Telefonica S.A. — Investor Presentation 2014

Dec 31, 2014

Results 2014 & Outlook 2015-2016

Back to profitable growth

Razón Social Telefónica, S.A. Investor Relations

Disclaimer

THIS DOCUMENT IS NOT AN OFFER FOR SALE OF SECURITIES IN THE UNITED STATES, AND ANY SECURITIES REFERENCED HEREIN MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION OR AN EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED ("THE SECURITIES ACT"). ANY PUBLIC OFFERING OF THE SECURITIES REFERENCED HEREIN IN THE UNITED STATES WILL BE MADE BY MEANS OF A PROSPECTUS CONTAINING DETAILED INFORMATION REGARDING TELEFÓNICA, S.A. AND ITS MANAGEMENT, INCLUDING FINANCIAL STATEMENTS.

This document contains statements that constitute forward looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 about Telefónica Group (going forward, "the Company" or Telefónica). The forward-looking statements in this document can be identified, in some instances, by the use of words such as "will," "shall," "target," "expect," "aim," "hope," "anticipate," "should," "may," "might," "assume," "estimate," "plan," "intend," "believe" and similar language or other formulations of a similar meaning or, in each case, the negative formulations thereof. Other forward-looking statements can be identified in the context in which the statements are made or by the forward-looking nature of discussions of strategy, plans or intentions. These statements include statements regarding our intent, belief or current expectations with respect to, among other things: the effect on our results of operations of competition in telecommunications markets; trends affecting our business financial condition, results of operations or cash flows; acquisitions, investments or divestments which we may make in the future; our capital expenditures plan; our estimated availability of funds; our ability to repay debt with estimated future cash flows; our shareholder remuneration policies; supervision and regulation of the telecommunications sectors where we have significant operations; our strategic partnerships; and the potential for growth and competition in current and anticipated areas of our business.

Such forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties, and actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. The risks and uncertainties involved in our businesses that could affect the matters referred to in such forward-looking statements include but are not limited to: changes in general economic, business or political conditions in the domestic or international markets in which we operate or have material investments that may affect demand for our services; exposure to currency exchange rates, interest rates or credit risk related to our treasury investments or in some of our financial transactions; existing or worsening conditions in the international financial markets; the impact of current, pending or future legislation and regulation in countries where we operate, as well as any failure to renew or obtain the necessary licenses, authorizations and concessions to carry out our operations and the impact of limitations in spectrum capacity; compliance with anti-corruption laws and regulations and economic sanctions programs; customers' perceptions of services offered by us; the actions of existing and potential competitors in each of our markets as well as the potential effects of technological changes; failure of suppliers to provide necessary equipment and services on a timely basis; the impact of unanticipated network interruptions including due to cybersecurity actions; the effect of reports suggesting that electromagnetic fields may cause health problems; the impact of impairment charges on our goodwill and assets as a result of changes in the regulatory, business or political environment; potential liability resulting from our internet access and hosting services arising from illegal or illicit use of the internet, including the inappropriate dissemination or modification of consumer data; and the outcome of pending or future litigation or other legal proceedings.

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.

Our journey

2012-14 TRANSFORMING THE BUSINESS IN ORDER TO…

2015-16E …RETURN TO SUSTAINABLE PROFITABLE GROWTH

• Investing to set the foundation for growth
• Monetising data opportunity
• Growing digital revenues
• Simplifying the business
• Extracting value from scale
• Proactively managing regulation
• Focusing portfolio
• Recovering financial flexibility
• De-risking the balance sheet

• Displaying clear proof points

• Accelerate growth

• Monetise booming data reality
• Invest further to grow (2017 to revert)
• Continue to simplify & transform
• Deliver synergies from consolidation (Germany, Brazil)
• Maintain leading profitability
• Continue to strengthen portfolio
• Maintain financial flexibility to support sustainable growth
• Grow cash dividend (Post proposed O2 UK sale closing)

Clear proof points already evident in 2014

Consistent improvement in our fundamentals: top line acceleration, with a strong performance in Q4 14…

Investor Relations Telefónica, S.A.

…while improving OIBDA & EPS trends

2014 guidance met on strong execution

	Guidance 2014 (organic and excluding Venezuela)		FY 14
	Positive revenue growth OIBDA margin towards stabilisation (erosion around 1 p.p. y-o-y) CapEx/Sales: 15.5%-16%			+0.7%	
				-0.8 p.p.	
				 15.9%
	Reported Net Financial Debt < €43bn				€43.9bn pre-VZ adjustment €45.1bn post-VZ adjustment	 €31.7bn post-VZ adjustment & proposed O2 UK sale
	Mid-term commitment Net Debt/OIBDA 2.35x			2.15x post-VZ adjustment & proposed 02 UK sale	
€/sh. 0.75		€0.35 voluntary scrip Nov-14 (84% take-up)	€/sh.	0.83	0.93
DPS	Cash/Scrip Cash dividend outflow €0.45/share	€0.40 cash Q2 15		FCFS 55% cash dividend payout	Underlying EPS

2015 and beyond: positioned for growth acceleration

1	Returning to growth in Spain	• Strong macroeconomic outlook • Positive market trends: appetite for higher value services and market rationalisation • Key differentiation assets /infrastructure (fiber, Pay TV, LTE)
2	Fuelling data monetisation	• Higher data adoption (LTE across markets; prepaid smartphone penetration in BZ & Hispam) • Monetising beyond the allowances and connecting everything • Capturing digital opportunities: video, cloud, M2M & security
3	Continued network & IT transformation	• Steady roll-out of a differential future-proof network • Accelerating the transformation of the business leveraging Full Stacks • Continue to optimise legacy
4	Delivering synergies from acquisitions	• Germany: >€5bn NPV • Brazil: >€4.7bn NPV • Additional revenue streams from upselling / cross-selling
5	Sustainable efficiency gains	• Delivering >€1.8bn savings in 2017E from simplification across markets and synergies from acquisitions

External factors: from headwinds to tailwinds

Improved Market structure

Consolidation in Spain, Germany, Brazil, Mexico & Colombia:

• From a price deflationary competitive model (no differentiation)
• To a quality of service model based on infrastructure

(1) Internal calculations & Consensus Forecast

Driving a fair policy framework in the digital ecosystem

Capital discipline: financial priorities 2015-16E

Robust Balance Sheet

• Financial Flexibility recovered
• Ratings stabilisation
• Capital increase in connection to the acquisition of GVT: rights issue up to €3bn
• Balance sheet de-risked (Venezuela FX adjusted)

Growing cash dividend(1) ND/OIBDA <2.35x

Support sustainable operating growth

• Organic growth fuelled by temporary increase in CapEx intensity
• Inorganic opportunities: Portfolio strengthening strategy remains in place

Attractive shareholder remuneration

• Sustainable Dividend
• Tactical buybacks & share cancellations to mitigate scrip dividend dilution

(1) Post proposed O2 UK divestment execution

2015 guidance & 2016 ambition

Base 2014 (Ex-UK; Ex-VZ; incl. 3M E-Plus and 6M Ireland)	2015 Guidance & 2016 Ambition (Constant FX 2014; ex-UK; ex-VZ; incl. 12M E-Plus and 6M GVT in 2015 and 12M in 2016	Guidance 2015E	Ambition 2016E
42,853	Revenues	>7%	>5% CAGR 2014-16E
32.6%	OIBDA margin	Limited margin erosion around 1 p.p. (to allow for commercial flexibility if needed)	Stabilising in 2016
16.7%	CapEx/Sales	Around 17%	Around 17%

Revert in 2017E: -2 p.p. vs 2016E

<2.35x	<2.35x
€0.75/sh.	Post proposed O2 UK sale Closing:
• €0.35/sh. voluntary scrip Q4 15 • €0.40/sh. Cash Q2 16	€0.75/sh. cash
1.5%	1.5%
Up to €3bn

1. 2014 Results

2014: Highlights

1

Built a solid platform; already clear proof points

• Inflection point to organic growth

• Recovered robust Revenue growth (+2.6% y-o-y in FY); further improving trends in Q4 to +5.0% (+1.7% ex-VZ; but +8.0% ex-Spain which is turning to positive)
• Picked-up commercial momentum on high-quality services
• Increasing customer value (Avg. Revenue/Access +2.6% vs Q4 13)
• Monetising booming mobile data
• Integrated tariff bundles; tiered pricing
• Simplify the operations through a new operating model & synergies
• Robust profitability; Return to FY organic OIBDA growth y-o-y and margin decline contained at 0.8 p.p.
• Run-rate synergies from simplification: €0.3Bn in FY 14
• CapEx intensity; speed-up network modernisation & differentiation
• Consistent investments in growth & transformation activities (15m FTTH premises passed; >20k LTE sites; TV accesses x1.5)

2 Enhanced Balance sheet strength

• Solid FCF generation (FY 14: €3.8bn)
• Net Debt /OIBDA 2.15x incl. proposed O2 UK sale; financial flexibility recovered

Superior asset portfolio with a focused footprint

• Active in-market consolidation with value enhancing deals
• Inorganic movements to strengthen position in key markets (Brazil, Germany, Spain)
• Delivered 2014 operating guidance; confirmed 2014 DPS

4

3

Financial summary

	2014			Q4 14
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenue	50,377	(11.7%)	2.6%	12,399	(14.1%)	5.0%
OIBDA	15,515	(18.7%)	0.2%	3,190	(35.9%)	0.0%
OIBDA Margin	30.8%	(2.6 p.p.)	(0.8 p.p.)	25.7%	(8.7 p.p.)	(1.6 p.p.)
OpCF (ex-spectrum)	7,361	(32.5%)	(12.7%)	582	(68.2%)	(3.9%)
Net Income	3,001	(34.7%)	---	152	(89.5%)	---
EPS	0.61	(38.1%)	---	0.02	(93.1%)	---
Underlying EPS	0.93	(21.2%)	---	0.25	(32.0%)	---
FCF	3,817	(29.2%)	---	978	(50.9%)	---
Net financial debt	45,087	(0.6%)	---	45,087	(0.6%)	---

Q4 results strongly impacted by non-recurrent/non-cash effects

• Adjustment in Venezuela from SICAD I 12 VZ/\$ to SICAD II 50VZ/\$ (-€915m in OIBDA; -€399m in net income)
• Venezuela contribution reduced to 1% of revenues & €390m net cash position. Minimising the impact of any further potential adjustment
• Venezuela adjusted from 6.3VZ/\$ to 50VZ/\$ in 2014
• Restructuring costs to further enhance efficiency (-€644m in OIBDA; -€405m in net income)
• Telco value adjustment (-€257m in net income)
• Asset sales (+€179m in OIBDA)

Q4 results impacted by non-recurrent, non-cash effects

Perimeter: E-Plus in Q4 14

Perimeter impact revenue (y-o-y)

Q4 non-recurrent impacts in OIBDA (€1.4bn) Q4 non-recurrent impacts in Net Income (€1.1Bn)

Investor Relations Telefónica, S.A.

Consistent improvement in growth profile

Revenues (organic y-o-y)

OIBDA (organic y-o-y)

Organic OIBDA margin (y-o-y)

Strong top line acceleration in Q4 (+220 bps vs Q3 y-o-y)

• Focused commercial activity on value
• Mobile Contract customers (+11% y-o-y); Smartphones +39%
• Fiber connected customers 2.1x y-o-y; record net adds in Q4 14
• Pay TV customers surpass the 5m mark (x1.5 y-o-y organic)
• FY Churn stable y-o-y

• High-class diversification; better revenue mix

• Robust mobile data in Q4 (+10.6% y-o-y)
• Progressive improvement of T. España in Q4 (+1.7 p.p. q-o-q); +7p.p. in last 4 quarters
• T. Hispam key driver of growth

Towards sustainable OIBDA growth

• Positive OIBDA growth in FY

Revenue flow, efficiency gains and organisational simplification leading to a contained margin erosion

• FY OpEx up 3.8% y-o-y

• Gaining differentiation on higher content and commercial costs (+5.5% y-o-y): Foster competitiveness (i.e. Brazil), regain leadership (i.e. Spain)
• Network and IT costs (+9.3% y-o-y): More data Co + data traffic expansion

Strong and clear progress on mobile data

Booming data traffic

• The sweet spot: increased penetration + increased usage

• Traffic growth accelerating in all regions
• Huge opportunities in Hispam: 18% prepay smartphone penetration in Dec-14
• LTE as the main trigger to foster growth
• 13m LTE customers(1) in Dec-14; 5% penetration

• Strong Q4 y-o-y growth in average smartphone consumption (Mbytes/month)

Spain: +43%; Germany: +48%; UK: +79%; Brazil: +21%; Hispam: +44%

Monetising the opportunity

• Breaking the decoupling between traffic and revenues

• Monetising beyond the allowance:

• "Bundle breakage" in ~1/3 of customers, using more data than they initially subscribed to in their data plan

• 1/3 of them enjoying best experience by subscribing to additional "data snacks"

• Plenty room to upsell
• ~1/3 of customers >1Gb plans

Mobile data revenue

FY 13 FY 14

(1) LTE devices with data plan attached, except Brazil (devices)

Capital intensity to structurally change the Company

CapEx ex-spectrum 2014 (€ in millions)

CapEx 2014 (organic y-o-y)

Organic growth y-o-y

Increased investments to grow

• Technological transformation and modernization
• Stimulate revenue opportunity & differentiation
• Addressing data traffic boom
• Built differential spectrum (Brazil, Hispam)

Deep network transformation; Increasing differentiation

• Developing high-speed networks (LTE & FTTH)
• Better quality and customer experience
• Global platforms accelerating time to market

Benefits on investments from efficiencies

• Lower maintenance CapEx vs. 2013
• Savings & operational efficiency coming from simplification, homogenisation and standartisation

Spain: Rebuilt a superior franchise

Net adds ('000)

2013 2014

Fiber 100 Mb IPTV

High value in "Fusión"

FTTH New premises passed (m)

Total Premises Passed

• Becoming market leader in Pay TV Gaining scale in high value; base growing

• 1.9m customers (x3 y-o-y); 36%E market share
• FTTH base: 1.3 m (>x2 y-o-y); 22% of FBB base
• 1m Fiber 100 Mb (10€ premium; churn 0.5x lower vs. DSL)
• Mobile contract growth (+0.5% y-o-y), first time since 2011
• Portability loss significantly improved (-30% y-o-y in FY)
• Churn declining across services

Enhanced convergent offer fostering loyalty and upselling

• Differential assets: Competitive TV and Fiber
• Improved content, MBB data volumes, VAS
• 3.7m "Fusión" customers (+27% y-o-y); 1.4m mobile add-ons
• Highly satisfied customers: Q4 "Fusión" churn 1.1%
• Longer lifetime vs. stand-alone: 2.2x FBB & 2.5x mobile contract
• Q4 "Fusion" ARPU virtually stable q-o-q at 69.3 euros
• Seasonal extra consumption out of bundle in Q3 (summer)

Leading network coverage

• FTTH 2014 target met; ~10m premises passed
• LTE coverage: 58% pop. in Dec-14
• 800 MHz availability in Q2 15
• 1.8m LTE customers, driving usage and ARPU up

Investor Relations Telefónica, S.A.

Spain: Improved revenue trend on solid fundamentals 24% of Group revenue

Revenue y-o-y (%)

Positioned for the upcoming revenue growth

• Consistent revenue improvement along the year
• Revenue y-o-y drop halved in 2014
• Quarterly revenue stabilised: ~€3bn in the last 4Qs
• Structural changes supporting performance
• Commercial turnaround on restored competiveness
• Backbook reducing impact (high convergent base)
• Price deflation stabilised / consolidation to drive more sustainable dynamics
• Higher demand for quality (macro recovery)

OIBDA Margin (%)

y-o-y organic

Top line improvement flowing to OIBDA
	•		Cost control (OpEx -1.1% y-o-y in FY; -0.1% in Q4)
			Efficiencies offsetting higher commercial costs
			Content and handsets costs up
			Insourcing, retail stores optimisation
	• Q4 OIBDA improvement q-o-q (-7.8% y-o-y organic)
			Q4 14: tower sales (€136m); real state sale (€41m)
			FY 14: tower sales €191m
	• 14.0% CapEx/Sales (+2.7 p.p. organic vs FY 13) to support structural transformation/differentiation

Germany: a solid start from a new leading position

UK: Strong customer growth & improving trends

Mobile contract net adds ('000)

Mobile Service Revenues (y-o-y)

MSR MSR ex-"O2 Refresh"

OIBDA margin

Solid trading performance continued

• Mobile base growth at 4% y-o-y (24.5m)
• Strongest net adds in 6 years: (394 k in Q4)
• Sustained expansion of contract (+6% y-o-y); 56% of total
  • o Sustained leadership in contract loyalty in Q4 (1.0%; -0.1 p.p. y-o-y)
  • o LTE penetration at 19% over total base
• Continued LTE roll-out (58% outdoor coverage at Dec-14)

• Improved ARPU trends

• Successful commercial proposition leading to price stabilisation
• Data monetisation (LTE usage 3x vs 3G; high single digit ARPU uplift)

Robust set of financials

• Revenue growth (ex-"O2 Refresh") accelerated in Q4 to +5.4% y-o-y (+0.6% y-o-y in FY)
• Ongoing MSR improvement on solid operating performance
• Handset revenues up on high-end strong trading devices (FY: +28.4%)
• FY OIBDA grew 1.1% y-o-y on efficiencies execution (OpEx:-0.9% y-o-y)
• "O2 Refresh" adds 3.7 p.p. to OIBDA margin in FY 14
• Broadly flat impact of "O2 Refresh" to y-o-y growth

Brazil: Capturing the best customers

Mobile accesses penetration

Strengthening mobile leadership

• New contract portfolio offer launched in December, reaching new monthly gross adds record
• Contract market share increased to 41.8% (+2.0 p.p. y-o-y) on best network (quality and coverage) and brand perception
• Strong outgoing ARPU y-o-y (Q4: +5.9%; FY: +5.3%)
• LTE leadership (140 cities covered; accesses market share: 38.9%)

FTTH New premises passed (m)

Transformation into a fiber Co.

• 375k fiber accesses at Dec-14 (+84% y-o-y): ~3x customer value vs. average FBB
• Strong Pay TV performance (Q4: 43k net adds, FY:131k)
• Growing IPTV net adds delivering higher ARPU
• Reshaped commercial proposal fostering DTH gross adds volume

22% of Group Brazil: OIBDA returning to growth in 2014 revenue

OIBDA (organic y-o-y)

Ex €58m one-off in Q4 13 and ex-restructuring costs in Q4 14 and Q4 13

Consistent organic revenue y-o-y growth trends

• Outperforming the market: 68% of incremental MSR market share captured in the last 12 months
• MSR accelerating to 5.7% y-o-y in Q4 excluding one-offs (ICMS tax reversal in Q4 13)
• Data revenues: 34% of MSR in FY 14
• Steady non-SMS mobile data revenue performance (+35.5% in Q4: +38.5% y-o-y in FY)
• Fixed revenue improved its trend in 2014 (-4.2% y-o-y vs. 6.8% FY 13)
• Negative impact of regulation (-3.2 p.p. in Q4 and -3.4 p.p. in FY)

Increased profitability on better OpEx evolution

• Strong efficiency efforts (i.e. restructuring costs in Q4: €68m) despite intense commercial activity, network costs and inflationary pressure
• Strong CapEx effort (FY: +15.0% y-o-y; 26% CapEx/Revenues) to enlarge quality gap vs peers

Hispam: Increased FY profitability amid strong trading 26% of Group revenue

Revenue (organic y-o-y)

Hispam Hispam ex-Venezuela

OIBDA (organic y-o-y)

Hispam Hispam ex-Venezuela

Commercial traction underpinning double-digit revenue growth

• Accesses growing by 3% y-o-y:
• Mobile contract (+4%); FBB (+6%); Pay TV (+14%)
• Higher traffic volumes driving mobile ARPU y-o-y growth (+10.6% FY; +14.3% Q4)
• Voice traffic up +16% y-o-y in FY
• Data traffic +65% y-o-y in FY 14 on increased smartphone penetration & average usage (+44% y-o-y in Q4)
• Data revenues main growth driver; 32% MSR (+2 p.p. y-o-y)
• Non-SMS data growing by 43.4% y-o-y in FY (+41.1% in Q4)

Improved profitability in most markets

• FY organic margin (+0.5 p.p. y-o-y) returning to 2012 levels despite stronger commercial activity
• Increased profitability in all countries but Venezuela and Uruguay in FY (y-o-y organic)
• Main contributors to margin y-o-y: Mexico (FY: +4.3 p.p.; Q4: +11.7 p.p.); Colombia (+2.7 p.p.; +4.4 p.p.) and Chile (+1.5 p.p.; +2.5 p.p.)
• Restructuring costs (€99m in Hispam in Q4) negatively impacting reported margin in Q4 by 4.4 p.p.

Mexico: Increasing momentum; accelerating growth

Mobile gross adds

Revenue (organic y-o-y)

OIBDA (organic y-o-y)

Commercial repositioning driving business turnaround

• Mobile accesses up 7% y-o-y; Smartphones +82% y-o-y
• Record-high gross adds in Q4 14
• Commercial offers adapting to new competitive environment
• New LTE offer launched (Oct-14)
• New Federal Telecommunications Law continued advancing

Rest of Hispam: Solid top line growth boosting OIBDA

OIBDA (organic y-o-y)

Q3 14 Q4 14

Increased profitability across the board (except VZ+CA)

• Colombia:

• Mobile data (FY: +15.0% y-o-y), FBB and Pay TV (+9.1% y-o-y) driving revenue increase
• Q4 OIBDA: +18.9% organic y-o-y on revenue acceleration and increased efficiency. FY Margin: 36.5% (39.0% in Q4)

• Peru:

• Revenue performance led by high-value accesses growth: mobile contract (+14% y-o-y); Pay TV (+6%) and FBB (+6%)
• Strong commercial activity in Q4

• Argentina:

• Commercial trading ramped-up in Q4 (mobile gross adds +16% y-o-y) on successful campaigns
• Q4 OIBDA margin stable organic y-o-y despite inflation and FX pressures

• Chile:

• Focus on high-value customers underpinned enhanced revenue & OIBDA performance
• Accelerated network deployment: LTE (64% pop coverage) & fiber (288k premises passed)

• Venezuela & Central America:

• Strong traffic growth: voice (FY: +16%) on higher MOU (+8%); data (+58%) on smartphone penetration & higher usage per access
• CapEx increase (+64.8% y-o-y organic) to foster network quality differentiation. 60 MHz LTE spectrum acquired in Q4

Strong FCF and net debt reduced ahead of O2 UK sale

Net Financial Debt

€ in millions

Robust liquidity and ample diversified financing

Investor Relations Telefónica, S.A.

29

2. 2015-16 Back to profitable growth

Continue transforming the business

Transforming the business mix

From selling minutes to selling Gigabytes

• From variable voice & fixed data consumption
• To voice bundled & variable data

Transforming the portfolio: Diversified growth profile with bigger local scale

Improving position in Key Markets: Spain, Brazil and Germany

• FY 14 57% of Revenue
• FY 16E ~2/3 of Revenue

Maintaining Global Scale & Increasing Focus in Key Markets

• 6 worldwide by accesses in 2012

• #6 in 2014 but with fewer operations

Monetising the new mobile data & video wave

Non-SMS Mobile Data Revenues ~+20% CAGR 2014-16E Video revenues >+30% CAGR 2014-16E

TGR: Differential future-proof network & IT ready by 2016

Major network transformation to be in place by 2016

Leaner Co: Simplification program enabling growth & transformation

• Structure simplification to adapt to the new operating model (from regional to global model and lower local layers)
• SG&A global policies driving further cost reductions
• Outsourcing of support functions (i.e. Brazil: 1k FTEs)
• Provision for restructuring costs & others (Germany, Brazil, Hispam and Other companies)
• Q4 14 impact (-€644m) on Group OIBDA
• Restructuring plan affecting ~ 4.5k FTEs

2014 gross savings €0.3 bn run rate Gross savings (OpEx+CapEx) 2015-17E

• Personnel cost savings related to restructuring
• Offer simplification & channel optimisation
• Customer driven simplification initiatives (i.e.: increase selfcare, e-billing…)
• Efficiencies through support functions (full transformation and further outsourcing)
• Demand based deployment leveraged on Analytics
• Network automation and global processes
• Germany & Brazil synergies related to fixed costs

Simplification Scope: ~55% of OpEx & CapEx (ex-spectrum)

Spain: Strengthening differentiation

environment to fuel unparalleled CapEx effort (subject to adequate regulation)

Up to €3.5Bn CapEx in 2015-16E(1)

A profitable growing Co. focused on value

CapEx(1) 2017E to return to 2013 level

FTTH premises passed (m) 5.2 10.3 Dec-13 Dec-14 Dec-16E LTE Coverage (% pop.) 40% 58% >85% Dec-13 Dec-14 Dec-16E "Fusión" customers (m) 2.9 +27% y-o-y 3.7 >5 CAGR 14-16E >15% Mid-single digit ARPU "Fusión" CAGR 14-16E

Dec-13 Dec-14 Dec-16

(1) Subject to adequate regulation

Every business unit contributing to accelerate growth

Digital Services: Capturing Digital growth opportunity

Germany: keep momentum, integrate quickly and transform the Co.

Brazil: Strengthening market leadership

HispAm: Consolidating revenue growth & further efficiency

• Accelerating on digital services capabilities (Cloud, Security, M2M, eHealth)
• Strong focus on SMEs with refreshed portfolio

Service Revenue drivers

• Setting market trends
• Leading monetisation on LTE

Smart upselling path

• Leading Digital Telco
• Best high-speed access experience
• Commercial focus on mobile data boosted by superior network quality (Smartphone penetration in prepaid >55% at 2016E)

• Fiber leadership in Sao Paulo; nationwide exposure post GVT

• Strong growth potential across prepay & contract mobile

• Optimal market structure leading to large structural opportunities
• Further smartphone penetration opportunity
• Mobile data main growth opportunity

• Bundling fixed services at the core of our strategy

• Driving emerging Digital Services

• Financial Services: Consolidate insurance & microcredits and deploy new services
• Accelerating advertising revenues
• Confirmed >€5Bn NPV synergies
• Integration completed by 2019:
• o €800m run-rate of OpCF synergies
• o ~30% of run-rate synergies by 2015
• o ~80% of run-rate synergies by 2018
• Strong synergies extracted from GVT acquisition: >€4.7Bn with net savings from 2015
• Annual run-rate of operating and revenue synergies of at least €450m; c70% of run-rate synergies by year 2017
• Efficiency improvement IT, network and shared services
• LTE available in all markets from 2015
• Differential spectrum holdings

Up to 90% LTE coverage 2016E

Closing remarks

For further information: Investor Relations Tel. +34 91 482 87 00 ir@telefonica.com www.telefonica.com/investors