Telefonica’s profits rise but Spanish business disappoints

* Oibda up 4.8 pct on stronger Brazilian real

* Underlying opoerating profit in Spain down 8.6 percent

* Shares down 3 percent
(Adds CEO comments on Spanish business)

By Julien Toyer and Andrés González

MADRID, May 11 Spanish telecoms group Telefonica
reported a 4.8 percent rise in its first-quarter core
profit on Thursday, helped by a stronger Brazilian real, but a
lacklustre performance in Spain sent the share price down 3

The company has invested heavily in super fast internet and
phone networks as well as premium TV content in a bid to
dominate the market for bundled packages of phone, TV and
internet services in its home market.

But while the strategy has helped Telefonica gain the bulk
of the mid- to high-end market it has left the firm exposed to
stiff competition from Orange, Vodafone and
MasMovil at the lower end of the market where they are
attracting a growing number of households with cheaper

Core operating income before depreciation and amortisation
(OIBDA) fell 8.6 percent in Spain from a year earlier, while
sales were down 2.6 percent, hit by the loss of a wholesale
contract with smaller retail rival Yoigo, now owned by MasMovil.

Chief Executive Jose Maria Alvarez Pallete said profits
would recover this year as the comparative effects of the Yoigo
contract fade but he also said he was working on a new strategy
to market cheaper packages, maybe even with a new brand.

“We cannot confirm a second brand launching still. We
analyse all alternatives of course and we have second branches
in some geographies. However, we foresee that we are very strong
on the bundled strategy on the mid and high end and we think
that we should gain some traction on the low end,” Pallete told
analysts on a conference call.

Shares were down 3 percent at 10.14 euros at 1057 GMT, when
the Stoxx Europe 600 telecoms sector index was down 1

The disappointing numbers in Spain mirrored a similar trend
at its majority-owned German subsidiary Telefonica Deutschland
, which last week reported a lower than expected 2
percent rise in core profits.

A 37 percent rise in core profit at Telefonica’s Brazilian
arm, both as a result of a strong recovery in the Brazilian real
and a solid underlying performance, lifted profits at group

Group OIBDA came in at 4.02 billion euros ($4.4 billion), up
4.8 percent from last year, while net profit was up 42 percent
at 779 million euros, boosted in part by accounting changes and
the sale earlier this year of up to 40 percent of its masts
company Telxius to private equity firm KKR.
($1 = 0.9202 euros)
(Editing by David Clarke, Greg Mahlich)