Colt crashes after warning tough telecoms trading could hit profits

Colt Telecom, whose customers are some of Europe's biggest blue-chip companies, yesterday warned its profits may fall this year as the tough market for telecoms continues. The news sent shares in Colt tumbling nearly 34 per cent. The shares ended down 27.25p at 53p.

Tony Bates, the chief administrative officer, said the second quarter of the year had seen slower trading than had been expected. The company has also suffered from sluggish sales of its high margin products, such as those that transmit data rather than straightforward telephone calls.

As a result, the company said overall margins were now under pressure. "These trends are expected to continue throughout 2004 and, consequently, Colt does not now believe that it will meet market expectations for the quarter," the company said. The poor performance is likely to stretch across the whole year. Analysts had been expecting Colt to produce earnings of £203m. But the company said it was now not likely to improve on last year's earnings of £163m.

The corporate telecom market is recovering from a three-year slump that followed the end of the dot.com and technology boom. The sector has been dogged by over-capacity and Colt, whose customers include Deutsche Bank, UBS, Citigroup and Lastminute.com, said competition on price was still tough.

Mr Bates said 2004 revenues would be above 2003 levels, as would second-quarter revenues. "But it is a simple case of the mix of revenues that is affecting our margins and bottom line. If you find that more low-margin products are sold, it can have a dramatic effect," Mr Bates said. Colt's earnings in the second quarter are now likely to be between £35m and £40m, down from market forecasts of up to £50m.

The size of the drop in expected earnings took the market by surprise. Shares of other telecoms companies were also hit, as investors feared they too may be struggling. Thus shares fell 8 per cent, while Cable & Wireless fell more than 3 per cent.

Colt sought to allay some shareholder fears by reiterating that it remained financially strong with cash and liquid resources of close to £800m.

In marked contrast to Colt's gloomy outlook, Easynet Group, a smaller rival, said it continued to have strong revenue growth. Its free cash flow is expected to become positive by the second quarter of 2005 and it will be profitable at an operating level by the end of the year.

Earlier this year, Colt said its chief executive, Steve Akin, was stepping down from his role at the company to return to Fidelity, the fund manager that was one of its initial backers.

Colt was once a stock market darling with a market capitalisation of £28bn but in the technology fallout, its shares collapsed and a US hedge fund tried to put the company into administration. Colt escaped but needed a £400m rights issue, supported by Fidelity which still has a majority stake in Colt.

Mr Akin was parachuted in to Colt from within Fidelity in 2002. Jean-Yves Charlier is replacing Mr Akin later this year from BT.