Cleaning up at BT Global Services

OVUM COMMENT / Richard Mahony and David Molony, principal analysts at Ovum

Köln, (PresseBox) - The star performer of the group was BT Retail, which, whilst it reported near flat revenues for the year, delivered a 9.33% growth in EBITDA over the previous year. Call and line revenues continue to decline, but UK broadband continues to perform well. Given the deteriorating economic environment, the pension liability fell into a deficit of £2.9 billion net of tax over 2008 and BT announced additional funding of £525 million, which it has agreed with the regulator. The dividend was cut sharply from 15.8p to 6.5p.

Whilst top-line performance is good, before contract and financial review charges BT Global Services' gross profit fell by 9.26% and EBITDA more than halved over 2008. The decline is most probably down to falling prices in core network services, more prudent accounting practices and currency factors.

Whilst this financial performance is disappointing, it's the write-down of £1.639 billion in the year that is the immediate concern. It is speculated that the write-downs are from two accounts. BT emphasised that these costs have already been incurred and therefore there is limited impact on the free cash flow of the business. In response to the weak financial performance, BT announced that this year there will be a similar level of job cuts as last year, which ended up at around 15,000.

BT announced a restructuring of Global Services into UK Domestic (with 1,100 customers, revenues of £2.5 billion and EBITDA of £0.4 billion) led by Mark Quartermaine, MNC business (revenues £3.5 billion, 400 customers and EBITDA of £0.2 billion) led by Michael Boustridge, and GS Enterprise, a portfolio of non-UK businesses specialising in domestic telecoms and professional services to corporates and the public sector within their domestic markets (revenues of £2.8 billion and EBITDA of £0.2 billion) led by Luis Alvarez. The appointments are all strong ones in our opinion, with Quartermaine previously leading public sector, Boustridge the US and Alvarez the European and Latin American leads.

Regional focus demonstrates customer flexibility

The key highlights of its new operational model are that the business is consolidating group functions in sales, marketing and professional services and applying them to this new functional structure. The creation of the BT Global Services Enterprises unit offers a more locally driven portfolio. Other operators are not doing this and we will need to understand the impact on global delivery capability, but we understand that MNCs and UK Domestic will continue to be serviced in the same way as they were before. That said, whilst we are not privy to how this new unit will operate, this could be good news for some customers. The regional focus also extends to systems - for example, the business has given up on one single global billing platform. Improving the bid process, consolidating customer support centres by investing in few but larger 'regional' operational hubs and the continued search for network efficiencies are also initiatives designed to reduce cost and commercial risk. In addition, £200 million of business is being transferred from BT Global Services to BT Business (Retail), which further emphasises the more localised approach of the business.

We reported in our last comment on BT Global Services that multinational customers are standing by the business and the good will towards the business was strong. We still believe that this is the position, but clearly this latest set of results will continue to test the faith in the business. BT Global Services closed significant contracts last quarter, and in Ovum's contract tracker we found it to be the best performing operator at the end of 2008.

Customer focus will need to be maintained throughout the transition

However, we need a better understanding of the impact of the new structure for Global Services strategy, as the previous business operator strategy will need to be modified to reflect the intent of the new structure and the more segmented approach to market. We expect that BT Global Services will partner more, and we also expect changes in mobility too - the Vodafone BT partnership has more to offer both parties, so it will be interesting to watch how this develops.

Whilst there are many good things under way in the internal programmes, the customer buy-in to the BT Global Services proposition, which has been the secret of its success to date, is at risk whilst it transitions its business. That said, it continues to win business and we believe that most existing customers will remain with BT Global Services and stand by the company whilst it tidies up its house.

Ovum

Ovum is a global advisory and consulting firm. Its primary activity is providing value-added advisory services and consulting to retained and project clients. The company acts as a well-respected and trusted source of industry data, knowledge and expertise on the commercial impact of technology, regulatory and market changes. Ovum engages in continuous research and industry analysis to determine market dynamics in its specialist sectors.

Ovum has developed long-standing relationships with many of its corporate clients, which include major international blue-chip companies such as Alcatel-Lucent, AT&T, BT, Cable & Wireless, Cisco Systems, Deutsche Telekom, Fujitsu, HP, IBM, Microsoft, Telstra and Vodafone.

Ovum is part of the Datamonitor Group.

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