Threats mount for Eircom (Sunday Business Post)

DonegalMan

Yesterday's Sunday Business Post
Full article

Extracts:

Threats mount for Eircom
12/09/04 00:00
By Kathleen Barrington

Investors in Eircom should read a company filing lodged with the US Securities and Exchange Commission (SEC) last July.

...Over the last five years Eircom's share of the fixed line market fell from 93 per cent to 80 per cent. With competition in the market set to intensify, Eircom fears it could be vulnerable to further market share loss...

...Eircom's quarterly results, published a fortnight ago, confirm the picture. Operating profit before restructuring costs rose by 86 per cent to €65 million, but that turned into a pre-tax loss of €16 million after accounting for restructuring, interest, tax and dividends.

Overall, the company reported a loss for the period of €24 million, bringing retained losses on the balance sheet to €232 million at the end of June.

Competitors accuse Eircom of making strong operating profits by fleecing customers, notably by pushing up fixed-line rental costs, an area over which its customers have little control.

Eircom's fixed-line rental costs are almost double the European average...

...``We believe that annual growth rates in the fixed-line market will continue to slow or decline, and there may continue to be periods of flat or negative growth, making it more difficult for us to increase turnover or even leading to a decrease in turnover,'' Eircom predicted...

...Other product innovations threaten Eircom's core business.

Figures published by telecoms regulator ComReg last week showed that over 17,000 consumers defected from Eircom in the month following the launch of single billing...

...Specifically, Eircom said its €2.2 billion indebtedness:

• will limit its ability to pay dividends
  
• will limit its ability to borrow additional funds for working capital, capital expenditure, acquisitions and other general corporate purposes
  
• could limit its flexibility in planning for, or reacting to, changes in technology, customer demand, competitive pressures and the industries in which it operates
  
• could place it at a competitive disadvantage compared to its competitors that are less leveraged than it is
  
• could increase its vulnerability to both general and industry-specific adverse economic conditions.

The finance director of a rival telco was even more blunt. ``Eircom is a basket case. It is losing money heavily in recent years at the pre-tax level. And it has depleted its reserves very substantially because of the €500 million dividend it paid to its former venture capitalist backers.''...

...In briefings with analysts following the publication of Eircom's quarterly results last month, Nolan sought to reassure investors that the company would not take any action that would undermine its ability to pay a dividend to investors...

...The finance director of another rival asked how a loss-making company would expect to pay an 8 per cent dividend.

He said that while Eircom has reduced its operating costs by €6 million, €3 million of that improvement was due to a change in accounting treatment under which salaries paid to employees are capitalised.

This was all the more surprising given that Eircom's overall capital expenditure was down from €69 million to €57 million in the quarter.

bealtine

On a somewhat related note:
This what Brian Carey in the Sunday Tribune had to say:

Eircom's numbers

For telecom trainspotters, Eircom has just filed its seperated
annual accounts with the regulator Comreg.
Now regulatory accounts, where the different bits of
Eircom's business are split up as if they were standalone,
should carry a misinterpretation health warning.
These numbers represent an ideal opportunity to put
two and two together and get four.
However, the accounts reveal some interesting
nuggets of information. For example, Eircom's
increase in line rental barely covered the company's
fall in call charges, with just some 14m to spare.
It earns twice as much revenue from calls to mobile
as it does on local calls, yet the margin (18%) is
considerably lower than terminating local calls
on its own network(56%).
Eircom loses an estimated 4m on its payphone business,
but makes over 3m on directory enquiries, a traditional
loss maker.
Internet dial-up calls earn twice as much revenue (95m)
as national calls. The 'margin' on dial-up internet
is 49%.With those juicy margins on voice and internet calls,
it is little surprise that the company faces competition from
numerous rivals.The fact that the total group margin on its
retail business is closer to 7% illustrates why so few operators
are building infrastructure and instead choosing to piggyback
on the wires of the industry behemoth.

viking

The SEC company filing document is here.

A fascinating read:

We are dependent upon increased turnover from data services to offset the impact of the declining market for fixed-line voice services on our operating results and to maintain our long term profitability. If demand for Internet access and usage does not grow, if our customers do not adopt our more expensive and faster forms of Internet access, such as ADSL, or if our competitors offer cheaper or more attractive services, we may not be able to grow our data services turnover. Furthermore, we expect to experience increased competitive pressure on our narrowband Internet access data revenues.

ComReg has required us to introduce a wholesale fixed rate internet access call origination, or FRIACO, product to
encourage competition in the Internet access services market. FRIACO allows our competitors to introduce new forms of
low-cost narrowband Internet access services, including unmetered access for a fixed monthly subscription. Our competitors may use FRIACO to provide narrowband Internet access services at prices low enough to erode our market share and cause us to reduce our prices substantially. Reduced turnover from narrowband Internet access services could have an adverse impact on our results of operations. In addition, we may face increased competition in this market from mobile companies following the implementation of third generation, or 3G, technology, which will allow mobile operators to offer higher rate data services to their subscribers through their mobile networks.

DonegalMan

viking wrote:

The SEC company filing document is here.

A fascinating read:

Sweet Mother of God, how could anyone reading that document seriously consider investing in Eircom - or avoid getting into a cold sweat if they already have?