BT is to axe more than the expected 10,000 jobs after its troubled Global Services arm decimated profits in the third quarter, with the division expected to cause further "substantial" losses by March. The bleak announcement sent BT's shares spiralling down to new lows yesterday.
The telecoms giant announced that pre-tax profits had plunged by81 per cent to £113m between October and December, as soaring costs and one-off charges hit BT's Global Services division.
Its chief executive, Ian Livingston, said: "Global Services has been very poor." He added that reviews at the division could see further "substantial one-off charges" in the fourth quarter, leading to "significantly lower" revenues.
Manoj Ladwa, a senior trader at ETX Capital, said: "It goes from bad to worse for BT as their results this morning show a drastic decline in third-quarter net income. The market is not going to take kindly to its key Global Services division potentially suffering further one-off charges in the fourth quarter." The shares subsequently fell 7.8 per cent to a record low of 97p.
The weakening markets since BT announced the 10,000 job cuts in Nov-ember have forced the group to increase its cull of employees. In the first nine months of the financial year to December, the group had cut 9,500 staff, of which 2,500 were permanent and the rest made up of contract and temporary workers. It will go through 10,000 by the end of March, although the company said it was too early to give a definitive number of departures.
There were also fears yesterday over the full-year dividend, after revelations that the pension fund had swung from a £2bn surplus in the third quarter of 2007 to a £1.7bn deficit the following year. Mr Livingston said BT was likely to dip into its cash reserves to top it up.
Analysts at Killik said: "The 2005 review required the company to make annual top-up payments of £280m. So, given the prospect of an even bigger deficit this time round – maybe £6bn-£8bn – we are concerned over the outlook for free cash-flow generation. We do not believe the current dividend is sustainable." Analysts believe the dividend is likely to be cut to 10p from 15.4p.
At Global Services, high costs, slow delivery of cost savings and contract review charges sent it to an operating loss of £501m in the third quarter from profits of £22m the previous year.
The announcement yesterday confirmed a surprise profit warning at the end of last month, which signalled that operational failures at Global Services would see returns tumble.
The 37,000-strong Global Services division has seen a dramatic turnaround in its fortunes, from being BT's "jewel in the crown" to triggering two profits warnings since October.
Global Services provides multinationals with IT networking and outsourcing services. The unit has 17 major contracts, including companies such as Procter & Gamble and KPMG, and overspending on servicing just three of these led to charges of £336m. Two contracts are expected to run to "hundreds of millions of pounds" each in losses in the fourth quarter.
Mr Livingston reconfirmed his commitment to the division, adding: "This is the year we're sorting things out." There is currently an operational and financial review of the division as well as the contract review, all of which are to be concluded by the end of the year.
The troubles in Global Services overshadowed the performance at its three other divisions – BT Retail, BT Wholesale and Openreach. They performed ahead of management expectations and had cut costs by 7 per cent over the previous year, while Global Services' costs leapt 10 per cent. "Three of our businesses performed ahead of expectations in the quarter and the group, excluding Global Services, delivered the best year-on-year profit growth in five years," Mr Livingston said.