Earnings in the three months to the end of March rose by a third to pounds 836m as revenues surged by 19 per cent to pounds 4.9bn, fuelled by the explosion in use of the Internet and mobile telephones.
UK revenues are growing at their strongest rate since 1990, with turnover from inland calls up by 10 per cent in the first quarter. BT estimates that 18 per cent of all local calls are to the Internet - a figure which could rise to 30 per cent in 12 months time - while 10 per cent of its 21 million customers are connected to the worldwide web.
The huge growth in revenues caught the City offguard and BT shares rose 48p to 1096p, lifting other telecoms stocks in their wake.
Sir Iain Vallance, the BT chairman, said the company was traditionally a bellwether for the UK economy and the strong growth in turnover "reinforces the view that things are getting rather better than they were before".
But BT's robust performance also re-ignited speculation that it might be tempted to join the merger mania that is sweeping the telecoms sector, particularly if the pounds 105bn merger of Deutsche Telekom and Telecom Italia collapses this week. Telecom Italia is fighting a hostile pounds 40bn cash and shares bid from Olivetti which closes tomorrow.
Commenting on a cross border merger, Sir Peter said: "If we can get good value and good growth, we are open minded about these things. We want to be a major global player."
Up until now, BT has built up its European presence by forging joint ventures with smaller operators and then challenging the dominant telecoms operator. But Sir Peter said BT would not be opposed to cross-border mergers, provided they did not harm competition.
The fall-out from the Telecom Italia bid battle is opening up other possibilities in Europe. France Telecom has abandoned its alliance with Deutsche Telecom and has launched a compensation claim for "several billion euros" against its erstwhile partner.
Sir Peter said BT had plenty of "firepower" to make acquisitions. The group could raise its gearing levels to 100 per cent which the finance director, Robert Brace, said would give it pounds 15bn to spend. BT is also reserving the option of returning more money to shareholders following last year's pounds 2.3bn special dividend.
Sir Peter cautioned analysts not to assume that BT's growth rate this year will be the same as in the fourth quarter but BT said the momentum of rising Internet and mobile use would carry it forward.
BT said that 380,000 customers had returned to it last year, including 100,000 in the fourth quarter, while about the same number had left.
The number of residential lines remained steady at just over 20 million while business lines grew by 6 per cent to 8 million, fuelled by the growth in ISDN lines.
There was a 72 per cent rise in the number of homes with a second line, taking the total to 600,000.
Pre-tax profits for the year were up by a third to pounds 4.3bn, bolstered by a pounds 1.1bn profit from the sale of BT's stake in MCI to WorldCom. At the underlying level, pre-tax profits were 9.5 per cent higher at pounds 3.26bn while the dividend was increased by 7.4 per cent to 20.4p.
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