UPDATE: BT Talking To UK Govt About Cuts; Confirms Outlook

By Lilly Vitorovich Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Telecommunications firm BT Group PLC (BT.A.LN) Thursday reiterated that it is in talks with the U.K. government over plans to slash public spending as it kept its full-year outlook and posted solid first-quarter results underpinned by contracts wins and further cost cutting. BT, whose exposure to U.K. government spending cuts has got investors jittery, said it is "actively engaged with the U.K. government" about spending cuts, which it said present both opportunities and challenges. Less than 10% of BT's business comes from the U.K. government, which has flagged that some departmental budgets will fall by 25% in real terms over the next four years, Chief Executive Ian Livingston said. "Like any customer, we're going to try help them meet their costs, their challenges. We're comfortable with our numbers," he said. The U.K. government's cost cutting plan has already resulted in Cable & Wireless Worldwide PLC (CW.LN) issuing a profit warning last week that knocked its shares, although a greater percentage of its sales derive from government contracts compared with BT. Cable & Wireless competes with BT's global services division. Livingston said the company has made an "acceptable start" to the new financial year, which ends March 31 2011, delivering improved financial results while investing in the future. "Despite the challenging environment, these financial results underpin our outlook for the full year," said Livingston. Stripping out redundancy costs, earnings before interest, tax, depreciation and amortization--one of the main figures U.K. telecom analysts track--rose 6% to GBP1.4 billion in the first quarter ended June 30, beating market expectations of GBP1.37 billion. The performance was driven by the group's global services division and a GBP291 million reduction in operating costs excluding depreciation and amortization in the first quarter, largely due to reductions in labour costs and cost savings across the board. Underlying Ebitda at global services, which provides outsourcing work as well as phone and Internet services to businesses, doubled in the first quarter to GBP130 million from GBP62 million a year ago. First quarter net profit rose 33% to GBP284 million from GBP214 million, driven by the cost savings and higher finance income. First-quarter revenue fell 4% to GBP5.01 billion from GBP5.24 billion, ahead of expectations of GBP4.95 billion, as customers made fewer landline calls. Free cash flow, another closely watched figure, rose GBP537 million in the first quarter, while net debt fell sharply by GBP1.6 billion to GBP8.9 billion. For the current financial year, BT expects revenue of about GBP20 billion, underlying operating cost savings of around GBP900 million and debt of less than GBP9 billion. BT said it expects free cash flow to be around GBP1.8 billion. However, the company expects a slowdown in underlying Ebitda growth in the second quarter due to the timing of the additional investments announced at the time of its fiscal 2010 results in May. At 0847 GMT, BT shares were up 1.8%, or 2p, to 143 pence, valuing the company at GBP10.99 billion, while the FTSE-100 was up 0.7%. -By Lilly Vitorovich, Dow Jones Newswires; 44-0-207 842 9290; lilly.vitorovich@dowjones.com (END) Dow Jones Newswires July 29, 2010 04:49 ET (08:49 GMT)