Carphone hit by slowing growth of broadband

Carphone Warehouse's share price dropped by 13 per cent yesterday as investors were spooked by a year-end trading statement with missed revenue predictions and net debt levels 30 per cent above forecasts.

The company anticipates pre-tax profits of £215m to £220m, slightly below analyst predictions of £225m. And while the number of mobile connections went up 12 per cent to 2.7 million in the last quarter, broadband sales of 109,000 were disappointing compared with forecasts of 128,000.

Year-end debt came in at £840m, against £617m last year and expectations of £630m to £660m. Adverse currency movements affecting borrowings held in euros and Swiss francs cost the group £120m in the fourth quarter, Carphone said. Capital investments, and an extra £50m of customer acquisition costs as a result of the group's free laptop marketing scheme, also played a part.

In the coming year, Carphone wants to add 400,000 broadband customers, to hit its target of 3.5 million by March 2010. It is also predicting revenue growth of around 10 per cent in the Distribution business, which includes its retail outlets and mobile division, and of around 5 per cent in the Fixed Line division, which includes the Talk Talk broadband service.

Charles Dunstone, the company's chief executive, explicitly denied that the plan for greater separation between the two arms of the business is a prelude to it being split.

"I would be loath to have them separated," Mr Dunstone said. "The two are symbiotic – we need the stores to recruit the customers for the fixed-line business, and that's a key advantage over BT and Sky, because they don't have natural distribution."

The market is likely to remain sceptical. "It is difficult to envisage any potential buyer being interested in both," Dan Gardiner, an analyst at Landsbanki, said. "However hard the company argues about cost savings and greater accountability, plans for greater separation will be seen as a way of creating two businesses that are able to stand alone."

Carphone also confirmed this week that it is interested in buying Tiscali, a rival internet service provider. Mr Dunstone said yesterday that a deal would only go ahead at a reasonable price. But the situation stands to benefit Carphone whichever way it goes. "It could be a no-lose situation, because either Carphone can buy the business for a reasonable price, or Tiscali's high price tag boosts the value of its own broadband assets," said James Barford from Enders Analysis.

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