Analysis: Eircom's second set of financial results since it returned to the public markets beat analysts' expectations and gave its shares a welcome lift yesterday, writes Jamie Smyth, Technology Reporter

The stock, which slipped below its €1.55 flotation price on its first day of trading in March and has yet to recover that level, suffers from a lack of investor faith that it will be able to pay its dividend.

Declining fixed-line revenues caused by a drift towards mobile phone use and an increasingly competitive Irish telecoms environment are pinpointed by analysts as key challenges ahead.

Eircom's 2 per cent dip in revenues in the first quarter reflects both of these issues and, with Eircom constrained from raising access charges further this year, growth remains a key concern.

But by reporting a 10 per cent increase in earnings and accelerating its severance scheme, Eircom has once again demonstrated an ability to cut costs in order to meet investor concerns.

Since taking the helm as Eircom's chief financial officer, Mr Peter Lynch has aggressively restructured the former State firm. Eircom targeted reducing staff by 1,000 over a two-year period when planning its flotation but, by persuading 400 staff to leave in the first quarter, it is now well ahead of this target.

The firm also assuaged concerns about its €256 million pension deficit, which was making investors nervous in the run up to the adoption of new accounting rules in early 2005. It says it will not have to make immediate payments into the fund unless there is a change in the public markets.

But there is a limit to how much fat management can cut out of Eircom to improve earnings in the future, which probably explains the firm's bullish comments on mobile re-entry.

Chief executive Dr Philip Nolan told analysts yesterday that the firm was determined to enter the mobile market as a virtual operator and more clarity should be available before the end of the year.

As yet, however, Eircom has not been offered the right margins by operators to enable it to enter, he said.

Ironically, the firm may have to rely on aggressive regulation by the Commission for Communications Regulation (ComReg) to force mobile firms to offer it a deal.

Dr Nolan said there was a growing trend toward regulating the mobile phone sector and he expected ComReg to intervene.