UPDATE 3-NZ Telecom Q3 profit drops, outlook tough

(Adds further detail, comment, updates shares)

By Adrian Bathgate

WELLINGTON, May 2 (Reuters) - Telecom Corp Ltd (TEL.NZ: Quote, Profile, Research, Stock Buzz) of New Zealand posted a bigger-than-expected 41 percent drop in quarterly profit, hit by a bigger tax bill and having to open its network to competitors TelstraClear and Vodafone.

The former state monopoly, which has been forced by government to split into three units to improve competition, said earnings were declining in line with its expectations, but that slide had eased slightly in the quarter, as Telecom grabbed more of the broadband and information technology markets.

Telecom maintained its previous forecast for net profit of NZ$700-730 million for the year to end-June, and said it still expected earnings before interest, tax, depreciation and amortisation (EBITDA) to dip 4-6 percent in 2009.

Despite a hint of improvement in operating performance, rising costs and falling revenues pointed to further risks in the quarters ahead, said BBY analyst Mark McDonnell.

"The near-term outlook is difficult and that'll keep the share price under pressure, the only thing that will sustain it is the dividend," McDonnell said.

Shares in Telecom initially dipped 1 percent but last traded up 2.3 percent at a 3-week high of NZ$3.94 in a broader market .NZ50 up 0.9 percent. The stock, which accounts for 18 percent of the main index, is down 10 percent this year, in line with the index.

"The stock gained on relief that the performance was not worse, and the company maintaining its full-year guidance," said Grant Williamson, partner at brokerage Hamilton Hindin Greene.