UPDATE 2-Telefonica Brasil posts weak profit, braces for World Cup drag

Thu May 8, 2014 1:31pm EDT

(Recasts with executive's comments, share performance)

By Brad Haynes

SAO PAULO May 8 (Reuters) - Telefonica Brasil SA , Brazil's biggest phone company, reported on Thursday an unexpectedly larger drop in quarterly profit, missing analysts' forecasts, and warned of possible World Cup-related headwinds in June and July.

Net income was 661 million reais ($297 million) in the first quarter, an 18 percent drop from the year-earlier period and below the average estimate of 746 million reais in a Reuters survey of analysts.

A weak economy, stiff competition and sliding fixed-line sales hurt revenue, which rose less than 1 percent.

The month-long World Cup soccer tournament, hosted by Brazil, will bring in roaming fees and other revenue from visiting fans, but could end up dragging on earnings, Chief Financial Officer Paulo Cesar Teixeira said in a conference call with analysts.

"In terms of revenues, we have an impact because many cities will declare holidays during the games," Teixeira said. "With this situation, it's possible to have a negative impact."

Brazil's phone companies also are spending heavily to avoid the embarrassing outages that plagued last year's Confederations Cup, a dress rehearsal for the World Cup.

Telefonica Brasil, the local unit of Spain's Telefonica , plans to increase investments by 15 percent this year, another senior executive, Alberto Horcajo, said at a corporate event in Sao Paulo on Thursday.

To jump-start stagnant sales, Telefonica Brasil has launched aggressive campaigns for new services from pay-television to mobile data packages, which have hurt profitability in the short term.

Sales of more profitable post-paid mobile subscriptions rose 28 percent in the first quarter from a year earlier, but sales expenses increased 18 percent to 1.9 billion reais, driven by advertising campaigns and sales commissions for mobile plans.

Earnings before interest, taxes, depreciation and amortization fell 7 percent to 2.563 billion reais, below an average estimate of 2.594 billion reais.

Telefonica Brasil's shares fell 2 percent on the Sao Paulo stock exchange, their biggest drop in more than five weeks.

($1 = 2.23 Brazilian reais) (Reporting by Brad Haynes; Editing by Jeffrey Benkoe and Paul Simao)