Telefonica S.A. — Earnings Release 2017

Mar 31, 2017

Results_ January –March 2017

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. 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.

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Mr. José María Álvarez-Pallete Chairman & CEO

Sustainable business model; differential quality

Delivering growth (reported and organic)

• Financials in euro terms reflecting FX tailwind effect
• Accelerating OpCF growth trends across the board; outstanding performance
• EPS up 48.8%

Further advance in transformation

• Introduction of AURA: a new type of relationship with our customers, based on cognitive intelligence
• Cost reductions (structural & simplification); synergies (from acquisitions)
• Encouraging response from "M4M" tariffs; growing demand for quality

Strengthening balance sheet

• Mar-17 Net Debt €47.5Bn incl. Telxius stake sale
• FCF x8.7 y-o-y to €599m up to March, offsetting traditional Q1 seasonality
• De-risking B/S; extending avg. debt life to 8.29 yrs post Q1 financing at historical low rates

Guidance and dividend reiterated

Q1 performance fully consistent with FY outlook

2017E Guidance (Organic)	Guidance 2017E	Q1 17
Revenues	Stable (in spite of regulation: ~-1.2 p.p.)	1.5% (regulation -1.1 p.p.)
OIBDA margin	Expansion up to 1 p.p.	(0.0 p.p.)
CapEx ex-spectrum/Sales	Around 16%	12.2%

2017 Dividend	To be paid in 2017/18
Interim Dec-17	€0.20/sh. Cash
Final Jun-18	€0.20/sh. Cash

Dividends to be paid in 2017 calendar year amount to €0.40/sh.:
	Cash dividend 16th Jun-17; €0.20/sh.

Cash dividend 14th Dec-17; €0.20/sh.

MAINTAINING A SOLID INVESTMENT GRADE RATING

Growth + Sustainable Dividend + Deleverage

Financials in a nutshell

	Q1 17
€m	Reported	Reported y-o-y	Organic y-o-y
Revenues	13,132	5.0%	1.5%
Service revenues	12,187	5.6%	1.7%
OIBDA	4,021	4.8%	1.3%
OIBDA Margin	30.6%	(0.1 p.p.)	(0.0 p.p.)
OIBDA Underlying	4,109	6.5%
OpCF (ex-spectrum)	2,404	12.1%	8.9%
Net Income	779	42.2%
EPS	0.14	48.8%
FCF	599	8.7x
Net Financial Debt	48,766	(2.7%)

1st Q with positive effect of FX since Q1 15

• Revenue: +3.7 p.p. y-o-y; OIBDA: +5.0 p.p. y-o-y
• Most Latam currencies with positive contribution, specially BRL

Reported growth accelerating at net income level

Accelerating free cash flow generation in Q1

Significant recovery in reported trends

OIBDA (y-o-y underlying)

OpCF (y-o-y underlying)

Organic performance and FX driving growth

OIBDA: Organic growth & FX impact (€m)

FX impact in Q1 FCF (€m)

Strong currency contribution • Positive FX impact y-o-y, reverting 2016 negative trend

• o +€191m in OIBDA vs. -€553m in Q1 16
• o Q1 y-o-y: +3.7 p.p. to revenues; +5.0 p.p. to OIBDA
• o Q1: BRL, CLP, COP & PEN appreciation more than offsetting GBP, VEF, ARS and MXN depreciation
• 2017 FX impact: at current rates FX to continue as tailwind in Q2
• FX effect mitigated at FCF

Steady organic growth of Revenues & OIBDA

Delivering growth from service revenues

• Service Revenues +1.7%, despite regulation (-1.1 p.p.)
• o Hispam (+2.1 p.p.), BZ (+0.4 p.p.) & UK (+0.3. p.p.) to Q1 y-o-y org
• BB & SoC revs. +5.3 p.p. y-o-y to 51% o/total

Stable profitability

• Continuous focus on efficiencies & synergies
• Diversification value
• o OIBDA contributors: BZ (+1.5 p.p.) Hispam (+1.4. p.p.), Germany (+0.1 p.p.) and UK (+0.1 p.p.)
• o Margin expansion in BZ & DE; flat in Spain; erosion in UK & Hispam

Boosting OpCF growth; high cash conversion

OpCF underlying (OIBDA-CapEx ex-spectrum)

OpCF growth (y-o-y organic)

Operating leverage and lower CapEx intensity

• Robust business performance
• Q1 CapEx €1,621m (-8.4% y-o-y org.)
• All segments accelerating trends (q-o-q org.)
• o Spain (+10.1 p.p.)
• o Germany (+14.6 p.p.)
• o UK (+18.9 p.p.)
• o Brazil (+24.5 p.p.)
• o Hispam (+1.6 p.p.)

Enhanced network and offer fostering data growth

Telefónica, S.A.

• Q1 LTE traffic 2.7x y-o-y; Mobile data traffic +68%
• Q1 Fixed data traffic +31% fostered by UBB

A new wave of data monetisation opportunities

Telefónica, S.A.

Digital Services: Distinctive model

Q1 17 Digital Services Revenues (€m)

y-o-y organic

Video: differential contents & widening partnerships

• Sustained revenue growth +4.6%
• o ARPU growth across footprint
• o Successful customer development on Premium TV offering
• International distribution agreements to monetise own production
• Pay TV accesses growth in Hispam

Increasingly relevant digital player

• CLOUD: Focusing on value proposition for SME segment
• SECURITY: Strengthening partnerships in B2B (Palo Alto, Fortinet, McAffee, Subex) and B2C (Allot)
• M2M: Rollout of flagship projects across main geographies; global strategy for "Low Power Wide Area" communications

TGR: UBB deployment and E2E Digitalisation

Telxius: Solid performance

15,897 Mar-17 Towers (# sites) Tenancy ratio 1.28x Submarine Cable (y-o-y) 35% 54% IP traffic Capacity bandwidth

Leading telecom infrastructure Co.

• Balanced asset portfolio: solid revs. + strong profitability
• Towers: 27 new sites under build to suit program with TEF in Q1
• Submarine Cable: solid traffic growth on current network (>65,000km)
• Ongoing deployment of 2 new submarine cables (active in 2018)
• o BRUSA: 8 fiber pairs; 10,700 km connecting Brazil, Puerto Rico & USA
• o MAREA: ownership of 4 fiber pairs (o/ 8 in total); 6,600 km connecting Virginia Beach (US) & Bilbao (Spain)

Mr. Ángel Vilá CSFO

Spain: Trading skewed to high value

• "Fusión" upselling gaining traction o "Fusión" high-end: 21% of base (Fusión+2 and above) o "Fusión" customers (+4%); stable churn • Mobile base growth (for the first time since Q2 11) o Additional mobile lines in "Fusión": +41% • Better IP TV net adds limiting TV loss • FBB base largely in fibre (52% o/FBB; +11 p.p.) Successful smart bundling dynamic

Differential assets

• Largest FTTH in Europe: 17.5m prem. passed
• o 18% uptake at Mar-17 (retail)
• o Upside in retail + wholesale uptake
• Leading TV platform: Exclusive content & features
• LTE expansion: 96% pop. coverage

Spain: Zoom on revenue evolution

Service revenues to improve from Q2

Investor Relations Telefónica, S.A.

17

Spain: Accelerating operating cash flow growth

Telefónica, S.A.

• Service revenues (-1.5%) reflecting tougher comps
• OIBDA evolution driven by top line (OpEx:-3.3%)
• Best-in-class cash conversion: easing CapEx cycle (-22.7%)

Service revenue to improve from Q2

• Consumer revs. (-0.4% y-o-y); negative calendar effect on "Fusión"
• o Tailwind from Q2 (tariff update in Apr-17)
• Business revs. (+0.1%) flat y-o-y
• Other revs. (-7.3%) from lower wholesale revs.
• o TV (-49%), MVNO (-12%)
• o Fiber wholesale to support mid-term growth
• High visibility on future savings (personnel, commercial, network….)
• o 2017 Redundancy Plan widened (Q1 provision: €76m)

Germany: Executing on synergies; improving quality

+1.4 p.p.

+1.3 p.p.

Dynamic market

• Focus on stimulating data growth

• o LTE cust. +61%; penetration 32% (+11 p.p.); cov. 79% (+3 p.p.)
• o +52% avg. data usage O² LTE to 1.8GB
• o +67% mobile data traffic vs. Q1 16
• o "O² Free" data usage ~ 1.5x vs. prior portfolio
• Contract; 172k net adds
• o 55% of gross adds from partners (-2 p.p. q-o-q)
• o Easing price pressure in non-premium

Robust profitability

• Q1 Synergies

• o ~€35m incremental OIBDA savings; FTE restructuring and network (~€160m in YE 17E)
• o Tougher comps vs Q1 16 (~€55m; ~€150m in FY 16), contribution of rollover effects
• Headwinds from regulation + commercial costs ("O² Free" + customer service quality)

UK: customer brand of choice

(21.0%)

11.9%

(3.4 p.p.)

CapEx +30.8%

Continued customer growth in a challenging market Solid performance in a competitive market

• Contract 63% o/total (+1 p.p.)
• o Leading contract churn: 0.9% in Q1
• 57% LTE penetration (+14 p.p.); 96% outdoor cov. (+10 p.p.)

• Avg. data usage per smartphone +57% vs. Q1 ¹⁶

• MSR +1.2% y-o-y; maintaining trends

• • Higher avg. subscription & out-of-bundle spend
• • Growing MVNO contribution
• • Value customer base growth
• ̶ Impact from roaming & MTRs (-2.0 p.p.)
• Handset and other revs. +5.3%
• • New device launches & Smart Metering Implementation Programme
• OIBDA fuelled by revenue growth
• CapEx: accelerating LTE rollout

Q1 17 (y-o-y organic)

Margin

2.1% 0.6%

Revenues OIBDA OpCF

26.0%

(0.4 p.p.)

Brazil: Growing & expanding margins; OpCF +21.6%

Commercial activity focus on value

• 30.5% mobile market share; 42.0% in contract; 34.5% in LTE
• Market leading contract churn (1.6%; 0.1 p.p.)
• Mobile positive net portability every month in 2017
• Enhancing customer experience
• o 4G coverage to 65% (47% a year ago)
• o 17.4m fiber prem. passed (4.2m connected)

Continued improvement in profitability

• Revenues up +1.6% on MSR acceleration (+5.1%)
• o Data / MSR: 69% (+16 p.p.)
• o Robust FBB revs.; partially offsetting voice decline
• o Regulation dragging revs. by 2.1 p.p.
• OpEx reduction for 5th quarter in a row (Q1: -1.1%)
• o Successful execution op. synergies: NPV 76% of best case

HispAm: Focus on quality growth

ARPU increases across services

• Ongoing improvement in QoS
• o LTE coverage 51%; +9 p.p. y-o-y
• o 5.0m prem. passed with FTTx/Cable (+1.7m in LTM)

• ARGENTINA:

• o Mobile ARPU uplift; tariff upgrades & growing volumes
• o Outstanding uptake on fiber connections: 41k net adds
• MEXICO:
• o Easing pricing competition driving ARPU stabilisation
• o Ongoing mobile contract improvement: positive net adds
• CHILE:
• o Steady growth in contract (5k net adds)
• o Growing FTTx (+22% to 329k connections; 1.2m prem. passed)
• PERU:
• o Trading affected by competition & natural disaster effects
• o Best-in-class assets: positive net adds in fixed
• COLOMBIA:
• o Good commercial momentum (contract accesses +6%)
• o Enhanced quality; positive FBB & Pay TV net adds

HispAm: Solid revenues, OIBDA and OpCF growth

Revenues (organic y-o-y)

Financials (y-o-y organic)

Margin

Robust y-o-y growth

• Solid top line increase

• o Double-digit MSR growth (+10.6%)
• o Fixed revenue +4.1%
• Slight OIBDA margin erosion (-0.8 p.p.)
• OpCF up 23.6%

• ARGENTINA: Outstanding revs. & OIBDA; margin +5 p.p.

• CHILE: Top line & OIBDA impacted by lower prepay accesses, regulatory effects and IT seasonality
• PERU: Intense competition explaining revs. & OIBDA decline; Q1 ARPU trend improving
• COLOMBIA: Sound revs. (+4.4%) and OIBDA (+5.0%)
• MEXICO: Revs. & OIBDA worsening on tougher comps (positive itx. effect in Q1 16) and despite improved ARPU trend

Leverage reduced on better operating performance

Net Financial Debt (€m)

Telefónica, S.A.

Average debt life above 8 years

Interest payments cost

Summary

• Solid performance with full-year guidance on track
• Distinctive OpCF generation and growth fuelling FCF
• Retaining benchmark profitability
• Outstanding EPS growth
• Reinforcing B/S: Deleverage; Active and diversified financing strategy

Strong set of results; advancing in sustainable growth

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