Telefonica S.A. — Investor Presentation 2015

Jun 30, 2015

Results

January – June 2015

Investor Relations 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; Q2 accelerating the new growth cycle

1 Robust performance improving; Reinforcing trends

• Solid growth in main metrics (Q2 y-o-y): Revenues (+12.4%), OIBDA (+6.8%), Net Income (+70.4%)
• Accelerating organic revenue growth to +4.4% in Q2 (from +3.3% in Q1)
• Ramping-up organic OIBDA growth to +3.3% in Q2 (from +2.4% in Q1)
• Outstanding EPS: €0.37 in Q2; €0.75 in H1
• Continuously investing in UBB networks (Capex: +12.6% y-o-y organic up to June)
• Significant OpCF improvement in Q2, limiting its organic decline to 0.4%

2 Net financial debt up to €51.2Bn on seasonal and non-recurrent factors; Rating agencies improving outlooks

• Leverage (2.38x as of Jun-15 post O2 UK sale) to come down further throughout the year (target <2.35x)
• Robust FCF pre-spectrum accrued (€1.4Bn up to June); Securing quality spectrum

Improved competitive position through strategic investments

• 12.5m premises passed with FTTH in Spain; 67% LTE coverage in Europe; 35% in LatAm
• Delivering on integration synergies: Germany already bearing fruit; Brazil upside potential
• Digital+: new offer launched; acquisition of exclusive rights for 2015/16 La Liga; Position to drive Pay TV growth

4 2015 guidance upgraded

3

Financial summary

	H1 15		Q2 15
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenues	23,419	12.5%	3.9%	11,876	12.4%	4.4%
OIBDA	7,320	7.2%	2.9%	3,702	6.8%	3.3%
OIBDA Margin	31.3%	(1.5 p.p.)	(0.3 p.p.)	31.2%	(1.6 p.p.)	(0.3 p.p.)
OpCF (ex-spectrum)	3,815	(3.5%)	(4.7%)	1,717	(1.6%)	(0.4%)
Net Income	3,693	105.4%		1,891	70.4%
EPS	0.75	100.9%		0.37	62.1%
FCF	(194)	c.s.		(557)	c.s.
FCF pre-spectrum accrued	1,395	(21.0%)		871	(32.5%)
Net Financial Debt	51,238	13.7%		51,238	13.7%
ND/OIBDA (post-O2 UK sale)	2.38x			2.38x

Q2 results impacted by the following factors

• Adjustment in Venezuela to SIMADI 197VZ/\$ (from 52 VZ/\$)
• Revenue: -€397m; OIBDA: -€90m; Net income: -€364m; Debt: +€289m
• Venezuela contribution reduced to 0.6% in Revenues and 0.4% in OIBDA in H1
• Positive taxes (large tax credits activation)
• Divestment in TI (+€380m in financial results)
• Net debt increase:
• Seasonal: Shareholder remuneration (+€2.2Bn)
• Non-recurrent: Telco Demerger (+€0.7Bn); GVT acq. (+€0.5Bn; net of right issue); DTS (+€0.9bn); German spectrum (+€1.2Bn)

Upgrading year-end guidance

	Original Guidance 2015 (Feb-15)	UPGRADED GUIDANCE 2015 (Jul-15)		H1 15 (Feb-15 criteria)
Revenues	Growth >7%	Growth >9.5%		9.4%
OIBDA margin	Limited erosion of around 1 p.p. y-o-y (to allow for commercial flexibility if needed)	Limited erosion of around 1.2 p.p. y-o-y (to allow for commercial flexibility if needed)		-0.9 p.p.
CapEx/Sales	Around 17%	Around 17%		14.8%

GUIDANCE CRITERIA 2015:

• Upgraded (Jul-15): Constant FX 2014; ex-UK; ex-VZ; incl. 12M E-Plus, 8M GVT, 8M DTS
• Previous (Feb-15): Constant FX 2014; ex-UK; ex-VZ; incl. 12M E-Plus, 6M GVT, 0M DTS

July 2015 (Q2 15 results)	UNCHANGED GUIDANCE 2015
Net Debt/OIBDA (adjusted for O2 UK sale)	<2.35x
Dividend	€0.75/sh. • €0.35/sh. voluntary scrip Q4 15 • €0.40/sh. Cash Q2 16
Share buyback: % share capital cancelled (treasury)	1.5%

H1 15 2.38x (2.35x ex-M&A) Voluntary scrip approved in AGM Already executed

Perimeter and organic performance accelerating in Q2

Investor Relations Telefónica, S.A.

Improved revenue trends on higher quality customers

Accesses growth (June organic y-o-y; except LTE)

Strong customers KPIs

• Increasing customer value
• Avg. Rev/Access ramping up to +1.5% (Q2 y-o-y organic)
• Continued churn reduction across services
• Total accesses 329m; +3% y-o-y organic
• GVT+DTS strengthening high value portfolio
• GVT: 8.5m (fixed 4.3m; FTTx 3.2m; Pay TV 1.0m)
• DTS: 1.4m Pay TV

Q2 Revenue (organic growth y-o-y)

Sequential acceleration of revenue growth (110 bps)

• All business contributing to better performance in Q2, except Germany
• Spain progressing well towards revenue growth
• Brazil growing solidly in the mid-single digit territory
• Mobile data boosting Q2 y-o-y organic growth
• 66% o/total revs coming from Spain, Brazil and Germany
• Positively evolving rev. mix
• Towards fixed & mobile data and Services over Connectivity

Mobile data monetisation fostering growth

Smartphone penetration

LTE

Encouraging data dynamics

• LTE accelerating

• LTE usage 60% higher vs 3G
• Strong potential from low penetration
• Q2 Avg. usage per smartphone +30% y-o-y (556 MB/month)

• Strong data potential in HispAm

• Smartphone penetration at 33% (+9 p.p. y-o-y) vs. 55% in Europe
• Most subscribers using currently data on non-recurrent basis

Mobile data revenue (y-o-y organic)

Non-SMS/Mobile Data: 82% (+6 p.p. y-o-y)

• Data beyond allowance Adding ~1 p.p. to Q2 organic revenue y-o-y Monetising traffic growth

• "Bundle Breakage": 30% clients; of which >40% buy extra data product
• New extra-data mechanisms paying off (Brazil -hard stop-; Germany and Spain -automatic data charge-)
• Double digit LTE ARPU uplift
• Commercial propositions transformation to meet demand
• Actively bundling content to drive data usage up

Investor Relations Telefónica, S.A.

Positive and solid growth in OIBDA; margin stabilising

Q2 OIBDA (organic y-o-y)

Q2 OIBDA accelerating 90 bps from Q1 to +3.3% y-o-y organic

• Spain and Germany explain improved performance:
• Spain: Revenues keep improving + lower commercial activity
• Germany: Synergies realisation + new value customer model
• Germany & Hispam main growth drivers y-o-y
• ^Synergies execution & simplification program on track
• Stable margin at 31% in Q2 (-0.3 p.p. y-o-y organic)

Q2 OIBDA Margin

Digital services: Solid growth with Video at the core

TGR: More technological and leaner Digital Telco

Differential network experience leveraged on new technologies

IT: Business transformation & simplification

Supporting Business Transformation

• Full Stack projects progressing in-line with targets
• Brazil: Full Stack reviewed and aligned with GVT
• Germany: VDSL upgrade for existing customers
• Spain: Customer channel renovation
• Chile: Real Time Decision project

Simplification (y-o-y organic)

Spain: Q2 atypical trading; normalised from June 25% of Group

Successful upselling driving top-line growth Slowdown in commercial activity

• Outsourced workers strike (installers)
• Strong decline in gross adds (April & mid May)
• Tariff update & commitment removal
• Churn upturn in fixed services (FBB & TV) in April & May
• June commercial activity recovered
• Both gross adds & churn improved vs Apr/May

Successful upselling driving top ARPU uplift across services -line growth

• Increased penetration in high-value
• 87% gross adds in "Fusión" add new services in Q2
• Strengthening position to further upsell
• Appealing TV offering: "Movistar+" launched in July
• 12.5m premises covered with FTTH
• LTE coverage: ~62% pop. after 800 MHz release

Spain: Revenues stable from May 25% of Group

Revenue

Successful upselling & upbeat commercial proposition

• Revenue stable for 2 months in a row (first y-o-y stabilisation since Dec-09)
• +2.7 p.p. q-o-q improvement in revenue evolution in Q2
• Supportive tailwinds
• Low churn levels
• Full impact from tariff update in H2 15
• Strongest offering (300 Mb; Premium TV; LTE)

OIBDA (organic y-o-y)

Material OIBDA improvement geared on revenue performance

• High profitability, top on the sector
• Q2 OpEx flat (-0.1% y-o-y; +1.3 p.p. improvement vs Q1) on:
• Low commercial activity and stable content cost q-o-q
• Higher subsidies in Q2 amid tariff update
• Q2 real estate sale (€19m)

Germany: Good momentum; mobile data strategy

Data take-up

• Mobile base: 42.6m (+2% y-o-y organic)
• Contract net adds at 201k in Q2 (Q1 15: 141k)
• Solid business and partner segments
• Focus on retaining retail customers; improving churn
• Strong progress on mobile data monetisation
• 35% new "O2 Blue All-in" customers take >1 Gb tariff
• 34% automatic data extensions (opted-in "O2 Blue All-in clients")

Revenue structure (€ in millions)

Top line up 2.1% organic vs. H1 14

• H1 15 MSR grew +0.8% y-o-y (Q2: +0.2%)
• 2/3 of MSR sequential deceleration on lower trading in high-value
• Data revenue at 51% of MSR (+0.4 p.p. y-o-y)
• Improved trends in fixed revs (Q2: -9.5% y-o-y; +1.4 p.p. vs Q1)
• Handset sales remained strong (Q2: +18.7% y-o-y; Q1: +28.8%)

Germany: Strong profitability; delivering on synergies 16% of Group revenue

OIBDA (y-o-y)

• Ramp-up in OIBDA growth • Solid Q2 OIBDA margin >40% of Q2 15 OIBDA expansion on early synergy benefits Accelerating profitability

• Commercial approach based on retention of high-value
• Positive hardware margin in Q2 15
• H1 15 OpCF +12.5% y-o-y organic ex non-recurrent items
• Strong spectrum portfolio (post Jun-15 auction)

OIBDA margin

Organic ex non-recurrent items

Early integration benefits starting to flow

• Confirmed synergy target for 2015: €250m OpCF (30% of run-rate¹ )
• Headcount restructuring
• 750 FTEs signed leaver program; in-line with FY 15 target
• Distribution network consolidation
• Transfer of 301 shops to Drillisch incl. 300 FTEs
• Decommission plan for >100 by year end
• Agreement to transfer 7,700 sites to DT

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

Brazil: GVT reinforces quality & value

Capturing almost all mobile market growth Capturing the value of the market

• New quarterly record in contract gross adds (1.9m)
• Outgoing ARPU +4.8% y-o-y in Q2
• Penetration y-o-y: 36% contract (+3 p.p.); 43% smartphone (+12 p.p.); 7% LTE (+5 p.p.)
• Growing volumes in Q2 15 y-o-y: data traffic +42%; voice +7%
• Strengthened market leadership
• Contract share 41.7% (+0.4 p.p. vs Jun-14)

• Positive signs of fiber & video transformation Superior Fixed UBB market share (57% >12Mbps in May) Capturing 93% of H1 market pay TV net adds FTTx premises passed 16.1m at Jun-15 (4.6m FTTH exc. GVT); gradually increasing take up ratio (3.6m HH connected) Further coverage expansion: 10 cities in the short term + 20 additional identified for the next 3 years GVT to fully complement high-quality strategy

Brazil: Improving growth profile

OIBDA organic (y-o-y)

Operational Synergies (R\$bn)

Solid revenue & OIBDA performance • Strong MSR growth +5.7% y-o-y in Q2 (+8.7% ex-regulation): Non-SMS data rev acceleration to +44.0% y-o-y in Q2 Data revs/MSR: 43% (+9 p.p. y-o-y) • Enhanced fixed business y-o-y trend: Strong recovery ex GVT (-0.3% y-o-y in Q2; -4.0% in Q1) Positive contribution of GVT (+2.7 p.p. to y-o-y in Q2) • Negative impact from regulation (revs -2.8 p.p. Q2; -3.0 p.p. H1)

• Revenue growth flowing into positive OIBDA performance
• Commercial expenses up on higher weight of smartphones & LTE devices
• Macro impact on higher bad debt and energy costs

Synergies upside potential

• Following the completion of GVT transaction synergies base case is confirmed while pointing out to upside potential on
• Revenue: 3P portfolio integration & cross selling potential revision
• OpEx: New operational and customer care model; G&A expenses reduction, organisation redesign
• CapEx: New assumptions & further procurement gains in Network & IT
• Financial & taxes synergies best case R\$5.9bn (base case R\$4.5bn)

Hispam: Balanced revenue and OIBDA growth

Traffic (Q2 15 y-o-y)

Mix of accesses & traffic increase driving ARPU growth

• LTE already available in all countries except Nicaragua & El Salvador
• FBB penetration at 42% of fixed accesses (+3 p.p. y-o-y)
• Pay TV/Fixed accesses still at 20% (+3 p.p. y-o-y)

Hispam Hispam ex-Venezuela

OIBDA (organic y-o-y)

(organic y-o-y)

6 th consecutive Q of margin expansion (organic y-o-y; ex-VZ)

Double digit organic OIBDA growth (Q2 ex VZ)

• Data revenues main revenue driver in Q2
• Data revs/MSR: 37%; Smartphone penetration still at 33%
• Non-SMS data +45.7% y-o-y; 85% of data revs
• FBB & new services revenues accelerating y-o-y growth
• +17.3% in Q2; 64% o/total fixed revs
• Ongoing margin y-o-y improvement (ex VZ):
• Main contributors: Mexico (+5.7 p.p.), Argentina (+3.7 p.p.), Colombia (+3.0 p.p.) and Chile (+0.8 p.p.)

Mexico: Gaining market share; improving profitability 4% of Group revenue

Strong commercial activity accelerating revenue growth

• Record gross adds for a Q2 (2.8m; +8% y-o-y)
• New contract & prepay plan "Bye Roaming" for travellers to US from June
• Revenue growth ramping-up on robust accesses & higher traffic volumes
• Voice traffic +11% y-o-y in Q2; Data traffic +74%
• MTRs reduction dragging growth by 2.7 p.p y-o-y.

OIBDA (y-o-y organic)

Strong profitability expansion

• Continued strong OIBDA vs Q2 14:
• Economies of scale mainly visible in lower unit costs (commercial, network & system)
• Benefits of new regulatory framework on MTRs asymmetry (Q2 y-o-y comps reflecting first step of decline from Apr-14)
• Efficiency measures

Rest of Hispam: Solid Q2 performance

OIBDA (organic y-o-y)

Q2 OIBDA margin (organic y-o-y)

Gaining revenue market share

• Colombia:

• Better commercial trading with positive contract net adds and booming penetration of smartphones & LTE
• Solid OIBDA growth & margin expansion

• Peru:

• Strong commercial traction (contract mobile +11% y-o-y; FBB +7%; Pay TV +23%) amid highly competitive environment
• Revenue y-o-y severely affected by MTRs reduction (-46%) from 1 April (-2.1 p.p. in Q2 15)

• Argentina:

• Increased y-o-y quarterly margin to 26.8% amid high inflation
• New spectrum secured in Q2: 700MHz for 4G services

• Chile:

• Strong uptake of 4G services; record high FBB net adds
• Highest revenue y-o-y growth since Q1 12 amid profitability expansion

• Venezuela & Central America:

• Results in VZ affected by conversion to SIMADI
• Strong traffic volumes & higher commercial activity on handsets availability

UK: Maintaining outperformance; strong financials Consolidated as

discontinued operation

Mobile contract net adds ('000)

Revenues (y-o-y ex "O2 Refresh")

From Q1 15 new perimeter

OIBDA margin

Strong commercial activity

• Sustained net adds over last two and a half years
• Outperforming the market: H1 total and contract net adds
• +4% mobile base y-o-y to 24.8m
• Continued popularity of high-end smartphones
  • o LTE penetration: 26% (+16 p.p. y-o-y)
  • o LTE net adds at 864k in Q2 (Q1: 784k)
• Record low contract churn driven by strength of customer service
• LTE roll-out (73% outdoor coverage at Jun-15)

Outstanding profitability

• Top-line up 1.6% y-o-y in Q2
• ARPU inflection through demand for higher-value tariffs
  • o Stabilisation of ARPU ex "O2 Refresh" (Q2:-0.8% y-o-y)

• Tight cost control

• Savings in marketing and commercial overheads
• "O2 Refresh" deducted 0.6 p.p. of OIBDA margin

Leverage to improve in H2 15

Net Financial Debt

(1) OIBDA 12 month rolling, not considering O2 UK discontinuation, incorporating E-Plus' OIBDA corresponding to Jul-Sep 2014 as well as DTS' and GVT's OIBDA corresponding to July14-April15, and excluding the non-recurring impact from restructuring costs in 2014.

Improving financial cost

Long-term financing (€11.9bn YTD)

€ in billions

Rating actions

Improved rating outlook by three rating agencies in H1

• Fitch (BBB+) and Moody's (Baa2) placing Stable Outlook
• S&P's (BBB) Positive Outlook

	Executing according to plan: delivering sustainable profitable growth
1	Q2 organic growth accelerated: Revenue & OIBDA
2	Strong uptake in fiber, smartphones (LTE) and Pay TV
3	Significant synergies to be unlocked on restructured portfolio
4	Focus on technology leadership and best customer experience
5	Balance sheet strength post O2 UK divestment; full financial flexibility
6	2015 guidance upgraded

Q2 ACCELERATING THE NEW GROWTH CYCLE

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