Telefonica S.A. — Earnings Release 2016

Dec 31, 2016

Results

January – December 2016

Disclaimer

This document and the conference-call webcast (including the Q&A session) may contain forward-looking statements and information (hereinafter, the "Statements") relating to the Telefónica Group (hereinafter, the "Company" or "Telefónica") or otherwise. These Statements may include financial forecasts and estimates based on assumptions or statements regarding plans, objectives and expectations that make reference to different matters, such as the customer base and its evolution, growth of the different business lines and of the global business, market share, possible acquisitions, divestitures or other transactions, Company results and other aspects related to the activity and situation of the Company.

The Statements can be identified, in certain cases, through the use of words such as "forecast", "expectation", "anticipation", "aspiration", "purpose", "belief" or similar expressions or variations of such expressions. These Statements reflect the current views of Telefónica with respect to future events, do not represent, by their own nature, any guarantee of future fulfilment, and are subject to risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such Statements. These risks and uncertainties include those identified in the documents containing more comprehensive information filed by Telefónica before the different supervisory authorities of the securities markets in which its shares are listed and, in particular, the Spanish National Securities Market Commission.

Except as required by applicable laws, Telefónica does not assume any obligation to publicly update the Statements to adapt them to events or circumstances taking place after the date hereof, including changes in the Company's business or business development strategy or any other unexpected circumstance.

This document and the conference-call webcast (including the Q&A session) may contain summarized, non-audited or non-GAAP financial information. The information contained herein and therein should therefore be considered as a whole and in conjunction with all the public information regarding the Company available, including any other documents released by the Company that may contain more detailed information.

In October 2015, the European Securities Markets Authority (ESMA) published guidelines on Alternative Performance Measures (APM), applicable to the regulated information published from July 3, 2016. Information and disclosure related to APM used in this presentation are included in the Appendix to the "Results January – December 2016" report. Recipients of this document are invited to read our consolidated financial statements and consolidated management report for 2016 submitted to the Spanish National Securities Market Commission.

Neither this document nor the conference-call webcast (including the Q&A session) nor any of their contents constitute an offer to purchase, sale or exchange any securities, a solicitation of any offer to purchase, sale or exchange of any securities, or a recommendation or advice regarding any security.

2017 Outlook

Mr. José María Álvarez-Pallete Chairman & CEO

2016 highlights; positioned to grow sustainably

Consolidation of growth trends

FY 16: Key financials

	FY 16
€ in millions	Reported	Organic y-o-y
Revenues	52,036	1.3%
Service revenues	48,005	2.6%
OIBDA	15,118	4.7%
OIBDA Margin	29.1%	1.0 p.p.
OpCF (ex-spectrum)	6,535	5.6%
Net Income	2,369
EPS	0.42
FCF	4,370
Net Financial Debt	48,595

Q4 non-cash effects: €1.3bn in OIBDA

	FY 16
€ in millions	Underlying
OIBDA	16,519
OIBDA Margin	31.7%
OpCF (ex-spectrum)	7,937
Net Income	4,038
EPS	0.75

+5.1%

Performance on 2016 guidance

2016 Guidance (Constant FX 2015; ex-VZ; ex-UK)	Guidance 2016E	FY 16
Revenues	>4%	+2.6%	Service Revenues +4.0%
OIBDA margin	Stabilising vs. 2015	+0.9 p.p.	Focus on service revenues
CapEx ex-spectrum/Sales	Around 17%	17.0%	(handset sales weak, in line with market dynamics)

2016 Dividend

• Voluntary scrip paid in Nov-16; €0.35/sh.
• Cash dividend to be paid in Q2 17; €0.20/sh.

Dividends paid in 2016 calendar year amounted to €0.75/sh.

• Cash dividend paid in May-16; €0.40/sh.
• Voluntary scrip paid in Nov-16; €0.35/sh.

Superior customer growth & improved retention

Average revenue/access

(organic y-o-y)

Upgrading customer value

• Double digit growth of LTE, FFTx/Cable & Smartphones accesses
• o 9.0m LTE accesses added in Q4 (+25% y-o-y; +23% q-o-q)
• o Q4 mobile contract net adds +18% y-o-y to 1.8m
• Mobile and fixed upsell strategies gaining traction (FFTx/4G/TV)

• Focus on customer loyalty

• o Q4 churn -0.5 p.p. y-o-y
• Enhancing customer experience
• o Omnichannel initiatives

Revenues accelerating; improving quality

2016 Revenues (y-o-y organic)

Total Handset sales Service revenues

Transitioning to a more sustainable mix

• Service revenues +2.3 p.p. q-o-q

• o Hispam +1.2 p.p.; UK +0.4 p.p.; Spain: +0.3 p.p.
• o Germany -0.2 p.p.; Brazil -0.1 p.p.
• Total revenues returned to positive growth (+3.0 p.p. q-o-q)
• Broadband sales accelerated to 15.6% y-o-y in Q4
• o Continued strong performance of mobile data (+12.3% y-o-y)

Q4 Service Revenues (y-o-y organic)

2016 Revenues

Higher speeds and data proposals fuel growth

Leading networks accelerating monetisation

Solid Mobile Data Revenues (y-o-y organic)

• "More 4 More" strategy leveraging mobile data allowance • Value accretion from recurrent prepay plans & tiered-pricing o ~15-20% ARPU uplift in Latam • Roaming propositions evolved to play elasticity • Data buckets for certain services (avoiding zero-rated) • Data sharing & family plans to unleash demand and drive upsell • Q4 LTE traffic (3x y-o-y); Mobile data traffic ramp-up: +71% y-o-y • Q4 FBB traffic +44% y-o-y driven by UBB Capturing the data opportunity NGN fostering volumes & ARPU growth

Strong upside in data usage & upselling

Extensive transformation starting to bear fruits

TGR: excellent connectivity; further digitalisation

Digital Services: enlarged growth platform

y-o-y organic

Driving data monetisation with video

• Virtuous circle: robust network intensive usage higher loyalty
• Cutting edge TV proposition: content, connectivity, customer experience
• o Adapting to new market dynamics (VoD, multiplatform, curated content)
• Pragmatic approach to quality content: Wide variety to differentiate vs. OTTs

2016 Digital Services Rev. Mix

Growing relevance of adjacent services

• CLOUD: Relevant player; very solid portfolio
• SECURITY: Own technology and global partnerships
• M2M: Best-in-class managed connectivity platform
• BIG DATA: Launched new service (LUCA) enabling companies to execute on actionable insights
• Telefónica Open Future_: Committed to innovation to benefit core business

2017 outlook & dividend policy

Operating 2017 Guidance (Organic)	Guidance 2017E
Revenues	Stable (in spite of regulation: ~-1.2 p.p.)
OIBDA margin	Expansion up to 1 p.p.
CapEx ex-spectrum/Sales	Around 16%

2017 Dividend	To be paid in 2017/18
Interim Q4 17	€0.20/sh. Cash
Final Q2 18	€0.20/sh. Cash

Dividends to be paid in 2017 calendar year amount to €0.40/sh.:

• Cash dividend in Q2 17; €0.20/sh.
• Cash dividend in Q4 17; €0.20/sh.

MAINTAINING A SOLID INVESTMENT GRADE RATING

Growing CF + organic deleverage

Growing profitability (expanding margins)

2017 priorities set on milestones reached

Focusing on revenue, OIBDA, OpCF and CF growth	P&L + CF growth
Focused investment in UBB/4G, in a more granular and targeted way	Company
A platform and data-driven Co.; Cognitive Intelligence: a new way to interact with our customers	transformation
Managing all situations in our portfolio and looking transversally at asset classes	Solid Investment Grade; Balance
Attractive and sustainable shareholder remuneration allowing cash preservation & organic deleverage	Sheet

& Results

Mr. Ángel Vilá CSFO

Q4 summary: Robust results

Business improvement (strengthening growth)

Fit for growth (competitive position reinforced)

Strong FCF

Pick-up in service revenues to +3.7% y-o-y organic

• Significant OIBDA acceleration to +9.4% y-o-y organic
• +2.0 p.p. y-o-y organic margin expansion; efficiency a non-stop process
• FX negative impact y-o-y diminishing
• Hispam & Spain accelerating trends in main metrics
• Materialisation of synergies in Brazil & Germany
• UK ramp-up in top line & OIBDA growth
• +11.6% CapEx y-o-y organic
• o Differential infrastructure
• Best quality base & targeted commercial actions

• o Data monetisation: Non-SMS mobile data revs. +19.2% organic y-o-y

• Enhanced FCF in Q4 (€2.1bn) to €4.4bn in FY (+24.4% y-o-y)

• Sale of Telefé (€0.3bn cash repatriated); Telxius (€1,275m announced in Feb-17)
• Organic deleverage: Dec-16 Net Debt €48.6bn

Underlying Q4 EPS €0.23: threefold y-o-y

Financials in a nutshell

	FY 16		Q4 16
€ in millions	Reported	Organic y-o-y	Reported	Organic y-o-y
Revenues	52,036	1.3%	13,721	2.7%
Service revenues	48,005	2.6%	12,493	3.7%
OIBDA	15,118	4.7%	3,187	9.4%
OIBDA Margin	29.1%	1.0 p.p.	23.2%	2.0 p.p.
OpCF (ex-spectrum)	6,535	5.6%	279	5.4%
Net Income	2,369		145
EPS	0.42		0.01
FCF	4,370		2,055
Net Financial Debt	48,595

	FY 16		Q4 16
€ in millions	Underlying	y-o-y	Underlying	y-o-y
OIBDA	16,519	-2.0%	4,464	6.0%
OIBDA Margin	31.7%	1.3 p.p.	32.5%	2.2 p.p.
OpCF (ex-spectrum)	7,937	0.3%	1,556	3.8%
Net Income	4,038	4.8%	1,233	2.5x
EPS	0.75	5.1%	0.23	2.7x

Underlying growth in € terms accelerating

Reported results reflecting FX and non-cash factors

• FX drag easing in Q4 ¹⁶ y-o-y on easier comps and BRL appreciation
• Q4 ¹⁶ restructuring costs: -€1.3bn in OIBDA
• Other factors in OIBDA: Capital gains ⁺€228m, Impairments -€215m

Reported Q4 affected by several factors

Non-cash effects; mainly restructuring charges to improve future profitability, productivity & cash flow

• Restructuring (personnel, channels): -€1,290m in OIBDA (T. España -856m; T. UK -36m; T. DE -30m; T. Brasil -14m; T. Hispam -81m and Others -274m)
• Capital gains: Telefé (+€199m in OIBDA) and T. Personalizadas (+€29m in OIBDA)
• Goodwill impairments: Venezuela (-€124m in OIBDA) and Mexico (-€91m in OIBDA)

Strong and healthy FCF generation

Delivering on >€4bn FY stated objective

• Growing FCF and FCFS throughout the year (including ^a record high CapEx level and with a balanced WC effort)
• ⁺€857m FCF improvement in FY y-o-y
• o Growth in adj. OpCF (€+1,676m y-o-y)
• o Savings on interest, tax and minorities (€+369m y-o-y)
• o Lesser WC contribution (€-1,189m y-o-y)

FCF & CapEx (ex-spectrum)/ Sales

(€ in millions)

FCF acceleration in spite of CapEx peaking

FCFS FY 16: €0.86; +24.6% y-o-y

Outstanding organic OIBDA growth in Q4

2016 OIBDA (y-o-y organic)

Q4 OIBDA (y-o-y organic)

Efficiency across the board

• Strengthening operating leverage

• o Q4 OpEx -2.3% y-o-y organic (Q3: -1.6%; FY: -0.7%)
• Main contributors to OIBDA sequential improvement: Hispam & Spain
• Simplification initiatives (commercial, network, CRM, billing, …)
• Synergies (BZ & Germany)
• FY OIBDA growth across segments
• o Q4 y-o-y in Brazil impacted by positive factor in Q4 15; +8.9% excl. this impact

Accelerating OIBDA growth; FX easing

OIBDA: Organic growth vs. FX impact

(€ in millions)

2016 Negative FX effect on OIBDA neutralised at FCF level

(€ in millions)

Organic acceleration; FX neutralising

• Organic OIBDA trends significantly accelerating
• o €+394m in Q4 vs. €+135m in Q3
• FX impact in OIBDA sequentially reduced
• o Q4: €-94m (Q3: €-187; Q2: €-332m; Q1: €-553m)
• o Q4: BRL appreciation; GBP and ARS depreciation
• ²⁰¹⁶ FX impact: -8.8 p.p. to OIBDA y-o-y; -4.7 p.p. to FCF y-o-y
• ²⁰¹⁷ FX impact: at current rates; FX would be ^a tailwind in Q1 ¹⁷

Growing OpCF despite CapEx still increasing in 2016

y-o-y organic

2016 OpCF ex-spectrum (Underlying)

Spain: superior franchise; sustained upselling

Q4 trading improvement & better value mix

• Ongoing benefits from "Fusión" (4.3m customers: +5% y-o-y)

• o +81% TV (+10 p.p.); +73% contract (+6 p.p.); +83% FBB (+3 p.p.)
• o Lower churn vs. unbundled services; consistent ARPU growth y-o-y
• o 58% of gross adds totally new customers in Q4

• Accretive adoption of higher value services on enhanced portfolio

o More speed, more mobile capacity, more content

Best-placed structurally

• Ahead of the pack on differential assets (upselling tools)
• o FTTH: 17.1m premises passed (+2.7m y-o-y); ~60% homes
• o LTE: 96% pop. coverage (+10 p.p. y-o-y)
• o TV: exclusive content and platform
• "More 4 More" strategy to successfully continue in 2017
• o Constructive market landscape
• o Promotions targeting differentiation

Spain: growing Service Revenues, OIBDA, OpCF

Steady growth on Service Rev. & OIBDA (2016)

• Service Revenues (y-o-y organic)
• OIBDA (y-o-y organic & ex-factors)

Back to growth; operating leverage starts to work

FY 15 FY 16 Margin y-o-y organic & ex-factors

Q4 revenues acceleration; margin expansion

• Sequential improvement in service revenues growth (+1.2 p.p. q-o-q)
• o "Consumer: +3.5% in Q4 y-o-y (FY: +1.8%)
• o "Business": +1.4% in Q4 y-o-y (FY: -1.4%)
• o "Other" decline on lower TV wholesale: -1.8% in Q4 y-o-y (FY:+3.2%)
• Margin +1.1 p.p. y-o-y to 40.6%, despite higher content costs

Cash conversion benchmark

• Strong execution in OpEx (Q4: -3.5% y-o-y; FY: -2.3% organic & ex-factors)
• o Substantial savings in personnel, commercial, network & systems
• o Higher net content cost (Q4: +46% y-o-y)
• Redundancy plan and channel optimisation extended (Q4 provision: -€856m)
• o Additional savings of €100m run rate from 2019
• FY CapEx: +3.0% y-o-y organic

24

o Expected to ease on lower legacy and LTE investment

Germany: realising synergies; improving profitability

2016 OIBDA (y-o-y organic & ex-yourfone in Q1 15)

Maintaining market momentum

• 1.3m contract net adds in 2016; 336k in Q4
• o 54% of gross adds from partners; 58% in Q4 (-1 p.p. q-o-q)
• o Signs of easing price pressure in non-premium
• Solid metrics of "O² Free" ("More 4 More")
• o Data traffic 1.5x vs. "O2 Blue All-in" portfolio
• Focus on data growth
• o LTE cust. +53%; penetration 28% (+9 p.p.); cov. 79% (+4 p.p.)
• o +41% y-o-y avg. data usage to 1.7 Gb
• o +62% mobile data traffic vs. Q4 15

Better OIBDA and margin trends; synergy-driven

• MSR ex-regulation performance stable q-o-q
• Successful synergy capture: Q4: ~€25m; incremental savings of ~€150m in 2016
• o Synergy case upgrade: +€100m to ~€900m OpCF synergies in 2019 (~€670m by YE2017)
• ²⁰¹⁶ guidance met; expanding FCF

UK: consistently outperforming the market

2016 contract net adds (ex-M2M) ('000)

Blended ARPU ex- "O2 Refresh" (y-o-y)

2016 (y-o-y organic)

MSR ex-"O2 Refresh" OIBDA

Continued customer growth in a challenging market Solid commercial & ARPU performance

• Mobile base 25.5m

• o Contract 62% o/total (+4 p.p. y-o-y)
• o Market-leading contract churn: 1.0% in Q4
• o 47% LTE penetration (+12 p.p.); 95% outdoor cov. (+16 p.p.)
• Q4 ARPU up 1.3% y-o-y (ex-"O² Refresh")
• o Solid data revenues; +4.5% y-o-y
• o Data traffic +63% y-o-y

Sustained total revenues uptick

• Q4 total revs. accelerated to 2.5% y-o-y ex-"O² Refresh"
• o MSR pick-up; larger out-of-bundle spend, lower regulatory impact and customer growth
• o Handset and other revs. +5.2% y-o-y (+13.3 p.p. q-o-q) on new device launches
• Q4 OIBDA increase driven by better top line and cost control
• FY CapEx/Sales 13.6%: investment in LTE rollout (CapEx: +18.7% y-o-y)

Brazil: focus on value; customer upgrades

Brazil: robust growth in revenues, OIBDA, OpCF

2016 (y-o-y organic & ex-Q4 15 positive factor)

2016 (y-o-y organic & ex-Q4 15 positive factor) Expanding margins

Gaining revenue market share (36%; +1 p.p. y-o-y)

• Capturing full incremental market revenue growth in 2016
• Q4 MSR +4.0% y-o-y (FY: +3.1%)
• o Data/MSR: 57% (+8 p.p. vs. FY 15)

• Regulation dragged 2.3 p.p. on revenues y-o-y in Q4 and FY

• Continued OpEx reduction (Q4: -1.6% y-o-y; FY: -1.9%)

• CapEx below initial guidance on optimisation and Big Data
• o 18.8% Capex/Sales: 4G, IP backbone, fiber and selective Pay TV
• o Enlarging quality gap: FY 16 CapEx BR\$8bn; BR\$24bn 2017-2019E
• Successful execution of operational synergies: €372m in OpCF
• o Fully secured base case NPV; 71% of best case

HispAm: strengthened market positioning

Sustainable growth

• Steady increase on value accesses driving sustained ARPU growth
• ARGENTINA: Quality base growth & gradual tariff updates fostering Q4 ARPU (mobile +28.7% y-o-y; FBB +35.2%)
• CHILE: Leadership position reinforced by LTE and UBB
• o LTE coverage 79%; 1.1m FTTx premises passed
• PERU: Solid growth in value amid intense competition
• o LTE coverage 65%; 2.8m FTTx/Cable premises passed
• COLOMBIA: +6% y-o-y mobile accesses on offer simplification
• o Solid ARPU growth in FBB (+9.1%) & Pay TV (+14.8%)
• MEXICO: Positive commercial momentum (Q4 mobile net adds: 620k)
• o Better sequential ARPU
• o Easing aggressiveness since Q1 17 (reducing duration of prepaid recharges in unlimited tariffs)

FBB & Pay TV

HispAm: revenues and OIBDA y-o-y acceleration

2016 Revenues (organic y-o-y)

2016 OIBDA (organic y-o-y)

Sound financials

• Strong Q4 MSR (+12.0% y-o-y; FY: +7.0%); accesses + ARPU growth acceleration (booming data volumes + "More 4 More" strategy)
• Double-digit growth in fixed rev. (Q4: +10.9% y-o-y; FY:+12.2%) driven by Pay TV and UBB
• OIBDA margin widening in H2 amid strong commercial activity

• OpCF stable in 2016 (-0.3% y-o-y organic); CapEx/Sales 18.5%

• ARGENTINA: Growth across the board; Q4 rev. +31.6% y-o-y; OIBDA +96.4% (higher volumes; tariff updates and better comm. comps)

• CHILE: Q4 top line ramp-up (+3.8% y-o-y; FY: +0.6%) due to mobile. Profitability affected by higher commercial trading
• PERU: Q4 Revenue & OIBDA trends reflect intense competition and promotional actions
• COLOMBIA: Solid top line growth (Q4: +2.5% y-o-y; FY:+4.3%); steadily grabbing revenue market share
• MEXICO: Better revenue and OIBDA (ex-factors affecting Q4 15)

Further deleverage on stronger FCF generation

Strengthening balance sheet with long term financing

Net debt maturities (Dec-16)

€ in billions; not considering hybrid NC dates

Closing remarks

• Solid year of growth flowing into FCF; strong strategy execution

• Delivered promising Q4 operating momentum
• Best-placed structurally
• Enhancing Balance Sheet
• 2017 outlook: further growth; consistent deleverage; sustainable dividend

A solid platform for sustainable growth

For further information: Investor Relations Tel. +34 94 482 87 00 ir@telefonica.com www.telefonica.com/investors