Telefónica's Net Profit Grows by 20.6% to 902 Million Euros in the First Quarter of 2013

  Telefónica's Net Profit Grows by 20.6% to 902 Million Euros in the First
  Quarter of 2013

Brazil becomes Telefónica's largest market by revenue, with year-on-year
growth rates of +3% in local currency, while profitability improves in Spain
for the second consecutive quarter.

The Executive Chairman of the company, César Alierta, highlighted the advances
 achieved in the transformation process of Telefónica, which translate into a
 progressive business stabilisation and a greater degree of diversification,
  while at the same time maintaining a constant improvement in the financial
position. The evolution of the first quarter, in line with internal estimates,
  makes it possible to reiterate the operating and financial targets set for
                                    2013.

  *Telefónica maintains a high level of profitability as a result of the
    transformation strategy of the Group, the improvements in efficiency, the
    benefits of scale and the sustained containment of costs. Thus, for the
    second consecutive quarter and, in organic terms, the OIBDA remained
    stable and the OIBDA margin grew (+0.5 percentage points), to 32.3%.
  *At the end of March, revenue stood at 14,141 million euros, the OIBDA
    reached 4,567 million euros and the operating result was 2,066 million
    euros. In reported terms, the year-on-year performance of these items was
    strongly impacted, among others, by exchange rates, especially the
    devaluation in Venezuela, and the deconsolidation of Atento. Not counting
    those impacts, i.e. in organic terms, their evolution compared to the
    first quarter of 2012 was -1.6%, -0.1% and -2.9%, respectively.
  *Telefónica Digital plays a fundamental role in driving sustainable,
    differential growth in revenue. Thus, between January and March, it made
    significant advances in the creation of innovative solutions that will be
    translated into new businesses for the Company: the initiatives around
    Firefox OS devices (which will go on sale in the third quarter of the
    year), the launch of an integral M2M platform or the advances in
    comprehensive eHealth  services in Brazil, among others, are clear
    examples of this.
  *In Spain, as a result of the progress in the transformation of the Company
    and the focus on efficiency, year-on-year OIBDA margin grew for the second
    consecutive quarter. Movistar Fusión’s convergent offer consolidates its
    position as a commercial lever in the country, it maintains a strong
    commercial momentum in the quarter, with 47%, of gross adds incorporating
    new services, and reached 1.7 million customers at the end of March. In
    addition, this offer is generating stabilisation in the evolution of
    revenues (excluding the sale of handsets).
  *In operating terms, at the end of March the Telefónica Group had a
    customer base of almost 316 million accesses (+2%), over 78% of whom are
    mobile customers. There was acceleration in the growth of the contract
    mobile accesses to +8% in the quarter, with year-on-year increases
    reaching +13% in Latin America, where Telefónica consolidates its position
    as the leader in this segment. Smartphones accounted for 20% of the total
    mobile access base (+6% pp year on year).
  *In the first quarter of 2013, Telefónica's net financial debt was
    negatively impacted by exceptional effects, specifically the devaluation
    of the Venezuelan bolivar (€873M) and the payments for spectrum auctions
    (€701M) as well as the recurrent first quarter´s seasonal effect.
    Nonetheless, the Company continued to undertake proactive management of
    its portfolio of assets with the aim of accelerating its deleveraging
    process. Thus, Telefónica's net debt would stand at 51,156 million euros,
    having been reduced by 653 million euros after the close of the quarter.
  *Since January, Telefónica has executed funding operations to a total value
    of around 7 billion euros, which makes it possible to achieve a debt
    maturity profile which is covered beyond 2014.
  *Telefónica invested 1,941 million euros in the first quarter of the year,
    including the acquisition of spectrum in the United Kingdom and Uruguay.
    82% of the total investment was in growth areas, specifically 3G, 4G and
    fibre networks.

Business Wire

MADRID -- May 8, 2013

Telefónica ended the first quarter of 2013 with a 20.6% growth in net profit
to 902 million euros, while basic net profit per share increased by 22.2% to
0.20 euros per share. In the presentation of the figures of the Company
corresponding to the period January-March, the Executive Chairman of
Telefónica, César Alierta, highlighted the advances made in the execution of
the Company’s transformation process, already producing visible results which
translate into "a progressive stabilisation of the business and a greater
degree of diversification, together with the constant improvement in the
financial position.”

In the first quarter of the year, the results continued to put in value the
growing diversification of the Group. In fact, for the second consecutive
quarter, Latin America generated over 50% of the consolidated revenue (which
totalled 14,141 million euros) and for the first time Brazil became
Telefónica's biggest market in revenue generation. Equally, the results also
reflect the benefits of the scale and scope of the Company and the new
commercial model based on quality and differential offers in each one of the
markets. All of this, together with the considerable effort to simplify and
save costs, enables Telefónica to maintain a high level of profitability, with
stability of the OIBDA in organic terms (4,567 million euros, -0.1%) and
year-on-year growth of the OIBDA margin (+0.5 percentage points) and the
operating cash flow (OIBDA-CapEx), which increased by almost double digits
year on year. At the same time, Telefónica continues to advance in the launch
of new businesses through Telefónica Digital and the projects led by
Telefónica Global Resources keep improving operating and commercial processes
globally.

With all of this, the results of the first quarter, in line with the company's
estimates, make it possible to reiterate the operating and financial targets
set for 2013.

Growth in mobile customers with contracts accelerates by up to +8%

Telefónica managed 315.7 million accesses at the end of March, up 2%
year-on-year driven by sustained growth in mobile contract, especially in
smartphones. Mobile accesses stood at 247.3 million at the end of the quarter
(+3% year-on-year), with the contract segment continuing to drive the
Company's commercial activity. Contract customers year-on-year growth
accelerated by one percentage point from December 2012 to 8% year-on-year,
already accounting for 33% of total mobile accesses (+2 percentage points
year-on-year). Quarterly contract net additions totalled 1.4 million
(excluding the disconnection of 114 thousand contract mobile accesses in the
Czech Republic).

Mobile broadband accesses -accesses with a data tariff attached- posted a
solid 34% year-on-year growth to surpass 55 million at the end of March 2013
and accounted for 22% of mobile accesses (+5 percentage points year-on-year).
One quarter more, it is worth highlighting the strong commercial momentum of
smartphones, with net additions of 2.6 million, reaching a penetration rate of
20% of mobile accesses (+6 percentage points year-on-year).

By region, Telefónica Latinoamérica (67% of the total accesses) consolidated
as the main contributor to access growth, increasing 3% year-on-year (despite
the application of more restrictive accounting criteria for prepay customers),
and continued to reinforce its regional leadership in contract customers (+13%
year-on-year to 40.7 million), reflecting the better quality of our customer
base in the region. Net contract additions in the quarter stood at 1.3 million
accesses, 1.5 times more than in the same period of 2012, strengthening the
growth in high-value customers.

Analysis of the profit and loss account

It is important to note that Atento Group deconsolidated its results from the
Telefónica Group as of the end of November 2012 (following the disposal of the
Company during the fourth quarter of 2012), therefore affecting year-on-year
comparisons of Telefónica's reported financial results.

Revenues in the first quarter of 2013 totalled 14,141 million euros, an 8.8%
year-on-year decrease reflecting mainly the negative impact of exchange rate
fluctuations (-5.5 percentage points) following the devaluation in Venezuela
effective from 1 January 2013. Changes in the perimeter of consolidation
reduced growth by 1.8 percentage points. In organic terms, revenues declined
by 1.6% year-on-year, as growth in Telefónica Latinoamérica could not offset
lower revenues of Telefónica Europe, still affected by the macroeconomic
situation, the intense level of competition and the negative impact of
regulation. Excluding the negative effect of regulation (-1.5 percentage
points), consolidated revenues declined 0.1% year-on-year.

By region, Telefónica Latinoamérica accounted for 51% of consolidated revenues
(+2.7 percentage points year-on-year), registering a sustained strong organic
growth of 6.8% year-on-year underpinned by the steady growth of the mobile
business. Telefónica Europe contribution to revenues fell to 47% of the total
(-1.5 percentage points year-on-year). Telefónica España's contribution
continued to decline, standing at 23% of consolidated revenues (-2.1
percentage points year-on-year), with Brazil ahead of Spain for the first time
as the main market in terms of revenue contribution.

Several initiatives were implemented during the first quarter towards
sustainable and distinctive revenue growth model, particularly focused on
fixed and mobile connectivity and new digital services. Mobile data revenue
maintained a strong growth in organic terms (+9.5% year-on-year) and accounted
for 37% of mobile service revenues, 3 percentage points more than in the first
quarter of 2012. Non-SMS mobile data revenues increased 21.9% in organic terms
and already represent 62% of total mobile data revenues (56% in the first
quarter of 2012).

Improvements in efficiencies deriving from the process of transformation of
the Group

Operating expenses amounted to 9,824 million euros, down 8.8% vs.
January-March 2012. In organic terms, this decline fell to 1.9%, in line with
the year-on-year rate of decline posted in the previous quarter, being the
third quarter in a row with cost reductions. This evolution is largely
explained by the Company’s transformation process reflected in expenses in
efficiency gains.

By components, supplies decreased 3.9% year-on-year in organic terms (-8.9%
year-on-year in reported terms), the same as in the previous quarter,
reflecting lower mobile interconnection costs, especially at Telefónica
Europe, and lower handset sales related to the transformation of the
commercial model. Subcontract expenses fell 2.6% year-on-year in the quarter
in organic terms (-3.8% reported) due to the reduction in commercial costs,
especially in subsidies, advertising and customer care expenses on the back of
simplification across the board. Finally, personnel costs increased 4.7% in
organic terms compared with the first quarter of 2012 (-15.6% in reported
terms) mainly as a result of higher costs in Latin America due to the negative
impact of inflation in some countries in the region. At the same time, the
Company continued to implement restructuring plans in several countries, which
are reflected in non-recurrent expenses in the first quarter of the year (58
million euros, principally in Brazil, UK and Czech Republic, vs. 42 million
euros in the first quarter of 2012).

The average headcount was 132,726 employees, stable compared with the first
quarter of 2012 (-0.4%) excluding the impact of the deconsolidation of Atento,
which was sold in the fourth quarter of 2012. Including Atento, the average
headcount fell by 54% year-on-year.

Gains on sales of fixed assets in the first quarter of 2013 amounted to 26
million euros. In the first quarter of 2012 this item totalled 136 million
euros, mainly explained by the sale of non-strategic towers in Spain and
Brazil for 123 million euros.

High profitability

Operating income before depreciation and amortisation (OIBDA) reached 4,567
million euros, virtually unchanged in organic terms (-0.1%) compared with the
same period of 2012 (-10.1% reported). It is worth highlighting Telefónica
Latinoamérica's solid growth in organic terms in the first quarter of 2013
(+7.7% year-on-year), already accounting for 53% of consolidated organic OIBDA
(+3.9 percentage points compared with March 2012).

OIBDA margin stood at 32.3%, up 0.5 percentage points in organic terms
compared with the first quarter of 2012, maintaining the year-on-year growth
trend for the second quarter in a row and highlighting the solid execution and
sustainability of the Company's transformational initiatives and the tangible
benefits of scale.

In the first three months of 2013, operating income (OI) totalled 2,066
million euros, down 2.9% year-on-year organically (-17.7% in reported terms).

Profit from associates amounted to 18 million euros in the first quarter,
while net financial expenses fell 17.6% year-on-year up to March thanks to the
reduction in average debt in the period (and the lower cost of gross debt due
to lower interest rates and the smaller weight of higher rate currencies.
Corporate income tax in the first quarter of 2013 stood at 451 million euros,
which, over an income before taxes of 1,410 million euros, implied an
effective tax rate of 32%. Profit attributable to minority interests declined
by 9.5% year-on-year.

As a result, consolidated net income up to March 2013 totalled 902 million
euros, up 20.6% year-on-year, while basic earnings per share increased 22.2%
to 0.20 euros.

Optimisation of investment, aimed at growth

CapEx in the first quarter of 2013 totalled 1,941 million euros (+13.4%
year-on-year) and included 695 million euros relating to the acquisition of
spectrum in the UK (671 million euros) and Uruguay (24 million euros). In
organic terms, CapEx fell 19.5%, though this trend cannot be extrapolated to
the rest of the year as a result of a different investment phasing. Once
again, the Company devoted the bulk of its investment to growth and
transformation projects (82% of the total), prioritising the expansion of
fixed and mobile high-speed broadband services.

Consequently, operating cash flow (OIBDA-CapEx) rose 9.6% year-on-year in
organic terms in the first quarter of 2013, continuing the growth trend
registered in the previous quarter (+6.2% year-on-year).

Financial position

In the first quarter of 2013, Telefónica's net financial debt was negatively
impacted by exceptional effects, specifically the devaluation of the
Venezuelan bolivar (€873M) and the payments for spectrum auctions (€701M) as
well as the recurrent first quarter´s seasonal effect. Nonetheless, the
Company continued to undertake proactive management of its portfolio of assets
with the aim of accelerating its deleveraging process. Thus, Telefónica's net
debt would stand at 51,156 million euros, having been reduced by 653 million
euros after the close of the quarter, and the leverage ratio would stand at
2.41 times.

In the first quarter of 2013, Telefónica's financing activity, excluding
short-term Commercial Paper Programmes activity, stood at around 5,000 million
equivalent euros (nearly 7,000 million euros year to date), so debt maturities
are currently covered beyond 2014.The financing activity was mainly focused on
financing in advance debt maturing in 2013 and on smoothing the debt maturity
profile for 2014 and beyond at the Holding level. Therefore, the Company
maintains a debt maturity profile that, along with cash flow generation
expectations, is covered beyond 2014. Net debt maturities for 2014 amount to
5,631 million euros, while for 2013 the cash and liquid assets position exceed
gross maturities.

Telefónica maintains total undrawn committed credit lines for an amount of
nearly 14,200 million euros, with around 11,400 million maturing in more than
12 months. At the end of March 2013, bonds and debentures represented 70% of
the consolidated financial debt breakdown, while debt with financial
institutions represented 30%.

Telefónica Digital and Telefónica Global Resources

During the first quarter, there were several new developments regarding the
mobile operating system based on HTML-5 Firefox OS. The first devices from
Alcatel and ZTE followed by LG, Huawei and Sony, will be launched in Spain,
Colombia and Venezuela in the third quarter of 2013 and, along the fourth
quarter of 2013, in five more countries, including Brazil.

As part of the venture capital initiative, Telefónica Ventures has invested in
TaskHub start-up to promote the expansion of its online services platform in
the UK. This is the first investment by Telefónica's venture capital division
in a start-up company accelerated by Wayra. On the other hand, Sprint and
Telefónica have signed a global alliance to create one of the world's largest
mobile advertising networks. In addition, Telefónica has presented Smart M2M
Solution, an integral, simple and flexible platform that gives global
customers a complete and precise view of their business, providing visibility,
control and management of M2M connections. Finally Telefónica will be the
first telecommunications group in Latin America to provide integrated eHealth
services, thanks to the acquisition of Axismed, Brazil’s largest chronic care
management Company.

With regard to mobile devices, the global area has consolidated its operating
model by leading negotiations at group level, with very positive results, such
as the simplification of our portfolio to 159 references, 30 out of which
account for 80% of the value. The global procurement unitis advancing on the
development and implementation of Telefónica's new procurement model towards
an E2E stance for the most relevant categories, including Networks, Systems,
Market Products, Devices, Services, Marketing and Advertising.

Contact:

Telefónica
Maite Núñez, +34 91 482 38 00
prensa@telefonica.es
www.telefonica.es/saladeprensa
 
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