UPDATE 2-Yell Q1 core profit up, on track for year guidance

(Adds CEO comments, shares, analyst comment, details)

By Georgina Prodhan, European Media Correspondent

LONDON, July 24 (Reuters) - UK-based directories group Yell (YELL.L) said it was on track to meet its full-year guidance for flat core profit after a rise in the first quarter despite tough economic conditions, lifting its shares more than 18 percent.

But Yell, which like its peers is struggling with tight customer advertising budgets while investing to develop Internet offerings, said it expected sales to stagnate in the current, second quarter as slowing economies take their toll.

Yell's market capitalisation has dropped to about 500 million pounds ($1 billion), roughly a seventh of its net debt, but it reassured investors with news that it had cut its debt in the quarter and had headroom on its debt covenants.

Shares in Yell rose almost 19 percent in early trading and at 0837 GMT were up 12.7 percent at 80 pence, outperforming a flat European media index .SXMP on Thursday.

Yell's quarterly adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 11.7 percent to 160.8 million pounds ($321.2 million), above the 148.8 million average forecast of five analysts polled by Reuters Estimates.

Sales rose 6.2 percent to 468.4 million pounds, slightly above the average forecast of 463.2 million for the April-June period, Yell's fiscal first quarter.

Weakness in Spain and Britain were offset by better-than-expected sales in the key U.S. market, and the company said it should manage flat sales this quarter, or a 3 percent drop in organic sales at constant currencies.

"Everyone recognises that the UK is deteriorating," Chief Executive John Condron told Reuters. "The competitive threat is going away a little bit in the United States," he added, but said it would be premature to say that the worst was over.

RBS analysts wrote in a note: "Numbers are ahead, but the outlook remains challenging (which we know)." They welcomed the fact that Yell provided a figure for headroom on its debt covenants for the first time -- of 13 percent.

UBS analyst Polo Tang was more pessimistic, noting Yell's expectation of sharp sales drops in Spain and the UK. "With negative operating momentum and concerns over debt likely to linger, we would continue to avoid Yell," he wrote.

Along with the U.S., Britain and Spain, Yell also sells classified ads in its print, online and phone-based directory services in Argentina, Chile and Peru.

NO TAKEOVER APPROACHES

Yell, which is being squeezed not only by smaller ad budgets but also faces competition from Internet giants like Google (GOOG.O), said it expected to continue reducing its debt/EBITDA ratio, which fell to 4.9 from 5.1 a quarter earlier.

Condron said: "We are well on the way to achieving what analysts expect," which he said was 4.6 times EBITDA by the end of the fiscal year.

Yell added that it had bank facilities until 2011.

At June 30, its net debt was 3.678 billion pounds, down slightly from 3.759 billion.

Condron added that Yell had not received any takeover approaches, in response to rumours that Google or Microsoft (MSFT.O) may be interested.

He also said he saw no need for the company to exit or enter any new markets, and said Yell would keep up investments in both its online and print products.

Yell shares have plummeted from a high of 645 pence in February 2007 to all-time lows this month. (Editing by Will Waterman)