Telefonica SA (TEF) said Thursday its first-quarter net profit rose slightly as its European and Latin American operations helped compensate for a drop in revenue in its recession-stricken Spanish market.

Telefonica, Europe's second-largest telecommunications company by market capitalization behind the U.K.'s Vodafone Group PLC (VOD), said net profit rose 2% to EUR1.66 billion, missing analysts' forecasts of EUR1.80 billion.

Madrid-based Telefonica also reiterated its guidance until 2012 that include an earnings per share of EUR2.10 and revenue growth of between 1% and 4% on the year.

The results were disappointing, said ING analyst Georgios Ierodiaconou, noting Spain was particularly weak. He added the results now make meeting its targets difficult, particularly a previous commitment to pay a EUR1.75 per share dividend in 2012. "Flexibility for acquisitions, spectrum auctions, buybacks and dividends is becoming limited," Ierodiaconou said.

At 0912 GMT, Telefonica's shares fell 1.6% to EUR15.79, underperforming an overall negative Spanish market.

Telefonica said operating income before depreciation and amortization, or Oibda, fell 4.1% to EUR5.11 billion for the period, while total revenue increased 1.7% to EUR13.93 billion.

Revenue in Latin America rose 4.2% to EUR5.62 billion in the period, but a slowdown in growth and an increasing reliance on inflation-prone markets has forced the company to change course and step up efforts to strengthen its foothold in the region.

Earlier this week, Telefonica made a EUR5.7 billion offer for Portugal Telecom SGPS SA's (PT) stake in the joint venture both companies control in Brazil.

"The bid for Vivo has opened the M&A can of worms again and it seems that Telefonica is in a tough spot strategically," CM Capital Markets' Dirk Schnitker said.

Latin America has traditionally been Telefonica's main growth market, but the company has faced a series of recent setbacks in the region.

Telefonica was outbid by French media conglomerate Vivendi SA (VIV.FR) for Brazilian telecommunications company GVT (GVTT3.BR). In January, it also said it would have to wipe EUR1.81 billion from its Venezuelan assets after the country's government devalued the bolivar. Venezuela's hyperinflationary economy also slashed revenue in the country by 44% to EUR491 million in the quarter.

Meanwhile, in Europe Telefonica faces increased competition, the continued fallout from the economic crisis and the impact of regulatory pressure on its revenue.

In recent months, Telefonica has lowered tariffs to hold on to customers. It also lost exclusivity on Apple Inc's (AAPL) iPhone.

Revenue in Spain, where unemployment tops 20% and low-cost competition has increased, fell 5.7% to EUR4.63 billion.

In Europe, where Telefonica operates under the O2 brand outside Spain, revenue increased 7.4% to EUR3.49 billion.

Company Web site: http://www.telefonica.com

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

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