Telefónica’s Net Profit Totals 2,056 Million Euros up to June and Revenues Return to Organic Growth in the Second Quarter

  Telefónica’s Net Profit Totals 2,056 Million Euros up to June and Revenues
  Return to Organic Growth in the Second Quarter

The Company has reduced net debt by 10 billion euros from June 2012, including
 the recently announced disposals of 40% in Central America, 100% in Ireland
                                 and Inversis

Business Wire

MADRID -- July 25, 2013

  César Alierta, Executive Chairman, has stressed the “significant progress”
 made in Telefónica’s (NYSE:TEF) (LSE:TDE) on-going process of transformation
during the second quarter of 2013. A programme which places the company in “a
 strong position both in terms of business and financial performance” and has
   allowed Telefónica to take an important step towards “forming a leading
operator in Europe’s largest market”. The results of the first six months are
   in line with internal estimates allowing the company to reaffirm annual
                       operating and financial targets.

  *Telefónica Group’s revenue returned to growth in organic terms for the
    first time since the first quarter of 2012. Revenues increased 0.5%
    year-on-year during the second quarter of 2013 driven by a strong
    acceleration in Latin America, which grew by double-digits in the same
    period (+10.4% yoy in organic terms), and improving trends in Europe. As a
    result, between January and June, Telefónica’s revenue totalled 28,563
    million euros and remained virtually stable in organic terms (-0.5%).
  *For the third consecutive quarter, and as a result of the solid execution
    of the transformation strategy implemented over the last year as well as
    appropriate cost saving and efficiency boosting measures, OIBDA and OIBDA
    margin remained virtually stable in organic terms. At the end of June,
    OIBDA reached 9,421 million euros (-0.4%) and the company maintained high
    levels of profitability with an OIBDA margin of 33%.
  *In reported terms, the evolution of the aforementioned items were
    particularly affected by exchange rate fluctuations, mostly by devaluation
    in Venezuela and depreciation of the Brazilian real and the Argentinian
    peso, which subtracted more than five percentage points from revenue and
    OIBDA performance.
  *Latin America accounts for 51.4% of the group's consolidated revenue with
    all of the countries in the region making a positive contribution to this
    item in the second quarter of the year.
  *Including the disposals of 40% in Central America, 100% in Ireland and
    Inversis, carried out after closing the second quarter, Telefonica´s net
    debt totals 48,614 million euros. This represents a leverage ratio of 2.36
    times net debt over OIBDA and places the Group’s net debt very near its
    objective of <47,000 million euros in 2013. To add to this significant
    progress in financial flexibility the cash flow generation reached over
    1,900 million euros in the second quarter of the year.
  *Telefónica’s financing activity amounted to approximately 7,800 million
    euros in the first quarter of the year. Therefore, as of June 30th the
    Company maintains a debt maturity profile that thanks to its liquidity
    position is covered for the next 2 years.
  *At the end of June, the Telefónica Group’s customer base reached 317.3
    million accesses (+2%) out of which more than 78% are mobile accesses
    (249.5 million). The second quarter saw 2.1 million net mobile contract
    customer additions resulting in mobile contract customers already
    amounting to 85 million (+8.1%). Noteworthy is the considerable increase
    in smartphones, with a record net gain in the quarter of 8.2 million or
    three-times the figure for the first quarter of the year. Smartphones
    already reached a penetration rate of 24% of mobile accesses.
  *Telefónica Group continues to progress, via its Telefónica Digital and
    Telefónica Global Resources units, on its transformation process towards
    becoming a Digital Telco with a completely global business model. The
    launch of the first handsets running Firefox in Spain and their arrival in
    Colombia and Venezuela, expected during this quarter, is further evidence
    of the continuing success of this programme.
  *In Spain, Telefónica continues to successfully execute the transformation
    needed to improve its competitive positioning and business parameters. In
    this respect, at the end of June, Movistar Fusión reached 2.2 million
    customers and is fostering new customer acquisition and the incorporation
    of new services, which already account for 56% of the gross additions for
    the quarter. At the same time, the performance of total revenue is
    improving (excluding handset sales) and Spain is continuing to show
    profitability levels which are a benchmark in the sector, with OIBDA
    margin growth of four percentage points at the end of June.
  *Brazil improved revenue trends during the second quarter (+3.1% and +4.8%
    excluding regulatory impacts) and strengthened its position in the higher
    value segments with contract accesses growing 20% yoy in the semester. In
    this regard, particularly noteworthy was the 58% share of net contract
    additions achieved by the Company in the second quarter which also saw a
    strong acceleration in net fixed broadband additions.
  *Between January and June 2013, the company invested 3,903 million euros,
    including 834 million euros for purchasing spectrum in the United Kingdom,
    Uruguay, Spain and Brazil. 84% of the total investment effort was
    allocated to growth and transformation activities.

Telefónica presented its results for the first quarter of the year today.
During this period, the company´s net profit was 2,056 million euros,
virtually unchanged versus the same period the previous year (-0.9%). During
the second quarter of 2013, Telefónica made significant progress in the
transformation process that the company is implementing. The return to organic
revenue growth in the quarter, the stabilisation of high levels of
profitability, and the significant progress made in financial flexibility (net
debt reduced by 10 billion euros since June 2012) demonstrate that the
transformation programme is starting to have a reflection in the improved
evolution of both operating and financial variables.

According to César Alierta, Telefónica’s Executive Chairman, all the above
“has placed us in a strong position in terms of both business and financial
evolution” which has been key for Telefónica to take the necessary step
towards “forming a leading operator in Europe’s largest market”. Thus, the
execution of the announcement made last Tuesday will make Telefónica the
leading operator in terms of accesses, network quality and distribution
network in three of its main markets: Brazil, Germany and Spain. At present,
these markets combined generate more than 54% of the Group’s revenue and
represent 50% of the total access base.

During the second quarter of the year, Telefónica continued to advance on
several initiatives, within the transformation strategy which is being
executed since last year and which is delivering visible results each quarter,
despite a challenging economic backdrop and a highly competitive environment
in key countries. On the one hand, the Company continued to adapt to customer
needs and to stay ahead in a changing environment, with a refreshed commercial
offer which allows to increase customer satisfaction and to reduce churn. On
the other hand, progress continued to be achieved on the simplification of the
operating model, delivering higher levels of efficiency and quality.

As a result, revenues, which totalled 28,563 million euros between January and
june, turned back to post a year-on-year organic growth in the second quarter,
boosted by the acceleration of the commercial activity, especially in Latin
America, driven by a increasing demand for smartphones. OIBDA (9,421M€) was
relatively stable year-on-year (-0.7% year-on-year in organic terms in the
second quarter; -0.4% in the first six months) reflecting the savings and
efficiencies achieved, and despite the higher commercial effort, while free
cash flow significantly improved both year-on-year and quarter-on-quarter. At
the same time, The Company continued to prioritize investment towards growth
activities and to reduce debt. Furthermore, first quarter results, in line
with forecasts, allow the company to reaffirm annual operating and financial

317 million accesses

Telefónica managed 317.3 million accesses at the end of June, up 2%
year-on-year, affected by the sale of the fixed business assets in the UK (720
thousand accesses) in the second quarter, the disconnection of 114 thousand
mobile contract accesses in Czech Republic and the application of more
restrictive accounting criteria for the prepay segment.

Mobile accesses stood at 249.5 million, up 2% compared with June 2012, driven
by the contract segment, which accelerated its growth to 8% year-on-year and
now accounts for 34% of total mobile accesses The Company strengthened its
position in this high value segment and during the second quarter ramped up
its pace of customer capture and commercial activity, particularly in
smartphones, with net contract additions of 2.1 million, the highest since the
third quarter of 2011.

Mobile broadband accesses stood at 63.3 million at the end of June, posting
the largest year-on-year growth since the second quarter of 2012 (+41%),
almost 7 percentage points higher than the first quarter and increasing its
penetration rate up to 25% of mobile accesses (+7 percentage points
year-on-year). This strong commercial activity continued to be underpinned by
the significant increase in smartphones, with a record of 8.2 million net
additions in the quarter, three-fold the figure in the first quarter and more
than double the figure in the same period of previous year. The smartphone
penetration rate stood at 24% of mobile accesses in June 2013.

Retail broadband accesses totalled 18.3 million at the end of June and
improved its growth up to 2% excluding the impact of the sale of the assets of
the fixed business in the UK. Net additions in the quarter stood at 165
thousand customers, 4.4 times more than in the first quarter and 1.9 times
more than in the same period of 2012.

The acceleration in commercial activity in the quarter was mainly driven by
Telefónica Latinoamérica, with mobile contract net adds rising by 44% compared
with the first quarter of 2013 and by 64% compared with the second quarter of
2012, reflecting the focus on high-value customers, especially on smartphones.
There was also a marked improvement in the operating performance of the fixed
business, mainly driven by broadband, with net adds in the quarter 1.6 times
higher than in the January-March period, to reach 214 thousand accesses.

Income statement analysis, entry-by-entry

Before going into the details of the income statement, 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. The results of the UK fixed business
assets were also excluded from 1 May following the sale of its assets in April

Year-on-year performance was also negatively impacted in the first half by
exchange rate fluctuations, mainly due to the devaluation of the Venezuelan
bolivar from 1 January 2013, and the depreciations of the Brazilian real and
the Argentine peso. Thus, in the first half and in the second quarter exchange
rates reduced revenue growth by 5.5 percentage points, while the impact on
OIBDA was -5.4 percentage points. Moreover, changes in the perimeter of
consolidation reduced revenue growth by 1.8 percentage points in the first
half and reduced OIBDA growth by 1.2 percentage points.

Revenues in the first half of 2013 totalled 28,563 million euros, down 7.8%
year-on-year (-6.8% in the quarter). In organic terms, however, revenues
started to grow again in the quarter (+0.5% year-on-year), limiting the
year-on-year decline in the first six months to -0.5%. This acceleration was
fuelled by Telefónica Latinoamérica, where growth accelerated by 3.5
percentage points to 10.4% year-on-year in April-June, whilst Telefónica
Europe improved by 1.7 percentage points. Excluding the negative impact of
regulation, consolidated revenues in organic terms would have grown by 1.0%
compared with the first half of 2012, accelerating its growth in the second
quarter up to 2.1%.

By region, Telefónica Latinoamérica is the Group's growth engine, accounting
for 51.4% of consolidated revenues in the first half of the year while
Telefónica Europe and Telefónica España's contributions fell to 46.9% and

Mobile data revenues are the other key lever for the Telefónica Group's
growth. Another quarter maintained a solid growth, rising by 9.8% year-on-year
in organic terms (+9.6% in the first half) and accounted for 36.4% of mobile
service revenues in the year (up 3 percentage points compared with the first
half of 2012). Non-SMS data revenues growth ramped up sequentially to 22.1%
year-on-year in organic terms (+22.0% in the half year) and now account for
63% of total data revenues.

Cost saving and efficiency initiatives maintain high profitability

Operating expenses amounted to 19,774 million euros in the first six months of
2013, posting a year-on-year decline of 0.1% in organic terms (-7.0% reported)
on the back of the cost savings from the efficiency initiatives implemented.

Breaking it down by components, Supplies decreased by 1.5% year-on-year in
organic terms in the semester (-6.8% reported), due to lower interconnection
costs and handset purchase costs at Telefónica. Personnel costs increased 4.4%
in organic terms in the year (-15.5% in reported terms) mainly due to higher
costs in Latin America stemming from the negative impact of inflation in some
countries in the region. Finally, subcontract expenses fell 1.0% year-on-year
in the first half in organic terms (-1.6% reported) due to the reduction in
commercial costs in Europe, mainly in handset subsidies and advertising, as a
consequence of the new commercial strategy launched in 2012, and savings due
to efficiency programs and process simplification.

The average headcount was 131,882 employees, down slightly compared with the
first half of 2012 (-3.5%).

Gains on sales of fixed assets in the first half of 2013 amounted to 152
million euros, of which 126 million euros were booked in April-June, mainly
associated with the capital gain from the disposal of the assets of the fixed
business in the UK (73 million euros), the capital gain from the sale of the
stake in Hispasat (21 million euros) and the sale of non-strategic towers in
Latin America (35 million euros of impact in OIBDA), partly offset by the
impairment of Telefónica Ireland (16 million euros).

Operating income before depreciation and amortisation (OIBDA) reached 9,421
million euros, virtually unchanged in organic terms (-0.4%) compared with the
same period in 2012 (-9.7% reported. The OIBDA margin stood at 33.0% in the
first half, stable compared with the same period in 2012 in organic terms,
highlighting the solid execution of the Company's transformation strategy
(cost saving and efficiency initiatives), and the benefits of Company’s scale
and diversification.

Depreciation and amortisation (5,105 million euros in the first half, -0.5%
reported) grew by 4.5% year-on-year in organic terms, while operating income
(OI) totalled 4,316 million euros in the first half, down 5.4% year-on-year in
organic terms. Share of profit (loss) of investments accounted for by the
equity method amounted to 28 million euros in the first half.

Net financial expenses amounted to 1,399 million euros in the first half of
the year, of which 47 million euros were due to negative forex differences.
Excluding this effect, net financial expenses fell 13.6% compared with the
same period in 2012 thanks to the reduction in average debt in the period
(-8.5% compared with June 2012) and the lower cost of gross debt. This implies
an effective cost of debt excluding exchange forex of 5.23% over the last 12

Corporate income tax in the first half of 2013 stood at 751 million euros,
down 21.8% year-on-year. Thus, the effective tax rate in the semester
decreased to 25.5%.

Profit attributable to minority interests reduced first-half net profit by 138
million and was down 24.2% year-on-year mainly as a result of the lower profit
attributed to minority interests in Brazil, affected by the exchange rate.

As a result, consolidated net income totalled 2,056 million euros, -0.9%
compared with the first half of 2012 while basic earnings per share decreased
by 0.7% year-on-year to 0.46 euros.

Investment efficiency, aimed at transformation and growth

With regard to investment, the Company continues to focus on reassigning
resources to growth and transformation activities (84% of the total),
leveraging on the efficiencies achieved in areas such as IT, procurement,
improvement of quality indices and churn reduction. CapEx in the first half
totalled 3,903 million euros (+6.7% year-on-year) and included 834 million
euros relating to the acquisition of spectrum; in the UK (671 million euros)
and Uruguay (24 million euros) in the first quarter and in Spain (65 million
euros), the UK (47 million euros) and Brazil (28 million euros) in the second

Consequently, operating cash flow (OIBDA-CapEx) rose 3.4% year-on-year in
organic terms in the first half, continuing the growth trend initiated in the
fourth quarter of 2012.

Financial position

As a result, free cash flow amounted to 1,451 million euros in the first six
months of 2013 (1,908 million euros in the second quarter), including spectrum
payments of 1,110 million euros. Excluding this impact, free cash flow would
have totalled 2,562 million euros, up 19.0% year-on-year as a result of lower
interest payments and the positive change in working capital.

Net financial debt stood at 49,793 million euros at the end of June 2013, down
8,517 million euros compared with June 2012 and 1,466 million euros versus
December 2012. Including post-closing events (40% sale in Central America’s
assets, sale of 100% of T. Ireland and Inversis), net debt would stand at
48,614 million euros.

The leverage ratio (net debt over OIBDA) for the past 12 months stood at 2.40
times at the end of June 2013. The ratio is reduced to 2.36 times once
considered post-closing events (40% sale in Central America’s assets, sale of
100% of T. Ireland and Inversis).

In the first half of 2013, Telefónica's financing activity, excluding
short-term Commercial Paper Programmes activity, has been intense through bond
and loan markets executing operations for an amount close to 7,800 million
equivalent euros. The financing activity was mainly focused on financing in
advance debt maturing in 2013 and beyond and on smoothing the debt maturity
profile at the Holding level for the following years while strengthening
liquidity position. Therefore, as of June 30th the Company maintains a debt
maturity profile that thanks to its liquidity position is covered for the next
2 years.

Telefónica maintains total undrawn committed credit lines for an amount over
14,000 million euros, with over 12,350 million maturing in more than 12

At the end of June 2013, bonds and debentures represented 71% of the
consolidated financial debt breakdown, while debt with financial institutions
represented 29%.

Telefónica Digital and Telefónica Global Resources

Additionally, Teléfonica Digital has further progressed with the launch of new
services which continue to transform the Company towards a digital telco
operator, to capture all the growth opportunities in this environment.

During the second quarter, there were several new developments regarding
Financial Services in Latam and Europe. MFS, a joint venture with Mastercard,
was launched in May 2013 under the “Zuum” brand the first mobile payment
service in Brazil. An agreement was also reached with Caixabank and Banco
Santander to establish the first joint venture in Europe between financial
institutions and telcos to create new digital services. A global agreement was
reached with Samsung, who will be the first handset manufacturer to integrate
with Telefónica’s billing capabilities. In addition, in May, Telefónica signed
an agreement with Dell to deliver the broadest pay-as-you-go mobile broadband
service for notebooks and tablets across Europe, through the “Dell Net Ready”

At the start of June, Telefónica Digital announced the creation of “Eleven
Paths”, a new center for innovation in Security services. “Eleven Paths” will
adopt a hothouse approach with the aim of radically introduce innovation in
the way security products are developed in Telefonica. On July 2nd the first
Firefox OS handset was launched in Spain. Next launches of Firefox handsets
will take place in Colombia and Venezuela.

Telefónica Global Resources has further advanced in the execution of its
priority projects for the year, which allow accelerating the transformation
into a fully global model.

The global Network and Operations unit contributed to deploy LTE sites, with
strong activity in Brazil and Germany during the quarter.

In the global IT area it is worth to highlight the progress made in our
infrastructure consolidation strategy, both in Europe and Latin America. As
part of the Company's simplification process, following an inventory of the
over 1,100 applications to be withdrawn, approximately 300 have now been
decommissioned, in line with forecasts, which will lead to a less complex IT,
better time-to-market and lower usage of resources.

With regard to mobile devices, the global area continued to focus on achieving
a more balanced vendor map. As such, it is important to note as we have
mentioned above, that Movistar España launched the first world FireFoxOS
device at the beginning of July. Also noteworthy are the agreements with
different relevant industry players to promote the sale of various smartphones
categories and operating systems in our markets.


Telefónica, S.A.
Dirección de Comunicación Corporativa
Ronda de la Comunicación, s/n
28050 Madrid
Miguel Angel Garzón, Tel: +34 91 482 38 00
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