Telefonica S.A. — Investor Presentation 2017

Sep 30, 2017

Results January – September 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.

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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 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.

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Q3: Solid execution on key priorities

Consistent and profitable organic growth

Growing strategic KPIs: fiber, LTE supporting customer lifetime value o Ramping-up avg. rev per access to +4.3% y-o-y; churn control

• Revenue acceleration to +4.0% y-o-y; Spain back to service rev. growth
• Continued OIBDA growth (+2.8% y-o-y); in spite of RLAH dragging -1.7 p.p.
• 9M EPS €0.44; +8.7% y-o-y

Company transformation (more efficient and improving resource allocation)

Reinforcing Balance Sheet

• Continued investments in best network; CapEx intensity starts reducing
• Delivering results from cost initiatives and synergies integration
• Leveraging on digitalisation; improving operating leverage & differentiation

• Cognitive Intelligence ("Aura"); new relationship of trust (increase loyalty and reduce churn)

• One more quarter of net debt reduction (-€2.4Bn y-o-y) to €47.2Bn (Sep-17)

• o Incl. sale of 40% Telxius: €45.9Bn; -€3.6Bn (-7.4% y-o-y)
• Strong 9M FCF: €3,226m; +39.2% y-o-y; Q3: €1,600; +6.7%
• Positive bond refinancing: long-term and historical low levels

On track to deliver FY outlook

2017E Guidance (Organic)	Guidance 2017E	9M 17
Revenues	>1.5% (in spite of regulation: ~-1.2 p.p.)	2.9% (regulation -1.1 p.p.)
OIBDA margin	Expansion up to 1 p.p.	0.3 p.p.
CapEx ex-spectrum/Sales	Around 16%	14.1%

2017 Dividend	To be paid in 2017/18
Interim Dec-17	€0.20/sh. Cash
Final Jun-18	€0.20/sh. Cash

	Dividends to be paid in 2017 calendar year amount to €0.40/sh.:
	Cash dividend already paid on 16th Jun-17; €0.20/sh.
	Cash dividend 14th Dec-17; €0.20/sh.

MAINTAINING A SOLID INVESTMENT GRADE RATING

Growth + Sustainable Dividend + Deleverage

Summary: Financials

	9M 17			Q3 17
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Reported	Reported y-o-y	Organic y-o-y
Revenue	38,846	1.4%	2.9%	12,754	(2.5%)	4.0%
Service revenues	35,970	1.3%	2.7%	11,746	(3.3%)	3.3%
OIBDA	12,274	2.9%	3.8%	4,095	(1.9%)	2.8%
OIBDA Margin	31.6%	0.5 p.p.	0.3 p.p.	32.1%	0.2 p.p.	(0.4 p.p.)
OpCF (ex-spectrum)	6,815	8.9%	9.2%	2,138	(0.3%)	2.0%
Net Income	2,439	9.6%		839	(14.7%)
EPS	0.44	8.7%		0.15	(17.5%)
FCF	3,226	39.2%		1,600	6.7%
Net Financial Debt	47,222	(4.8%)

• Revenue growth accelerated in Q3 y-o-y org.
• OIBDA ex-regulation maintaining trends vs. H1
• 9M OIBDA margin expansion y-o-y
• High single-digit OpCF growth vs. 9M 16
• 9M FCF +39.2%
• Net debt reduction y-o-y and q-o-q

Bottom line increased by 10%, with EPS €0.44

(1) Q2: Capital loss in Mediaset Premium and CU; impairment in Prisa and net effect of VZ devaluation. Q3: Contingency in ARG

Progressive improvement in FCF

Investor Relations Telefónica, S.A.

• FCF to improve in Q4 as seasonal factors impact positively • Further net debt reduction

6

Growth fuelled by organic contribution

OIBDA: Organic growth & FX impact (€m)

FX impact in 9M FCF (€m)

• Up to September, organic performance added €457m (+€119m in Q3) o FX dragged €85m or -0.7 p.p. y-o-y o RLAH ~-€70m in Q3 OIBDA • Negative FX effect in Q3 y-o-y (-5.4 p.p.) Remarkable organic trends despite regulation

• o -€224m in Q3 vs. -€51m in Q2
• o Main currencies drained y-o-y: VZ, ARS, GBP, BRL
• FX persist as a headwind in H2 17 at current spot rates
• 9M OIBDA FX drag was offset at FCF level

Revenue trends ramped-up

Strong and quality top line

• Q3 revenues accelerated +90 bps
• Q3 service revs increased y-o-y in all segments, except Germany
• o Better performance in Spain; explains most of the improvement
• Growth engines contributing in Q3
• o Spain back to growth in service revs y-o-y
• o Hispam improved 60 bps to +14.3% y-o-y service revs
• o Mobile data revs +16.3% y-o-y
• 9M BB Connectivity & SoC revs. gaining ground to 51% o/total
• Robust commercial momentum
• o Continued growth on high value base
• o "M4M" and portfolio optimisation
• o Innovation & Big Data capabilities increasing differentiation

Revenue growth based on successful data monetisation

Mobile Data Revenues (€m)

FTTH (Q3 17)

9

Several levers to foster data revenues

• Prepaid recurrent plans in Latam boost ARPU growth

• o High penetration: >50% Brazil, ~30% Hispam
• o >10% ARPU uplift after data adoption
• "M4M" to improve value for money
• o Upselling strategy in Spain
• o New postpaid portfolio in BRA
• o New "O2 Free" portfolio in GER with ARPU up potential
• o Video dedicated data in COL and PER
• o Family plans in mobile only & convergent portfolios
• Neuropricing: Improving value mix
• o Being rapidly deployed: 12 countries
• o Proven value accretion (+5% ARPU of gross adds)
• A new prepaid concept (APP's) leveraging digital capabilities
• o MEX: Flexible, Real Time control, reward programme
• o BRA: Community data sharing, data rollover

Generating profitability and cash

Investor Relations Telefónica, S.A.

Positive OIBDA: operating leverage increase

• Committed to improve efficiency and operational excellence
• Q3 y-o-y OIBDA maintaining trends ex-regulation
• o RLAH -1.7 p.p. impact in Q3
• o Tougher comparisons in ARG, lower real estate cap. gains in Spain
• Well diversified 9M OIBDA growth; margin expanding
• 9M OpCF +9.2% y-o-y

10

• o CapEx intensity begins to lessen (-2.3% y-o-y)
• o Smart investments associated with further business transformation

Upselling existing customer relationships

Digital Services: differentiated offering

Other digital services (21% o/9M Dig. Revs.) include: Advertising, Applications and Financial Services

TGR: progressing on UBB & digitalisation

Telefónica, S.A.

At the forefront of digitalisation

DRIVER FOR DIFFERENTIATION AND EFFICIENCY

E2E digitalisation programme underway

LEVER TO TRANSFORM CUSTOMER PROCESSES … Impact on Operations … AND ALSO TO TRANSFORM OUR NETWORK • Automation and real-time processes • Fostering digital channels • Reducing assisted channels interactions • Improving customer experience • All-IP Networks • Radical network virtualisation: "UNICA" • NFV/SDN • Using Big Data o Network deployment optimisation o Network capacity planning o E2E service quality management Commissions & payments IMPACTING DIRECTLY ON COST STRUCTURE Customer care Technical support Invoice printing & sending Back-office and commercial Costs Increasing unique users in app/web Increasing the interactions in digital channels Reducing calls to call center Reducing orders with manual intervention and incidents Network OpEx reduction CapEx optimisation Faster deployments Flexible network management

Digitalisation bearing clear benefits in Spain

Transformation process started in 2012 towards building a leaner and more competitive Company

Simplification programmes and Full Stack have driven benchmark efficiency and business process enhancement

				Tangible Benefits
Commercial		Var 12-17E	2017E
• Portfolio simplification • Channels optimisation (size /mix/ efficiency) • Automated processes (E2ED front and back) • Fostering online experience	Share of sales online Points of sale Unique digital users Handset subsidies	+20 p.p. (63%) --- (97%)	24% --- 41% ---	 Improved TTM  Improved CSI  Commercial costs (-67% in 12-17E)
Network & Operations	Var	12-17 E	2017 E	 Lower failures
• NGN deployment (FTTH/LTE) • Network optimisation • Legacy network/platforms switch-off	 Failures/access (41%)  Remote solved incidents --- 82%  Calls to call center/access (50%) ---  Legacy closed --- 65%	Energy efficiency Sale of freed assets Increase FTTH take Revenue increase  Lower unitary
IT & Systems		Var 12-17 E		maintenance cost of
• Transformation operating model • Virtualisation/automation • Simplification	Reduction of: Systems Servers Data centers Platforms	(19%) (47%) (57%) (28%)		customer equipment: FTTH vs. Copper -40%  OpEx+CapEx Systems: (-37% in 12-17E)
Organisation			9M 17 annualised
• Workforce simplification	Productivity (OpCF/employee)		€128k	 Productivity (+9% in 14-9M 17A)

Digitalisation being gradually adopted group-wide

SELF-MANAGEMENT LEVEL, PROCESS AUTOMATION

BRAZIL EXAMPLE

Impact on Operations…

% of sales in selfassisted channels

% Remotely resolved incidents

… is boosted by BUSINESS INITIATIVES to become digital

• … Initiatives promoting the use of digital channels
• … Simplify and communicate our value proposition
• … Boosting e-billing and new payment methods
• … Initiatives for filtering calls towards self-assisted channels

… Promotion of field operations improvement (problems diagnosis, traceability, …)

… and supported by key TECHNOLOGICAL ENABLERS

Full Stack	Providing automated, real-time processes and 360˚ customer view
Online Charging	Enabling real-time spend control and data sharing
Payment Systems	Providing new payment methods
Network Diagnosis	Systems providing service monitoring, remote diagnosis and resolution, self healing …
App / NOVUM	New app for a differential self management experience

Ms. Laura Abasolo CFCO

Spain: Recovered momentum; focus on value

Better trading on enhanced positioning

• Positive volumes from new "Fusión" packs (launched in July)
• o Q3 gross adds recovery: "Fusión" (+16% y-o-y), FBB (+13%)
• o Best contract quarterly net adds in last 10 years
• o FBB net adds (+29k q-o-q)

• Better "Fusión" customer mix

• o Consistent ARPU growth, accelerating in Q3
• o UBB penetration (39%; +4 p.p. y-o-y); TV (73%; +5 p.p.)
• o Upgrades offsetting limited downgrades

Clear focus on convergence upselling

• Value oriented strategy

• o Segmentation of the offer; ARPU & loyalty increase
• Clear market-leadership in network & service quality
• o LTE: 97% pop. cov.
• o 18.6m premises passed FTTH (>60% households)
• o Exclusive TV content and functionalities

Spain: Improved revenue trends; strong OpCF

2017 Financials (y-o-y organic)

2017 Service Revenues by segment (y-o-y organic)

Consumer Business Wholesale & other revenues

y-o-y organic ex-real estate sale

Back to growth in Service Revenue

• Consumer revs. ramping-up (+1.0 p.p. q-o-q)
• Business revs. (+0.2 p.p. q-o-q) affected by IT seasonality
• Wholesale & Other revs. improved trend (+3.2 p.p. q-o-q)
• o Comparable wholesale TV revs. from mid-August
• o FTTH wholesale increase
• o Marginally positive impact from RLAH

High operating leverage, strong upside

• Q3 OpEx +0.2% y-o-y (-1.2% in Q2)
• o (+) Personnel savings
• o (-) Handsets, roaming-out, content cost
• Q3 OIBDA margin: 41.0%; -0.1 p.p. y-o-y ex-real estate sale
• High visibility on CapEx reduction
• Growing OpCF throughout the year

Germany: Data monetisation opportunity ahead

MSR MSR ex-regulation (y-o-y organic) (1.8%) (2.1%) (3.3%) (3.0%) (3.6%) (2.7 p.p.) Regulation (0.9%) (0.9%) (0.6%) (0.4%) (0.1%) Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 (2.6 p.p.) (2.7 p.p.)

Telefónica, S.A.

Larger data buckets

• Stimulating data usage (mobile data traffic +49% vs Q3 16)
• o Commercial activities O² Free 15 & new O² Free portf. (Sep.)
• o O2 Free 15 cust. data usage > 5GB; ARPU-up potential
• Solid momentum: Contract (+4% y-o-y); 183k net adds
• o LTE cust. (+48% y-o-y); penetration 36% (+11p.p.); cov. (81%)
• o Resilient partner contribution (Q3: 53% of gross adds; 9M: 55%)

Strong cash conversion

• Better revenue trends y-o-y (Q3: -1.3%; 9M:-3.1%)
• o Q3 MRS ex-reg: continued gradual improvement
• Q3 OIBDA y-o-y reflecting
• o Higher commercial efforts
• o Regulation headwinds (-€28m in Q3, mostly related to RLAH)
• o ~ €40m incremental OIBDA synergies (~€115m in 9M)
• Lower CapEx intensity (-7.4% y-o-y in 9M 17); ~€50m synergies

UK: Sustained top line growth in spite of RLAH

Continued customer growth in a challenging market Strong operational base and KPIs

• Contract expanding: 63% o/total (+1 p.p.)
• o Sustained, best-in-class contract churn: 1.0% in Q3
• 58% LTE penetration (+6 p.p.); 98% outdoor cov. (+5 p.p.)
• Avg. data usage per smartphone +55% vs. Q3 16; 2.1 GB per month

Financials reflecting RLAH impact

• Total revenue growth
• • Higher spend: subscription (larger data allowances) & out-of-bundle
• • Quality customer base growth
• Q3 OIBDA impacted by RLAH effect (€48m)
• CapEx +0.6% vs. 9M 16; LTE rollout investment

Brazil: Enhancing best-in-class value positioning

Contract net adds 2017 ('000)

Expanding differentiation gap

• Network quality widening

• o 76% population 4G cov.; 1,919 cities already covered (700 MHz spectrum in 199 cities)
• o 18.0m premises passed with FTTx; 4.5m connected
• 12 new cities in 2017: 40% already connected o/premises passed & 82% m. share

• Growing in strategic accesses (higher ARPU)

• o Contract +10%; ARPU 4x vs prepay
• o 4G +73%
• o FTTx +9%; ARPU 1.2x vs Copper
• o IPTV +54%; ARPU 1.2x vs DTH
• o New contract portfolio from October 23rd; unique and innovating features aligned with "M4M" strategy
• Outperforming the market
• o Mobile: 42.3% contract m. share; ~46% net adds share in Jan-Aug
• o Fixed: 36.6% FBB>34 Mbps m. share

Brazil: Delivering growth; expanding profitability

Data driving steady positive revs performance

• Q3 Revenue growth +1.2% y-o-y (9M; +1.5%)
• o Healthy MSR performance (Q3: +3.8% y-o-y) on data revs. (+28.2%) despite tougher comps
• o Gradual improvement in fixed revs y-o-y on fiber revs. (+21.9%) and IPTV (+76.9%)
• Regulation dragging 1.9 p.p. on Q3 revenue y-o-y

Expansion in OIBDA & OpCF margins

• Consistent OpEx y-o-y reduction (Q3: -1.1%; 9M: -0.8%) on efficiency measures
• o 7 consecutive quarters with OpEx reduction
• o Digitalisation initiatives bearing fruits (billing and collection, top-ups, call-center…)
• Successful execution of operational synergies (OpCF 9M; €392m; €939m over last two years)

HispAm: Improved commercial traction

2017 ARPU (y-o-y local currency)

FBB Pay TV Mobile

Focus on value • LTE cov. 56% (+8 p.p. y-o-y); 6.2m premises passed FTTx & Cable (+2.1m LTM) o Record net adds in Q3 for LTE (2.8m; 9M 6.2m) & FTTx/cable (249k; 9M 492k) • ARGENTINA: Growing uptake of contract; LTE & fiber driving data traffic up (9M: +76% mobile; +41% fixed)

• CHILE: Back to positive net adds (contract 27k; LTE 331k; FTTx 12k; Pay TV 13k)
• PERU: Solid trading in fixed; record FTTx net adds (146k); reshaped commercial portfolio driving signs of recovery in mobile
• COLOMBIA: Robust commercial performance; fostering adoption of FTTx (32k Q3 net adds) & LTE (538k)
• MEXICO: Sound contract (+15%) and LTE (+55%) accesses growth & easing pricing pressure. Positive ARPU (Q3: +3.9% y-o-y)

HispAm: Solid revenues & OIBDA; OpCF +26.8%

2017 Revenues (y-o-y organic)

Delivering growth

• Solid MSR and fixed growth (Q3: +19.0% and +5.6%, respectively)
• o Mobile data revs. acceleration Q3: +38.2%; +3.5 p.p. q-o-q
• o Double-digit growth in FBB & new services (Q3:+10.0% Q2:+7.3%) and pay TV (Q3: +11.1%; Q2: +13.4%)

• Q3 OIBDA margin -1.8 p.p. y-o-y (inflation driven costs, higher commercial efforts & tougher comparisons)

• ARGENTINA: Outstanding growth across all metrics (Q3 Revs. + 30.6% & OIBDA +37.8%; 9M OpCF >4x)

• CHILE: Enhanced top line trend despite competition. 9M OpCF +5.5% y-o-y to €258m
• PERU: Better revs & OIBDA performance amid continued competition; OIBDA margin +2.5 p.p. q-o-q
• COLOMBIA: Tougher comps in rev & OIBDA growth. 9M OpCF +39.1%
• MEXICO: Consolidating positive rev. growth despite earthquake

Telxius: Solid operational momentum

Strong set of results • 9M financials; strong revenue growth and solid profitability o Revenues: €547m o OIBDA: €261m o OpCF: €126m • Robust OIBDA margin across both businesses o Sequential decline on seasonal taxes and hurricanes effect • Infrastructure; expanding the reach o Tenancy ratio improved +0.03x vs. Dec. 16 in Q3 17 o Argentina added 304 towers & 539 tenants to the perimeter o Stimulating traffic demand and revenue growth in Cable • Developing the 2 new cables (to be active in 2018) o MAREA (connecting US & Spain) wet plant deployment already completed Sept. 17 o BRUSA (connecting Brazil, Puerto Rico & USA) construction as planned

Deleverage on strong organic FCF and disposals

Net Financial Debt (€m)

Stronger balance sheet and credit profile

Net Debt maturities (Sep-17)

(€bn; not considering hybrid NC dates)

Liquidity position (Sep-17)

Investor Relations Telefónica, S.A.

(€bn)

Interest payments cost

28

Summary: executing on fundamentals

• Delivering profitable organic growth

• o Top line accelerating trends; sound OIBDA performance despite regulation, high-single digit OpCF growth in 9M (CapEx peak is behind)
• Best technology platforms, IT systems integration, development of new digital P&S
• o Building for the future (Cognitive Intelligence: better customer value; new value-added propositions)
• Focused on digitalisation, started with simplification and E2E task some years ago
• o Proof points already reached. Big opportunity ahead (customer experience, new revenue streams, higher efficiencies)

• Progressive leverage improvement

o Growing OIBDA, solid FCF generation and inorganic actions (40% Telxius) leading to sharp debt reduction

• Secured market position

• o Best assets in key markets
• 2017 outlook and dividend confirmed

Clear and consistent strategy: growth and digitalisation

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