Telefonica S.A. — Investor Presentation 2013

Dec 31, 2013

Results

January – December 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.

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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.

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• 1. One step further into Digital transformation
• 2. 2013 Results
• 3. 2014 Outlook

More than ever convinced about the digital opportunity

2013-2018E Latam x13 Asia Pacific EMEA Western Europe North América x13 x14 x7 x8 x11 Traffic per customer 2013 2018E 3.8 GB 440 MB

Source: CISCO Source: CISCO and GSMA Intelligence

Telcos are in a privileged position to capture the potential from the digital revolution

Taking now the next step in our digital transformation journey

To fully capture the digital opportunity & maximise value creation we are evolving our operating model…

…leading to a digital customer centric & leaner organisation

T. Digital: Towards a differential commercial proposition

Accomplishments in Q1 13 Pioneers as a Telco Company moving forward to the Digital world

(1) It includes subsidiaries and other businesses of T. Digital and digital services already comprised in T. Latinoamérica and T. Europe

The Chief Commercial Digital Officer is key to ensure data monetisation

Main responsible	"Take a giant leap in customer insight"	"Offer the most valued proposition"	"Ensure the best commercial experience"
for revenue growth in the Group (B2B & B2C)	Know the customer	Design the value proposition	Optimise the go-to-market
One single Data Monetisation strategy One single Market Intelligence	• Owner of all customer data in the Group (Big Data) • Ensures excellence in understanding customers' needs • Develop BI platforms	• Develop P&S framework and road maps • Develop global products:  Digital scope (former T.Digital verticals)  Core products with high digital overlap • Develop alliances with content and	• Defines channel strategy, operating model and mix • Leads global efforts (e.g. multichannel) • Global responsible for brand
platform Responsibility over products & channels		OTT players (video, music, apps…) • Defines "equipment" & Customer Experience

T. Global Resources: Capturing value from scale and empowering the Digital Telco

⁽¹⁾ Fiber and Radio IP backhaul over total sites.

• Consolidation of IT commodity infrastructure

• Set up of the world-class data center in Madrid

• Application decommission & transformation:

• Optimising of time-to-market and simplifying integrations

IT Applications turned-off

Global procurement & devices

• Driver of long term sustainable value

• E2E Strategic Sourcing introduced: E2E seamless definition and execution for key global purchasing categories

• Devices:

• Agreements with relevant players allowed to rebalance O/S and vendor map, driving smartphone penetration

2014 building infrastructure based-long term advantages

Developing High Speed Networks (LTE & FTTH) ~40% PoP(1) 2012 2014 ~x2 vs 2013 FTTH homes passed by Dec-14 (m) 50% Fiber Churn vs ADSL 2012 2013 2014 Sites with LTE service 2013 FTTH ~25%PoP(2) ~40% PoP(1) ~10m >9,000 >20,000 2014 FTTH ARPU Fewer physical servers Servers Virtualised Data Centers Applications Infrastructure consolidation Apps transformation -10% +9 p.p. -11 ~-300 2014 IT simplification Efficiency PoP PoP Major advance in EU 4G Coverage 2012 2014 50% 50% >60% ~50% 15% >65% Sites with UBB backhaul(3) ~x2 vs 2013 2014 CapEx in growth & transformation: 75% of organic CapEx +7 p.p. y-o-y FTTH CapEx +65% y-o-y LTE CapEx 3G CapEX Transport CapEx 4G launches +27% y-o-y +27% y-o-y +35% y-o-y External plant faults vs. copper ~50% TV CapEx +84% y-o-y 2014 LTE ARPU

(1) Coverage calculated as total homes passed over total national homes (Sources EPA)

(2) In Sao Paulo urban areas with electricity

(3) Fiber and Radio IP Backhaul

Investor Relations Telefónica, S.A.

Opportunity to generate significant synergies trough a new operating model

Savings from new operating model (€ Bn)

Network

• Run a more integrated network factory: generating efficiencies and delivering top quality
• "One design": adoption of global standards and designs for key network elements. Higher procurement savings through more aggregation of demand
• Global OSS & processes: acceleration of current programs
• CapEx: cross-country allocation and global management

IT

• Implement shared services and global management initiatives to reduce cost and support digital business transformation
• Infrastructure: production concentrated in fewer world class regional Datacenters, standardisation of operations and increase of virtualisation levels (a truly cloud driven infrastructure)
• Applications: sharp reduction of local applications and decommission legacy, maximise re-use and adoption of market standards. Operate applications regionally

Support (F&A, HR, other) and Commercial

• Adopt global processes and concentrate operations in regional centers to achieve higher efficiencies and improve execution
• Simplification and globalisation of support E2E processes
• Accelerate consolidation of transactional back office activities into regional shared service centers
• Streamline commercial costs by becoming more digital
• Optimise channel mix, adjusting footprint whilst developing best on-line platform
• Sustainable hardware models

2013 Highlights

1. Back to organic growth

• Third consecutive quarter of organic revenue increase (+1.8% y-o-y; +0.7% in FY)
• Highly diversified portfolio; double digit growth of T. Latam and digital services in Q4 (y-o-y organic)
• Higher value & more sustainable access base

2. Stabilisation of business trends

• OIBDA back to growth in Q4 (+1.2% y-o-y organic; flat in FY)
• Virtually stable OIBDA margin y-o-y (-0.2 p.p. organic in Q4 and FY) to 33.4% in FY
• Initiatives to bolster future growth (reinvesting efficiencies&investments) lead to a -2.7% y-o-y organic OpCF

3. Maintaining high FCF generation in spite of FX headwinds

• Solid FCF generation (€5.4Bn in 2013; €6.9Bn ex-spectrum payments)
• FCFS/EPS comfortably exceeding DPS

4. Enhancing financial flexibility

• Continued debt reduction: €45Bn at year-end (ND/OIBDA: 2.36x)
• Net financial debt reduced by €9Bn in 2013 to €42Bn including post-closing events (ND/OIBDA 2.31x)
• €16Bn net debt reduction since Jun-12 (including post-closing events); improving solvency & liquidity
• 5. Active portfolio rationalisation freeing resources from non-core activities to increase ROCE in core markets

6. Delivering on 2013 guidance

Financial summary

	FY 13			Q4 13
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenues	57,061	(8.5%)	0.7%	14,436	(8.9%)	1.8%
OIBDA	19,077	(10.1%)	0.0%	4,977	(8.7%)	1.2%
OIBDA Margin	33.4%	(0.6 p.p.)	(0.2 p.p.)	34.5%	0.1 p.p.	(0.2 p.p.)
OpCF (ex-spectrum)	10,905	(11.8%)	(2.7%)	1,828	(18.4%)	(12.0%)
Net Income	4,593	16.9%	--	1,448	206.3%	--
EPS	1.01	15.6%	--	0.31	196.2%	--

Reported figures impacted by:

• Significant impact of FX on y-o-y variations:
• -7.5 p.p. in FY revenues (-9.2 p.p. in Q4)
• -7.5 p.p. in FY OIBDA (-9.4 p.p. in Q4)
• Changes in the perimeter (Atento) effect on y-o-y change:
• -1.7 p.p. in FY revenues (-1.3 p.p. in Q4)

• -1.0 p.p. in FY OIBDA (-0.7 p.p. in Q4)

• ^~2/3rds of FX impact in OIBDA offset at FCF level through lower CapEx, Interest, Tax & Minorities payments

• Strong track record of debt reduction despite FX

Maintaining strong cash flow generation

Delivering on 2013 guidance

Guidance 2013	2013
Revenue growth	+0.7%
Lower OIBDA margin decline than in 2012 (-1.4 p.p.)	-0.2 p.p.
Similar CapEx/Sales as in 2012 (14.1%)	14.5%
Net Financial Debt < €47bn	€45.4bn

Investing in quality, setting stage for future growth

Mobile contract accesses (y-o-y)

Smartphone penetration (y-o-y)

Fixed UBB coverage (fiber+VDSL/ Fixed Accesses)(1) 26% 30% 34% 1.5 m UBB connected

Dec-12 Jun-13 Dec-13

Capturing high value customers

• Q4 mobile net adds: 83% contract
• Contract segment is already 35% of mobile base (+2 p.p y-o-y)

Continued smartphone momentum

• Smartphone net adds 1.3x vs. 2012
• Monetising the data opportunity

Fostering UBB uptake

• Accelerating differentiation (Fiber, LTE)

• FBB(1) accesses up 2% y-o-y: high single digit growth in Latam

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

Improved trends in 2013 across all items

Revenue (organic y-o-y)

OIBDA (organic y-o-y)

y-o-y OIBDA margin organic

CapEx (organic y-o-y)

OpCF ex-spectrum

Capitalising diversification and business transformation

• Enhanced revenue mix to a more data centric Company
• OIBDA stabilisation on sequential margin improvement
• Strict cost discipline, savings from efficiencies and simplified operating model

Increased investments to grow

• Developing UBB to offer better quality and experience
• Improved OpCF profile
• Maintained good OpCF margin of 19.1% in FY

Revenue accelerating; profitability stabilising

Accesses growth translating to sales increase

• T.Latam (51% of total) growing at 10.3% organic y-o-y in Q4
• T.Digital ramping-up (Q4:+19.4% organic y-o-y)
• Enlarged contribution of data (37% of MSR; +3 p.p. y-o-y)
• Continued strength in non-SMS (Q4: +22.4% organic y-o-y)
• ²⁰¹³ organic top line +2.3% (y-o-y ex-regulation)

Revenues, cost discipline and efficiency flowing into OIBDA

• Improving OIBDA y-o-y organic trend to flattish at YE
• T. Latam OIBDA accelerating to 6.1% organic y-o-y in Q4
• T. Europe margin: 37.8% in Q4 (+0.6 p.p. organic y-o-y)
• Significant decline in commercial expenses (-6.1% y-o-y in FY; +2.0 p.p vs. 9M on focused commercial activity)
• Higher coverage, capacity and speed in UBB lead to increased network costs (FY: +6.3% y-o-y; +0.4 p.p. vs. 9M)

Focused CapEx to promote growth opportunities

Capex ex spectrum (€ in millions)

CapEx oriented to growth (organic y-o-y)

Spectrum (€ millions)

Targeted investments

• Improved spectrum position
• 4G spectrum secured in core markets
• Enabling fast and efficient LTE expansion
• Solid execution of investment efficiencies

Strict capital allocation

• Devote CapEx to the right priorities
• Building differentiation, improving customers experience
• Ongoing transformation of our networks

Superior spectrum holdings already built

• 2010: Germany (€1.4bn; 800 MHz; 2.0 MHZ & 2.6 MHz); Mexico (€1,2 bn; 800 MHz; 1,700 MHz & 1,900 MHz)
• 2011: Spain (€ 0.8bn; 800 MHz & 900 MHz; 2.6 MHz); Brazil (€0.3 bn; 3G licenses).
• 2012: Brazil (€0.4bn; 4G licenses)
• ²⁰¹³: UK (€0.7bn; 800 MHz); Spain (€0.1bn; Extension 900 MHz); Brazil (€0.2bn; LTE); Peru (€ 0.1bn; AWS); Colombia (€0.1 bn; AWS).

T. Latam: Outstanding commercial activity boosting growth

Net Adds ('000)

Leading sector transformation

• Best quality customer base: Upgrading to contract & smartphone
• Mobile contract: 46.4m. Penetration: 25% (+3 p.p. y-o-y)
• Smartphones: 38.1m. Penetration: 22% (+9 p.p. y-o-y)
• Leveraging on integrated infrastructure:
• Increased contribution of 3P bundles (net adds 2x FY 13/12)
• Reduced churn: FBB & mobile contract (-0.2 p.p. y-o-y)

Revenue and OIBDA growth acceleration

• Revenue performance gradually fuelling into OIBDA
• Peru, Colombia, Mexico, Central America and Argentina accelerating revenue y-o-y sequential organic growth in Q4

T. Latam: Revenue growth drivers ramping-up

Mobile Service Revenues (organic y-o-y)

Steady MSR increase improvement on booming data

• Increased contribution of mobile data on successful strategy oriented to customer value
• Data revenues accounts for 32% of MSR (+2 p.p. vs. FY 12)
• Non-SMS already 68% of data revenues (+11 p.p. vs. FY 12)

Fixed Revenues (organic y-o-y)

Stable fixed revenues in 2013

• Sound improvement in Q4 fixed business (+3.0% organic y-o-y)
• Commercial turnaround starting to deliver results
• Acceleration of FBB and other new service revenues: 49% of fixed revenues (+4 p.p. y-o-y)
• All countries contributing to sequential acceleration y-o-y organic growth in Q4

Brazil: Strengthened market position

Leadership in high value customers

• Record contract net adds for third quarter in a row: accesses +26% y-o-y; smartphone penetration: 24% (+11 p.p. y-o-y)
• Superior competitive positioning:
• Best-in-class network:
  • 3.1k municipalities covered with 3G (x2 vs closest competitor)
  • 73 cities covered with 4G
• CSI leadership in both fixed and mobile businesses

Fixed Services Net Adds ('000)

Steady execution of fixed turnaround strategy

• Fibre coverage reaching 1.4m households (15% take-up to 204 k connected). Target: 2.5 m households by 2014 YE
• Expanding coverage through Fixed Wireless technology (165 k net adds in Q4; 341 k in FY to 484 k customers)
• All fixed services posting positive net adds in Q4 and FY
• Positive net adds for second quarter in a row in Pay TV on adoption of IPTV and DTH

Brazil: Solid revenue and OIBDA performance

2013 Revenue (organic y-o-y)

Fixed & Mobile service revenues MSR Fixed

Consistent revenue growth

• Outgoing mobile revenue growing by 9.7% y-o-y in Q4 and 9.3% in FY on strong data growth (+20.9% y-o-y in FY)
• Enhanced fixed revenue trend on FBB and new services (+3.8% y-o-y in Q4)
• Revenue y-o-y growth slightly decelerates in Q4 to 1.3% (+1.5% in Q3) on lower handset sales contribution
• Regulation dragging y-o-y growth by 1.5 p.p. in Q4 and FY

OIBDA Margin

Organic y-o-y

OIBDA margin erosion in 2013 to further capture growth

• Sequential margin improvement (35.7% in Q4 vs 28.9% in Q3) on lower commercial costs, non-recurrent effects (+€33m) and efficiency gains
• Strong commercial efforts dragging OIBDA margin
• Higher network costs to tackle booming data and maintain coverage and quality leadership
• Synergies flowing (personnel, taxes,…); strong FCF generation

T.LATAM

T. Latam: Strengthened market positioning (I/II)

T. Latam: Strengthened market positioning (II/II)

T.LATAM

T. Europe: Focused portfolio with enhanced margins

2013 Revenue (y-o-y organic ex-regulation)

2013 OIBDA margin (y-o-y organic)

• Sound commercial trading in very dynamic markets
• Leadership in Spain: "Fusión" (quality premium on FTTH)
• Ongoing momentum in contract mobile: "O2 Refresh" in the UK
• Innovative multibrand and data centric approach in Germany

• Building the foundations for data growth monetization

• Further progress on LTE across Europe
• Focus on fibre deployment in Spain

Transformation and profitability

• Sustainable customer base fuelling top line improvement
• Consistent margin expansion on cost optimisation
• Deep simplification of the operating model
• Reduction in commercial costs (-16.7% y-o-y organic in FY)
• Continuous investment in key priorities (LTE, fiber)

Spain: Remarkable trading, strong push on fiber

Movistar Fusión % New & upselling customers /gross adds

Improved trends in Q4: Turnaround to higher value

• Record-high fiber and Pay TV net adds in Q4
• Christmas campaign leveraged on cross-selling
• Full Pay TV for new contract mobile lines within "Fusión"
• High penetration of "Movistar Fusión" in consumer segment:
• 52% of FBB in Dec-13 (+29 p.p. y-o-y)
• 45%(1) of contract mobile in Dec-13 (+29 p.p. y-o-y)
• Mobile contract net loss reduced in Q4
• Differential value proposition after renewal offer in Sep-13
• LTE, fiber, Mini TV

Acceleration of quality differentiation

• FTTH coverage increased to 20% of total homes by Dec-13
• Deployment accelerated in Q4 (580 k additional HHPP)
• Higher value fiber customers (3x gross value vs. ADSL)
• 1.5x ARPU
• 0.5x churn
• LTE reached ~40% of pop. by Dec-13

Spain: Consolidating trends across the board

2013 Revenue (organic y-o-y)

2013 OIBDA Margin

organic y-o-y

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

Consistent revenue stabilisation

• Fixed revenue trend improvement on better commercial trend of "Fusión"
• Strong regulatory impact (MTR -60% on 1st July)
• Successful Christmas campaign not yet reflected in revenues

Outstanding profitability on full benefits from transformation

• Impressive savings (OpEx y-o-y: -17.6% in FY; -11.5% in Q4)
• Strong reduction in commercial costs (-31.3% y-o-y in FY)
• Restructuring Program and temporary suspension of pension plan
• Simplification and higher quality
• Efficiency initiatives on progress
• Insourcing
• Distribution channel optimisation (PoS reduction, foster on-line)
• Call center simplification

High operating cash flow generation (FY: €4.8 bn)

• CapEx y-o-y reduction in 2013 (-13.6% organic) on optimization and focused allocation towards fiber and LTE
• CapEx in fiber +44% y-o-y in 2013
• Benchmark OpCF margin at 37% in FY (+3 p.p. y-o-y)

UK: Solid commercial momentum

2013 Mobile Service Revenues (y-o-y)

MSR MSR ex-Refresh ex-regulation

2013 OIBDA margin

Financial y-o-y change are in local currency

Successful commercial proposition

• "O2 Refresh" surpasses the 1 million mark
• Only available in direct channels; 56% of contract activity (+3 p.p. q-o-q)
• LTE progressively adopted by customers
• 38% outdoor coverage; target >60% at Dec-14
• Monetisation based on increasing data consumption
• LTE customers: 2x higher data consumption vs. 3G

Improved revenue trends

• Stabilisation of total revenues y-o-y (+0.3% in Q4; -0.5% in FY)
• "Refresh" contributed with 8.5 p.p. to Q4 and 5.8 p.p. in FY
• Fixed business disposal deducted 1.7 p.p. in Q4 and 1.2 p.p. in FY
• MSR growth negatively impacted by "Refresh" model

Managing growth and profitability

• OIBDA performance y-o-y (+11.8% in Q4; +7.0% in FY) reflects
• Efficiencies on outsourcing and lower commercial spend (OpEx y-o-y: -3.2% in Q4; -1.2% in FY)
• Benefits of "Refresh" proposition partially offset by direct trading
• OpCF ex-spectrum up 19.0% y-o-y in FY

Investor Relations Telefónica, S.A.

Germany: Data monetisation in a competitive environment

LTE enabled devices sold

2013 Revenues (y-o-y)

Revenues MSR ex-MTR

Solid progress in LTE

• LTE population coverage at >40%
• 4G customers: 3x usage vs non-LTE smartphone
• Doubling CapEx in LTE in 2013
• ~100% clients in consumer contract opting for a data-centric tariff
• 3G network densification: Enhancement of HSPA+ with dual cell

Transforming the business towards data

• Top line pressure on:
• Continuous tariff renewals
• Further decline of SMS revenue in Q4
• Sustained y-o-y growth of non-SMS revenues (Q4: +18.6%; FY: +21.7%)
• Non-SMS/data revenues at 70% in Q4 (+10 p.p. y-o-y)

Sustained OIBDA margin q-o-q

• Reported OIBDA (+6.5%) and margin (31.4%;+4.1 p.p.) in Q4 impacted by asset sales
• OIBDA -8.8% y-o-y in FY excluding capital gains (-14.3% in Q4):
• Higher commercial costs mainly in retention
• Specific promotions on devices & higher mix of LTE sales

Substantial net debt reduction, well below our 2013 target

Net Financial Debt

Outstanding liquidity while reducing interest costs

Increased average debt life above 7 years (1) (Dec-13)

Total liquidity cushion at €22.6bn

€12bn well diversified long term financing in 2013

Effective interest cost at guidance bottom (12 month rolling)

(1) Includes Hybrids maturing at Non-call dates (year 5, 7 and 8)

2014 outlook

Guidance 2013	2013	Guidance 2014 (organic and excluding Venezuela)
Revenue growth (>0%)	0.7%	Positive revenue growth
Lower OIBDA margin decline than in 2012 (-1.4 p.p.)	(-0.2 p.p.)	OIBDA margin towards stabilisation with erosion of around 1 p.p. y-o-y to allow for commercial flexibility if needed
Similar CapEx/Sales as in 2012 (14.1%)	14.5%	CapEx/Sales: 15.5%-16%
2014 Dividend: €0.75/share
		Guidance 2014 (Reported)
Net debt < €47Bn	€45.4Bn	Lower than €43Bn
• CapEx increase oriented to stimulate growth  Network differentiation, further revenue opportunities  Improve market positioning & ROCE in core markets  CapEx to encourage FCF generation • Mid-term commitment 2.35x ND/OIBDA reiterated	• 2013 Dividend: €0.75/share  €0.35: cash payment Nov-13  €0.40: cash payment in Q2 14 • 2014 Dividend: €0.75/share  To be paid in Q4 14 (€0.35 scrip) and Q2 15 (€0.40 cash)
		Q4 14 scrip dividend allowing to re-invest dividend into business

CapEx intensification compatible with attractive shareholder remuneration & regaining further financial flexibility

Closing remarks

• One step further in our evolution to the Digital era

• Faster, simpler, closer, efficient, sustainable: capabilities needed to maximise returns from the Digital opportunity
• Technology strength and differential infrastructure are non-replicable competitive advantages

• Significant progress reached in 2013

• Recovering revenue organic growth, stable organic OIBDA and strong FCF generation
• Regaining further financial flexibility, increasing the focus in core markets, improving Group's growth potential through in-market consolidation

• Accelerating growth in 2014

• Building stronger networks to improve our market positioning in key markets coupled with increasing efficiency levels
• Financial discipline and superior shareholder remuneration as core principles; further portfolio optimisation remains as an opportunity