Eircom posted an unexpected fall in core earnings this morning as competition bit, but it pointed to strong growth at its new Meteor mobile unit, which made up most of its revenue increase.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) fell to €142 million euros in the third quarter to end-December from €153 million in the same period of 2004, below analysts' forecasts of €154 million.
Like other former phone monopolies, Eircom aims for growth from its mobile operations, acquiring Meteor late last year to re-enter the business, and from high-speed broadband services, while revenues from traditional phone services slide.
Eircom shares fell 3.8 per cent to €2.04 euros by 09.30am, underperforming a 0.6 per cent firmer ISEQ.
"Unless the indications are that Meteor can add very quickly to EBITDA and earnings, our first instinct is that current-year EBITDA forecasts will be reduced due to the issues in the fixed-line business," said Davy analyst Jack Gorman.
Eircom declined to give full-year forecasts but said that at least one reason for the lower-than-expected earnings was a one-time event.
"There are two factors that explain the EBITDA reduction," Chief Executive Philip Nolan said in a statement. "Firstly, in common with other incumbents, Eircom faces margin contraction due to increasing competition.
"Secondly, we are investing to drive increased DSL (digital subscriber line) and line penetration to grow future revenue. These actions yield win-back rates of 78 percent and a DSL customer base of 215,000 on February 9th, 2006."
Finance Director Peter Lynch told a conference call Meteor could contribute €8 to €10 million to overall EBITDA for the full year but that the group was primarily aiming for top-line growth from the unit and did not expect an EBITDA contribution in the final quarter to end-March.
"We're not budgeting for it to do that," Mr Lynch said. "We think that it is possible that into our coffers you could probably push €8 or €10 million EBITDA ... but I think it's probably not the right thing to do in this period of consolidation."
Eircom has also invested €80 million to €100 million in DSL technology, which increases the transmission speeds of its fixed lines into customers' homes and businesses, and it is moving towards profitability, Mr Lynch said.
Although Meteor was included for just one of the three months in the third quarter, it boosted overall revenue. Group turnover was up 6 per cent to €424 million in the quarter, beating analysts' expectations of no growth.
Meteor's subscriber numbers grew 66 per cent year-on-year to 565,000, putting market share for the unit at close to 14 per cent.
The group is targeting a 20 per cent market share for Meteor. Its main challenge is to increase the post-paid subscriber base.
Post-paid subscribers now make up 6 per cent of Meteor's subscriber base after accounting for around 12 per cent of the net additions in the last quarter, Mr Nolan said.
He declined to comment on media speculation that shareholder Babcock & Brown Capital Ltd. was considering a takeover.
Eircom shares rallied earlier this month following a media report that B&B Capital was set to bid £2 billion for the group.
B&B Capital bought 12.5 per cent of Eircom in October for $308 million, saying the investment was for the long term.
Mr Nolan said Eircom would be interested in bidding for the country's fourth 3G high-speed mobile licence should it become available.
Eircom lost out to Smart Telecom in the award late last year of the licence by communications regulator ComReg. But ComReg has since withdrawn Smart Telecom's licence for failing to meet certain offer conditions.