FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

Telefónica, S.A.

(Translation of registrant’s name into English)

Distrito C, Ronda de la Comunicación s/n,
28050 Madrid, Spain
3491-482 85 48
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F þ     Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes o      No þ

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes o     No þ

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes o     No þ

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

 

 

Telefónica, S.A.

TABLE OF CONTENTS

				Sequential
				Page
Item				Number
1.		Telefónica — 2009 First quarter financial results			3

INTERIM MANAGEMENT STATEMENTS

JANUARY — MARCH 2009

Quarterly results

January — March 2009

TABLE OF CONTENTS

TELEFÓNICA GROUP			2
Market Size			2
Consolidated Results			4
Financial Data			9
RESULTS BY REGIONAL BUSINESS UNITS			16
Telefónica España			16
• Wireline Business			16
• Wireless Business			18
Telefónica Latinoamérica			23
• Brazil			24
• Argentina			26
• Chile			28
• Peru			29
• Colombia			31
• México			33
• Venezuela			33
• Central America			34
• Ecuador			34
Telefónica Europe			44
• Telefónica O2 UK			44
• Telefónica O2 Germany			45
• Telefónica O2 Ireland			46
• Telefónica O2 Czech Republic			47
Other Companies			53
• Atento Group			53
ADDENDA			55
Key Holdings of the Telefónica Group and its Subsidiaries			55
Significant Events			56
Changes to the Perimeter and Accounting Criteria of Consolidation			57

The financial information contained in this document has been prepared under International Financial Reporting Standards (IFRS). This financial information is unaudited.

The English language translation of the consolidated financial statements originally issued in Spanish has been prepared solely for the convenience of English speaking readers. Despite all the efforts devoted to this translation, certain omissions or approximations may subsist. Telefónica, its representatives and employees decline all responsibility in this regard. In the event of a discrepancy, the Spanish-language version prevails.

January — March 2009 Results Telefónica 1

TELEFÓNICA GROUP

Market Size

January — March 2009 Results Telefónica 2

TELEFÓNICA GROUP

Market Size

TELEFÓNICA GROUP
ACCESSES
Unaudited figures (thousands)

		January — March
		2009				2008				% Chg
Final Clients Accesses			257,700.8				230,665.4				11.7
Fixed telephony accesses (1)			42,439.2				43,499.6				(2.4	)
Internet and data accesses			14,736.1				13,564.5				8.6
Narrowband			1,798.2				2,531.1				(29.0	)
Broadband (2)			12,778.5				10,873.3				17.5
Other (3)			159.4				160.1				(0.4	)
Mobile accesses (4)			198,177.8				171,719.7				15.4
Pay TV			2,347.7				1,881.6				24.8
Wholesale Accesses			3,654.3				2,840.7				28.6
Unbundled loops			1,886.7				1,512.4				24.8
Shared ULL			584.8				755.0				(22.5	)
Full ULL			1,301.9				757.4				71.9
Wholesale ADSL (5)			513.9				552.9				(7.0	)
Other (6)			1,253.7				775.4				61.7
Total Accesses			261,355.1				233,506.0				11.9

January — March 2009 Results Telefónica 3

TELEFÓNICA GROUP

Consolidated Results

The structure of the Telefónica Group by business unit (Telefónica España, Telefónica Latinoamérica and Telefónica Europe), in line with the current integrated, regional management model, means that the legal structure of the companies is not relevant for the presentation of Group financial information. Therefore, the operating results of each of these business units are presented independently, regardless of their legal structure.

In line with this organisation, Telefónica has included in the Telefónica España and Telefónica Latinoamérica regional businesses units all information pertaining to the wireline, wireless, cable, Internet and TV businesses.

Furthermore, the results for Telefónica Europe include those of Telefónica O2 UK, Telefónica O2 Germany, Telefónica O2 Ireland, Telefónica O2 Czech Republic and Telefónica O2 Slovakia.

The “Other companies” heading includes the Atento business and other holding companies and eliminations in the consolidation process.

For the purpose of presenting information on a regional basis, revenue and expense resulting from intra-group invoicing for use of the brand and management contracts which do not have an impact on consolidated results have been excluded from the operating results for each Group region.

As of 31 December 2007, in order to align the criteria for the key performance indicators of the mobile operations of the Group, the series of mobile accesses and therefore the total Group accesses have been revised, including machine to machine accesses, thus reporting ARPU and churn figures accordingly. Furthermore, in order to avoid the distortion on MoU of the strong growth of mobile devices which mostly use data services (M2M and mobile broadband devices), the Company has decided to publish the traffic evolution in absolute terms (million minutes), using this indicator to replace the previous MoU metric. In addition, the accounting criteria for prepaid access in the Czech Republic and Slovakia have been modified to align them, changing from 13 months (registered) to three months (active), thus reporting ARPU and churn figures accordingly.

From 1 January 2009, Medianetworks is being consolidated as T. Internacional, S.A.U.’s subsidiary (previously consolidated as Telefónica del Perú’s subsidiary). For the purpose of presenting comparable information, the year-on-year organic changes of Telefónica del Perú and, as a result, of the country consolidated information, has been calculated excluding Medianetworks results in 2008.

In the current economic context, the sound performance of the Telefónica Group in the first quarter of 2009 reflects the success of the Company’s strategy, focused on capturing the growth potential in expanding businesses while increasing the cash flow generation, leveraging the advantages of the high diversification of the Group’s operations, both by businesses and by geographies.

This strategy has allowed Telefónica to consolidate its differentiated profile in the sector, showing a notable revenue and OIBDA year-on-year growth in organic terms¹, being this positive performance reinforced with a strong cash flow generation.

Therefore, revenues stood at 13,703 million euros in the first quarter of 2009, showing a solid 2.8% year-on-year growth in organic terms¹, boosted mainly by the strong performance posted by the businesses at Telefónica Latinoamérica, contributing with 3.3 percentage points to revenue growth and, to a lesser extent, by the positive behaviour of revenues at Telefónica Europe, with a contribution of 0.9 percentage points in the period.

By services, it is noteworthy the positive performance of broadband connectivity revenues, both fixed and mobile, together with the high acceptance and growing contribution to revenues of value added services, showing the successful commercial strategy of the Company.

January — March 2009 Results Telefónica 4

TELEFÓNICA GROUP

Consolidated Results

Operating income before depreciation and amortization (OIBDA) reached 5,354 million euros at the end of March, advancing 2.5% year-on-year in organic terms². The strong performance of Telefónica Latinoamérica’s OIBDA (+4.9 percentage points) and Telefónica Europe (+1.2 percentage points), offset the lower OIBDA coming from T. España, demonstrating the value of the high diversification of the Group.

The Telefónica Group’s ability to flexibly manage OpEx and CapEx is reflected in the efficiency ratio³, +0.9 percentage points year-on-year to 75.3%, enabling to increase the operating cash flow (OIBDA-CapEx) significantly to 4,154 million euros till March, up 4.5% year-on-year in organic terms².

As a result, organic² operating cash flow growth exceeded revenue growth by 1.7 percentage points, basically as a result of the strong growth achieved by Telefónica Latinoamérica (+14.3% in organic terms²; 1,606 million euros) and Telefónica Europe (+11.7% in organic terms²; 527 million euros), together with the stability of the cash flow generated by Telefónica España in comparable terms⁴ (2,068 million euros).

At the same time, the Company is focusing its commercial strategy on capturing growth in expanding markets. This led to an 11.9% rise in the total number of accesses for the Telefónica Group compared to the first quarter of 2008, to over 261.3 million. The increase was underpinned by the expansion in wireless accesses (+15.4%), broadband (+17.5%) and pay TV (+24.8%) accesses. By region, it is worth highlighting the contribution by Telefónica Latinoamérica, with over 159 million accesses across the region at the end of March (up +15.8% on March 2008).

By type of access, the Telefónica Group’s wireless accesses exceeded 198 million at the end of March, with net adds in the first quarter of around 2.4 million and around 22.5 million customers⁵ compared to the end of March 2008. The main drivers of the net adds in the first quarter of the year were Brazil (0.7 million), Germany (0.3 million), Mexico (0.2 million) and Argentina (0.2 million).

Retail internet broadband accesses stood reached close to 12.8 million, a year-on-year increase of 17.5%, driven by the growing adoption of voice, ADSL and pay-TV bundled offers. It is worth highlighting that in Spain over 86% of retail broadband accesses are bundled as part of some kind of dual or triple offers, whilst in Latin America, 51% of broadband accesses are bundled as part of a dual or triple package. In the first quarter net adds were 0.3 million accesses, most of which coming from Brazil.

Pay TV accesses exceeded 2.3 million by the end of March, almost 25% more than a year ago. The Company has pay TV operations up and running in Spain, the Czech Republic, Peru, Chile, Colombia, Brazil and Venezuela.

Reported revenue fell by 1.4% compared to the first quarter of 2008. However, this was mainly as a result of the negative exchange rate effect, which reduced growth by 4.7 percentage points. Changes in the consolidation perimeter contributed with 0.5 percentage points to revenue growth.

In absolute terms, Telefónica Latinoamérica’s contribution to total Group revenue continued to grow, rising to 39.4% (+2.3 percentage points compared to the same period in 2008), whilst Telefónica España and Telefónica Europe contributed around 36% and 24% respectively, to reported revenues.

January — March 2009 Results Telefónica 5

TELEFÓNICA GROUP

Consolidated Results

The Telefónica Group’s operating expenses in the first quarter amounted to 8,572 million euros, down 2.3% on the end of March 2008. Excluding the impact of exchange rate fluctuations, operating expenses increased by 3.2% on a year-on-year basis, mostly as a result of higher expenses at Telefónica Latinoamérica, which were mainly due to higher commercial expenses at Vivo and the higher resources associated to the new businesses at Telesp, as a result of the Company’s efforts to improve service quality for customers. In organic terms⁶, operating expenses increased by 2.6%.

At the end of March, supply costs fell by 6.9% year-on-year to 4,013 million euros. Excluding the exchange rate effect, supply costs declined by 0.7%. Cost reductions at Telefónica España, mainly explained by lower interconnection expenses and lower handset purchases, more than offset the increase, mainly from interconnection expenses, at Telefónica O2 UK and Telefónica Latinoamérica.

Personnel expenses rose 0.6% year-on-year to 1,694 million (+4.7% in constant euros). The average headcount during the period was 256,632, an increase of 7,582 employees, mainly due to expansion of the Atento Group workforce. Excluding the Atento Group workforce, the average number of employees in the Telefónica Group was virtually stable year-on-year at 124,901.

External service expenses (2,348 million euros) fell by 1.6% year-on year. Excluding the exchange rate effect, external service expenses increased by 4.0%. This evolution is mainly due to increased expenses at Telefónica Latinoamérica, mostly from higher commissions, customer care expenses and network and systems maintenance in the mobile businesses in Brazil, Venezuela, and Argentina, together with increased customer care expenses at Telesp.

On the other hand, in the first quarter of the year, gains on sales of fixed assets totalled 6 million euros, mainly from the sale of property in the Czech Republic.

Operating income before depreciation and amortisation (OIBDA) in reported terms remained virtually stable vs. the first quarter of 2008 (-0.4% year-on-year). In absolute terms, Telefónica España accounted for almost 45% of total Group OIBDA, compared to 38.9% and 16.5% for Telefónica Latinoamérica and Telefónica Europe, respectively.

In the first quarter of 2009 the expanding margins trend observed throughout 2008 continued, reflecting the ongoing focus of the Company on efficiency, with an active management of costs to adapt them to market conditions, and the advantages of the higher scale of operations. All the regions showed improvements in comparable terms^6,7: +1.7 percentage points Telefónica Latinoamérica; +0.8 percentage points Telefónica Europe and 0.4 percentage points Telefónica España. Telefónica Group’s OIBDA margin in reported terms improved by 0.4 percentage points compared to the same period in 2008, to stand at 39.1%.

Depreciation and amortisation in the first quarter totalled 2,164 million euros, down 5.0% year-on-year. In organic terms⁶, depreciation and amortisation at the Telefónica Group increased by 0.6%, mainly as a result of increased depreciation and amortisation in Telefónica Latinoamérica.

In the first quarter, operating income (OI) was 3,190 million euros, an increase of 3.9% in organic terms⁶ or 2.9% in reported terms.

Profit from associated companies was 5 million euros for the period January-March 2009. Profit from the Company’s stake in Portugal Telecom is partially offset by the losses from the Telefónica Group’s shareholdings in Lycos Europe and Telco SpA.

Net financial results at the end of March 2009 amounted to 731 million euros, down 4.7% vs. the same period of 2008, mainly due to:

	•		A decrease of the average cost of the Group’s debt, to 5.95% over total average debt excluding foreign exchange results, that leads to a lower expense of 70 million euros due to lower interest rates in 2009.
	•		A decrease of 7.3% in the average debt, which has generated savings of 48 million euros.

January — March 2009 Results Telefónica 6

TELEFÓNICA GROUP

Consolidated Results

•

Changes of the actual value of commitments derived mainly from the pre-retirement plans and other positions equally accounted at market value have generated more expenses of 27 million euros in comparison with the same period of the previous year.

•

Changes in the FX gains and losses up to March 2009 with respect to the same period in 2008 yield a higher cost of about 55 million euros.

Free cash flow generated by the Telefónica Group up to the end of March 2009 amounted to 1,299 million euros of which 290 million euros were assigned to Telefónica’s share buyback program, 226 million euros to commitment cancellations derived mainly from the pre-retirements plans and 58 million euros to financial and Real Estate net divestments. As a result, net financial debt decreased by 726 million euros. On the other hand, net debt increased by an additional 249 million euros because of the foreign exchange impact, changes in the consolidation perimeter and other effects on financial accounts. All this has led to a decrease of 477 million euros with respect to the net financial debt at the end of 2008 (42,733 million euros), leaving the net financial debt of the Telefónica Group at March 2009 at 42,256 million euros.

Leverage ratio, net debt over OIBDA, stands at 1.9 times at the end of March 2009, with a reduction of the net financial debt in the period for an amount of nearly 500 million euros.

During first quarter of 2009, the financing activity of Telefónica Group, excluding short term Commercial Paper Programmes activity which rose to above 7,350 million euros, mainly focused on Telefónica, S.A. debt refinancing. To highlight the Euro bond issuances for an amount of 2,000 millions raised in January and 1,000 millions raised in March, leaving Group’s cash balance exceeding gross maturities for remaining of 2009 and re-financing almost entirely debt maturities for this year 2009 outside Latin America region.

In addition, a 4,000 million euros extension on a syndicated facility maturing in 2011 was successfully signed, moving 2,000 million euros to 2012 and the remaining 2,000 million euros to 2013, adjusting 2011 maturities to levels more in line with cash flow generation figure.

Telefónica S.A. and its holding companies have continued active in these first months of 2009 under their various Commercial Paper Programmes (Domestic and European), for an outstanding balance of 1,521 million euros, maintaining spreads over reference rates.

Regarding Latin America, our subsidiaries have tapped the capital markets up to March 2009 for an amount above 350 million equivalent euros, mainly renewing existing debt or re-financing maturities till year end.

As of March 31^st of 2009, as a result of recent bond public capital markets transactions, bonds and debentures continue increasing their weight on the consolidated financial debt breakdown to 58%, with debt with financial institutions representing 42%.

The solid financial position of the Group has deserved a change in Telefónica, S.A. outlook, from stable to positive affirming the long-term Baa1 ratings by Moody’s last February 17^th 2009, following the upgrades performed by Fitch, S&P’s and JCR to A or A- the end of last year 2008.

The income taxes at the end of the first quarter totalled 744 million euros, implying an effective tax rate of 30.2%, not affected by any extraordinary transaction.

Profit attributable to minority interests fell by 46.1% year-on-year, reducing net profit at the end of March by 31 million euros. Most of the profit attributable to minority interests relates to shareholdings in Telesp, Telefónica O2 Czech Republic and Telefónica Telecom, whilst the year-on-year decline is mainly attributable to lower minority interests in Vivo and Telefónica Chile, following the takeover bid launched on minority shareholders, and to increased losses at Telefónica Telecom.

Consolidated net income for the first quarter of the year amounted to 1,690 million euros, 9.8% higher than at the end of March 2008.

Basic earnings per share at the end of the quarter stood at 0.37 euros, year-on-year growth of 12.9%.

January — March 2009 Results Telefónica 7

TELEFÓNICA GROUP

Consolidated Results

As previously mentioned, in the current context, the Company’s strategy is focused on growing the businesses and the cash flow generation. In this scenario, the active management of operating expenses and CapEx, together with leverage on the benefits from scale economies are key levers to the Group’s strategy.

It is noteworthy that around 45%-50% of the Company’s total operating expenses can be considered to be variable as they relate mostly to interconnection and commercial expenses (handset subsidies, dealers commissions and advertising), and could therefore be managed in the short term to respond to changes in demand. As a result, in a context of revenue pressure in those markets being more negatively impacted by the current economic climate, the Company’s cost base structure gives it the flexibility to adapt its operating costs. Furthermore, as part of the transformation process required to respond to the new trading environment in some markets, the Company has launched a range of initiatives in different areas (technology, IT, procurements, commercial) which will generate savings in the short and medium-term.

Regarding investment, around 75% of total CapEx planned for 2009 relates to business transformation and growth projects which could be managed and adapted to respond to changes in demand, competitive pressures and the macroeconomic climate. Many of these initiatives are designed to accelerate the transformation of the Company’s operational model, and this will increase CapEx efficiency and enable the Company to benefit from economies of scale and from the integrated management model it is always implementing.

After reaching peak levels in the CapEx/Revenue ratio (14.5%) in 2008, the Company has announced that CapEx for 2009 will stand below 7,500 million euros⁸ (vs. 8,401 million euros in 2008) with CapEx cuts in all the regions of operations, prioritising investment projects in growth businesses, mainly those related to cover the demand on broadband services, both fixed and mobile.

At the end of the first quarter of 2009, total CapEx committed for 2009 represents around 30% of the CapEx target⁸ for the year, reflecting the Company’s ability to adapt its investment to the evolution of the markets where it is present.

January — March 2009 Results Telefónica 8

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP
CONSOLIDATED INCOME STATEMENT
Unaudited figures (Euros in millions)

		January — March
		2009				2008				% Chg
Revenues			13,703				13,896				(1.4	)
Internal exp capitalized in fixed assets			155				167				(7.2	)
Operating expenses			(8,572	)			(8,777	)			(2.3	)
Supplies			(4,013	)			(4,312	)			(6.9	)
Personnel expenses			(1,694	)			(1,683	)			0.6
Subcontracts			(2,348	)			(2,386	)			(1.6	)
Bad Debt Provisions			(211	)			(180	)			17.7
Taxes			(306	)			(216	)			41.8
Other net operating income (expense)			64				36				76.5
Gain (loss) on sale of fixed assets			6				55				(89.1	)
Impairment of goodwill and other assets			(2	)			(1	)			55.6
Operating income before D&A (OIBDA)			5,354				5,376				(0.4	)
OIBDA margin			39.1	%			38.7	%			0.4	P.P.
Depreciation and amortization			(2,164	)			(2,277	)			(5.0	)
Operating income (OI)			3,190				3,099				2.9
Profit from associated companies			5				(1	)			C.S.
Net financial income (expense)			(731	)			(767	)			(4.7	)
Income before taxes			2,464				2,331				5.7
Income taxes			(744	)			(736	)			1.1
Income from continuing operations			1,720				1,595				7.8
Income (Loss) from discontinued ops.			(0	)			0				C.S.
Minority interest			(31	)			(57	)			(46.1	)
Net income			1,690				1,538				9.8
Weighted average number of ordinary shares outstanding during the period (millions)			4,567.6				4,696.8				(2.8	)
Basic earnings per share (euros)			0.37				0.33				12.9

Notes:

January — March 2009 Results Telefónica 9

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP
RESULTS BY REGIONAL BUSINESS UNITS
Unaudited figures (Euros in millions)

		REVENUES												OIBDA												OIBDA MARGIN
		January — March												January — March												January — March
		2009				2008				% Chg				2009				2008				% Chg				2009				2008				Chg
Telefónica España (1)			4,913				5,131				(4.2	)			2,402				2,597				(7.5	)			48.9	%			50.6	%			-1.7	P.P.
Telefónica Latinoamérica (2)			5,403				5,158				4.8				2,081				1,877				10.9				38.5	%			36.4	%			2.1	P.P.
Telefónica Europe			3,245				3,472				(6.6	)			883				912				(3.2	)			27.2	%			26.3	%			0.9	P.P.
Other companies and eliminations			142				135				4.9				(11	)			(10	)			16.6				N.M.				N.M.				N.M.
Total Group (2)			13,703				13,896				(1.4	)			5,354				5,376				(0.4	)			39.1	%			38.7	%			0.4	P.P.

		OPERATING INCOME												CAPEX												OPCF (OIBDA-CAPEX)
		January — March												January — March												January — March
		2009				2008				% Chg				2009				2008				% Chg				2009				2008				% Chg
Telefónica España (1)			1,871				2,019				(7.4	)			334				463				(28.0	)			2,068				2,134				(3.1	)
Telefónica Latinoamérica (2)			1,200				986				21.7				475				459				3.6				1,606				1,419				13.2
Telefónica Europe			163				135				20.8				356				382				(6.9	)			527				530				(0.6	)
Other companies and eliminations			(44	)			(41	)			6.9				35				15				131.9				(46	)			(25	)			86.1
Total Group (2)			3,190				3,099				2.9				1,200				1,319				(9.1	)			4,154				4,057				2.4

January — March 2009 Results Telefónica 10

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP
CONSOLIDATED BALANCE SHEET
Unaudited figures (Euros in millions)

		Mar 2009				Dec 2008				% Chg
Non-current assets			81,583				81,923				(0.4	)
Intangible assets			15,750				15,921				(1.1	)
Goodwill			18,510				18,323				1.0
Property, plant and equipment and Investment property			30,412				30,546				(0.4	)
Non-current financial assets and investments in associates			9,676				10,153				(4.7	)
Deferred tax assets			7,236				6,980				3.7
Current assets			19,915				17,973				10.8
Inventories			1,197				1,188				0.7
Trade and other receivables			9,536				9,315				2.4
Current tax receivable			829				970				(14.5	)
Current financial assets			2,065				2,216				(6.8	)
Cash and cash equivalents			6,280				4,277				46.8
Non-current assets classified as held for sale			8				7				19.0
Total Assets = Total Equity and Liabilities			101,498				99,896				1.6
Equity			20,999				19,562				7.3
Equity attributable to equity holders of the parent			18,622				17,231				8.1
Minority interest			2,377				2,331				2.0
Non-current liabilities			56,074				55,202				1.6
Long-term financial debt			45,873				45,088				1.7
Deferred tax liabilities			3,638				3,576				1.7
Long-term provisions			5,401				5,421				(0.4	)
Other long-term liabilities			1,162				1,117				4.0
Current liabilities			24,425				25,132				(2.8	)
Short-term financial debt			8,190				8,100				1.1
Trade and other payables			7,581				7,939				(4.5	)
Current tax payable			2,465				2,275				8.3
Short-term provisions and other liabilities			6,189				6,818				(9.2	)
Financial Data
Net financial Debt (1)			42,256				42,733				(1.1	)

January — March 2009 Results Telefónica 11

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP
FREE CASH FLOW AND CHANGE IN DEBT
Unaudited figures (Euros in millions)

				January — March
				2009				2008				% Chg
I		Cash flows from operations			4,457				4,188				6.4
II		Net interest payment (1)			(854	)			(1,200	)
III		Payment for income tax			(473	)			(354	)
A=I+II+III		Net cash provided by operating activities			3,129				2,634				18.8
B		Payment for investment in fixed and intangible assets			(2,047	)			(1,975	)
C=A+B		Net free cash flow after CapEx			1,082				659				64.1
D		Net Cash received from sale of Real Estate			28				61
E		Net payment for financial investment			(86	)			(5	)
F		Net payment for operations with minority shareholders and treasury stock (2)			(299	)			(569	)
G=C+D+E+F		Free cash flow after dividends			726				146				N.M.
H		Effects of exchange rate changes on net financial debt			(28	)			(395	)
I		Effects on net financial debt of changes in consolid. and others			277				(321	)
J		Net financial debt at beginning of period			42,733				45,284
K=J-G+H+I		Net financial debt at end of period			42,256				44,423				(4.9	)

January — March 2009 Results Telefónica 12

TELEFÓNICA GROUP

Financial Data

RECONCILIATIONS OF CASH FLOW AND OIBDA MINUS CAPEX
Unaudited figures (Euros in millions)

		January — March
		2009				2008				% Chg
OIBDA			5,354				5,376				(0.4	)
- CapEx accrued during the period			(1,200	)			(1,319	)
- Payments related to cancellation of commitments			(226	)			(193	)
- Net interest payment			(854	)			(1,200	)
- Payment for income tax			(473	)			(354	)
- Results from the sale of fixed assets			(6	)			(55	)
-Investment In working capital and other deferred income and expenses			(1,513	)			(1,596	)
= Net Free Cash Flow after CapEx			1,082				659				64.1
+ Net Cash received from sale of Real Estate			28				61
- Net payment for financial investment			(86	)			(5	)
- Net payment for operations wirh minority shareholders and treasury stock			(299	)			(569	)
= Free Cash Flow after dividends			726				146				N.M.

		January — March
		2009				2008				% Chg
Net Free Cash Flow after CapEx			1,082				659				64.1
+ Payments related to cancellation of commitments			226				193
- Operations with minority shareholders			(9	)			0
= Free Cash Flow			1,299				852				52.5
Weighted average number of ordinary shares outstanding during the period (millions)			4,568				4,697
= Free Cash Flow per share (euros)			0.28				0.18				56.9

Note: The concept “Free Cash Flow” reflects the amount of cash flow available to remunerate Telefónica S.A. Shareholders, to protect solvency levels (financial debt and commitments), and to accomodate strategic flexibility.

The differences with the caption “Net Free Cash Flow after CapEx” included in the table presented above, are related to “Free Cash Flow” being calculated before payments related to commitments (workforce reductions and guarantees) and after operations with minority shareholders, due to cash recirculation within the Group.

January — March 2009 Results Telefónica 13

TELEFÓNICA GROUP

Financial Data

NET FINANCIAL DEBT AND COMMITMENTS
Unaudited figures (Euros in millions)

						March 2009
				Long-term debt (1)			46,401
				Short term debt including current maturities			8,190
				Cash and cash equivalents			(6,280	)
				Short and Long-term financial investments (2)			(6,055	)
	A			Net Financial Debt			42,256
				Guarantees to IPSE 2000			149
	B			Commitments related to guarantees			149
				Gross commitments related to workforce reduction (3)			4,684
				Value of associated Long-term assets (4)			(718	)
				Taxes receivable (5)			(1,333	)
	C			Net commitments related to workforce reduction			2,633
	A + B + C			Total Debt + Commitments			45,038
				Net Financial Debt / OIBDA (6)			1.9	x
				Total Debt + Commitments/ OIBDA (6)			2.1	x

DEBT STRUCTURE BY CURRENCY
Unaudited figures

		March 2009
		EUR				LATAM				GBP				CZK				USD
Currency mix			65	%			13	%			9	%			7	%			6	%

CREDIT RATINGS

		Long-Term		Short-Term		Perspective		Last review
Moody’s		Baa1		P-2		Positive		17-Feb-09
JCR		A		—		Stable		17-Dec-08
S&P		A-		A-2		Stable		2-Dec-08
Fitch/IBCA		A-		F-2		Stable		25-Nov-08

January — March 2009 Results Telefónica 14

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP
EXCHANGES RATES APPLIED

		P&L and CapEx (1)								Balance Sheet (2)
		Jan — Mar 2009				Jan — Mar 2008				March 2009				December 2008
USA (US Dollar/Euro)			1.303				1.498				1.331				1.392
United Kingdom (Sterling/Euro)			0.909				0.757				0.931				0.952
Argentina (Argentinean Peso/Euro)			4.618				4.722				4.951				4.806
Brazil (Brazilian Real/Euro)			3.016				2.603				3.081				3.252
Czech Republic (Czech Crown/Euro)			27.588				25.578				27.380				26.930
Chile (Chilean Peso/Euro)			789.889				693.963				776.398				885.740
Colombia (Colombian Peso/Euro)			3,134.796				2,865.330				3,389.831				3,125.000
El Salvador (Colon/Euro)			11.404				13.103				11.645				12.177
Guatemala (Quetzal/Euro)			10.366				11.515				10.798				10.830
Mexico (Mexican Peso/Euro)			18.705				16.195				19.073				18.841
Nicaragua (Cordoba/Euro)			26.026				28.477				26.734				27.623
Peru (Peruvian Nuevo Sol/Euro)			4.153				4.329				4.204				4.371
Uruguay (Uruguayan Peso/Euro)			30.676				31.351				32.006				33.888
Venezuela (Bolivar/Euro)			2.802				3.220				2.861				2.992

January — March 2009 Results Telefónica 15

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

In the current macroeconomic climate, in the first quarter of 2009 the Company’s strategy focused on maximising cash flow generation and safeguarding its highest value customers.

Thus, Telefónica España delivered a sound operating cash-flow (OIBDA-CapEx), reaching 2,068 million euros in the first quarter of 2009 and posting a slight increase in comparable¹ terms (+0.2% vs. first quarter 2008; -3.1% in reported terms). This positive performance highlights the Company’s ability to manage OpEx and CapEx within a pressuring topline environment, driving operative expenses plus capital expenses down 6.8% in total vs. first quarter 2008.

By the end of March, Telefónica España managed a total of 47.2 million accesses, with highlights being the greater number of retail broadband Internet accesses, which grew by 9.4% to 5.3 million, and growth in the wireless customer base to 23.6 million (+2.6% year-on-year), pushed up by the greater adoption of mobile data flat rates (2x vs. March 2008).

A total of 75.3 million euros of revenue were booked in the first quarter associated with the recognition of the Universal Service Obligation at Telefónica España Wireline Business for the 2006 fiscal year. This had a positive impact of 21.7 million euros on OIBDA.

Revenues amounted to 4,913 million euros in the quarter, a year-on-year fall of 4.2%, mainly reflecting the slowdown in the market as a whole, the stiff competition and lower consumption of voice services from customers. However, it is noteworthy the increased revenues from IT services and Data services in the wireline business (+24.5% and 3.6% year-on-year respectively), and there was also a significant rise in wireless data connectivity revenues (+50.4% compared to 2008). Excluding revenues associated with the recognition of the Universal Service Obligation, revenues would decline by 5.7%.

In comparable terms¹, operating income before depreciation and amortisation (OIBDA) fell by 5.0% year-on-year in the first quarter of 2009, with the OIBDA margin improving by 0.4 percentage points in comparable terms² up to 49.2% on cost control initiatives implemented by the Company, and improving in the wireless business by 1.2 percentage points up to 44.6% in comparable terms³.

Reported OIBDA reached 2,402 million euros (-7.5% year-on-year) with the margin staying at 48.9%.

CapEx amounted to 334 million euros in the first quarter of 2009, falling 28.0% year-on-year. This decline shows the Company’s management abilities to adapt to demand fluctuations while prioritizing investments in strongly growing business areas such as mobile broadband.

WIRELINE BUSINESS

The performance of the wireline telephony access market in Spain in the first three months of the year reflects the impact of the current economic situation with an estimated year-on-year decline of 0.3%.

January — March 2009 Results Telefónica 16

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

Within a backdrop of loops being further unbundled and market size shrinking, the Company’s wireline telephony accesses posted a net loss of 321,341 accesses in the first quarter of 2009, to a level above 15.0 million at the end of March 2009 (-5.3% year-on-year). Estimated wireline telephony access market share stood at around 76%. As regards telephony access decline, two items are to be highlighted: i) 53% of the accesses loss is related to different wholesale accesses available upon Regulation, and as wholesale accesses they generate revenues for the Company; ii) ARPU of accesses lost is significantly lower than the average ARPU of the remaining Company’s accesses.

The number of pre-selected lines continued to decline, dropping 79,885 in the first quarter of 2009 to fewer than 1.4 million lines at the end of March.

The wireline broadband Internet access market continued to slow, partly affected by the strong growth recorded by mobile broadband, with a total of 9.4 million wireline broadband accesses, 10.0% higher than in March 2008. Telefónica maintained its leadership position with an estimated market share over 56% following a net gain of 45,363 accesses in the quarter to close to 5.3 million in total (+9.4% vs. March 2008).

Wholesale broadband accesses (wholesale ADSL and unbundled loops) posted a net gain of 119,326 accesses in January-March 2009, boosted by 137,290 net loops unbundled in the quarter, to surpass 1.8 millions and 19% share of the Spanish broadband market. ULL net adds came from both, market growth and migrations from wholesale ADSL accesses, with wholesale ADSL accesses declining by 17,964 in the quarter to 405,800 (-15.5% from March 2008). Almost 32% of the unbundled loops are shared access loops, with the remaining 68% fully unbundled loops (including over 303,000 naked shared access loops). There was an increase of 154,786 fully unbundled loops in the quarter, of which 28% were naked shared access loops, whilst shared access loops declined by 17,496 in the quarter.

Telefónica’s share of the pay TV market remained steady at an estimated 14% at the end of March 2009, posting a better relative performance than the market as the number of Pay TV customers declined by 7,675 to a total of 604,819 (+9.2% year-on-year).

The total number of Duo and Trio bundles stood at 4.6 million units. This means that more than 86% of the Company’s retail broadband accesses form part of a double or triple offer bundle.

Revenues in the quarter ending March 2009 were practically flat versus the same period last year at 3,062 million euros (-0.5%). In the quarter, 75.3 million euros were recorded in recognition of the Universal Service Obligation for year 2006 under Traditional access revenues. By items:

•

Traditional access revenues grew by 5.4% year-on-year in the quarter, positively affected by the recognition of the Universal Service Obligation.

•

Voice service revenues fell by 8.4% in the quarter as a result of lower fixed-to-mobile and international traffic consumption and the growing contribution from traffic under flat-rate plans.

•

Internet and broadband revenues fell by 0.4% in the quarter.

•

Retail broadband service revenues grew by 1.3% in the quarter as a result of slower growth in the total number of accesses.

•

The performance of wholesale broadband revenues (-2.2% in the quarter) reflects the impact of the 20% reduction in monthly fee for fully unbundled loops since December 2008, which has not been offset by growth in the number of unbundled loops.

•

Data service revenues rose 3.6% year-on-year to 300 million euros.

•

IT service revenues totalled 114 million euros in the quarter, up 24.5% year-on-year.

Operating expenses totalled 1,641 million euros in the quarter after declining by 1.3% year-on-year in comparable terms⁴ (+1.6% growth in reported terms). Other key points include: i) external service expenses increased by 0.8% to 322 million euros; ii) personnel expenses rose 1.9% to 529 million euros; iii) these effects were amply offset by the 5.3% reduction in supply costs to 684 million euros, resulting from lower interconnection costs associated with lower fixed-to-mobile traffic and the reduction in mobile termination rates.

January — March 2009 Results Telefónica 17

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

Operating income before depreciation and amortisation (OIBDA) in the first quarter of 2009 stood at 1,463 million euros, down 3.8% year-on-year in comparable terms⁵ while OIBDA margin remained almost unchanged in comparable terms⁵ at 47.4% (47.9% in the first quarter of 2008).

Reported OIBDA was down 6.1% year-on-year in the first quarter of 2009, while margin stood at 47.8%. This performance reflects the changes in revenues and expenses mentioned above, lower real estate capital gains (0.4 million euros in January-March 2009 compared to 67 million euros in the same period in 2008), the positive impact of the bad debt recovery amounting to 17 million euros in the first quarter of 2008, and the recognition of the Universal Service Obligation to the amount of 45.6 million euros in the first quarter of 2009.

WIRELESS BUSINESS

The Spanish wireless market totalled 53.9 million lines at the end of March 2009, a 5.1% y-o-y growth and with an estimated penetration rate of 118%, an increase of almost 6 percentage points compared to March 2008.

In the current economic climate and given the characteristics of the Spanish market (highly mature with maintenance in competitive pressure), the Company is focussing its commercial activity on maintaining its market leadership in revenue terms (with a positive differential between its share of revenue and its share of customers estimated between 4 and 5 percentage points, an improvement on the first quarter of 2008).

At the end of March 2009, Telefónica España’s wireless business handled over 23.6 million wireless lines, up 2.6% year-on-year, driven mainly by growth in the number of contract customers (+4.3% compared to March 2008), which represents 61.6% of the total (1.0 percentage points higher than at the end of March last year). Net adds in the year’s first quarter totalled 9,836 lines.

Blended churn was 1.9% in the quarter almost flat compared to the first quarter of 2008 (+0.04 percentage points). The contract segment posted a lower level (1.4% in the first quarter of 2009), an increase on the first quarter of 2008, mainly due to the rise in disconnections among SMEs and businesses. On the other hand, prepay churn registered a better evolution on a yearly basis.

In terms of usage, traffic carried in the first three months of the year was 10,038 million minutes, 3.6% lower year-on-year, reflecting customers’ growing control of their expenses, especially for voice services, in the current climate.

Voice ARPU was 22.3 euros in the first quarter of 2009, 12.3% lower than in the same quarter of 2008, affected by the lower usage rate and the drop in interconnection tariffs implemented in April and October 2008 (-17.4%).

Data ARPU grew by 4.0% compared to the same period in 2008 to 5.3 euros, representing 19.2% of total ARPU (+2.5 percentage points year-on-year). The positive performance of wireless data revenues (+7.0% compared to the first quarter of 2008) was mainly driven by growth in connectivity revenues (+50.4% year-on-year) supported by strong growth in flat-rate data plans (over one million flat-rate plans at the end of March 2009) and higher content revenues (+3.9% compared to the first quarter of 2008). The number of 3G handsets held by customers totalled 6.9 million at the end of March 2009, 1.6 times those of March 2008.

Outgoing ARPU was 23.7 euros, 8.0% lower than in the first quarter of 2008, with total ARPU of 27.6 euros (-9.5% year-on-year).

January — March 2009 Results Telefónica 18

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

Revenues in the first quarter of the year totalled 2,172 million euros, 9.4% down on the same period in 2008, mainly as a result of lower handset, interconnection and customer revenues. By item:

•

Service revenues fell by 7.3%:

•

Customer revenues fell 4.9% in year-on-year terms to 1,608 million euros, as a result of the change in customer usage patterns compared to the first quarter of the previous year, and lower roaming out revenues.

	•		Interconnection revenues fell 17.4% year-on-year in the first quarter as a result of lower interconnection prices (-17.4% in April and October 2008), which were not offset by increases in traffic.
	•		Roaming in revenues fell by 32.3% in the first three months of the year as a result of the ongoing decline in wholesale roaming prices and lower traffic from visiting users on our network.

•

Revenues from handset sales were 251 million euros, with a year-on-year decrease of 22.8%, as a result of lower commercial activity and different phasing of handset shipments to the channel.

Operating expenses saw a year-on-year decline of 9.4% to 1,241 million euros in the first quarter of 2009, despite the recognition of 23.9 million euros in relation to the Universal Service Obligation for the 2006 fiscal year. This was due to lower handset sales, the drop in commercial costs given the lower levels of activity and the various cost reduction measures taken to adapt to the current economic situation. The ratio of commercial efforts to service revenues fell by approximately 1 percentage point year-on-year.

In the first quarter of 2009, operating income before depreciation and amortisation (OIBDA) fell by 6.9% on comparable terms⁶ year-on-year to 945 million euros, being noteworthy the positive evolution of the comparable⁶ OIBDA margin, which expanded by 1.2 percentage points to 44.6%. Reported OIBDA declined by 9.9% year-on-year, with an OIBDA margin of 43.5%, virtually in line with the first quarter of 2008.

January — March 2009 Results Telefónica 19

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

TELEFÓNICA ESPAÑA
ACCESSES
Unaudited figures (thousands)

		2008																2009
		March				June				September				December				March				% Chg y-o-y
Final Clients Accesses			44,872.9				45,019.7				45,160.7				45,213.6				44,885.7				0.0
Fixed telephony accesses (1)			15,842.1				15,670.0				15,526.9				15,326.3				15,004.9				(5.3	)
Internet and data accesses			5,468.4				5,547.6				5,608.3				5,670.0				5,661.3				3.5
Narrowband			589.5				502.3				453.9				388.0				336.4				(42.9	)
Broadband (2)			4,835.9				5,005.0				5,117.0				5,246.4				5,291.8				9.4
Other (3)			43.1				40.4				37.4				35.6				33.1				(23.2	)
Mobile accesses			23,008.4				23,225.4				23,436.0				23,604.8				23,614.7				2.6
Pre-Pay			9,058.4				8,964.6				8,978.5				9,037.0				9,061.8				0.0
Contract			13,950.0				14,260.8				14,457.5				14,567.8				14,552.9				4.3
Pay TV			554.0				576.6				589.6				612.5				604.8				9.2
Wholesale Accesses			1,953.3				2,001.3				2,035.0				2,136.1				2,271.5				16.3
WLR (4)			0.0				0.0				0.0				9.5				25.9				N.M.
Unbundled loops			1,467.4				1,532.6				1,585.2				1,698.0				1,835.3				25.1
Shared ULL			755.0				683.6				640.2				602.3				584.8				(22.5	)
Full ULL (5)			712.5				849.1				945.0				1,095.7				1,250.5				75.5
Wholesale ADSL			480.3				463.3				444.8				423.8				405.8				(15.5	)
Other (6)			5.7				5.3				5.0				4.7				4.4				(22.4	)
Total Accesses			46,826.3				47,020.9				47,195.7				47,349.7				47,157.2				0.7

TELEFÓNICA ESPAÑA
CONSOLIDATED INCOME STATEMENT
Unaudited figures (Euros in millions)

		January — March
		2009				2008				% Chg
Revenues			4,913				5,131				(4.2	)
Internal exp capitalized in fixed assets			45				51				(12.2	)
Operating expenses			(2,566	)			(2,646	)			(3.1	)
Other net operating income (expense)			15				6				155.3
Gain (loss) on sale of fixed assets			(3	)			57				C.S.
Impairment of goodwill and other assets			(2	)			(1	)			39.4
Operating income before D&A (OIBDA)			2,402				2,597				(7.5	)
OIBDA margin			48.9	%			50.6	%			(1.7	P.P.)
Depreciation and amortization			(531	)			(577	)			(8.0	)
Operating income (OI)			1,871				2,019				(7.4	)

Notes:

January — March 2009 Results Telefónica 20

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

TELEFÓNICA ESPAÑA: WIRELINE BUSINESS
SELECTED FINANCIAL DATA
Unaudited figures (Euros in millions)

		January — March
		2009				2008				% Chg
Revenues			3,062				3,079				(0.5	)
OIBDA			1,463				1,557				(6.1	)
OIBDA margin			47.8	%			50.6	%			(2.8	P.P.)
CapEx			239				299				(19.9	)
OpCF (OIBDA-CapEx)			1,224				1,259				(2.8	)

Notes:

TELEFÓNICA ESPAÑA: WIRELINE BUSINESS
SELECTED REVENUES DATA
Unaudited figures (Euros in millions)

		January — March
		2009				2008				% Chg
Traditional Access (1)			741				703				5.4
Traditional Voice Services			1,032				1,126				(8.4	)
Domestic Traffic (2)			588				672				(12.4	)
Interconnection (3)			229				234				(2.2	)
Handsets sales and others (4)			214				220				(2.7	)
Internet Broadband Services			738				741				(0.4	)
Narrowband			10				19				(48.6	)
Broadband			728				722				0.9
Retail (5)			649				641				1.3
Wholesale (6)			79				81				(2.2	)
Data Services			300				289				3.6
IT Services			114				91				24.5

January — March 2009 Results Telefónica 21

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

TELEFÓNICA ESPAÑA: WIRELESS BUSINESS
SELECTED FINANCIAL DATA
Unaudited figures (Euros in millions)

		January — March
		2009				2008				% Chg
Revenues			2,172				2,398				(9.4	)
OIBDA			945				1,048				(9.9	)
OIBDA margin			43.5	%			43.7	%			(0.2	P.P.)
CapEx			94				165				(42.6	)
OpCF (OIBDA-CapEx)			850				883				(3.8	)

Notes:

TELEFÓNICA ESPAÑA: WIRELESS BUSINESS
SELECTED REVENUES DATA
Unaudited figures (Euros in millions)

		January — March
		2009				2008				% Chg
Service Revenues			1,921				2,072				(7.3	)
Customer Revenues			1,608				1,692				(4.9	)
Interconnection			267				324				(17.4	)
Roaming — In			29				43				(32.3	)
Other			16				14				14.2
Handset revenues			251				326				(22.8	)

TELEFÓNICA ESPAÑA: WIRELESS BUSINESS
SELECTED OPERATING DATA

		2008																2009
		Q1				Q2				Q3				Q4				Q1				% Chg y-o-y
Traffic (Million minutes)			10,408				10,991				11,441				10,727				10,038				(3.6	)
ARPU (EUR)			30.5				30.8				30.9				29.5				27.6				(9.5	)
Pre-pay			14.6				14.5				15.4				13.8				12.5				(14.2	)
Contract			41.0				41.1				40.6				39.3				36.9				(10.0	)
Data ARPU			5.1				5.0				5.3				5.5				5.3				4.0
%non-P2PSMS over data revenues			52.7	%			53.6	%			54.8	%			55.5	%			59.4	%			6.8	P.P.

Notes:

January — March 2009 Results Telefónica 22

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica Latinoamérica

Once again Telefónica Latinoamérica ended the quarter with a solid set of commercial and financial results amid a slight slowdown in the commercial activity in the region’s telecommunications market. This was mainly due to seasonality effects after the Christmas campaign and, to a lesser extent, the economic downturn in Mexico and Central America. Overall, however, the region remains buoyant compared with other geographical areas.

Against this backdrop, Telefónica Latinoamérica continued to develop its strategy based on capturing the growth of the wireless market and managing the transformation of its wireline telephony businesses, increasing the weighting of Internet, Broadband and pay TV services while enhancing operating efficiency to maximise profitability.

In this regard, the positive evolution of revenues in the quarter, that reached 5,403 million euros (+8.7% in organic terms¹), and cost control measures resulted in operating income before depreciation and amortisation (OIBDA) of 2,081 million euros, up 13.9% in organic¹ terms. Consequently, the OIBDA margin showed a significant advance of 1.7 percentage points in organic terms¹ from the first quarter of 2008.

Also noteworthy was the 14.3% organic¹ growth in operating cash flow (OIBDA-CapEx) to 1,606 million euros despite higher CapEx (+12.6% year-on-year in organic terms¹) in the wireless business, primarily in Brazil, Mexico and Venezuela.

From an operating standpoint, Telefónica Latinoamérica managed 159.5 million accesses at the end of March 2009, up 15.8% year-on-year and primarily underpinned by the wireless business and growth in broadband and pay TV accesses.

In wireless telephony, estimated penetration in the region stood at 83%, 12 percentage points higher than in March 2008. Telefónica Latinoamérica had a total of 124.7 million mobile accesses, a strong year-on-year increase of 20.2% (+15.8% in organic terms²), with solid growth in its wireless operations in Brazil, Mexico, Peru, Argentina, Chile and Venezuela. Net adds during the quarter stood at 1.3 million, underpinned by the strong performance of churn, which stood at 2.6% in the quarter (-0.2 percentage points year-on-year) against a backdrop of lower gross adds (-6.2% year-on-year; -10.1% in organic terms¹).

In addition to the significant increase in wireless accesses, the strategy to encourage customer usage was reflected in the 17.7% year-on-year rise in outgoing traffic, leading to 16.6% year-on-year growth in traffic in the first quarter. ARPU fell 4.3% in the quarter in organic terms¹, impacted by lower mobile termination rates, while outgoing ARPU performed better (-1.0% year-on-year in organic terms¹). The contribution of data services is also increasing, representing 17.2% of the Company’s mobile service revenues (+3.0 percentage points over the same period of 2008 in organic terms¹), after having recorded a year-on-year increase of 38.7% in organic terms¹.

 

January — March 2009 Results Telefónica 23

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Telefónica Latinoamérica

In the wireline business, as a result of the transformation process of the operations, the contribution of growth businesses (broadband, pay TV and data) rose, boosted by the increase in bundled products and an improved portfolio of services, putting the customer base at 34.8 million accesses, up 2.4% year-on-year. A total of 51% of broadband accesses have bundled packages (2P/3P), up 14 percentage points vs. March 2008. Moreover including local packages and control usage bundles, over 60% of wireline accesses are part of a bundle (up 5 percentage points from March 2008). By service:

•

In Broadband the Company continued to achieve significant growth in its customer base (+18.6% year-on-year to 6.2 million accesses) after reporting net adds of 142,000 accesses in the quarter. This increase was achieved thanks to sustained growth in Brazil (+22.7% year-on-year) and in Argentina (+24.9% year-on-year) and the ongoing expansion of the service in Colombia, where the customer base increased by 74.6% year-on-year to 416,000 accesses.

•

In the pay TV business, Telefónica Latinoamérica now has over 1.6 million customers (+30.2% year-on-year) after capturing 74,500 accesses in the first quarter of 2009.

•

Wireline accesses remained virtually unchanged vs. March 2008 at 25.5 million (-0.3% year-on-year) as a result of the increase in fixed wireless accesses in Venezuela and Peru.

The Company’s sound commercial and operating performance in the quarter was reflected in a solid set of financial results in organic terms³. Reported figures, which were negatively impacted by year-on-year exchange rate fluctuations (mainly the depreciation of the Brazilian real, Chilean peso and Mexican peso vs. the euro, partially offset by the appreciation of the cross exchange rate of the Venezuelan bolivar vs. the euro).

Revenues increased 4.8% vs. the first quarter of 2008 in current euros (exchange rate fluctuations detracted 5.3 percentage points from revenue growth). By country, Brazil remained the main growth driver, accounting for 35.1% of Telefónica Latinoamérica’s first quarter revenues in current euros, followed by Venezuela (16.3%) and Argentina (12.8%).

In organic terms³ the biggest contributors to revenue growth (+8.7% year-on-year) were Venezuela (+3.8 percentage points), Argentina (+2.2 percentage points) and Brazil (+1.8 percentage points).

The increased scale of the business and implementation of a range of cost reduction programmes were reflected in operating expenses, which rose 2.3% in current euros (+8.4% in constant euros). Operating income before depreciation and amortisation (OIBDA) increased by 10.9% in current euros, outpacing revenue growth (exchange rates detracted 4.2 percentage points from OIBDA growth), leading to a 2.1 percentage points increase in the OIBDA margin to 38.5%.

Brazil was the largest contributor, accounting for 33.7% of OIBDA at Telefónica Latinoamérica. The performance of Venezuela and Argentina was also noteworthy. The contribution of these markets increased to 22.2% and 12.1% of the OIBDA in the region respectively. In organic terms³, OIBDA advanced 13.9% year-on-year, driven by Venezuela (+6.8 percentage points), Argentina (+3.0 percentage points) and Mexico (+2.4 percentage points).

CapEx to March 2009 amounted to 475 million euros, up 3.6% vs. the first quarter of 2008 in current euros (+12.6% in organic terms³).

BRAZIL

The Brazilian telecommunications sector remained buoyant in the first quarter of 2009, with significant growth in both broadband and wireless telephony, and leaving scope for increased penetration.

Telefónica managed 61.4 million accesses in Brazil at the end of March, year-on-year growth of 22.9%. The significant growth in the wireless, broadband and pay TV segments underpinned this strong performance. Vivo continued to lead the market with high growth in its customer base, which now exceeds 45.6 million accesses (+33.0% year-on-year), while Telesp has 2.7 million broadband customers and over half a million pay TV accesses.

Telefónica once again reported robust financial results in Brazil. First quarter revenues stood at 1,898 million euros, up 7.8% in local currency, underpinned by sustained revenue growth at Vivo, while the wireline business also recorded positive growth rates.

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Telefónica Latinoamérica

Operating income before depreciation and amortisation (OIBDA) advanced 4.4% in local currency to 700 million euros, putting the OIBDA margin at 36.9% (38.1% in the first quarter of 2008). It is noteworthy that Vivo maintained its margin in a highly competitive environment, though this performance could not offset the growth of lower margin businesses at Telesp associated with new services and mobile originated traffic revenues.

CapEx grew 30.8% year-on-year in local currency to 221 million euros, mainly due to increased investment by Vivo, which completed several network projects started at the end of 2008 (mainly the start-up of operations in the Northeast of Brazil and the expansion of wireless broadband capacity), and investments to meet quality targets imposed by the telecom regulator Anatel.

As a result, operating cash flow (OIBDA-CapEx) amounted to 479 million euros, down 4.4% in local currency vs. the first quarter of 2008.

VIVO

Wireless accesses in the Brazilian market topped 153 million at the end of March, an increase of over 3 million in the first quarter. The market continues to achieve significant growth rates, with a penetration rate of 80.5% (up almost 15 percentage points vs. March 2008).

Competition remained stiff in the quarter as the commercial approach for the Christmas season was maintained, with aggressive offers from all operators. Against this backdrop, Vivo sustained its commercial drive, with gross adds virtually in line with the first quarter of 2008 in organic terms⁴ (-1.9% year-on-year), with a particular focus on the wireless broadband business. As a result Vivo’s market share held at around 30%.

Vivo continues to push customer loyalty and retention programmes. This was reflected in a 0.3 percentage points year-on-year fall in churn in organic terms⁴, which stood at 2.4% for the quarter.

As a result, Vivo now has 45.6 million accesses (up 19.1% year-on-year in organic terms⁵), after reporting 696,420 net adds in the quarter. Particularly noteworthy is the Company’s focus on new technologies. As a result, GSM+3G customers now represent 73% of Vivo’s total customer base. With regard to customer mix, the contract segment accounts for 19.3% of total accesses thanks to the Company’s policy of actively unlocking value in the customer base.

With regard to traffic, Vivo’s networks managed 10,344 million minutes in the first quarter, an 18.6% year-on year increase in organic terms⁴. This sharp growth is largely due to the performance of on-net traffic, which increased by over 46% from January-March 2008.

ARPU fell 9.4% in organic terms⁴ in local currency in the first quarter, mainly due to the decline in incoming ARPU. This was affected by wireless operators’ promotion of on-net traffic. As a result, outgoing ARPU fell by a smaller 6.2% in organic terms⁴ in local currency.

Year-on-year growth rates remained high at the wireless data business (over 30% in organic terms⁴),underpinned by the increase in SMS, largely due to the spread of GSM technology, as well as in connectivity and content revenues. Data revenues now account for 11.0% of Vivo’s service revenues. Vivo enjoyed significant success in increasing wireless broadband uptake through enhanced commercial offerings.

As a result of its strong operating performance, Vivo reported first quarter revenues of 676 million euros, an increase of 21.6% in local currency (+10.2% in organic terms⁴). This was based on sustained service revenue growth (+10% in organic terms⁴), underpinned by the strength of outgoing voice and data revenues (+12.5% in organic terms⁴), which largely offset the modest increase in incoming revenues.

Despite the fierce competition, which led the Company to maintain its commercial drive, operating income before depreciation and amortisation (OIBDA) totalled 203 million euros, 23.6% higher year-on-year in local currency vs. the first quarter of 2008 (+11.7% in organic terms⁴), a growth in line with the increase in revenues, that allowed the Company to keep the OIBDA margin at 30.0%.

First quarter CapEx stood at 87 million euros, double the figure in the same period a year earlier in organic terms⁴, and included this time the completion of network projects started at the end of 2008, along with investments to meet quality targets set by the regulator Anatel. As a result, operating cash flow (OIBDA-CapEx) was 116 million euros.

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Telefónica Latinoamérica

TELESP

Telesp continued to focus on its bundling and segmentation strategy in the first quarter, fostering in the first months of 2009 flat local rates and Duo and Trio bundles with high-speed broadband connections. At the end of the quarter over 57% of Telesp’s wireline and 29% of broadband accesses had bundled offers.

Thanks to this strategy, the Company is succeeding in capturing the growth of the broadband and pay TV markets, offsetting the fall in traditional accesses (-3.0%), which have been affected by the enactment of the new call centre law since the end of 2008. As a result, Telesp ended the first quarter with 15.7 million accesses (+0.7% year-on-year). Broadband accesses grew 22.7% year-on-year, virtually in line with the increase recorded in 2008, to 2.7 million at the end of March, with net adds of 101,500 customers in the quarter (+3.5% year-on-year). Pay TV accesses grew 77.9% year-on-year to over half a million customers.

First quarter revenues totalled 1,323 million euros, a year-on-year increase of 2.2% in local currency. The slowdown in growth vs. 2008 was largely due to lower wireline telephony revenues (-3.3% in local currency), which were affected by the reduction in fixed telephony accesses (-2.9% in average), lower traffic, largely impacted by the fixed to mobile substitution effect and the slowdown affecting the wireless traffic business (SMP), which, nevertheless, grew in line with the mobile market. However, this was amply offset by the growth in revenues from new businesses. Internet, pay TV and content revenues now account for 14.5% of revenues (+2.7 percentage points year-on-year), having increased 26.0% year-on-year in local currency thanks to growth in broadband (+20.7% year-on-year in local currency) and pay TV revenues (which doubled compared with the first quarter of 2008). Also noteworthy was the positive performance of data, IT and capacity rental revenues, which advanced 24.9% year-on-year in local currency, virtually in line with the increase reported in 2008.

First quarter operating expenses advanced 6.1% year-on-year in local currency, largely due to costs associated with new businesses and interconnection costs, given the increase in wireless traffic (SMP). Telesp also recorded higher commercial costs, related with customer service (impacted by the new call centre law) and equipment maintenance costs, reflecting the growth in broadband and pay TV accesses, and the operator’s efforts to improve the quality of customer care. Nonetheless, Telesp is still striving to improve efficiency and has implemented a number of plans to optimise resources and improve processes. Also, and thanks to progress made in improving credit scoring and the collection process, its bad debt provision remains in the levels of 2008 (3.3% of revenues).

Operating income before depreciation and amortisation (OIBDA) decreased 1.8% year-on-year in local currency to 498 million euros, leaving the OIBDA margin at 37.6%, 1.5 percentage points lower than in the same period of 2008, affected by the larger weighting of new businesses, with lower margin.

CapEx in the first quarter totalled 134 million euros (up 5.1% year-on-year in local currency), mainly driven by broadband and TV, while operating cash flow (OIBDA-CapEx) amounted to 363 million euros (down 4.1% year-on-year in local currency).

ARGENTINA

Argentina’s telecoms market showed a high dynamism in the first quarter of 2009, posting significant revenue growth, underpinned by improved usage ratios and higher customer numbers.

In this context, Telefónica’s customer base increased 6.5% year-on-year to 20.9 million, with significant year-on-year growth in wireless accesses (+9.1% to 15.0 million) and broadband (+24.9% to over 1.1 million).

The Company is achieving solid results with its drive to unlock value in the customer base. This led to significant growth at the wireless business, where the community effect is being leveraged to promote on-net traffic. At the wireline business the Company is fostering bundles penetration, with 49% of customers now having bundled services and 63% of broadband accesses having a Duo offering.

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Telefónica Latinoamérica

The robust operating momentum generated a solid set of financial results. Revenues advanced 20.6% year-on-year in local currency to 690 million euros in the first quarter of 2009, in line with the trend seen in the last quarter of 2008.

At the same time the Company is successfully managing operating costs, with revenue growth feeding into OIBDA. As a result, OIBDA stood at 251 million euros in the first quarter, up 30.8% year-on-year in local currency and outstripping revenue growth by 10.1 percentage points. The OIBDA margin stood at 35.4% (+3.0 percentage points vs. the same period in 2008).

Operating cash flow (OIBDA-CapEx) advanced 47.9% year-on-year in local currency to 205 million euros thanks to the increase in OIBDA and fall in CapEx (-14.2% year-on-year in local currency to 46 million euros).

T. MÓVILES ARGENTINA

The estimated penetration rate of the Argentine wireless business stood at 112% at the end of March 2009, 12 percentage points higher than a year earlier. Sector revenues grew sharply overall, also underpinned by higher usage ratios.

Telefónica managed a total of 15.0 million wireless accesses at the end of March, up 9.1% year-on-year. Net adds totalled 172,794 in the first quarter of 2009, 38.1% more than a year earlier, on a sharp improvement in churn (-0.9 percentage points vs. the first quarter of 2008) to 1.9%.

Traffic in the first quarter stood at 3,485 million minutes (+29.8% vs. the first quarter of 2008) thanks to healthy growth in outgoing minutes (+36.9% year-on-year), boosted by on-net traffic, which advanced 68.4%.

ARPU increased 14.7% in the first quarter in local currency leveraging the strong growth in usage and wireless data business, in line with rates seen in the last quarters of 2008.

First quarter data revenues accounted for 27.7% of service revenues, up 36.1% year-on-year in local currency, with the connectivity and non-SMS data businesses performing especially well. In the first quarter the Company began to market its wireless broadband services more actively.

Revenues totalled 432 million euros, a year-on-year increase of 21.4% in local currency, driven by outgoing revenues (+29.6% vs. the first quarter of 2008). This positive performance and improved efficiency ratios underpinned a 45.7% year-on-year rise in operating income before depreciation and amortisation (OIBDA) to 145 million euros. The OIBDA margin stood at 33.4%, showing a significant advance of 5.6 percentage points vs. the first quarter of 2008.

Operating cash flow (OIBDA-CapEx) amounted to 130 million euros in the quarter, up 48.8% year-on-year in local currency despite increased investment in the period (15 million euros; +23.2% year-on-year in local currency).

TELEFÓNICA DE ARGENTINA

Telefónica de Argentina ended March 2009 with 5.9 million accesses, up 0.4% year-on-year. This rise was driven by the broadband business, where accesses grew by 24.9% year-on-year to over 1.1 million. Net broadband adds totalled 24,038 in the period thanks to improved churn and the ongoing commercial drive. Wireline accesses fell 1.5% year-on-year, affected by the loss of fixed wireless lines.

The commercial performance of the broadband service was underpinned by the bundling strategy and improved service quality. 74% of gross adds in the quarter include a Duo package, with 63% of broadband accesses bundled as part of such a package. Also, the higher speeds made available at the end of 2008 are increasing customer loyalty as the Company now provides a differentiated offering in the market.

Revenues totalled 281 million euros, up 17.4% year-on-year in local currency. The bundling strategy is the cornerstone of revenue growth, leading to an increase in the unit value of the customer base Growth rates picked up compared to 2008, with Internet, TV and content revenue advancing an impressive 50.4% year-on-year in local currency in the first quarter. These now account for 19.8% of total revenues. Solid growth was also posted in traditional wireline revenues, which advanced 8.2% year-on-year in local currency.

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Telefónica Latinoamérica

The overall increase in prices had virtually the same impact on all operating expense items, which rose 19.3% in local currency in the first quarter. Bad debt provisions totalled 1.7% of revenues, 0.2 percentage points higher than in the first quarter of 2008.

As a result, Telefónica de Argentina’s operating income before depreciation and amortisation (OIBDA) increased 14.3% year-on-year in local currency to 106 million euros, leaving a margin of 33.6%.

First quarter CapEx fell 25.0% in local currency to 31 million euros, permitting a sharp 45.3% increase in operating cash flow (OIBDA-CapEx) in local currency to 76 million euros.

CHILE

Chile has one of the highest penetration rates for telecommunications services in Latin America. Against this backdrop, the Company is focused on increasing unit customer value and optimising efficiency.

At the end of March 2009 Telefónica managed 10.1 million accesses in Chile, up 6.3% year-on-year, thanks to sustained growth in the wireless customer base and a slight increase in wireline accesses, which were affected by the seasonality inherent to the summer period. The Company has 2.1 million wireline telephony accesses, 713,000 broadband accesses and 7.0 million wireless accesses.

Revenues advanced 1.9% in local currency to 452 million euros, impacted by the slowdown of the market and the application of the Tariff Decree from 23 January, which entails a 44.6% reduction in mobile termination rates.

Growth in operating income before depreciation and amortisation (OIBDA) outpaced revenue growth in the first quarter, climbing 4.1% in local currency to 174 million euros. The OIBDA margin grew 0.8 percentage points year-on-year to 38.4% thanks to the increase in the wireless business.

CapEx in the first quarter totalled 65 million euros, 11.8% down in local currency vs. the same period in 2008, thanks to investment carried out in previous years, which allowed reduced investment in 2009 while service quality standards remain high. This underlines the Company’s commitment to cash generation, with operating cash flow (OIBDA-CapEx) in the first quarter rising 16.7% year-on-year in local currency to 109 million euros.

T. MÓVILES CHILE

At the end of March 2009 the estimated penetration rate of the Chilean wireless market exceeded 98%, 6 percentage points higher than in March 2008.

Movistar Chile has cemented its leadership position in terms both of revenues and customer base. Accesses increased by 8.6% year-on-year to 7.0 million at the end of March, of which 98% use GSM technology.

The Company reported net adds of 111,000 accesses in the first quarter, reflecting the slowdown in the market due mainly to lower gross adds (-13.5% year-on-year). Churn performance remained positive and stood at 1.7% in the first quarter of the year, 0.3 percentage points lower than in the same period of 2008, despite the shutdown of the TDMA network at the end of February.

Regarding traffic levels, the Company managed 2,537 million minutes in the first quarter, 10.6% more than in the same period in 2008, thanks to the 14.1% year-on-year rise in outgoing traffic driven by on-net traffic (+18.0% year-on-year).

ARPU in the first quarter fell 7.5% year-on-year in local currency, affected by the application of the new Tariff Decree in January. This entails a 44.6% reduction in mobile termination rates, that led to a 17.1% year-on-year decrease in incoming revenues in local currency in the first quarter. The Company is focused on increasing customer value and is implementing policies to stimulate usage. Particularly noteworthy are the adjustment of the offering for hybrid propositions and the commercial drive centred on the contract segment, with a particular focus on wireless broadband and 3G voice services.

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Telefónica Latinoamérica

Wireless data revenues rose further, climbing 43.1% in the first quarter in local currency (higher than the 37.8% increase reported for 2008). As a result they now account for 11.4% of the Company’s service revenues (+3.3 percentage points year-on-year).

First quarter revenues totalled 248 million euros, a year-on-year increase of 3.3% in local currency. Outgoing service revenue growth remained strong in the first quarter, rising 7.7% vs. the first quarter of 2008 in local currency, slightly higher than the increase reported in the final quarter of 2008.

Operating income before depreciation and amortisation (OIBDA) advanced 10.3% in local currency thanks to efficiency improvements to reach 97 million euros, leaving an OIBDA margin of 39.0%, 2.5 percentage points higher than at the end of March 2008.

Operating cash flow (OIBDA-CapEx) grew 19.4% year-on-year in local currency to 58 million euros, reflecting the strong OIBDA performance and lower CapEx, which stood at 39 million euros (-0.9% in local currency).

TELEFÓNICA CHILE

At the end of March 2009 Telefónica Chile had 3.1 million accesses, 1.3% higher than the figure reported 12 months earlier. Telefónica achieved 10.0% year-on-year growth in broadband accesses to 713,000, with a stable market share, although a loss of almost 4,000 accesses was recorded in the first quarter, largely due to the slowdown in the market growth and to the traditionally lower commercial activity in the first quarter of the year for seasonal reasons. The number of pay TV accesses advanced 13.4% vs. March 2008 to almost 263,000.

As a result, Telefónica further cemented its position as market leader thanks to its service bundling strategy. A total of 96% of broadband accesses have a bundled product (2P/3P), while 64% of wireline accesses are bundled.

Telefónica Chile’s first quarter revenues fell 1.0% year-on-year in local currency to 222 million euros due to the abovementioned cut in mobile termination rates, which has been translated to fixed to mobile call rates. As a result, wireline telephony revenues dropped 8.2% in local currency, also affected by the fall in wireline accesses (-2.4%) and the decrease in traffic. Noteworthy was the strong performance of Internet, TV and content revenues, which grew 14.3% in local currency and now account for 24.7% of total revenues (+3.3 percentage points vs. January-March 2008).

The Company keeps a tight rein on costs and strives constantly to improve efficiency. Operating expenses remained virtually unchanged from March 2008 (-0.9% year-on-year in local currency) due to the fall in mobile termination rates and lower external service expenses. Bad debt provisions stood at 5.0% of revenues in the first quarter of 2009.

Operating income before depreciation and amortisation (OIBDA) fell 3.1% year-on-year in local currency to 77 million euros. The OIBDA margin stood at 34.7%, 0.7 percentage points lower than in the first quarter of 2008.

CapEx through to March 2009 totalled 26 million euros, down 24.3% in local currency from the same quarter last year, with operating cash flow (OIBDA-CapEx) advancing 13.1% year-on-year in local currency to 51 million euros.

PERU

At the end of March 2009 total accesses managed by Telefónica in Peru were 18.6% higher year-on-year, at over 15.2 million thanks to the significant growth of the wireless customer base (+23.6% year-on-year).

Also noteworthy were the 5.6% year-on-year rise in wireline accesses, the sustained growth in broadband (+21.0% year-on-year) to 719,006 accesses, and the advance in Pay TV accesses to 680,927 (+7.5% year-on-year).

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Telefónica Latinoamérica

The Company’s financial results continue to show a positive performance, achieving in the first quarter revenues of 429 million euros, up 10.9% in organic⁶ terms from March 2008 (+9.5% reported). This performance was largely driven by higher wireless, broadband, Pay TV, Data and IT revenues.

Reflecting the ongoing efficiency improvements at the wireless business and the continuous cost control measures implemented by the Company, operating income before depreciation and amortisation (OIBDA) grew 17.6% in organic⁶ terms (+16.4% reported), outpacing revenue growth, to 160 million euros. Accordingly, the first-quarter OIBDA margin stood at 37.4%, showing an organic⁶ advance of 2.1 percentage points from March 2008 (+2.2 percentage points reported).

CapEx through to March totalled 18 million euros (-43.2% year-on-year in local currency), leaving operating cash flow (OIBDA-CapEx) at 143 million euros, a noteworthy organic⁶ year-on-year increase of 35.3% (+33.6% reported).

T. MÓVILES PERÚ

The estimated penetration rate of the Peruvian wireless market stood at 62% at the end of March 2009, a solid year-on-year increase of 10 percentage points.

Telefónica remains market leader at the end of March with over 10.7 million wireless accesses, up 23.6% year-on-year. This growth was driven by the increase in both prepay (+23.5% year-on-year) and contract customers (+24.7% year-on-year).

Churn stood at 3.2% (0.1 percentage points below March 2008) and 1.2 million gross adds were reported in the quarter. Net adds in the period stood at 143,534, with a sharp increase in the contract segment (+16.3% year-on-year). GSM customers accounted for 91% of the total customer base at the end of March (+10 percentage points versus March 2008).

Following the launch of the “Single Tariff” in April 2008, the traffic grew to 2,809 million minutes, a year-on-year increase of 18.4%, showing significant growth rates both in incoming and outgoing traffic. However, ARPU fell in the quarter by 18.1% year-on-year in local currency, affected by the sharp increase of the customer base over the last twelve months and several promotional campaigns, mainly in the prepay segment, associated with the commercial offer that reduced the traffic bundle offered to new customers, increasing handset revenues and reducing wireless service revenues included in ARPU.

Revenues in the first quarter of 2009 totalled 210 million euros, up 21.5% year-on-year in local currency, underpinned by higher wireless service revenues (+5.9% year-on-year in local currency) and wireless handset sales (6.5 times more than in the first quarter of 2008 in local currency). Particularly noteworthy was the solid growth in incoming wireless revenues (+21.2% year-on-year in local currency) underpinned by higher traffic volumes, and the increase in data revenues (+11.3% year-on-year in local currency) which account for 12.1% of wireless service revenues (+0.6 percentage points versus March 2008). Outgoing wireless revenues grew 2.5% year-on-year in local currency impacted by the strong reduction in the traffic bundle given to new prepay customers.

Thanks to revenue growth and the drive to improve efficiency, operating income before depreciation and amortisation (OIBDA) in the quarter jumped 57.2% year-on-year in local currency to 76 million euros, leaving an OIBDA margin of 36.4%, showing a significant advance of 8.3 percentage points versus the first quarter of 2008.

This performance, along with the lower CapEx compared to the same period a year earlier (10 million euros, -46.2% year-on-year in local currency), contributed to the improvement in operating cash flow (OIBDA-CapEx), which more than doubled to 66 million euros (28 million euros in March 2008).

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TELEFÓNICA DEL PERÚ⁷

At the end of March 2009 Telefónica del Perú managed a total of 4.5 million accesses, up 7.9% year-on-year. It is noteworthy the 72.8% year-on-year increase in fixed-wireless accesses, to reach 555,452, after recording 69,923 net adds in the quarter. Meanwhile, broadband accesses increased steadily by 21.0% year-on-year to 719,006, following net adds of 20,588 in the quarter. In Pay TV quarterly net adds were 26,390 customers to reach 680,927 accesses.

As a result of the strategy to expand broadband, bundle services and segment the offering, of particular note is the performance of the “IT Workstation” service for corporate and residential customers, the progress made in the digitalisation of premium Pay TV customers in Lima, and the improvement of almost 8 percentage points from year-end 2008 in the percentage of bundled broadband accesses (52% of broadband customers at the end of the quarter).

In organic⁸ terms, revenues grew 3.7% year-on-year (+1.9% reported) in the quarter to 254 million euros, underpinned by higher Internet, TV and Content revenues (+9.2% organic⁸) and the sharp rise in Capacity rental, Data and IT revenues (+48.3% in local currency). This growth offsets the lower traditional telephony revenues that, despite being affected by fixed wireless substitution, show a deceleration in its decline thanks to the cut made in public telephony tariffs, which led to a strong growth in traffic. Internet, TV and Content revenues at the end of March account for 30.7% of total revenues (+1.5 percentage points year on year in organic⁸ terms).

Operating expenses grew 10.8% in organic⁸ terms versus the same period in 2008 due to higher personnel expenses and especially, the growth in interconnection costs associated to a higher traffic volume in public telephony, and content costs which were negatively affected by exchange rates. Bad debt provisions stood at 2.7% of revenues at the end of March, 1.2 percentage points lower than in March 2008 in organic⁸ terms.

Operating income before depreciation and amortisation (OIBDA) in the quarter amounted to 89 million euros (+1.0% year-on-year organic⁸; -0.4% reported), leaving the OIBDA margin at 35.0% (versus 35.9% organic⁸ in the same period of 2008).

The decline in CapEx in the first quarter of 2009 is to be highlighted (7 million euros, -38.3% in local currency versus the first quarter of 2008), and allows operating cash flow (OIBDA-CapEx) to reach 81 million euros, up 7.1% year-on-year in organic⁸ terms (+5.3% reported).

Finally, the concession contract awarded by the Ministry of Transport and Communications to Telefónica del Perú was renewed until 2023 in the first quarter of 2009.

COLOMBIA

At the end of March 2009 Telefónica managed 12.6 million accesses in Colombia, up 10.0% year-on-year, underpinned by the increase in wireless (+12.0%), broadband (+74.6%) and Pay TV (+56.5%) accesses.

First-quarter revenues totalled 315 million euros, down 6.2% year-on-year in local currency, due to the decline in wireless revenues and flat wireline revenues.

Thanks to the Company’s drive to maximise efficiency, operating income before depreciation and amortisation (OIBDA) rose 7.0% year-on-year in local currency to 118 million euros, leaving an OIBDA margin of 37.5% with a significant 4.6 percentage point increase versus the same period in 2008, thanks to the sharp improvement at the wireless business.

Operating cash flow (OIBDA-CapEx) jumped 21.8% year-on-year in local currency to 97 million euros, with CapEx falling 30.9% year-on-year in local currency in the quarter to 21 million euros.

January — March 2009 Results Telefónica 31

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica Latinoamérica

T. MÓVILES COLOMBIA

The estimated penetration rate of the Colombian wireless market stood at 92% in March 2009, an increase of 16 percentage points versus March 2008.

At the end of the quarter the Company managed 9.8 million wireless accesses, up 12.0% year-on-year, with GSM customers representing 93% of the total (+9 percentage points year-on-year).

The commercial activity was maintained in the period versus 2008, recording 1.1 million gross adds in the quarter. Nevertheless, churn picked up to 4.4% in the quarter (+1.1 percentage points year-on-year), due to the prepay segment performance, resulting in a net loss of 157,322 accesses in the period.

Traffic stood at 3,265 million minutes in the quarter, unchanged from the same period in 2008. However, ARPU fell by 18.9% in local currency due to lower outgoing traffic.

At the end of March, revenues amounted to 166 million euros, down 10.5% year-on-year in local currency, due to the decline in service revenues (-6.2% year-on-year in local currency) and lower handset sales (-57.2% in local currency). Data revenues advanced strongly, up 39.0% year-on-year in local currency, and now account for 7.6% of service revenues (+2.5 percentage points year-on-year).

Thanks to ongoing efficiency improvements operating income before depreciation and amortisation (OIBDA) increased by a notable 27.8% year-on-year in local currency to 52 million euros. As a result, the OIBDA margin stood at 31.3% (+9.4 percentage points versus January-March 2008), maintaining the growth trend seen throughout 2008.

Control on costs and CapEx, which fell 72.1% year-on-year in local currency, underpinned a sharp rise in operating cash flow (OIBDA-CapEx), which advanced 69.5% year-on-year in local currency to 49 million euros.

TELEFÓNICA TELECOM

At the end of March, Telefónica Telecom managed a total of 2.8 million accesses, up 3.4% year-on-year. This improvement was driven by an increase in broadband (+74.6% year-on-year) and TV (+56.5% year-on-year) accesses, with quarterly net adds of 22,151 and 3,275 accesses respectively, offsetting the smaller number of wireline accesses due to the fixed-wireless substitution effect (-6.2% year-on-year). The Company is pressing ahead with its bundling strategy, with 73% of wireline accesses and 87% of broadband accesses at the end of March (+20 percentage points year-on-year) being part of a bundle.

First quarter revenues stood at 158 million euros, almost unchanged versus the same period in 2008 (+0.5% in local currency). This performance reflects the success of the broadband access massive extension strategy, which notably boosted Internet, TV and Content revenues (+37.9% year-on-year in local currency) up to now account for 19.0% of total revenues (+5.2 percentage points vs. the same period of 2008). The larger weighting of these revenues and the increase in Capacity rental, Data and IT revenues (+10.8% year-on-year in local currency) offset lower traditional telephony revenues (-8.6% in local currency) due to the smaller wireline telephony customer base.

Operating expenses grew 4.1% year-on-year in local currency in the quarter, mainly due to the higher costs associated with the development of broadband and TV businesses, primarily equipment and content costs — with the latter negatively affected by exchange rate fluctuations- as well as energy and network maintenance costs. Bad debt levels fell slightly versus the first quarter of 2008, with the bad debt provision standing at 2.8% of revenues at the end of March (-0.1 percentage points year-on-year).

As a result, operating income before depreciation and amortisation (OIBDA) stood at 66 million euros in the first quarter, down 5.1% year-on-year in local currency, leaving the OIBDA margin at 42.1%, 2.5 percentage points lower than in March 2008, although in line with the margin recorded in the fourth quarter of 2008 (42.9%).

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Telefónica Latinoamérica

CapEx through to March 2009 stood at 18 million euros (-5.0% year-on-year in local currency), with operating cash flow (OIBDA-CapEx) declining 5.1% year-on-year in local currency to 48 million euros.

MÉXICO

The growth of the Mexican wireless market slowed in the first quarter vs. the same period in 2008, with an estimated penetration of 72% at the end of March (+8 percentage points vs. March 2008), due to lower commercial activity following the Christmas campaign and the country’s current economic situation.

Telefónica strategy in the first quarter of 2009 focused on continuing to improve operating profitability and implemented fresh cost control measures to deal with the slowdown in market growth. Particularly noteworthy were the progressive reduction in subsidies, the focusing of handset offers on certain models and more stringent credit scoring procedures.

As a result, and also reflecting the benefits of larger scale, first quarter operating income before depreciation and amortisation (OIBDA) jumped 61.4% year-on-year in local currency to 104 million euros, with a 9.8 percentage point improvement in the OIBDA margin to 28.8%. Despite the higher investment associated with the ongoing expansion of network capacity, operating cash flow (OIBDA-CapEx) stood at 69 million euros, up an outstanding 41.3% in local currency vs. the same period in 2008.

Telefónica’s wireless customer base in Mexico at the end of March 2009 totalled 15.5 million, an increase of 17.0% vs. March 2008 and bringing the total number of customers to 15.7 million (+17.9% vs. March 2008). Its estimated market share improved to above 19.5%, with an improvement in both its share of revenues and of customer base.

Recent commercial initiatives leading to an improvement in the Company’s competitive position include segmented promotions based on customer top-up histories, complementing the Movistar plan 1,2,3, and the relaunch of the offer of free calls to to certain numbers for the prepay segment. These initiatives, along with actions aimed at bolstering customer loyalty, helped achieve 1.4 million gross adds in the first quarter of 2009 (vs. 1.7 million in the same period a year earlier) and to maintain churn at a similar level (2.6%). Net wireless adds in the first quarter of 2009 stood at 187,128. Telefónica’s churn remains the benchmark in the Mexican market.

With regard to usage, traffic in the first quarter of 2009 stood at 5,378 million minutes, in line with the same quarter in 2008 (-1.6%) and affected by lower outgoing traffic (-5.1% year-on-year) resulting from lower incentives for traffic in the current commercial offering vs. the first quarter of 2008 and optimisation of usage by customers. This was reflected in ARPU, which fell 9.7% year-on-year in local currency.

The growth of the customer base and higher data revenues (+40.9% in local currency vs. March 2008) underpinned the sharp growth in service revenues (+16.7% in local currency, more than 2.5 times the growth in total revenues). Particularly noteworthy was the growth in outgoing revenues (+9.1% in local currency vs. March 2008). By contrast, handset sales fell by 46.6% due to the lower commercial activity. As a result, revenues increased by 6.5% year-on-year in local currency to 359 million euros.

VENEZUELA

The Venezuelan wireless market remained buoyant in the first quarter of 2009 with an estimated penetration rate of 103%, up 16 percentage points from March 2008 and one of the highest rates in the region.

Telefónica’s Venezuelan businesses performed extremely well in the quarter, with the Company achieving a solid set of commercial results (commercial activity increased compared with January-March 2008) and financial results, underpinned by growth in service revenues and improved profitability.

The Company continued to focus on capturing the solid market growth and the development of its product portfolio (including its nationwide pay TV service via DTH satellite technology and 3G wireless broadband service) while improving efficiency via more stringent credit scoring procedures, segmented promotions for contract customers and lower handset subsidies and advertising costs. As a result wireless gross adds grew significantly in the first quarter (+15.5% vs. the same period a year earlier) and churn was reduced to 2.1% (-0.7 percentage points).

January — March 2009 Results Telefónica 33

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica Latinoamérica

Telefónica Móviles Venezuela had 12.0 million total accesses at the end of March (+15.8% vs. March 2008), a rise underpinned by the 14.7% increase in wireless customers to 10.7 million and the sharp growth in fixed wireless accesses (+23.8%). The GSM customer base now accounts for 57% of the total, an increase of 16 percentage points vs. March 2008.

Traffic stood at 3,767 million minutes (+7.4% vs. January-March 2008) thanks to the increase in incoming and outgoing traffic. As a result, ARPU jumped 22.0% in local currency vs. the first quarter of 2008.

Revenues advanced by a solid 34.5% year-on-year in local currency to 883 million euros, driven by a sharp increase in service revenues (+33.3% in local currency), marking faster growth than in the prior quarter (+27.7% in the fourth quarter of 2008) and continuing to outpace growth of the customer base. Particularly noteworthy was the solid performance of outgoing revenues, which grew 40.4% year-on-year in local currency.

Operating income before depreciation and amortisation (OIBDA) totalled 463 million euros, up 47.3% year-on-year in local currency, underpinned by higher revenues, commercial savings and lower interconnection costs. The OIBDA margin stood at 52.4%, up 4.5 percentage points from the first quarter of 2008.

Operating cash flow (OIBDA-CapEx) increased by 45.7% in local currency vs. January-March 2008 to 407 million euros despite higher CapEx vs. the first quarter of 2008 (+59.8% in local currency) due to the rollout of the GSM and 3G network and satellite pay TV service.

CENTRAL AMERICA

The estimated wireless penetration rate in Central America stood at around 80% at the end of March 2009, with a slowdown in commercial activity during the first quarter of the year similar to that reported in the previous quarter.

In this context, gross adds in the first three months of 2009 maintained a positive performance, though net adds were -68,662, impacted by the evolution in El Salvador, where the market as a whole is estimated to have recorded negative growth in the quarter.

At the end of March 2009 Telefónica managed 6.1 million accesses in the region, up 6.9% year-on-year, with a noteworthy positive evolution reported in Panamá (+23.3% year-on-year) and Nicaragua (+16.0%).

In a slowing down environment, the Company is focused on maximising cash flow, pushing to increase commercial efficiency through a more selective customer acquisition policy and trough a significant effort to contain costs across all areas. As a result, operating income before depreciation and amortisation (OIBDA) in the first quarter of 2009 advanced 14.9% year-on-year in constant currency to 63 million euros despite the lower revenues, that reached 150 million euros (-3.8% year-on-year in constant currency). The OIBDA margin reached 41.8%, 6.8 percentage points higher than in March 2008.

CapEx in the first quarter of 2009 stood at 3 million euros compared with 2 million euros in the same period in 2008, with operating cash flow (OIBDA-CapEx) advancing by a solid 14.7% year-on-year in constant currency to 60 million euros.

ECUADOR

The Ecuadorian wireless market maintained in the first quarter the growth trend seen in 2008, with an estimated penetration rate of 81% at the end of March (up 9 percentage points compared to March 2008).

In this context, Telefónica Móviles Ecuador reported 48,285 net adds in the quarter, reaching 3.3 million accesses at the end of March 2009 (+18.1% year-on-year), underpinned by churn contention (3.1%, down 0.5 percentage points from the same period a year earlier).

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RESULTS BY REGIONAL BUSINESS UNITS

Telefónica Latinoamérica

Particularly noteworthy was the increase in GSM services, with 87% of customers now using this technology (+10 percentage points compared to 2008).

Additional to the growth of the client base, traffic rose sharply (+52.7% year-on-year), with significant increase in both outgoing — driven by commercial campaigns aimed at encouraging top ups and usage — and incoming traffic. ARPU rose slightly 1.0% year-on-year in local currency in the first quarter of the year.

First quarter revenues advanced 8.7% in local currency to 87 million euros, underpinned by higher service revenues (+17.1% in local currency), which maintained the solid growth seen throughout 2008 and particularly by the strong outgoing revenue growth (+27.0% in local currency vs. the first quarter of 2008).

The Company continued to strive to improve operating efficiency, achieving 46.2% year-on-year growth in operating income before depreciation and amortisation (OIBDA) in local currency to 27 million euros and leaving an OIBDA margin of 31.7% (an increase of 8.1 percentage points vs. the same quarter in 2008).

Operating cash flow (OIBDA-CapEx) stood at 22 million euros, up by a solid 48.8% year-on-year in local currency despite the increase in CapEx (5 million euros, +35.6% year-on-year in local currency).

January — March 2009 Results Telefónica 35

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica Latinoamérica

TELEFÓNICA LATINOAMÉRICA
ACCESSES
Unaudited figures (thousands)

		2008																2009
		March				June				September				December				March				% Chg y-o-y
Final Clients Accesses			137,612.4				147,845.8				153,060.9				158,200.1				159,401.5				15.8
Fixed telephony accesses (1)			25,595.4				25,757.6				25,758.2				25,644.5				25,517.1				(0.3	)
Internet and data accesses			7,099.9				7,275.1				7,572.4				7,629.8				7,611.1				7.2
Narrowband (2)			1,752.9				1,635.3				1,587.9				1,445.8				1,306.4				(25.5	)
Broadband (3) (4)			5,237.2				5,525.8				5,875.7				6,067.0				6,208.9				18.6
Other (5)			109.8				114.0				108.8				117.0				95.8				(12.7	)
Mobile accesses (6)			103,676.7				113,459.6				118,269.8				123,385.2				124,658.3				20.2
Pre-Pay			85,634.0				93,527.9				97,713.7				102,329.7				103,333.4				20.7
Contract			18,042.7				19,931.7				20,556.1				21,055.5				21,324.9				18.2
Pay TV			1,240.4				1,353.6				1,460.5				1,540.5				1,615.1				30.2
Wholesale Accesses			56.0				57.6				69.6				59.0				58.5				4.5
Total Accesses			137,668.4				147,903.4				153,130.5				158,259.0				159,460.0				15.8