On a like-for-like basis earnings per share rose 41.4% to 1.63 euros and net profit climbed 38% in 2008
The Company expects growth rates between 8%-11% in operating cash flow in 2009, confirms its commitment to prioritise shareholders remuneration and to progressively increase dividend per share
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The Company delivered healthy growth rates in organic terms excluding capital gains, with momentum intensifying from Revenues to Operating Income:
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Revenue advanced 6.9% driven by Latin America (+12.9%), reinforcing its position as Group’s growth engine, and underpinned by the business in Spain (+1.5%) and Europe (+5.9%)
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OIBDA climbed 14.7% thanks to revenue momentum and Telefónica’s proven ability to manage its costs, while operating income (OI) grew 28.7%
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Intense sales and marketing activity throughout the year translated into growth in the customer base of 13.2% to nearly 259 million accesses at year-end. Latin America posted a noteworthy performance; the market continued to grow at healthy rates and Telefónica increased its customer base in the region by 18% to over 158 million accesses
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Thanks to high levels of efficiency coupled with the Company’s ability to generate cash flow, operating cash flow (OIBDA-CapEx) rose 20.2% yoy in organic terms excluding capital gains to 14,519 million euros
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In current euros, the Company posted growth in revenue (+2.7%), OIBDA (+0.4%) and OI (+3.6%) while net profit (-14.8%) was negatively impacted by capital gains from the sales of Airwave and Endemol registered in 2007
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Telefónica earmarked 69% of free cash flow to shareholder remuneration both in dividend payments and share buybacks. In line with this priority, the Company has announced a dividend of €1.15/share against 2009 profit (+15%)
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The Company also reinforced its financial health, maintaining leverage ratios at 2x (net debt+commitments/OIBDA) at the bottom of the target range (2x-2.5x)

Madrid, February, 26th, 2009.- Against the current complex backdrop, the solid operating and financial results released by Telefónica today underline the benefits of its unique profile, namely: extensive business diversification, integrated operations in key markets, strong competitive positioning in its main markets, proven capacity to deliver and financial strength.
Despite the prevailing operating environment, Telefónica delivered on Group guidance, coming in at the upper end of the range, thanks to its ability to optimise management of and unlock value at its broadly diversified businesses. Based on the criteria used to set its financial targets for 20081, Telefónica posted growth in all income statement headings at the upper end or above the target ranges announced to the market. Specifically, topline growth was 7.3% (range: 6%-8%), OIBDA growth was 10.6% (range: 7.5%-11%), while growth in operating profit exceeded guidance at 20.4% (range: 13%-19%).
Telefónica has set as its targets2 for this year the goal of defending its healthy cash flow in the markets under most economic pressure, while tapping the growth potential of expanding markets. Thus, the Company expects growth rates between 8%-11% in cash flow in 2009. Equally, Telefonica expects to increase revenues, OIBDA (between 1% and 3%) and will keep CapEx to a maximum of 7,500 mill €.
The strong cash flow generation expected for 2009 has permitted the Company to increase the dividend corresponding to 2009 fiscal year to a total amount of 1.15 euros per share, up 15% from the dividend of 1 euro per share to be paid against 2008 results. This proposal confirms Telefónica’s commitment to prioritize shareholders returns for the use of its Free Cash Flow and to progressively increase the dividend per share.
The Company maintains its target to reach an EPS3 of 2.304 euros and a FCFS4 of 2.87 euros in 2010.
The Company has conducted a sensitivity analysis to assess the impact of the changes in the trading environment, reflecting an extreme scenario for 2010 (extrapolating the strong depreciation of some currencies versus the euro and current economic weakness). Under this extreme scenario, 2010 EPS3 would stand at 2.10 euros and 2010 FCFS4 would reach 2.50 euros.
In a complex operating environment the Group delivered solid growth rates in organic terms excluding capital gains5, with growth accelerating from revenues down through OI. At the
1 2007 base figures exclude Airwave and Endemol and include the consolidation of TVA in October-December 2007. The revenues of T. España are adjusted to reflect the new business model for public telephony service revenues. As a result, Group revenues have been adjusted to reflect this new model. The 2008 figures include TVA, Deltax and Telemig (since April 2008). Telefónica’s CapEx does not include the Real Estate Efficiency Programmes. The growth provided for 2008 guidance assumes constant exchange rates from 2007. In terms of guidance calculations, OIBDA and OI exclude exceptional revenues and expenses not foreseeable in 2007.
2 2008 adjusted figures for guidance excludes Sogecable capital gain (143 million euros) and the application of provisions made in T. Europe in respect of potential contingencies deriving from the past disposal of shareholdings, one these risks had dissipated or had not materialized (174 million euros), includes 9 months of consolidation of Telemig in T. Latam. 2009 figures for guidance assume 2008 constant FX (average FX in 2008). In terms of guidance calculation, OIBDA exclude capital gains and losses from sale of companies and write-offs. Group CapEx excludes Real Estate Efficiency Program of T. España and spectrum licenses. 2008 Based figures for financial targets: Operating cash flow (OIBDA-CapEx): 14,201mill€; Consolidated OIBDA: 22,602 mill €; Consolidated Revenues: 57,946 mill €; Consolidated CapEx: 8,401 mill €.
3 Reported EPS
4 FCF available to remunerate Telefonica S.A. shareholders, to protect solvency levels and to accommodate strategic flexibility.
5 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In revenues, the impact in Telefónica España of the new model for the public use telephone service (-147.4 million euros in 2007) is included. In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods.

same time, the Company’s focus on maximising efficiency and cash generation resulted in operating cash flow growth (in organic terms, excluding capital gains) outpacing revenue and OIBDA growth by 13.3 percentage points and 5.5 percentage points respectively. The strong rise in organic1 revenues reflects the Company’s success in capturing growth in its markets in 2008.
30 million new customers: demonstrating the company’s ability to tap growth
As a result, the intense commercial activity recorded in 2008 enabled it to increase total accesses by 13.2% versus 2007 to around 259 million. This growth was driven by the increases in wireless (+16.6%), broadband (+20.9%) and pay TV (+29.7%) accesses The strong rise in organic1 revenues reflects the Company’s success in capturing growth in its markets in 2008. By region, the contribution by Telefónica Latinoamérica is especially noteworthy, with over 158 million accesses across the region at the end of December (up 18.0% on December 2007).
By access type, the Telefónica Group’s wireless accesses stood at approximately 196 million at the end of 2008, with 6.7 million net adds in the fourth quarter and around 24 million6 in the full year. The main countries contributors to net adds were Brazil (7.52 million), Mexico (2.8 million), Peru (2.5 million) and Germany (1.7 million).
Retail internet broadband accesses stood at around 12.5 million, a year-on-year increase of 21%, driven by the growing penetration of voice, ADSL and pay-TV bundles. In fact, in Spain over 85% of retail broadband accesses are bundled as part of some kind of dual or triple service package while in Latin America 49% of retail broadband accesses are bundled as part of Duo or Trio packages. In the fourth quarter net adds amounted to 0.4 million accesses, with a total of 2.1 million accesses in the full year, of which 1.0 million originated in Latin America, 0.6 million in Spain and 0.5 million in Europe.
Pay TV accesses stood at over 2.2 million at the end of 2008, up almost 30% on the prior year, driven by net adds of 109,500 in the fourth quarter and some 519,500 in the year. At the end of 2008 the Company offered pay TV services in Spain, the Czech Republic, Peru, Chile, Colombia, Brazil and Venezuela.
Healthy organic revenue growth, with Latin America as growth engine
The growth of the customer base and initiatives to boost usage led to revenues of 57,946 million euros in 2008, with similar growth in the full year (+2.7%) and the fourth quarter (+2.6%). In 2008, the negative impact of the exchange rates eroded 3 percentage points of revenue growth, while changes in the consolidation perimeter reduced top-line growth by a further 1.2 percentage points
In organic terms7, revenue growth remained virtually unchanged from September, standing at 6.9% in 2008 (+7.0% in January-September 2008), mainly driven by the significant expansion in Telefónica Latinoamérica (4.6 percentage points contribution to growth) and, to a lesser degree, in Telefónica Europe (1.5 percentage points contribution to growth). By service, wireless service
6 The Telemig customers incorporated by the Group in April 2008 (close to 4 million) are not included as net adds in the period.
7 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In revenues, the impact in Telefónica España of the new model for the public use telephone service (-147.4 million euros in 2007) is included. In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods

revenues, underpinned by a growing contribution from data services, wireline broadband and pay-TV were again the main drivers of organic revenue growth.
In absolute terms, Telefónica Latinoamérica accounted for 38.3% of total Group revenues in 2008 (+2.7 percentage points from 2007), with Telefónica España and Telefónica Europe accounting for 36.0% and 24.7%, respectively.
Operating expenses declined 2.3% year-on-year in 2008 to 36,553 million euros. Stripping out the impact of currency movements, operating expenses would have risen 0.9% year-on-year, consolidating the declining trend noted since the start of the year as a result of initiatives to maximise efficiency in both years.
Gains on sales of fixed assets in 2008 totalled 292 million euros, mainly related with capital gains recognised on the sale of the stake in Sogecable (143 million euros) and gains from Real Estate programmes at Telefónica España and Telefónica Europa. It is worth recalling that in 2007 the Company recognised the capital gains realised on the disposal of Airwave (1,296 million euros) and Endemol (1,368 million euros) in the second and third quarters respectively.
Growing efficiency lifts growth in OIBDA and OI
The sound revenue performance and cost control are reflected in operating income before depreciation and amortisation (OIBDA), which amounted to 22,919 million euros in 2008 (+0.4% versus 2007). In the fourth quarter of 2008 OIBDA grew by around 29% year-on-year reflecting the positive impact from the provision of 900 million euros for workforce restructuring plans registered in the previous year.
In organic terms8, OIBDA grew 2.8% in 2008. However, organic OIBDA excluding capital gains9 would have grown 14.7% in 2008, outpacing revenue growth by 7.8 percentage points, with this gap widening from September mainly due to the aforementioned workforce restructuring provisions reported in the fourth quarter of 2007. Telefónica Latinoamérica (+7.7 percentage points) and Telefónica España (+4.2 percentage points) were the main contributors to this growth.
In absolute terms, OIBDA at Telefónica España accounted for almost 45% of total Group OIBDA, compared to 36.8% and 18.2% at Telefónica Latinoamérica and Telefónica Europe respectively.
The OIBDA margin in 2008 stood at 39.6% (compared to 40.4% in 2007, mainly due to capital gains on the disposals of Airwave and Endemol).
In organic terms, and excluding capital gains9, the OIBDA margin was 38.7% in 2008, up 2.6 percentage points year-on-year, driven by efficiency gains and economies of scale, in a context of high commercial activity and transformation of the wireline business in Latin America.
8 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007.
9 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods.

Depreciation and amortisation in 2008 totalled 9,046 million euros, down 4.1% year-on-year. Telefónica Europe includes the amortisation of the purchase price allocation made following the O2 Group acquisition (689 million euros) and the Telefónica O2 Czech Republic acquisition (131 million euros). In organic terms10 the Telefónica Group’s depreciation and amortisation charges for the full year fell 0.9% from 2007, with Telefónica España and Telefónica Europa chiefly responsible for this decline.
Operating income (OI) totalled 13,873 million euros in 2008, down 3.6% on 2007, due to recognition of the aforementioned capital gains on the sale of Airwave and Endemol. In organic terms11, operating income would have increased by 5.6%. Stripping out also the impact related with Sogecable, Endemol and Airwave disposals from both periods, operating income would grow 28.7% year-on-year.
Accordingly, growth accelerated in organic terms and excluding capital gains12, from revenue through operating income (revenue up 6.9%, OIBDA up 14.7%, and OI up 28.7%).
The net profit from associated companies amounted to –161 million euros in 2008 (versus a profit of 140 million euros in 2007). Results for 2008 include the impact of the impairment charge taken by Telco, S.p.A.’s on its investment in Telecom Italia. To estimate the impact, the Telefónica Group considered the synergies to be obtained by improving certain processes in its European operations through the alliances reached with Telecom Italia S.p.A. The Company has recorded a 209 million euros loss in this respect (146 million euros after the related tax effect at Telefónica, S.A.).
Net financial results in 2008 amounted to 2,797 million euros, down 1.6% versus 2007, mainly due to the decrease of 7.6% in the average debt, which has generated savings of 240 million euros.
Acknowledged financial health and ability to generate strong cash flow
Free cash flow generated by the Telefónica Group in 2008 amounted to 9,145 million euros of which 2,224 million euros were assigned to Telefonica’s share buyback program, 4,165 million euros to Telefónica S.A. dividend payment and 920 million euros to commitment cancellations derived mainly from the pre-retirements programmes. Financial and Real Estate net investments for the period amounted to 1,327 million euros mainly due to the Telefonica Chile minority stake purchase, the increase of our participation in China Unicom, the Telemig purchase and the sale of Sogecable´s participation. Because of these effects, net financial debt decreased in 508 million euros. Also, net debt was reduced by an additional 2,043 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 2,551 million euros with respect to the net financial debt at the end of 2007 (45,284 million euros), leaving the net financial debt of the Telefónica Group at December 2008 at 42,733 million euros.
10 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007.
11 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007.
12 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods.

Leverage ratio, net debt over OIBDA, continues to fall down to 1.89 times at December 2008 versus 1.91 times at September 2008, thanks to both the reduction of the net financial debt in the period and to an increase in the OIBDA figure
During the year 2008, the financing activity of Telefónica Group, excluding short term Commercial Paper Programmes activity, rose to above 3,000 million euros, less intense compared to previous periods due to the instability of the credit markets and the Group's liquidity position. At the end of the year, the cash balance covers in excess the debt maturities of the coming 12 months, resulting in a negative net debt figure for 2009, of approximately 400 million euros.
The solid financial position of the Group has led the rating agency Fitch to upgrade, on November 25th, Telefónica, S.A. long term credit to “A-/stable outlook” from BBB+/positive outlook” since Telefónica’s operational and financial profile is according to Fitch, comfortably in line with an 'A-'(A minus) rating. On December 2nd the rating agency Standard & Poor’s raised Telefónica, S.A. long term corporate rating to “A-/stable outlook” from “BBB+/positive outlook” reflecting Telefónica's steady deleveraging over the last year. On December 17th the Japanese rating agency JCR, also upgraded the rating on the foreign currency long-term senior debts of Telefónica, S.A. to “A/stable”prompted by Telefónica’s improved leverage ratio supported by its high profitability and cash generating capacity. Finally, last February 17th 2009, the rating agency Moody’s has changed the outlook of Telefónica, S.A. to positive affirming the long-term Baa1 ratings.
The tax provision for 2008 totalled 3,089 million euros, impliying a tax rate of 28.3%, though cash outflow for the Telefónica Group was lower in 2008 as loss carryforwards generated in previous years were offset and pending deductions applied. It is worth highlighting that in 2007 the tax provision was lower, mainly on account of the Endemol disposal which triggered a capital loss for tax purposes.
Minority interests grew 10.2% year-on-year, reducing net income for 2008 by 234 million euros.
In all, consolidated net income in 2008 totalled 7,592 million euros, down 14.8% year-on-year. This decline is mainly due to the recognition in 2007 of capital gains on the sale of Airwave and Endemol. Stripping out the impact of asset disposals (Airwave, Endemol and Sogecable) from both periods, and the impact of the impairment charge taken by Telco, SpA’s on its investment of Telecom Italia, net income growth to December 2008 would rise to 38.0%. Basic earnings per share in 2008 stood at 1,63 euros, with year-on-year growth of 41.4% on a like-for-like basis.13
CapEx in the full year amounted to 8,401 million euros, up 4.7% on 2007. This increase was mainly driven by investment in broadband, pay TV and expansion of the coverage and capacity of wireless networks in Latin America.
Also, the Company’s drive to manage operating expenses and CapEx resulted in a significant increase in operating cash flow (OIBDA-CapEx), which stood at 14,519 million euros at the end of 2008, up 20.2% year-on-year in organic terms excluding capital gains14. By region,
13 Excluding the impact of asset disposals (Airwave, Endemol y Sogecable) in both periods and the impact of the impairment charge taken by Telco, SpA’s on its investment of Telecom Italia.
14 Assuming constant exchange rates and including the consolidation of TVA in January-December 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In OIBDA and OI, the impact of asset
Telefónica España accounted for 8,077 million euros of the total, while Telefónica Latinoamérica generated 4,410 million euros and Telefónica Europe, 2,108 million euros.
In 2008, the Company devoted 69% of the Free Cash Flow to shareholder remuneration, combining dividend payments and share buybacks (126.7 million shares in 2008). The Company expects to complete the share buyback programme announced in 2008 (150 million shares) during the first quarter of 2009.