Telefonica S.A. — Investor Presentation 2014

Jul 31, 2014

Results

January - June 2014

Investor Relations Telefónica, S.A. 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.

Highlights

• Execution of strategy on track. Strong commercial push; focus on high value segments

• Q2 net adds: 2m contract, 0.6m Pay TV, 0.2m FTTH
• Increasing customer value through average life extension and improving ARPU
• Fifth consecutive quarter of top line growth (Q2: +1.3% y-o-y)
• Highly diversified asset mix; improving trends in UK, Germany and Brazil
• Outstanding commercial traction in Spain anticipates improving performance
• OIBDA stable in H1 (-0.1% y-o-y) amid increased commercial activity in Q2
• Q2 OIBDA -0.7% y-o-y; limited erosion of 0.6 p.p. y-o-y in margin
• Cost efficient organisation; H1 margin 32.3% (-0.5 p.p. y-o-y); OpEx savings continue to offset higher commercial expenses
• Continued investments on developing high speed networks, enlarging market differentiation
• Robust FCF up to June (€1.7Bn); sustained financial flexibility
• Net debt €43Bn (2.43x ND/OIBDA) considering Ireland sale completed in July
• Net income up 5% y-o-y in Q2 (€1.2Bn); EPS accelerating to €0.26 per/share
• 2014 outlook and dividend confirmed
• Performance consistent with FY targets (Revenues +0.1%; OIBDA margin erosion -0.9 p.p.; CapEx/Sales 13.7%; all organic and ex-Venezuela)

All y-o-y changes are organic

Key figures / Financial summary

	H1 14			Q2 14
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenues	24,957	(12.6%)	1.4%	12,725	(11.8%)	1.3%
OIBDA	8,055	(14.5%)	(0.1%)	4,126	(15.0%)	(0.7%)
OIBDA Margin	32.3%	(0.7 p.p.)	(0.5 p.p.)	32.4%	(1.2 p.p.)	(0.6 p.p.)
OpCF (ex-spectrum)	4,722	(25.7%)	(13.5%)	2,161	(28.7%)	(16.9%)
Net Income	1,903	(7.5%)	---	1,210	4.9%	---
EPS	0.41	(11.0%)	---	0.26	2.0%	---
FCF	1,644	14.7%	---	1,325	(30.6%)	---
Net financial debt	43,791	(12.1%)	---	43,791	(12.1%)	---

Reported growth rates impacted mainly by forex

• Depreciated FX rates, basically BRL, ARG and VEF dragged y-o-y:
• Revenue and OIBDA; H1: -10.9 p.p; Q2: -10.0 p.p.
• T. C. Republic deconsolidation drained y-o-y:
• Revenue (H1 -3.1 p.p.; Q2: -3.0 p.p.); OIBDA (H1 and Q2: -3.7 p.p.)

FX effect at FCF level virtually neutralised as lower CapEx, Interest, Tax & Minorities payments offset OIBDA impact

Accelerating commercial activity towards value and quality in Q2 (i)

Net adds. Q2 14 excludes 131K TV Mini accesses in Spain, and 50K FW accesses in Peru, but includes backlog in Spain (Pay TV, FBB and FTTH). Q1 14 excludes disconnections made in Spain, Mexico and T. Czech Republic accesses as of Dec-13

Accelerating commercial activity towards value and quality in Q2 (ii)

LTE coverage

CONTINUED INVESTMENTS SET STAGE FOR FUTURE GROWTH

Pay TV accesses (organic y-o-y)

Increasing differentiation and customer experience

• Exploiting smartphone momentum: accesses +38% y-o-y organic
• FTTH connected accesses: 1.2m in Jun-14 (x2 y-o-y)
• Higher take-up and strong demand of LTE; fostering data monetisation
• Booming Pay TV adoption, mainly in Spain

Steady organic revenue growth; healthy profitability

Revenues (organic y-o-y)

OIBDA (organic y-o-y)

OIBDA margin

All y-o-y changes are organic

Positive organic top line growth for the fifth consecutive quarter

• Benefits from diversification in H1:
• T. Hispam boosting growth (+13.0% y-o-y; +10.4% ex-VZ)
• T. Brazil (+0.6% y-o-y)
• T. España (-8.6% y-o-y)
• Mobile data: 40% of MSR (+3 p.p. y-o-y)
• Consistent acceleration of Q2 mobile data revenues to 9.2% y-o-y
• Q2 revenue y-o-y showed similar trend to previous quarter
• Ramped-up in Q2 ex-regulation (+3.7% y-o-y vs. +3.4% in Q1)

OIBDA and margin reflected growth reinvestment

• Broadly stable OIBDA in H1 y-o-y:

• Ongoing cost control and revenue flow
• Targeted efficiencies and scale benefits
• Q2 OIBDA y-o-y decline affected by increased customer investment for capturing market growth opportunities:
• Commercial costs +6.1% y-o-y vs. -1.3% in Q1 on higher advertising and commissions
• Higher coverage, capacity and speed of UBB driving network costs 7.3% up y-o-y in Q2 (+2.2 p.p. q-o-q)

6

Solid double digit FCF growth

FCF (€ in millions)

FCF absolute change y-o-y (€ in millions)

	FCF improvement y-o-y
•	WC improvement (+€767m) mainly driven by optimisation measures and advanced collections in Germany
•	Lower spectrum payments (+€953m)
•	Savings on tax payments (+€331m)
•	Reduced minority drag (+€35m)
•	Higher interest payments (-€35m)

TGR: leading technological transformation

(1) Business Support System

(2) Supply Relationship Management

Digital Services: Innovative portfolio of digital solutions

Spain: Starting the recovery; outstanding KPIs

Movistar Fusión ('000)

(3) Excludes the disconnection of inactive M2M accesses in Q1 14

Investor Relations Telefónica, S.A. (4) Internal estimate

Strong demand of "Fusión TV": Best 4P offer in the market

• Pay TV: 1.2 m customers, nearly doubling y-o-y
• 27% market share(4) (+9 p.p. q-o-q)
• Steady growth in FTTH to 861K customers (791K 100Mb)
• 10€/month price premium (ex-VAT); 0.6x churn vs. DSL
• Positive net adds in mobile contract in Q2, first since Q2 11
• Strong portability improvement (net loss in contract: -43% q-o-q)

Record high loyalty; enhancing the value of the base

• Churn reduction extends lifetime of services
• Lifetime within "Fusión": 2.3x FBB & 3x Mobile contract
• Loyalty reset by new portfolio (12 month)
• Fostered growth in high-end packages
• 79% of "Fusión" gross adds in Q2 >60€/month
• ARPU "Fusión": €68.8 in Q2

Accelerating UBB deployment

• Widening our quality gap with FTTH
• 7.4m premises already covered
• Fiber 10 Mb launched: 70K customers as of Jun-14
• LTE reached ~47% of pop. by Jun-14 (~60% Dec-14E)

Spain: Revenues have reached the bottom

Investor Relations Telefónica, S.A.

UK: Record loyalty on superior customer experience

Contract net adds ex-M2M ('000)

Mobile Service Revenues (y-o-y)

Financial y-o-y change in local currency

Improved commercial traction

• Sustained mobile base growth at 3% y-o-y
• "Refresh" tariffs keep momentum
• Upgrade of high value customers to LTE
• Further investment in LTE expansion (43% outdoor coverage Jun-14)
• Strong contract access growth (+6% y-o-y)
• Launch of new set of prepay tariff "Big Bundles" in May

Top line returned to growth in Q2

• Revenue growth: Q2 +0.1% y-o-y (Q1: -0.3% y-o-y)
• "Refresh" deducted 0.8 p.p. (+6.0 p.p. in Q1) and fixed assets disposal deducted 0.5 p.p. (-1.7 p.p. in Q1)
• ARPU uplift on data monetisation: Non-SMS data revenue accelerated to 19.2% y-o-y in Q2
• Q2 OIBDA (-8.4% y-o-y in Q2) impacted by:
• Disposal of fixed business assets in Q2 13 (€73 m)
• Q2 13 restructuring expenses (€40 m)
• Contribution of "Refresh" gradually normalising from April-14
• OIBDA margin stable in Q2 y-o-y (ex-fixed business assets & restructuring), due to better business performance, despite "Refresh" (-1.0 p.p.)

Germany: Successful data monetisation strategy

Investor Relations Telefónica, S.A.

Brazil: Enhancing leadership in high value customers

Contract vs. Prepaid

Focus on profitable growth

• 4th consecutive quarter capturing >60% of new contract customers in the market
• +3.4 p.p. contract market share y-o-y to 41.3%
• Highest coverage in 3G and 4G
• Leadership in quality and brand perception
• Contract: record high gross adds (+7% y-o-y) and lowest churn ever (-0.5 p.p. y-o-y) in Q2 14
• Sound outgoing ARPU (+6.2% y-o-y organic in Q2 and H1)

Fixed Services Net Adds ('000)

(Fixed telephony, TV and FBB)

Execution of turnaround strategy on track

• Accelerating penetration of fiber: 19% of premises passed in São Paulo state
• Fiber connected customers: 273k Jun-14
• Fiber vs. ADSL customers 1.7x ARPU & 0.6x churn
• Growing Fixed Wireless, 89% net adds outside São Paulo (168k net adds in Q2 to 821k customers)

Brazil: Improved revenue and OIBDA trend

Service Revenue (organic y-o-y)

Revenue y-o-y growth acceleration

• Increased regulatory impact in Q2 (dragging y-o-y growth by 4.6 p.p. vs. 2.7 p.p. in Q1)
• Outgoing mobile revenues improved y-o-y (+11.3% in Q2; +10.0% in H1) on steady non-SMS data revenue growth of 40%
• Fixed revenues (H1: -4.6% y-o-y; Q2: -6.1% y-o-y) affected by seasonal effects and higher regulatory impact (-1.4% ex-regulation y-o-y in H1)

OIBDA (organic y-o-y)

OIBDA margin organic y-o-y

OIBDA returning to y-o-y growth in Q2

• Revenue improvement flowing into OIBDA
• OIBDA margin (32.1% in Q2) ramped-up both q-o-q and y-o-y
• Strict cost discipline offsetting higher commercial and network costs

Hispam: Double digit revenue & OIBDA growth

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

Hispam Hispam ex-Venezuela

New revenue streams boosting revenue growth

• Strong growth¹ across the board: Peru (+9.7%); Chile (+2.8%); Mexico (+6.3%); Argentina (+26.4%); Colombia (+9.7%)
• Higher regulatory effect and lower handset sales dragging Q2 organic y-o-y growth by -1.6 p.p. and -2.3 p.p. respectively
• Non-SMS mobile data and FBB & new services: +41.5% and +18.5% y-o-y in Q2, respectively
• Voice traffic volumes booming: MOU up +12% y-o-y in Q2
• Commercial push on high-value segments setting the basis for further growth

OIBDA (organic y-o-y)

OIBDA margin organic y-o-y

(1) Q2 14 organic growth ex-regulation y-o-y

Solid OIBDA growth acceleration

• All countries (but Uruguay) posting OIBDA growth y-o-y
• OIBDA margin y-o-y trend steadily improving (Q2 14: 32.8%)
• Strong efficiency efforts offsetting higher commercial costs and network & IT expenses
• CapEx growing strongly (+44.2% y-o-y in H1 14) to capture further growth

Investor Relations Telefónica, S.A.

Hispam: Strong growth across the board (i)

Hispam: Strong growth across the board (ii)

Year to date net debt reduction to €43bn

Diversified financing at managing liquidity

Effective interest cost (12 month rolling)

€ in billions Cash position excluding Venezuela Undrawn credit lines & syndicated RCF Liquidity position 10.1 22.2 Jun-14 12.1 89% LT

Net debt maturities (Jul-14)

Investor Relations Telefónica, S.A.

Conclusion

• Consistently executing our transformation strategy
• Accelerated subscriber intake in Q2
• Strong traction of commercial offers and sequential churn improvement
• Increased demand for value and quality services, with lower churn & higher associated ARPU
• Consolidating revenue growth trends in Q2
• Improving revenues in Brazil, UK, and Germany offsetting slowdown in Spain and Hispam
• Strong commercial traction in Spain anticipating revenue recovery
• Limited OIBDA margin erosion despite intense commercial activity in Q2
• Robust margin of 32.3% in H1 (-0.5 p.p. y-o-y organic); 32.4% in Q2 (-0.6. p.p. y-o-y organic)
• OpEx savings ongoing delivery
• Strong focus on expanding 4G coverage and fiber networks
• Sound FCF increase in H1
• Net debt at €43Bn, including sale of T. Ireland closed in July