Who said Bland was boring?

So much for the skepticism of many a doubting Thomas a few years ago about whether BT Group (NYSE, BT) would be a major force when it came to 'new wave' technologies. However, as fourth quarter results illustrate, BT is in fact leading the way.

In our view, the results unveiled last month are further proof that BT is keeping up with the dynamism of available technologies and customer demands. Traditional revenues continue to tail off (down 3 percent this quarter), but 'the times they are a changing' and so is BT. Therefore, we predict that the company will continue to flourish in ever-changing markets in the years ahead.

And we expect a stock re-rating to reflect as much, although the smart money is already there. Since our last review in December, the upward trend in the stock has extended to a new all-time high of $66.06.

We believe these results were as much about where BT has been, as where it is going. But looking back, it would be hard to fault the company's performance. Turnover rose for the thirteenth consecutive quarter, up 3 percent this occasion to £5.29 billion. This takes the full year numbers to more than £20 billion for the first time since 2003.

Underlying earnings (before interest tax, depreciation and amortization) came in 3 percent higher at £1.54 billion.

'New wave' sales derive primarily from networked IT services, broadband and mobile phones. Revenues here rose 14 percent to £2.12 billion, now accounting for 40 percent of group turnover.

Despite a decline in revenues, earnings at the retail division rose 6 percent, driven by rising broadband margins and cost-cutting initiatives.
However, the real story was the broadband performance. BT added a further 245,000 broadband connections on top of the 195,000 connections gained through the acquisition of PlusNet late last year.

A raft of entrants has caused many in the stock market to regard BT's broadband strategy in the UK with caution. Doubt no longer we say. BT now has 3.7 million connections, and 34 percent of the pie, surpassing Virgin Media as the leading retailer by market share.

Acquisitions aside, we attribute this performance as justification of a service that emphasizes quality, reliability, and general customer service. Differentiating on price will not work for long if product quality suffers. Customers will pay up if a product is good - and BT's product is. More than half of new customers are choosing higher value packages.

Indeed, we expect a significant investment in networks, a wide suite of innovative products, solid customer service and on the mark pricing to continue to drive market share gains and further earnings growth in the years ahead.

We expect BT to push hard with 'converged' offerings. These products bundle broadband, mobile telecoms, voice over internet and next generation TV.
In an age where 'bandwidth is everything', it is pleasing that the company's '21st Century Network programme' is making such excellent progress. BT is on track to launch next generation broadband services to many customers by Spring next year.

A state of the art suite of 'Voice over Internet Protocol' products is already proving popular, leading to a greater take up of higher value broadband packages. BT was targeting 1 million VoIP customers by June, but it actually already has 1.4 million.

A digital TV offering, BT Vision, is also currently being rolled out. The group has a wide range of content deals with partners including NBC Universal, Paramount, Dreamworks, Warner, MTV, Sony and the FA Premier League.

Other novel products include BT Openzone, the WiFi business. The company has set up Wi-Fi zones in twelve UK city centres with plans to expand further.

We also would not be surprised to see BT extend wireless operations to Wi-Max, which operates over a wider range (kilometers rather than meters) and at faster speeds. However, we believe that management will be very cognisant that the business case needs to stack up. We do not expect BT to overpay when these licenses go up for auction later in the year.

Away from retail, we anticipate the contribution of the wholesale division to continue growing. Revenues here increased 1 percent to £1,003 million, with the outlook for broadband services again looking increasingly robust.

The division launched a 'white label managed services' platform which enables customers to present bundles without the operational and financial risk of running a network and developing new offerings. With many of BT's retail rivals now appreciating that the broadband game is not the bonanza they thought, demand for this service should see substantial growth. BT already manages 'Vodafone at Home' in this respect.

Meanwhile, BT's Global Services division continues to be a star performer. Revenue in the fourth quarter grew by 4 percent to £2.5 billion. Around £2 billion of this is generated outside the UK and the contribution will rise following acquisitions in the US, Latin America and Asia. Order intake was robust with mandates of £2 billion including a 5 year agreement with Credit Suisse. Total orders over the last twelve months now stand at an impressive £9.3 billion.

And the division is set to grow even further as it expands into fast growing markets such as India where BT has a joint venture. Management is confident that revenues from the region will top US$250 million by 2009.

So all things considered, the future is looking fairly rosy. Management is certainly confident, raising the dividend by 27 percent and moving to a two thirds payout ratio.

Robust cash flow generating ability and financial strength has also allowed retiring Chairman Sir Christopher Bland to bow out with a bang. His swansong was the unveiling of a further £2.5 billion in stock buybacks between now and March 31, 2009.

Interestingly, despite such financial strength and cash flow generating ability, the market remains fixated with BT's pension liability. A ruling is due soon on whether the UK government should 'guarantee' this. The deficit stands at £0.3 billion currently, £1.5 billion less than a year ago. With quarterly free cash flows of around £1.5 billion currently, it is hard to understand the fuss.

At least initial investor concern over CEO Ben Verwaayen's reorganization plans is subsiding, and rightly so.

The creation of two new divisions will see 'BT Design' responsible for the design and development of the platforms, systems and processes. 'BT Operate' will be responsible for their deployment and operation. Mr Verwaayen believes the move will accelerate BT's transformation from hardware to a software based services company. In our view, the statement simply reaffirms management's commitment to changing with the times. However, BT is not about to ditch existing roots.

Turning to the charts, we cannot rule out volatility in the near term, but support in the region of $60 should limit downside risks. The March low of $55.36 provides further buttress.

Given the resilience of the longer-term upward trend, we believe that the outlook for BT remains bright. In the months ahead, we anticipate a continuation above $66.06 toward new all-time highs.

Fundamentally, we regard BT's valuation as undemanding. The stock trades on a prospective price earnings multiple of 13 times and a yield approaching 5 percent. Accordingly, BT will remain firmly held in the Fat Prophets Portfolio.