Telefonica S.A. — Investor Presentation 2015

Dec 31, 2015

Results

January - December 2015

Disclaimer

This document contains forward-looking statements regarding intentions, expectations or forecasts related to the Telefónica Group (hereinafter, the "Company" or "Telefónica"). These statements include financial forecasts and estimates based on underlying premises, statements regarding plans, objectives and expectations that make reference to different matters, including, the customer base and its evolution, growth of the different business lines and of the global business, the market share, possible acquisitions, divestitures or other transactions, Company results and other aspects related to the activity and situation of the Company.

The forward-looking statements or forecasts contained herein can be identified, in certain cases, through the use of words such as "expectation", "anticipation", "purpose", "belief" or similar expressions, or the corresponding negative forms, or through the own predictive nature of all issues referring to strategies, plans or intentions. These forward-looking statements or forecasts do not represent, by their own nature, any guarantee of future fulfilment, and are subject to risks, uncertainties and other relevant factors that could cause the final developments and results to differ substantially from the ones put forward through these intentions, expectations or forecasts. These risks and uncertainties include those identified in the documents containing more comprehensive information filed by Telefónica before the different supervisory Authorities of the securities markets in which its shares are listed and, in particular, the Spanish National Securities Market Commission.

The content of this statement must be taken into account by any individual or entity who may have to adopt a decision, or elaborate or disseminate opinions related to the securities issued by the Company, and, in particular, by analysts and investors that may be examining this document. Except as required by applicable laws, Telefónica is not required to inform publicly of the result of any review it may perform concerning these statements to adapt them to events or circumstances taking place after this document, including changes in the Company's business, in its business development strategy or any other unexpected circumstance.

This document may contain summarized or non-audited information. To this regard, the information contained herein must be read as a whole and is subject to all the public information available, including, if any, other documents released by the Company that may contain more detailed information.

Finally, it is hereby stated that neither this report nor any of its contents should be interpreted as a securities purchase, sale or exchange offer, or a request for offers regarding the purchase, sale or exchange of securities, or a recommendation or advice regarding any security

2016 Outlook

Mr. César Alierta Chairman & CEO

Unprecedented wealth creation ahead of us

Digitalisation will foster growth and innovation

• Digitalisation and Big Data will transform all the productive models
• Industrial Internet is a huge opportunity to unleash all the potential of the Digital Economy
• Digital Single Market in Europe is a clear step in the right direction to foster digitalisation

An era of exponential growth

3G 10 GPS 4G 5G 25 MBPS 5 MBPS Exponential speeds Exponential growth in connections Source: Huawei and Telefónica

Source: Ericsson

Exponential traffic growth

(EB/month estimated in TEF networks) (Data/month)

Exponential information volume

Source: Alcatel-Lucent

5

The Digital Economy opens up a new growth wave

Telefónica's ongoing transformation

2012-2015: Positive proof points; returning to growth

• Data monetisation underway (smartphones x2; double digit ARPU uplift), driving revenue growth
• Back to growth in Spain, expanding profitability in Germany and widening leadership in Brazil
• Building ^a solid set of differential assets
• Active portfolio management & record debt reduction
• Outstanding shareholder returns

2016: Step forward in accelerating growth

• Increase data monetisation to foster revenue acceleration
• Enhance Big Data & Innovation capabilities
• Massive value from synergies (integration & simplification)
• Maintain financial flexibility & continue portfolio optimisation (improve ROCE)
• Full cash dividend (post-O2 UK sale)

Positive 2015, better prospects for 2016 and further upside potential from Data revolution

2015 Highlights: A profitable & growing Company

Accelerating revenue growth Clear progress on OIBDA growth

8

2015 Main financials: a year of return to growth

	FY 15
€ in millions	Reported	Organic y-o-y
Revenues	47,219	4.0%
OIBDA	11,414	3.6%
OIBDA Margin	24.2%	(0.1 p.p.)
OpCF (ex-spectrum)	3,420	1.9%
Net Income	2,745
EPS	0.51
FCF	3,514
FCF pre-spectrum	4,821
Net Financial Debt	49,921

	FY 15
€ in millions	Underlying
OIBDA	14,926
OIBDA Margin	31.3%
OpCF (ex-spectrum)	6,872

	Underlying	Underlying y-o-y
Net Income (€ millions)	5,787	29.7%
EPS (€)	1.12	23.9%

Non-cash effects

• Mainly €3.2bn Restructuring charges to improve profitability & productivity going forward

Delivering on our commitments

2015 Guidance (Constant FX 2014; ex-UK; ex-VZ; incl. 12M E-Plus, 8M GVT, 8M DTS)	UPGRADED Guidance 2015	FY 15
Revenues	Growth >9.5%	12.3%
OIBDA margin	Limited margin erosion around 1.2 p.p. (to allow for commercial flexibility if needed)	(1.1 p.p)
CapEx/Sales	Around 17%	16.9%

Net Financial Debt/OIBDA (adjusted for O2 UK sale)	<2.35x	2.38x
Dividend	€0.75/sh. • €0.35/sh. voluntary scrip Q4 15 • €0.40/sh. Cash Q2 16	First Tranche Scrip dividend: €0.35/sh. Nov-15
Share buyback: % share capital cancelled (treasury)	1.5%	Executed in Jun-15

2016 Outlook

Base 2015 (Ex-VZ; incl. 8M GVT & DTS)	Guidance (Constant FX 2015; Ex-VZ)	2016E
46,757	Revenues	>4%
31.5%	OIBDA margin	Stabilising vs. 2015
16.8%	CapEx/Sales	Around 17%

€0.75/sh. Full Cash Dividend (subject to the closing of O2 UK sale) €0.75/sh. 1.5% Share buyback: % share capital cancelled (treasury; subject to the closing of O2 UK sale) 1.5% Net Financial Debt/OIBDA (adjusted for O2 UK sale) <2.35x

Better than 2yr outlook guided in Feb- 15

2016 Priorities

Mr. José María Alvarez-Pallete COO

2015 Highlights: A profitable & growing Company

Strong year of commercial performance/ accelerating revenue growth

Benefitting from consolidation in key markets/ Simplifying to transform

Healthy FCF generation/ Robust Balance Sheet

• Focus on value customers (Fiber, LTE, Pay TV, …) rather than volumes
• o Increasing customer lifetime value
• Several assets delivering organic growth
• Focused level of investments to build outstanding connectivity
• o CapEx/Sales ex-spectrum 16.9%

Focus on value customers

		FY 14	FY 15
•	Smartphone penetration	34%	48%
•	Fiber connections	1.8m	6.1m
•	Pay TV	5.1m	8.3m

• Enhancing competitive position via in-market consolidation
• Spain recovering top line traction; Germany accelerating profitability; Brazil continuing leadership expansion
• E-Plus, GVT & DTS integration on track and ramping-up
• Driving profitability; advancing in simplification
• FCF of €4.8bn pre-spectrum, up nearly 2% y-o-y
• o Enabled shareholder returns and high investments (network, systems and financial)
• Leverage progressing towards post-O2 UK sale target (2.38x as of Dec-15)
• Substantial diversified financing reinforcing credit quality
• Managing asset portfolio to improve ROCE

Delivering on operating guidance in all metrics

Revenue & OIBDA growth with margin stabilisation

14

Revenue 2015 (organic y-o-y growth)

Strong organic revenue increase in 2015

• Engines of organic growth

• o Mobile data: Q4 15 +18.7% y-o-y (FY 15 +16.9%)
• o T. Hispam: Q4 15 +8.1% y-o-y (FY 15 +10.1%)

• Revenue mix improvement

• o BB Connectivity & SoC: 43% o/total; +5 p.p. y-o-y
• o Access & Voice: <50% o/total for the first time ever (47%)

Improving OIBDA growth in 2015

• Positive, meaningful operating leverage
• o Revenue flow-through
• o Execution in synergies & simplification initiatives
• Maintaining cost control: FY +4.6% y-o-y organic
• Good momentum in organic OIBDA margin: ongoing expansion in absolute level and y-o-y stabilisation

Capturing value for Revenue per Access expansion

Quality platform

Accesses (y-o-y organic; LTE reported) Accesses base

Strengthened customer value

Average Revenue / Access (organic y-o-y) Accesses y-o-y organic

Profitable growth driven by high quality connections

• Strong momentum in KPIs

• o Added 6.1m LTE devices in Q4; +42% y-o-y; +22% q-o-q
• o 271k fiber connections net adds in Q4
• o Pay-TV take-up gaining traction to 8.3m accesses
• o Record mobile contract net adds in the last 6 Qs (1.7m)
• T. Hispam delivered accesses growth (42% o/total): +2% y-o-y

Excellent customer retention

• Continued churn reduction across regions coupled with higher commercial activity (growth and quality services)
• Enhancing customer experience
• o Customer knowledge embedded in every decision taken

Data monetisation: Accelerating data growth

2015 revenue (y-o-y organic)

Data Non-SMS data

Strong mobile data performance

• LTE: Outstanding dynamics

• o LTE traffic (4x y-o-y) is 20% of mobile data traffic in Q4
• o Double digit LTE ARPU uplift
• Continued smartphone growth: 48% penetration (+15 p.p. y-o-y)
• o Q4 avg. usage per smartphone +27% y-o-y (643 MB/month)
• o Capturing the prepay data opportunity in Brazil & T. Hispam
  • o T. Hispam prepay penetration: 29% (+11 p.p. y-o-y)
  • o Double digit prepay ARPU uplift once client uses data
• o Roaming initiative to foster usage and improve experience

• Continued monetisation data usage

• o Mobile data traffic up 45% vs. Q4 14
• o ~30% of customers run-out of data
• o >40% of customer hitting caps buy extra data
• o Further usage & monetisation through data test drive

Connectivity & data monetisation is starting; but it is just the first wave

Digital Services: Driving innovation and value

• M2M (€169m; +16.5%): future-proofing solutions. 4G-LTE IoT: new "Smart m2m" solutions
• LTE supporting surge in data usage: 56% of purchased smartphones were LTE. Joint Procurement Program w/ China Unicom
• Big Data: consolidating worldwide reach. China Unicom JV: "Smart Steps" technology in China

Investor Relations Telefónica, S.A.

Combining partnerships with in-house capabilities to support open ecosystems

TGR: Creating value through transformation

All-IP Transformation

All IP & Network Innovation

• All-IP Architecture: Starting to shutdown legacy Copper COs
• VoLTE launched in Germany
• LTE-A with 2 carriers available
• R&D 5G lab to develop and test 5G technologies
• Automatised Virtual Network Functions deployment trials

Transforming Operations

• 4 Global Centers launched, delivering results
• o E2E diagnosis and integrated field force management
• o Home Gateway Unit (ONT+router+video bridge)
  • o Up to 300Mbps speed

• o >60% new home devices designed by Devices Global Center

• Full Stack Acceleration: 15 countries

• Digitalisation capabilities:
• o Boosting Big Data and Real Time Decision
• Maintained Record IT Service Delivery -40%

13% Full Stack Customers

Telxius: A global infrastructure Company

Optimising TEF's asset portfolio & improving ROCE by bringing together best-in-class infrastructure assets

• Specialised and focused management of the telecommunications infrastructure
• Targeting to increase services provided to other operators
• More active participation in growth opportunities of the industry, including the possibility of acquiring third party assets
• More of TEF's assets expected to be progressively incorporated (towers, DAS, Small Cells, Backhaul)

Tower business

• ^~15k telecommunication towers out of ~62k total owned by Telefónica
• o ~11k towers in Spain; ~4k in other countries
• Primary functions include to build, maintain and operate passive tower infrastructure

Cable Business Submarine cable business

• Extensive international network with over 65k km of which 31k km of proprietary submarine fiber optic cable
• o SAM-1 (25k km) the largest submarine cable connecting the US with LatAm
• o PCCS (6k km) linking Ecuador, Panama, Colombia, the Caribbean and the US
• o Unisur (0.2k km) linking Argentina and Uruguay
• Capacity & IP businesses
• o Capacity: >3.5Tbps of lit capacity on submarine systems
• o IP: >4.5Tbps of IP traffic delivered during peak hours
• o Non-TEF clients representing approx. 50% of revs
• International Tier 1 Network
• o Reduce traffic costs and improve sustainability on peering agreements; maximise content access quality

Considering different strategic alternatives

CapEx is paying off

2015 OpCF

CapEx intensity in technology leadership

• Driving competitive advantage

• o Transforming networks and systems (Fiber, LTE, Full Stacks…)
• o CapEx/Sales 13-14% in Germany & Spain and 19% in LatAm
• Reinforcing our network position and securing future growth through spectrum acquisition
• o Passing peak investment for spectrum, expected to be lower in the coming years

Back to growth in OpCF

• Investment boost enabled us to become ^a stronger Co.
• Improved trends throughout the year led by enhanced profitability and targeted efficiencies (CapEx+OpEx)
• Simplification, CapEx optimisation and prioritisation

Mr. Angel Vilá CSFO

Key financials

	FY 15		Q4 15
€ in millions	Reported	Organic y-o-y	Reported	Organic y-o-y
Revenues	47,219	4.0%	11,881	3.3%
OIBDA	11,414	3.6%	401	3.8%
OIBDA Margin	24.2%	(0.1 p.p.)	3.4%	0.2 p.p.
OpCF (ex-spectrum)	3,420	1.9%	(2,078)	17.6%
Net Income	2,745		(1,832)
EPS	0.51		(0.38)
FCF	3,514		2,307
FCF pre-spectrum	4,821
Net Financial Debt	49,921

	FY 15	Q4 15
€ in millions	Underlying	Underlying
OIBDA	14,926	3,781
OIBDA Margin	31.3%	31.8%
OpCF (ex-spectrum)	6,872	1,302
	FY 15
	Underlying	Underlying y-o-y
Net Income (€ in millions)	5,787	29.7%
EPS (€)	1.12	23.9%

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

• TOTAL Personnel reorganisation: -€3,122m in OIBDA in Q4 (T. España Voluntary Employment Suspension Plan: -€2,896m, Other Companies: -€227m, mainly Telefónica Headquarters)
• Additionally, Q4 includes, among others, commitments in the following years relating to TEF's Foundation: -€325m in OIBDA

Reported Q4 reflects non-recurrent & FX

Maintaining a solid FCF generation

Spain: Sustained momentum, new market dynamics

Net adds FY 15 (000)

FY 14 FY 15 Q4 15

Reinforced leadership based on value

• Excellent trading balance: higher loyalty and gross adds
• o Solid Q4 net adds improving q-o-q
• o Churn decline y-o-y despite eliminating retention
• "Fusión" ARPU uplift: +7.3% y-o-y to €74.4 in Q4
• o 4.2m base (+13% y-o-y); 36% with mobile add-ons
• Largest Pay TV platform
• o 3.7m customers (+10% y-o-y organic)
• o "TV Premium" promo reached ~700K customers in Q4
• Largest FTTH in Europe: 14.3m premises passed (+4.0m y-o-y)
• LTE expansion: 75% pop. coverage (+17 p.p. y-o-y)

"More for more": further commercial upgrades

• New tariff repositioning from Q1 16
• o "Fusión", mobile contract, FBB non convergent
• Best content guaranteed until 2018/19

Spain: Strong revenue recovery in 2015

Revenue ex-DTS 2015 (y-o-y)

Including DTS since May (y-o-y organic)

OIBDA including DTS 2015

(since May, ex non-recurrent)

y-o-y

Solid start from a leading position

• Second consecutive quarter of revenue growth (ex-DTS)

• o Strong performance in IT and handset sales in Q4
• o Growth y-o-y decelerated vs. Q3 partly due to TV promo
• FY Revenue including DTS (May 1st) €12.4Bn: -2.1% y-o-y organic
• Successful TV add-ons uptake post promo
• o ~€30m incremental revenue (Q1 16E vs. Q4 15)
• o Pay TV penetration still at 30%

Profitability reflecting TV promo

• Non-recurrent: Restructuring costs, tower and real estate sales gains and adjustment in DTS supplies in Q3
• OIBDA (ex -DTS) non-representative due to content cost allocation
• FY organic margin incl. DTS: 42.1% (-1.0 p.p. y-o-y)
• Q4 net content cost including DTS: -8.1% y-o-y organic
• o Q4 net content cost/Pay TV sub: -16.8% y-o-y organic

Spain: A reference in efficiency; new plan 16-17

Voluntary Employment Suspension Plan Impacts

• Adapt the organization to the new competitive, economic and technological reality
• Conditions
• o 2 year plan (2016-2017)
• o Minimum age: 53 years old before YE 17 with at least 15 year in the Co.
• o 68% of salary until age of 65 + social security + social benefits fully covered by TEF
• o Periods to join: Jan-Mar 16; Jan-Mar 17. Acceptance so far in line with expectations
• o Will leave no later than Dec-17
• Agreed with largest unions
• Other agreements
• o Salary increases: +1.9% in 2016; +1.5% in 2017
• o Job creation through the incorporation of young talent

Speeding up transformation to improve profitability in a new growth cycle

Germany: Successfully maintained momentum

Contract net adds 2015 ('000)

Ex-adjustments: 400k in Q4 15; 428k in Q4 14

Solid commercial performance

• Rational and dynamic market
• Contract delivers growth & loyalty
• o Solid LTE demand: 7.9m base (+13% q-o-q) to 19% penetration
• o LTE coverage at 75% (+13 p.p. y-o-y)
• o Contract churn improved 0.2 p.p. to 1.7% in Q4
• VDSL drives fixed performance
• o Strong VDSL net adds in Q4: 73k (+12% y-o-y)

2015 Revenue (y-o-y organic)

Slight MSR market share increase

• Sequential top line improvement

• o Strong handset sales (Q4 +17.9% y-o-y vs. Q3 +2.7%) on Christmas promotions
• o Better fixed trends (Q4: -3.2% y-o-y vs. Q3: -9.5%)

• Continued data monetisation

• o 40% of new O² Blue opting for a tariff with >1GB
• MSR (+0.1% vs. FY14) meets outlook; higher contribution from partners

Germany: Anticipated synergies drive growth

OIBDA 2015

OIBDA margin 2015

Organic ex non-recurrent y-o-y

Strong profitability

• Better OIBDA growth trends throughout ²⁰¹⁵ (+35.5% in Q4)
• Synergies & commercial efficiencies drive exceptional OIBDA growth
• o Synergies: >50% of Q4 OIBDA growth; successful execution in first full year of integration
• o Leavers programme: 50% of total target
• o Shop footprint reduction: 80% of target
• o In-city consolidation of facilities: 30% of target
• o 3G National roaming
• o Focused subsidy approach based on retention of value base
• Continued OIBDA margin expansion to 23.9% in Q4
• FY ¹⁵ OpCF at €826m (>2x vs 2014)
• o Rev & OpEx synergies of €140m
• o CapEx synergies of €140m
• Reported OIBDA (2015: €1,858m; Q4: €586m) affected by
• o Final agreement on E-Plus purchase price (Q4: +€102 m)
• o Restructuring expenses (2015: €73m; Q4: €7m)
• ²⁰¹⁵ OIBDA & synergies meet upgraded outlook

Brazil: Capturing value across segments

Outstanding commercial results

• 97m customers in a market of >200m people
• New portfolio of mobile tariffs launched in Nov-15 to further push market outperformance
• o 69% Q4 contract net adds share (50% in FY 15)
• o 100% of 2015 MSR market growth
• Data ARPU: 52% of total (+15 p.p. vs. Q4 14) boosted by LTE
• o LTE 15% penetration (+11 p.p. y-o-y)

Increased uptake of UBB & Pay TV

• Growing share of UBB & Pay TV

• o Capturing 100% of Pay TV market growth in 2015
• o 52% UBB net adds share in 2015
• 16.6m FTTx premises passed as of Dec-15 (4.7m FTTH ex. GVT)
• o Increasing take-up ratio (3.8m HH connected vs 3.3m a year ago)

1.8m 3.8m

Brazil: Sustained market outperformance

Robust revenue performance

• Balanced mobile & fixed growth

• o Q4 MSR +2.7% y-o-y (+5.3% FY)
• o Mobile revenue market share +5p.p. in 2015
• o 2 nd consecutive Q leading fixed revenue growth
• o Negative impact of regulation y-o-y (-2.5 p.p. Q4 15; -2.7 p.p. FY)
• Accelerating mobile data trends (Q4 +37.6% y-o-y; FY +34.5%)
• o Mobile data 49% o/MSR in Q4
• o New data monetisation initiatives

Accelerating OIBDA growth despite macro

• Outstanding OIBDA performance: +7.3% y-o-y in Q4; +2.9% in FY
• o OpEx y-o-y well below inflation (Q4 15: +5.6%; FY: +6.1%)
• o Better sequential costs trend; bad debt reduction standing out
• Synergy initiatives aligned with Best case scenario
• Organisation fully integrated and operating as a single Co.

Hispam: Sound performance on quality growth

Revenue 2015 (organic growth y-o-y)

Total Revenue Rev ex-handset

OIBDA Margin 2015

Organic margin y-o-y

Increase adoption of value services

• Contract mobile consolidates improving trend in Q4
• o Highest-ever net adds (732k; >3x y-o-y)
• o Booming Smartphone & LTE penetration (+10 p.p. y-o-y & +6 p.p.)
• Enhanced capabilities pushing bundled fixed services
• o FBB speeds >4Mb: 54%; +4 p.p. y-o-y
• o Growing Pay TV: best-ever net adds (380k in 2015; +27% y-o-y)

Solid top line growth & profitability over the year

• Sequential revenue growth deceleration

• o Lower handset sales y-o-y (Q4: -5.0%; Q3: +13.7%)
• o Tariffs promotions & repositioning in MEX / different seasonality on tariffs update in ARG
• o Strong Pay TV & FBB top line expansion
• Solid OIBDA increase (Q4: +4.0% y-o-y; FY: +7.2%)
• o Efficiency measures and cost rationalisation offsetting FX impact and higher commercial expenses

Hispam: Commercial momentum; solid performance

Revenue (organic y-o-y)

Q4 15 FY 15

• Mexico
• o Strengthening market position with Q4 best-ever net adds (postpay and prepay); LTE coverage of 45m POPs at Dec-15
• o Sound FY Rev, OIBDA & OpCF increase; Q4 deceleration on intense tariff promotions and higher commercial costs

• Colombia:

• o Continued momentum on value segments: highest quarterly net adds of last 2 years (72k) in contract mobile
• o Sequential OIBDA margin improvement (Q4 36.3% vs. Q3 34.3%) despite commercial intensity
• Peru:
• o Robust accesses (contract mobile +13%; FBB +8%; Pay TV +27%) driving revenue & profitability improvement
• o Data promotions underpinned traffic (2.5x vs. Q4 14)
• Argentina:
• o Rev & OIBDA y-o-y trends affected by seasonality of tariffs update & higher commercial expenses
• Chile:
• o Steady growth of contract mobile (+4%), FBB (+6%) and Pay TV (+7%)
• o Lower handset sales & regulation dragging revenue y-o-y
• VZ & CA:
• o Handset availability limiting commercial trading and leading y-o-y margin expansion in Q4

UK: Gaining market value

Substantial progress in commercial momentum

• Strongest quarterly contract net adds in ²⁰¹⁵

• o Solid gross adds on successful propositions
• o O2 had the most satisfied customers in the mobile market for the 7th year in a row (Ofcom)

• LTE as main lever of growth

• o LTE Penetration: 35% (+5 p.p. q-o-q)
• o 80% outdoor coverage at Dec-15

Continued revenue growth

• Total revenue up 4.6% y-o-y in FY ex "O² Refresh"
• o Ongoing customer appetite for high-value tariffs
• o Q4 growth decelerating y-o-y
  • Primarily due to slowdown of high-end handset sales
• Strong OIBDA margin on top-line progress and cost control
• ²⁰¹⁵ OIBDA grew 2.2% y-o-y ex non-recurrent
• o Q4 OIBDA maintained similar growth to Q3

Leverage in line for reaching the target

Effective interest cost below guidance

Sources of financing

€ in billions

Chairman & CEO

Summary

2016	Maintain revenue momentum; Significant data monetisation potential
2016	Accelerate in transformation, Synergies & Simplification
2016	Ongoing investments & Attractive shareholder remuneration

GROW PROFITABLY; MAINTAINING FINANCIAL FLEXIBILITY

Investor Relations Telefónica, S.A.

For further information: Investor Relations Tel. +34 94 482 87 00 ir@telefonica.com www.telefonica.com/investors