UPDATE 2-NZ Telecom Q2 profit falls 25 percent, shares drop

(Updates share price, adds analyst comment)

By Adrian Bathgate

WELLINGTON, Feb 8 (Reuters) - Telecom Corp Ltd (TEL.NZ: Quote, Profile, Research) of New Zealand reported a 25 percent fall in quarterly profit on Friday, in line with expectations, but its shares fell to a 14-year low as a weak operating performance raised concerns about future earnings.

Telecom, a former state monopoly, is being forced by the government to split into three units to boost competition. It said earnings were declining at a rate at the top end of its expectations, driven by lower returns from mobile and broadband.

A weaker operating performance was masked by an unexpected NZ$19 million ($15 million) dividend from Telecom's investment in the Southern Cross cable, said James Lindsay, domestic equities manager at Tyndall Investment Management.

"Without question the profit number has in fact fallen by at least NZ$20 million, so the risk is for further downside, " Lindsay said.

Southern Cross is a fibre-optic cable that runs between Australasia and the United States, carrying the bulk of the region's internet traffic.

Telecom said it still expected NZ$700-730 million in net profit for the year to June 2008, but Lindsay said the Southern Cross dividend and a forecast NZ$10 million dividend in the next quarter, was all that saved Telecom from a profit downgrade.

The company booked a net profit of NZ$172 million for the three months to Dec. 31, compared with NZ$228 million in the year earlier period, just beating an average forecast of NZ$171 million in a survey of six analysts by Reuters.