BT banks on Internet boom to beat recession

BRITISH TELECOM yesterday shrugged off worries about an economic slowdown as it reported a strong rise in profits powered by an explosion in Internet traffic.

Sir Peter Bonfield, chief executive, said BT was beginning to see signs of a slowdown and forecast that growth could slow next year to between zero and 1 per cent - lower that the Chancellor Gordon Brown's forecasts.

But he said it would not be a "bloodbath", and indicated that BT expected to be bolstered by the extraordinary rise in Internet, data and multimedia traffic on its network.

He was speaking as BT unveiled a 14 per cent rise in underlying pre-tax profits for the second quarter to pounds 778m, fuelled by a sharp jump in business revenues and an explosion in the number of homes installing a second line to surf the Internet or link up to interactive services.

Top-line profits soared to pounds 1.878bn for the three months to the end of September as BT booked a pounds 1.1bn profit on the sale of its 20 per cent stake in MCI to WorldCom.

BT, which generates all its profits from UK operations and still accounts for more than 90 per cent of all telephone lines, restricted the net loss of residential lines to 65,000 during the half year, compared with a reduction of 230,000 in the same period last year.

Robert Brace, finance director, said the slowdown in erosion of its domestic customer base was due more to households installing a second line than returning to BT from rival operators.

In the 15 months between June last year and this September, BT's Internet customers grew from 76,000 to 280,000 and its new Click Plus pay-as-you- go Internet service has attracted 20,000 customers in three weeks.

Mr Brace estimated that Internet revenues now amounted to pounds 300m to pounds 400m a year. Much of this is pure profit since it is incremental income.

Despite pounds 250m worth of price reductions, BT's inland call revenues still rose by 2 per cent to just over pounds 2.5bn during the six-month period on a 6 per cent rise in call volumes. However, international call revenues fell by 8 per cent to pounds 733m.

Despite the pounds 1.1bn MCI windfall and a gearing of just 4 per cent, BT gave little indication that it was planning to return large amounts of cash to shareholders following last year's pounds 2bn special dividend.

The group indicated that it would prefer to use its surplus cash to invest in expansion of the domestic and international networks. Capital expenditure on the network is running at pounds 3bn a year while BT is investing a further pounds 1bn abroad, including heavy investment to roll out its European network.

Cellnet, the mobile telephone operator in which BT has a 60 per cent stake, added 230,000 customers in the three months between July and September, taking its customer base to 3.39m.

Sir Peter indicated that BT would be lobbying the Government to be allowed to buy out the remaining 40 per cent in Cellnet owned by Securicor. This would allow BT to offer an integrated fixed-mobile network when it bids next year for one of the three third-generation mobile licences.

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