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UPDATE 2-Bezeq Q3 profit flat, misses forecast

Published 11/02/2010, 09:02 AM

* Q3 net profit 588 million shekels, vs 620 million forecast

* Q3 revenue 3.03 billion shekels, vs 2.99 bln forecast

* Q3 EBITDA 1.33 billion shekels, vs 1.275 bln forecast

* Sees 2010 revenue, profit flat to slightly above 2009

* Shares down 0.4 percent

(Adds detail, analyst comment, shares, changes dateline)

By Steven Scheer

JERUSALEM, Nov 2 (Reuters) - Bezeq Israel Telecom, Israel's largest telecoms group, reaffirmed its full-year outlook when posting flat third-quarter net profit that was at the low end of forecasts.

Bezeq said on Tuesday it still expected 2010 revenue and net profit from continuing operations and EBITDA would be in line with or slightly higher than last year's levels, adding gross capital expenditure would be close to the 2009 level.

Third-quarter net profit was flat at 588 million shekels ($162 million), excluding a 1.5 billion one-time gain in 2009 when the company deconsolidated digital satellite TV unit YES.

Revenue rose 3.7 percent to 3.03 billion shekels.

Bezeq was forecast to earn, on average, 620 million shekels in a Reuters poll in which estimates were in a 574-670 million range. Revenue was seen at 2.99 billion shekels.

"With the stock having rallied strongly into results, there may be some profit-taking here," Citi analyst Michael Klahr said in a note.

Bezeq's shares were down 0.4 percent at 9.77 shekels in afternoon trade in a marginally higher market.

Analysts said while Bezeq's results were solid, with improvement at all units -- especially mobile phone operator Pelephone and DSL broadband services -- they were concerned that regulatory changes could hurt Bezeq.

A key issue for Bezeq, for decades the country's dominant phone company but now with a growing number of competitors, is if and when state-run Israel Electric Corp (IEC) may set up a fibre-optic network that would provide services such as voice over internet protocol (VoIP) and ultra high-speed internet.

"The only serious threat we can identify (for Bezeq) is the entrance of IEC into the telecom market ... Barring this eventuality, Bezeq stays a cash-generative, quality defensive play," said Gilad Alper, an analyst at the Meitav brokerage.

The communications ministry was expected to decide soon on regulations for IEC.

For now, Bezeq has largely offset competition to cheaper VoIP alternatives to its fixed-line services through a next generation network (NGN) for Internet. It said it was on track to reach half of Israeli households with NGN by the end of the year and 80 percent in 2012.

Bezeq has 1.06 million DSL subscribers, up 2.9 percent over the past year. It said revenue per user has risen as subscribers upgrade to faster surfing speeds.

PELEPHONE GIVES AND TAKES

Its bottom line was hit by an unexpected one-time 75 million shekel royalty payment to the Israeli government by mobile phone subsidiary Pelephone.

Pelephone, however, was a key driver of Bezeq's growth in the July-September period, as Israel's third-largest mobile phone provider continued to attract customers to its new high-speed HSPA network. An upgrade by subscribers to the new network and advanced smartphones led to a 5.1 percent rise in revenue and 3.5 percent increase in quarterly profit.

Pelephone grew its subscriber base to 2.825 million. Market leader Cellcom and rival Partner Communications will report later this month.

Earnings before interest, tax, depreciation and amortisation (EBITDA), which analysts say is a key measure of Bezeq's health, rose 7.5 percent to 1.33 billion shekels, compared with a forecast for 1.275 billion.

Bezeq approved a new submarine cable to connect Israel to Europe, significantly enhancing the country's international data communications capacity. (Additional reporting by Tova Cohen; Editing by Dan Lalor) ($1 = 3.62 shekels)

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