BT slumps on Livingston's first results

By Kate Holton

LONDON (Reuters) - Shares in BT (BT.L) dropped over 12 percent on Thursday on poor first quarter results and as some analysts questioned whether the targets set for new Chief Executive Ian Livingston were too ambitious.

BT posted first-quarter core earnings towards the lower end of forecasts and disappointed investors on a host of divisional targets, including a drive within the Global Services unit for earnings' margins of 15 percent within the medium term.

The Global Services division, which provides outsourced IT, telephone and network services to large companies, had an EBITDA margin of 9.5 percent in the first quarter.

The company said it expected the margin to be slightly lower in 2008/09 than last year when it was 11.2 percent, in part due to currency movements.

"BT looks a bit sick," said one analyst.

The group reiterated its full-year outlook and revenue was ahead of forecasts, but the market focused on the negative comments, with analysts also citing the Wholesale division, pension deficit and free cash outflow as cause for concern.

"This is a poor quarter, with three negative highlights; weak Global Services margin, poor cash flow generation due primarily to a major working capital outflow and also a higher than expected IAS pension deficit," Dresdner Kleinwort analysts said in a note.

"Although guidance has been reiterated investors' concerns about the outlook for future dividend growth will increase. The bright spot is the top-line but expect the shares to be weak."