UPDATE 1-Telefonica Deutschland core profit drops as competition bites

Wed Jul 30, 2014 9:16am EDT

* Q2 core profit 265 mln euros vs 246 mln expected

* Expects margin pressure through rest of the year

* Shares rise 0.8 pct, in-line with sector index (Adds, CEO comment, E-Plus results, background)

FRANKFURT, July 30 (Reuters) - Telefonica Deutschland reported a 14.5 percent drop in quarterly core earnings due to lower revenues from its wireless services and heavy investments aimed at winning market share, and warned profit margins would remain under pressure.

The company, controlled by Spain's Telefonica, reported on Wednesday a decline in second-quarter operating income before depreciation and amortisation (OIBDA) to 265 million euros ($355 million), though that beat analysts' mean forecast for 246 million in a Reuters poll.

Telefonica Deutschland last month received regulatory approval to buy the German business of Dutch peer KPN, which operates under the E-Plus brand, to create Germany's largest telecoms operator in terms of customers.

The new combination will have a market share of roughly 30 percent and Telefonica is hoping to get more clout in its battle with Vodafone and Deutsche Telekom.

Budget-oriented E-Plus has been winning customers at the expense of Vodafone despite having poorer network coverage and little high-speed 4G mobile broadband.

E-Plus said on Thursday it had added 392,000 customers during the second quarter, outperforming Telefonica Deutschland which added 161,000 customers. Last week Vodafone said it had lost 366,000 customers in Germany.

The competition came at a cost as all three posted lower wireless service revenues. Deutsche Telekom will report results on Aug. 7.

Telefonica Deutschland said it expected operation margins would remain under pressure as a result of investments in its network, as well as due to promotions to lure new customers. That assumption is for the group including E-Plus, which it expects to incorporate in the third quarter.

Berenberg analysts said Vodafone had started offering 50 percent more data in its Red tariffs, while keeping prices unchanged.

"If affected permanently, it moves the price curve for Vodafone voice and SMS flat rates closer to Telefonica Deutschland (O2D), from being aligned with T-Mobile in the past," said analyst Usman Ghazi in a client note.

Telefonica Deutschland shares were up 0.8 percent at 5.99 euros by 1235 GMT in line with the European telecoms index .

($1 = 0.7460 Euros) (Reporting by Harro ten Wolde; Additional reporting by Sabine Wollrab in Frankfurt and Leila Abboud in Paris; Editing by Maria Sheahan and Mark Potter)