Telefonica S.A. — Investor Presentation 2011

Apr 13, 2011

Leading growth and profitability

Investor Conference
London, 13 - 14 April 2011

Julio Linares
Chief Operating Officer, Telefónica

Telefónica

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Disclaimer

This presentation contains statements that constitute forward-looking statements about the Company, within the general meaning of the term and within the meaning of applicable securities laws, including financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations. These statements appear in a number of places in this document and include statements regarding our intent, belief or current expectations regarding our customer base, estimates regarding future growth in our different business lines and our global business, market share, financial results and other aspects of our 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 the 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 actual results may differ materially from those in the forward-looking statements as a result of various factors. These risks and uncertainties include those discussed or identified in the documents filed by Telefónica with the relevant Securities Markets Regulators, and in particular, with the Spanish Securities Market Regulator.

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 presentations, including, without limitation, changes in Telefónica's business or acquisition strategy or to reflect the occurrence of unanticipated events.

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.

Finally, be advised that 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. Furthermore, Telefónica may present financial information herein that is not prepared in accordance with IFRS. This non-GAAP financial information should be considered in addition to, but not as a substitute for, financial information prepared in accordance with IFRS. Telefónica has included such non-GAAP financial information because Telefónica's management uses such financial information as part of its internal reporting and planning process and to evaluate Telefónica's performance. Accordingly, Telefónica believes that investors may find such information useful. However, such non-GAAP financial information is not prepared in accordance with IFRS or any other generally accepted accounting principles, and such non-GAAP financial information, as defined and calculated by us, may be different from similarly-titled financial information used by other companies. Investors are cautioned not to place undue reliance on such non-GAAP financial information.

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Content

01 Seizing the digital opportunity
02 Accelerating transformation
03 Recap

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01

Seizing the digital opportunity

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Capturing the digital growth leveraging on broadband and new services

	Access & voice	Broadband	Services Beyond Connectivity
Market view	Still market opportunities in our footprint	Mobile and fixed broadband complementary markets	New market with high growth potential
Telefónica strategy	Capture remaining mobile growth and defend fixed voice	Lead mobile data growth and further develop fixed broadband	Reinforced open ecosystem underpinned by our digital assets

Investor Conference Telefónica

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Mobile broadband is the biggest market growth opportunity today

Sales¹
Worldwide. Millions cumulative units shipped

Time spent²
/day

Non smartphone

Mobile data traffic growth³
Worldwide. Pbps/Month

¹Morgan Stanley 2010
²Merril Lynch. Matrix Wireless Q4; AppsFire. January 2011; Morgan Stanley Blue Paper, February 2011
³Cisco VNI 2010-2014. June 2010
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Profitable mobile data monetisation is our key strategic priority

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Extend smart device adoption with specialized customer care

Lead the market away from unlimited data tariffs

Customer innovation

Profitable Monetisation

Yield management

ARPU management

Maximise customer lifetime value

Increase usage of data, new services and applications

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Innovation focus on customer experience

	Dongle	Basic Smartphone	Mid-Advanced Smartphone	Tablet
Affordable range of devices
TEF minimum purchase cost (Q1 11)	<20€	100€	150€	270€
Balanced device ecosystem
TEF purchase share (1H 11)	26%	iPhone
26%	symbian
Q2
23%	RPM
20%
Network services	RCS		NFC	CDN
Specialized customer care in place	Specialized shops	Gurus in the shops	YouTube	Movistar channels

RCS: Rich Communications Suite

NFC: Near Field Communications

CDN: Content Delivery Networks

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Tiered pricing is based on segmentation and customer needs

Offers based on data caps	Examples of execution
Type of service and use	Service specific tariffs for email, chat, social networks, browse...
Limited volume with additional bolt-ons	Limited volume tariffs for 100 MB, 500 MB, 1GB
Maximum speed	Speed offers for 2, 7, 14 Mbps
Time of the day	MB accounted half if used in off peak hours
Type of device	Seamless access from screen of choice

Tiered pricing in place in each of our markets

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ARPU management is increasingly important

ARPU management

Bundles

• Connectivity
• § MBB, FBB, WiFi
• Services
• § m-payment
• § storage
• § security

Shared services

• M2M – Jasper
• Financial services – Mastercard, VISA
• Security services

Multiscreen / multiplatform

ARPU Uplift¹
TEF. FY 2010
VAR

Contract

x1.5
Smartphone

¹Average contract (feature phone) and smartphone data attached rate customers across footprint
MBB: Mobile Broadband
FBB: Fixed Broadband
VoD: Video on Demand
RCS: Rich Communication Suite
M2M: Machine to Machine

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Yield management to reinforce customer profitability

Smartphone profitability

Mid to long term

ARPU uplift softening driven by mass market

Increased profit through network and service costs decrease and SAC&SRC aligned to customer spend

CLV uplift

TEF. 2010

Illustrative

CLV: Customer Lifetime Value

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Telefónica

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Mobile broadband is the major growth driver for Telefónica revenues

MBB Accesses

TEF. Millions

CAGR

Dec - 10
Dec - 13E

MBB Penetration

TEF.

11%

~30%

MBB Revenues

TEF. % /Total Revenues

MBB Revenues

FY 2010
FY 2013E

MBB Revenues

1Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter

MBB Penetration: MBB accesses with data attached rate/Total mobile customer base

MBB Revenues from smartphones, smart devices and connectivity MBB, mobile mail, MBB equipment (PCMCIAs, Dongles), roaming and WAP browsing.

SMS and M2M excluded

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We maintain our FBB strategy with a higher complementary approach

FBB

• Evolve our fixed offer towards full FBB proposals with increasingly higher bandwidth
• Reinforce our platforms to deliver full IP services from voice to video
• Deliver full bundles (multiscreen, multimedia and integrated full home networking)

ADSL <25 Mbps

• Massive deployment across footprint
• 3P standard quality offer providing TV and VoD plus full interactivity services:
• OTT video
• Online gaming
• Videoconference
• PVR
• Pricing schemes for entry level and medium level users

FBB leverages mobile services

UBB ≥25 Mbps

• Selective and demand driven rollout
• High quality full bundled offer supporting capillarity for cloud services with enriched experience and low latency:
• Unlimited set of services including high quality content (HD, 3D)
• Multiroom and multidevice applications, PVR enhanced functionality
• Telepresence
• Pricing schemes consistent with advanced services and multitasking for high level users

FBB: Fixed Broadband
VoD: Video on Demand
PVR: Personal Video Recorder
OTT: Over The Top
UBB: Ultra Broadband includes FTTx, VDSL and HFC
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FBB will continue to be a significant growth engine

FBB Retail Accesses

TEF. Millions
CAGR

FBB Revenues¹

TEF. €bn
CAGR

FBB Revenues
TEF. % / Total Revenues
13%

¹Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter
FBB Retail Accesses: Include FO (Fiber Optics), DSL, cable modem and satellite
FBB Penetration: Over total fixed lines ex Fixed Wireless
FBB Revenues: Include Retail FBB connectivity, VAS, wholesale FBB, fixed data services and equipment revenues

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Beyond connectivity we are reinforcing our service ecosystem

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Our digital assets strengthen our service ecosystem

7 Companies

jajah	Jajah	Unified communications
tutenti	Tuenti	Social network
terra	Terra	Media content and services
Rumbo	Rumbo	eTravel
Telefónica
ingeniería de Seguridad	TIS	Security
Safetica
telefónica telecomencia	TLS	eLearning
Telefónica
Telefónica telecomera	T Solutions	Enterprise solutions

ONE PLATFORM - ONE SERVICE - ONE ROLLOUT

DH: Digital Home

M2M: Machine to Machine

TIS: Telefónica Ingeniería de Seguridad

TLS: Telefónica Learning Services

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Broadening our portfolio to new growth engines

	Video & DH	IPTV, Videoclub, HD, Social features, Telepresence, CDN
	Apps	BlueVia, Wac X.0, App Folder, eBooks, O2 Media, RCS
	Financial services	Handset insurance, Merchant payments & NFC, Direct to bill, m-pass, Cobranded cards
	eHealth	Movistar eHealth, Health CRM, Tele rehabilitation, Imaging, Mobile baby, Chronic management
	Security	Clean pipes, Anti fraud, Managed security, Mobile security, Data loss prevention, Identity management
	M2M	Managed connectivity, Managed devices, Asset management, Utilities, Connected car, Smart cities
	Cloud	Aplicateca, Terabox/3G, Virtual DC, Virtual Desktop

Country focus rollout:

• Identified leading countries per product
• Progressively expanding to remaining countries
• Globally following up to reinforce execution and delivery

CDN: Content Delivery Network
RCS: Rich Communications Suit
NFC: Near Field Communications
CRM: Customer Relationship Management
DC: Data Center
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Services beyond connectivity will further foster top line growth

Services Beyond Connectivity Revenues¹
TEF. €bn
CAGR

Services Beyond Connectivity Profitability¹
TEF. OIBDA Margin

Profit drivers

• Global approach & scale
• New business leverage on core assets
• Margin improvement from greenfield to run rate

¹Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter
Services Beyond Connectivity Revenues: Include content, digital services, ICT solutions and vertical units revenues

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Telefonica

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We have important remaining revenue opportunities in voice

• Clear marketing focus:
• Consumer: Deepen segmentation and stimulate usage and loyalty through commercial actions, up-selling plans and voice traffic promotions

• Business: Reinforce position in SMEs and MNCs

• Mobile: Solid growth in Latam and MTRs dragging growth in Europe and Spain:

• Capture penetration in growth markets. Increase usage by accelerating prepay to contract migration

• Manage market share in mature markets to offset MTRs cuts

• Fixed: Defend ARPU through additional services:

• Defend competitive positioning through bundles
• Develop new VAS to increase usage

1Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter
Voice and Access Revenues: Include fixed/mobile access & voice (SMS included), narrowband and mobile & fixed equipment revenues
Mobile Accesses: Dongles and PCMCIAs are not included
Fixed Accesses: Fixed Wireless Accesses included

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We are expanding our value oriented customer base

Accesses	Dec-10	CAGR 10-13 E
TEF. Millions
MBB	23.7	+50%
FBB	17.1	+7%
Mobile	212.6	+5%
Fixed	41.4	-1%
Total	287.6	~+6%

1Average prepay, contract (feature phone) and smartphone with data attached rate customers across footprint

2Smartphones with data attached rate / Total Mobile base excluding dongles and M2M accesses

Mobile Accesses: Dongles and PCMCIAs are not included

Bundles: 2P+3P customers

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We are increasingly capturing growth opportunities

^{1}
Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter

Voice and Access: Include fixed/mobile access & voice (SMS included), narrowband and mobile & fixed equipment revenues

BB: MBB and FBB revenues

Services Beyond Connectivity: Include content, digital services, ICT solutions and vertical units revenues

Others: Subsidiaries and other companies

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02

Accelerating transformation

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Our operational model is adapting to customer behaviour changes

Smartphone data traffic¹
Quality rate

Before

Fixed Network

Customer tightened to the network

• Smartphones may either support 3G or dual 3G / WiFi
• Tablets may either support dual 3G / WiFi connectivity (65%²) or just WiFi

From now on

¹Preliminary measures on TEF networks including total mobile data traffic (2010)
²Business Insider. November 2010
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Leverage fixed and wireless technologies to meet customer demands

Fixed access support:

• Higher wireless access bandwidth (LTE/LTE Advanced)
• Closer sites to customers (Small Cells)
• Customer indoor experience (WiFi)

Wireless access support:

• Wireless loops (FW)
• Wireless broadband (FWB)

People

Home

Business

Cloud

Apps

3G & LTE BS FO connected
TEF. % /Total BS
VAR
FY 2010
FY 2013E

IMS implemented
TEF. % of countries
VAR
FY 2010
FY 2013E

Global CDN deployment
TEF. Number of countries
FY 2010
FY 2013E

FW: Fixed Wireless
FWB: Fixed Wireless Broadband
IMS: IP Multimedia Subsystem
CDN: Content Delivery Network
BS: Base Station
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Demand driven coverage expansion

Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter
¹Includes VDSL and FO
²Peak theoretical speed supported by different MBB technologies
³Coverage for countries with LTE spectrum in the period
⁴Includes investment in Fibre Optics accesses as well as customer equipment

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Manage network traffic growth in an efficient way

• Mobile access evolution
• Offload mobile data traffic to WiFi and femtocells
• Better smartphone interworking
• Capacity increase (densification, sectorization, small cells and technology evolution through LTE, MiMo, dual carrier...)
• Software Defined Radio and Active Antennas for flexible configuration
• 5 cm

• Efficient spectrum management (priority on low-frequency bands and spectrum for LTE)

• Fixed Access evolution

• Leverage copper technology evolution (bonding, vectoring)

• Optimal FTTH/N deployment

• IP transport efficiency and QoS optimization

• Network intelligence capabilities (PCRF)
• Online Charging System

• CDN

• New operational models

• Site building efficiency programs
• Network sharing agreements to rollout new sites

PCRF: Policy and Charging Rules Function

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Progressing our IT transformation with focus on execution

Figure for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter
DC: Data Center
HRT: Human Resources
BI: Business Intelligence
CRM: Customer Relationship Management
OSS: Operations Support System
TTM: Time To Market

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DC's and Mainframe

Vision

From fragmented country-based infrastructure...
...to highly resilient global DCs (for both internal IT and commercial services)

FY 2011E

• Unified mainframe management
• DC in Brazil already launched
• DCs in Spain, CR and Mexico along FY 2011E

FY 2013E

• 6 global DCs: 2 in Europe + 4 in LatAm

Global Applications

From specific country applications...
...to global solutions when applicable...
...focused on business requirements and supported with software factories

• SAP: Finance, HR, Logistics, Sourcing, Collections
• Service Platforms: Billing, Online Charging System, New Global Services

• BI; Corporate & MNC CRM

• Consumer CRM

• OSS

IT OpEx+CapEx to revenues

TEF

IT transformation

TEF. % OpEx+CapEx transformation/IT

TTM

TEF

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Accelerate online evolution to a fully digital company

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ENGAGE

for a better relationship with customers, employees and vendors

• Seamless commercial experience across channels (web, store)
• Increase use of social networks:
• For institutional communication, sales and customer care
• To enhance professional communication
• Boost integration with vendors to fully online purchases (qualifying, quotation, bidding, signing, procurement, delivery, billing)

SIMPLIFY

processes, systems and organization

• Redesign end-to-end process to radically shorten “ready for service” cycle (from first contact to use)
• Integrate process and systems across channels (online/contact center/store/ sales team,...)

EXTEND

for new growth services and efficiency opportunities

• Increase commercial agility for Services Beyond Connectivity
• Develop new array digital services (Sonora, Video club, O2 Money)
• Facilitate 3rd party cooperation (BlueVia, Aplicateca)

Online transactions
TEF

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Deepen our global and multilocal organization to fully exploit scale opportunities

Local and regional integration

Spain

• Integrated network, operations, distribution and commercial organization
• Unified customer care and online channel

Europe

• Germany: Merger O2/Hansenet completed
• CR: Fully on track integrated operation

Latam

• Brazil: Vivo and Telesp integration on track
• South: F&M integration in progress
• North: Wireless Fixed and BB

Global units

P&S
MNC
Technology
IT

Global companies

| R&D
New Telefónica I+D |
| --- |
| IT
TGT |
| Procurement
TGS |
| Roaming
TGR |

€ 1.5 bn

Cumulated

OIBDA

11-13E¹

One integrated company to optimise our cost structure and competitive advantage

¹Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter

TGT: Telefónica Global Technologies

TGS: Telefónica Global Services

TGR: Telefónica Global Roaming

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Working to maximize efficiency

Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela and changes in consolidation perimeter

1Includes roaming

2Cost Of Goods Sold and operating expenses

3Includes fixed and mobile customer related equipment

4Other fixed, 2G and other CapEx

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03

Recap

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Leading growth and profitability

Seizing the digital opportunity

• Profitable MBB growth monetisation as the key priority
• New global services (verticals) and digital assets will be our new growth engines
• We keep on capturing FBB and mobile business growth opportunities

Accelerating transformation

• Best in class networks leveraging fixed and mobile and managing efficiently coverage and traffic growth
• IT transformation and full evolution to a digital company as important accelerators
• Reinforced global and integrated organization to leverage our scale and diversity

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Guidance recap

CAGR 10-13E
Revenues
+1%/ +4%

FY 2011E-FY 2013E
OIBDA margin
Upper 30's
limited
erosion from
FY 2010

Cumulative FY 2011E - 2013E
CapEx
<€ 27 bn

FY 2010 adjusted figures for guidance include full consolidation of Vivo, Hansenet and Tuenti in the whole year (12 months) and excludes Marx Telecom's results in January-June FY 2010. FY 2010 adjusted OIBDA excludes the capital gain from the revaluation of Telefónica's pre-existing stake in Vivo at the date of the acquisition of the 50% in Brasícel owned by Portugal Telecom, non-recurrent restructuring expenses registered in the second half of FY 2010, and the capital gain derived from the disposal of Marx Telecom. FY 2013E guidance assumes constant exchange rates as of FY 2010 (average FX in FY 2010), excludes hyperinflationary accounting in Venezuela and changes in the perimeter of consolidation. At the OIBDA level guidance for FY 2013 excludes write-offs (impairments of subsidiaries), capital gains/losses from companies disposals and significant exceptional mainly related with restructuring costs. Results from the operation in Costa Rica are excluded from guidance calculation. Group CapEx excludes Real Estate Efficiency Program of T. España, the Real State commitments associated to the new Telefónica premises in Barcelona and spectrum licenses

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