Telefonica S.A. — Investor Presentation 2018

Jul 26, 2018

Disclaimer

This document and 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's 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 law, 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, in its business development strategy or any other unexpected circumstance.

This document and the Q&A session may contain summarized, non-audited or non-GAAP 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, if any, other documents released by the Company that may contain more detailed information.

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 related to APM used in this presentation are included in the our condensed consolidated interim financial statements and consolidated interim management report for the six-month period ended Jun 30, 2018 submitted to the Spanish National Securities Market Commission (CNMV), in Note 2, page 9 of the .pdf filed. Recipients of this document are invited to read it.

Neither this document nor the Q&A session nor any of their contents constitute an offer to purchase, sale or exchange any security, a solicitation of any offer to purchase, sale or exchange any security, or a recommendation or advice regarding any security.

Q2 18 Highlights

Mr. José María Álvarez-Pallete Chairman & CEO

Q2 Highlights | Continued progress with strategic priorities

Enable people with the power of connectivity	• Strong demand drives value momentum; +31% LTE; +23% FTTx/Cable; +6% Pay TV • UBB deployments; +15% y-o-y premises passed with FTTx/Cable ; +6pp LTE cov. • Bundling & Upselling; Avg. Rev per Access +3.0% org.; lower churn
Operate in markets where we can have an impact & create value	• Spain: Consistent trends; stronger franchise (O2 brand; football rights' acquisition) • Brazil: OIBDA accelerates, strong margin expansion; best ever fiber net adds • Germany: Better commercial activity; new propositions (O2 Boost; O2 Connect) • UK: Sustainably improving financial trends; leading loyalty • South Hispam: High single-digit increase in Revs & OIBDA • North Hispam: Accelerating momentum in value customers
Optimise our capabilities for a sustainable digital future	• Radically transforming networks, bringing new opportunities (Network slicing, Edge computing, Network as a Service) • Global digital ecosystem (Novum, IoT, Movistar Play, Smart Wifi) • Digitalisation driving business strategies, starting to generate efficiencies • Forefront runners in cognitive intelligence
Strong Delivery continues	• Profitable growth; accelerating in revenues, OIBDA and margin vs Q1 y-o-y Net debt decline for 5th • consecutive Q • Guidance reiterated; H1 performance consistent with FY targets • Dividend payment of €0.2/share in cash

Financial achievements

		H1 18			Q2 18
	Reported	Reported	Organic	Reported	Reported	Organic
€ in millions	IFRS 15&9	y-o-y	y-o-y	IFRS 15&9	y-o-y	y-o-y
Revenues	24,334	(6.7%)	2.0%	12,144	(6.3%)	2.0%
Service revenues	22,042	(9.0%)	0.7%	11,002	(8.6%)	0.7%
OIBDA	8,102	(0.9%)	3.7%	4,237	1.9%	4.1%	Sustained Revenue, OIBDA and OpCF growth
OIBDA margin	33.3%	1.9 p.p.	0.5 p.p.	34.9%	2.8 p.p.	0.7 p.p.
OpCF (ex-spectrum)	4,765	1.9%	2.4%	2,384	9.7%	0.3%
Net Income	1,739	8.6%		902	9.9%		Net Income boost
EPS (€)	0.29	(0.8%)		0.16	11.0%
FCF	1,548	(4.8%)		998	(2.5%)		1.5x FCF
FCF (ex-spectrum)	2,167	32.7%		1,588	54.7%		ex-spectrum y-o-y
Net Financial Debt	43,593	(10.1%)					Cutting debt

Reported figures y-o-y affected by

• Negative FX evolution & regulation
• Non-recurrent impacts (OIBDA: Q2: +€225m ; H1: +€215m; Net Income Q2: -€60m ; H1: -€68m)

Guidance confirmed

Operating 2018 guidance (organic)	Guidance 2018E (IAS 18)	H1 18
Revenues	Growth of around 1% (despite regulation dragging: -0.9 p.p.)	+2.0%
OIBDA Margin	Continues expanding around 0.5 p.p. (despite regulation dragging -1.6 p.p. on OIBDA growth)	+0.5 p.p.
CAPEX ex-spectrum/Sales	Around 15%	13.9 %

Dividends to be paid in 2018 calendar yr. €0.40/sh.	2018 DIVIDEND	€0.4/SH. CASH
Cash: 15/Jun/18 €0.20/sh.	Interim Dec-18	€0.20/sh.
Cash: 20/Dec/18 €0.20/sh.	Final Jun-19	€0.20/sh.

Continued Revenue, OIBDA and OpCF increase

• Improving Q2 revenue trends y-o-y
• Service rev. trends maintained (Q2: +0.7%; Q1: +0.8%), despite regulatory drag of -1.2p.p.
• Handset sales improving (+19.6% y-o-y vs. +16.5% Q1)
• OIBDA growth ramping-up (+0.9 p.p. vs. Q1 18) levered on T. Brasil, N. Hispam and T. UK
• All regions contributing to Q2 OIBDA growth (ex. N. Hispam)
• Margin progression y-o-y (Q2:+0.7 p.p.; Q1 +0.4 p.p.)
• Steady growth in OpCF
• CapEx phasing in Q2 (+8.8% y-o-y vs. +1.5% in Q1)

1.9% Healthy growth rates in main metrics Revenues, OIBDA, & OpCF (ex spectrum) y-o-y organic Q1 18 Q2 18 €12.2bn Reported y-o-y 3.3% 4.1% Q1 18 Q2 18 Revenues OIBDA €3.9bn 2.0% (7.2%) (6.3%) (3.9%) 1.9% €12.1bn €4.2bn

A platform Company advancing towards a Digital Telco

Data monetisation | Capturing the added value of connectivity

Open platform ecosystem to integrate digital services at home

• Smart Wi-Fi, Consumer IoT, Movistar Play

Evolved portfolio; increasing Customer Lifetime Value

• Capturing the prepaid growth opportunity
• Integrated Recurrent Data Plans, more loyalty & ARPU
• Accelerating the mobile postpaid potential
• Family plans (data sharing…)
• Dedicated data (increasing value perceived with content)
• Content bundling: "Movistar Play" (Video OTT) in almost all Latam countries
• Fixed: Upselling with UBB and Video

B2C B2B

A leading technological partner to B2B digitalisation

• Comprehensive solution: flexible, secure, on-demand

Differential capabilities to capture a large opportunity

• Global capillarity
• 45k km network, 11 SOCs, Cloud VPN, 12k sales force…
• Complete Digital ecosystem

Video| a key driver for engagement gaining scale

Latam

UK

Netflix promotion already launched in the UK from mid June

8

Q2 18 Results

Mr. Ángel Vilá COO

Digitalization increases customer value and lifespan

Build….

• Leading-edge smart networks
• Network stands for >50% of total customer satisfaction
• Radical processes automatisation
• Full stack deployment, the seed of our transformation

… to offer

• World-class digital experience
• Novum, Movistar Play, IoT, Smart Wifi
• Distinctive value proposition
• Customer satisfaction, loyalty, cross-sell, up-sell, winback

Increasing customer lifetime

Clear proof points of business sustainability

Avg. Rev/Access +3.0% y-o-y

	Q2 ARPU (y-o-y)	Avg. Lifetime
Fusión (4.5m)	+5.5% (€89.5)	6 years
Mobile contract (38.4m) FTTX (4.8m)	flat +9.1%	5 years 4 years
Mobile contract (15.9m)	+1.9%	8 years

…

Digital Transformation | Easing customer's digital life

...proof points on our largest operations enhancing customer experience and operational efficiency

Spain | Good trading; increasing long-term high-value

Growth in accesses; higher ARPU

• Sustained growth at retail base (+1.4% y-o-y)
• FBB back to growth (Fiber net adds exceed DSL loss)
• "Fusión" trends positive overall
• Growth in accesses y-o-y (+10%) and ARPU (+5.5%)
• Longer CLV in mid-high segments (+ARPU, churn)
• High-end: 27% of "Fusión" base (+3 p.p. y-o-y)
• Churn reduction across services

Fiber gaining traction

• Predominant at retail; increasing at wholesale
• Increasing ROCE, adding long-term value
• Largest owned FTTH coverage & TV platform

Jun-17 Mar-18 Jun-18

Spain | Solid financials; stronger franchise

Q2 Serv. Revs. Growth; +1.4% ex-MTR/MasMóvil

• Serv. Rev. growth deceleration due to calendar effect
• "Residential" & "Business" revs. growing (83% o/Serv. Rev.)
• Solid "Fusión": +7.7% y-o-y; accelerating IT: +7.4%
• "Wholesale & Others" y-o-y decline on regulation and MVNO
• MVNO negative impact not material from Q4 18
• MTR cut larger impact in Q2

Solid profitability and operating leverage

• Q2 OpEx stable y-o-y (-0.7 p.p. q-o-q)
• Acquisition of Premium football rights (Jun-18)
• High visibility on mid-term cost structure
• Further expected savings (personnel, distribution, digitalization….)
• Football content cost peak Q4 18 (starting to decline in Q3 19)
• Q2 CapEx (+16.2% y-o-y) on different phasing (FY18E<FY17)

OIBDA margin

Germany | Network integration well on-track

Robust operational momentum

• Q2 Contract net adds +333k (+69% y-o-y)
• Launched refreshed ^O2 Free (boost option) & O² Connect
• ^O2 contract LTE cust. avg. data usage of 3.4GB (+22% q-o-q)
• Partner trading; 58% of gross additions (+61% in Q1)

Improving data monetisation

LTE customers & Penetration

Focus on profitable growth

• MSR ex reg. remains positive y-o-y (H1 +0.3%)
• Strong demand for high-end handsets (H1: +9.1% y-o-y)
• Continued growth in OIBDA (H1: +0.5% y-o-y)
• Synergy capture (~€65m in H1)
• Focus on value-over-growth approach and efficient cost controls
• Efficient spend: CapEx (-2.3% vs. H1 17); synergies ~ €25m in H1

Financials (y-o-y organic)

UK | Ongoing growth delivery across the period

Sustained customer growth

• Remains the UK's favourite network carrier (>32m customers)
• Contract net adds 84k (43k ex-M2M)
• Market leading loyalty with lowest churn at 1% in contract
• 59% LTE penetration (+0.8 p.p. y-o-y)
• Continuing investment in customers and the network
• Netflix promotion already launched in UK
• Spectrum acquisition of 40MHz of 2.3GHz, and 40MHz of 3.4GHz
• Mobile data traffic +58% vs. Q2 17

7 th consecutive quarter of top-line growth

• Consistent revenue growth y-o-y: +4.2% in H1
• Increased customer spend (incl. RPI impacts), handsets, wholesale and non-mobile
• OIBDA growth and margin expansion (top-line growth +lower annual licence fee payment)
• Strong OpCF increase of 21.0% in H1 ex-spectrum
• CapEx (-6.1% vs. H1 17); due to phasing of spend

Financials

Brazil | Reinforcing a leading sustainable business

Unrivaled assets; enhancing differentiation

• Accelerating high-quality growth
• Sustainable leadership: 41.3% contract M.S. (stable q-o-q)
• 4G+: 714 cities (+596 in 2018)
• 0.9m Q2 contract net adds (+9% y-o-y)
• 1.8% Q2 contract churn (stable y-o-y)
• H1 Mobile ARPU +1% y-o-y (+11.8% Data ARPU)

Fixed Penetration (Jun-18)

Mobile Penetration (Jun-18)

• Outstanding fiber expansion

• 18.8m FTTx premises passed
• 4.8M already connected (+10% y-o-y)
• FTTH record high Q2 Net adds (162K)
• Q2 IPTV net adds 56k (+36% y-o-y)
• H1 FBB ARPU +8% y-o-y; Pay TV +4%

Brazil | Expanding profitability

Consistent evolution of revenue

• Total Revenue : Q2 +0.5% y-o-y
• MSR +1.9%
• Sustained postpaid evolution offsetting weaker prepaid trend on tougher macro trends
• +11.8% data revenue driven by plan upgrades
• Handset sales soaring (+60.5% in Q2; +20.8% in Q1)
• Fixed: -5.2% vs Q2 17
• Affected by fixed to mobile voice substitution, regulation & DTH
• Double digit growth in Fiber (+20.3%) and IPTV (+59.1%)

Highest Q2 margin since 2013

• OpEx continue declining (-0.7% in Q2; 10th consecutive Qs of cost reduction) driven by digital initatives
• OpCF -2.6% vs. H1 17; 26.1% margin
• CapEx (+17.2% in H1 18; on different CapEx phasing)
• -IT transformation to full stack (accelerated pace)

1.0% 3.5% (4.0%) 0.5% 1.9% (5.2%) Total MSR Fixed Revenues y-o-y organic OIBDA y-o-y organic 4.5% 7.1% Margin (organic) Q1 18 Q2 18 36.1% +1.2 p.p. 36.5% +2.2 p.p. Q1 18 Q2 18

South Hispam | Solid revenue & OIBDA growth

Commercial momentum

• Value-acesss growth acceleration
• Positive contract net adds in every country
• FTTx/Cable: 2.1M connected (1.5M FTTH/Cable)
• Q2 ARGENTINA (Revs. €703m; OIBDA €218m)
• Accesses: Contract +5%; LTE +43%; FTTx: x3
• Sound Revenue & OIBDA growth
• Q2 CHILE (Revs. €525m; OIBDA €158m)
• Fixed & mobile ARPU trends stabilized in Q2
• Both Rev & OIBDA growing y-o-y for the 1st time in 10 Qs
• Q2 PERU (Revs. €518m; OIBDA €111m)
• Positive trend in Contract; more rational market
• Differential attributes in Pay TV (Q2: 66k net adds)
• Improved Rev & OIBDA trends

Financials 2018

North Hispam | Mantaining solid commercial performance

Network improvements driving value growth

• FTTx/Cable: 284k connected (+117 in Q2 18)
• Record Pay TV net adds in Q2
• LTE (+70%), Smartphones (+1%)
• Financials strongly affected by Mexican regulation
• Q2 COLOMBIA (Revs. €370m; OIBDA €128m)
• -Acceleration in FTTx net adds (x6 vs. Q2 17)
• -Highest contract net adds in the last 8 quarters
• -OpCF growing by 38.7% vs. H1 17
• Q2 MEXICO (Revs. €297m; OIBDA €55m)
• -Further deterioration in competitive environment in prepaid
• -Solid contract performance (7Qs with positive net adds)
• -Rev. and OIBDA (-6.1% and -24.6%) strongly affected by regulation (-28.3 p.p. in OIBDA)

Financials 2018

Telxius | Accelerating growth

Strong financials	Revenues		OIBDA
	y-o-y organic	Revenues	y-o-y organic	OIBDA
• Solid revenue growth across businesses in Q2
-+8.8% y-o-y towers; +4.1% y-o-y cable		6.1%		4.5%
• Improving OIBDA trends (+3.9 p.p. q-o-q)
-OIBDA margin 47.0% (47.3% in H1)	2.0%
• CapEx mainly intended for MAREA and BRUSA deployments			0.6%
-To be reduced once BRUSA comes into service in H2 18	Q1 18	Q2 18	Q1 18	Q2 18
	€180m	€186m	€86m	€87m

Q2 18 Results

Ms. Laura Abasolo CFCO

Q2 results factors

• Non-cash:
• Contingencies in T. Brasil
• Goodwill impairment & DTA reversal in Mexico
• Court Ruling in Brazil:
• FCF neutral in Q2 18; to flow in FCF from 2019 onwards
• Restructuring costs, enhancing future profitability and cash flow
• T. DE -€18m; T. Brasil -€28m

H1 Net income of €1.7bn and EPS of 0.29€

H1 2018 impacted by Q2 factors

EPS (0.8%) reported

€m

FX remains a major drag in Q2 OIBDA year-on-year

Strong cash generation

H1 18 FCF affected by UK spectrum & H1 seasonality €m

FCF to improve in H2

23

Net debt reduction on strong FCF

Strong liquidity thanks to attractive long-term financing

Sources of long-term financing

Liquidity position

Net Debt maturities

Jun-18 | €bn; not considering hybrid NC dates

Interest payment costs

Conclusion

Mr. José María Álvarez-Pallete Chairman & CEO

Concluding remarks| Solid quarterly results

Executing on key priorities

Reported y-o-y

1.9%

€12.2bn

€3.9bn

€12.1bn €4.2bn

Revenues (y-o-y organic) OIBDA (y-o-y organic)

(7.2%) (6.3%) (3.9%) 1.9%

1 Delivering robust financials, strenghtening BS 2 Returning

value to shareholders 3 Outlook

2018 confirmed

4

• Spain: Consistent trends; stronger franchise (O2 brand; football rights' acquisition)

• Brazil: OIBDA accelerates, strong margin expansion; best ever fiber net adds
• Germany: Better commercial activity; new propositions (O2 Boost; O2 Connect)
• UK: Sustainably improving financial trends; leading loyalty
• South Hispam: High single-digit increase in Revs & OIBDA
• North Hispam: Accelerating momentum in value customers

Net debt decline for 5th consecutive Q

Customer-centric transformation (digitalisation + values)

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