Britain's former telephone monopoly BT managed a small rise in third-quarter core earnings, relying on cost cuts and lower regulatory charges to offset falling sales, with broadband a rare bright spot on the demand side.

BT, which has increasingly relied on deep cuts and operational efficiencies in recent years as its fixed-line business struggles, said both earnings and cash generation for the three months to end December were up, despite a further 5 percent fall in revenues.

In added 146,000 new retail broadband customers, however, representing 56 percent of all net additions in the market, confirming its position alongside BSkyB as the main provider of broadband in Britain.

Take-up of its super-fast BT Infinity broadband product increased, with 95,000 customers added in the quarter, taking the base to more than 400,000 customers.

The group also repaid over a billion pounds of debt in the period, but its pension deficit jumped, reminding investors that cash and the company's ability to raise its dividend could be constrained for some time to come.

We have delivered another quarter of growth in profits and cash flow despite the economic headwinds, Chief Executive Ian Livingston said.

These are a reasonable set of results. We're seeing further cost reductions, and that's despite very significant investment we're making in the business. We are becoming a more efficient and better business, but we've still got more to do.

Shares in the group were up 3.3 percent at 212.7 pence at 1023 GMT on the back of the operational gains, though analysts noted that the stock had risen strongly in the last six months, up over 16 percent, and that perhaps value could be found elsewhere in the sector.

Whilst Q3 numbers are broadly in line with expectations, we can't help feeling the stock has already arrived, Liberum analyst Mark James said. BT has outperformed the FTSE by around 15 percent in the last 12 months.

BT to our mind is expensive versus its peers, and upside to shareholder returns is likely to be constrained by the pension deficit.

A leap in the pension deficit at the end of December to 4.1 billion pounds from 2.5 billion just three months earlier will be closely examined this quarter as a new triennial valuation begins in earnest.

The evaluation will determine how much the company will have to pay into the scheme, and it could opt for an early payment to take advantage of tax benefits.


BT, which competes with Virgin Media, TalkTalk and other corporate providers, has been steadily recovering after profit warnings in 2008 and 2009 over the poor running of its corporate Global Services division, and has also invested heavily in new fibre networks.

The group posted third-quarter revenues down 5 percent at 4.77 billion pounds, slightly below forecasts and down on the previous quarter, but the group said that was due to timing issues on some contracts and it remained on course to meet its full-year sales forecast.

Due to continued strong cost control, core earnings were up 3 percent at 1.5 billion pounds, in line with forecasts.

Adjusted free cash flow was up 65 million pounds to 634 million pounds, while adjusted earnings per share was up 13 percent to 6.1 pence.

The group said it now expected to exceed its target of 6 billion pounds of adjusted core earnings one year early. It also lifted its expectations for free cash flow to around 2.4 billion pounds, from an earlier forecast of 2.2 billion pounds.

(Reporting by Kate Holton; Editing by Will Waterman)