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UPDATE: Telefonica 3Q Net Profit +39% on Endemol, Growth

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MADRID -(Dow Jones)- Telefonica's third-quarter net profit rose 39%, boosted by a EUR1.4 billion capital gain from the sale of a stake in Endemol and sustained growth in key Latin American and Spanish markets.

Madrid-based Telefonica, the largest telecommunications company in Spain and Latin America, said net profit rose to EUR4.02 billion in the quarter from EUR2.90 billion a year earlier. A Dow Jones Newswires survey of seven analysts pointed to a EUR3 billion net profit.

Telefonica benefitted from a tax credit due to the Endemol sale, that boosted net profit. Earlier this year, Telefonica sold the production company, famous for its Big Brother format, to a consortium that included Italian media conglomerate Mediaset.

Telefonica's earnings are strong especially in Spain and Latin America, Banesto said in a research note. "Telefonica is continuing to weather the storm even in Spain, where competition is tough and is in line to meet recently-updated guidance forecasts for 2007 and beyond", Banesto added. The brokerage rates Telefonica at buy with a EUR25.67 price target.

Telefonica shares reacted positively to the earnings, and at 0930 GMT were up 0.8% to EUR22.56, outpacing an overall positive Spanish market.

The company's shares have skyrocketed 42% so far this year, boosted by aggressive earnings targets. In the company's Investors' Day last month, Telefonica said revenue compound annual growth rate, or CAGR, would be between 5% to 8% for the period 2006 to 2010.

JP Morgan said Spain and Latin America continue to boost the company's earnings but said even with strong client growth in Germany, Telefonica hasn't been able to improve profitability there. JP Morgan rates Telefonica at overweight, with a EUR22.39 target.

For the third quarter, oerational income before depreciation and amortization, or OIBDA, stood at EUR6.98 billion for the quarter, up 29% from EUR5.41 billion. Oibda is Telefonica's preferred measure of profitability.

Total revenue increased 4.8% to EUR14.19 billion from EUR13.54 billion in the same period last year.

Revenue at domestic unit Telefonica Espana grew 4.3% in the period to almost EUR5.27 billion, boosted by growth in high-speed Internet services that offset a fall in fixed line revenue. However, revenue growth was less than in the second quarter, when it rose 6.5%, after regulators put a cap on mobile roaming rates and cut contract termination penalties charged to consumers.

Total broadband clients in Spain rose 10% to 5.13 million at the end of September as the company migrated current Internet users to high-speed connections and added new ones. Telefonica's Spanish cellular customers also rose 6.7% in the period to 22.4 million.

Telefonica's high-growth Latin American division reported a revenue increase of 11% to EUR5.05 billion.

Total clients in the region rose nearly 15% to 126.4 million at the end of September as the company's Latin American mobile customer base grew 20% to 94.7 million.

Revenue at Telefonica's European 02 unit stood at EUR3.71 billion, 2.8% higher than a year earlier. The company has faced stiff competition, especially in the German market. Market observers will be watching for any new information about the company's strategy in Germany during Telefonica's conference call, set for 1500 GMT.

Analysts will also be watching for fresh information about control and strategy at Telecom Italia, after Telefonica bought an indirect controlling stake in the company earlier this year.

Telefonica said worldwide customers stood at 218.6 million, 11% more than the same period last year.

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

(END) Dow Jones Newswires

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