Telefonica S.A. — Earnings Release 2014

Sep 30, 2014

Results

January - September 2014

Razón Social Investor Relations Telefónica, S.A.

Disclaimer

This document contains statements that constitute forward looking statements about Telefónica Group (going forward, "the Company" or Telefónica) including financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations which may refer, among others, to the intent, belief or current prospects of the customer base, estimates regarding, among others, future growth in the different business lines and the global business, market share, financial results and other aspects of the activity and situation relating to the Company.

The forward-looking statements in this document can be identified, in some instances, by the use of words such as "expects", "anticipates", "intends", "believes", and similar language or the negative thereof or by forward-looking nature of discussions of strategy, plans or intentions. Such forward-looking statements, by their nature, are not guarantees of future performance and involve risks and uncertainties, and other important factors that could cause actual developments or results to differ from those expressed in our forward looking statements. These risks and uncertainties include those discussed or identified in fuller disclosure documents filed by Telefónica with the relevant Securities Markets Regulators, and in particular, with the Spanish Market Regulator.

Analysts and investors, and any other person or entity that may need to take decisions, or prepare or release opinions about the securities issued by the Company, are cautioned not to place undue reliance on those forward looking statements, which speak only as of the date of this presentation.

Except as required by applicable law, Telefónica undertakes no obligation to release publicly the results of any revisions to these forward looking statements which may be made to reflect events and circumstances after the date of this presentation, including, without limitation, changes in Telefónica's business or acquisition strategy or to reflect the occurrence of unanticipated events.

This document may contain summarized information or information that has not been audited. In this sense, this information is subject to, and must be read in conjunction with, all other publicly available information, including if it is necessary, any fuller disclosure document published by Telefónica.

Finally, it is stated that neither this presentation nor any of the information contained herein constitutes an offer of purchase, sale or exchange, nor a request for an offer of purchase, sale or exchange of securities, or any advice or recommendation with respect to such securities.

Key points for the third quarter

• Strong operating momentum gaining traction

• Boost in strategic areas (fiber, Pay TV, mobile contract -smartphones & LTE-), increasing customer value and reinforcing leading position amid sustained competitive pressures
• Best ever quarterly net adds of smartphones and fiber customers

• Ramp-up in Q3 revenue growth (+2.8% y-o-y); generating sustainable expansion

• Enhanced revenue trends across most markets
• OIBDA back to growth (+0.8% y-o-y) and sequential margin expansion to 32.8%, limiting erosion to 0.6 p.p. y-o-y
• CapEx intensity for a scale All-IP Company and to drive customer growth
• High cash generation profile & Robust balance sheet
• 9M FCF €2.8Bn; FCFS €0.63
• Net debt at €41.2Bn as of Sep-14; E-Plus acquisition to be reflected in Q4
• Value enhancing deals; reinforcing competitive edge in main markets
• E-Plus closed; GVT underway
• Results up to September fully aligned with expectations and year-end guidance. Dividend reiterated
• 9M: Revenues +0.4%; OIBDA margin erosion -0.7 p.p.; CapEx/Sales 14.4%; all organic y-o-y and ex-Venezuela

All y-o-y changes are organic

Financial highlights

	9M 14			Q3 14
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenue	37,978	(10.9%)	1.9%	13,021	(7.4%)	2.8%
OIBDA	12,325	(12.6%)	0.2%	4,269	(8.7%)	0.8%
OIBDA Margin	32.5%	(0.6 p.p.)	(0.5 p.p.)	32.8%	(0.5 p.p.)	(0.6 p.p.)
OpCF (ex-spectrum)	6,779	(25.3%)	(14.4%)	2,057	(24.5%)	(16.4%)
Net Income	2,849	(9.4%)	---	947	(13.0%)	---
EPS	0.61	(12.9%)	---	0.20	(16.6%)	---
FCF	2,839	(16.5%)	---	1,175	(39.7%)	---
Net financial debt	41,200	(10.6%)	---	41,200	(10.6%)	---

FX headwinds starting to ease in Q3 14; changes in perimeter from Q4 14

C. Republic T. Ireland

(4.5 p.p)

FX effect mitigated at FCF level as lower CapEx, Interest, Tax & Minorities payments offset OIBDA impact

Stepping-up investments already fostering high value growth

Q3 improvement across the board (% and absolute)

Revenue (organic y-o-y)

OIBDA margin (organic y-o-y)

Attractive growth profile

• 6 consecutive quarters of y-o-y revenue growth
• Accelerating revenue trends in Q3; +1.5 p.p. q-o-q underpinned by
• Decline slowed-down in Spain (+2.5 p.p. q-o-q) to -6.6% y-o-y
• T. Hispam improved +2.8 p.p. to 14.1% y-o-y
• Continued mobile data strength (Q3: +11.1% y-o-y) improving revenue mix towards a more data & digital Company
• Non-SMS data sales accelerating to +25.3% y-o-y in Q3 (+1.3 p.p. q-o-q)
• Mobile data/MSR 40% (+3 p.p. vs.Q3 13)
• Growing sales of digital services: >20% y-o-y in 9M

Profitability up sequentially as revenue flows

• OIBDA returned to positive growth (flat ex-Venezuela)
• Improvement of 1.5 p.p. vs. Q2 y-o-y despite very high level of commercial activity
• Supported by cost efficiencies, synergies and scale
• Retained healthy margin at 32.8% in Q3 (contained erosion of 0.6 p.p. y-o-y) even in a context of intense commercial efforts and higher CapEx to lead network modernisation
• Q3 Commercial costs up 9.4% y-o-y (+3.4 p.p. q-o-q)
• Growing network & IT costs +11.3% y-o-y in Q3 (+4.0 p.p. q-o-q)

All y-o-y changes are organic

TGR: Strengthening differentiation

Digital Services: Enriching our digital solutions portfolio

Consumer: Differential customer propositions

B2B: Solid performance on the back of our B2B services enhancement

Spain: Gaining momentum on differential quality

High value in "Fusión"	"Fusión" ARPU starts to grow
Fusión IPTV Fusión Fiber 100 Mb	Euros
37% 27% 18% 17% 12%	69.7 +1.2% 68.8
Sep-13 Jun-14 Sep-14	Q2 14 Q3 14

FTTH New premises passed (m)

(1) Internal estimate

(2) Excluding the disconnection of inactive M2M accesses

Investor Relations Telefónica, S.A.

Spain: Top line improvement acceleration

Investor Relations Telefónica, S.A.

UK: Outperforming the market & improving trends

Mobile Service Revenues (y-o-y)

OIBDA margin

Solid commercial traction

• Mobile base growth sustained at 3% y-o-y
• Strong contract customer expansion (+6% y-o-y)
  • o New devices drive Q3 contract gross adds acceleration (+5% y-o-y)
  • o Enhancing leadership contract loyalty in Q3 (1.0%; -0.1 p.p. y-o-y)
• Continued LTE roll-out (49% outdoor coverage at Sep-14)
• Q3 Prepay net adds (110k ; -8k in Q2) on successful propositions in May

• Better ARPU trends ex-"O2 Refresh" (Q3: -1.4% y-o-y; Q2: -2.6% y-o-y)

• Price stabilisation
• Data monetisation (LTE usage 2x non-LTE; high single digit ARPU uplift)

Accelerating top-line growth ex-"O2 Refresh" in Q3

• Revenue growth: Q3 +2.3% y-o-y ex-"O2 Refresh"
• MSR trends keep improving
• "O2 Refresh" deducted 6.6 p.p. y-o-y of MSR growth
• Q3 OIBDA (€482m) expanded 2.7% y-o-y:
• Non-recurrent impact mostly related to final settlement from disposal of fixed business assets (€34m)
• Flat OpEx y-o-y on cost control despite increased commercial activity
• "O2 Refresh" contribution gradually normalising from April-14
• Q3 OIBDA margin growth impacted by non-recurrent effects (+2.0 p.p.); "O2 Refresh" impact in y-o-y change: Q3 :-4.0 p.p.; Q2: -1.0 p.p.

Financial y-o-y change in local currency

Germany: Keeping momentum; E-Plus deal closed

Revenue (y-o-y)

Revenues MSR ex-MTR

OIBDA margin

(1) Excludes 8 million euros of restructuring costs related with the acquisition of E-Plus

Commercial investments remain high

• Q3 OIBDA (€255m): -16.5% y-o-y (ex-restructuring)
• Initial restructuring costs due to the integration with E-Plus (€8m).
• Additional E-Plus transaction costs (Q3: €6m)
• Higher commercial spend with the launch of new devices
• E-Plus to be consolidated from Q4

Brazil: Strengthening position in value segments

Focus on mobile data

• Strong contract & smartphones growth (+23% & 2x y-o-y respectively) increasing customer base value:
• Contract vs.Prepay: ARPU 4x; churn 1/3
• Q3 Data ARPU +15% y-o-y (37% of total ARPU)
• 6th consecutive quarter capturing >1m contract net adds; 10th quarter increasing contract market share
• 4G leadership: ¹¹¹ cities covered; 39% market share

FTTH net adds ('000)

Premises passed (m)

Transformation process into a fiber Company

• FTTH connections ramping-up (322k accesses in Sep-14; almost 2x y-o-y)
• Strong TV performance (40k net adds in Q3 14, 88k in 9M 14) underpinned by growing net adds on IPTV technology (higher ARPU)

(1) Anatel public information as of August 2014

Brazil: Growth acceleration in revenue and OIBDA

Revenue (organic y-o-y)

Consistent revenue growth trends • Positive contribution from mobile & fixed businesses to revenue increase (ex-regulation) Non-SMS mobile data revenue performance (+37.8% y-o-y in Q3) boosting mobile service revenues Fixed revenues (ex-regulation) growing again after 7 quarters, on better TV & FBB commercial traction • Negative regulatory effect; dragging 3.3 p.p. in Q3 y-o-y organic revenue growth • 68% of incremental MSR market share captured in the last 12 months

OIBDA improvement with controlled cost evolution

• Steady revenue growth plus strict OpEx control driving OIBDA y-o-y growth acceleration in Q3
• Lower supplies (on MTRs cut), personal expenses along with further efficiency efforts, offsetting higher subcontract expenses on higher commercial costs
• Strong CapEx efforts strengthening our market position (+25.5% y-o-y in 9M 14)

Hispam: OIBDA +17.8% y-o-y, ex-Venezuela

Mexico: Quality assets & new regulation boosting growth

Mobile gross adds

Revenue (organic y-o-y)

OIBDA margin

Commercial turnaround already delivering results

• Smartphone base doubling y-o-y, but still limited penetration (24%; +11 p.p. y-o-y)
• New LTE offer launched in October to further reinforce our commercial positioning
• Strong 4G network capabilities (10x faster speed than 3G)
• New MVNO agreements already signed and in effect

Q3 OIBDA +50.6% y-o-y

• Steady revenue growth acceleration
• Highest MSR y-o-y growth in more than 4 years
• 2nd consecutive quarter of ARPU growth (+3% y-o-y) on voice & data traffic booming (+38% and 2x respectively y-o-y)
• Strong OIBDA margin expansion y-o-y and q-o-q on:
• New regulatory framework in place from August 14th. Asymmetry of MTRs already effective
• Commercial strength gradually flowing into economies of scale
• The lowest margin in Hispam (-13.6 p.p. vs.9M 14 T. Hispam margin)

Rest of Hispam: Steady growth across the board

OIBDA (organic y-o-y)

Revenue (organic y-o-y)

Q2 14 Q3 14

Q3 OIBDA margin (organic y-o-y)

Sound OIBDA growth y-o-y; acceleration in Colombia & Peru

• Colombia:

• Increasing 4G adoption
• Outstanding OIBDA margin expansion y-o-y on solid revenue growth and easier commercial comps

• Peru:

• Solid commercial activity with record high prepay gross adds & record low churn in contract
• Non-SMS mobile data sales booming (Q3: +45.5% y-o-y) and accounting for 2/3 of MSR growth

• Argentina:

• LTE spectrum (AWS & 700MHz) secured in October to capture future growth opportunities
• OIBDA margin (Q3: 25.3%) improving y-o-y despite inflationary pressure

• Chile:

• Outstanding LTE rollout: 60% of population covered (Sep-14)
• Q3 OIBDA margin (35.4%) expanding y-o-y even with higher gross adds (+11% total; +18% in contract)

• Venezuela & Central America:

• Commercial activity recovered in Venezuela with the best net adds of the last 4Qs
• Inflation dragging OIBDA y-o-y growth

Net debt stable YTD despite E-plus payment & FX impact

Net Financial Debt

€ in millions

Smooth maturity profile on long-term financing

Effective interest cost (12 month rolling)

--- Guidance

Investor Relations Telefónica, S.A.

€ in billions

Summary

• Successful strategy execution creates momentum into 2015

• Delivering high-value customer growth

• Record quarterly net adds in smartphones and fiber; increasing 4G adoption across markets
• Effective management of customer loyalty

• Revenues growing & accelerating in Q3

• Positive growth in the last 6 quarters, setting the basis for an attractive top line growth profile
• Key drivers: T. Hispam (increasing at double-digit), T. España (smoothing decline) and mobile data (effectively monetising the data opportunity)

• Stabilising OIBDA performance YTD; back to growth in Q3

Sequential expansion of OIBDA margin (+0.4 p.p.); T. España (+1.2 p.p.); Peru (+5.3 p.p.); Colombia (+5.1 p.p.); Mexico (+7.4 p.p.)

• Balance sheet strength

Reducing net debt YTD even after German consolidation

• Continued investments to ensure the best network / UBB / All IP while transforming our IT

• CapEx devoted to growth & transformation: 73% of total in 9M
• Active consolidation in main markets
• Germany, Brazil, Spain

For further information: Investor Relations Tel. +34 91 482 87 00 ir@telefonica.com www.telefonica.com/investors