Telefonica S.A. — Investor Presentation 2015

Mar 31, 2015

Results

January – March 2015

Razón Social 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 15: 1st step of the new profitable growth cycle

1 Delivering on growth

• Returning to growth across the board: Revenues (+12.6%), OIBDA (+7.7%), Net Income (+162%), EPS (+164%)
• Robust organic top line growth (+3.3% y-o-y) and sustainable improvement in OIBDA (+2.4% y-o-y)
• Organic revenue growth ex-VZ accelerated on the back of improved performance in Spain, Brazil and Germany
• Strong commercial performance maintained; enhancing commercial propositions with refreshed offers
• Building high-quality & value KPIs
• Successfully monetising mobile data
• Continuous efforts to contain costs; ongoing savings on leaner operating model
• Investing further in networks & platforms (CapEx +21.5% y-o-y organic) is the foundation for the above
• Building a differential future-proof network: Investments in growth & transformation are 76% of total

2 Deleveraging and strengthening the balance sheet

• Net debt/OIBDA 2.13x including O2 UK sale; cost of debt declining to 5.27% (-18 b.p. y-o-y)
• Strong FCF (+25.8% y-o-y) despite normal seasonality in Q1

Early signs of benefits from portfolio optimisation/in-market consolidation strategy

• Focus on key markets (Spain, Brazil and Germany), with solid and improving performance in Q1
• In-market consolidation: the first and boldest mover
• Digital+ transaction closed on April 30th; One step further to becoming a Video Company

4 Q1 performance fully consistent with FY guidance

3

Key financials

	Q1 15
€ in millions	Reported	Reported y-o-y	Organic y-o-y
Revenues	11,543	12.6%	3.3%
OIBDA	3,618	7.7%	2.4%
OIBDA Margin	31.3%	(1.4 p.p.)	(0.3 p.p.)
OpCF (ex-spectrum)	2,098	(5.0%)	(8.3%)
Net income	1,802	2.6x	--
EPS	0.38	2.6x	--
FCF	363	25.8%	--
Net financial debt	45,627	3.8%	--
ND/OIBDA (post O2 UK sale)	2.13x	--	--

Positive impacts from FX & changes in the perimeter

• Most Latam currencies added y-o-y
• Revenue: +3.2 p.p.; OIBDA +2.5 p.p.
• Consolidation perimeter contributed y-o-y
• Revenue: +5.9 p.p.; OIBDA +3.0 p.p.

2/3 of Revenues from Spain, Brazil and Germany

Investor Relations Telefónica, S.A.

Fully on track to meet 2015 outlook

2015 Guidance (Constant FX 2014; ex-UK; ex-VZ; incl. 12M E-Plus and 6M GVT)	Guidance 2015E	Q1 15
Revenues	>7%	8.8%
OIBDA margin	Limited margin erosion around 1 p.p. (to allow for commercial flexibility if needed)	(1.0 p.p)
CapEx/Sales	Around 17%	13.3%

Net Debt/OIBDA (adjusted for O2 UK sale)	<2.35x	2.13x
Dividend	€0.75/sh. • €0.35/sh. voluntary scrip Q4 15 • €0.40/sh. Cash Q2 16	First Tranche: €0.35/sh. Voluntary scrip proposal to the AGM (12th June)
Share buyback: % share capital cancelled (treasury)	1.5%	Proposal to the AGM (12th June)

Strong operating and financial performance

LTE and Prepay data: Main levers for data monetisation

Encouraging data dynamics

• Accelerating usage growth

• Mobile data traffic: +52% y-o-y
• Average usage per smartphone +25% y-o-y (512 MB/month)
• LTE fostering growth (usage +60% vs 3G)
• LTE traffic at 11% of total mobile data traffic (+9 p.p. y-o-y)
• Prepay data upside in HispAm (21% prepay smartphone penetration; +7 p.p. y-o-y)

Q1 Mobile data revenue

Additional revenues coming from data

• Monetising data beyond the allowance
• Contribution of 1 p.p. to Q1 15 y-o-y revenue growth
• "Bundle Breakage": 25% customers; of which ~1/3 buy data snack
• New commercial schemes to optimise revenues in Spain, Germany & Brazil
• LTE ARPU uplift: double digit

Digital services: a strong start to 2015

Investor Relations Telefónica, S.A.

TGR: Network and IT supporting business transformation

Differential technology for Best Network Experience

IT: Execute business transformation + enable differential digital capabilities

+Customer experience +Efficiency

• Progressing on Full Stack projects in Argentina, Chile, Peru & Mexico
• Big Data (pilot in Spain)
• Online Channel renovation in Spain: sales automation
• DC consolidation through "Midrange" projects (Brazil + Spain)

+Simple and agile (y-o-y organic)

Spain: Enhanced value mix in a better environment

Mobile contract net adds ('000)

Fiber 100 in "Fusión"

Outstanding commercial performance

• Access base back to growth: +1% y-o-y; Churn reduction across the board
• FTTH base: 1.6 m (x2 y-o-y): 26% of FBB base
• Fiber 100 Mb to 1.2m (10€ premium; lower churn vs DSL)
• Strengthened Pay TV leadership: 2.1m (x3 y-o-y)

108 244 Q1 14 Q1 15 x2 16% 23% Fiber 100 Accesses y-o-y o/w 58% 100 Mbps Penetration Mar-14 Mar-15

Pay TV net adds ('000) 58 255 Q1 14 Q1 15 x3 Accesses y-o-y

FTTH net adds ('000)

• 3.9m "Fusión" customers (+21% y-o-y); 1.4m mobile addons • "Fusión" KPIs in the right direction ARPU virtually stable y-o-y at €69.6 Churn: 0.9% -0.3 p.p. y-o-y Upselling on differential Quad-Play offer

• Enhanced offer to increase premium quality
• MBB data caps up ~25-36%; Fiber speed to 300 Mb

Spain: first place in FTTH coverage and connections in Europe

• Strong investment effort with current regulatory conditions
• T. España: 11.5m premises passed
• LTE coverage to accelerate; 800 MHz available from April

Spain: Another step ahead towards revenue growth

Revenue (y-o-y)

Revenue ex- handset sales Revenue

OIBDA margin

Revenue to continue improving on solid fundamentals

• Strong trading in high-end services & churn reduction
• Increased value in customer mix (TV & Fiber)
• Upselling & tariff update
• High penetration of convergence
• 76% FBB & 59% mobile contract base in "Fusión" (consumer)
• Improved market conditions
• Handset sales softening y-o-y (Q1:-10.3% ;Q4 14: +14.7%)

Solid profitability despite improved commercial activity

• Q1 OIBDA (-8.4% y-o-y organic) affected by:
• Higher trading; Pension plan, Higher content costs
• Efficiency progress
• IT Simplification & distribution channel optimisation

Germany: Executing on operations & key integration milestones 16% of Group revenue

Focus on data monetisation in a more profitable environment

• Mobile base: 42.2m (+2% y-o-y organic)
• Stronger focus on customer base development
• 86% share of LTE-enabled Smartphones sold (O2 Premium)
• LTE coverage at 68% (62% at Dec-14); 75% target by year-end
• Value approach to handset sales from the beginning of the year
• VDSL uptake (66k net adds) improving retail fixed base

30% of target synergy run-rate(1) in 2015 on track

Synergy target on track (€250m in 2015; more biased to H2)

• Staff negotiation process
• Agreement with Workers Councils reached in February
• 2015 full-year goal well-advanced at the end of April
• Distribution network consolidation
• Drillisch to take 301 shops in H2 15; significant portion of LT target
• 3G National Roaming agreement from mid-April

(1) Run-rate: Approx. €800m run-rate OpCF synergies from year 5 of integration onwards

Germany: Solid financial performance

Strong revenue performance driven by data centric strategy

• Top line growing sequentially
• MSR momentum; favorable customer mix in acquisition & retention
  • o Data revs/MSR: 51%
  • o Non-SMS data revs +7.3% y-o-y (71% of data revs)
  • o SMS volume decline stabilisation
• Robust handset revenues y-o-y (Q1: +28.8%; Q4 14: +5.4%)

Profitability turnaround

• Efficient commercial approach
• Customer base retention
• Value-based handset sales
• OpEx synergies to accelerate from H2
• OpCF at €187m (+6.4% y-o-y organic ex non-recurrent items)

Brazil: Quality growth driving ARPU improvement

Investor Relations Telefónica, S.A.

Brazil: Strong revenue growth acceleration

Best revenue growth in last 3 years

• Strong MSR improvement in Q1 (+4.6 p.p. vs Q4 14) leveraging data monetisation strategy
• Data revenues/MSR: 39% (+7 p.p. y-o-y; +3 p.p. q-o-q); Non-SMS revenues +42.0% y-o-y
• 8x higher adoption of data snacks since throttling elimination
• Enhanced fixed revenue y-o-y trend; higher contribution from Pay TV and fiber revenues
• Negative impact of regulation (-3.2 p.p. in y-o-y revenue growth)

OIBDA (organic y-o-y)

Positive y-o-y OIBDA growth

• OpEx (+4.9% y-o-y) once again below inflation:
• Strong efficiency efforts (personnel and G&A expenses) and MTR reduction
• Offset higher subsidies (LTE adoption) and bad debt (more difficult environment)
• OIBDA margin stood at 30.1% (-1.0 p.p. y-o-y)

Hispam: Resuming reported & organic growth

Accesses (Mar-15 y-o-y)

Revenue (organic y-o-y)

Hispam Hispam ex-Venezuela

OIBDA (organic y-o-y)

Hispam Hispam ex-Venezuela

Commercial momentum across services

• 3.1m Smartphone net adds (+62% vs. Q1 14)
• Limited penetration (29% total; 21% prepay) provides significant upside
• Record-high net adds in Pay TV (104k)
• Volumes growing strongly y-o-y: Voice (+6%) & data traffic (+52%)

Margin expansion for 5th consecutive Q (organic y-o-y and ex-VZ)

• Positive impact from FX: all currencies but Colombian COP\$ contributing positively y-o-y
• Combination of access & ARPU growth fueling revenues
• Data revenues 1/3 of total Q1 revenues
• Non-SMS data +25.1% y-o-y
• Margin improvement: y-o-y trend maintained
• Main contributors: Mexico (+9.2 p.p.), Argentina (+3.3 p.p.) and Colombia (+3.0 p.p.)

Mexico: Operational momentum fostering growth

Strong commercial momentum

• Strengthened market positioning boosting y-o-y accesses & traffic growth
• Strong gross adds (Q1: 2.7m; +10% y-o-y); 2nd quarterly volume ever despite seasonality
• Record-high in Smartphones; Q1 net adds 2.0m; New LTE plans fostering adoption (820k accesses at Mar-15)

Q1 Revenue & OIBDA (y-o-y organic)

Larger scale bringing further profitability

• Strong revenue growth y-o-y
• Steady increase of both accesses & usage (MOU +18%)
• MTRs reduction dragging MSR growth by 3.2 p.p. in Q1

• Increased profitability y-o-y

• Strong access growth delivering economies of scale
• Successful implementation of efficiency plan
• Asymmetric interconnection tariff

Rest of Hispam: Growth across the board

Q1 OIBDA (y-o-y)

Q1 OIBDA margin (organic y-o-y)

+3.0 p.p.	(2.6 p.p.)	+3.3 p.p.	(0.8 p.p.)	(1.7 p.p.)
Colombia	Peru	Argentina	Chile	VZ & CA

Solid start of the year

• Colombia:
• Strong organic OIBDA growth and margin expansion y-o-y
• Asymmetric regulation extended until 2017

• Peru:

• Solid growth in high-value accesses y-o-y: contract mobile +13%; Smartphones +31%; FBB +7%; Pay TV +15%
• OIBDA y-o-y organic decline impacted by more intense competition

• Argentina:

• Continued LTE deployment aiming to cover all provincial capitals by year end
• Strong margin increase on efficiency efforts and rationalisation of commercial costs

• Chile:

• Focus on quality of service: LTE (67% pop coverage) and FTTH (307k premises passed)
• Regulatory effects dragging revenues and OIBDA y-o-y (-4.2 p.p. and -4.3 p.p. respectively)

• Venezuela & Central America:

• 4G services launched in Q1 in Venezuela & Panama
• Strong traffic volumes (voice +10% y-o-y; data +43% y-o-y)

UK: Commercial momentum & robust financials Consolidated as

Investor Relations Telefónica, S.A.

(2) Q1 14: €24m true-up commissions & €5m restructuring costs

Substantial deleverage following O2 UK sale

(1) OIBDA 12 month rolling, not considering O2 UK discontinuation, incorporating E-Plus OIBDA corresponding to April-Sep 14 and excluding the non-recurring impact from restructuring costs in 2014.

Investor Relations Telefónica, S.A.

Substantial diversified financing reinforcing credit quality

Long-term financing (€10.8Bn YTD)

Outstanding support for both capital increases

Telefónica Right issue

• Offering size
• €3Bn; issuance of new shares (281.2m)
• Subscription price
• €10.84: discount to TERP of 18.9%

T. Brasil follow-on offering

• Offering size
• BRL16.1Bn (~€4.7Bn)
• Subscription price

• BRL47/share for PN shares (-2.4% discount to last price)

• Demand: 3.7x of the shares offered in the rights issue

• Discount to TERP significantly lower than other European rights issues in the last 2 years (~10 p.p)

• Largest equity transaction in LatAm in the last 4 years

• First public registered offering in Brazil in the last 6 months
• Market book oversubscribed
• Lower discount than precedents

Conclusion

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