May 26, 2016 / 8:16 AM / a year ago

UPDATE 1-Israel's Bezeq Telecom blames YES merger costs as quarterly profit drops 38 pct

(Adds details, share reaction, analyst comment)

By Steven Scheer

JERUSALEM, May 26 (Reuters) - Israel's largest telecoms group, Bezeq Israel Telecom, reported a bigger-than-expected 38 percent drop in quarterly profit, blaming expenses related to taking full control of its satellite TV unit YES.

The company maintained its 2016 net profit forecast of 1.4 billion shekels ($365 million) and earnings before interest, taxes, depreciation and amortisation (EBITDA) of 4.2 billion, but its shares fell 2.8 percent in early trade in Tel Aviv after the poor first-quarter performance.

Bezeq said it was testing G.fast and other fibre optic technologies that will enable Internet surfing speeds of up to 1 gigabit per second - 10 times the 100 Mbps top speed Bezeq currently offers.

"These ... trials will help us determine the amount of investments needed to operate the network efficiently," Bezeq's Chief Executive Stella Handler said, adding the company was investing nearly 1 billion shekels a year to guarantee growth in subscribers.

While revenue from telephone services continues to decline, revenue from Internet services increased further. Bezeq added 113,000 new broadband Internet lines in the last year to 1.5 million and the average revenue per retail subscriber rose 4.6 percent, it said.

Still, Internet speeds in Israel, at an average of 38.9 Mbps, are low compared with Western countries.

Bezeq earned 288 million shekels in the first quarter, down from 463 million a year earlier and below a forecast of 333 million shekels in a Reuters poll of analysts.

The consolidation of YES, though, boosted revenue 18 percent to 2.56 billion shekels, in line with expectations, and offset lower revenue at mobile phone subsidiary Pelephone.

Bezeq last year bought the remaining 50.2 percent stake in YES that it did not already own. Once a state-owned monopoly, Bezeq had long sought to merge with YES to save costs and potentially allow it to combine TV, phone and Internet sales as cable company HOT - its main competitor - does.

Taking over YES helped push Bezeq's salary expenses up 17 percent in the January-March period, and operating expenses up 27 percent. Net financing expenses jumped 176 percent to 102 million shekels.

Pelephone posted a 64 percent fall in quarterly net profit to 13 million shekels, while revenue slipped 8 percent. It added 41,000 subscribers to 2.692 million.

Pelephone and its main rivals, Cellcom and Partner , have been hard hit by intense competition from smaller companies offering cut-throat rates. Last week, Cellcom reported a rise in quarterly profit while Partner's fell.

YES's net loss widened to 71 million shekels from 3 million a year ago. Bezeq blamed competition and "rising piracy".

$1 = 3.8445 shekels Editing by Susan Fenton

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