Telefonica S.A. — Investor Presentation 2017

Jun 30, 2017

Results_ January –June 2017

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.

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.

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In October 2015, the European Securities Markets Authority (ESMA) published guidelines on Alternative Performance Measures (APM), applicable to the regulated information published from July 3, 2016. Information and disclosure related to APM used in this presentation are included in the Appendix. Recipients of this document are invited to read our condensed consolidated interim financial statements and consolidated interim management report for 2017 submitted to the Spanish National Securities Market Commission.

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: Executing on strategy; structural quality

Organic growth acceleration across the board

• Improving Avg. rev per access to +3.1% y-o-y; churn -0.2 p.p. q-o-q
• Accelerating trends; Revs +3.1%, OIBDA +7.2%, OpCF +17.5%
• Flowing through EPS +16.3% y-o-y (Q2: €0.15)

Ongoing transformation (Efficiencies + Synergies + Digital Agenda)

Focus on efficiency driving Q2 margin expansion to 32.1% (+1.2 p.p. org.)

• Well invested & high quality assets; strong competitive position
• CapEx targeted to UBB, underpinning E2E digitalisation and Cognitive Intelligence; differential value proposition for customers

Stronger Balance Sheet

• Net Debt Jun-17: €48.5Bn; €-3.7Bn y-o-y
• Net Debt €47.2Bn incl. Telxius deal; €-5.0Bn y-o-y
• Robust FCF (H1: €1,620m, 2x y-o-y; Q2: €1,021m, +36.8%)
• Falling cash interest cost & extended avg. debt maturity

2017 outlook upgraded; dividend confirmed

Financial Summary

	H1 17			Q2 17
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenue	26,091	3.4%	2.3%	12,960	1.9%	3.1%
Service revenues	24,224	3.7%	2.3%	12,037	1.8%	2.9%
OIBDA	8,179	5.5%	4.3%	4,158	6.1%	7.2%
OIBDA Margin	31.3%	0.6 p.p.	0.6 p.p.	32.1%	1.3 p.p.	1.2 p.p.
OIBDA Underlying	8,292	6.0%		4,183	5.5%
OpCF (ex-spectrum)	4,676	13.7%	13.0%	2,273	15.5%	17.5%
Net Income	1,600	28.9%		821	18.4%
EPS	0.29	30.3%		0.15	16.3%
FCF	1,620	98.6%		1,021	36.8%
Net Financial Debt	48,487	(7.1%)

• Accelerating growth in Revs., OIBDA, OpCF in Q2
• OIBDA margin expansion y-o-y
• Doubling H1 FCF y-o-y
• Significant net debt reduction y-o-y
• EPS +30.3% vs H1 16

Upgrading full year guidance

2017E Guidance (Organic)	Original Guidance 2017	UPGRADED GUIDANCE 2017	H1 17
Revenues	Stable (in spite of regulation: ~-1.2 p.p.)	> 1.5% (regulation ~-1.2 p.p.)	2.3% (regulation -1.0 p.p.)
OIBDA margin	Expansion up to 1 p.p.	Expansion up to 1 p.p.	+0.6 p.p.
CapEx ex-spectrum/Sales	Around 16%	Around 16%	13.4%

MAINTAINING A SOLID INVESTMENT GRADE RATING

Growth + Sustainable Dividend + Deleverage

OIBDA growth flowing to net income

• H1 VZ weight over total Group reduced to 0.3% in Revs; 0.2% in OIBDA

(1) Capital loss in Mediaset Premium and CU; impairment in Prisa and net effect of VZ devaluation

Robust FCF generation; improvement y-o-y and q-o-q

Q2 q-o-q change in Net Debt (€m)

• FCF to accelerate in H2 17
• Continued net debt decline

Accelerating OIBDA growth

OIBDA: Organic growth & FX impact (€m)

FX impact in H1 FCF (€m)

Strong organic improvement in Q2 • Up to June, organic and FX added €477m to OIBDA • Organic OIBDA trends ramping-up o +€285m in Q2 vs +52m in Q1 • FX impact reverting positive trend in Q1

• o -€51m in Q2 vs. +191m in Q1 due to VZ devaluation
• o Excluding VZ, positive contribution continues (+€70m) mainly on BRL
• o FX effect limited at FCF level

Strengthening organic trends; sustainable growth

Q2 17 Profitability (y-o-y organic)

Q1 17 Q2 17 Margin

Top line (y-o-y organic)

Operating leverage improving returns

• Q2 Service revenues ramping up +120 bps
• o All segments accelerating; UK stable
• Outstanding sequential improvement in OIBDA of +590 bps
• o All segments improving q-o-q; Brazil stable
• OpCF sequential improvement +860 bps
• o CapEx easing y-o-y decline to -3.3%
• Hispam: Main growth lever of acceleration in Q2 in all metrics
• Q2 OpCF growth in all segments

Gaining momentum in data monetisation

Fostering data usage and revenue growth

• Ensuring ARPU growth in Latam: recurrent plans & tiered pricing

• o ~10% ARPU uplift after data adoption
• o 46% smartphone penetration in prepay (+7 p.p. y-o-y)
• Increasing ARPU; higher value for money in mobile data proposals
• o "M4M" in mobile-only (Spain)
• o "O2 Free" portfolio (Germany)
• Neuropricing: Pioneer in the sector; more effective communication
• o Proving different techniques to foster higher value plans
• o Proven value accretion (+5% ARPU of gross adds)

Ample growth opportunity

• Better trends in Data traffic in Q2 y-o-y (mobile and fixed)
• o Mobile data (+15 p.p. vs Q1)
• o Fixed data (+7 p.p. vs Q1)

New wave of value creation opportunities

Digital Services: progress in the new ecosystem

Global Resources: Progress on technology evolution

Telxius: Consolidating solid results

Mr. Ángel Vilá COO

Spain: Improved trading, ongoing upselling

Mobile contract net adds ex M2M ('000)

TV net adds ('000) FBB net adds 2017 ('000)

Mobile contract (y-o-y ex M2M)

Quality, ARPU & loyalty increase

• Churn improvement q-o-q (Fusión, TV, mobile)
• Steady "Fusión" upselling; high-end: 24% (+3 p.p. q-o-q)
• Mobile voice contract growth acceleration
• o Improved portability
• TV recovery fostered by new bundle ("Fusión+ Ocio")
• Gradual improvement in FBB; stable churn
• o FBB base largely on fiber (53% o/FBB; +9 p.p.)
• o New offer to foster trading in H2

New entry-level; adding differentiation

• Segmentation strengths competitive positioning

• o 2 new bundles in July: "Fusión #0"; "Fusión Series"
• o Best value for money: TV, exclusive content & VAS

• Leading assets

o 18m premises passed FTTH, LTE 97% pop., Pay TV 100% pop.

Spain: Revenues trending upwards, solid cash flow

2017 Service Revenues (organic y-o-y)

Telefónica, S.A.

Revenues in the right direction

• Consumer revs. back to growth (+1.4 p.p. q-o-q)
• o Tariff upgrade and upselling
• Business revs. (-1.4 p.p. q-o-q) reflecting seasonal factors
• Wholesale & Other revs. eased decline (+2.2 p.p. q-o-q)
• o Flat y-o-y in Q2 ex-TV ("La Liga")
  • Drag (-€30m; -1.0 p.p.of SR) to disappear in August
• o FFTH wholesale continues to grow, strong potential

Benchmark cash conversion

• Q2 OIBDA improving (-1.5% y-o-y; +0.9 p.p. q-o-q)
• o Q2 margin expansion: 40.6% organic (+0.8 p.p. q-o-q)
• H1 OpCF solid growth
• o 27.6% OpCF margin (+2.7 p.p. y-o-y); 70.9% OpCF/OIBDA (+6.6 p.p.)
• CapEx/Sales 11.3% (-2.6 p.p. vs H1 16)

Germany: Solid momentum; realisation of synergies

Promotions with larger data buckets MSR ex-regulation (y-o-y organic)

• Contract (+7% y-o-y); 197k net adds (172k in Q1)
• o 55% of gross adds from partners (stable q-o-q)
• o Promotional activities; 15yr anniversary O² and Non-Premium
• o Churn improving 0.1 p.p. y-o-y to 1.5% in Q2
• Prepay (+2% y-o-y); strong 322k net adds (4.6x y-o-y)
• Driving data usage (mobile data traffic +60% vs. Q2 16)
• o LTE cust. +53%, penetration 33% (+11 p.p.); cov. 80% (+4 p.p.)
• o "O² Free 15" cust. >3GB of data usage

Improving financial trends

• Continued recovery in MSR ex-reg (+0.2 p.p. q-o-q)
• OIBDA growth rate accelerated to 3.8% y-o-y (+2.7% in H1)
• o Revenue flow (+1.2 p.p. sequentially; -4.1% in H1)
• o ~ €40m incremental OIBDA synergies (~€75m in H1)…
• o …despite investments in "O2 Free" positioning and 15y anniversary promotions
• ^~€20m CapEx synergies in H1

16

MSR Regulation

UK: Customer focus delivers robust performance

Continued customer growth in a challenging market Quality customer base growing…

• Contract growing: 62% o/total (+1 p.p.)
• o Contract accesses: +2% y-o-y
• o Leading contract churn: 1.0% in Q2
• 58% LTE penetration (+9 p.p.); 97% outdoor cov. (+7 p.p.)
• Avg. data usage per smartphone +66% vs. Q2 ¹⁶

… Leading to sound financial performance

• MSR continued to grow: H1 +1.3% y-o-y
• • Larger spend: subscription & out-of-bundle
• • Quality customer base growth
• ̶ Impact from regulation (-0.9 p.p.)
• Handset and other revs. +7.6% vs Q2 ¹⁶
• • FX driving up handset prices, Smart Metering contribution
• OIBDA boosted by top line acceleration & lower commercial activity
• CapEx +15.4% y-o-y in H1: accelerating LTE rollout

Brazil: Accelerating profitable growth

Q2 Pay TV ARPU +5.0% FTTx Net adds 2017 (k) 81 139 Q1 Q2 29 42 Q1 Q2 IPTV Net adds 2017 (k) Q2 FBB ARPU +10.5% x2.0 y-o-y x2.3 y-o-y

Quality-centric strategy continues delivering

• Strengthening mobile leadership

• o Total market share of 30.6%; 42.3% in contract
• o Smartphones accesses (+33%), LTE (+90%)
• o 4G coverage to 71% of pop.; +657 cities with 4G in Q2
• o Booming data ARPU (+35.9%)

• Fixed; widening quality gap

• o 17.7m premises passed with FTTx, 4.4m connected
• Record high net adds in FTTx and IPTV
• o Reaching 69 cities with FTTH, 5 new cities in H1 17

Brazil: Sustained benchmark performance

• Consistent mid-single digit MSR growth o Double-digit postpay growth o Data / MSR: 72% (+15 p.p. vs Q2 16) • Fixed revs. improving trend on FBB performance Accelerating revenue growth

• o UBB revs.: +19.5% y-o-y in Q2
• Regulation dragged 1.8 p.p. to revs. y-o-y

Expanding margins once again

• Sustained OpEx reduction; ⁶ th consecutive Q of efficiencies and synergies
• Successful execution of operational synergies (€286m in OpCF in H1; €833m over last two years)

Telefónica, S.A.

19

HispAm: Focus on value driving ARPU acceleration

Network upgrades driving superior growth

• Strong ARPU increase on booming data

• o Mobile data ARPU 55% o/total
• o LTE coverage 54%; +9 p.p. y-o-y
• o 5.4m premises passed FTTx/Cable (+1.8m in LTM)
• ARGENTINA: Solid value growth (Contract +6%; LTE +91%); fiber uptake (58k net adds)
• MEXICO: Sequential ARPU improvement; easing pricing pressure and solid contract performance
• CHILE: Growth across value accesses (contract +1%; LTE +40%; FTTx +18%; Pay TV +2%) amid intense competition
• PERU: Positive adoption of new prepay portfolio ("Preplan") and strong momentum in FTTx (+32% to 822k connections)
• COLOMBIA: Sound growth in mobile (contract +5%; prepay +4%); FTTH launch in 5 cities

Cable

9.4%

12.1%

HispAm: Growth acceleration across the board

Strong Revs., OIBDA, OpCF both organic & reported

• Organic top line ramped-up on MSR (Q2: +18.2%; Q1: +10.6%) and fixed (Q2: +5.7%; Q1: +4.1%)
• o Mobile data revs. +34.7% in Q2 (+23.1% in Q1)
• o Pay TV revs. +13.4% in Q2; FBB & new services +7.3%
• OpCF accelerating y-o-y growth (+71.8% Q2; +23.6% Q1)
• ARGENTINA: Revs. & OIBDA y-o-y acceleration driving strong OpCF (H1: €210m, +€207m y-o-y)
• CHILE: Top line trend affected by commercial intensity. H1 OpCF +19% y-o-y to €159m
• PERU: Revs & OIBDA trends impacted by intense competition; mobile ARPU stabilization along Q2
• COLOMBIA: Solid revenue and OIBDA performance amid consolidation of positive commercial trends. OpCF +27.5% y-o-y
• MEXICO: Positive revs. & OIBDA y-o-y on ARPU improvement

Deleverage on strong organic FCF and disposals

Net Financial Debt (€m)

Telefónica, S.A.

Solid and diversified liquidity

Net Debt maturities (Jun-17)

(€Bn; not considering hybrid NC dates)

Interest payments cost

Closing remarks

• Solid acceleration in organic growth; Revenues, OIBDA and OpCF
• Sustained commercial momentum; adding higher value customers & "M4M" actions
• Strengthening our differentiation; network leadership & quality businesses
• Upfront CapEx investments fading
• Sound earnings growth
• Robust FCF generation; reducing leverage organically
• 2017 guidance upgraded; dividend reiterated

Positioning for sustainable long-term growth

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