May 11, 2017 / 6:28 AM / 4 months ago

UPDATE 2-Telefonica's profits rise but Spanish business disappoints

* Oibda up 4.8 pct on stronger Brazilian real

* Underlying opoerating profit in Spain down 8.6 percent

* Shares down 3 percent (Adds CEO comments on Spanish business)

By Julien Toyer and Andrés González

MADRID, May 11 (Reuters) - Spanish telecoms group Telefonica reported a 4.8 percent rise in its first-quarter core profit on Thursday, helped by a stronger Brazilian real, but a lacklustre performance in Spain sent the share price down 3 percent.

The company has invested heavily in super fast internet and phone networks as well as premium TV content in a bid to dominate the market for bundled packages of phone, TV and internet services in its home market.

But while the strategy has helped Telefonica gain the bulk of the mid- to high-end market it has left the firm exposed to stiff competition from Orange, Vodafone and MasMovil at the lower end of the market where they are attracting a growing number of households with cheaper offerings.

Core operating income before depreciation and amortisation (OIBDA) fell 8.6 percent in Spain from a year earlier, while sales were down 2.6 percent, hit by the loss of a wholesale contract with smaller retail rival Yoigo, now owned by MasMovil.

Chief Executive Jose Maria Alvarez Pallete said profits would recover this year as the comparative effects of the Yoigo contract fade but he also said he was working on a new strategy to market cheaper packages, maybe even with a new brand.

“We cannot confirm a second brand launching still. We analyse all alternatives of course and we have second branches in some geographies. However, we foresee that we are very strong on the bundled strategy on the mid and high end and we think that we should gain some traction on the low end,” Pallete told analysts on a conference call.

Shares were down 3 percent at 10.14 euros at 1057 GMT, when the Stoxx Europe 600 telecoms sector index was down 1 percent.

The disappointing numbers in Spain mirrored a similar trend at its majority-owned German subsidiary Telefonica Deutschland , which last week reported a lower than expected 2 percent rise in core profits.

A 37 percent rise in core profit at Telefonica’s Brazilian arm, both as a result of a strong recovery in the Brazilian real and a solid underlying performance, lifted profits at group level.

Group OIBDA came in at 4.02 billion euros ($4.4 billion), up 4.8 percent from last year, while net profit was up 42 percent at 779 million euros, boosted in part by accounting changes and the sale earlier this year of up to 40 percent of its masts company Telxius to private equity firm KKR. ($1 = 0.9202 euros) (Editing by David Clarke, Greg Mahlich)

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