Consolidated Communications Holdings Inc., a voice, data and video communications provider for customers in Illinois and Texas, reported a 33 percent drop in second-quarter net income primarily due to a tax expense that was a benefit a year ago.

Despite the fall in profits, the Mattoon, Ill.-based company exceeded analysts' expectations.

Net income for the quarter ended June 30 fell to $5.5 million, or 21 cents per common share, from $8.2 million, or 28 cents per common share, from the year earlier period. The results were better than the average estimate of 17 cents per share forecast by analysts polled by Yahoo Finance.

As a result of new tax legislation in Texas, the company had enjoyed a $3.1 million tax benefit in the second quarter of 2006. The state amended the law this year, causing the tax benefit to become a $1.1 million expense in the second quarter.

Second-quarter revenues rose 2 percent to $80.9 million compared with $79.3 million in the year-ago period, as an increase in broadband   subscribers helped to drive overall revenue growth in spite of a decline in residential and business telephone line subscriptions.

The company’s digital subscriber line business added nearly 2,300 net new subscribers since the end of the first quarter. Its Internet protocol television business, which delivers television programming, in part, by using a broadband connection, added more than 1,200 subscribers since the end of March.

Analyst Jonathan Chaplin of JPMorgan Chase & Co. in New York is optimistic about the company’s prospects, even after the drop in second-quarter earnings. He said traders should keep an on eye Consolidated Communications’ stock.

“It’s trading at a substantial discount when it should be trading at a premium,” Chaplin said. “They have better revenue than most of their peers and more opportunity for margin expansion.”

He points out that the company’s access line decline is under control, as is that of North Pittsburgh Systems Inc., a telecommunications company that Consolidated Communications announced last month it’s purchasing for $375.1 million. Consolidated Communications said in its conference call Thursday that the acquisition is moving along smoothly.

“This is a deal that we think can bring a 15 percent increase in cash flow once the synergies are captured,” Chaplin said. It could give shareholders an opportunity to increase their dividends by as much as 20 percent in the next couple of years, he said.

Consolidated Communications maintained its 2007 outlook, which it released in the fourth quarter of 2006. The company expects capital expenditures to range between $32 million to $34 million, cash interest expense to range between $43.5 million to $45 million, and cash income taxes to be between $12 million and $14 million.

The company’s forecast is in-line with Chaplin’s expectations, who sees full-year revenues   of $329 million and earnings per share of 68 cents. However, his revenue and earnings forecasts are lower than the $331.9 million and the 69 cents per share estimates, respectively, of analysts on Yahoo Finance.

For the first six months of the year, the company earned $10.1 million, or 39 cents per common share, compared with $11.8 million, or 40 cents per common share, in the year-ago period. Revenues rose 3 percent to $163.9 million from $158.8 million in the first two quarters of 2006.

Shares of the company fell 3.5 percent, or 62 cents, to $17.20 in late Thursday trading.