Telefonica S.A. — Investor Presentation 2011

Jun 30, 2011

January-June 2011

Disclaimer

This document contains statements that constitute forward looking statements about Telefónica Group (going forward, "the Company" or Telefónica) including financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations which refer to the intent, belief or current prospects of the customer base, estimates regarding, among others, future growth in the different business lines and the global business, market share, financial results and other aspects of the 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 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 other important factors that could cause actual developments or results to differ from those expressed in our forward looking statements. These risks and uncertainties include those discussed or identified in fuller disclosure documents filed by Telefónica with the relevant Securities Markets Regulators, and in particular, with the Spanish Market Regulator.

Analysts and investors, and any other person or entity that may need to take decisions, or prepare or release opinions about the securities issued by the Company, are cautioned not to place undue reliance on those forward looking statements, which speak only as of the date of this presentation. 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 presentation, 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, 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.

H1 11 Highlights

Performance consistent with FY ²⁰¹¹ guidance, outlook reiterated

Strong revenue growth (+6.3%) amid challenging conditions & severe regulation

• T. Latam ex-Mexico revenue remains very robust (+20.9%)
• Fast growth in mobile data revenues (+18.5%)

Retaining benchmark profitability, limited year-on-year erosion:

• Sequential OIBDA margin expansion to 37.1% in Q2 despite higher commercial activity
• T. España's y-o-y OIBDA performance in Q2 unchanged from Q1
• ^≈45% of revenues, OIBDA & OpCF came from T. Latam, driven by Brazil
• DPS targets reiterated
• Further progressing in cash generating initiatives, proving strong execution skills
• New Social Agreement in Spain, higher than expected synergies in Brazil, "Partnership Program"

Key financials

Growth in nominal rates is impacted mainly by the full consolidation of Vivo from Q4 10

Solid performance leveraging diversification

Telefónica, S.A Investor Relations Organic growth: assumes constant average exchange rates as of H1 10 and excludes changes in the perimeter of consolidation and hyperinflation accounting in Venezuela. Further details included at the end of the document.

Net income mainly affected by a non-recurrent effect

Jan-Jun 2011 € in millions (y-o-y change)

Building consistent "value over volume" commercial strategy

Telefónica, S.A Investor Relations MBB penetration: MBB accesses (dongles and smartphones)with data attached rate/total mobile customer base. Smartphone penetration: Smartphones with data attached rate/total mobile base excluding dongles and M2M.

TELEFÓNICA

Strong mobile data momentum, fast revenue growth

• Mobile data revenue accounts for 30% of MSR (+4 p.p. vs. H1 10)
• Limited SMS cannibalization risk from new technologies on the back of:
• Right bundling plans (including voice, SMS and mobile data) and/or already high contribution from non-P2P SMS (i.e. Spain)

Increasingly capturing growth opportunities

Contribution to H1 11 revenue growth Contribution to H1 11 organic revenue growth

T. Latam boosts Telefónica growth

Solid BB & Services Beyond Connectivity revenue (+20% y-o-y) reach 26% of total sales in H1 11, offsetting lower access & voice revenue

Healthy profitability sustained

• Sequential OIBDA margin improvement despite increased commercial activity
• Limited y-o-y margin erosion in H1 (≈¹ p.p.) both in reported & organic terms
• Commercial investments in high value customers & MBB offset by strong cost efficiencies:
• Higher commercial costs (+2.9% organic y-o-y) & IT / Network costs (+6.5% organic y-o-y), linked to revenue growth
• Interconnection costs down 2.3% due to MTRs cuts
• Further benefits from integrated management, scale and scope (€ ^{230 m} in H1 OIBDA from global projects)

On track to meet full year outlook

T. ESPAÑA

T. España: Contained OIBDA decline in a challenging environment

Revenue impacted by volatile consumer trends amid weak confidence in a very competitive market

• Focus on "value over volume" led to lower gross additions but better churn
• Contained sequential OIBDA y-o-y erosion

Flexibility to further reduce costs:

• 2.2% y-o-y drop in Q2 (-0.7% in Q1)
• Labour costs rise driven by 2010 CPI
• Commercial costs biased towards retention & MBB

Sequential improvement in margin, limiting y-o-y erosion:

• 44.7% in H1 11 (-2.3 p.p. y-o-y)
• CapEx (+8.7% y-o-y) focused on Total BB to deliver top quality service

Sustained solid momentum in mobile data

Decrease in voice revenues driven by lower outgoing ARPU and MTRs cuts

• Ramp-up in data revenue growth led by higher MBB adoption:
• MBB penetration up 7 p.p. y-o-y to 23%
• Strong H1 non-P2P SMS accounting for 73% of data sales

• Data revenues already 24% of MSR

• Voice ARPU erosion impacted by usage optimisation, strong price competition and MTR declines

• Outgoing voice ARPM decline eased (-6.8% y-o-y in Q2 vs. -7.6% in Q1)
• Solid Data ARPU growth, ramping-up sequentially

T. ESPAÑA

Continued pressure in fixed line, more rational FBB market

Solid growth in IT continues at 14.6% y-o-y in H1 11

• Internet & BB revenue driven by ARPU erosion and lower commercial activity:
• Focus on value and fewer promotions led to lower gross adds
• Improved churn on higher customer satisfaction
• Solid leadership: 51% market share
• More rational market post ULL price increases
• More than 65% of line losses offset by wholesale

New Social Agreement will lead to higher flexibility and efficiency gains

Conditions

• Agreed with unions & approved by labour authorities
• Up to 6,500 employees (27,896 headcount in June 2011)

Workforce Reduction Plan

• 3 years plan (2011-2013)
• Minimum age: 53 years
• 68% of salary until age of 61; 34% from 61 to 65
• Average cost /employee (€ 415 K1), including unemployment benefits covered by TEF

New Collective Agreement

Covering 2011-2013

Salaries linked to Company's OIBDA targets for the first time, rather than exclusively to CPI

Workforce Reduction Plan impacts

P&L

• One-off cost to be recorded in H2 11:
• Current value of the cost of ERE (€2.7 bn before taxes1) to be booked as personnel expenses
• Efficiency gains from recurrent savings in OpEx (Personnel + G&A) in coming years

Cash-flow generation

• Cash Flow positive since year 1:
• Savings in personnel expenses + G&A expenses > payments to pre-retirees – tax effect

Leverage

Related liabilities (committed payments) to gradually increase TEF leverage as employees join the program

Impacts not included in guidance

€ 1.4 bn of excess cash at end of Plan1

1. NPV.

T.Latam: Strong commercial momentum and robust profitability

• Strong commercial activity in Q2 11
• Solid top line growth:
• Brazilian revenues speeding up consistently
• Southern Region keeps a solid pace
• Weak financials in Mexico but improved commercial momentum
• New regional initiatives dragging y-o-y growth. Focus on delivering results
• Q-o-q OIBDA margin expansion and limited y-o-y erosion (-0.5 p.p. organic) despite higher commercial activity

Telefónica, S.A Investor Relations Organic growth: assumes average constant exchange rates as of H1 10 and excludes changes in the consolidation perimeter and hyperinflation accounting in Venezuela in both years. Further details included atthe end of the document. (*) Pay TV include 150 thousand accesses from TVA consolidation.

T.Latam: Data revenues drive growth across businesses

Brazil: Perfect balance, sequential growth with higher profitability

• Strong commercial momentum, clear leadership
• Higher net adds in Q2 across services
• Sequential improvement in all financial metrics
• Mobile data drives top line growth, with ARPU expansion both q-o-q and y-o-y
• Steady acceleration in FBB revenue growth
• Outstanding profitability; further upside from synergies

Telefónica, S.A Investor Relations

T. LATAM

Brazil: operating synergies target upgraded by over 16%

• Outperforming initial targets from year 1
• Reinvesting CapEx synergies to reinforce our lead in 3G coverage, VAS and quality
• Run rate in line with previous estimates (€ 400 m operating synergies from 2014E)
• Corporate restructuring underway to fully capture synergies potential

New synergies target from 2012 not included in guidance

T. LATAM

Brazil: Faster than anticipated synergies execution path

LEVERS	Initiatives	Innovation projects
Offer	Integrated offer, mainly for Corporates and SMEs, leveraging cross  selling potential Fixed wireless inside & outside Sao Paulo, to offer fixed outside SP  (new market) and complement copper network inside SP Reinforce LD service ("15") for mobile customers 	1.7 m sold packages Torpedo Message
Platforms & efficiency	Processes rationalization to improve operating & tax efficiency (LD  Code "15 "…) Common network & IT planning  Traffic aggregation & common traffic management  Network outside SP, specially backbone transmission  Network core, architecture & topology  IT functions, data centers and architecture  Distribution channel optimization, focusing on new market trends 	2.3 m users 240 k users (30d) Kantoo "Soletrando" n o ati 2 m users > 7 m SMS e c z Ringer Mega Promo SMS ni a pl a g n or y i e d 370 k users (30 d) gl a e PTT n alr e si n O 850 k co branded cards
Customers	Best-practices implementation in sell & attention processes  Launch new products & services, maximising benefits from  innovation both in fixed and mobile Reduce time-to market 	Financial services 20 k users (1st week) Security
	Brand integration  + Outperforming peers in Brazil (operating & financial performance)	Progressing faster than expected

Telefónica, S.A Investor Relations

Mexico: improving operating KPIs, sharp MTRs cuts

• COFETEL approved cuts in MTRs, FTRs and transit rates
• MTRs changes:
• From 1.0 in 2010 to 0.3912 peso cents per min.
• From rounding-up to the first minute to per second billing
• Effective from January 1st, 2011 with the exception of Telmex/Telcel (from mid-May 20111)
• H1 11 Impact: € -33 m in revenue and € -18 m in OIBDA

Changes in termination rates Impacts for Telefónica (€ millions)

	FY 2011E	FY 2012E
Revenue	-120/-130	-190/-210
OIBDA	-40/-50	-45/-55

Medium /Long term benefits

Q2 10 Q2 11

Q3 10 Q4 10 Q1 11

Regulatory framework needs to evolve

Telefónica, S.A Investor Relations

Solid performance in other key operations

North Region

Growth rates in financials are given in local currency. In Venezuela, excludes also hyperinflation accounting in both years.

T.Europe: growing value from mobile data

Telefónica, S.A Investor Relations From January 1st, 2011 T.Europe also includes TIWS and TNA in its consolidation perimeter. Financial results have been restated accordingly from Q1 10. All financial metrics following organic growth criteria: assumes constant exchange rates (average H1 10) and includes 6 months of HanseNet in H1 10. Manx T. financial results and accesses are excluded from the organic growth calculation.

T. UK: driving a profitable MBB ecosystem

Non-P2P SMS data revenues partially offsetting regulation and usage optimisation

• Customer spend broadly stable q-o-q
• MTR cuts dragging 4 p.p. in total Q2 revenue growth
• Changes in commercial relationship model with some distributors impacting y-o-y performance

T. EUROPE

T. Germany: continued strong momentum in the market

Containing financial expenses despite debt increase

• Leverage ratio including commitments at 2.56x: excess debt over 2.50x would be offset by setting the working capital consumption within the target range (2011-2013E between 2% and 5% of OpCF)

Telefónica, S.A Investor Relations

• 1. FY 2010 OIBDA including 100% of Vivo's OIBDA, excluding results on the sale of fixed assets and the provision related to the Telefónica Foundation's social activities.
• 1. LTM OIBDA including 100% of Vivo's OIBDA, excluding results on the sale of fixed assets and the provision related to the Telefónica Foundation's social activities.

Conclusions

• H1 ¹¹ performance consistent with FY ²⁰¹¹ guidance, outlook reiterated
• Very strong revenue growth & benchmark profitability despite challenging conditions & severe regulation
• Diversification and exposure to Latam, our key differential factor
• Fully capturing the mobile data opportunity
• Executing new cash-generating initiatives (New Social Agreement in Spain, aboveexpectations synergies in Brazil, "Partnership Program"…)
• Fully committed to dividend targets

Organic growth: In financial terms, it assumes constant average exchange rates as of January-June 2010, and excludes changes in the perimeter of consolidation and hyperinflation accounting in Venezuela. Therefore, in January-June 2010 the consolidation of Vivo, HanseNet and Tuenti are included whereas the results of Manx Telecom are excluded. In OIBDA terms, in January-June 2011 the positive impact from the partial reduction of our economic exposure to Portugal Telecom is excluded, along with the impact of the capital gain from the sale of Manx Telecom booked in the second quarter of 2010. Results from the Costa Rica operation are excluded from the organic growth calculation. Telefónica's Capex excludes the Real Estate Efficiency Programme at T. España, the real estate commitments associated with Telefónica's new headquarters in Barcelona and investments in spectrum. In terms of accesses, changes in the consolidation perimeter are excluded and in terms of organic net adds customer disconnections made in the second quarter of 2010 are excluded. 2011 Financial results and accesses include from the second quarter of the year and retroactively from January 1st, 2011,the full consolidation of TVA, company that was already part of Telefónica's perimeter since the fourth quarter of 2007.