Market Overview

Telefónica's Net Income Increased by 42.2%, Reaching 779 Million Euros in the First Quarter of the Year

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Telefónica (NYSE:TEF) (LSE:TDE):

Financial Highlights

  • Revenues amounted to €13,132M (+5% year
    on year; +1.5% in organic terms), driven by service revenues (+1.7%
    organic growth). Mobile data revenues services was particularly
    notable, maintaining its double-digit growth.
  • OIBDA reached €4,021M (+4.8% year on
    year; +1.3% in organic terms) and the margin remained stable.
  • Free cash flow totalled €599M in the
    quarter, and improved by €530M versus January-March of 2016.
  • Net income reached €779M (+42.2% vs 1Q16)
    and earnings per share stood at €0.14
    (+48.8%).
  • Improved quality of the customer base reflects in LTE customers (1,7x
    year-on-year), in the number of smartphones (+18%) and in the growth
    in FTTx and cable (+21%). Total customer base stands at 347 million
    accesses.

José María Álvarez-Pallete, Executive Chairman of Telefónica:

"First quarter results reflected a further step forward in our
business model, which is focused on the pursuit of sustainable growth.
The differential quality of our asset portfolio enables us to offer
differential services, which translated into improvements in our
results; in particular: i) the growth in main financial metrics,
including the positive impact of foreign exchange rates in the quarter;
ii) the savings obtained from synergy capture and process
simplification; and iii) the strengthening of our balance sheet and the
strong free cash flow growth, 9x higher vs. January-March 2016. In
addition, we have announced the launch of AURA, a new, more innate and
simple customer relationship model, a pioneer in the area of cognitive
intelligence. At the same time, the results are aligned with our
expectations and allow us to reiterate the guidance set for 2017".

Financial Results – January-March 2017

Telefónica presented today its results for the first quarter of the
year, which show growth in main financial and operational metrics and a
positive impact of exchange rates. With regard to revenues for the
quarter, the figure stands at 13,132 million euros, a 5% increase year
on year.

In organic terms, revenue has grown by 1.5%, driven by service revenues
(+1.7%). Mobile data revenues maintained double-digit y-o-y growth
(+13.5% in organic terms).

OIBDA amounted to 4,021 million euros between January and March 2017,
which was 4.8% y-o-y (+1,3% in organic terms).
This positive result
reflects a positive revenue evolution, cost containment efforts, and
synergy capture and efficiencies from the transformation process. The
OIBDA margin stands at 30.6%, remaining stable versus previous year.

Net income reached 779 million euros in the first quarter, which
represented a year-on-year increase of 42.2%, and earnings per share
stood at €0.14 (+48.8%).

The company remains committed to the Company's transformation
with major progress made in the quarter, both in infrastructure and LTE
coverage. Regarding infrastructure, at the end of the first quarter,
Telefónica achieved nearly 40 million premises passed with FTTX and
cable (+14% vs 1Q16), of which 17.4 million are in Brazil (FTTH and
cable) and 17.5 million in Spain (FTTH). Moreover, LTE coverage
increased by 64%, of which 88% is in Europe. In addition, in February,
Telefónica introduced a new customer relationship model based on
cognitive intelligence, which was a pioneer in the industry.

In this context, the focus of CapEX for the first quarter of 2017
was once again on the deployment of ultra-fast networks and amounted to
1,621 million euros during the period, which was 4.4% less than in the
same period of 2016, reflecting integration synergies, consolidation and
network optimisation. Operating cash flow (OIBDA-CAPEX), stood at
2,400 million euros (+12%).

Free cash flow reached 599 million euros in the first three months of
the year, which was a year-on-year increase of 530 million euros,
despite working capital seasonality. The effective cost of interest
payments in the past 12 months stood at 3.48% to March, which was 128
b.p. lower than the first quarter of 2016.

Net financial debt at the end of the quarter stood at 48,766
million euros, 171 million euros higher compared to December 2016, which
is the smallest debt increase in a first quarter of the last three
years, despite the seasonal peculiarities of the period. In this regard,
Telefónica's financing activity amounted to approximately €6,106m
equivalent and focused on strengthening the liquidity position,
refinancing and extending debt maturities, in an environment of very low
rates. Therefore, at the end of March, the company maintained a
comfortable liquidity position, with gross debt maturities covered
beyond the next 24 month. The average debt life, including the
operations carried out since the end of the first quarter, is 8.29 years.

The customer base amounted to 347 million accesses, which
remained stable year on year, and reflects its improved quality,
boosting the average revenue per user (+2.1% organic year-on-year
growth) and maintaining low levels of churn. The weight of higher-value
services continued to increase, as shown by the better numbers of LTE
customers (1,7 times), mobile contract accesses (+5%), smartphones
(+18%) and FTTx and cable customers (+21%).

The Company reiterates its guidance and dividend announced for 2017.

Results by geographies:
(y-o-y changes in organic
terms)

Spain. Telefónica España's results continued to reflect the
strategy focused on increasing customer value, which resulted in the
growing penetration of high-value services. However, the y-o-y changes
in the first quarter were affected by the different phasing of tariffs
and promotion upgrades. Revenues in January-March came to €3,066m and
decreased 2.6% both due to lower service revenues (-1.5%) and lower
handset sales (-29.9%).

OIBDA, excluding an additional restructuring provision of €76M, totalled
€1,219m in the quarter, decreasing 2.4% y-o-y; and OIBDA margin grew 0.1
p.p. y-o-y to 39.8%. CapEx in January-March stood at €333m, and
operating cash flow grew solidly by 8.3% to €886m.

Germany. Telefónica Deutschland maintained solid operational
momentum in the first quarter of 2017, leveraging a continued strong
performance of partners while the competitive environment showed further
signs of improvement across segments. The Company also benefited from
continued successful execution on the integration milestones. Results
were in line with the full-year outlook, reflecting significant
regulatory impacts (the reduction in mobile termination rates since
December 2016 and the glidepath of the European roaming legislation)
that weighed both on revenue and OIBDA performance.

In the first quarter, revenues reached €1,771m (-4.7% y-o-y, improving
vs. -6.0% in the fourth quarter of 2016). OIBDA totaled €400m in
the quarter and grew 1.4% y-o-y, despite the negative effect from the
above mentioned regulatory changes, and reflected incremental synergies
totaling €35m more (vs. €55m in the first quarter of 2016), as well as
investments in "O2 Free" positioning. The OIBDA margin was 22.6%, up 1.4
p.p. y-o-y.

CapEx benefited from savings related with network consolidation and the
rollout of a single LTE network and fell 4.2% y-o-y to €208m in the
quarter. Operating cash flow (OIBDA-CapEx) totaled €192m; up 7.7% y-o-y.

United Kingdom. In the first quarter of 2017 Telefónica UK
continued to reinforce its position as a leading mobile operator in the
UK with increasing users on its network and y-o-y growth in both
revenues and OIBDA, underpinned by increasing ARPU and leading levels of
loyalty.

Revenues in the first quarter totalled €1,601m and grew 2.1% y-o-y
(+2.4% in the fourth quarter 2016). OIBDA grew 0.6% y-o-y to €416m in
the quarter, driven by continuing revenue growth, and OIBDA margin stood
at 26.0%, slightly decreasing y-o-y (-0.4 p.p.).

CapEx amounted to €225m in January-March, an increase of 30.8% y-o-y,
principally dedicated to furthering the LTE rollout. Thus, operating
cash flow (OIBDA-CapEx) totalled €191m in the quarter (-21.0% y-o-y).

Brazil. In the first quarter of 2017, Telefónica Brasil recorded
an acceleration in revenues mainly driven by the positive performance of
mobile service revenues that, together with the reduction in operating
expenses (synergies and efficiency measures), enabled it to maintain the
solid y-o-y expansion of margins and the strong growth of operating cash
flow. Revenues in the first quarter totalled €3,165m and increased by
1.6% y-o-y, underpinned by ARPU growth across the main services. OIBDA
totalled €1,104m and increased by 7.5% y-o-y, while the OIBDA margin
increased to 34.9% (+1.9 p.p. y-o-y). Over the three first months of the
year, the company generated synergies of €107m, €46m of which had a
positive impact on revenues from cross-selling and €61m in expenses from
renegotiations with suppliers and lower commercial and personnel
expenses.

CapEx in this quarter (€397m) was mainly dedicated to expansion of the
4G network, the IP backbone and expansion of the fibre network,
reflecting optimisation thanks to the use of big data and synergies. As
such, operating cash flow (OIBDA-CapEx) totalled €707m in the quarter
and maintained solid growth (+21.6%).

Hispanoamérica. Telefónica Hispanoamérica recorded a solid set of
financial results in the first quarter of the year, which was reflected
in the positive y-o-y performance in revenues and OIBDA, thanks to the
strategic focus on capturing value that translated into a strong
increase in the average revenue per user (+9.3% y-o-y).

Revenues in the first quarter increased to €3,285m and grew by 9.2%.
OIBDA in the first three months increased to €904m and increased 6.2%
y-o-y, while the OIBDA margin stood at 27.5% (-0.8 p.p. y-o-y). The
CapEx totalled €430m and decreased 9.0% y-o-y, and was mainly allocated
to the rollout of 4G and fibre networks and to improve and increase the
capacity of 2G and 3G mobile networks. Thus, the operating cash flow
(OIBDA-CapEx) rose to €474m, with y-o-y growth of 23.6%.

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