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Telefonica builds profit hopes on shaky Spanish ground

By Andrés González and Isla Binnie
FILE PHOTO: A general view shows the Telefonica headquarters in Madrid

By Andrés González and Isla Binnie

MADRID (Reuters) - A weak performance at home overshadowed a forecast-beating rise in second quarter earnings at Spain's Telefonica on Thursday, although the telecoms group saw better times ahead for its largest market.

Shares in Europe's third-biggest telecoms firm fell as much as 2.6% after it reported a drop in quarterly margins and barely any growth in revenues in Spain, which accounts for more than a quarter of group core profit and sales.

Overall, the group made operating income before depreciation and amortisation of 4.44 billion euros ($4.94 billion), up from 4.24 billion a year earlier and beating analysts' mean forecast of 4.35 billion, helped by growth in Britain and Argentina.

But analysts were concerned about progress in Spain where a multibillion euro investment in deploying Europe's biggest fibre network is key to meeting full-year goals for 2% growth in revenues and a 2-percentage point hike in margins.

Group margins were down 0.7 percentage points in the second quarter, while revenues were up 3.7%.

"In Spain revenues are not really accelerating and EBITDA (core earnings) is under pressure," Kepler Chevereux analysts said in a note to clients.

Like other large telecoms firms in Europe, Telefonica is struggling to boost profits in an ever-more crowded market.

Smaller regional operator Euskaltel is now priming itself to become Spain's fifth national operator, readying the launch of telecom services under the Virgin brand.

A 0.3% increase in quarterly revenue in Spain failed to stop Telefonica's core profit there from falling 1.6%, although Chief Operating Officer Angel Vila saw competition easing somewhat during the second half of the year.

The second quarter "is expected to be the lowest year-on-year growth in service revenues in Spain and we expect to recover solid growth in the second half," he told analysts on a conference call.

Vila said he expected the Spanish profit margin to be flat or "slightly positive" compared with the previous year, adding that avoiding a fall in profit "could be an achievement not seen in the last years".

Telefonica's biggest rival in Spain, France's Orange, painted a bleaker picture for the country as it presented its own results on Thursday, saying heavy "back-to-school" promotions for autumn had started to dent sales.

($1 = 0.8982 euros)

(Editing by Jason Neely and Mark Potter)