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UPDATE 2-Brazil's Telefonica profit falls by nearly half as expenses rise

(Adds analyst comment)

By Peter Frontini

SAO PAULO, July 26 (Reuters) - Telefonica Brasil said on Tuesday its second-quarter net profit fell 44.6%, as higher financial and operating costs offset strong results from its mobile phone unit.

The company, a unit of Spain's Telefonica, which operates in Brazil under the Vivo brand, posted net income of 746 million reais ($139.4 million).

Telefonica's bottom line was mainly affected by a 282% jump in financial expenses, as the company took on more debt to pay for the acquisition of 5G licenses and the mobile phone business of carrier Oi, at a time of rising borrowing costs.

Recurring earnings before interest, taxes, depreciation and amortization came in at 4.58 billion reais, up 8.3% from the previous year.

Operating net revenue for the period rose 11.1% to 11.83 billion reais. Net revenue from the company's mobile phone services, its main business, grew 16% to 8.1 billion reais, boosted by new clients brought over from Oi, which Telefonica agreed to buy in 2020.

The migration of Oi's clients is expected to be fully completed by the end of the first quarter of 2023.

Amid rampant inflation in Brazil, Telefonica's operating costs rose by 27.3% in the period, to reach 5.06 billion reais.

Despite the healthy top-line figures, analysts at Citi said that the results will negatively surprise the market.

"The combined impact of higher cost inflation and the higher financial charges pressured profitability beyond our expectations," Citi said in a note to clients. ($1 = 5.3511 reais) (Reporting by Peter Frontini; Editing by Leslie Adler, Richard Pullin and Sam Holmes)