Great Titchfield Street, London -- The big story this morning is confirmation that profits are slipping at former telecom monopoly BT (LSE: BT.A). The group reported figures for its third quarter today. These show that in the nine months of the fiscal year so far pre-tax profits have fallen by a third to £2.31b, despite turnover rising a fifth to £15.9b. This means overall operating margins have slumped dramatically in this period from 35.4% to just 15.5%. Frightening!
The group blames falling margins in the UK fixed line business. Oftel has been forcing BT to open its lines to competition ceaselessly for sometime now. It seems this is having some effect. Also I wonder how many of the 24m people who now have mobile telephones use them to make calls they would previously have conducted over a BT land-line?
Chairman Sir Iain Vallance in his accompanying statement tried to brush aside fears of further profit erosion, by emphasising BT's international credentials through the Concert alliance with AT&T as well as its own fast-growing mobile arm BT Cellnet.
Also it must be remembered that the comparative period last year was exceptionally good for BT. Now with data traffic, which are effectively low margin local calls, making up a greater percentage of the group's turnover, it's hardly surprising that profits are slipping slightly.
However, the competition BT faces can only increase with the practical implementation of deregulation speeding up all the time. No doubt the Ruleshaker team, who selected the company for its long term rule making properties will offer more thought and comment on the results later today.
Certainly it seems as if the group's future growth will no longer come from its traditional domestic UK operations of fixed-line connection. Overseas acquisitions as well as the purchase of the outstanding stake in Cellnet contributed 40% of the growth in turnover in the last three months and a quarter of total sales growth for the nine-month period.
Costs have mounted though as the burgeoning diverse operations need increasing amounts of cash to run properly. And Cellnet, like many mobile operators, is barely profitable yet, being still in a development stage, where any profits are ploughed back into growing the business. BT has also increased its debt substantially during this period to fund these acquisitions. Gearing stands at 42%. The group owes £7b in all now.
However, a more dire problem is that other telecom networks are swinging their weight around now. Many rivals are charging BT substantial sums to allow calls emanating from BT account holders to end on their networks. I suppose BT is getting a taste of its own medicine, which it used to dole out to up-starts in huge quantities.
Oftel seems to think these are BT's just desserts. Consequently in early trading the stock plunged 192, or 16.1%, to 998p. Does the group have any friends? Let us know on the BT message board.
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Leisure group Chorion (LSE: COR) tidied up its portfolio of businesses this morning. The company came to an arrangement with landlord Burford (LSE: BUO) about the loss making Trocadero complex. Chorion will pay Burford £7.2m to get out of the White Elephant on Piccadilly early. But Burford has to return £12.8m to Chorion in unused rental deposits.
This means Chorion actually makes £5.6m on the deal. This leaves the debt-free group with £30m in cash to expand its profitable and popular chain of Tiger Tiger bars. It can now also exploit its intellectual property portfolio, which includes Agatha Christie and Enid Blyton. The shares rose 0.75p, or 1.7%, to 45.5p.
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