Telefonica S.A. — Earnings Release 2017

Dec 31, 2017

Results_ January – December 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's 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 law, 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 summarised, 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 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 the year 2017 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 security, a solicitation of any offer to purchase, sale or exchange of any security, or a recommendation or advice regarding any security.

2018 Outlook

Mr. José María Álvarez-Pallete Chairman & CEO

Our mission: Let our customers choose it all

Enable people with the power of connectivity

Operate in countries where we can have an impact & create value

Optimise our capabilities for a sustainable digital future

Strong financial performance & shareholders' returns

Our mission: Let our customers choose it all

Enable people with the power of connectivity

• UBB connectivity tailored to each market
• Integrated offer
• o fiber, mobile data, content, digital services
• Best experience, starting to leverage cognitive intelligence
• Trust, Privacy & Security

Operate in countries where we can have an impact & create value

• Leaders in convergent markets
• Leaders in mobility
• Leaders in key Latam markets
• Best positioned for structural growth in Latam

Optimise our capabilities for a sustainable digital future

• Becoming a platform Co.
• Pioneers in digitalisation
• Pioneering the new technological wave: SDN, eSON, 5G,…
• Relentless focus on efficiency
• Maximise group synergies

Growing Revenues, OIBDA, OpCF, FCF & EPS Improving ROCE & B/S

Excellent execution of 2017 priorities

In spite of adverse regulatory impacts

Growth acceleration

Revenues gaining momentum

Revenues & Service revenues (y-o-y organic)

Revenues Europe & Latam (y-o-y organic ex-reg.)

Yielding improvement in Europe & Latam ex-reg.

• Further transforming our revenue mix towards BB and SoC
• o 52% o/ total +5 p.p. vs. 2016
• Turning volumes into revenues
• o Mobile data revs +19.5% y-o-y in Q4 (FY: +16.8% y-o-y)
• Balanced revenue distribution
• Strengthening profitability (FY OIBDA +5.3% y-o-y org.)
• o Revenue acceleration; 85% of y-o-y in FY driven by service revs
• o Cost actions; best-in-class efficiency
• o Delivering merger synergies in BRA & GER

Telefónica's model: digitalisation at the core

• Enhance high-value connectivity
• o FTTH, LTE, transport network, all-IP
• Monetisation of data traffic explosion
• o Fixed data traffic/ user in our networks x16 (2012- 20E)
• More users, more services
• o Attract, bundle and upsell customers
• o Higher ARPU
• Selling more digital services
• o Enhanced offering (security, Big Data, Cloud, IoT)
• o Enhanced capabilities (specialised sales resources)

Data monetisation Digital transformation

• Network leadership

• o New network elements virtualised, IP Comms, legacy switch-off
• o New technological wave: SDN, eSON, 5G
• Radical processes automation
• o Efficient sales processes, effective service provision, faster issue resolution
• o Largest full-stack deployment, zero back-office
• World-class digital customer experience
• o Distinctive and enriched digital user interfaces
• Distinctive digital value proposition
• o Align our offer to customer needs in real time

Monetisation opportunities continuing

Targeted, ROI-based CapEx effort; peak already behind us

2017 key financials & solid financial position

Solid financial
position

	FY 17
€ in millions	Reported	Reported y-o-y	Organic y-o-y
Revenues	52,008	(0.1%)	3.4%
Service revenues	47,857	(0.3%)	3.1%
OIBDA	16,187	7.1%	5.3%
Underlying OIBDA	16,638	0.7%
OIBDA margin	31.1%	2.1 p.p.	0.6 p.p.
OpCF (ex-spectrum)	8,027	22.8%	12.2%
Net Income	3,132	32.2%
EPS	0.56	33.9%
Underlying EPS	0.75	(0.3%)
FCF	4,947	13.0%
Net Financial Debt	44,230	(9.0%)

Revenue growth and margin expansion

Double digit OpCF growth in €

EPS /FCF double digit growth

Leverage down from 2.95x to 2.66x

Growing at all levels: organic & reported; Revenues, OIBDA, OpCF, FCF, EPS Reducing debt across all fronts: Net Debt -€4.4bn; (Net Debt + Commitments) -€4.6bn; (Net Debt + Commitments + Hybrids) -€3.7bn

Beating 2017 guidance

2017E Guidance (Organic)	Guidance 2017E	FY 17
Revenues	>1.5% (in spite of regulation: ~-1.2 p.p.)	3.4% (regulation -1.1 p.p.)	Organic y-o-y
OIBDA margin	Expansion up to 1 p.p.	0.6 p.p.	Revenues +3.4%
CapEx ex-spectrum/Sales	Around 16%	15.8%

2017 Dividend	Payable in 2017/18
Interim 14-Dec-17	€0.20/sh. cash
Final Jun-18	€0.20/sh. cash

• Cash dividend paid on 16th Jun-17 (€0.20/sh.)
• Cash dividend paid on 14th Dec-17 (€0.20/sh.)

Ms. Laura Abasolo CFCO

2017 key financials: FY & Q4

		FY 17			Q4 17
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenues	52,008	(0.1%)	3.4%	13,162	(4.1%)	4.8%
Service revenues	47,857	(0.3%)	3.1%	11,875	(4.9%)	4.3%
OIBDA	16,187	7.1%	5.3%	3,913	22.8%	9.2%
Underlying OIBDA	16,638	0.7%		4,230	(5.2%)
OIBDA margin	31.1%	2.1 p.p.	0.6 p.p.	29.7%	6.5 p.p.	1.4 p.p.
OpCF (ex-spectrum)	8,027	22.8%	12.2%	1,213	4.3x	24.4%
Net Income	3,132	32.2%		693	4.8x
EPS	0.56	33.9%		0.12	7.9x
Underlying EPS	0.75	(0.3%)		0.18	(22.6%)
FCF	4,947	13.0%		1,721	(16.5%)
Net Financial Debt	44,230	(9.0%)

Q4 reported y-o-y affected by several factors

• Non-cash factors in OIBDA (Q4 16: -€1.3Bn vs. -€0.3Bn Q4 17)
• FX FY drag in revenues & OIBDA (-3.2 p.p. & -4.7 p.p.)
• Roaming drag in OIBDA (Q4 -0.7 p.p.; Q3: -1.7 p.p.)

Q4 results factors

FX impact structurally neutralised

Deleverage driven by growing organic FCF

Net Financial Debt (€m)

Cost effective long-term financing strengthens B/S

Liquidity position (Dec-17)

Mr. Ángel Vilá COO

Spain: Improved trading and value mix

Investor Relations Telefónica, S.A.

Superior offer for premium customers

• Improved operational momentum, seasonal promos Q4
• o "Fusión" net adds recovered (+41k; +31k q-o-q)
• o FBB growth; strong TV, positive mobile portability
• o "Fusión" churn impacted by tariff upgrades/promos
• "Fusión" value mix continue to show value upselling
• o Fostering services growth per customer
• o Consistent ARPU growth in 2017
• "M4M" continued in Q1 18 (convergent & non-convergent)

Quality assets enhance monetisation

• Largest NGN network (structural advantage)
• o LTE: 97% pop.; FTTH: 19.2m premises passed
• o Fiber wholesale; growth opportunity
• Largest TV distribution platform & production skills
• o Excellent audience for in-house series (more viewers of three series than "El Clásico" football match)

The most advanced telco in Europe, best-positioned to compete with future-proof infrastructure

Spain: Revenue acceleration & OIBDA growth

(1.5%) (0.8%) 0.4% 0.7% (2.4%) (2.1%) (0.6%) 0.5% Q1 17 Q2 17 Q3 17 Q4 17 Improving Service Rev. & OIBDA Service revenues (y-o-y organic) OIBDA (y-o-y ex-provisions & cap. gains) Margin ex-provisions & cap. gains 39.8% 40.3% 41.0% 39.9% (0.3%) (1.1%) FY 17 40.3% FY 17

Falling CapEx & growing OpCF 2017 (ex-provisions & cap. gains)

Service Revenue consolidate growth

• QoQ service revenues growth improved (+0.3 p.p. q-o-q)
• o "Consumer"(53% of SR): +1.3% in Q4; +1.0% in FY
• o "Business" (28% of SR): -2.6% in Q4; -1.3% in FY
• o "Wholesale & Other" (19% of SR): +4.2% in Q4; -2.5% in FY
• Q4 OIBDA growth driven by revenue flow
• Sustained benchmark OIBDA margin (FY 40.3% ex-provisions & cap. gains)

Cash growth momentum

• Further cost savings to come

• o Redundancy; 490M€ run-rate savings from 2019 (365M€ in 2017)
• o Digitalisation (channels, network, IT...)
• o Copper switch-off
• Visible growth in cash-engine on slowing CapEx
• o FTTH/LTE build matures
• o Lower unitary CapEx

Q4 back to Ser. Rev. & OIBDA growth. The best OpCF margin among European peers

Germany: MSR ex-regulation back to growth

MSR ex-regulation (y-o-y organic)

Solid momentum driven by larger data buckets

• ^O2 Free portfolio well received; data usage >7 GB/month
• o Avg. use postpay LTE customers 2.8 GB/month (+68% y-o-y)
• o Mobile data traffic up 55% vs. 2016
• Strong Q4 contract net additions (+186k; +2% q-o-q)
• o Solid partner momentum (Q4: 58% gross adds; +5 p.p. q-o-q)
• o LTE cust. (+31% y-o-y); penetration 37% (+10 p.p.); cov. (82%)

Synergy delivery fully on-track

• Q4 OIBDA y-o-y accelerating
• o Regulatory drag (€-10m vs. €-28m in Q3)
• Efficient CapEx spend (FY 17: -13.7% y-o-y; ~€80m synergies)
• Improving cash conversion

19

o 75% of full 2019 synergy target achieved

Largest mobile operation in the leading European market

UK: Solid financials and commercial performance

MSR ex-regulation (y-o-y organic)

Telefónica, S.A.

812

+6.9%

Continued customer growth in a challenging market Momentum despite competition

• Contract base expanding
• o Q4 net adds +70k (excl. M2M; Q3: +32k)
• o Sustained, best-in-class contract churn: 1.0% in Q4
• 60% LTE penetration (+5 p.p. vs. Dec-16)
• Avg. data usage per smartphone +46% vs. ²⁰¹⁶

Robust financials

• Revenue growth (ex-regulation): Q4: +4.5% y-o-y (FY: +3.6%)
• • High-value tariff take-up (new customer propositions)
• • Wholesale growth (MVNOs)
• • Handset sales (flagship devices)
• RLAH impact y-o-y (Q4: -1.2 p.p. & FY: -1.3 p.p.)
• Revenue expansion flowed through to OIBDA, RLAH drag (Q4: -€25m; Q3: -€48m)
• CapEx -4.8% vs. FY 16; LTE indoor coverage objective met (98%)

Customer-centric approach, great brand, most loyal contract customers in Europe

Brazil: Further improvement on differentiation

Contract net adds (m)

• Strongest contract net adds over last 3 years
• o New contract portfolio (23rd October) delivering results
  • o Better mix on high-end Family Plans: +82% y-o-y
• o 42% contract market share
• o 84% 4G population cov.
• o Q4 mobile ARPU up +1.0% y-o-y (FY +2.6%)

• o Record levels of customer satisfaction

• Fixed business transformation on-track

• o 16 new cities deployed with FTTx in 2017
  • o 79% m. share, 40-60% take-up 6m after deployed
• o IPTV (+51% y-o-y); continued focus on profitability
• o Q4 ARPU FBB +15.0% y-o-y (FY +11.3%); pay TV +5.6% (FY +6.1%)

Best network, best brand, best market positioning, best customers... The best LatAm telco

Brazil: Solid margin improvement, above 35%

Revenues(y-o-y organic)

Consistent revenue growth

• MSR growing above inflation (Q4: +3.9% y-o-y; FY: +4.4%)
• o Data still booming y-o-y (Q4: +24.9%; FY: +30.2%)
• o Postpaid revenue improved to +9.3% y-o-y (FY: +9.6%)
• Fixed revs -3.8% y-o-y (regulation and voice decline)
• o Strong growth in fiber (+29.8%) and IPTV (+64.6%)

Double-digit OpCF growth

• Highest OIBDA margin in 2 years (Q4: 35.6%, +1.0 p.p.)
• o OpEx declining for 8 Qs in a row (Q4: -0.2% y-o-y; FY: -0.6%)
• o Benefits from digitalisation and synergies
• CapEx stable y-o-y; in line with 2017-2019 guidance
• o Focused on 4G and fiber to guarantee superior quality; improved customer experience
• Successful execution of operational synergies

Hispam: Sound commercial results

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Value customers growth yielding results

• Contract net adds back to positive (+227k; -82k in 2017)
• o Improvements in ARG, MEX, CHI and PER
• Positive prepaid net adds (+194k; -4.6m in 2017)
• o Change in trend in MEX and better in COL & PER
• FTTx/cable connections +60.8% y-o-y (1.8m)
• o 6.8m premises passed (1.4x y-o-y)
• ARGENTINA: Quality increase: contract +5%, LTE +71%. 51k new fiber connections (209k in 2017)
• CHILE: Positive Q4 contract net adds (+52k) & portability
• PERU: Better contract performance amid competition. Solid net adds in fiber & pay TV (highest in last 2 years)
• COLOMBIA: Fostering FTTx (Q4: 40k net adds) & LTE (529k)
• MEXICO: Positive ARPU growth for ² nd consecutive Q on more rational competition

A well-diversified portfolio of leading players in most markets; macro improving, structural growth ahead

Hispam: Delivering strong financial performance

FY 17 Revenues & OIBDA (y-o-y organic)

Revenues OIBDA

Telefónica, S.A.

Expanding profitability

• Organic growth more than offsetting FX depreciation
• o VZ contribution 0.2% o/group revs from 0.8% FY 16
• o ARG reported OIBDA +21.8% y-o-y (organic +42.0%)
• o FX in CHL, COL & PER positive impact

• 2017 OpCF ex-spectrum €1.4bn vs. €1.1bn in FY 16

• ARGENTINA: Strong Q4 Rev. & OIBDA, growing in € despite depreciation; FY 17 OpCF €370m (+67.8% in €)

• CHILE: Flattish revs. on intense competition. FY 17 OpCF €274m
• PERU: Improvement in Rev. & OIBDA. FY 17 OpCF €194m
• COLOMBIA: Improving Rev. & OIBDA trends
• MEXICO: Recovering revenue growth in H2; OIBDA margin improving. OpCF FY 17 €86m

Telxius: Leading infrastructure, solid profitability

Clear proofs points in 2017

Investor Relations Telefónica, S.A.

26

More value customers, more services

Driving usage, increasing yield

Data penetration (Dec-17)

Mobile data revenues (€bn)

Investor Relations Telefónica, S.A.

28

Digitalisation at the core of customer journey

Digitalisation

Digitalisation brings efficiency to our cost structure... …higher customer satisfaction and stickiness

Further room to improve efficiency

2017 Figures

Telefónica, S.A.

Mr. José María Álvarez-Pallete Chairman & CEO

2018 outlook

Operating 2018 Guidance organic	Guidance 2018E (IAS 18)
Revenues	Growth of around 1% (despite regulation dragging: -0.9 p.p.)	~2%
OIBDA margin	Continues expanding around 0.5 p.p. (despite regulation dragging -1.6 p.p. on OIBDA growth)
CapEx ex spectrum/Sales	Around 15%		CapEx peak behind us

Third consecutive year of margin expansion Sustained profitable growth

(cost discipline, digitalisation, synergies, network…)

Applying 2017 organic criteria

SOLID BALANCE SHEET/ INVESTMENT GRADE
ADDITIONAL DELEVERAGE
IMPROVED ROCE
ATTRACTIVE, STABLE & SUSTAINABLE DIVIDEND

2018 Dividend €0.4/sh. Cash Interim Dec-18 €0.20/sh. Final Jun-19 €0.20/sh.

Dividends to be paid in 2018 calendar year €0.40/sh.:

Cash: Jun-18 €0.20/sh.

Cash: Dec-18 €0.20/sh.

Closing remarks

Profitable and sustainable growth Technology as a key enabler going forward Massive transformation during the last 7 yrs At the forefront of the digitalisation process

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