COMMUNICATIONS: ESAT Telecom, the second biggest telecoms firm in the State, lost €74.6 million in last three months of 2001, according to company accounts filed in the US this week.

Ballooning losses at the company in its third fiscal quarter include group operating losses of €47.7 million, an increase of 42 per cent on the same period during 2000. Group turnover was just €63.6 million.

The €304 million acquisition of Ocean - the 50/50 joint venture between the ESB and British Telecom (BT) - in May, 2000 contributed €14.5 million to the increased operating losses.

Publication of the weak results yesterday comes just one week before Esat is expected to decide whether it will shut its heavily loss-making residential operations in the Republic.

The firm, with more than 90,000 customers, is conducting a full review of its business following BT's decision to close or sell its loss-making overseas subsidiaries from March 2003.

Esat's results show it needed €67.8 million to fulfil capital expenditure to March 2002 and the firm had just €53.5 million in cash at December 31st, 2001. The directors said they believed the continuing financial support of British Telecom would continue.

Despite its weak financial results, Esat sources told The Irish Times yesterday that it was not likely to shut down its consumer businesses. Rather, it is likely to cut back and set tight deadlines for a move into profit. The firm is also expected to pressure the telecoms' regulator to balance what it considers a regulatory system that favours Eircom.

The exit of Esat from the residential telecoms sector would undermine competition in the Republic, and would give Eircom penetration rates of more than 90 per cent. Spirit Telecom pulled out of the Irish residential market last year claiming it couldn't compete against Eircom, and there are few other providers of any size.

The scale of the challenge faced by Esat is underlined by its weakening margins and the current crisis in the telecoms sector.

Esat's results, which are disclosed to the US Securities and Exchange Commission because of outstanding loans agreed before it was acquired by British Telecom, show gross margins decreased by seven percentage points to 29 per cent in the third quarter of 2001.

This decline was blamed on a range of factors, including: price reductions of 8-10 per cent, which came into effect from April 1st, 2001; additional network costs relating to the acquisition of Ocean; and an increased proportion of wholesale traffic, which has lower margins than retail traffic.

Earnings before interest, tax, depreciation and amortisation were €13.4 million in the three months, compared to a loss of €6.5 million in the same period during 2000. General sales and administration expenses increased to €31.9 million in the period, up from €25.6 million year-on-year.

Esat's €74.6 million losses for the three months include depreciation charges of €11.8 million due to the acquisition of Ocean, an increase in operating expenditure of €6.3 million, interest charges of €6.2 million, and currency exchange losses of €5.5 million.

Total borrowings outstanding at December 31st, 2001 amounted to €657.2 million, down from €922.8 million six months earlier.