Telefonica S.A. — Investor Presentation 2011

Apr 14, 2011

Grab the future today

Investor Conference
London, 13 - 14 April 2011

José María Álvarez-Pallete
Chairman and Chief Executive Officer, Telefónica Latinoamérica

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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Sustaining market leadership

Regional revenues share¹
(Constant FX effect)

FY 2009

Market revenue share
FY10

Leader in value & growth
Dec-10

35 % MBB²
Regional access share¹

40% Brazil

30 MM
The largest mobile contract base

Stable
Revenue share

1 - #2

In all markets

Moving faster

Source: Telefónica estimates
¹ Footprint share: only mobile in Mexico, Venezuela, Ecuador, Uruguay and Central America. Excluding TV in Argentina
² Dongles

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Delivering profitable growth

Accesses
Millions

44.5%
FBB+MBB access growth 2010 vs. 2009

Revenue
€ in billions

43.4%
Mobile data rev. growth 2010 vs. 2009

OIBDA
€ in billions

39.9%
OIBDA margin 2010

Source: Reported Data; organic growth rates

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Index

01 Latin America in bold letters
02 Capturing current growth, building new options
03 Our Portfolio: leading Brazil, leveraging diversity

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01

Latin America in bold letters

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Latin America plays a key role in the new international arena

Morgan Stanley Composite Index

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Latin America is growth & stability

The Economist

Latin America in an Uneven Global Recovery: Managing Abundance

Paris, January 24, 2011

Population Millions

552
2008

559
2009

565
2010

GDP % 4.3
2008

5.9
2009

>70% GDP Investment Grade

Source: IMF, Standard & Poors (Brazil, Colombia, Peru, Mexico, Panamá & Chile)

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Latin America in bold letters

| Middle Class | 200 m
population | The population of Germany, France
and Italy as a whole |
| --- | --- | --- |
| Young and Urban | 150 m
<14 years | The population of Russia |
| Addicted to Internet | 400 m
Internet users
in 2015 | Double since 2010 |

Latin America time is NOW

Source: ECLAC & Pyramid

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Latin America has reached a critical level of development

GDP per capita
US$ ppp

Income levels support new and more intense patterns of consumption

GDP per capita
US$ ppp 2010

Income levels
way ahead of
other emerging
economies

Latin America time is NOW

Source: IMF

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Telecom sector: thriving on regional growth

Telecom market expected to grow faster than GDP in Latin America

CAGR
2010 - 2013E

4.3%

GDP

7.7%

ICT Market

Positive context for Telcos

• Stable regulation, MTRs expected to follow predictable glide path
• Low and decreasing exposure to regulated prices (mobile retail prices, FBB, MBB and bundles not regulated)
• Major spectrum auctions already done
• Consolidated competitive market structure

Latin America time is NOW

Source: IMF & IDC

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Plenty of room to grow

^{1}
Incoming and outgoing traffic

Source: Yankee Group, Pyramid, Q4 2010

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Capturing current growth, building new options

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Capturing current growth, building new options

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Capturing current growth, building new options

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An integrated and innovative complete offer

^{}[]

An empiric case that shows the value of an integrated offer

Mobile Data Service Revenues
FY 2010 vs. FY 2009
% local currency
+46.9%

Fixed Internet, Content and Pay TV Revenues
FY 2010 vs. FY 2009
% local currency
+10.0%

One of the few companies in the world with a complete offer supported on a mobile network

Mobile ARPU
FY 2010 vs. FY 2009
% organic¹
+26.3%

Mobile Data Service Revenues
FY 2010 vs. FY 2009
% organic¹
+47.4%

Accelerating growth businesses

Focusing on value

¹ In local currency and excluding hyperinflation accounting in both years

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Driving mobile voice to the limit of its potential

Targeting untapped potential across segments

• New commercial approach to valuable young customers through social networks

Young and Urban

ISC improvements specially in prepaid

Savings in call center

Systematic up selling

Caribú Project

• 2.8 millions of net migrations to contract in FY2010

Potential of Middle Class

30 m The largest contract base

Key targets

Mobile voice market Penetration % population

99%

Dec-10

110-115%

Dec-13E

T. Latinoamérica Customer Mix % contract / Total mobile accesses

20%

Dec-10

~30%

Dec-13E

1 Calls to call center: -28% mar'11 vs. aug'10

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Accelerating on mobile broadband

Lowering entry barriers

100 US$ Smartphone to boost growth

Dongles

• One supplier
• Quality
• Time to market
• Simple portfolio

1.3 millions

Dongles sold since Q3 10

Enhancing our commercial offer

Paquete NAVEGACIÓN

Paquete REDES SOCIALES

Paquete MAIL+CHAT

Paquete CHAT

Paquete MAIL

Paquete CHAT

Paquete

X 3.5

MBB accesses 2010 vs. 2009 in Colombia

Key targets

MBB accesses

T. Latinoamérica millions

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Dec-10

Dec-13E

Mobile data revenues

T. Latinoamérica % Mobile service revenues

>33%

Dec-10

>33%

Dec-13E

X3 non SMS/MMS mobile data revenues (€ m FX 2010)

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Capturing the fixed opportunity

Intensifying bundles

Bundling¹
%Traditional fixed accesses

Dec-06

Dec-10

Minimizing F2M revenues cannibalization

Segmented development of multimedia and connectivity offer

DCB

TV
Basic

medianetworks Latin America

TV
Advanced

Develop a full offer for the 200+33 m middle class

Key targets

FBB penetration
T. Latinoamérica
% BB accesses/ fixed lines

Dec-10

Dec-13E

No FBB access without valuable bundle (2P /3P)

¹ % of fixed accesses with bundled voice plans

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Building new options

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Video OTT

• Increased market potential
• Profitability improvement
• More value for BB access

Financial Services

• Banking the unbanked (70% of population without savings account)
• Innovative value propositions

Cloud Computing

• Leverage of Telefonica's Global Network
• Global T-Cloud

BANCO PICTINICIA

MAPFRE

Services beyond connectivity revenues FY 2010 5% Total T.Latinoamérica Revenues

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Capturing current growth, building new options

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Capturing current growth, building new options

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Leveraging a non replicable platform

Ensuring the best basics

Enhancing with unique assets

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Extracting value from our global model

7 Verticals

Video & DH

Apps

Financial services

eHealth

Security

M2M

Cloud

Leveraging global scale

Telefónica

~ 290 m accesses

Key strategic partnerships

• 730 m combined customers

Sharing best practices

• Quality and customer oriented projects
• Network management
• Fixed transformation initiatives
• Medianetworks and TIWS capabilities
• Device strategy

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TIWS allows us to manage traffic growth and to implement new technologies quicker and cheaper

Competitive advantages

• Economies of scale
• Economies of scope
• Access to new markets
• Technological evolution

Unique Infrastructures

4th largest submarine cable ring

• Key Asset in the region
• Terrestrial domestic networks
• Satellite Infrastructure provides extended coverage
• Global CDN¹ with local capillarity

1 Content Delivery Network

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Our brand attributes strengthen the value of a customer oriented strategy

1# or 2#
Top of mind in every market

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Quality as the main driver for customer satisfaction

What we said in October 9th 2009

• Consistent Delivery
• End to end process focus & COPC¹ methodology
• FCR² focus & billing claims reduction
• Best Customer Experience
• Unique experience
• Strong reduction of unsatisfied
• Customer Culture
• Employee and customer program linked to customer experience

Improving CSI in every market

What we have achieved so far

FCR² %

Oct -09

Dec-10

Billing claims %

Oct -09

Dec-10

Our customer oriented strategy and quality management have been a key factor in our commercial performance in every market

1 COPC: Customer Operations Performance Center

2 FCR: First Call Resolution

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Business intelligence as a key driver to enhance customer focus

图

Key initiatives

• FCR focus & billing claims reduction
• Seamless multichannel experience
• Customer culture

BUSINESS INTELLIGENCE TLATAM

An integrated, customer focus, regional and flexible business intelligent project

Best in class churn

Reference in customer satisfaction in main markets

Source: Global wireless matrix, Q4 2010, Merrill Lynch and Telefónica estimates

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Capturing current growth, building new options

Where?

Increased CapEx commitment to the region

How?

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Committed to the opportunity

We are investing to capture the growth

1 Equal or higher than 8 Mbps

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03

Our portfolio:
leading Brazil, leveraging diversity

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Leveraging diversity

FY 2010¹
Latam revenue

Brazil
- Our key growth pool
- Improving commercial momentum
- Capture synergies

48%

North Region (7 countries)
- Mexico, strong bet on 3G as the key driver to recover momentum
- Venezuela, focus on value through a complete offer

16%

South Region (6 countries)
- Complete and integrated offer
- Lead introduction of new services in our networks being the best provider of video and applications

33%

1 Assumes 100% VIVO
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Mexico, refocusing our commercial approach and recover momentum

Solid track record as an attacker

Challenging situation in 2010

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A large growth potential

The opportunity

Source: Yankee Group, Pyramid, Q4 2010, Economist Intelligence Unit, Universal McCann

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And the platform to build upon it

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Spectrum

MHz

Q310 Spectrum acquisition

1,700-1,900 MHz Band

Starting point to capture the MBB wave of growth

LD Backbone

Thousands Km

Signed dark fiber consortium in June 2010

Customer satisfaction

CSI

Dec-10

Mobile

8.71

8.50

8.79

8.60

8.42

7.89

Telefónica

Main competitor

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Betting on 3G to kickstart the new wave of growth

3G coverage by socioeconomic segment %

%
ABC+
43%
95%
ABCD+
27%
70%
Total population
23%
Dec-10
Dec-11E

Telefónica MBB accesses

In millions

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Brazil, a very large and rapidly growing market

Total Revenues Telecom Market Brazil

R$ in billion

Top 10 telecom markets in the world per 2010 revenue

Total market revenues

CAGR FY06 - FY10

Source: Pyramid

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Brazil, plenty of opportunities

The opportunity

1 Incoming and outgoing traffic

Source: Yankee Group, Pyramid, Q4 2010

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Brazil, much more to come

Mobile Voice Market

FY 2010-2013E

Mobile Penetration %

• 17 p.p.

MOU¹ Min

MBB Market

FY 2010-2013E

Mobile data users %

• 23 p.p.

Smartphone penetration %

• 8 p.p.

FBB & TV Market

FY 2010-2013E

Pay TV Subscribers / Households %

• 5 p.p.

FBB/STB %

• 12 p.p.

¹ Incoming and outgoing traffic

Source: Yankee Group, Pyramid, Q4 2010

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Telefónica in Brazil, clear leadership

A leadership position¹
December 2010

1 Share and position in fixed voice, FBB and TV Sao Paulo

Source: Anatel and Telefónica estimates

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Telesp, a strong fixed incumbent

Best performance vs. peers in Latin America

Thousands of fixed accesses net adds, FY 2010

Source: Company data

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Vivo, the indisputable leader

VIVO 2010

40% Dongles Market Share

35% Contract Market Share

30% Market Share

1 Top of mind (6 p.p. above competition)

1 Customer satisfaction

Leader in population coverage (over 25 m advantage)

Leader in 3G coverage (x3 covered towns closest competitor)

Source: Anatel

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We are increasingly capturing growth opportunities

TV accesses
Millions
0.5
Dec - 2010

~1.4
Dec - 2013E

FBB accesses
Millions
3.3
Dec - 2010

~5.1
Dec - 2013E

MBB accesses
Millions
3.3
Dec - 2010

>20
Dec - 2013E

Mobile data revenues /
Mobile service revenues
%
19%
FY 2010

>30%
FY 2013E

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We are transforming our company

Revenue Mix
TEF Brazil

*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

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We are going to capture a significant value

Minimum Synergy targets

Operating synergies NPV
€ in billions

On track

Projects Launched Q4 10 – Q1 11

Examples

• Interconnection optimization
• Topology and network common design (voice and IP core)
• Unifying Internet access
• IT vendor management
• Up sell & cross sell for MCN’s, corporate and SOHO common customers

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Brazil, a country of opportunities

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Index

01 Latin America in bold letters ☑
02 Capturing current growth, building new options ☑
03 Our Portfolio: leading Brazil, leveraging diversity ☑

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Telefónica Latinoamérica

• Championing growth
• Accelerating investment
• Leading Brazil

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