Telefonica S.A. — Earnings Release 2018

Dec 31, 2018

Disclaimer

This document and 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, in its business development strategy or any other unexpected circumstance.

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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 related to APM used in this presentation are included in our consolidated financial statements and consolidated management report for the year 2018 submitted to the Spanish National Securities Market Commission (CNMV), in Note 2, page 17 of the .pdf filed. Recipients of this document are invited to read it.

Neither this document nor 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 any security, or a recommendation or advice regarding any security.

2018 Highlights 2019 Outlook

Mr. José Mª Álvarez-Pallete Chairman & CEO

2018 Highlights

Gaining customers' relevance	Transforming our revenue mix	Investing to reinforce our platforms
Top digital customer experience, best technology at their service Demand for FFTx/Cable, LTE, Pay TV unabated Increasing customer lifetime = providing business sustainability	Radical transformation in demand from voice to data Increasing weight of high growing revenues (BB and SoC) Created several unicorns	Best technological platforms at the service of our customers' needs At the forefront of technology Pioneers in digitalisation, simplification, virtualisation & AI
Growth (sustainable & profitable)	Strengthening financial position	Dividends (sustainable & attractive)
Accelerating our growth path Robust and sustainable FCF Efficient use of investment resources for sustainable growth	rd 3 straight year of net debt decline Organic deleverage driven by FCF Reshaping our asset's portfolio via ROCE-driven inorganic actions	Returned value to shareholders Reinforced balance sheet Investment grade credit rating

2018 proof points backing up our strategy

y-o-y organic variations

DESPITE TOUGH REGULATION

Last 4 years: organic growth; growing cash; reducing debt

€m

FCF ex-spectrum

Financials in a nutshell

		FY 18			Q4 18
	Reported	Reported	Organic	Reported	Reported	Organic
€ in millions	IFRS 15&9	y-o-y	y-o-y	IFRS 15&9	y-o-y	y-o-y
Revenues	48,693	(6.4%)	2.4%	12,917	(1.9%)	3.0%	Profitable Growth
Service revenues	43,585	(8.9%)	1.0%	11,275	(5.1%)	1.3%
OIBDA Underlying	15,813	(5.0%)		4,008	(5.2%)
OIBDA	15,571	(3.8%)	3.5%	3,537	(9.6%)	2.4%
OIBDA margin	32.0%	0.9 p.p.	0.3 p.p.	27.4%	(2.3 p.p.)	(0.2 p.p).
OpCF (ex-spectrum)	8,320	3.6%	8.0%	1,354	11.6%	31.1%	Double-digit OpCF growth
Net Income	3,331	6.4%		610	(11.9%)
EPS (€)	0.57	2.2%		0.11	(11.9%)
FCF	4,904	(0.9%)		1,947	13.1%		FCF boost
FCF (ex-spectrum)	5,578	5.3%		1,987	14.1%
Net Financial Debt	41,785	(5.5%)					Further ND decline

Reported headlines reflect

• FX swings & regulation
• Hyperinflation in Argentina in Q4 & FY 18: Revs. (+€305m; -€313m), OIBDA (+€80m; -€148m) & N. Income (-€46m; -€305m)
• Other special factors in Q4 & FY 18: (OIBDA: Q4: -€552m; FY: -€93m; N. Income Q4: -€606m; FY: -€811m)

Delivering on our commitments

Operating 2018 guidance (organic)	Upgraded Guidance 2018	FY 18
Revenues	Growth of around 2% (despite regulation dragging: ~-0.9 p.p.)	+2.4%
OIBDA Margin	Continues expanding around 0.5 p.p. (despite regulation dragging ~-1.6 p.p. on OIBDA growth)	+0.3 p.p.
CAPEX ex-spectrum/Sales	Around 15%	15.1 %
Additional Attractive, stable	Solid balance sheet deleveraging Improved ROCE & sustainable dividend
	Dividends to be paid in 2018 calendar yr. €0.40/sh.		2018 DIVIDEND	€0.4/SH. CASH
	Cash: 15/Jun/18 €0.20/sh.	Interim Dec-18		€0.20/sh.
	Cash: 20/Dec/18 €0.20/sh.	Final Jun-19		€0.20/sh.

Our platforms make us relevant to our customers

Open APIs <<<<<<<<<<<<<<

FY & Q4 18 Results

Mr. Ángel Vilá COO

Ongoing strong momentum

Sequential improvement in Revenues & OpCF

• +30 bps revs. acceleration
• Services revs. (+10 bps.); mainly Brazil + Spain
• Handsets sales (+20bps)
• Both Latam and Europe revs. ramping-up
• 60 bps Europe
• 40 bps Latam
• Q4 revs. €12.9bn (€11.7bn Q3)
• Outstanding Q4 OpCF (+27.1 p.p. q-o-q)
• Sustained OIBDA (Q4:+2.4%)

Revenues

y-o-y organic

OpCF (ex-spectrum)

B2C | Enriched portfolio, video and data boost growth

Growth across regions in 2018

• New offers developed in convergent markets
• "M4M" new Fusión portfolio (SP Oct-18)
• Pay TV launch (ARG Oct-18)
• First convergent offer (PER Jan-19)
• Netflix available (CHI, COL, ECU, UK, SP)
• Prepaid growth with integrated data
• Integrated recurrent plans in all Latam (ex-MEX)
• New features foster upsell and engagement (BRA)
• Mobile post-paid, flexible & personalised
• "M4M" strategy (data & content) (COL, BRA, SP)
• "Movistar Play" (OTT) in Latam; increasing loyalty
• Family plans (ARG, UK, BRA, CHI, GER)
• Flexible tariffs (UK, BRA)
• Device integrated offers, innovative models
• +18.8% handset revenue vs 2017 (€5.1Bn)

B2B | Differentiated proposal, relevant and distinctive growth engine

• Integral Digital Solutions portfolio, ready to tailor
• "Digital Core" services: Comms + Cloud + Security
• Building blocks: In-house digital services (IoT…) + leading partners (AWS, MSFT, Cisco...)
• Leveraged on Group's unique global capabilities

Lego-like value proposal Business Revenues ²⁰¹⁸

Capturing a large and growing opportunity

• FY B2B Digital Services revs. (19% of FY B2B revs.): +31.5% y-o-y
• Cloud Revenues: +21% y-o-y
  • Leading infrastructure and partners
• IoT revenues: +31% y-o-y
  • Leader in Gartner's Magic Quadrant
• Security revenues: +66% y-o-y
  • Leading Security Operation Centres and brands

Split by Region 2018

y-o-y organic

Digital Transformation | Customer at the centre

Transforming our digital relationship with our customers delivering operational efficiency

Spain | Competitive differentiation in a rational market

ARPU growth ramps up on value strategy

• Competitive offering underpins sound trading
• New "Fusión"(Oct), "O2"(Oct), Netflix (Dec)
• Positive contract portability (Q4 & FY)
• Churn flat q-o-q (convergent, mobile contract)
• Further room for "M4M"
• Convergent ARPU up on better mix
• 30% high-end base: +3 p.p. y-o-y
• Higher ARPU growth q-o-q despite "O2" launch

FY net adds

Fiber/Wholesale Fiber /FBB

673K 517K

Pay TV Fusion TV

80% Convergent (+5 p.p. y-o-y)

Growth levers

• Differential TV increases engagement
• Increased football viewers (+90% Champions League audience vs last season)
• 34% Pay TV penetration still below EU avg. (> 40 p.p. opportunity)
• Fibre progress in coverage and connections
• 21.3m FTTH premises passed (+2.1m y-o-y)
• 26% FTTH network uptake (+3 p.p. y-o-y)

Spain | Improved delivery: revenue acceleration, stronger cash

th straight quarter of SR growth 6 th straight quarter of SR growth

6

• Q4 service revenues growth improved (+0.6 p.p. q-o-q)
• "Consumer" (+0.6 p.p.) on convergence (+7.1% y-o-y)
• "Business" (+3.5 p.p.) on record IT sales & flat comms
• "Wholesale & other" (-3.8 p.p.) on tough base
• FY service revenues: +0.3% y-o-y (+1.7% ex-MTR/MásMóvil)
• Tailwinds ahead: Tariffs update, promos expiry, IT, TV wholesale and easing regulation/MVNO impact

Growing OpCF despite OpEx peak

• Q4 OpEx: +3.6% y-o-y (+1.9 p.p. q-o-q); content cost peak
• 297m provision (2016-18 plan; €40m extra savings run-rate)
• Q4 OIBDA y-o-y: -3.2 p.p. vs Q3
• ~-2 p.p. content one-offs (calendar related)
• -1.5 p.p. new football cycle
• Benchmark organic OIBDA margin 40% in FY 18
• CapEx decline for a second year in a row
• Superior operating leverage: 27% OpCF margin

FY OIBDA, CapEx & OpCF (organic)

Germany | Network integration largely finalised

Positive operational momentum

• 47.1m accesses in EU largest market
• Monetising data demand: Innovative tariff portfolio O² Free with "Boost & Connect"
• LTE cust. 18.4m (+17% y-o-y); penetration +7 p.p. y-o-y
• Mobile churn improved -0.8 p.p. in Q4 (-0.2 p.p. in FY)
• Strong partners contribution: +62% of Q4 gross additions (60% in 2018)
• Step-up in network tests in H2 18: Connect magazine (+127 points y-o-y); Computer Bild ("strong LTE expansion"); Chip ("very good" in Hamburg & Munich)

Key financial highlights

• MSR -0.8% y-o-y (in Q4 and FY)
• MSR ex-reg -0.4% y-o-y in Q4 (flat in FY)
• Strong handset sales: +24.2% y-o-y in Q4 (+12.3% in FY)
• Q4 OIBDA ex-reg. -2.8% y-o-y (+1.8% in FY)
• FY 18 OpCF €868m (-3.7% y-o-y)

UK | Consistently outperforming the market

Customer-centric

• Market-leading UK mobile operator with 32.6m accesses (25.0m own brand + 7.6m MVNO partners)
• Strong contract net adds on the back of differentiated propositions (+284k in Q4; +501k in FY)
• Leading loyalty with lowest contract churn remaining at 1%
• 63% LTE penetration +3 p.p. y-o-y

Strong growth across the board

• Strong top-line growth +5.3% y-o-y in Q4 (+5.4% in FY)
• 10th consecutive quarter of MSR growth (+2.9% y-o-y in Q4; +2.8% in FY)
• Robust Q4 OIBDA growth +23.8% y-o-y
• 27.5% OIBDA margin in FY (+1.5 p.p.)
• 2018 CapEx +7.1% y-o-y
• OpCF €988m ex-spectrum in FY

Brazil | Strong operating momentum

• Strengthening leadership
• Contract Net adds: 3.6m (+7% vs 2017)
  • Churn 2018: stable y-o-y
• Better performance in Q4 in prepaid
• Room to continue migration to contract
• 33m prepaid accesses (25% market share)
• Irreplicable assets
• Best 3G+4G coverage (95% coverage; 88% 4G coverage)
• 1,000 4.5G cities (+819k cities in 2018)
• Focus on Fiber/IPTV
• Outstanding results in cities launched since 2017: 42% up take
• ARPU 2018 y-o-y; FBB +11.0%, Pay TV +4.2%

FTTH (Dec-18)

(premises passed in m) FTTH connected

Brazil | Best quarterly OIBDA margin ever

Revenue trend reversed

• FY 18 Total Revenues: +0.3% y-o-y (+1.5 p.p. q-o-q in Q4)
• MSR +1.1% (+1.0 p.p. q-o-q in Q4)
  • Better macro & prepaid
  • Solid contract performance: prepaid migration & M4M
• Fixed: -4.5% y-o-y (+1.9 p.p. q-o-q in Q4)
  • Fiber related products accelerating: Fiber revs.:+26.6%; IPTV +59.0%
• B2B improving (+4.8 p.p. q-o-q)

12 consecutive quarters of OpEx decline

• FY 18 OpEx -2.0% y-o-y (Q4: -1.9%) on digitalisation & simplification
• FY 18 CapEx (18.9% CapEx/Revenues, +0.4 p.p. y-o-y)
  • Acceleration in 4G and fiber deployment
• FY 18 OIBDA +5.6% y-o-y (+5.4% in Q4)
• FY 18 OpCF €2,401m (+9.1% y-o-y)

OpEx Inflation

South Hispam | Sustainable growth in a difficult environment

Growth in value; still low penetration

• 5th consecutive quarter of positive contract net adds, +860k in 2018 (-565k in 2017)
• Focus on fiber deployment
• 2.1m prem. Passed in 2018 (8.3m Dec-18); 30% FTTx take-up
• FY 18 OpCF ex-spectrum €624m
• Q4 ARGENTINA (Revs. €884m; OIBDA €252m)
• Consistent Revenue & OIBDA (+28.2% & 29.5% y-o-y)
• 469k FTTx connections (x2 y-o-y); 30k IPTV accesses (launch in Oct-18)
• Q4 CHILE (Revs. €524m; OIBDA €150m)
• Accelerating contract (+13%) & FTTx accesses (+45%). Mobile ARPU +0.3% y-o-y after 6 Qs decreasing
• Efficiencies boosting OIBDA: +11.2% y-o-y; margin +3.8 p.p.
• Q4 PERU (Revs. €528m; OIBDA €60m)
• Accelerating contract (+5%) & FTTx/cable accesses (+42%)
• Positive revenue growth ex-regulation (+3.1%). OIBDA -37.1% affected by intense competition

North Hispam | Regulation and competition dragging growth

Outstanding FY OpCF (+18%) in a difficult environment

• Value growth offseting Mexico headwinds
• Contract accesses y-o-y growth in COL, MEX & CAM
• 304k FTTx connections (x2.4 y-o-y); 27% FTTx take up
• FY 18 OpCF ex-spectrum €260m
• FY 18 OIBDA margin organic: 27.4% (-2.3 p.p.)
• Q4 COLOMBIA (Revs. €363m; OIBDA €148m)
• Sound growth in contract (+3%), prepaid (+9%) and Pay TV (+3%)
• Commercial success, efficiencies & CapEx rationalisation led OpCF x2 (€364m in FY)
• Q4 MEXICO (Revs. €308m; OIBDA €13m)
• Commercial traction in both prepaid (+5%) & contract (+8%)
• Revenue & OIBDA (-6.3% & -78.9% y-o-y) highly affected by regulation, competition & spectrum fees
• Q4 CAM (Revs. €228m; OIBDA €94m)
• Strong acceleration in contract access (+15% y-o-y)
• OpCF FY €172m, +25.2%

Telxius | Crystallising value from premium infrastructure

Growing asset portfolio

• Increased traction in Towers
• 291 new tenants in Q4; largest quarterly gain in 2018
• Higher tenancy ratio: 1.36 (+0.01x q-o-q; +0.03x y-o-y)
• Commercial momentum in Cable
• New cables BRUSA (US-Brazil) and MAREA (US-Spain) fully on service
• Ongoing capacity sales

Increasing revenue and cash flow

• Healthy service revenues growth in Q4
• -Towers: +10% y-o-y
• -Cable: +2% y-o-y
• Capital intensity down (-6.3% y-o-y in FY); new cables are already completed
• Robust FY 18 OpCF (+33.9% y-o-y; €189m)

Q4 FY Q4 FY Revenues 2018 y-o-y organic +11.6% €792m +5.5% €195m y-o-y organic +4.9% +4.6%

Ex-BRUSA effect margin Ex-BRUSA effect

FY & Q4 18 Results

Ms. Laura Abasolo CFCO

Q4 OIBDA & Net income special factors

• Restructuring costs: enhancing profitability and FCF going forward
• OIBDA: (SPA -€297m; GER -€38m, BRA -€19m; PER -€18m, CHI -€7m; COL -€6m; MEX -€5m, ECU -€3m; Others +€29m)
• Capital gains on towers
• OIBDA: Towers: CAM +€16m; COL +€3m
• Capital loss on sale of Catsa in Spain (-€3m OIBDA)
• Mexican impairment (€-242m OIBDA)
• T. Mexico DTA de-recognition (-€28m Net Income)
• Hyperinflation in ARG (+€80m OIBDA, -€46m Net Income)

FY Net income surpassed €3.3bn; EPS €0.57

Underlying EPS €0.81 +9.0%

Managing FX headwinds

Strong FCF; mid-single digit growth in FY ex-spectrum

FCF reported

Net financial debt (7th Q in a row declining)

FCF ex-spectrum growing on improved business performance

FCF/sh. 2018

Steady net debt reduction out of strong FCF

Strong liquidity thanks to attractive long-term financing

Sources of long-term financing

FY 2018 & 2019 YTD | €Bn

Liquidity position

Net Debt maturities

Dec-18 | €Bn; not considering hybrid NC dates

Interest payment costs

Dec-18

Conclusion

Mr. José Mª Álvarez-Pallete Chairman & CEO

2019 guidance

Operating 2019 guidance (organic)	Guidance 2019E
Revenues	Around +2%	Sustainable revenue & OIBDA growth
OIBDA	Around +2%	despite regulation
CapEx / Sales ex-spectrum	Around 15%	CapEx rationality
Attractive, stable	& sustainable dividend
		2019 DIVIDEND	€0.4/SH. CASH
Dividends to be paid in 2019	calendar yr. €0.40/sh.
Cash: Jun/19 €0.20/sh.		Interim Dec-19	€0.20/sh.
Cash: Dec/19	€0.20/sh.	Final Jun-20	€0.20/sh.

Summary

2018

• Focus and invest in transformation
• Leading the pack in digitalisation, virtualisation & AI
• Upgrade customer base; clear drive towards FTTx and 4G

• Sustainable organic growth; margin expansion; further deleverage on robust FCF

2019

• Growth & returns; leveraging our differential assets and our global capabilities
• Network transformation enables to better customer experience, regain differentiation

• Monetisation of our leading value proposition

• Capture benefits of digitalisation efforts; flexibility to reallocate resources across footprint

• Increase ROCE

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

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