TDE.L Regulatory News (TDE)

FINANCIAL HIGHLIGHTS

·; Telefónica reached 300 million accesses at the end of September 2011, setting the basis for the Company's future revenue growth:

o The strong increase in the commercial activity led the customer base to grow by 6% year-on-year.

o Telefónica Latinoamérica reported record net adds of 4.9 million in the third quarter (1.6 times the figure obtained in the third quarter of 2010).

o Contract mobile customers accounted for close to 50% of mobile net adds in the first nine months, and mobile broadband penetration stood at 15% (34 million accesses; +76% year-on-year).

·; Consolidated revenue in the first nine months totalled 46,672 million euros, with a solid year-on-year growth of 5.4%:

o Telefónica Latinoamérica was once again the Company's growth driver, accounting for 46% of total revenues.

o Mobile data revenue growth accelerated to 19.6% year-on-year in organic terms, accounting for 30% of mobile service revenue. This increase was driven by the rapid expansion of non-P2P SMS revenue, which now accounts for 52% of total data revenue.

o Excluding the impact of mobile termination rate cuts, revenue would have risen by 6.8%.

·; OIBDA remained stable in underlying terms (+0.1%) to 14,251 million euros in the first nine months despite increased commercial activity and the negative impact of regulation:

o Telefónica Latinoamérica accounted for 46% of underlying OIBDA, with this percentage increasing to 65% when adding Telefónica Europa.

o Telefónica España's OIBDA performance in the first nine months of the year (-10.7% year-on-year in comparable terms) was similar to that in the first half.

o Mobile termination rate cuts dragged 149 million euros to January-September 2011 OIBDA.

o The underlying OIBDA margin stood at 35.9%, with a limited year-on-year erosion of 1.9 percentage points.

·; Free cash flow in the first nine months grew by 11.6% year-on-year to 5,701 million euros.

·; The Company reiterates its guidance for 2011 and confirms its shareholder remuneration policy. 

Comments from César Alierta, Executive Chairman: 

"The results presented today reflect the Company's focus on setting the foundations for future revenue growth. Our strategy for fostering mobile broadband penetration is already bearing fruits and data revenues now account for 30% of our mobile service revenue, after growing by almost 20% in organic terms. This driver, which is a key lever in the sector, together with the strong revenue performance in Latin America, which now contributes over 45% of Telefónica's revenue, allowed us to increase our revenues by 5.4% in the first nine months, despite the negative impact of regulation and the adverse macro conditions in Europe.

In Spain, revenues and OIBDA stabilised versus prior quarters and the new commercial offerings that we have launched, both in the fixed and in the mobile business, will allow us to step up commercial activity, further boosting data revenue.

One year after completing the acquisition of 50% of Vivo, Telefónica Brasil has strengthened its position as the undisputed market leader, with solid results that contribute to boost Telefónica's growth in the region and positioned as an integrated operator that is a benchmark in the region.

Despite the growth in commercial expenses resulting from increased activity and higher CapEx we maintain a high operating efficiency and a strong operating cash flow generation, at over 7,600 million euros in the first nine months. Moreover, financial debt was cut by around 1,000 million euros in the last three months. 

In the coming months we will continue working to reach all the financial targets committed for 2011.

The challenging economic environment, the growing competition and a regulation that does not favour the development of the sector in some of our markets, mean that we face significant challenges, but the new Telefónica's organisational structure announced in September will allow us to accelerate our growth in the digital world and to improve our efficiency, leveraging our differential attributes: our diversification, integration, scale and scope." 

Organic growth: In financial terms, it assumes constant average exchange rates as of January-September 2010, and excludes changes in the perimeter of consolidation and hyperinflation accounting in Venezuela. Therefore, in January-September 2010 the consolidation of Vivo, HanseNet, Tuenti and Acens are included whereas the revaluation of our pre-existing stake in VIVO accounted for in Q3 10, the results of Manx Telecom and restructuring costs in Germany are excluded. In OIBDA terms, in January-September 2011 the positive impact from the partial reduction of our economic exposure to Portugal Telecom is excluded, as well as workforce provision related to the Redundancy Program approved in Spain and the impact of the capital gain from the sale of Manx Telecom booked in the second quarter of 2010. Results from the Costa Rica operation are excluded from the organic growth calculation. Telefónica's Capex excludes the Real Estate Efficiency Programme at T. España, the real estate commitments associated with Telefónica's new headquarters in Barcelona and investments in spectrum. Net additions exclude accesses disconnections made in the second quarter of 2010 and in the third quarter of 2011.

2011 Financial results and accesses include from the second quarter of the year and retroactively from January 1st, 2011, the full consolidation of TVA, company that was already part of Telefónica's perimeter since the fourth quarter of 2007.

Underlying growth: Reported figures, excluding exceptional impacts and spectrum acquisition. In 2011 the following items were excluded: provision for workforce restructuring in Spain (2,671 million euros; 1,870 million euros net of taxes), the positive impact from the partial reduction of our economic exposure to Portugal Telecom (183 million euros), Telco, S.p.A.'s writedown of its stake in Telecom Italia (505 million euros; 353 million euros net of taxes) and PPAs (844 million euros; 664 million euros net of taxes). In 2010 the following items were excluded: the positive impact from the revaluation of the previously-held stake in Vivo at its fair value at the date of acquisition of the 50% in Brasilcel owned by Portugal Telecom (3,797 million euros; 3,476 million euros net of tax), restructuring costs in Germany (202 million euros; 141 million euros net of tax), capital gains on the sale of Manx Telecom (61 million euros), write-down of T. Capital (6 million euros) and PPAs (792 million euros; 633 million euros net of taxes).

DISCLAIMER

This document contains statements that constitute forward looking statements about Telefónica Group (going forward, "the Company" or Telefónica) including financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations which refer to the intent, belief or current prospects of the customer base, estimates regarding, among others, future growth in the different business lines and the global business, market share, financial results and other aspects of the activity and situation relating to the Company.

The forward-looking statements in this document can be identified, in some instances, by the use of words such as "expects", "anticipates", "intends", "believes", and similar language or the negative thereof or by forward-looking nature of discussions of strategy, plans or intentions.

Such forward-looking statements, by their nature, are not guarantees of future performance and involve risks and uncertainties, and other important factors that could cause actual developments or results to differ from those expressed in our forward looking statements. These risks and uncertainties include those discussed or identified in fuller disclosure documents filed by Telefónica with the relevant Securities Markets Regulators, and in particular, with the Spanish Market Regulator.

Analysts and investors, and any other person or entity that may need to take decisions, or prepare or release opinions about the securities issued by the Company, are cautioned not to place undue reliance on those forward looking statements, which speak only as of the date of this presentation. Except as required by applicable law, Telefónica undertakes no obligation to release publicly the results of any revisions to these forward looking statements which may be made to reflect events and circumstances after the date of this presentation, including, without limitation, changes in Telefónica's business or acquisition strategy or to reflect the occurrence of unanticipated events.

Neither this presentation nor any of the information contained herein constitutes an offer of purchase, sale or exchange, nor a request for an offer of purchase, sale or exchange of securities, or any advice or recommendation with respect to such securities.

Finally, this document may contain summarized information or information that has not been audited. In this sense, this information is subject to, and must be read in conjunction with, all other publicly available information, including if it is necessary, any fuller disclosure document published by Telefónica.

For further information please refer to the information on 2011 third quarter financial results filed by the Company and also available on the Company's website: www.telefonica.com