For the first quarter, net income rose to E1.27 billion ($1.63 billion), from E912 million ($1.17 billion) a year earlier. Sales soared 45.4% to E12 billion ($15.45 billion). Analysts had been expecting net income in the range of E1 billion ($1.28 billion) to E1.26 billion ($1.62 billion).

Strategically, Europe’s third largest telecoms company is in good shape because besides its domestic market in Spain, it principally operates in relatively unsaturated markets in South America. Like many others carriers, it relies heavily on its mobile unit to provide the bulk of profits and sales.

Indeed Telefonica Moviles, like many other former incumbents, was the main contributor to revenue growth in the quarter. Sales at the unit rose 17.7% to E4.33 billion ($5.57 billion) as it gained 4.1 million customers to 98.5 million.

Telefonica’s fixed-line sales in its domestic market in Spain rose 3.3% to E2.94 billion ($3.78 billion), thanks to data-services sales offsetting declining traditional phone service revenues. Traditional fixed-line calls accounted for E1.25 billion ($1.61 billion), down 2.6%.

The healthy results are mostly thanks to Telefonica’s GBP17.7 billion ($31.3 billion) acquisition of the UK-based mobile operator O2, and the E2.7 billion ($3.22 billion) purchase of 51% of Cesky Telecom. In the UK, O2 added 359,000 customers, bringing its British base to a very healthy 16.3 million customers, and consequentially UK revenues rose 17%.

However, there was a downside to these acquisitions, namely Telefonica’s debt burden, which mushroomed up to a scary E53.5 billion ($68.9 billion) in the quarter from E30 billion ($38.63 billion) in December, mainly down to the O2 purchase. This now ranks Telefonica has one of Europe’s most indebted carriers.

It is clear how expensive Telefonica’s move into the UK has been, but in a further sign of how strategic it regards the UK market, O2 chief executive Peter Erskine said that it was likely to offer customers fixed-line broadband services across its territories, including the UK, in the future. O2 already runs fixed-line operations in Germany and the Czech Republic.

A move into UK fixed-line would bring Telefonica into direct competition with former UK incumbent BT Group. Indeed, the move would be ironic, considering that O2 is actually BT’s former mobile operation, which was spun off into a separate unit back in 2001.

Telefonica’s intention for a UK fixed-line operation is part of a recent trend for mobile operators to be able to offer their customers some form of ‘converged’ or bundled service. This usually entails offering its mobile phone customers free broadband access or other fixed-line service as well, but in order to do this, the mobile operator requires some form of fixed-line network.

This would usually mean an acquisition, or alternatively leasing capacity from a wholesale provider. A further option could be building its own network, although this seems unlikely due to the high cost of putting fiber or copper into the ground.

O2’s potential acquisition of a fixed-line network is not the first of such speculation. Recent reports have linked Vodafone’s name with a possible purchase of the UK operation of Tiscali, or even Bulldog, the consumer broadband unit of Cable & Wireless.

Convergence is certain the keyword of the moment for fixed-line and increasingly mobile operators. Orange UK, owned by France Telecom, recently announced it would start offering its business customers fixed-line services via its Wanadoo ISP.

A number of other deals in this space have also set the wheels in motion for this theme, including the purchase of Virgin Mobile by cable operator NTL, BSkyB’s intention to launch a broadband service around August/September, and companies such as The Carphone Warehouse offering a bundled fixed-line, mobile, and broadband offering.