May 13 (Bloomberg) -- Telefonica SA, Europe’s second- largest phone company, said first-quarter profit climbed 9.8 percent as it added more Latin American customers.

Net income rose to 1.69 billion euros ($2.31 billion) from 1.54 billion euros a year earlier, Madrid-based Telefonica said today in a regulatory filing. Analysts had predicted a 1.66 billion-euro profit, the median of nine estimates in a Bloomberg News survey. Sales fell 1.4 percent to 13.7 billion euros.

Chairman Cesar Alierta is counting on Latin America to generate growth as the company’s operations in Europe stumble with shrinking economies. In January, Telefonica pledged to increase this year’s dividend by 15 percent to lure investors.

“The positive performance in Latin America more than offsets the weakness in the Spanish market,” said Juan Tuesta, an analyst at Banesto Bolsa, who has an “overweight” rating on the stock.

Telefonica slipped 0.5 percent to 14.75 euros in Madrid trading. Before today, Telefonica dropped 6.4 percent this year, less than the 9.1 percent decline in the Bloomberg Europe Telecommunication Services Index.

Spanish Division

Sales from Telefonica’s Spanish division dropped 4.2 percent to 4.9 billion euros, while revenue elsewhere in Europe decreased 6.6 percent to 3.2 billion euros. Sales at the Latin American unit climbed 4.8 percent to 5.4 billion euros. The company’s customer base in its home market was almost unchanged from a year earlier, compared with a 16 percent increase in Latin America.

Operating income before depreciation and amortization slipped 0.4 percent to 5.35 billion euros. Analysts had predicted Oibda of 5.34 billion euros on sales of 13.74 billion euros, according to the survey.

The company repeated its 2009 goals of increasing operating cash flow by 8 percent to 11 percent, boosting sales and generating 1 percent to 3 percent growth in Oibda. The objectives were first announced in February.

In January, Telefonica said it will boost its 2009 dividend to 1.15 euros a share from 1 euro for 2008.

To contact the reporter on this story: Paul Tobin in Madrid at ptobin@bloomberg.net

Last Updated: May 13, 2009 12:48 EDT