Results

January – June 2016

Disclaimer

This document and the conference-call webcast (including the Q&A session) may contain forward-looking statements and information (hereinafter, the "Statements") relating to the Telefónica Group (hereinafter, the "Company" or "Telefónica") or otherwise. These Statements may include financial forecasts and estimates based on assumptions or statements regarding plans, objectives and expectations that make reference to different matters, such as the customer base and its evolution, growth of the different business lines and of the global business, market share, possible acquisitions, divestitures or other transactions, Company results and other aspects related to the activity and situation of the Company.

The Statements can be identified, in certain cases, through the use of words such as "forecast", "expectation", "anticipation", "aspiration", "purpose", "belief" or similar expressions or variations of such expressions. These Statements reflect the current views of Telefónica with respect to future events, do not represent, by their own nature, any guarantee of future fulfilment, and are subject to risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such Statements. 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 disclaimer must be taken into account by any individual or entity who may have to purchase or sell or elaborate or disseminate opinions related to any securities issued by the Company, and, in particular, by analysts and investors. Except as required by applicable laws, Telefónica does not assume any obligation to publicly update the Statements to adapt them to events or circumstances taking place after the date hereof, including changes in the Company's business or business development strategy or any other unexpected circumstance.

This document and the conference-call webcast (including the Q&A session) may contain summarized or non-audited financial information. The information contained herein and therein should therefore be considered as a whole and in conjunction with all the public information regarding the Company available, including any other documents released by the Company that may contain more detailed information.

Neither this document nor the conference-call webcast (including the Q&A session) nor any of their contents constitute an offer to purchase, sale or exchange any securities, a solicitation of any offer to purchase, sale or exchange of any securities, or a recommendation or advice regarding any security.

Mr. José María Álvarez-Pallete Chairman & CEO

Q2 16 Highlights; strategy is working

Profitable growth remained solid

Best technology platforms

Improved competitive position

Committed to deleverage

%: y-o-y organic

• Service revenue +1.5%, offsetting handset sales (-18.0%)

o Data monetisation driver continue their positive trend (Non-SMS data revs +16.0%)
o Av. Rev/Access +2.0% capitalising on fiber, smartphones, LTE and Pay TV
Maintaining focus on efficiencies & merger synergies
o Growing OIBDA, margin and OpCF
Fiber premises passed 32.9m; LTE coverage 55% (84% in Europe)
Building the future (new customer knowledge platform linked to Big Data; offering a differential experience)
Spain: OpCF back to growth
Brazil & Germany: Margins boosted by synergies (proving TEF's capacity to extract value from them)
UK: Distinctive customer growth, loyalty and brand awareness
Hispam: Increasing value penetration
Best in class diversification; further improvement of operations and FX drag to ease in H2
FCF €815m in H1 to significantly improve along the year
Broad diversity of potential debt reduction measures, combined with attractive debt re-financing opportunity

2016 guidance; dividend & mid-term leverage confirmed

Key financials (UK full consolidation)

	H1 16			Q2 16
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenue	25,235	(7.1%)	1.3%	12,723	(7.7%)	(0.2%)
Service revenue	23,364	(5.7%)	2.7%	11,824	(6.1%)	1.5%
OIBDA	7,756	(6.4%)	3.1%	3,918	(7.1%)	0.8%
OIBDA Margin	30.7%	0.2 p.p.	0.5 p.p.	30.8%	0.2 p.p.	0.3 p.p.
OpCF (ex-spectrum)	4,112	(5.9%)	3.3%	1,968	(3.1%)	1.4%
Net Income	1,241	(42.1%)		693	(54.5%)
EPS	0.23	(45.2%)		0.13	(55.6%)
FCF	815	c.s.		746	c.s.
Net Financial Debt	52,568	2.7%

Negative FX effect in OIBDA offset at FCF level

H1 affected by FX and perimeter impacts

FX to ease in H2 16

H1 ¹⁶ results impacted by average FX, following sharp depreciation
o Q3 15: BRL and COP
o Q4 15: ARS

Perimeter impact (y-o-y)

Revenues OIBDA

Perimeter; no impact in H2 16

• GVT & DTS consolidated in May-15

Full-year guidance on track

2016 Guidance (Constant FX 2015; ex-VZ; ex-UK)	Guidance 2016E	H1 16
Revenue	>4%	+5.0%	Service Revenues
OIBDA margin	Stabilising vs. 2015	+0.1 p.p.	+6.4%
CapEx/Sales	Around 17%	15.1%

Dividend	€0.75/sh. €0.35/sh. voluntary scrip Nov-16 €0.4/sh. cash Q2 17
Share buyback: % share capital cancelled (treasury) (BoD to decide in H2 16)	1.5%
Mid-term target Net Financial Debt / OIBDA <2.35x	3.20x Jun-16

Strong FCF performance in Q2 16

Cash generation improvement (y-o-y and q-o-q)

Robust H1 FCF y-o-y (+€1,009m) on the back of:
o Better performance of OpCF in Q2
o Lower spectrum, CapEx, financial payments & minorities
o Higher WC consumption (partly due to spectrum) & slightly higher taxes impacted by non-recurrents in H1 15
FCF sequential improvement (+€677m) mainly due to WC and financial expenses, offsetting higher taxes, Capex and minorities

FCFS (€)

FCF to improve in H2 16

Expected improvement in operational performance (OIBDA)
Lower FX headwinds
Seasonality of WC & other factors

Continued strong momentum with quality customers

Securing a distinctive top-line growth profile

Exploiting growth opportunities to foster service revenues
o X2 LTE accesses vs. Jun-15
o 1.7m smartphones added to base in Q2
o +31% y-o-y FFTX + VDSL accesses
o Fast adoption of Pay TV (+5% y-o-y)
Increasing bundling with FFTX/4G, allowing high-end pricing power
Increasing customer lifetime value
o Strong Q of customer retention (churn -0.2 p.p. q-o-q)
o Innovative value propositions
o Best customer experience

Resilient growth of service revenues

Q2 Service Revenues (y-o-y organic)

Service Revenues (y-o-y organic)

Quality of revenues

Service revenues growth offset handset sales
Service revenues expansion higher than total revenues in all segments
o Consistent trends in Q2 in Brazil & Spain vs. Q1
Lower handset sales impacting Q2; worsening trends in all business

Q2 growth levered on strategic business

BB Connectivity & SoC growing robustly and increasing weight to 47% o/total (+6 p.p. y-o-y)
Declining Voice & Access (43% o/total; -5 p.p. y-o-y)
Continued demand for mobile data (Non-SMS revs. +16.0% y-o-y)

Revenue (H1 16)

Sustaining OIBDA growth, strong diversification

H1 OIBDA (y-o-y organic)

OIBDA 2016 (y-o-y organic)

High operating leverage

Ongoing synergies & efficiencies improvements

OIBDA growth for ⁸ th Q in a row
Outstanding OpEx in Q2 (-0.8% y-o-y organic); outpacing revenue decline
o Merger synergies on track (BZ, DE)
o Redundancy programs driving personnel savings (Spain, BZ, …)
o Global simplification initiatives across regions
Broad-based y-o-y margin improvement in Q2, except in Hispam
Ongoing organic OpCF growth in Q2 (H1: +3.3% y-o-y)
o Back to growth in Spain (Q2: +1.0% y-o-y)
o Brazil maintains its robust increase (H1: +33.6% y-o-y)

OIBDA (H1 16) OpCF ex-spectrum (H1 16)

Clear data monetisation results

ARPU uplift Traffic (y-o-y) Usage uplift Q2 LTE dynamics

LTE data upselling; ARPU growth

LTE customers 50.1m (x2 y-o-y)
o Q2 avg. usage/per smartphone +34% y-o-y (955 MB/month)
Prepaid data ARPU uplift in Latam (Q2:+18% y-o-y)
o T. Hispam opportunity; smartphone penetration 30%
Contract data monetisation via traffic dynamisation and upselling

Fixed data opportunity ahead

Booming FBB traffic (Q2: +50% y-o-y)
Fiber quality and speed fostering usage

Digital Services: enhancing customer experience

Revenues(y-o-y organic)

Solid growth (y-o-y organic)

Q2 16 H1 16

Weight o/ total revs. Q2 16

Building on solid platforms

Video: 8.4m accesses (+5% y-o-y)
o Introduction of new functionalities and success of own productions
Cloud:
o Chile & Brazil: new "Open Telefónica Cloud" services
Security:
o Two new Security Operations Centres in Mexico & Spain
o New strategic alliances to integrate with own security solutions
M2M:
o Consolidating Smart m2m platform as strategic asset to win key industry references
Financial Services:
o O2 Mobile Banking, Germany's first mobile-only bank, launched commercially
Telefónica Open Future_:
o Integrating startups' services internally and into customer offering

TGR: Technology excellence

All-IP upgrade: More capability & efficiency
o Native VoWiFi in Germany based on IMS (IP Multimedia Subsystem)
o New metro network in Spain; OTN (Optical Transport Network)
Global Centers: Standardisation & simplification
o Devices: HGU (Home Gateway Unit) already in Spain & Brazil
Innovation:
o SON (Self Optimizing Networks) to improve 70m customers' experience
o Telefónica awarded best NFV/SDN solution
o Agreements with main vendors to evolve 5G architecture

E2E Digitalisation

Mr. Angel Vilá CSFO

Spain: Commercial momentum gaining pace

Quarterly net adds ('000)

Unique platform

• High customer stickiness

o Fusion churn: 1.1% in Q2 (-0.2 p.p. q-o-q)
Best-in-class UBB network in Europe
o FTTH coverage: 15.7m premises passed (H1: +1.4m)
o LTE coverage: 86% pop (+3 p.p. q-o-q)
Continuous quality upgrade of quad-play offer
o Innovative TV (VoD off-line, shift TV,…), 300 Mb symmetry, HGU,..

Jun-15 Jun-16 "Fusión" high value

Q2 15 Q1 16 Q2 16

Consistent upselling

"Fusión" remains unabated (subs: +10% y-o-y)
o Penetration upside
New step on the "more for more" strategy launched in July
o Smart bundling (Premium TV & mobile add-ons)

Spain: Further progress in the new growth cycle

Revenues (y-o-y organic)

Total Handset sales Service Rev. Total Revenues

Profitability

(y-o-y organic ex-real estate in Q2 15)

Q1 16€3,126mQ2 16 Margin

Total OIBDA

Sustainable service revenues growth

Accelerating service revenues increase despite negative calendar effect from "Fusión" tariffs update
All revenue segments delivering y-o-y growth in Q2
o Convergence and IT drive Business improvement

Improved OIBDA & OpCF; efficiency gains

Savings from Redundancy Program since Q2
o Q2 OpEx: -1.9% y-o-y (Q1: -1.3%)
Commercial process simplification (Q2 commercial cost: -18% y-o-y)
Sustainable margin expansion
OpCF increasing in Q2 y-o-y; despite Q2 CapEx +1.2% y-o-y

Germany: Outstanding OpCF; synergies on track

Increasing competition in non-premium (aggressive pricing)
Revenues pressure in Q2
o Lower handset sales y-o-y (Q2: -25.5% y-o-y; Q1: -5.5%)
o MSR showed wholesale mix; legacy base headwinds and regulation
Further progress on LTE: Coverage at 77% (+7 p.p. y-o-y)
o Ramp-up of non-SMS data revs in Q2 to 13.6% y-o-y
o Avg. data usage of contract LTE O2 consumer +16% q-o-q to 1.4G

Financial (y-o-y ex non-recurrent)

OIBDA margin expansion to remain

Incremental savings from H2: Q2 synergies (€40m); H1 (€95m)
OpEx transformation peaking in H1 (brand, retention)
Outlook confirmed but CapEx guidance reduced to 'mid to high singledigit % growth'
Proposal for annual dividend growth over next 3 years (2016: €0.25/sh.)

UK: Strong trading; leading loyalty

Continued customer growth in a challenging market Continued customer growth

Strongest quarterly net additions in ⁶ quarters
Contract customers: 61% of the total; +5 p.p. y-o-y
Fast LTE deployment
o 91% outdoor coverage (+18 p.p. y-o-y)
o Penetration at 43% of base (+17 p.p. y-o-y)
o Customers up 64% y-o-y to 9.5 m

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

OIBDA margin expansion OIBDA margin expansion in Q2 (26.6%; +0.1 p.p. y-o-y)

Q2 MSR broadly flat (ex-O2 Refresh) y-o-y
Top line pressure in Q2 (ex "O² Refresh")
o Handset sales market wide slowdown (-11.6% y-o-y)
o Roaming + MTRs (-2.0 p.p. in Q2 y-o-y)
OpEx decline y-o-y (phasing of marketing spend and underlying savings)
Increased investments in LTE (H1 CapEx: +6.3% y-o-y)

Brazil: Best positioned in the market

Fixed:
o Increasing speed fostering ARPU expansion
- o 16.1m homes passed with fiber/4.0m connected
o Shortening the loop in the legacy copper network in SP
o Leader in UBB with 54% market share
o Successful cross-selling between former GVT and Vivo customers: All stores already selling fixed products

Brazil: Growing market share with margin expansion

HispAm: Reinforcing leadership in high-value

Contract accesses (y-o-y)

FBB & Pay TV accesses (y-o-y)

FBB Pay TV

Quality investments paying-off

• T. HispAm:

o Strong performance in contract
o Net adds x2.5 vs. Q2 15
o Very intense competition, mainly Peru and Chile, hitting prepaid performance
o Rapid take-up of new services y-o-y
o Smartphone & LTE penetration: +6 p.p. y-o-y
o Accelerating fixed transformation (bundling 41%; +5 p.p. y-o-y)
o Delivering higher speeds (56% > 4 Mbps; +5 p.p. y-o-y)
o Positive Q2 Pay TV net adds in main markets

HispAm: Healthy growth in top line

Service Revenue (organic y-o-y)

Q1 16 Q2 16

Peers' outperformance in broad markets

Robust Q2 fixed revenues: +16.1% y-o-y
Sequential deterioration of OIBDA y-o-y (Q2: -3.4%; Q1: +0.8%) affected by MEX and VZ
o FX, competition (higher interconnection costs) and inflation: drivers of margin erosion (-2.0 p.p. y-o-y)
MÉXICO:
o Intense competition in H1, but easing in recent weeks. Gaining market share
PERÚ:
o OIBDA and margin improving in Q2 on efficiencies and strong performance in fixed business
ARGENTINA:
o Steady revenue increase in Q2 & improving OIBDA trends
CHILE:
o Very solid fixed revenue performance; OIBDA growth impacted by higher commercial costs and FX
COLOMBIA:
o Improved revenue growth; OIBDA and margin declining (inflation & commercial investments)

Leverage impacted by Q2 dividend payment

Strong liquidity to face upcoming maturities

Sources of long-term financing (Jun-16)

Liquidity position (Jun-16)

€ in billions

Net debt maturities (Jun-16)

€ in billions; not considering hybrid NC dates

Summary: Structural transformation

Executing and building for the future

Networks upgrades & product differentiation driving commercial activity: growing value & improving sustainability
Strengthening market positioning across markets
Ongoing efficiencies & synergies driving margin expansion
Profitable organic growth continues, improvement expected in H2
FX headwinds expected to ease in H2
Improving FCF generation, H2 to benefit from seasonality