Times are changing for venerable BT Group (NYSE:BT), the British telecommunications behemoth that is the direct descendent of The Electric Telegraph Company, founded in 1846. This old company is poised to start cashing in on its investment in the newest technologies.

Shares of BT Group jumped 4% last Friday as the company announced a long-term extension of its broadband partnership with Yahoo! (NASDAQ:YHOO). BT Group will now offer Yahoo!'s enhancements, previously available only in a premium package, to all new and existing BT broadband customers.

The deal is -- pardon the horrendous pun -- no big deal in and of itself. The revenue generated is likely to be a mere drop in the $35.5 billion bucket that BT Group is expected to collect in its fiscal year ending March 2006.

More importantly, the agreement illustrates that BT Group continues to draw increasing revenues from "new wave" services such as broadband Internet, networked IT corporate solutions, and wireless services (epitomized by BT Fusion, which offers traditional fixed-line services on a mobile phone).

In the most recent quarter, ended June 2005, these newer services grew a galloping 48% (or, excluding acquisitions, a still eminently respectable 31%) to roughly $2.4 billion. High-tech services represented 29% of BT Group's $8.4 billion in revenue for the quarter, up from 20% last year.

Wall Street analysts should like what they're seeing, right? Not exactly. The process of implementing these new offerings continues to impact the holy grail of telecom valuation -- earnings before interest, taxes, depreciation, and amortization (EBITDA).

Consider this: Annual orders at the BT Global Services division have increased from $5.3 billion to $12.4 billion over the past three years. Each order has upfront costs (research & development, site preparation, installation, etc.), and these expenses affect the bottom line.

Simply put, BT Group is paying the price of success. The network IT service division signed up $4.2 billion worth of contracts in the first quarter. BT's broadband unit nearly doubled its number of customers year over year, with more than 5.6 million at the end of the latest quarter. And BT Mobile had 370,000 customers, up 72% from last year.

It doesn't take a genius to see why total revenue (excluding acquisitions and items) was up 3% while EBITDA on the same basis was down 2% versus the first quarter of FY 2005.

What does all this dry stuff mean? Basically, BT Group is about to reap the rewards for all its hard work. The company's EBITDA growth should turn positive over the next two quarters as BT Global's revenue streams outpace its startup costs. (In short, it'll start making more money than it's spending.)

Why do I believe the proverbial corner has been turned? BT's rate of EBITDA decline has been slowing. As I pointed out above, EBITDA fell 2% year over year in the first quarter, but this was ahead of the average 2.5% decline posted in the previous four year-over-year quarterly comparisons.

The resulting increase in free cash flow (FCF) as capital expenditures peter out will allow BT Group to increase both its dividend payout (currently 5%) and its share buybacks. In fact, Citigroup (NYSE:C) estimates that BT Group will have the ability to double its dividend ($1.97 per share in FY 2005) and quadruple its share buybacks over the next four years.

Furthermore, BT Group's net debt of approximately $14 billion -- defined as debt minus current financial assets, cash, and cash equivalents -- is down 4% from last year's first quarter. Even better, the stock trades at a reasonable 11.2 times FY 2006 consensus earnings estimates of $3.41.

BT Group's story of increasing FCF and reasonable valuation might not be sexy, but it should prove profitable for investors willing to dial in to the company's stock.

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