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Financial Analysis Update of Telefonica Status at the end of the first semester of 2012

Financial Analysis Update of Telefonica Status at the end of the first semester of 2012. July 2012. For further information, please contact: Carlos Ruiz Gómez-Ibáñez cruizgomez@gmail.com + 34 609.22.66.76 http://es.linkedin.com/in/carlosruiz http://carlosrgomez.wordpress.com/.

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Financial Analysis Update of Telefonica Status at the end of the first semester of 2012

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  1. Financial Analysis Update of TelefonicaStatus at the end of the first semester of 2012 July 2012 For further information, please contact: Carlos Ruiz Gómez-Ibáñez cruizgomez@gmail.com + 34 609.22.66.76 http://es.linkedin.com/in/carlosruiz http://carlosrgomez.wordpress.com/

  2. Financial Analysis Update of Telefonica The absolute share of revenues and OIBDA of LatAm is around 50% but, per subscriber, it is much lower than Europe’s Sources: Telefonica annual reports Analysis Update of TEF at 1H12 Page 2

  3. “TEF hopes to raise 2 Billion EUR in O2 Germany IPO, and another 2 Billion EUR in partial sales of [14] carriers in Mexico, Chile and Central America.” “TEF is also expected to sell travel agency Rumbo in Spain, and Atento Call Center.” “TEF cuts its dividend from 1.75 EUR for 2012 and 2013, to 1.5 EUR for 2012 and 1.60 EUR for 2013, in an effort to keep its Net Debt between 2 and 2.5 x OIBDA.” “TEF resume dividend payments in 2013, but at half of the 1.50 EUR that was foreseen in Q3, 2011 for 2012.” TEF expects to “save 6.8 Billion EUR.” “TEF sell back a 4.56 percent stake in China Unicom.” “TEF will still hold a 5 percent stake […] and does not expect to sell any more China Unicom shares for at least 12 months.” Financial Analysis Update of Telefonica Telefonica has been scrapping its dividend policy since December 2011 Dec’11 May’12 Jun’12 Jul’12 Sources: Telefonica press reports, The New York Times, The Financial Times, Yahoo! Financials Analysis Update of TEF at 1H12 Page 3

  4. SHAREHOLDERS Financial Analysis Update of Telefonica Indeed, despite of some improvement, TEF has halved its DPS forecast … Evolution of Telefonica’s Dividend Policy (DPS in euros) 1.6 (as of Dec’11) 1.5 (as of Dec’11) • In 9M’12, TEF more or less stabilized its Net Income, obtaining 2.1 bn, vs. 2.7 in 9M’11 and 8.8 in 9M’10 • TEF doubled its 4Q11 Net Income w.r.t. the first 9 months of the same year (compared with 26.7% in 2006-09, and 15.9% in 2010) 15.9% 26.7% 0.75 (as of Jul’12) 0.75 (as of Jul’12) 100% Sources: Telefonica press reports Analysis Update of TEF at 1H12 Page 4

  5. SHAREHOLDERS Financial Analysis Update of Telefonica … with TEF‘s leverage ratio being among the highest in the industry Although Telefonica ranks fourth worlwide in terms of OIBDA, after China Telecom, Verizon and AT&T, its Net Financial Debt is 21% higher than its most immediate competitor, AT&T 12-Months Net Financial Debt / OIBDA at March 31st, 2012 (Net Debt in millions of euros) Sources: CNBC, NYSE, NASDAQ Analysis Update of TEF at 1H12 Page 5

  6. SHAREHOLDERS Financial Analysis Update of Telefonica Indeed, TEF Net Debt has been increasing steadly since 2009 … With a definitely decrease in OIBDA, the yearly guidance for Telefonica Net Debt (< 2.35x) is sort of a mirage at the end of the first semester of 2012 12-Months Net Financial Debt / OIBDA • If net commitments related to workforce reduction in Spain were considered, the leverage ratio in 1H12 would stand at 2.85 x • The evolution with respect to FY11 can be explained, on the one hand, by shareholder remuneration not fully compensated by the debt reduction in Colombia due to the merger of the Colombian subsidiaries Sources: Telefonica annual reports Analysis Update of TEF at 1H12 Page 6

  7. FINANCIALS Financial Analysis Update of Telefonica … worsened by a decrease in Free Cash Flow (*) Indeed, because the Free Cash Flow is decreasing, there are three options out: decreasing the spending, stop paying dividends and / or increasing the debt of the company Evolution of Telefonica’s Financial Cash Flow (FCF in millions of euros, FCF per Share in euros) • The FCF per Share at 1H12 has halved the one at 1H11, so the dividend per share at the end of 2012 would have to be halved as well, from 1.60 EUR to 0.80 EUR, very close to the value that Telefoncia has provided for the new dividends policy Sources: Telefonica annual reports * The amount of cash that is left for finacnial commitments, like dividends Analysis Update of TEF at 1H12 Page 7

  8. FINANCIALS Financial Analysis Update of Telefonica TEF’s debt depends heavily on the short term The current economic situation in Europe is forcing the European Telcos to depend more on the short-term debt, and plan ahead less than their US counterparts 12-Months share Short- and Long- term Debt and Cash at March 31st, 2012 Sources: CNBC, NYSE, NASDAQ Analysis Update of TEF at 1H12 Page 8

  9. EFFICIENCY Financial Analysis Update of Telefonica That’s why TEF has been focusing on a strict control of CapEx Most of the efficiency increase efforts are been concentrated on the control of the CapEx in 1H12 (below the 2012 guidance so far in the 1H) Evolution of the Efficiency Ratio *, CapEx / Revenues and OpEx / Revenues Sources: Telefonica annual reports * (OpEx + CapEx exspectrum / Revenues Analysis Update of TEF at 1H12 Page 9

  10. EFFICIENCY Financial Analysis Update of Telefonica Supplies and Provisions decrease, Subcontracts and Taxes increase OpEx has been growing 11.98% from 2009 to 2011, but has decreased so far in H1, 2012, with all components down, except an increase in costs in Subcontracts and Taxes Evolution of the Operational Expenditures (OpEx) Supplies Subcontracts Non Personnel 1 Bad Debt Provisions Personnel 2 Taxes Other 3 Notes: 1 Energy & real estate, mobile sites, external contractors, NOC, handset costs and MTRs, customer care, commercial activity, other 2 Recurrent (wages, SS, pensions), non-recurrent (restructuring, Fundacion Telefonica) 3 Leasing, advertising, bad debt provisions, taxes Analysis Update of TEF at 1H12 Page 10

  11. EFFICIENCY Financial Analysis Update of Telefonica Efficiency gets better, but revenue generation slows down All in all, and because of the control in CapEx, the better Group efficiency in 2011, despite of Spain’s, is needed to counteract the revenue growth decrease in 2010-11 resp. 2010-09 Revenue Growth vs. Efficiency Ratio, 2010-11 • The only region where the revenues grow consistently since 2009, is LatAm, although this has not made the Group revenue growth in 2011-10 to keep up with the one in 2010-09 • The evolution at the end of 2012 remains to be seen Sources: Telefonica annual reports Analysis Update of TEF at 1H12 Page 11

  12. Financial Analysis Update of Telefonica Conclusion • TEF are determined to increase the health of their current financial status • Because of this, CapEx is severely under control, non-strategic asset diversification is the rule, and the pressure on OpEX is expected to increase substantially • But TEF benefit from a strong geographical diversification, and is recognized by the industry for that, with an important exposure to the growing Latin American markets (>50% of OIBDA) • TEF efforts are focused at becoming more competitive, more efficient and regain momentum in Spain and the UK • In LatAm, Brazil is expected to drive the business of TEF Analysis Update of TEF at 1H12 Page 12

  13. A passion about Telecoms & Media and Geopolitics Carlos Ruiz Gómez-Ibáñez MSc, ExMBA Executive with experience since 1991 in the Telecom & Media industry as strategist and management consultant. CRG has skills in strategy, marketing, sales and is skilled at leading large, multidisciplinary teams. Experience includes leading positions in Huawei Technologies, Everis Management Consulting, Nortel Networks and SAT – SAGEM, in Marketing & Strategy, Sales and Operations, with responsibilities over Europe, Middle East & Africa (EMEA), LatAm and NA, as well as in Chinese companies. CRG is also Associate Analyst at the Instituto de Empresa Business School ENTER think tank in ICTs.

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