Royal KPN, Wednesday said second-quarter net profit fell 12% due in part to a higher tax rate and higher interest, but shares rose after the Dutch telecom operator raised the outlook for its domestic business.

KPN said net profit for the three months ending June 30 was EUR353 million compared with EUR400 million a year ago, below analysts' expectations for net profit of EUR380 million.

But at its domestic business, KPN said it now sees flat earnings before interest, tax, depreciation and amortization compared with its previous guidance for a EUR100 million Ebita decline.

"Our domestic performance has been ahead of our expectations, not only succeeding in achieving substantial growth in new services such as VoIP, TV and mobile data, but also in retaining more and more customers in traditional services through attractive product offerings," said Chief Executive Ad Scheebouwer.

"There are no signs in the Netherlands...that things will deteriorate in the short term," Scheebouwer told reporters after the results release.

That reassurance and the improved domestic guidance gave a boost to KPN's shares, which by 0810 GMT were trading 5.1% higher at EUR10.65, outperforming a 1.1% rise in the broader Amsterdam market and a 1.8% rise in the DJ Stoxx Europe telecommunications index.

Telco sector shares across Europe were also boosted Wednesday after Vodafone Group said it planned a GBP1 billion share buyback program. Its stock fell more than 13% Tuesday after it said it expects full year revenue to be at the low end of its guidance amid weakening economic conditions, particularly in Spain.

KPN Wednesday confirmed its outlook for 2008, reiterating that capital expenditure for the year is expected to be approximately EUR2 billion and free cash flow at least EUR2.4 billion.

Analysts were upbeat about KPN's results, particularly in the wake of Vodafone's downbeat guidance Tuesday.

Despite headline numbers below expectations, "the underlying figures were clearly better than expected" said SNS Securities analyst Thijs Berkelder. He said the main reason for the positive surprise is KPN's continuing effort to reduce its cost base.

SNS rates KPN stock at buy with a EUR14.04 price target.

KPN's second quarter revenue and other income came in at EUR3.66 billion, driven by acquisitions and the consolidation of Getronics and iBasis. Second-quarter revenue was 22% above the EUR3.01 billion reported last year, topping analysts' expectations for EUR3.62 billion.

Earnings before interest, tax, depreciation and amortization fell 0.6% to EUR1.27 billion.The company said second-quarter Ebitda includes a EUR34 million contribution from Getronics, a EUR199 million release of pension provisions and a restructuring charge of EUR221 million, the majority of which is related to 4,500 jobs which will be cut by 2010.

However, stripping for one-off efects of real estate gains, restructuring charges and pension provision, underlying second-quarter Ebitda rose 3.9%.

Source:Dow Jones