Telefonica S.A. — Investor Presentation 2013

Sep 30, 2013

Results

January – September 2013

Investor Relations Telefónica, S.A.

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.

Q3 Highlights: Reaching FY 13 targets in advance

1. Recovering Growth

• Revenue growth acceleration
• Second consecutive quarter of organic growth (+2.1% y-o-y)
• Positive revenue growth in 9M (+0.4% y-o-y organic)

2. Stabilising organic OIBDA and OpCF

• Revenue growth flowing towards OIBDA stabilisation (-0.4% y-o-y organic in 9M; -0.3% in Q3)
• Limited margin erosion; incurred to foster revenues (33.1% in 9M; -0.2 p.p. y-o-y organic)
• Virtually stable 9M OpCF (-0.6% y-o-y organic)
• Rationalising CapEx while pushing on LTE & fiber to capture future growth
• Solid FCF generation in 9M (€ 4.7 Bn; stable y-o-y ex-spectrum)

3. Reducing Debt & Increasing Value Growth Potential

• Net Financial Debt at € 46 Bn as of September; leverage ratio: 2.30x
• € 45 Bn net debt including post-closing events
• € 14 Bn net debt reduction since Jun-12 (including post-closing events), when deleverage process was prioritised
• Strengthened and focused portfolio management; fostering in market consolidation

2013 guidance and dividend confirmed

Key financials

	9M 13			Q3 13
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenues	42,626	(8.4%)	0.4%	14,063	(9.5%)	2.1%
OIBDA	14,100	(10.7%)	(0.4%)	4,678	(12.6%)	(0.3%)
OIBDA Margin	33.1%	(0.8 p.p.)	(0.2 p.p.)	33.3%	(1.2 p.p.)	(0.8 p.p.)
OpCF (ex-spectrum)	9,078	(10.3%)	(0.6%)	2,726	(18.4%)	(8.3%)
		Underlying y-o-y			Underlying y-o-y
Net Income	3,145	(9.0%)	(8.5%)	1,089	(21.1%)	(8.6%)
EPS	0.70	(9.2%)	(8.7%)	0.24	(22.0%)	(9.7%)

Reported figures negatively impacted by forex & changes in perimeter

• Depreciated FX rates, mainly BRL, VEB, and ARS drained y-o-y:
• -9.8 p.p. to revenue growth in Q3 (-7.0 p.p. in 9M)
• -9.7 p.p. to OIBDA growth in Q3 (-6.9 p.p. in 9M)
• Changes in the perimeter (Atento) also deducted y-o-y
• ~-2 p.p. and ~-1 p.p. in revenues and OIBDA respectively, in both Q3 and 9M

Enhancing cash flow generation across the year

Stable FCF 2013 ex-spectrum payments (y-o-y)

• LTE spectrum already acquired in main markets

FCF 2013 (€/share)

FCF 2013 (€ in millions)

EPS 2013 (€/share)

Successfully acquiring and retaining high value customers

Mobile contract accesses (y-o-y)

Smartphone penetration (y-o-y)

UBB coverage (fiber+VDSL/ Fixed Accesses)

Continued progress on quality growth

• 35% of mobile base in contract (+2 p.p. vs. Sep-12)
• Mobile contract net adds: +57% vs. Q3 12 (+79% in T. Latam)
• Booming smartphone adoption (penetration: +8 p.p. vs. Sep-12; net adds 1.5x vs. 9M 12)
• Deeper commercial approach to be at the forefront of market expansion; tappering all growth opportunities

Investing in high growth opportunities

• Targeted fiber roll-out, mainly Spain and Brazil
• Further advance on LTE deployment (launched in Spain and UK in Q3 and already available in Germany, Brazil, C. Republic, Mexico)
• UBB connected customers (1.3 m; 1.6x vs. Sep-12)

• Steady FBB¹ expansion (+2.0% y-o-y) and better trends in fixed accesses¹ (-0.5% y-o-y), both boosted by T. Latam performance

• FBB and fixed accesses excluding the impact of the sale of the fixed business assets in the UK

Accelerated revenue growth translating into OIBDA

Revenue growth (organic y-o-y)

Enhanced top line trends throughout the year (+1.6 p.p. q-o-q)

• Improvement at all levels in Q3:
• 10 countries accelerating organic performance y-o-y vs. Q2
• T. Latam ramping-up its y-o-y organic increase to 10.9%
• Continued gradual recovery at T. Europe (-7.1% y-o-y organic)
• T. Digital keeps accelerating growth (Q3: +17.9% y-o-y organic)
• Non-SMS data revenues (+22.4% y-o-y) drives consistent growth in mobile data (+10.2% y-o-y organic; 37% of MSR)
• Reaping the benefits of renewed commercial initiatives and investments in high growth areas

OIBDA growth (organic y-o-y)

OIBDA stabilisation driven by improved revenues

• The value of diversification: Latam is the main contributor to OIBDA growth and Europe to margin stabilisation
• Sequential improvement in Q3 OIBDA y-o-y performance
• Q3 OIBDA margin 33.3%, declining 0.8.p.p y-o-y organic
• T. Latam impacted by higher commercial traction
• T. Europe continued with its margin expansion
• Strengthening efficiency, limiting 9M margin erosion (-0.2 p.p y-o-y organic)

T. Global Resources: Capturing value from our scale

Enhancing Data Coverage and Capacity		• Optimising and speeding up LTE roll-outs, with active sharing agreements
Fiber HHPP (Sep-13)	1 Sites with UBB Backhaul	>2,300 sites, covering 64 cities ~1,300 sites, covering 11 cities
1.5m 3.0m	~60%	>1,000 sites, covering 10 metropolitan areas
Network virtualisation:
 Speeding up vCPE	trials in Brazil, benefits from simplified network management and enhanced user experience
IT Simplification and Transformation
Consolidation of Commodity IT YTD:		• Simplify and Standardise Applications
 Closed 6 Data centers		 >700 Applications reduced YTD
 Reduced more than 1,400 physical servers		 Better time to market
 33% virtualised servers		 Enabling growth in new businesses
Devices: Towards vendors map and OS rebalancing
Working to change the industry dynamics in the device market		• More consolidated negotiation process generating efficiencies
Agreements with key players benefits commercial offers
Delivering savings from global procurement on E2E
Average Savings ~6-7% (depending of each global category)		• E2E Simplification & standardisation

^1. Fiber + Radio IP backhaul

T. Digital: Building up new services & capabilities

Accomplishments in Q1 13 Building New Digital Services

• Continuous leading position in new Digital P&S in high growth markets. Key contracts won and new partnerships created:

• M2M Smart Metering contract awarded to deliver smart meter communications services in the UK
• The industry's largest M2M contract win to date (worth £1.5Bn)
• JV with Caixabank & Santander: European Union antitrust authorities cleared the creation of a joint e-commerce

Accomplishments in Q1 13 The Best Core Value Proposition

• Evolving on our core offering, launching Digital enhancements to our communications services:
• Firefox OS handsets launched in Colombia and Venezuela in August; Brazil in October; Peru in November

• TU Go commercial launch in August, marketed by Telefónica UKs "Be More Dog" campaign: 161k active users

• Using investments and partnerships to create the best range of value-added services:

• Rhapsody investment: Napster as our preferred music service provider
• Pinterest partnership: Exclusive deal to provide the Pinterest Android widget
• Evernote: Free access to the Premium version for 12 months: great customer uptake

T. Latam: Revenue & OIBDA growth acceleration

Revenues (organic y-o-y)

OIBDA margin organic y-o-y

Strong commercial activity in the most valuable segments

• Record high contract mobile net adds, growing by 79% y-o-y in Q3
• Smartphones almost doubling y-o-y to 20% penetration
• Building the largest smartphone community in Latam (33.7 m; +86% y-o-y) fed by the largest contract community (44.5 m; +16% y-o-y)
• Ongoing fixed services turnaround: strengthening F2M cross selling and bundling strategy

Double digit organic revenue growth
•	7 countries posting better organic y-o-y performance than in Q2
	 MSR growth improvement (+13.7% y-o-y in Q3) led by strong mobile data revenues (+22.9% y-o-y)
•	OIBDA y-o-y organic growth ramping-up
	 Revenue acceleration flowing into enhanced OIBDA trend

More intense commercial activity reflected in margin pressure

Brazil: Strengthening leadership on high-value customers

Outstanding performance in high-value segments

• Record high contract net adds in Q3, capturing 64% of the market to reach 39% of market share
• Smartphones uptake driving accesses growth (>2x y-o-y)
• Commercial leadership on 4G services already launched in 64 cities (28% of population) and 40% market share
• Solid top ups (+7.3% y-o-y in Q3)

Fixed Services Net Adds ('000)

Continued improvement on fixed services

• Fiber coverage reaching 1.5m households (11% take-up). On track to reach 1.8m households by year-end
• Focus on quality: >90% FBB net adds with >= 4Mbps
• Increased fixed traditional penetration; targeting new growth areas through "FW" technology (95k net adds in Q3)
• Pay TV turnaround on reinforced commercial proposal (DTH & IPTV products)

Brazil: Strong commercial effort for a sustainable growth

Strong MSR growth

• MSR accelerating to 7.0% y-o-y on booming data and steady voice increase
• Revenue y-o-y deceleration in Q3 mainly due to lower handset sales growth
• Fixed revenues y-o-y decline deterioration mainly on volatility of IT corporate projects and specific factors negatively affecting traffic trends
• Regulation dragging y-o-y revenue growth by 1.6 p.p. in Q3

OIBDA Margin

Higher commercial activity driving OIBDA margin erosion

• Sequential margin decline on the back of variable commercial costs and higher content costs
• Corporate restructuring already delivering results on cash flow generation

• Savings reinvested to capture future growth

• Commercial activity includes subsidies and commissions

T. Latam: Widespread revenue acceleration (I/II)

T.LATAM

13

T. Latam: Widespread revenue acceleration (II/II)

T.LATAM

T. Europe: Transforming to lead a changing market

Revenues (y-o-y organic ex-regulation)

OIBDA margin

Commercial portfolio adapted to more data-demanding customers

• Enhanced competitive profile amid intense competition
• Compelling data-centric offer gradually away from subsidies
• LTE services in all footprint after launch in UK & Spain in Q3
• Smartphone solid growth (40% penetration Sep-13; +8 p.p. y-o-y)

Profitability supported by a sustainable business model

• Sequential revenue improvement despite higher negative regulatory impact in Q3
• OIBDA margin growth y-o-y organic driven by cost discipline and rationalisation of resources
• CapEx focused to expand top quality networks (LTE, fiber)
• Capturing benefits from network sharing

Spain: Focusing on premium quality and convergence

Movistar Fusión, year one

• Fiber traction sustains FBB market share
• FBB churn at record lows (1.5% in Q3, -0.4 p.p. y-o-y)

Fiber: a long term structural differentiation

• Fiber customer delivering 3x gross value vs. ADSL
• 1.5x ARPU
• 0.5x churn

Enhanced offer to increase competitiveness

• Higher value for the same price
• Key features leverage on differential strengths
• 4G in all Fusión products
• TV Mini in all Fusión Fiber products
• Unlimited mobile voice in Fusión high value
• Completing mobile portfolio with "Movistar 20" 4G
• Increased mobile data allowance
• Remove mobile commitment
• Competitive handset portfolio
• Positive preliminary results on trading

Launch mid-Sept

LTE, launch and roll out LTE roll out

• 4G launch in October with 20% pop. coverage (~50% 13E)
• Deployment of own 4G network (1,800 MHz)
• Roaming agreement with Yoigo
• To continue deploying on the most valuable spectrum when it becomes available
• 800 MHz spectrum already secured
• UBB backhaul available for ~64% sites

Spain: Improved revenue trend, record levels of profitability T.EUROPE

Revenue ex-handset sales (organic y-o-y)

Revenue ex-handset sales Revenue ex-handset sales ex-regulation

OIBDA Margin

organic y-o-y

Main Financials (organic y-o-y) Revenues OIBDA OpCF

Revenue trend continues its recovery path

• Fixed revenue improvement on the back of Fusión commercial traction
• Strong impact from last MTR cut of glide-path (-60% on 1st July)
• Lower y-o-y decline in mobile handset sales on easier y-o-y comps due to new commercial model of Mar-12 (Q3: -32.8% vs. Q2: -51.6%)

Continued improvement on OIBDA margin

• Proven capacity to manage cost base and bring efficiencies (Q3 OpEx: -15.8% y-o-y)
• Reduction in commercial costs (subsidy removal)
• Restructuring Program and temporary suspension of pension plan
• Benefits from simplification, insourcing activities and higher quality
• Working on insourcing, call centers and reshaping of distribution channels to deliver further savings and increase quality of sales

Very solid OpCF (€3.8 bn in 9M)

• Prioritisation of investments (9M CapEx: -28.8% organic y-o-y)
• Recurrent savings (legacy, IT, systems, churn reduction…)
• Increased investment in fiber and LTE
• Outstanding OpCF margin at 39.2% in 9M
• OpCF stable organically y-o-y

UK: Maintained momentum in a very dynamic market

Mobile net adds ('000)

Total Contract

Mobile Service Revenues (y-o-y)

OIBDA margin

y-o-y

Financials y-o-y change are in local currency

Successful commercial proposition

• "O2 Refresh" gaining traction
• Available in all direct channels since July
• 53% of contract commercial activity on "Refresh"

• Successful launch of LTE on August 29th

• Available in 11 cities by now
• Outstanding customer experience
• Encouraging results in terms of data consumption
• Contract base up 9% (54% of total): churn <1% for third quarter in a row

Revenue growth (Q3: +3.1% y-o-y)

• "Refresh" contributed with 9.2 p.p.
• Fixed business disposal deducted -1.9 p.p.
• MSR growth negatively impacted by "Refresh" model (-1.7 p.p. in Q3)
• Regulation dragged -2.3 p.p. to MSR growth in Q3

Working on efficiencies to improve business sustainability

• OIBDA up 3.7% y-o-y in Q3 benefitting from "Refresh" model
• Optimising investments through network sharing
• Benefits from the outsourcing of the customer service

Germany: Building the fundamentals of data monetisation

Mobile net adds ('000)

LTE gaining traction as a purchasing decision factor

• Smartphone penetration 30% (+6 p.p. y-o-y)
• 55% of devices sold were LTE enabled in Q3 (40% in Q2)
• Data usage of LTE smartphone 3x higher vs. non-LTE
• LTE coverage in 10 metropolitan urban areas
• Doubling CapEx in LTE
• Contract churn down 0.1 p.p. y-o-y to 1.3%
• Strong prepay net adds in Q3 driven by secondary brands

ARPU (ex-MTR y-o-y) (3.4%) (4.5%) (4.4%) Q1 13 Q2 13 Q3 13 MSR (ex-MTR y-o-y) 0.5% (1.3%) (1.8%) Q1 13 Q2 13 Q3 13 -1.8 p.p. -0.5 p.p.

OIBDA Margin

Sequential improvement of MSR y-o-y trend

• MSR decline due to combination of trading momentum, tariff renewals & lower SMS volumes
• Better ARPU performance:
• Improved tariff mix in "O2 Blue All-in", focus on mid-range
• Lower average dilution per user renewing their tariff
• Higher smartphone penetration leads to better trends in prepay ARPU

OIBDA margin impacted by increasing commercial activity

• OIBDA -12.0% y-o-y in Q3:
• Investing in retention activity focused on high value tariffs
• Tariff & handset bundles
• Taking the appropriate actions to maintain market momentum

Leverage and net debt targets achieved

Outstanding liquidity while reducing interest costs

Increased average debt life close to 7 years (1) (Sep-13)

Net debt maturities (€ in billions)

Outstanding liquidity (+€2.4bn vs. Jun-13)

Over €10bn 2013 YTD long term financing Effective interest cost at guidance bottom (12 month rolling)

(1) Includes Hybrid maturing at Non-call dates (year 5 and 8)

Conclusion

Recovering Growth & Stabilising margin and CF

• Revenues growing & accelerating
• Stabilising OIBDA and OIBDA margin
• Virtually stable 9M OpCF (y-o-y organic)
• Solid FCF generation in 9M (stable y-o-y ex-spectrum)

Reducing Debt & Increasing Value Growth Potential

• Net Financial Debt at € 46 Bn as of September; leverage ratio: 2.30x
• € 14 Bn net debt reduction since Jun-12 including post-closing events to € 45 bn
• Active portfolio management fostering in market consolidation and improving growth potential

2013 guidance and dividend confirmed