A trading statement from Eircom indicating that it expected lower profits next year got a mixed reaction in the market yesterday where it was seen as either a clear profits warning or evidence of an aggressive new strategy for growth. Eircom announced that, while results for the year to the end of March would be in line with market expectations, the need to invest for the future, increasing competition and the dilutive effect of new business would reduce earnings in the short term. The statement was issued in advance of current year results due for release on May 24th.

From an overnight close of 4.70, the shares fell to a low of 4.52 as the market initially read the statement as a profits warning before firming to close at 4.65 as the market took a more positive approach to what is seen as a more aggressive growth path.

Chief executive Mr Alfie Kane said that, in an increasingly competitive environment - competition is expected to accelerate following the take-over of Esat by British Telecom - Eircom had to invest to ensure ongoing growth. Investment would be required in its mobile business to accelerate migration of fixed-line to data and Internet focused activities and to extend the home market through organic growth. In addition, the group was bidding to take a mobile licence in Britain, expanding into Northern Ireland and establishing "points of presence" in some key cities in Britain. Its objective was to be "the `all-Ireland' communications provider".

While repositioning for growth would impact on earnings in the short term, Mr Kane said this investment strategy "is essential to underpin Eircom's longer-term economic growth prospects and enhance shareholder value".

ABN Amro analyst Ms Jemma Houlihan described it as "a very welcome aggressive investment strategy for growth". Eircom could have allowed margins to erode and market share to fall gradually but it had decided to take a hit on profits in the short term and invest in the high-growth areas, she commented.

Results for the current year are expected to show the positive effects of continuing strong growth in the mobile phone and Internet businesses. The impact of increased competition in the market and a shift towards lower margin Internet access and inter-connector calls in the fixed-line operation will have a negative impact. Analysts forecast pre-tax profits of between 700 million and 710 million. Eircom said its mobile phone business had exceeded its targets by about 25 per cent, adding 381,000 new customers since April 1999. Customers numbers now top the one million mark.

Pre-paid mobiles account for 60 per cent of the customer base. It estimated Irish mobile telephone market penetration at 43 per cent, up from 33 per cent at the end of September 1999, and expects the total number of mobiles to exceed fixed lines before the end of 2000.

But the growth in the mobile business has impacted negatively on the fixed line business with a significant number operating only mobile telephones.

Mr Kane said the group decided to release a trading statement as it was approaching a closed period - from its yearend to the release of results.