BT's shares drop on strong earnings

British Telecommunications (quote: BT) beat analysts' expectations on its full-year profits Thursday, but concern over its growing pile of debt helped bring its share price down more than 75 points, or 7.5 percent, by the end of the day.

Still, the reaction was far less serious than last quarter's bad news, which wiped 20 percent off the share price. BT, which had very little debt a year ago, has borrowed heavily to pay for its next-generation mobile phone licence, as well as acquiring telecommunications providers Esat and Telfort. Analysts are concerned over the mounting debt because of rising interest rates.

The Internet continues to grow as a segment of the company's overall business. For example, a year ago 17 to 20 percent of local calls were Internet-related, and that figure is now greater than 30 percent. BT has 5.5 million customers to its Internet services.

Pre-tax profits fell 32 percent to £2.942bn ($4.40bn) in 1999/2000 while profits before exceptional items dropped 5.3 percent to £3.1bn. Analysts were forecasting around £2.853bn.

But the company said price cuts continued to weigh on revenues in the fourth quarter, reducing turnover on its fixed network by 6.8 percent.

Falling UK call prices and an increase in lower margin wholesale business with other operators were among the reasons for the fall in group profits. BT also blamed the drop on rising interest costs and international investments.

"Prices are falling, competitors are introducing all sorts of products and we've got to fight back," Chief Executive Peter Bonfield said on CNN television. BT's response would be to increase its innovation and marketing and cut costs.

Turnover rose 20 percent to £21.903bn and earnings per share before exceptional items fell 2.3 percent to 34.2 pence.

Despite the company's scheduled introduction of ADSL broadband Internet service 29 June, BT said its ISDN business grew more than 30 percent over the last year. ISDN is an older, more costly and slower technology than ADSL.

Bonfield said the company will continue to offer ISDN after ADSL is rolled out, despite the fact that the two services will compete for many of the same customers at roughly the same price. He expects the ISDN business to continue to grow. "It will be a phased rollout. ISDN is better than ADSL in some ways, it has a longer reach than ADSL for example," Bonfield said. "The two products will exist side by side for some time... although ultimately ISDN will be merged into the ADSL business."

The disclosure after the third-quarter results of how much BT was suffering from price competition with cable companies and international call discounters wiped a fifth off its share price. But the stock was indicated to open stable on Thursday.

BT last month announced plans to split itself into six companies in an effort to revitalise the shares, and the full-year results indicated sales and operating profits for the new divisions.

Its UK wholesale and retail businesses, which will be split into two under the new structure, recorded no change in operating profits of £3.4bn.

Losses at BT Wireless, which includes its Cellnet mobile phone business, tripled to £300m despite turnover growing to £4.5bn from £2.7bn. Cellnet alone saw operating profits slip to £154m from £166m.

BT attributed the losses to the need to subsidise handsets for new customers. "In the mobile phone business it's a strange situation where the more you grow, the more you have to spend," Bonfield said.

The company said it has paid its multi-billion-pound fee to the government for a next-generation wireless licence, though it is involved in an action against the government for allowing Vodafone (quote: VOD) to delay paying its fee.

Asked whether such licence auctions are unfair, as some European telcos have charged, BT Chairman Iain Vallance said, "When we were state owned we used to say things were unfair too."

Yell, the Yellow Pages subsidiary it will demerge later this year, had profits of £200m on sales of £600m. Its Concert joint venture with AT&T earned £300m from revenues of £1.9bn.

The final dividend was increased to 13.2 pence, taking the total for the year to 21.9p, 7.4 percent higher than a year ago.

Reuters contributed to this report.

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