Marconi tumbles on margins 'challenge'

Marconi shares plummeted 15 per cent yesterday after the company revealed extra costs and suggested that it would be a "challenge" to make its profit margin target.

Marconi shares plummeted 15 per cent yesterday after the company revealed extra costs and suggested that it would be a "challenge" to make its profit margin target.

The telecoms equipment maker's trading statement, ahead of half-year results, caused analysts to slash forecasts with the house broker Cazenove reducing its estimate from £71m to £50m for full-year operating profits.

Cazenove said: "The cash position is disappointing," adding that tax and transaction costs on the disposal of Marconi's Outside Plant and Power business in August were higher than expected. The company reported a cash balance of £335m at the end of the second quarter on 30 September, up from £188m at the end of the first quarter, but the latest balance included the £204m received from the OPP divestment.

Mike Parton, the chief executive, said: "We continue to make progress in challenging market conditions. Increased demand for access equipment, in support of our customers' broadband and 3G development plans, is driving our top-line growth and underpins our full-year sales guidance."

A change in the company's sales mix ­ with strong growth in lower margin activities such as the access equipment (used for the "last mile" in a telecoms network) ­ meant it would be more difficult to achieve the 34 per cent full-year operating margin target, Marconi said. Even though the company stuck with the target, some brokers had already assumed that it would be beaten. In addition, Marconi flagged up an extra £10m of costs for research and development and the sales effort.

For the second quarter detailed in yesterday's update, margins came in below the 33 per cent annual target whilesales grew at an underlying rate of 4 per cent to £305m.