BT to Cut 10,000 Jobs as Pre-Tax Profits Slump 11%

British Telecom (BT) has announced it is cutting 10,000 jobs, as the group reports an 11% fall in pre-tax profits in the third quarter of 2008, to £590 million (US$903 million) from £660 million in the third quarter of 2007 year-on-year (y/y). Revenue during the quarter rose 4% to £5.30 billion, up from £5.095 billion in the third quarter of 2007 y/y, and earnings before interest, taxes, depreciation and amortisation (EBITDA) fell 1% to £1.39 billion, from £1.41 billion the same quarter of 2007.

BT has reported a conflicting 19% rise in its third-quarter pre-tax profit after specific items, of £516 million up from £435 million y/y; however, these figures are largely as a result of inflated costs in the third quarter of 2007 due to restructuring, specifically the continued roll-out of its Global Services division.

BT revealed the 10,000 job cuts would take place chiefly among contract, agency and offshore workers, with some sub-contractors and other indirect employees also losing jobs. The cuts from BT's global workforce of 160,000 would be complete by the end of March 2009; however, BT revealed that around 4,000 staff have already left would not be replaced.

Outlook and Implications

• BT's Global Services Becomes a Millstone: BT has admitted that the quarterly figures are "disappointing", and freely admits that the group is being dragged down by poor performance in its Global Services wing. The unit saw third-quarter 2008 EBITDA fall by a huge 36%, to £119 million, from £186 million in the same quarter of 2007 y/y, with gross profit falling 8% to £611 million, down from £663 million in third-quarter 2007 y/y. Ian Livingston, group chief executive, frankly stated: "Three out of our four business units, BT Retail, BT Wholesale, and Openreach are delivering on or ahead of target. But profits in BT Global Services are simply not good enough and we are taking decisive action to put matters right." BT claims the setback in the division is chiefly due to slower than expected cost-cuts, declines in more profitable business lines, and the effects of currency fluctuations against the pound. However, it is clear the group has overstated the potential of its Global Services unit, and the high cost of its roll-out is not bringing in sufficient reward.

• Swinging the Axe: BT's announcement of job cuts will come as a shock to the U.K. telecoms industry, which is already reeling from the announcement of 2,200 job losses at BT rival Virgin Media this week (see United Kingdom: 12 November 2008: Virgin Media to Cut 2,200 Jobs as Restructuring Bites), and fears of redundancies at Vodafone as the mobile giant announces plans to cut £1 billion costs (seeUnited Kingdom: 11 November 2008: Vodafone Looks to Cut £1-bil. Costs as Net Profit Falls 35%).However, the indication seems to be that many of the job losses would be among contract, agency and offshore workers, suggesting the poor-performing Global Services division will be hit hardest. BT's core U.K. customer and business units are performing well, despite stiffening competition, so Global Insight believes there will be no sweeping job losses in these areas. Despite BT's recent announcement of sweeping cuts to its £35 billion pension scheme following a surprise profit warning about margins from its Global Services unit (see United Kingdom: 3 November 2008: BT to Cut Pension Plans Following Profit Warning—Report), while U.K. staff may see some unit consolidation and a reduction in benefits, the large majority of roles in it's core operations should be safe.

• Broadband Continues to Perform: BT has reinvented itself since the sale of its mobile phone division O2 to Telefónica, and managed to rid itself of the burden of nearly £30 billion in debt. Under CEO Ian Livingston, the group has concentrated on providing network services for corporate customers, and the rollout of its 21st Century Network (21CN) continues, with the first live trials announced recently (see United Kingdom: 14 October 2008: BT Announces First FTTC Sites). BT has announced the network footprint has now passed 8% of the addressable U.K. market, remaining on track to achieve 40% by April 2009 and 60% of potential U.K. customers by March 2010. The network will also prove a key revenue stream from business and telecoms operator use, will most of the U.K.'s mobile operators signing up to make use of the backbone (see United Kingdom: 7 October 2008: T-Mobile and 3 Sign Deal to Use BT's Next-Generation Network , and United Kingdom: 14 April 2008: BT, Vodafone Sign Five-Year Access Deal).

• Looking Forward: Going ahead, BT has announced it expects revenue to continue to grow in the current financial year, reiterating its targets for its Retail, Wholesale and Openreach units. In residential services, it has begun to compete for more efficiently with key rivals Virgin Media and emerging player BSkyB, who are ramping up the competition particularly in the triple and quad-play sectors. Although it still has some regulatory issues to iron out (see United Kingdom: 4 August 2008: Ofcom to Investigate BT Over Line Rental), the operator has made sufficient concessions in key pricing areas, and competition is sufficiently healthy in the United Kingdom to avoid any major concerns about EU intervention. Global Insight believes BT's overseas growth will slow as the group moves to consolidate its existing customer and business markets, and stay lean in the face of global financial uncertainty and increased competition at home.