UPDATE 2-Telefonica Q1 profit undershoots, focus on Brazil

* Net profit 1.66 bln euros vs 1.73 bln fcast

* Rev 13.93 bln euros vs 13.83 bln fcast

* Reiterates targets to 2012, analysts see tough job

* Focus on 1400 GMT conference call and news on Brazil bid

* Shares down 0.9 pct, underperform European telecom peers

(Adds further details, background)

By Elisabeth O’Leary

MADRID, May 13 (BestGrowthStock) – Telefonica (TEF.MC: ) posted
lower-than-expected first-quarter results with weak Spanish
operations offset by strength in key pockets of Latin America
and Europe, and providing the logic for attempts to expand its
empire in Brazil.

Europe’s No. 2 telecom by market capitalisation said on
Thursday it was “prioritising the capture of growth
opportunities in its markets”.

That tallied with news earlier this week that Portugal
Telecom (PTC.LS: ) had rejected an offer from Telefonica to buy
out its share of their Brazilian joint venture Vivo (VIVO4.SA: ).

Although its business overall is doing well in Latin
America, strong results at mobile operator Vivo contrasted with
the performance at its Brazilian fixed-line business Telesp,
where core profit margin declined markedly.

“The offer for PT’s stake in Vivo clearly shows the urgency
with which Telefonica wants to gain 100 percent control of a
Brazilian telecom asset,” said Michael Kovacocy, analyst at
Daiwa. He noted that the integration of fixed and mobile assets
in Brazil by Telefonica’s arch rival America Movil
[ID:nN11263159] would force the Spanish operator to follow suit.

“Whilst we are believers in the benefits of consolidating
market share in the face of economic weakness, we would expect
that analysts may begin to question when will see an
acceleration in the business and reduction in customer
investment and acquisition costs,” he added.

Telefonica group net profit rose 2.0 percent to 1.66 billion
euros ($2.11 billion). Operating profit in Latin America in
overall terms fell 5 percent, but rose 9 percent after stripping
out currency effects.

Despite the first-quarter trend undershooting full-year
guidance for core profit (OIBDA), Telefonica reiterated all of
its earnings guidance targets to 2012.

“Results are a mixed bag. Revenues are better which is good
as a sign of more activity, but costs are higher because of more
marketing. But it seems pretty complicated for them to reach
their targets by year end,” said Javier Borrachero, analyst at
Kepler in Madrid.

Telefonica has kept its head above water during a global
downturn by offsetting declining profit in recession-hit Spain
with more robust earnings elsewhere, particularly in Latin
America, and limiting investment outlay.

Chairman Cesar Alierta’s aggressive bid for more assets in
Brazil to gain share in that fast growing market is a measure of
how mature Telefonica’s current operations are, analysts say.

Telefonica said the first quarter showed that the revenues
growth trend had continued to speed up, but that marketing
activity had been stepped up amid tougher competition.

In Spain, hit by a severe recession which has put almost one
in five out of work, revenue fell almost 6 percent. Spain
accounts for about one third of core profit (OIBDA).

Latin American units continued to perform better, with
revenue still accelerating.

Telefonica holds a conference call at 1400 GMT at which it
will be closely questioned on its 6.3 billion euro ($8 billion)
bid to buy out Vivo — which PT rejects, saying it would
“amputate its future” — and what alternatives there might be.

PT has until June 6 to change its mind.

Investment Basics
(Reporting by Elisabeth O’Leary; Editing by Mike Nesbit and
Erica Billingham)
($1=.7872 euros)

UPDATE 2-Telefonica Q1 profit undershoots, focus on Brazil