cash charge of around GBP 340 million, as a result of the BTGS review to date. The company also sees quarterly earnings before interest, taxes, depreciation, and amortization, or EBITDA, of GBP 17 million prior to the one-off charges, due primarily to insufficient delivery of cost savings and the continued decline in the higher margin UK business.
In November, BTGS had reported a decrease in second-quarter EBITDA before leaver costs to GBP 119 million from GBP 186 million in the year-ago quarter, resulting in an EBITDA margin of 5.5%.
BT Group further stated that the substantial one-off charges might go up even higher for the current financial year as the BTGS review is still ongoing. The company said it expects to also recognize a one-off credit of GBP 40 million related to the financial review with respect to the asset value of an associate.
BT Group expects the BTGS division to grow revenues around 15% in the third quarter, boosted by favorable foreign exchange movements as well as on acquisitions. The company also noted that order intake during this period was around GBP 1.8 billion, leading to an annual rolling order intake of GBP 8.3 billion.
Chief Executive Ian Livingston said, "The first job of the new management team in Global Services and the new group finance director has been to review the financial position of Global Services and its major contracts. These ongoing reviews reflect changed circumstances and a more cautious view of the delivery of cost efficiencies and contract performance, particularly in the light of the current economic climate. We have also initiated a review of Global Services' operations which will help us drive our cost savings initiatives and further enhance our ability to serve customers."
In addition, BT Group said that the rest of the group, comprising BT Retail, BT Wholesale, and Openreach, are all expected to deliver results for the quarter above expectations. The company also noted that group EBITDA, excluding BTGS, is seen to be 5% above that of the same period last year. "The performance of the rest of the group is ahead of expectations for the third quarter, but unfortunately this will be more than offset by the issues in Global Services," Livingston cautioned.
Moving ahead, the company envisages the contract reviews, together with ongoing commercial discussions for two of its largest contracts, to likely be complete during the fourth quarter.
The company further noted that the charges announced are expected to be largely non-cash, and, therefore, will not affect its dividend outlook. The Board intends to announce the final dividend at the time of its year-end results, the company added.
BT Group is slated to release it results for the quarter ended December 31, 2008, on February 12, 2009.
In mid-November, the London-based company reported an 11% decline in its second-quarter pre-tax profit, excluding specific items and leaver costs, but an increase of 19% all-inclusive, with 4% growth in revenue.
BT-A.L is currently trading on the LSE at 378.75 pence, up 6.25 pence, or 1.68%, with a volume of 71,558 shares.
BT closed Wednesday's regular trading on NYSE at $17.48, up $1.00, on 209,200 shares.
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