PREVIEW-NZ's Telecom Corp Q2 to fall sharply

* What: Telecom Corp. of NZ Q2 earnings

* When: Friday, Feb. 8

* Earnings expected to fall on margin hit, higher tax bill

By Adrian Bathgate

WELLINGTON, Feb 1 (Reuters) - Telecom Corp. of New Zealand Ltd (TEL.NZ) is expected to post a 25 percent drop in quarterly earnings due in part to shrinking revenues in its main phone businesses and a higher tax bill.

Telecom is preparing to enact a government-enforced split of its operations to increase competition and speed up access to broadband Internet services around the country.

Margins are already under pressure as the former state-owned monopoly battles tough competition from Australia's Telstra Corp (TLS.AX) in traditional fixed-line phones and from Britain's Vodafone (VOD.L) in mobiles.

Investors will look to how Telecom's main New Zealand operations are tracking against its forecast operating earnings decline for the year of 5-8 percent, said analyst Guy Hallwright of brokerage Forsyth Barr.

"The thing the market's definitely looking for is no change to the earnings guidance for the full year," Hallwright said.

The average forecast from six analysts spoken to by Reuters was for second quarter net profit after tax of NZ$171 million ($134.6 million), compared with NZ$228 million last year.

Group earnings before interest, tax, depreciation and amortisation (EBITDA), are expected to be flat at NZ$467 million.

The company has forecast a full-year profit of between NZ$680 million and NZ$720 million.

The 2007 result included a one-off NZ$65 million tax credit and a contribution from the Yellow Pages business, which Telecom sold to a consortium of CCMP Capital and Canadian pension fund Teacher's Private Capital in March 2007 for NZ$2.2 billion.

Telecom, New Zealand's largest-listed company, has been ordered by the government to open up its network for competitors, and split into three separate operating units.

The company has submitted a draft separation plan for government approval, ahead of the scheduled split date of March 31.

The result marks the first quarter in charge for new chief executive Paul Reynolds, who joined in October 2007.

Reynolds is working on a strategic plan to arrest the slide in earnings, but little is expected to be revealed until the company's annual investor briefing day in April.

"The focus will be on the separation and how's that's progressing rather than moving beyond that," Forsyth Barr's Hallwright said.

Telecom's shares last traded up 1 percent at NZ$4.02. Its shares have fallen 17.3 percent since the start of 2007, compared with a loss of 8 percent for the benchmark top 50 index .NZ50.

Improvements in Telecom's Australian operation, after the merger of Powertel with its existing AAPT business, are expected to offset the EBITDA decline from its New Zealand business.

The company is also searching for two senior executives, including a new chief financial officer, with an update on the search expected with the results. ($1=NZ$1.27) (Editing by Lincoln Feast)