Results January-December / 2012

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2012 Highlights

A YEAR OF OPERATIONAL TRANSFORMATION AND CONTINUING TO BUILD POSITIONS OF POWER IN DIGITAL SERVICES

LATAM: QUALITY GROWTH AMID

• Brazil: Expanding leadership, outperforming expectations

ENHANCED PROFITABILITY EUROPE: A YEAR OF STRATEGIC CHANGE

• Spain:

Fusion: a commercial success with margin break-even in December net adds
Strong growth of margin & OpcF in Q4

FURTHER SEQUENTIAL COST CONTAINMENT AND MARGIN EXPANSION GROUP WIDE

CONTINUED EXPANSION OF UNDERLYING EPS & FCFS WHICH ARE TWICE THE ANNOUNCED DPS

Substantial deleverage, to continue

in 2013 Extensive liquidity (well into 2015)

2012 operational transformation for a sustainable model

Transformation is already delivering results (I)

Transformation is already delivering results (II)

Continued sequential OIBDA growth and margin expansion

Transformation for a brighter future

Telefónica Digital to accelerate growth

MBB & FBB driving growth across the footprint

Fast smartphone adoption Strong growth in FBB

Record quarterly smartphones net adds in 2012:
Q4 net adds: 1.7x Q3 boosted by T. Europe
Net adds in Latam grew 51% y-o-y in Q4
Smartphones represents 80% of handsets sales in T. Europe
Increasing weight of Mobile Contract over Mobile Base to 33%
Positive Q4 FBB net adds in Europe, reversing trends
High single digit growth of FBB base in T. Latam
Selective UBB deployment in key markets
Fixed line stabilization (-0.3% y-o-y in Dec-12), with Q4 positive net adds

Solid revenue growth of Latam and mobile data

Further efficiencies on continued execution

Very sound cost containment in Q4 despite record smartphone sales:
Significant decline of commercial costs (-11.9% y-o-y) mainly driven by new commercial policy in Spain
Higher efficiencies and scale benefiting OIBDA margin erosion y-o-y (commercial costs, increased efficiency in call center costs, overheads, outsourcing…)
Good progress in TGR delivering efficiency goals (procurement, devices, new data centers, simplification of processes, efficiency projects …)

(1) Excluding Workforce Reduction Plan provision in T.España in Q3 11 (€ -2,671 m).

Prioritised investments to cope with future growth

T. Global Resources achieving significant results

	Accomplishments
IT	• 15% Application Simplification Delivered • New World Class Data Centres in Brazil, Mexico & Spain • Material IT Savings leading a reduction in IT OpEx+CapEx
Devices	• Leveraging benefits from scale: > 80% of total spend in devices negotiated globally • Global portfolio optimisation to increase savings: 95% value in < 100 references • Focus in strategic reshaping OS map: proactive development of alternative ecosystems
Global Sourcing	• Increased leverage on joint purchases; +4 p.p. in last 12 months to > 40%
Network and operations	• Network sharing and co-investment deals on track (UK, Mexico, Spain) • Efficiency activities and assets optimisation (non-strategic towers: € 643 m in FY 12)
MNCs	• Revenues growing at high single digit • Upgrade portfolio focusing on core telco services for multinationals (Managed Mobility & WAN) • Leverage synergies with wholesale business to improve efficiency and competitiveness

Financial Summary: OpCF growth in Q4

	Reported		Underlying			Organic
€ in millions	FY 12	Chg y-o-y	FY 12	2012 Chg y-o-y	Q4 12 Chg y-o-y	2012 Chg y-o-y	Q4 12 Chg y-o-y
Revenues	62,356	(0.8%)	62,356	(0.7%)	(1.6%)	(0.8%)	(0.7%)
OIBDA	21,231	+5.1%	21,741	(4.1%)	(1.4%)	(3.9%)	(0.1%)
OIBDA Margin	34.0%	+1.9 p.p.	34.9%	(1.3 p.p.)	+0.1 p.p.	(1.1 p.p.)	+0.2 p.p.
OI	10,798	+7.3%	12,270	(10.2%)	(5.4%)	(8.7%)	(1.8%)
Net income	3,928	(27.3%)	6,465	(13.6%)	(4.3%)
EPS	0.87	(25.9%)	1.44	(11.9%)	(2.3%)
OpCF (OIBDA-CapEx ex-spectrum)	12,360	+9.6%	12,870	(6.6%)	+3.3%	(6.6%)	+6.2%
CapEx(ex-spectrum)/sales	14.2%	+0.0 p.p.	14.2%	+0.0 p.p.	(0.7 p.p.)	+0.2 p.p.	(0.9 p.p.)

Revenues +71 +71 • ERE Spain: €-2,671m Reduction in the value of TI: €- OIBDA (510) (2,472) (413) +17 949m • • Impairment T. Ireland: €-513 m OI (1,472) (3,596) (646) (264) Reduction in the value of TI:€-570m • VZ devaluation: €-417m • Impairment T. Ireland: €-513m	Exceptional items	FY 12	FY 11		Q4 12	Q4 11

	Net Income	(2,536)	(2,082)	• VZ devaluation: €-417m	(1,578)	+527

VIVO: € +952m

Revenues, OIBDA margin and CapEx/Sales in line with 2012 targets

Underlying growth: Reported figures excluding major exceptional items, spectrum acquisition and changes in consolidation.

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

Latam: Quality growth amid enhanced profitability

Telefónica, S.A.

Brazil: Focus on quality delivering results

Organic growth: Local currency and excludes the positive impact of the partial sale of our stake in PT in Q2 11.

Brazil: Increased profitability

• Higher impact from tower sales in Q4 12 (€ 269 m vs. € 163 m in Q4 11)

Integration benefits flowing to cash generation

Operational improvement along with integration benefits results in strong OpCF generation
CapEx increase (+2.9% y-o-y ex-spectrum)

Latam: Key Metrics (I)

Operational turnaround process in due course
Sequential revenue and margin improvement on the back of higher commercial efficiency, Iusacell agreement (from Q3) and non-strategic tower sales

OIBDA Margin

Outstanding operating performance
Gradual revenue acceleration and enhanced profitability

Latam: Key Metrics (II)

Sustained commercial momentum across services
Healthy growth and improved profitability

OIBDA Margin

Solid commercial momentum remained in 2012
Strong revenue performance and better margin evolution throughout the year

OIBDA Margin

Revenue (organic y-o-y)

Sequential improvement on mobile commercial activity in a highly competitive environment
Acceleration in revenue growth in Q4 y-o-y

T. Europe: A year of strategic change

Contract mobile AMPU sequential improvement (right balance between customer growth and profitability)
Solid contract churn
Successful new propositions focused on value & MBB
Continued data monetisation
Non-SMS data revenue up 15.7% y-o-y in FY 12
Accounting for 58% of mobile data revenue (+6 p.p. y-o-y)

Net adds: excluding disconnections in Spain in Q1 12. OIBDA and OIBDA margin exclude the impairment in T. Ireland in Q4 12. Financials year-on-year change are organic.

OIBDA margin expansion in Q4 y-o-y
Commercial costs -17.6% y-o-y
Sustainable efficiency gains
OpEx -6.7% y-o-y in FY 12; -6.5% non-commercial costs
Top line pressure continued
-8.1% y-o-y in Q4; -7.8% in FY 12 amid tough macro, competition, regulation and usage optimization
2012 CapEx (-9.0% y-o-y) focused on growth

Spain: Financial turnaround is taking place

Progressive OIBDA stabilization in Q4 y-o-y driven by new commercial model (subsidies, commissions, Movistar Fusion)
Revenues adjusting re-pricing effort:
High penetration of new tariffs as of Dec-12
- (80% of FBB; 66% of mobile contract)
Different phasing in commercial costs impacting Q4 y-o-y
2012 CapEx down 18.3% y-o-y (vs -16.9% in 9M 12) despite a 32% increase in fiber

Adapting the company to a different environment Multiple drivers behind strong margin expansion

Savings in commercial costs (more than € 500 m in FY 12), mainly from new subsidies policy
Large scale organizational restructuring (€ 257 m savings in 2012)
Portfolio and processes simplification driving IT and service savings
Churn efficiencies along with improved quality (customer claims -56% y-o-y in Q4)

Penetration of new tariffs, including Fusion, in residential.

OIBDA, CapEx and OpCF y-o-y change excluding provision for redundancy program and spectrum.

Spain: Movistar Fusion leading the Spanish market

UK : Commercial traction flowing through to financials

(1) Excluding MTR cuts and new roaming regulation. Y-o-y in local currency

Germany: Market benchmark performance

Substantial deleverage on FCF generation and disposal plan execution TELEFÓNICA

Net Financial Debt (€ in bn)

Deleverage will continue in 2013 to comfortably below 2.35x

(1) Reported 2011 OIBDA ex-Redundancy Program in Spain.

TELEFÓNICA Strong financing exercise & improved liquidity while contained interest expense

2013: recovering our growth DNA while reducing leverage

(1) Figures according to guidance criteria.

2012 Bases for guidance purposes: Revenue (€ 61,054 m), OIBDA margin erosion -1.4 p.p. in 2012, CapEx to sales 14.1%.

2013 Operating Businesses Priorities

T. Europe T. Latam

In Spain, accelerate the transformation process through quality and simplification along with the new commercial model leading to lower OpEx & CapEx
In UK, maintain commercial traction with market leading propositions while delivering cost effective 4G network experience
In Germany, outperform the market in mobile market share by capitalising multi-brand portfolio and maintain a competitive network, delivering LTE to urban areas
In Czech Republic we will continue focus on our efficiency agenda to protect profitability
In Ireland we move towards business stabilisation
In Brazil:
Focus on the ongoing fixed business turnaround
Maintain mobile business outperformance leveraged on our top quality proposal
Catch up market leaders in Mexico, Colombia and Ecuador
At a regional level, exploit the benefits of further efficiency gains while grabbing the advantages and opportunities of our scale

TGR: Scale benefits leading to further progress in transformation and OpEx & CapEx savings T. Digital: Fostering digital growth in several markets, leveraging our core assets and building powerful positions through partnerships

Conclusions

• Reinforcing our growth model, solid execution of transformational initiatives:

Progressive margin recovery driving OIBDA stabilization; improvement of underlying EPS along 2012
Benefits from best-in class diversification
Outstanding growth in mobile data and T. Latam
Improved commercial momentum on focused areas
Accelerating cost savings and efficiencies along the year
CapEx efficiency and simplification

• Financial flexibility regained:

Substantial deleverage progress in H2 12 to continue in 2013
Normalised access to financial markets
Strong liquidity position
Delivery on 2012 guidance and realistic outlook for 2013

Organic growth: In financial terms, it assumes constant average exchange rates as of January-December 2011 and excludes changes in the perimeter of consolidation and hyperinflation accounting in Venezuela. The results of the Atento Group are included up to 30 November 2011 and those of Rumbo are included up to 31 October 2011. In OIBDA and OI terms, 2012 excludes the reduction in value made by the Telefónica Group on its investment in Telefónica Ireland (-527 million euros), the capital loss generated by the sale of China Unicom shares (-97 million euros), and the capital gains generated by the sale of the Atento Group (+61 million euros), Rumbo (+27 million euros) and the partial sale of Hispasat (+26 million euros). Excluded from OIBDA and OI in 2011 were the positive impact of the partial sale of Telefónica"s economic exposure to Portugal Telecom (+184 million euros), and the provision for the redundancy program in Spain (-2,671 million euros). Telefónica"s CapEx excludes spectrum investment and, in 2011, the Real Estate Efficiency Programme at T. España, and the real estate commitments in relation to the new Telefónica headquarters in Barcelona.

Underlying growth: Reported figures, excluding exceptional impacts and spectrum acquisition and excluding the impact from changes in the perimeter of consolidation. The results of the Atento Group are included up to 30 November 2011 and those of Rumbo are included up to 31 October 2011. 2012 figures exclude the reduction in the value of the Telecom Italia investment and the recovery of all the operating synergies considered at the time of this investment (-1,355 million euros; -949 million euros net of taxes), and also PPAs (-1,073 million euros; -689 million euros net of taxes and minority interests), the reduction in value made by the Telefónica Group on its investment in Telefónica Ireland (-527 million euros; -513 million euros net of taxes), the effect of Venezuelan Bolivar devaluation (-438 million euros; -417 million euros net of taxes), the capital loss on the sale of China Unicom shares (-97 million euros; -45 million euros net of taxes), the capital gain on the sale of Atento Group (+61 million euros; +33 million euros net of taxes), the capital gain on the sale of Rumbo (+27 million euros; +24 million euros net of taxes) and the capital gain on the partial sale of Hispasat (+26 million euros; +19 million euros net of taxes). In 2011, results exclude the provision for the redundancy program in Spain (-2,671 million euros; -1,870 million euros net of taxes), the reversal of deferred tax liabilities at Vivo (+1,288 million euros; +952 million euros net of taxes and minority interests), value adjustments in relation to the stake in Telecom Italia and the operating synergies achieved (-662 million euros; -481 million euros net of taxes), the positive impact arising from the partial reduction of Telefónica"s economic exposure to Portugal Telecom (+184 million euros), the difference in market value of the BBVA stake (-80 million euros; -56 million euros net of taxes), tax asset reassessment (-30 million euros) and also PPAs (-1,228 million euros before taxes; -790 million euros net of taxes and minority interests).

Guidance criteria 2013: 2012 adjusted figures for guidance exclude results of Atento, Rumbo and small changes in T. Digital perimeter. It also excludes all capital/loss gains (China Unicom, Atento, Hispasat and Rumbo), tower sales, impairment of T. Ireland and change in contractual commercial model for contract handsets in Chile. 2013 guidance assumes constant exchange rates as of 2012 (average FX in 2012), excludes hyperinflationary accounting in Venezuela in both years and considers constant perimeter of consolidation. OIBDA level guidance for 2013 excludes write-offs, capital gains/losses from companies" disposals, towers sales and other significant exceptionals. CapEx excludes spectrum acquisition, changes in the accounting for handsets in Chile and Atento, Rumbo and small changes in T. Digital perimeter.