Warning proves third time unlucky for CWW boss

All change at Cable & Wireless Worldwide as the dividend is cut and the chiefexecutive resigns.
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The Independent Online

An old market adage is that profit warnings come in threes. Just over a year into its independence, Cable & Wireless Worldwide (CWW) has already hit that inauspicious landmark, and yesterday moved to make sure it does not have to announce a fourth.

CWW provides telecoms services to businesses predominantly in the UK and has suffered a tough year. Yesterday, its shares plunged 14 per cent to 44.63p as it warned that full-year profits would not meet expectations, announced a cut to its dividend and revealed that its chief executive Jim Marsh had resigned with immediate effect.

John Pluthero, the former chairman who has taken over the helm, said that the latest profit warning "will be the last" and the company was "fundamentally sound". He added: "There is some stuttering but the wheels are not falling off."

CWW demerged from Cable & Wireless Communications (CWC) in March last year. The company posted solid results in May, only to warn on profits two months later. The company, which has a significant number of government contracts, blamed the move on the effects of the public sector cuts.

The second warning came this March, once again shortly after the publication of an in-line trading update. This time the blame fell on an unexpected increase in electricity prices and other inflationary factors, that caused a £30m drag on the bottom line. There was more fall-out from the incident as Tim Weller, the financial director quit. It is understood that he had urged the board to downgrade the initial announcement, but was overruled and made good on his threat to resign.

Yesterday, CWW pointed to slowing sales, as clients scaled back their orders or delayed them, at the same time as it made heavy investment in its cloud and hosting business.

Mr Pluthero said: "We've seen a weakness in sales. There are one or two competitive issues, although they are not unusual. This slowdown is across the industry, it is not a problem of our market share."

This slowdown could mean earnings before interest, taxation, depreciation and amortisation are as much to 10 per cent lower than the current expectations, the company said. It had guided that gross margins would be around £442m. That could now drop to £400m.

Philip Carse, the head of telecoms at IS Research, said: "We remain to be convinced that this latest warning reflects market conditions, as claimed by the company, rather than company-specific underperformance," before pointing to the company's "underlying issues and historic underperformance".

Among the biggest issues facing CWW is its reliance on revenues from voice services, which face a massive structural decline. Analysts have also pointed to its lack of a diverse portfolio of services and a reliance on Government contracts.

John O'Brien, a research analyst at TechMarketView, said the company "has been up against it since the demerger" adding that rival BT had not suffered so strongly as "it is much more diversified, especially in the public sector. It was quick to catch on to the need to offer more services."

Mr Marsh was not forced out by shareholders but this was something "he knew he had to do" following the warning, Mr Pluthero said, adding the former chief executive had been dealt a "tough hand of cards".

Mr Carse said: "Under Jim Marsh's leadership, the company has been in denial over the last year about its declining performance, perhaps partly due to a long-term incentive plan-led aggressive sales culture. John Pluthero is plain speaking, and one would hope for a more honest view of the world going forward."

The long-term incentive plan that caused so much controversy before the demerger centred around a bonus pot for the company's top managers of £70m. Mr Pluthero said the remuneration structure had been overhauled and was now no longer an issue.

Cable & Wireless can trace its roots back to UK telegraph companies operating in the 1860s, which merged in 1928. The company was nationalised by the Labour Government in 1947 before being privatised once again in 1981.

Despite the rich history, the management is in a bitter battle to secure its future and Mr Pluthero has announced a shake-up of the business targeting the lucrative "managed services" business of hosting client data. He said after a "very difficult 12 months, it is now important that we take the necessary steps to ensure the future growth of our business".

Investec's analyst Morten Singleton said the move to bring in Mr Pluthero means that "operationally, we may now see the more radical approach we have been calling for" adding: "This has never been a story about near-term financials ... which is just as well really."

Mr Pluthero said the company would actively look at deals as a both buyer and as sellers. The company was this month approached by telecoms investor Pacnet about its international operations but turned the offer down. Higher bidders may find a more sympathetic ear. The company is also looking to expand, not only organically but through a series of acquisitions.

Mr O'Brien said: "There is a turnaround opportunity in this company. If it does execute on what it has been talking about there is no reason it will not improve. But it is a long road."

Meanwhile at CWC...

* The other half of the old business, Cable & Wireless Communications, which runs telecoms services in 38 territories outside the UK, said in May it had made "good progress" since the demerger. It posted a 21 per cent rise in pre-tax profits to $462m. Yet the group, run by Tony Rice, warned that profits from the Caribbean operation were likely to disintegrate further. This, as well as the general economic outlook this year and the chance of a cut to its dividend, has seen the stock underperform its peers on the FTSE 250 by 40 per cent.

Yet Adam Rumley, an analyst at HSBC, was yesterday bullish about the prospects for the group and believes at its current price the shares are materially undervalued, as the levels of fear were "overdone". The company is set to update the market on its prospects for the Caribbean on Friday, which may "begin the long process of rebuilding investor confidence" over the region's operations. Mr Rumley pointed to Jamaica as the country where the business needs fixing as it caused 85 per cent of the regional decline in earnings before charges in the company's last financial year. HSBC believes there is "a small degree of optimism".

In Macau and Panama, mobile data is driving strong revenue growth, which sets up "a strong platform for growth", according to Mr Rumley. He also backed the management's mergers-and-acquisitions strategy as "disciplined" as the management look to reshape the portfolio. Mr Rumley concluded: "We believe CWC's targets are achievable, notwithstanding the tough economic conditions it must face in the Caribbean."