UPDATE 3-Telecom NZ Q3 profit up, but earnings to fall

(Updates share price, adds company comment)

By Adrian Bathgate

WELLINGTON, May 3 (Reuters) - Telecom Corp. (TEL.NZ), New Zealand's largest-listed company, posted a better-than-expected 7.2 percent rise in quarterly profit on higher mobile and Internet earnings but said it expected profits to decline into next year.

It also said it would return NZ$1.1 billion ($809 million) to shareholders via a share cancellation, in a widely flagged move following the NZ$2.24 billion sale of its Yellow Pages group in March.

Telecom, which competes with local units of Britain's Vodafone Group (VOD.L) and Australia's Telstra Corp. (TLS.AX), faces a tough outlook as growth in New Zealand slows and its Australian business struggles and as it faces a government break-up plan.

"There's still downside risks. Let's face it with all the regulatory stuff going on its hard to forecast where things are headed," said Craig Brown, principal at Walker Capital Management, adding interest lay around Telecom's outlook given the market was undergoing extensive reform.

Telecom earned a net profit of NZ$238 million for the quarter ended March 31, excluding proceeds from the sale of the Yellow Pages unit, up from NZ$222 million a year ago.

The result beat average forecast of NZ$225 million by five analysts polled by Reuters.

Shares in Telecom fell 1 percent to NZ$4.82 shortly after the result, before recovering to last trade 0.2 percent higher at NZ$4.88 in a broader market .NZ50 up 0.6 percent.

PROFIT ON DECLINE

Group earnings before interest, tax, depreciation and amortisation (EBITDA) for the quarter, excluding the Yellow Pages sale, fell 3.1 percent to NZ$507 million from last year.

Telecom reaffirmed its forecast for a full-year net profit of between NZ$875 million and NZ$895 million, but said it expected EBITDA at its New Zealand operations to continue to decline at its current pace into the 2008 year.

That decline was 6.6 percent on the third quarter of 2006, but Telecom's chief executive Theresa Gattung said that included some one-off costs.

"We are saying that given the fluidity of the situation, we're not able to give explicit guidance for next year," Gattung told a media briefing.

"We simply don't have enough information to give a better set of assumptions," Gattung said.

The government has ordered Telecom, formerly a state-owned monopoly which listed in 1991, to open up its network to competitors and split into three separate operating units.

DETERIORATION IN AUSTRALIA

Telecom said the group EBITDA decline, expected to be 3 percent in fiscal 2007, was due to continuing deterioration at its AAPT unit in Australia and higher costs domestically, though this was offset by lower depreciation, amortisation and tax costs, which boosted net profit.

Its shares fell 2.7 percent in the quarter, compared with a 1.3 percent gain for the benchmark top 50 index .NZ50.

The company said it expected to name a replacement for Gattung before the end of June, when she steps down as chief executive.

Group revenue for the quarter was flat at NZ$1.36 billion.

The strongest growth came from Internet services and mobile, while calling revenue continued its steady decline.

EBITDA at AAPT was A$14 million ($11.6 million) for the quarter, down from A$15 million last year.

($1=NZ$1.36) ($1=A$1.21)

((Editing by James Thornhill & Jean Yoon; Reuters Messaging: adrian.bathgate.reuters.com@reuters.net;- +64-4-471-4233)) Keywords: TELECOM RESULTS/

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