* Q1 net earnings up 4 pct to C$131.6 mln
* Q1 rev down 1.5 pct to C$408.4 mln
* Cuts annual cash distribution by 32 pct
* Shares drop as much as 7 pct (Adds details; analyst comment; updates share movement)
By Ashutosh Joshi
BANGALORE, May 7 (Reuters) - Canada's Yellow Pages Income Fund YLO_u.TO reported a quarterly-profit on strong performance of its directories segment, but cut its annual cash distribution by nearly one-third, sending shares down as much as 7 percent.
The phone directories company lowered its annual cash distribution per unit to 80 Canadian cents from C$1.17 and said it was adopting a more conservative policy which will result in lower financial leverage.
"It's a move that we support. And given the environment and given the valuation of the units. I think it's a reasonable announcement," said analyst Robert Bek of CIBC World Markets.
The company said as a result of a its lower payout, it expects to retain an incremental C$300 million of pre-tax earnings to the end of 2010.
"I think it does work towards reducing some of the leverage concerns, the was cash simply getting paid over and valuation was not reflecting that cash," Bek added. Yellow Pages, which is in the process of converting itself from an income fund to corporation, expects to generate more than C$1.3 billion of pre-tax free cash flow in excess of cash distributions and future common share dividends by the end of 2012.
"We are in the midst of challenging economic times and cannot predict how long these conditions will continue. Difficult times call for difficult but important decisions," Marc Tellier, chief executive of Yellow Pages Group said in a statement.
The company said it targets to pay 60 percent to 70 percent of cash earnings per share, after it completes its transition into a corporation by first quarter of 2011.
For the first quarter, the company reported consolidated net earnings of C$131.6 million or 26 basic earnings per unit, compared with C$127 million or 24 basic earnings per unit, a year earlier.
Revenue fell 1.5 percent to C$408.4 million.
Analysts on an average were expecting earnings of 29 Canadian cents per unit, before items, on a revenue of C$421.25 million, according to Reuters Estimates.
Adjusted revenue in the directories segment rose 5 percent and adjusted earnings before interest, tax, depreciation and amortization grew 3.2 percent for the quarter.
Units of the Montreal, Quebec-based company were down 15 Canadian cents or 2.5 percent at C$5.87 Thursday afternoon on the Toronto Stock Exchange. They were down as much as 7 percent at C$5.58 earlier in the day. (Editing by Deepak Kannan, Dinesh Nair)