Telefonica S.A. — Investor Presentation 2011

Apr 13, 2011

Anticipating the future to transform the present

Investor Conference
London, 13 - 14 April 2011

César Alierta
Chairman and Chief Executive 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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Index

01 Progress made in the last 18 months
02 Improved outlook for a dynamic and growth industry
03 Telefónica's strategy and long term guidance

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01

Progress made in the last 18 months

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Significant progress since our last Investor Conference

• We are delivering on our commitments
• We continue transforming our company
• We have outperformed the market
• We have reinforced our scale

We have strengthened our growth capabilities

We are better positioned to continue leading this growth industry

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Fully capturing revenue growth potential …

Revenue mix¹ evolving in the right direction

• Access & Voice
• BB connectivity
• Services beyond Connectivity

More customer focus

• CSI Improvement to over 7
• Positive evolution of CSI gap with competitors

Brand consolidation

• The most admired telecom company worldwide by Fortune

• 1 / #2 in brand consideration in most markets

Telefónica

movistar

O₂

Total Accesses² (million)

1. Revenues from other subsidiaries and other companies not shown in the graph

2. Morocco and Manx Telecom accesses excluded in 2008 for comparison reasons

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...while transforming to continue growing profitably

Advancing in a more efficient and growth enabling operating model

Network: Multiaccess
- Selective deployment of high speed FBB access x 4
- Expansion of MBB capacity and coverage x 1.6
- Increase integrated backbone capacity x 2.2

IT enabler
- TTM improvement: -18% vs. FY 2009
- Maintaining IT OpEx+CapEx / revenues ~4%

Processes: On-line @core
- Share of online transactions x5 vs. FY 2008
- Agile contact with suppliers: 90% purchases online

08/10
x 4
x 1.6
x 2.2

(OpEx + CapEx)¹/Accesses
FY 2008
FY 2010

TTM: Time to market
1. OpEx: Operating expenses + Own Worked Capitalized, excluding non-recurrent restructuring expenses. CapEx: excludes Real Estate Efficiency Program of T.Espana and spectrum licenses
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Telefónica: A highly predictable and reliable company

Delivering on our commitments

• Meeting our annual targets for 8 years in a row (from 2003 to 2010)
• Robust financial position: leverage ratio within target range
• € 1.40 DPS in 2010

Source: Morgan Stanley

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We have reinforced our asset base in an industry where scale and spectrum are key...

Through organic growth...
- ~28 m new organic accesses in the last 18 months
- #5 on worldwide accesses ranking (Dec-10)

... selective M&A ...

In-market consolidation
HanseNet

Spectrum auctions

Increase shareholding in CU
Recently announced 9.7%

... and strategic & industrial alliances

China
unicom中国联通

TELECOM
ITALIA

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...and we have strengthened our capabilities to capture the new digital world opportunities

P&S Global Units
Financial services
eHealth
M2M
Cloud

Video & DH

Apps

Security

OTT companies
terra
The leading digital media company in Latin America

Jajah
The most innovative IP communication company
ituenti
The most engaging social network in Spain

OTT: Over the Top
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We are the most diversified integrated company in the world...

% outside country of origin (Dec-10)

	Accesses	Revenues	OIBDA
vodafone	95%	89%	92%
Telefonica	83%	68%	64%
américa
móvil	68%	59%	46%
france telecom	66%	49%	39%
T Deutsche^{1}
Telekom	60%	60%	51%
TELECOM
ITALIA	45%	27%	18%

Source: Companies Press Releases

1 DT excluding US assets: 52% Accesses, 46% Revenues and 37% OIBDA

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...with a unique global profile

Latin American Footprint

• Population: 526 m people
• ICT market value: US$ 227 bn
• TEF accesses: 184 m
• TEF Revenue share¹: 29%

Spanish Footprint

• Population: 46 m people
• ICT market value: US$ 64 bn
• TEF accesses: 48 m
• TEF Revenue share²: 53%

European Footprint

• Population: 164 m people
• ICT market value: € 307 bn
• TEF accesses: 56 m
• TEF MSR share: 25%

288 m accesses #1 & #2 in most of our markets

Telefónica

TELECOM

China unicom中国联通

>730 million combined customers

Data as of December 2010

MSR: Mobile Service Revenue

Sources: IMF (2011), IDC (2011), Telefónica (2011), and Pyramid Research (2011)

1. Constant FX 2009. Footprint share: only mobile in Mexico, Venezuela, Ecuador, Uruguay and Central

America. Excluding TV in Argentina

1. Retail communication revenue market share

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We are leading DJSI in our industry for the second year in a row

DJSI: “Corporate Sustainability is a business approach that fosters value creation in the long term for shareholders taking advantage of the opportunities and the effective risk management, related to social, economic and environmental development”

Dow Jones Sustainability Indexes

• Telefónica
• DJSI sector average
• Best company within DJSI sector

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We are committed with the societies where we operate

Fundación Telefónica's social activities

• € 400 million committed to finance short and medium term activities
• Mainly to fund “Proniño” program

Proniño

Contributing to the progressive eradication of child labour through ongoing and high quality education

FY 2010 FY 2013E

Children ~ 211,000 357,000

FY 2009 US Cash Donation Ranking¹ (US$ m)

1 Source: The Chronicle of the Philanthropy and Fundación Telefónica

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02

Improved outlook for a dynamic and growth industry

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Steady global growth ahead

Real GDP Growth

Source: IMF (Jan2011)

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ICT Global growth

| | ICT Market
CAGR 10E-13E |
| --- | --- |
| North America | 3.6% |
| Europe | 2.6% |
| Asia-Pacific | 6.6% |
| Latin America | 7.7% |
| MEA | 7.2% |
| Worldwide | 4.6% |

Source: IDC (2011)

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People have embraced a fascinating journey towards a total digital life

Even more – the world will be truly connected

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Industry growth will be fostered by the digitalisation of the real economy that is already happening

Communication expenditure/Total Consumer expenditure

Source:. Euromonitor International. Bain Analysis (2011)

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Industry trends are already anticipating this growth

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Customers will continue growing

Worldwide data FY 2010

Total Accesses
6.6 bn
6%

Mobile Accesses
5.0 bn
8%

FBB Accesses
0.5 bn
9%

MBB Accesses
0.7 bn
46%

Internet Users
2.0 bn
13%

Social Networking Users
767 m
14%

CAGR 10-13E

Source: IDC (2011), Yankee Group (2011) Pyramid (2011) and The Radicati Group (2010)

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Device explosive demand driven by Smartphones...

Personal Devices evolution

Annual Global Sales - Million Units

• Rapid growth in Smartphones & Tablets
• Smartphones are increasing customer average lifetime value

Source: Morgan Stanley (2010) and Strategy Analytics (2010)

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...while M2M devices will grow exponentially

M2M Devices explosion

• Automotive
• Fleet management
• Smart cities
• Smart meters
• Consumer electronics
• eHealth, eFinance, security, ...

Automotive

Consumer Electronics

Smart meters

Smart cities

Almost every device will be connected by 2020

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New services and applications will support new business opportunities

Services beyond Connectivity – Worldwide Revenues

US$ bn

Source: IDC (2011) and Analysis Mason (2010)

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Data traffic is booming and new technological developments will allow this growth

Source: Cisco (2010)

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ICT, one of the industries with the best growth prospects

More Customers

More Devices

More Traffic

More Apps & Services

A great opportunity to be monetised

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Enlarged and growing scope for Telcos

2010 Global Revenue Breakdown
Worldwide – US$ bn

Fixed Voice	Mobile Voice	Fixed Data	Mobile Data	Telecom Industry	Serv. beyond Connectivity	Total Market
-4.8%	2.4%	5.1%	10.5%	2.6%	5.0%	3.3%
Telefónica footprint growth				3.1%	5.0%

Source: IDC (Jan2011) and Analysys Mason (2010)

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Active cooperation among ICT players key to address industry challenges

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03

Telefónica's strategy and long term guidance

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We have a clear strategy to capture the opportunities of the new Digital World

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The customer continues to be the centre of our strategy

Telefónica quality main initiatives

Value proposition

Offer simplification

Business Intelligence

Emotional engagement

Multichannel company

Brand unification

Customer Satisfaction Index (%)

7.1

FY 2010

FY 2013E

2.3

FY 2010

FY 2013E

Maximizing customer value

Yield Management

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We are increasingly capturing growth opportunities

1 Profitable mobile data growth monetisation
2 Continue to enhance Fixed Broadband portfolio
3 Development of applications and new services
4 Capturing remaining mobile and fixed voice opportunities

Telefónica's Revenues

1. Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela in both years and changes in the perimeter of consolidation Note: 2010 adjusted figures for guidance include full consolidation of Vivo, Hansenet and Tuenti in the whole year (12 months) and excludes Manx Telecom's results in January-June 2010.

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Our main strategic pillars to lead growth …

1. Profitable mobile data growth monetisation
2. Tiered pricing
3. ARPU management
4. Customer innovation
5. Yield management

MBB Revenues
CAGR 10-13E¹: +30/35%

1. Continue to enhance Fixed Broadband portfolio
2. Full FBB proposals with increasingly higher bandwidth
3. Full IP services from voice to video
4. Full bundles

FBB Revenues
CAGR 10-13E¹: +4/7%

1. Development of applications and new services
2. Broaden our portfolio of apps and new services
3. Leverage P&S global units and OTT assets

Serv. beyond Connectivity Revenues
CAGR 10-13E¹: >20%

1. Capturing remaining mobile and fixed voice opportunities
2. Increase penetration and usage in mobile
3. Defend ARPU through additional services in fixed
4. Reinforce position in SME and MNC

Access & Voice Revenues
CAGR 10-13E¹: -3/-1%

1. Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela in both years and changes in the perimeter of consolidation
   MBB Revenues: Include revenues from smartphones, smart devices and connectivity MBB, mobile mail, MBB equipment (PCMCIAs, Dongles), roaming, and WAP browsing. SMS and M2M excluded
   FBB Revenues: Include Retail FBB connectivity, VAS, wholesale FBB, fixed data services and equipment revenues
   Services beyond Connectivity Revenues: Include content, digital services, ICT solutions and vertical units revenues
   Voice and Access Revenues: Include fixed/mobile access & voice (SMS included), narrowband and mobile & fixed equipment revenues

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… and further evolve our revenue mix

Telefónica's Revenue Mix

1. Figures for guidance assume constant FX (average FY 2010), excludes hyperinflationary accounting in Venezuela in both years and changes in the perimeter of consolidation
   Access & Voice: 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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Our transformation strategy to enable growth and maximize efficiency

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1. Best in class networks
2. Leveraging fixed and mobile technologies to meet customer demands

3. Managing efficiently coverage and traffic growth

4. IT as a key transformation accelerator

5. Highly resilient 6 Global Data Centres

6. Global Applications when applicable focused on business requirements

7. Online company

8. Increase online processes to improve engagement with our customers, employees and vendors
9. Process and system simplification and end-to-end integration

Continuous focus on efficiency improvement

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We continue maximizing the benefits of our scale and diversity...

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… and further leveraging on our strategic and industrial alliances

Execution of Industrial Partnership:
- Technological alignment
- Combined scale and volumes
- New customer proposition

Delivered Synergies for FY 2008-10:
€1.3 bn

Synergy Program for FY 2011E-13E:
~ €500 m/year

China
unicom中国联通

Strategic cooperation:
- Services to multinationals
- Procurement
- Technology and new services

Growth value:
- Over 600 million new accesses in China since Telefónica's establishment
- CU: The fastest revenue growth operator in China (+11.3% y-o-y FY 2010)

Strong commitment to the Alliance:
- Cross ownership
- Cross board representation

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Our strategic priorities by regions

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Telefónica Latinoamérica

• Capturing growth through a full offer
• Driving voice to the limit of its potential
• Boosting broadband
• Building new opportunities
• Leveraging on a unique platform and reinforcing our global scale and regional skills
• Maximizing the value of a diversified portfolio and of our clear leadership in Brazil

• Defend our OIBDA and our value leadership
• A differential Customer Experience and value oriented portfolio
• A leading approach to growth opportunities in connectivity and Services beyond Connectivity
• Increase flexibility reshaping our cost structure
• Improve use of capital efficiency through a growth oriented CapEx and asset optimization policies

• Outperform the market by focusing on
• Revenue share growth
• Data penetration
• Return per customer
• Accelerate growth in Germany with mobile data as the catalyst
• Continue to outperform in the UK and shape the market with business model extensions
• Total aggregated cash flow to increase from Czech, Slovak and Irish businesses

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We have the best committed and motivated team in the industry

A committed management team
- Highly committed management with vast experience in our business
- Telefónica Executive Committee and Board of Directors exposure to Telefónica share (> 7.8 m shares)

Committed and engaged employees
- PSP linked to stock performance
- Global Employee Share Plan in 2010

Creating a great place to work
- Employee commitment expected to increase
- High correlation between employee commitment and customer satisfaction
- 26 companies in GPTW

Incentives linked to our operating and financial KPIs

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Long term guidance

CAGR 10/13E
Revenues
+1/4%

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

Cumulative 2011E-2013E
CapEx
< €27 bn

Note: 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 2010. 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 Brasilcel owned by Portugal Telecom, non-recurrent restructuring expenses registered in the second half of 2010, and the capital gain derived from the disposal of Marx Telecom

2013 guidance assumes constant exchange rates as of 2010 (average FX in 2010), excludes hyperinflationary accounting in Venezuela and changes in the perimeter of consolidation. At the OIBDA level guidance for 2013 excludes write-offs (impairments of subsidiaries), capital gains/losses from companies disposals and significant exceptionals 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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Financial policy centred in Cash-flow allocation

• Shareholder remuneration
• € 1.60 DPS for FY 2011E (14.3% y-o-y)
• € 1.75 DPS minimum target for FY 2012E

• € 1.75 minimum annual shareholder remuneration beyond 2012

• Solvency Protection

• Net debt + cash commitments within the range 2.0 to 2.5x OIBDA

• Predictable M&A strategy

• Spectrum auctions in current markets to foster growth
• Product & Service innovation to further strengthen our growth capabilities

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In summary

We are better positioned to lead our growing industry: the right scale, capabilities and strategy

We are focused on value growth and on capturing new services opportunities

We continue transforming our company to enable growth and maximize efficiency

We maintain a solid financial position while investing in our business and committing best in class shareholders' remuneration

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