Telefonica S.A. — Investor Presentation 2014

Mar 31, 2014

Results

January - March 2014

Telefónica, S.A. Investor Relations

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.

Q1 14 Highlights

• Solid beginning of the year

• Delivering on 2014 strategy; increasing customer value and network differentiation while improving financials
• Continued strength in revenue growth & consistent OIBDA stabilisation
• Organic sales up for the fourth consecutive quarter (+1.5% y-o-y)
• Robust growth in high-quality customer base (smartphones, LTE, fiber)
• Organic OIBDA growth of 0.5% y-o-y, with strong margin at 32.1% (-0.3 p.p. organic y-o-y) on efficiency progress
• Targeted investments for future growth and top quality networks
• CapEx devoted to growth & transformation: 69% of total
• Speed-up network modernisation: creating a more efficient platform for innovation and differential customer experience

• Best Q1 FCF in the last three years

• Lower spectrum payments & working capital improvement offsetting CapEx increase, FX impact and asset disposals
• Q1 FCF +€796m y-o-y
• Further leverage reduction
• Net financial debt reduced by €2.7Bn in Q1 to €42.7Bn (2.30x ND/OIBDA), absorbing seasonal effects on FCF and Venezuelan implicit devaluation

• Full year guidance and dividend reiterated

Quarterly performance aligned with 2014 guidance (Revenues: -0.1%; OIBDA margin erosion: -0.4p.p.; CapEx/Sales: 11.5%; all organic and excluding Venezuela)

Key financials

	Q1 14
€ in millions	Reported	Reported y-o-y	Organic y-o-y
Revenues	12,232	(13.5%)	1.5%
OIBDA	3,929	(14.0%)	0.5%
OIBDA Margin	32.1%	(0.2 p.p.)	(0.3 p.p.)
OpCF (ex-spectrum)	2,561	(22.9%)	(10.6%)
Net Income	692	(23.2%)	--
EPS	0.15	(27.0%)	--
FCF	339	c.s.	--
Net financial debt	42,724	(17.5%)	--

Reported figures hit by FX & changes in the perimeter

• Depreciated FX rates, mainly BRL, ARG and VEF drained y-o-y:
• Revenue: -11.8 p.p.; OIBDA -11.7 p.p.
• T. C. Republic deconsolidation deducted y-o-y:

• Revenue: -3.1 p.p.; OIBDA -3.7 p.p.

• FX impact in OIBDA neutralised at FCF level through lower CapEx, Interest, Tax and Minorities payments

• Outstanding debt reduction (-€16Bn in the last 7 quarters) in spite of implicit VEF devaluation

Strongest Q1 FCF since 2011, despite CapEx and FX

FCF to improve sequentially as Q1 is traditionally impacted by seasonal effects

Selective commercial approach; increasing customer value

Organic growth: in 2013 excludes the accesses of T. Czech Republic and T. Slovakia as well as the accesses relating to the fixed consumer business in the UK

Revenue & OIBDA growing organically

TGR: speeding up technological transformation in network, IT and operations

IT Transformation: simplification on track and new major initiatives

• IT transformation: implementing core commercial application suites in most of Hispam countries
• Simplification and transformation of the business through standardised customer oriented processes
• Reutilisation and standardisation resulting in major savings vs. local contract

• Quantum leap in customer experience and business agility

• IT infrastructure consolidation in EU & Brazil

• Decommissioning ~80 applications (25% of 2014 target)
• More than 35% servers virtualised

Digital Services: Advancing across different P&S

	Consumer: Towards new and sustainable revenue opportunities		B2B: Digital Services to move forward to a digital telco
Video	• Exclusive Moto GP & F1 Revenue 12% content rights signed in (organic y-o-y) Spain Accesses 8% 11% • Increasing Pay TV (y-o-y) 14% market share	Advertising	• Creation of Axonix, 1st mobile advertising exchange platform owned by a mobile operator and powered by MobClix technology
	Mobile Security
Security 3.9 m x4 y-o-y accesses
			• Revenue Adding value, leveraging Corporate & (organic y-o-y) SMEs offering
Global device management	65% x9 y-o-y of total shipments LTE handsets are smartphones volume	Cloud	• Acquisition of eyeOS, >20% pioneer in the open source web desktop to offer DVS(1)
	Accesses
Strategic	• Rhapsody Adding value to our Evernote		• Revenue Managed M2M connectivity for (y-o-y growth) urban solutions with JCDecaux >50%
data proposition Partnerships 74K 185K		M2M	• Accesses Partnership with Tesla for M2M (y-o-y) 20%(2) connectivity
Ehealth	• New agreement with Saluspot enables to offer free online health advice and consultations
			• Revenue Relevant CyberSecurity projects awarded (y-o-y growth) in Spain and Colombia leveraging global
Financial	• Announcement of Yaap brand for the digital services to be launched in Spain jointly with Santander & CaixaBank:	Information Security	SOC(3) roll-outs >20%
Services	 Yaap Shopping, a virtual showroom
	 Yaap Money, a P2P payment service
Investor Relations	(1) Desktop Virtualisation Service (2) Organic and impacted by the disconnection of 0.6m inactive accesses in Spain in Q1 14 (3) Security Operation Center

Telefónica, S.A.

Spain: Unique assets driving quality trading

Movistar Fusión

Customers New & upselling adds % New & upselling adds

"Movistar Fusión" improving momentum

• Significant contribution of new/upselling services
• 2/3 of contract mobile base in "Fusión" & new mobile tariffs
• "Fusión TV" focused on differential value
• TV in all packages with exclusive content & functionalities
• New portfolio (end April) adding value for the same price
• "Fusión" churn lower than standalone services
• FBB lifetime x1.8; Mobile contract x2.8
• "Fusión" ARPU at high level (70€)

Strong growth of high value customers

• New record in Q1 FTTH net adds
• Fiber customers at 701K (x1.9 y-o-y)
• "Fusión Fiber" priced at 10€/month premium (ex-VAT)
• "Movistar TV" gaining traction
• Mobile contract improved (Q1 net loss(2) -62% y-o-y)

Enlarging network differentiation

• FTTH roll out acceleration (Mar-14: 4.1m HHPP; 6.1m premises)
• Coverage at 24% of total homes in Spain (+4 p.p.vs Dec-13)
• Uptake maintained at 17% despite accelerated deployment
• LTE at ~44% of pop. by Mar-14 (~60% Dec-14E)
• 800 MHz will enable more efficient deployment

24% of Group revenue

FTTH ('000)

Net adds ('000)

Spain: Revenue improvement trend accelerates

OIBDA margin

Mobile contract gross adds

Top line improvement in a very competitive market

• Commercial turnaround delivering results
• Increasing customer preference for premium quality
• Back book repricing largely digested
• Growth in handset sales (+23.2% y-o-y in Q1), changing trend vs Q4 13 (-13.0% y-o-y)

Very solid profitability; combining improved commercial activity with efficiency gains

• Continued efficiency gains from transformation
• Personnel, simplification, insourcing
• Distribution channel and call centers
• Increased commercial effort
• Higher gross adds y-o-y (fiber, TV, mobile)
• Higher handset upgrades

UK: Growing contract customer value

Mobile Service Revenues (y-o-y)

MSR MSR ex-Refresh & ex-regulation

OIBDA margin

Financial y-o-y change in local currency

• Upgrading customers to LTE
• 41% outdoor coverage; ongoing investment in LTE expansion through network sharing
• ARPU uplift (high-single digit %): higher data consumption (2x vs 3G)
• Strong adoption of "O2 Refresh"
• Strengthened loyalty
• New tariffs from Feb. 28th: incorporating a wider range of handsets
• 135k contract net adds in Q1

Sequential consolidation of trends in MSR y-o-y (ex-Refresh&egulation)

• Revenue remained broadly stable (-0.3% y-o-y in Q1)
• "Refresh" added 6.0 p.p. and fixed assets disposal deducted 1.7 p.p.
• Solid growth of non-SMS data revenue (+13.9% y-o-y)
• Q1 OIBDA up 16.3% y-o-y
• Benefits of "O2 Refresh" proposition; Lower trading activity; True-up of past commissions (€24 m); Tight cost control (OpEx -5.1% y-o-y)
• "O2 Refresh" impact gradually normalising from April-14 (anniversary of launch)

Germany: Investing in opportunities around LTE

Increasing value of the base

Revenues (y-o-y)

Best positioned to benefit from data monetisation opportunities

• O2 Blue All-in portfolio refreshed from April
• LTE is included in all tariffs plus attractive roaming packages
• New Premium tariff & continued attractive bundle offers
• New tariff "O2 Unite" announced for the business segment
• LTE outdoor coverage at 50% at the end of April (~40% in Dec)

Stabilising MSR performance q-o-q

• Revenue pressure on:
• Lower handset sales (-33.2% y-o-y): price & volume driven
• MSR: accelerated decrease of SMS volumes, renewal of tariffs within the base and weakened prepaid dynamics
• Sequential lower ARPU dilution
• Non-SMS/data revenues at 72% in Q1 (+9 p.p. y-o-y)

OIBDA Margin Margin erosion on increasing commercial spend

• OIBDA performance (-14.6% y-o-y) affected by:
• Higher commercial expenses
• Revenue flow-through

(1) Q4 13 excludes €76m of asset sales

Brazil: Reinforcing leadership in high value customers

Contract Mobile Net Adds (m)

Contract Prepaid

Outperforming in mobile market

• Reinforcing market leadership in the contract segment to 40.6% of market share (+3.5 p.p. y-o-y)
• Mobile contract penetration: 32% (+6 p.p. y-o-y)
• Smartphone penetration: doubling y-o-y to 28%
• New "Vivo Tudo" prepaid offer (bundling voice, data and SMS), boosting prepaid net adds (4m customers in 2 months)

• Superior networks and lower complaints, towards ^a more sustainable growth model

• Fiber reached 1.5m households (2.3m premises), with 236k already connected

• Expansion of Fixed Wireless technology (169k net adds in Q1 to 653k customers)

(1) Includes Fixed Wireless broadband

Brazil: Solid financial performance

Revenue (organic y-o-y)

Consistent revenue growth

• Total revenues up 0.2% organic y-o-y, with negative impact of regulation and lower handset sales (-2.7 p.p. and -0.8 p.p., respectively)
• Outgoing mobile revenue +8.7% y-o-y organic on strong data growth (+20.7%) boosted by non-SMS revenues (+42.0%)
• Best fixed revenues y-o-y performance in almost ³ years thanks to commercial turnaround from H2 13

OIBDA Margin (y-o-y) Limited OIBDA margin erosion y-o-y

• Strong commercial activity and higher network expenses dragging profitability
• Strict cost discipline delivering savings on personal expenses and other G&A costs

Hispam: Strong revenue & OIBDA growth 28% of Group

Revenue (organic y-o-y)

Hispam Hispam ex-Venezuela

OIBDA (organic y-o-y)

• Hispam Hispam ex-Venezuela
• OIBDA margin organic y-o-y

Balanced portfolio with all the countries contributing to growth

• Increased contribution of Mexico, Chile and Colombia:
• Mexico: Revenue acceleration y-o-y driven by steady commercial activity improvement
• Colombia: Revenue y-o-y growth improved by 12 p.p. in just 1 year
• Chile: Best revenue growth ex-regulation in almost 4 years on better commercial activity

Revenue growth drivers (organic y-o-y) Healthy revenue expansion on new revenue sources

• Strong increase across services in Q1 (MSR +17.5% y-o-y; Fixed +8.9% y-o-y)
• Non-SMS data main growth driver (9 p.p. out of MSR y-o-y growth)
• Recent launch of 4G services in Chile, Colombia and Peru
• Record-high mobile voice traffic volumes with y-o-y trend accelerating (+26% in Q1 vs. 15% in Q4 13)

OIBDA margin increasing y-o-y

• Solid double digit OIBDA y-o-y organic growth on efficiency savings more than offsetting higher network & commercial expenses

Hispam: Consolidating growth across the board (I)

Hispam: Consolidating growth across the board (II)

Ongoing net debt reduction & leverage improvement

Net Financial Debt

€ in millions

Broad financing while maintaining ample liquidity

Long term financing: well diversified

Guidance

Liquidity cushion

Net debt maturities (Mar-14)

Conclusion

• Solid earnings momentum
• Increasing value of our customer base
• Improving revenue growth trends
• Consolidated revenues up 1.5% y-o-y organic (+3.4% ex-regulation)
• Continued strength of mobile data revenues and Hispam, while Spain accelerates recovery
• High profitability at 32.1%, nearly flat vs. Jan-Mar 13
• Revenue flow and lower cost structure lead to a +0.5% y-o-y organic OIBDA growth
• Maximising value from scale and efficiency measures transformation
• Continue to invest in high speed networks (FTTH & LTE)
• Best Q1 FCF in the last three years
• Strong debt reduction to €42.7Bn

Guidance criteria 2014: 2014 guidance in organic terms assumes constant exchange rates as of 2013 (average FX in 2013), excludes Venezuela in both years and considers constant perimeter of consolidation. OIBDA level guidance for 2014 excludes write-offs, capital gains/losses from companies' disposals, towers sales and other significant exceptionals such as restructuring costs, etc. CapEx excludes spectrum acquisition.

Organic growth: Assumes constant exchange rates as of 2013 (average FX in 2013), excludes hyperinflationary accounting in Venezuela in both years and considers constant perimeter of consolidation. In OIBDA and OI terms, excludes write-downs, capital gains/losses from the sale of companies, tower sales and material non-recurring impacts. CapEx also excludes spectrum acquisition.