Telefonica SA (TEF) said Thursday net profit fell 6.1% in the second quarter due to the slowdown in some of its mature European markets and after asset sales boosted the year-ago figure.

Telefonica, Europe's largest telecommunications company by market capitalization, said net profit for the quarter ended Jun. 30 fell to EUR1.93 billion. In the first quarter last year, it booked a combined EUR257 million gain from the sale of radio operator Airwave and a stake in Spanish pay-TV firm Sogecable.

Madrid-based Telefonica reaffirmed its guidance from February of a 1% to 3% increase in operating income before depreciation and amortization, or Oibda, and a growth in revenue this year.

The company didn't provide guidance for 2010, but Telefonica has pledged a compound annual revenue growth rate of 5%-8% for the period between 2006 and 2010 and has said its Oibda compound annual growth rate would be between 7% and 11% for the same period.

Operating income before depreciation and amortization, or Oibda fell 2.8% to EUR5.59 billion for the period, while total revenue fell 2.6% to EUR13.89 billion.

Telefonica's second-quarter results are solid, Banesto said in a research note, but added they were overly dependent on Latin America and capital expenditure cuts. Still, Banesto said the results would likely support the stock in coming weeks and the company could announce this autumn a new share buyback or an improvement in its 2009 guidance. Banesto rates Telefonica at overweight with a EUR17.40 target price.

At 1153 GMT, Telefonica shares rose 1% to EUR17.65, broadly in line with the Spanish market.

In May, Telefonica said it was reducing expenses and capital expenditure in response to weak European market and to preserve cashflow and honor dividend commitments. Telefonica's operating expenses fell 6.6% in the second quarter to EUR8.47 billion.

"Our capital expenditure and operating expenditure cuts are focussed on the right areas," Telefonica's Chief Executive for Europe, Matthew Key, said in an interview with Dow Jones Newswires. "We always said 2008 would be our peak for capital expenditures."

Telefonica has also been forced to lower rates as competition grows and consumers look for cheaper alternatives for mobile and Internet services. The shift is particularly evident in Spain, where unemployment is higher than in most of Europe and low-cost competition has increased recently.

A slowing take-up of mobile phone and high speed Internet net additions in Spain led to a 6.9% fall in second quarter revenue to EUR4.84 billion. A decade-long building boom that has now gone bust has contributed to the decline, especially in high-speed Internet growth. Low cost competitors and tighter regulation in Spain has also hit revenue.

Thursday, Spain's telecommunications regulator slashed mobile termination rates, or the fees operators charge each other to connect calls, by between 40% and 50%. Reductions in MTRs directly hurt the revenue of mobile carriers. European Commission telecommunications chief Viviane Reding has pushed to reduce MTRs across the region, arguing they don't reflect the cost of providing the service.

In Europe, where Telefonica operates under the O2 brand outside Spain, revenue fell 5.9% to EUR3.33 billion. The bulk of the unit's revenue comes from the U.K. and Germany.

Key said Latin America is a "fantastic growth motor," but added the company's U.K. operations were solid if the depreciation of sterling against the euro was stripped out.

Revenue growth in Latin America increased 3.6% to EUR5.57 billion. Telefonica's customers in the region rose 8.7% to 160.7 million as the company added mobile and broadband users.

At the end of June, Telefonica had 242.2 million customers worldwide.

 
   Company Web site: www.telefonica.com

-By Jason Sinclair, Dow Jones Newswires, 34 913958127, jason.sinclair@dowjones.com