The credibility of BT's management has been "damaged" by its disappointing first-quarter results, according to the head of the company's retail division.

Gavin Patterson, head of BT Retail, said the UK's leading fixed-line phone company had been "punished" by the markets for its results covering the three months to June 30. He is a close ally of Ian Livingston, who became BT's chief executive on June 1.

However, Mr Patterson said he was "bullish" about BT's prospects, suggesting the economic downturn may have a limited impact on his division because many of its products and services were regarded as "non-discretionary" by customers.

In a candid admission about BT's performance, he told the FT: "Our credibility has been damaged recently . . . if I look back to the quarter-one results, our cash flow performance was poor. It was disappointing."

BT's shares fell almost 12 per cent on July 31, their third-largest drop, after the company reported a free cash outflow of £734m at the first-quarter stage.

The disappointing performance was caused largely by a deterioration in its working capital.

BT pledged to improve its billing of customers to remedy the problem and reiterated previous guidance that it would generate £1.4bn of free cash flow in 2008-09.

But the company also warned the profit margin at BT Global Services, the division serving the telecoms needs of large companies, might fall in 2008-09.

BT Wholesale, the division providing services to other telecoms companies, has been reporting declining operating profit, partly because rivals such as Carphone Warehouse are buying fewer products from it.

BT's shares have fallen 45 per cent this year, as the FTSE 100 has fallen 32 per cent, because of concerns about its performance and broader fears among investors that telecoms companies may get hurt in the downturn.

After the recent bout of market turmoil, BT's shares rose 8p to 150p yesterday. They reached a high of 336¾p last year, but are now trading at a similar level to when Ben Verwaayen, Mr Livingston's predecessor, began his turnround of the company.

BT Retail serves consumers and smaller companies and Mr Patterson said he expected them to review their budgets because of the downturn. But he added: "What we find is the vast majority of our products and services are, from a customer's point of view, considered to be non-discretionary. So to some extent, I think we are somewhat protected from the downturn."