Brazil's leading cellular operator, Vivo Participacoes (VIV) issued generally solid first quarter earnings but did record a decline in usage and higher customer acquisition costs as the population became recession wary.

Early Friday, Vivo, which is jointly controlled by Spain's Telefonica SA (TEF) and Portugal Telecom SGPS SA (PT), reported a first-quarter net profit of BRL123.5 million ($58.5 million), up 26.5% from BRL97.6 million in the first quarter of 2008.

"We consolidated our strong position within the industry ... We have seen consumers become more conservative though," said Roberto Lima, Vivo's chief executive, on a conference call.

Investors chose to focus on strong overall operating performance and Vivo shares were 2.1% higher at BRL36.18 in lunchtime trade.

Vivo's first-quarter net revenue rose 9.2% to BRL4.02 billion from BRL3.68 billion in the first quarter of 2008. But sales dropped significantly on the fourth quarter and came in below analyst expectations.

Greater prudence among customers meant average revenue per user, or Arpu, came in at BRL27.00, down on BRL29.50 in the same month last year and lower than market consensus of BRL28.00.

The economy slowed down dramatically in the fourth quarter, shrinking 3.6% compared with the quarter before, leading average Brazilians to worry about the future of the economy.

The company's earnings before interest, taxes, depreciation and amortization, or Ebitda, were BRL1.2 billion, down from BRL1.3 billion a year earlier.

The Ebitda margin, a measure of profitability over net revenue, was 29.9% in the quarter, down from 35.5% in the same quarter of last year.

But last year's Ebitda was boosted by an extraordinary tax break. Discounting the non-recurring credit, the margin rose from 28.9%.

The average cost of acquiring customers shot up to BRL97 in the quarter from BRL74 in the fourth quarter and BRL88 in the same quarter last year as the company went chasing higher-end costumers.

The positive side of that was Vivo managed to attract a much higher portion of postpaid clients than the competition. Higher-revenue, postpaid clients accounted for 33% of Vivo's net subscriber additions in the last quarter compared with an industry average of 11%.

Meanwhile, data and value added revenue continued to grow strongly, rising 29% on the year.

Vivo said it invested a total of BRL541.3 million in its operations in the first quarter, compared with BRL268.8 million in the first quarter of 2008.

The company ended the quarter with 45.64 million customers, a 19% increase from 38.3 million in the first quarter of last year.

"Vivo's operating performance remains strong and we expect the company to continue to deliver good numbers in the next quarters," said Vera Rossi, telecom analyst at Morgan Stanley.

-By Alastair Stewart, Dow Jones Newswires; 5511-2847-4520; alastair.stewart@dowjones.com