Telefonica S.A. — Investor Presentation 2012

Jul 26, 2012

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 may refer, among others, 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.

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.

Finally, it is stated that 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.

H1 Highlights

OIBDA growth and margin expansion q-o-q	• Improved OIBDA performance in Q2 across the board • Further OIBDA improvements in H2 12 • Benefits from best-in class diversification, different realities across countries • Risk perception decoupled from business fundamentals • Positive revenue growth on strong top line performance in Latin America
Further initiatives to enhance business model	• Solid commercial momentum, leveraging smartphone adoption and tariffs refreshment • New approach to mobile handset subsidies (no subsidies in acquisition in Spain, gradual reduction in the UK) • Other actions to maximise efficiency (network sharing with Vodafone in the UK, alliance in Mexico with Iusacell) • Positive assessment on new stable regulatory framework for NGNs in Europe
Decisive actions to improve balance sheet and defuse potential risks	• Cancellation of 2012 dividend and share buyback program as one-time exceptional measure. Shareholder remuneration to be resumed in 2013 (€0.75 DPS) • Debt maturities covered till year end 2013 • Full commitment to proactive portfolio management and asset divestment program announced, where substantial progress has been already made
Transitioning from "Telco" to "Digital Telco" model	• Significant growth opportunities for Telcos from the upcoming transformation of wider parts of the economy • We already started this journey with significant progress through T. Digital

Key financials

	Reported			Underlying
€ in millions	H1 12	H1 12 y-o-y	Q2 12 y-o-y	H1 12	H1 12 y-o-y	Q2 12 y-o-y
Revenues	30,980	+0.3%	+0.1%	30,980	+0.3%	+0.1%
OIBDA	10,431	(7.7%)	(6.6%)	10,431	(6.2%)	(5.1%)
OIBDA Margin	33.7%	(2.9 p.p.)	(2.5 p.p.)	33.7%	(2.3 p.p.)	(1.9 p.p.)
OI	5,300	(16.5%)	(15.3%)	5,792	(13.9%)	(12.2%)
Net income	2,075	(34.4%)	(13.7%)	2,818	(24.1%)	(21.9%)
EPS	0.46	(33.3%)	(12.1%)	0.62	(22.9%)	(20.3%)
OpCF (OIBDA-CapEx ex-spectrum)	6,780	(14.1%)	(11.9%)	6,780	(12.0%)	(9.8%)
CapEx(ex-spectrum)/sales	11.8%	+0.7 p.p.	+0.5 p.p.	11.8%	+0.7 p.p.	+0.5 p.p.

Underlying growth: Reported figures excluding major exceptional items and spectrum acquisition.

Organic growth: Constant exchange rates, excludes changes in the perimeter of consolidation and hyperinflation in VZ. It also excludes spectrum acquisition and exceptional items.

Enhanced profitability in Q2 12 across the board

Underlying OIBDA Margin

Risk perception decoupled from business fundamentals

Differences up to and over 100% are due to "Others & Eliminations".

OpCF: OIBDA-CapEx ex-spectrum .

Transitioning from "Telco" to "Digital Telco" model

• Traditional Internet models* not the answer for Telcos …

• Advertising-funded businesses taking their revenues from a 1% GDP pool shared with other big players
• Reaching their own growth limitations (online penetration maturing and mobile advertising business models not yet defined properly)

• … but opportunities for Telcos lay in the upcoming transformation of wider parts of the economy

• Security, Education, Public Administration, Heath, Financial Services: representing 35-40% of GDP
• "Commission/ Revenue share" based business models (typically 3-6% of rev)
• Leading to an addressable market up to 2% of GDP for players willing to play in these areas

New opportunities from digitalisation "Digital Telco" well placed to capture them

• Telcos have key assets …

• Customers and customer data
• Go To Market capabilities (retail, brands, marketing…)
• Network Infrastructure
• Transaction capabilities (IT/Billing)
• R&D resources
• Scale and financial resources
• … complementing those of other players in the value chain (e.g. software and hardware players) …
• … therefore creating many opportunities for partnership models, innovative business propositions where Telco can play a major role

* Providing social communication and information&entertainment services (excluding Internet as a sales channel for traditional businesses).

We already kick started this journey

Telefónica: extracting value from Digitalisation

Investor Relations Telefónica, S.A.

1

Regaining commercial momentum

Mobile net additions exclude 3.6 m disconnections in Spain and Brazil in H1 12. Accesses passed include homes and corporate premises passed.

Positive top line growth, improved margin sequentially

Latam: Solid revenue growth driven by mobile

1. Excludes the disconnection of 1,600k inactive prepay mobile accesses in Brazil in Q2 12.

Latam: Improved margin quarter-on-quarter

• Quarterly margin expansion from efficiency gains and specific impacts:
• Reversal of provision (+) and integration costs (-) in Brazil
• Service interruption in Argentina (-), new labor law in Venezuela (-) and others
• Sequential OIBDA growth, improved trends y-o-y

Underlying OIBDA (€ millions)

• Strong commercial activity focus on MBB dragging OIBDA y-o-y; lower impact in Q2
• Network & system costs driven by expanded coverage and capacity:
• 3G base stations up 63% y-o-y in H1 12
• 27,000 Kms of fiber for backbone in progress in Brazil

Brazil: Leading service quality & investing in future growth

1. Excludes the disconnection of 1,600k inactive prepay mobile accesses in Q2 12.

2. IDA = Service Performance Index released by Anatel.

T. LATAM

Brazil: Keeping growth on a balanced & diversified structure

Improved profitability in Q2

• Better trends in OIBDA y-o-y growth; despite drag from regulation (-2.2 p.p. in Q2 12; -0.8 p.p. in Q1 12)

Latam: Diversified growth, revenue growth in all countries (i)

T. LATAM

Latam: Diversified growth, revenue growth in all countries (ii)

• Visible results from turnaround actions:

• ^Negative regulatory impacts progressively easing
• MSR and ARPU are back to growth : +1.3% and +6.7% y-o-y in Q2, respectively
• New commercial propositions to further improve positioning:
• New plans billed by second and innovation in roaming
• "Movistar Total", a unique market proposal
• Agreement with Iusacell to drive further benefits

Underlying OIBDA (€ millions)

Organic growth: assumes average constant exchange rates and excludes changes in the consolidation perimeter and hyperinflation accounting in Venezuela in both years. 1. Excludes MTRs cuts and changes on F-M retail tariffs.

Investor Relations Telefónica, S.A.

T. LATAM

T. EUROPE

T.Europe: Improved commercial performance, growing OIBDA in the quarter

Spain: Gradual progress in our turnaround plan

1. Excluding the impact of the mobile accesses disconnection in Spain in Q1 12.

Spain: Improved profitability on strong cost savings

UK: Sequentially improving performance

Germany: Growth across the board, basis set for the future

1. Market shares: Jun-12 data points correspond to Mar-12 shares. Based on Q1 12 reported figures by operators.

T. EUROPE

Germany: Strong operating performance flowing into financials

Updated revenue outlook, OIBDA margin and CapEx/sales targets unchanged

	FY 12 Outlook	H2 12
Revenue Growth	Flat to positive in current euros (previously >1%)	• More challenging than anticipated performance driven by a weaker macro environment and further negative impacts from regulation
OIBDA Margin	Lower y-o-y decline than in 2011 (unchanged)	• Y-o-y erosion to ease, driven by better y-o-y comparisons in commercial activity, net savings in commercial costs in Spain and further cost efficiencies across countries. Operating synergies in Brazil becoming visible
CapEx/Sales(ex-spectrum)	Similar than in 2012 (unchanged)	• Reallocation of resources within the Group to accelerate UBB connections, leveraging CapEx efficiencies from lower churn

Operating guidance considers constant perimeter. 2011 base for guidance purposes: Revenue (€ 62,837 m), OIBDA margin (36.1%), CapEx/Sales ex spectrum 14.2%. Assumes average FX for 2012 of €1: US\$1.32; €1: BRL2.30; €1: £0.85.

TELEFÓNICA

Net debt evolution impacted by timing of dividend payment

1. Net Financial Debt ex-Redundancy Program in Spain and adjusted by post Closing events.

2. Post closing events (pending regulatory approval) include disposals of China Unicom & other minority stakes (Hispasat)..

2012-13 debt maturities covered

Fully committed to increase financial flexibility, improve liquidity and defuse potential risks

Adjustment of shareholder remuneration policy improves liquidity immediately and reduces refinancing risk

Fully committed with announced portfolio management and asset divestment program

• Cancellation of 2012 dividend (Nov-12 cash+May-13 scrip) and share buyback program as one-time exceptional measure
• Shareholder remuneration to be resumed in 2013 by paying a dividend of €0.75/share (intention two tranches: Q4 13 and Q2 14)
• Rationale:
• Further strengthen Balance Sheet (retained earnings, deleverage, shareholder value)
• Accelerate debt reduction in the short term
• Decouple from exogenous macro factors affecting our country of domicile
• Immunize from debt markets liquidity conditions
• De-risk the execution of portfolio management and asset divestment program
• Continued investment in profitable growth in our operations

• Already achieved: € 3.1 Bn

• Colombia restructuring, China Unicom, Hispasat, non-strategic towers, Zon
• In progress ≥ € 1.5 Bn
• Atento, PT, Rumbo, non-strategic towers
• Next actions:
• Launching preparations for IPO of T. Germany
• Analyzing potential listing alternatives for Latin American businesses
• Monitoring market conditions to make selective asset monetisations

• Cash savings up to Q2 13:

• € 2.7 Bn in 2012
• Up to € 4.1 Bn in Q2 13
• Further savings from H2 13 onwards
• Debt maturities covered till year-end 2013
• Net Debt/OIBDA <2.35x by 2012 YE

• Enhanced credit and liquidity metrics

• ≥ 4.6 Bn in 2012

• Additional proceeds in 2013

Conclusions

• Improved performance in Q2 12 from OIBDA to net income in underlying terms:
• Benefits from best-in class diversification
• Risk perception decoupled from business fundamentals
• Positive revenue growth on strong top line performance in Latin America
• OIBDA growth and margin expansion q-o-q
• H1 OIBDA margin performance consistent with 2012 guidance, further improvements in H2 12
• Further initiatives to enhance business model
• Decisive actions to improve balance sheet and defuse potential risks
• On track with our transition towards a "Digital Telco"

Organic growth: In financial terms, it assumes constant average exchange rates as of January-June 2011, and excludes hyperinflation accounting in Venezuela. Therefore, in OIBDA and OI terms, the first half-year of 2011 excludes the positive impact of the partial sale of our stake in Portugal Telecom (+183 million euros). Telefónica's CapEx excludes spectrum investment and, in 2011, Real Estate commitments in relation to the new Telefónica headquarters in Barcelona.

Underlying growth: Reported figures, excluding exceptional impacts and spectrum acquisition. First half of 2012 also excludes the reduction in the value of Telecom Italia investment and operating synergies achieved (-512 million euros; -358 million euros net of taxes), and also PPAs (-492 million euros; -363 million euros net of tax and minority interests) and difference in market value of BBVA stake (-30 million euros; -21 million euros net of tax and minority interests). Figures for the first half of 2011 exclude value adjustments in relation to the stake in Telecom Italia (-505 million euros; -353 million euros net of tax), the positive impact arising from a partial reduction of Telefónica's economic exposure to Portugal Telecom (+183 million euros) and also PPAs (-564 million euros; -381 million euros net of taxes and minority interests).