FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

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

For the month of February, 2010

Commission File Number: 001-09531

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 þ       No 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)(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.		Quarterly Results of Telefónica Group: January- December 2009		2

TELEFÓNICA GROUP

Financial Highlights

•		Telefónica recorded solid results in 2009, meeting all its financial targets for the seventh consecutive year despite the challenging economic and operating environment, reflecting the value of its highly diversified business portfolio.
		Under the criteria used to establish 20091 guidance:

	•		Revenues advanced 0.3%, in line with the Company’s positive growth forecast;
	•		OIBDA increased by 1.1%, within the announced range of 1%-3%;
	•		CapEx totalled 7,459 million euros vs. a target of less than 7,500 million euros;
	•		Operating Cash Flow (OIBDA-CapEx) increased by 8.4%, in line with the range of 8%-11%.

•

The Company’s strategy allowed it to strengthen the bases for future growth while sustaining an outstanding operating efficiency. This is reflected in Telefónica’s OIBDA margin and its high cash flow generation. As a result, there was acceleration from revenues to operating cash flow in year-on-year organic2 growth rates.

•

Total accesses increased by 5.1%3, to around 265 million, with sharp rises in mobile3 (+7.4%), fixed broadband (+8.2%) and pay TV (+9.8%) accesses. Mobile broadband accesses also registered significant growth, topping 15 million at the end of December (vs. 9 million accesses in 2008).

•

There was a ramp-up in commercial activity across all areas of operation in the fourth quarter, with mobile net adds3,4 exceeding 6.8 million (around 15.0 million in the full year).

•

Revenues reached 56,731 million euros (+0.2% in organic2 terms) while OIBDA advanced 0.9% year-on-year in organic2 terms to 22,603 million euros.

•

The OIBDA margin stood at 39.8%, a 0.3 percentage points year-on-year improvement in organic2 terms.

•

Operating cash flow (OIBDA-CapEx) totalled 15,346 million euros, representing solid year-on-year growth of 8.0% in organic2 terms thanks to the 1.4 percentage points improvement in the efficiency ratio5 versus 2008, to 74.1%.

•

Telefónica España consolidated its leadership position, built the foundations for future growth and maintained a substantial cash flow generation against a challenging economic backdrop:

•

Noteworthy is the slowdown in the pace of year-on-year revenue decline for the second consecutive quarter, both at the wireline and wireless businesses. In the fourth quarter this improvement stood at 2.1 percentage points versus the third quarter on comparable6 basis.

•

The Company remains a sector benchmark for efficiency with an OIBDA margin of 48.0% in 2009 on comparable basis6.

•

Telefónica Latinoamérica delivered a solid operating and financial performance in a region with significant growth potential:

•

The number of accesses managed in the region advanced by 6.5% to close to 169 million, and commercial activity increased sharply in the fourth quarter, which saw the first positive year-on-year growth in net adds in 2009.

•

Particularly noteworthy is the acceleration in year-on-year organic growth7 from revenues (+5.3%) to operating cash flow (OIBDA-CapEx +29.8%), being Mexico the main contributor to operating cash flow growth in 2009.

January — December 2009 Results Telefónica

TELEFÓNICA GROUP

Financial Highlights

•

Telefónica Europa’s 2009 results reflect the benefits of its increased business diversification and ongoing efficiency improvements:

•

Telefónica Europa strengthened its competitive position in its main markets, outperforming market revenue growth.

•

Revenue growth, excluding the impact of mobile termination rates cuts and foreign exchange rates, improved on a sequential basis, underpinned by the increase in wireless accesses (+6.9% year-on-year); operating cash flow jumped 21.7% year-on-year in organic8 terms.

•

Net income reached 7,776 million euros in 2009 and earnings per share amounted to 1.71 euros, up 2.4% and 4.5% year-on-year in reported terms, respectively.

•

The ratio of net debt + commitments to OIBDA stood at 2.1 times in 2009, reflecting the Company’s financial strength.

•

The Company announces its guidance9 for 2010, which reflect a strategy focused on capturing the growth in its markets while maintaining high cash flow generation. Telefónica forecasts:

•

Consolidated year-on-year revenue growth in the range of +1%/+4%;

•

Consolidated year-on-year OIBDA growth in the range of +1%/+3%;

•

CapEx in the range of 7,450/7,650 million euros.

•

2009 bases9 for financial targets:

•

Consolidated revenues:56,407 million euros

•

Consolidated OIBDA: 22,344 million euros

•

Consolidate CapEx: 7,262 million euros

•

The Company also reiterates its 2010 EPS10 target of 2.10 euros and its medium-term guidance.

•

Telefónica confirms its dividend targets through 2012 (1.15 euros per share in 2009, 1.40 euros per share11 in 2010 and a minimum of 1.75 euros per share11 in 2012).

January — December 2009 Results Telefónica

TELEFÓNICA GROUP

Financial Highlights

Note 1:		Base guidance 2009: 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) and exclude the impact of the hyperinflationary accounting in Venezuela. 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.
Note 2:		Organic growth rates: Assuming constant exchange rates, excluding the impact of the hyperinflationary accounting in Venezuela, and including the consolidation of Telemig in January-March 2008. OIBDA and OI exclude the impacts of the capital gains from the sale of Airwave and Sogecable, registered in 2008, and the impact of the capital gains from the disposal of Medi Telecom in the fourth quarter of 2009.
Note 3:		Accesses growth criteria: Excluding Medi Telecom’s customers from the 2008 and 2009 bases, after its disposal in the fourth quarter of 2009.
Note 4:		Net adds calculation criteria: For comparison purposes, net customer additions exclude the disconnection of inactive customers in December 2008 and December 2009.
Note 5:		Efficiency ratio definition: Last twelve months (OpEx+CapEx-Internal expenses capitalized in fixed assets)/Revenues. CapEx excludes the acquisition of spectrum and Efficiency Program at T. España.
Note 6:		Comparable basis in T. España: Exclude the following effects: Universal Service Obligation: 183 million euros in revenues and 51 million euros in OIBDA in the third quarter of 2008, 75 million euros in revenues and 22 million euros in OIBDA in the first quarter of 2009 and 148 million euros in revenues and 47 million euros in OIBDA in the fourth quarter of 2009; bad debt recovery: 25 million euros in OIBDA in the first quarter of 2008; real estate capital gains: 6 million euros in OIBDA in 2009 and 74 million euros in 2008; revision of the estimates for the adjustment to workforce provision provided for in prior periods, which has resulted in lower expenses of 90 million euros in the second quarter of 2009; sale of application rights: 48 million euros in revenues and OIBDA in the third quarter of 2009; and 220 million euros in OIBDA from capital gains on the disposal of Medi Telecom in the fourth quarter of 2009.
Note 7:		Organic growth in T. Latinoamerica: Assuming constant exchange rates, excluding the impact of the hyperinflationary accounting in Venezuela, and including the consolidation of Telemig in January-March 2008.
Note 8:		Organic growth in T. Europe: Assuming constant exchange rates and excluding the impacts of the capital gains from the sale of Airwave.
Note 9:		Base guidance 2010: 2009 adjusted figures for guidance exclude Telyco Morocco results in T. España, Medi Telecom capital gain and write-offs. 2010 guidance assumes constant exchange rates as of 2009 (average FX in 2009) and excludes hyperinflationary accounting in Venezuela in both years. It also includes 10 months of consolidation of Hansenet and Jajah in T. Europe. In terms of guidance calculation, OIBDA excludes capital gains and losses from sale of companies and write-offs. Group CapEx excludes Real Estate Efficiency Program of T. España and spectrum licenses.
Note 10:		Earnings per share criteria: Reported EPS.
Note 11:		Dividend’s considerations: Targeted under current guidance hypothesis.

January — December 2009 Results Telefónica

TELEFÓNICA GROUP

Financial Highlights

TELEFÓNICA GROUP
SELECTED FINANCIAL DATA
Unaudited figures (Euros in millions)

										% Chg
		January - December																Guidance
		2009				2008				Reported				Organic				Criteria
Revenues			56,731				57,946				(2.1	)			0.2				0.3
Telefónica España (1)			19,703				20,838				(5.4	)			(5.4	)
Telefónica Latinoamérica			22,983				22,174				3.7				5.3
Telefónica Europe			13,533				14,308				(5.4	)			1.1
OIBDA (2)(3)(4)			22,603				22,919				(1.4	)			0.9				1.1
Telefónica España (1)(4)			9,757				10,285				(5.1	)			(7.3	)
Telefónica Latinoamérica			9,143				8,445				8.3				10.1
Telefónica Europe (2)			3,910				4,180				(6.4	)			4.1
OIBDA margin (2)(3)(4)			39.8	%			39.6	%			0.3 p.p.				0.3 p.p.
Telefónica España (4)			49.5	%			49.4	%			0.2 p.p.				(1.0 p.p.	)
Telefónica Latinoamérica			39.8	%			38.1	%			1.7 p.p.				1.7 p.p.
Telefónica Europe (2)			28.9	%			29.2	%			(0.3 p.p.	)			0.8 p.p.
Operating Income (OI) (2)(3)(4)			13,647				13,873				(1.6	)			0.7
Telefónica España (4)			7,617				8,046				(5.3	)			(8.1	)
Telefónica Latinoamérica			5,350				4,800				11.5				13.9
Telefónica Europe (2)			1,015				1,144				(11.3	)			14.3
Net income (2)(3)(4)			7,776				7,592				2.4
Basic earnings per share (euros) (2)(3)(4)			1.71				1.63				4.5
Free Cash Flow per share (euros)			2.00				1.97				1.5
OpCF (OIBDA-CapEx) (2)(3)(4)			15,346				14,519				5.7				8.0				8.4
Telefónica España (1)(4)			7,893				8,077				(2.3	)			(5.0	)
Telefónica Latinoamérica			5,693				4,410				29.1				29.8
Telefónica Europe (2)			2,183				2,108				3.5				21.7

January — December 2009 Results Telefónica

Quarterly results

January — December 2009

TABLE OF CONTENTS

• TELEFÓNICA GROUP			2
Market Size			2
Consolidated Results			4
Financial Data			10
• RESULTS BY REGIONAL BUSINESS UNITS			16
• Telefónica España			16
• Wireline Business			17
• Wireless Business			19
• Telefónica Latinoamérica			26
• Brazil			28
• Argentina			31
• Chile			32
• Peru			34
• Colombia			36
• México			38
• Venezuela			39
• Central America			40
• Ecuador			41
• Telefónica Europe			51
• Telefónica O2 UK			52
• Telefónica O2 Germany			53
• Telefónica O2 Ireland			54
• Telefónica O2 Czech Republic			55
• Other Companies			62
• Atento Group			62
• ADDENDA			64
Key Holdings of the Telefónica Group and its Subsidiaries			64
Significant Events			65
Changes to the Perimeter			66

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 — December 2009 Results Telefónica 1

TELEFÓNICA GROUP

Market Size

(Data in thousands accesses)

January — December 2009 Results Telefónica 2

TELEFÓNICA GROUP

Market Size

TELEFÓNICA GROUP
ACCESSES
Unaudited figures (thousands)

		December
		2009				2008				% Chg
Final Clients Accesses			260,510.2				255,671.1				1.9
Fixed telephony accesses (1)			40,606.0				42,930.8				(5.4	)
Internet and data accesses			15,082.5				14,654.3				2.9
Narrowband			1,427.5				1,997.2				(28.5	)
Broadband (2)			13,492.6				12,472.1				8.2
Other (3)			162.4				185.0				(12.2	)
Mobile accesses			202,332.5				195,818.6				3.3
Pay TV			2,489.2				2,267.5				9.8
Wholesale Accesses			4,095.3				3,433.0				19.3
Unbundled loops			2,206.0				1,748.1				26.2
Shared ULL			447.7				602.3				(25.7	)
Full ULL			1,758.3				1,145.8				53.5
Wholesale ADSL (4)			463.4				534.7				(13.3	)
Other (5)			1,426.0				1,150.1				24.0
Total Accesses			264,605.5				259,104.1				2.1

January — December 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.

Telefónica posted a solid set of results in 2009 meeting all its financial targets for the year, despite the adverse economic environment and the major operational challenges the Company had to face.

These results highlight the strengths of the Company, being key the value of its highly diversified asset portfolio -both geographical and by business-, its competitive leadership in its main markets and its proven execution skills, all in a framework of sound financial position.

The Company’s flexibility to adapt to changes in the operating environment is reflected in its performance over a year in which Telefónica adapted its commercial focus to the progressive economic upturn, with a sharp increase in commercial activity across all regions of operations in the second half. This strategy allowed the Company to strengthen the bases for future growth while maintaining a high efficiency. This is reflected in Telefónica’s OIBDA margin and its high cash flow generation.

The Company’s intense commercial activity resulted in a 5.1% year-on-year increase in total accesses¹ to around 265 million. This growth was underpinned by the increase in wireless¹ (+7.4%), fixed broadband (+8.2%) and pay TV (+9.8%) accesses. By region, the growth rates reported by Telefónica Europa (+6.9% year-on-year) and Telefónica Latinoamérica (+6.5% year-on-year) must be highlighted.

January — December 2009 Results Telefónica 4

TELEFÓNICA GROUP

Consolidated Results

By type of access, the Telefónica Group had over 202 million wireless accesses at the end of 2009, with net adds of around 15.0 million accesses in comparable terms^2,3. It is worth highlighting that in the second half of the year net adds tripled the ones for the first six months. This impressive performance was underpinned by the significant improvements in the three areas of operations, whose quarterly net adds progressively rose over the year. In the second half of the year, net adds³ in Latin America were 3.3 times higher than in January-June 2009, while wireless net adds³ at Telefónica España and Telefónica Europa in the second half were 4.9 times and 1.9 times higher respectively than in January-June 2009.

The main drivers of wireless net adds to December 2009 were Brazil (6.8 million), Mexico (2.1 million), Germany³ (1.5 million), Argentina (1.1 million) and UK (1.0 million). The main contributors in the fourth quarter were Brazil (2.9 million), Mexico (0.9 million), Argentina (0.5 million) and Germany³ (0.6 million).

Mobile broadband accesses also registered significant growth, exceeding 15 million at the end of December 2009 (vs. 9 million accesses recorded in 2008).

Retail internet broadband accesses stood at 13.5 million, a year-on-year increase of 8.2%, driven by the growing adoption of bundled voice, ADSL and Pay-TV service packages. In Spain nearly 88% of retail broadband accesses are bundled as part of some kind of dual or triple play package, whilst in Latin America almost 56% of broadband accesses are bundled as part of Duos or Trios. In 2009 net adds exceeded 1.0 million accesses (0.3 million in the fourth quarter), mostly from Argentina and UK.

Pay TV accesses stood at around 2.5 million at the end of 2009, 9.8% up from a year earlier. It is worth mentioning that the Company already offers Pay-TV services in Spain, the Czech Republic, Peru, Chile, Colombia, Brazil, Venezuela and Argentina.

With regard to financial results, it is worth mentioning that during 2009 and the beginning of 2010 several factors have surfaced with respect to the Venezuelan economy that have led to reconsider the accounting treatment that the Telefónica Group currently applies in the translation of the financial statements of its subsidiaries in Venezuela, and the recoverability of their financial investments in the country. Key among these factors are: the inflation index reached in 2009 and the cumulative inflation index over the last three years, restrictions in the official foreign exchange market, and finally, the devaluation of the Bolívar, by decision of the Government of that country on January 8th, 2010. Consequently, according to International Financial Reporting Standards (IFRS), the Venezuelan economy should be considered as hyperinflationary for 2009. As a result, the financial results of Telefónica Group and, therefore, those of Telefónica Latinoamérica and the Atento Group are affected by the above mentioned effects.

With respect to the above mentioned matters, the main impacts on the 2009 consolidated financial statements of the Telefónica Group are the following:

		Million euros
Revenue			267
OIBDA			64
Net Income			(548	)
Translation differences			1,224
Net impact in Equity			676

January — December 2009 Results Telefónica 5

TELEFÓNICA GROUP

Consolidated Results

For comparative purposes and in order to facilitate the interpretation of the year-on-year variations versus 2008 results, changes in constant currency of the items affected by the hyperinflation adjustment are reported excluding these impacts.

Therefore, and despite the complex trading environment in 2009, reflected in sharp pressure on revenues in some of our markets, the strong diversification of the Company’s business portfolio enabled the Group to achieve revenues of 56,731 million euros in 2009 (-2.1% year-on-year in reported terms), up 0.2% year-on-year in organic⁴ terms. Particularly noteworthy is the significant increase in revenues at Telefónica Latinoamérica, which contributed 2.7 percentage points to organic⁴ growth and, to a lesser extent, at Telefónica Europa, which contributed 0.2 percentage points. Also worth noting is the improved revenue performance from Telefónica España in the second half of the year, with a slowdown in the pace of year-on-year revenue decline in the fourth quarter (for the second consecutive quarter).

The negative impact from foreign exchange rates reduced revenue growth by 2.9 percentage points, excluding the impact from hyperinflationary accounting while changes in the consolidation perimeter added 0.1 percentage points, also excluding the adjustment from hyperinflationary accounting.

By service, broadband connectivity revenues (wireline and mobile) and revenues from applications and services continued to increase their contribution to Group revenues, adding 2.5 percentage points to organic⁴ revenue growth in 2009. This offsets the lower contribution of access, voice and equipment resulting from the consumers’ usage optimization in the current economic environment.

In absolute terms, Telefónica Latinoamérica contributed 40.5% to total Group revenues (+1.8 percentage points compared to 2008, excluding the impact from hyperinflationary accounting), whilst Telefónica España and Telefónica Europe contributed 34.7% and 23.9% to Group revenue respectively.

Telefónica Group’s operating expenses in 2009 amounted to 35,489 million euros, down 0.4% from 2008 in organic terms⁴ (-2.9% in reported terms), as a result of lower supply expenses.

Supply expenses declined by 6.2% to December in reported terms. Excluding exchange rate effects and the impact from hyperinflationary accounting, supply expenses fell 3.1% year-on-year. This decline is mainly due to lower interconnection costs resulting from the decline in fixed-to-mobile traffic and the fall in mobile termination rates.

Personnel expenses rose 2.7% year-on-year in constant euros and excluding the impact from hyperinflationary accounting to 6,775 million euros (+0.2% in reported terms). The average number of employees in the period was 255,151 (3,376 more than the 2008 average), mainly due to the larger workforce at the Atento Group. Excluding the Atento Group workforce, the average number of employees in the Telefónica Group was virtually stable year-on-year at 125,266.

External service expenses (9,921 million euros) rose 1.0% year-on-year in 2009 excluding the impact from exchange rates and from hyperinflationary accounting. This increase is largely due to higher customer, network and systems management expenses at Telefónica Latinoamérica. External service expenses fell 1.6% in reported terms in 2009.

Gains on sale of fixed assets in 2009 amounted to 248 million euros, mainly from the disposal of Medi Telecom, which generated 220 million euros of capital gains, registered in the fourth quarter of the year. It is worth highlighting that gains on sale of fixed assets in 2008 (292 million euros) were affected mainly by the sale of Sogecable and real estate disposals at Telefónica España and Telefónica O2 Czech Republic.

January — December 2009 Results Telefónica 6

TELEFÓNICA GROUP

Consolidated Results

The Company’s focus on increasing efficiency and exploiting economies of scale was reflected in operating income before depreciation and amortisation (OIBDA), which totalled 22,603 million euros in 2009 (-1.4% in reported terms). In organic⁴ terms, OIBDA grew 0.9% year-on-year, underpinned by Telefónica Latinoamérica (+3.8 percentage points) and Telefónica Europa (+0.7 percentage points), which offset Telefónica España’s lower contribution (-3.3 percentage points). In organic⁵ terms, the Telefónica Group improved its OIBDA margin by 0.3 percentage points to 39.8%, mainly boosted by margin expansion at Telefónica Latinoamérica (+1.7 percentage points) and at Telefónica Europe (+0.8 percentage points).

OIBDA at Telefónica España accounted for 43.2% of total Group OIBDA, compared to 40.5% and 17.3% for Telefónica Latinoamérica and Telefónica Europe, respectively.

Depreciation and amortisation in 2009 totalled 8,956 million euros, up 1.2% year-on-year in organic terms⁵ and excluding the adjustment for hyperinflationary accounting, mainly due to higher depreciation and amortisation at Telefónica Latinoamérica (+2.0 percentage points contribution to growth) and Telefónica Europa (+0.7 percentage points contribution to growth). In reported terms, depreciation and amortisation was down 1.0% year-on-year.

Operating income (OI) amounted to 13,647 million euros in 2009, with 0.7% year-on-year growth in organic⁵ terms (-1.6% in reported terms).

Profit from associated companies reached 47 million euros to December (-161 million euros in 2008), mainly as a result of increased profits from the Company’s stake in Portugal Telecom and reduced losses from its participation in Telco, S.p.A. Results for 2008 include the impact of the impairment charge taken by Telco, S.p.A.’s on the Company’s investment in Telecom Italia, amounting to 209 million euros (146 million euros after the related tax effect at Telefónica, S.A.).

Net financial results in 2009 amounted to 3.307 million euros (+18.2% vs. 2008), with the average cost of debt of the Group standing at 7.3%. The impact derived from recent announcements coming from Venezuela amounted to 630 million euros; stripping out this effect, the average cost was 5.92%, with a 4.3% decline in the financial costs vs. the previous year, due to:

•

Lower expenses (298 million euros) due to lower interest rates during 2009 mainly in European currencies.

•

A decrease of 3.7% in the average debt, which has generated savings of 104 million euros.

•

Changes of the actual value of commitments derived mainly from the pre-retirement plans and other positions equally accounted at market value have generated a lower income of 85 million euros.

•

Changes in the foreign exchange gains and losses up to December 2009 with respect to 2008 yielded a higher cost of 197 million euros.

Free cash flow generated by the Telefónica Group in 2009 reached 9,097 million euros. Out of this figure, 959 million euros were assigned to Telefónica’s share buyback program, 4,557 million euros to Telefónica S.A. dividend payment and 793 million euros to commitment cancellations derived mainly from the pre-retirements plans. In addition there was a payment of 1,178 million euros due to financial investments and divestments. As a result, net financial debt decreased by 1,610 million euros. On the other hand, net debt increased by an additional 2,429 million euros because of the foreign exchange impact, changes in the consolidation perimeter and other effects on financial accounts. All this led to an increase of 818 million euros with respect to the net financial debt at the end of 2008 (42,733 million euros), leaving the final figure in December 2009 at 43,551 million euros.

The leverage ratio, net debt over OIBDA, stood at 1.9 times at December 2009, in line with the reported leverage ratio at September 2009.

January — December 2009 Results Telefónica 7

TELEFÓNICA GROUP

Consolidated Results

During 2009, the financing activity of the Telefónica Group, excluding short term Commercial Paper Programmes activity, rose above 14,000 million euros mainly focused on refinancing 2009 maturities and pre-financing part of 2010 debt at Telefónica, S.A. level. It is worth highlighting the 5 years Euro-denominated bond issue for an amount of 2,000 million euros raised in January, 1,000 million euros raised in March through a 7 years bond issue, the re-opening of this last one in June for another 500 million euros, a 6 year private issue of 400 million euros placed in the same month and a US dollar-denominated issue for USD 2,250 million divided in 2 tranches of 5.5 and 10 years maturities launched in June. During the last quarter of the year, Telefónica issued in November a 10 year euro denominated bond for an amount of 1,750 million euros and, in December, Telefónica launched a 5 year private issue for 100 million euros and a 13 year bond for an amount of GBP 650 million. Thanks to these transactions, the Group’s cash position exceeds 2010 maturities.

Additionally, in February a 4,000 million euros extension on a syndicated facility maturing in 2011 was successfully signed, smoothing 2011 maturities and adjusting them to levels more in line with cash flow generation figure. Of this figure, 2,000 million euros were shifted to 2012 and the remaining 2,000 million euros were shifted to 2013.

Telefónica S.A. and its holding companies have continued active during 2009 under its various Commercial Paper Programmes (Domestic and European), for an outstanding balance of approximately 800 million euros.

Regarding Latin America, Telefónica subsidiaries have tapped the capital markets up to December 2009 for an amount above 2,000 million equivalent euros, mainly for refinance 2009 maturities and renewing existing debt.

At the end of December, bonds and debentures represented 63%, on the consolidated financial debt breakdown, while debt with financial institutions weighted 37%.

In 2009 income taxes totalled 2,450 million euros, implying a tax rate of 23.6%. It is worth mentioning that at the end of 2009, the European Commission’s conclusion with respect to the legal action against the Kingdom of Spain regarding tax amortization of goodwill generated from certain foreign investments made subsequent to December 21st, 2007 was published. In accordance to the above, this decision has no effect on the Telefónica Group. As the above mentioned legal action has been resolved, the consolidated income statement of the Telefónica Group for 2009 will reflect a lower income tax expense for the tax amortization of goodwill from the acquisition date to year-end, in an amount of 591 million euros.

In addition, the expected impact in future years is estimated to be a lower income tax expense of approximately 140 million euros on an annual basis. It should be noted that, in accordance with the Spanish Tax Income Law goodwill amortization charges are deductible for 20 years.

Losses attributable to minority interests reduced net income to the end of December by 161 million euros (-234 million euros in 2008), mainly due to minority interests in the profits of Telesp, Telefónica O2 Czech Republic and in the losses of Telefónica Telecom. This year-on-year change in performance is explained by the lower profits attributable to minority interests in Telefónica Chile (following the takeover bid for minority interests in 2008) and Telesp, and the increased losses at Telefónica Telecom.

January — December 2009 Results Telefónica 8

TELEFÓNICA GROUP

Consolidated Results

As a result of the above, consolidated net income in 2009 amounted to 7,776 million euros, up 2.4% from 2008 in reported terms, whereas basic earnings per share in 2008 stood at 1.71 euros, with a 4.5% year-on-year growth.

CapEx in 2009 reached 7,257 million euros (-11.1% year-on-year in organic terms⁶), with the investment devoted to growth and transformation being the Company’s priority. Therefore, as compared to 2008, 3G coverage increased by 15 percentage points, fixed loops able to support bandwidth above 25 Mbps grew by 6 percentage points, whereas the capacity of the IP network doubled. As a result, operating cash flow (OIBDA-CapEx) stood at 15,346 million euros, up 8.0% year-on-year in organic terms⁶. This performance was driven by strong growth at Telefónica Latinoamérica (+29.8% in organic terms⁶; 5,693 million euros) and at Telefónica Europa (+21.7% in organic terms⁶; 2,183 million euros), which offset the lower cash flow generated by Telefónica España in comparable terms⁷ (-5.9% to 7,893 million euros). Economies of scale and efficient management of operating expenses and investment enabled an efficiency ratio⁸ of 74.1% to be achieved, a year-on-year improvement of 1.4 percentage points.

All in all, 2009 results show acceleration from revenues to operating cash flow in organic⁹ growth terms, with the latter exceeding revenue growth by 7.8 percentage points, highlighting the Company’s success in combining strong commercial activity with high cash flow generation in a complex macroeconomic context.

January — December 2009 Results Telefónica 9

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP

CONSOLIDATED INCOME STATEMENT
Unaudited figures (Euros in millions)

		January - December												October - December
		2009				2008				% Chg				2009				2008				% Chg
Revenues			56,731				57,946				(2.1	)			14,976				14,804				1.2
Internal exp capitalized in fixed assets			720				736				(2.2	)			237				207				14.6
Operating expenses			(35,489	)			(36,553	)			(2.9	)			(9,654	)			(9,367	)			3.1
Supplies			(16,717	)			(17,818	)			(6.2	)			(4,560	)			(4,607	)			(1.0	)
Personnel expenses			(6,775	)			(6,762	)			0.2				(1,770	)			(1,697	)			4.4
Subcontracts			(9,921	)			(10,079	)			(1.6	)			(2,734	)			(2,607	)			4.9
Bad Debt Provisions			(874	)			(748	)			16.8				(210	)			(186	)			13.0
Taxes			(1,203	)			(1,147	)			4.9				(380	)			(271	)			40.3
Other net operating income (expense)			435				510				(14.7	)			221				196				12.8
Gain (loss) on sale of fixed assets			248				292				(15.1	)			230				56				n.m.
Impairment of goodwill and other assets			(42	)			(12	)			n.m.				(32	)			(3	)			n.m.
Operating income before D&A (OIBDA)			22,603				22,919				(1.4	)			5,978				5,893				1.4
OIBDA margin			39.8	%			39.6	%			0.3 p.p.				39.9	%			39.8	%			0.1 p.p.
Depreciation and amortization			(8,956	)			(9,046	)			(1.0	)			(2,293	)			(2,243	)			2.2
Operating income (OI)			13,647				13,873				(1.6	)			3,685				3,650				0.9
Profit from associated companies			47				(161	)			c.s.				0				(180	)			c.s.
Net financial income (expense)			(3,307	)			(2,797	)			18.2				(1,034	)			(698	)			48.0
Income before taxes			10,387				10,915				(4.8	)			2,651				2,771				(4.3	)
Income taxes			(2,450	)			(3,089	)			(20.7	)			(161	)			(715	)			(77.5	)
Income from continuing operations			7,937				7,826				1.4				2,490				2,057				21.1
Income (Loss) from discontinued ops.			(0	)			0				c.s.				(0	)			0				c.s.
Minority interest			(161	)			(234	)			(31.1	)			(50	)			(60	)			(17.0	)
Net income			7,776				7,592				2.4				2,440				1,996				22.2
Weighted average number of ordinary shares outstanding during the period (millions)			4,553				4,646				(2.0	)			4,554				4,593				(0.8	)
Basic earnings per share (euros)			1.71				1.63				4.5				0.54				0.43				23.3

January — December 2009 Results Telefónica 10

TELEFÓNICA GROUP

Financial Data

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

		REVENUES												OIBDA												OIBDA MARGIN
		January - December												January - December												January - December
		2009				2008				% Chg				2009				2008				% Chg				2009				2008				Chg
Telefónica España (1)(2)			19,703				20,838				(5.4	)			9,757				10,285				(5.1	)			49.5	%			49.4	%			0.2 p.p.
Telefónica Latinoamérica (3)			22,983				22,174				3.7				9,143				8,445				8.3				39.8	%			38.1	%			1.7 p.p.
Telefónica Europe (4)			13,533				14,308				(5.4	)			3,910				4,180				(6.4	)			28.9	%			29.2	%			(0.3 p.p.	)
Other companies and eliminations			512				625				(18.1	)			(207	)			9				c.s				n.m.				n.m.				n.m.
Total Group (2)(3)(4)(5)			56,731				57,946				(2.1	)			22,603				22,919				(1.4	)			39.8	%			39.6	%			0.3 p.p.

		OPERATING INCOME												CAPEX												OPCF (OIBDA-CAPEX)
		January - December												January - December												January - December
		2009				2008				% Chg				2009				2008				% Chg				2009				2008				% Chg
Telefónica España (1)(2)			7,617				8,046				(5.3	)			1,863				2,208				(15.6	)			7,893				8,077				(2.3	)
Telefónica Latinoamérica (3)			5,350				4,800				11.5				3,450				4,035				(14.5	)			5,693				4,410				29.1
Telefónica Europe (4)			1,015				1,144				(11.3	)			1,728				2,072				(16.6	)			2,183				2,108				3.5
Other companies and eliminations			(335	)			(117	)			n.m.				216				85				153.6				(423	)			(76	)			n.m.
Total Group (2)(3)(4)(5)			13,647				13,873				(1.6	)			7,257				8,401				(13.6	)			15,346				14,519				5.7

January — December 2009 Results Telefónica 11

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited figures (Euros in millions)

		Dec 2009				Dec 2008				% Chg
Non-current assets			84,311				81,923				2.9
Intangible assets			15,846				15,921				(0.5	)
Goodwill			19,566				18,323				6.8
Property, plant and equipment and Investment property			32,003				30,546				4.8
Non-current financial assets and investments in associates			10,925				10,153				7.6
Deferred tax assets			5,971				6,980				(14.5	)
Current assets			23,830				17,973				32.6
Inventories			934				1,188				(21.4	)
Trade and other receivables			10,622				9,315				14.0
Current tax receivable			1,246				970				28.5
Current financial assets			1,906				2,216				(14.0	)
Cash and cash equivalents			9,113				4,277				113.1
Non-current assets classified as held for sale			9				7				33.3
Total Assets = Total Equity and Liabilities			108,141				99,896				8.3
Equity			24,274				19,562				24.1
Equity attributable to equity holders of the parent			21,734				17,231				26.1
Minority interest			2,540				2,331				9.0
Non-current liabilities			56,931				55,202				3.1
Long-term financial debt			47,607				45,088				5.6
Deferred tax liabilities			3,082				3,576				(13.8	)
Long-term provisions			4,993				5,421				(7.9	)
Other long-term liabilities			1,249				1,117				11.8
Current liabilities			26,936				25,132				7.2
Short-term financial debt			9,184				8,100				13.4
Trade and other payables			7,365				8,120				(9.3	)
Current tax payable			2,766				2,275				21.6
Short-term provisions and other liabilities			7,621				6,637				14.8
Financial Data
Net financial Debt (1)			43,551				42,733				1.9

January — December 2009 Results Telefónica 12

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP

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

				January - December
				2009				2008				% Chg
I		Cash flow from operations			21,178				20,571				3.0
II		Net interest payment (1)			(2,070	)			(2,781	)
III		Payment for income tax			(2,942	)			(1,413	)
A=I+II+III		Net cash provided by operating activities			16,165				16,377				(1.3	)
B		Payment for investment in fixed and intangible assets			(7,592	)			(7,861	)
C=A+B		Net free cash flow after CapEx			8,573				8,516				0.7
D		Net Cash received from sale of Real Estate			241				248
E		Net payment for financial investment			(1,419	)			(1,575	)
F		Net payment for operations with minority shareholders and treasury stock (2)			(5,785	)			(6,681	)
G=C+D+E+F		Free cash flow after dividends			1,610				508				n.m.
H		Effects of exchange rate changes on net financial debt			1,226				(2,142	)
I		Effects on net financial debt of changes in consolid. and others			1,203				99
J		Net financial debt at beginning of period			42,733				45,284
K=J-G+H+I		Net financial debt at end of period			43,551				42,733				1.9

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

		January - December
		2009				2008				% Chg
OIBDA			22,603				22,919				(1.4	)
- CapEx accrued during the period			(7,257	)			(8,401	)
- Payments related to cancellation of commitments			(793	)			(920	)
- Net interest payment			(2,070	)			(2,781	)
- Payment for tax			(2,942	)			(1,413	)
- Results from the sale of fixed assets			(248	)			(292	)
-Investment In working capital and other deferred income and expenses			(719	)			(597	)
= Net Free Cash Flow after CapEx			8,573				8,516				0.7
+ Net Cash received from sale of Real Estate			241				248
- Net payment for financial investment			(1,419	)			(1,575	)
- Net payment for operations wirh minority shareholders and treasury stock			(5,785	)			(6,681	)
= Free Cash Flow after dividends			1,610				508				n.s.

		January - December
		2009				2008				% Chg
Net Free Cash Flow after CapEx			8,573				8,516				0.7
+ Payments related to cancellation of commitments			793				920
- Operations with minority shareholders			(269	)			(291	)
= Free Cash Flow			9,097				9,145				(0.5	)
Weighted average number of ordinary shares outstanding during the period (millions)			4,553				4,646
= Free Cash Flow per share (euros)			2.00				1.97				1.5

January — December 2009 Results Telefónica 13

TELEFÓNICA GROUP

Financial Data

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

				December 2009
		Long-term debt (1)			48,122
		Short term debt including current maturities			9,184
		Cash and cash equivalents			(9,113	)
		Short and Long-term financial investments (2)			(4,642	)
A		Net Financial Debt			43,551
		Guarantees to IPSE 2000			71
B		Commitments related to guarantees			71
		Gross commitments related to workforce reduction (3)			4,257
		Value of associated Long-term assets (4)			(827	)
		Taxes receivable (5)			(1,169	)
C		Net commitments related to workforce reduction			2,260
A + B + C		Total Debt + Commitments			45,883
		Net Financial Debt / OIBDA (6)			1.9x
		Total Debt + Commitments/ OIBDA (6)			2.1x

DEBT STRUCTURE BY CURRENCY
Unaudited figures

		December 2009
		EUR				LATAM				GBP				CZK				USD
Currency mix			69	%			12	%			8	%			6	%			4	%

CREDIT RATINGS

		Long-Term		Short-Term		Perspective		Last review
Moody’s		Baa1		P-2		Positive		17/02/2009
JCR		A		—		Stable		17/12/2008
S&P		A-		A-2		Stable		2/12/2008
Fitch/IBCA		A-		F-2		Stable		25/11/2008

January — December 2009 Results Telefónica 14

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP
EXCHANGES RATES APPLIED

		P&L and CapEx (1)								Statement of Financial Position (2)
		Jan - Dec 2009				Jan - Dec 2008				December 2009				December 2008
USA (US Dollar/Euro)			1.390				1.463				1.441				1.392
United Kingdom (Sterling/Euro)			0.891				0.795				0.888				0.952
Argentina (Argentinean Peso/Euro)			5.174				4.632				5.474				4.806
Brazil (Brazilian Real/Euro)			2.757				2.659				2.508				3.252
Czech Republic (Czech Crown/Euro)			26.435				24.969				26.465				26.930
Chile (Chilean Peso/Euro)			775.795				758.725				730.460				885.740
Colombia (Colombian Peso/Euro)			2,985.075				2,873.563				2,941.176				3,125.000
El Salvador (Colon/Euro)			12.165				12.806				12.605				12.177
Guatemala (Quetzal/Euro)			11.331				11.069				12.035				10.830
Mexico (Mexican Peso/Euro)			18.778				16.239				18.812				18.841
Nicaragua (Cordoba/Euro)			28.258				28.365				30.023				27.623
Peru (Peruvian Nuevo Sol/Euro)			4.186				4.285				4.165				4.371
Uruguay (Uruguayan Peso/Euro)			31.303				30.605				28.275				33.888
Venezuela (Bolivar Fuerte/Euro) (3)			2.989				3.147				3.097				2.992

January — December 2009 Results Telefónica 15

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

Against an adverse economic backdrop, the Company adapted its management priorities throughout the year, delivering a healthy cash flow generation in 2009 while posting a sharp pick up in commercial activity during the second half, thereby setting the base for future growth from a sound leadership position. All this, in a highly mature and very competitive market, and against a backdrop of an increasing number of customers optimising their spending, especially on voice services.

It is especially noteworthy the better revenue performance evidenced across all business in the fourth quarter, recording a slowdown in the year-on-year decline versus previous quarters. As a result there was a 1.1 percentage point quarter-on-quarter improvement in wireline revenues on a comparable basis¹, and a 3.9 percentage point improvement in wireless revenues (+0.4 percentage points in service revenues).

At the end of 2009, Telefónica España continues leading the Spanish market, with a total of 46.8 million accesses. It is worth highlighting the greater number of retail broadband Internet accesses, which rose 4.4% year-on year to nearly 5.5 million, the significant increase in the number of pay-TV customers (+14.8% versus December 2008), and the strong growth in contract customers in the wireless business (+5.3% year-on-year), to reach the wireless customer base 23.5 million. At the same time, the rising appetite for wireless flat-rate data plans continued, which exceeded 1.9 million at the end of the year, twice the figure for year-end 2008.

Revenues totalled 19,703 million euros in 2009, down 5.4% year-on-year and 1.6% in the fourth quarter. The improved performance in the fourth quarter reflects revenues booked in the quarter associated with the recognition of the Universal Service Obligation for the 2007 and 2008 fiscal years. Recall that in 2008 revenues associated with the recognition of the Universal Service Obligation totalled 183 million euros (all booked in the third quarter) while for the full-year 2009 the figure is 223 million euros (75 million euros booked in the first quarter and 148 million euros booked in the fourth quarter).

On a comparable basis¹, 2009 revenues declined 5.9% year-on-year and 4.5% in the fourth quarter. a decrease that was smaller than in previous quarters (-6.6% in the third quarter and -6.9% in the second quarter). The major driver of 2009 revenue performance was the lower consumption of voice services. On the other hand, in the wireline business, IT Services (+14.7% year-on-year in 2009; +19.5% in the fourth quarter of 2009) and Data Services (+8.7% versus 2008; +11.3% in the fourth quarter), performed very well in both the fourth quarter and the full year, as well as wireless data connectivity revenues (+52.2% versus 2008).

Reported operating income before depreciation and amortisation (OIBDA) reached 9,757 million euros in 2009 (-5.1% versus 2008), with a solid OIBDA margin of 49.5%, similar to the margin of the previous year (+0.2 percentage points). On comparable basis¹, OIBDA declined 8.0% year-on-year in 2009, mainly due to the loss of higher-margin revenues, mostly from wireline and wireless voice traffic and wireline access related revenues, and the higher commercial activity in the second half of 2009. In the fourth quarter OIBDA was down 7.5% on a comparable basis¹, following the sharp increase in commercial activity in the wireless business targeted at the business’ most valuable customers. On a comparable basis¹, the OIBDA margin stood at 48.0% for 2009, a figure that remains a benchmark in the European telecom sector.

January — December 2009 Results Telefónica 16

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

CapEx totalled 1,863 million euros in 2009 (-15.6% year-on-year), reflecting the Company’s ability to adapt investments as a function of demand and to focus on the fastest growing businesses, such as mobile broadband.

As a result, operating cash flow (OIBDA-CapEx) totalled 7,893 million euros in 2009 (-2.3% year-on-year on a reported basis and -5.9% on a comparable basis²), reflecting the initiatives taken to contain costs and investment in order to limit the impact of pressure on revenues.

WIRELINE BUSINESS

In 2009, Spanish wireline access market continued affected by an adverse economic climate, and showed an estimated year-on-year decrease of 0.8%. Against this backdrop, the Company’s total number of wireline accesses in service (retail wireline telephony accesses, wholesale line rental, fully unbundled loops, and naked wholesale ADSL) was down 2.4% in 2009 (-386,465 wireline accesses in the year).

Total retail wireline telephony accesses stood at 14.2 million at the end of 2009 (15.3 million in December 2008), affected by ongoing loop unbundling. Hence, the Company had an estimated market share in 2009 of 72%. It is worth highlighting that in 2009 66% of the retail wireline telephony accesses lost were offset by net growth in wholesale accesses, which generate revenues for the company.

It should also be highlighted that in the fourth quarter the Company registered the lowest quarterly line losses of 2009, with the exception of the third quarter, which was affected by seasonal factors; line losses in the fourth quarter were 282,352 accesses.

The number of pre-selected lines continued to decline, dropping by 122,583 in the quarter and by 406,815 in 2009 to below 1.1 million lines at the end of December.

Telefónica remains market leader in wireline retail broadband Internet accesses, with an estimated market share of around 56% and nearly 5.5 million accesses (+4.4% versus December 2008), after registering 53,262 net adds in the fourth quarter and 230,379 in 2009. As of December 2009, the total market topped 9.9 million accesses after posting an estimated year-on-year growth of 7.2%.

The Company lost 64,739 wholesale indirect broadband accesses in 2009, down to a total of 359,025 at year end (-15.3% versus 2008) after posting an increase of 21,786 accesses in the fourth quarter. Unbundled loops net adds in 2009 were 455,749 (132,455 in the fourth quarter). Total unbundled loops reached 2.2 million, of which 21% are shared access loops, and the remainder 79% are fully unbundled loops (including more than 428,000 naked shared access loops). In 2009 net adds of fully unbundled loops were 610,426 (184,789 in the fourth quarter), 28% of which were naked shared access loops. Shared access loops decreased by 154,677 in 2009 and by 52,334 in the fourth quarter.

During the fourth quarter Pay-TV accesses continued delivering an excellent performance, with net adds of 48,725 (+112.4% year-on-year). After registering 90,486 Pay-TV net adds in 2009, Telefónica finished the year with a total of 702,980 customers (+14.8% year-on-year) and a significant improvement in its estimated market share to around 17%; this market share figure is even more remarkable bearing in mind current Imagenio’s coverage, limited to 60% of Spanish households.

The total number of Dúo and Trío accesses means that nearly 88% of the Company’s retail broadband accesses now form part of a double or triple play bundle.

January — December 2009 Results Telefónica 17

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

Full-year 2009 revenues amounted to 12,167 million euros in 2009, down 3.3% year-on-year. On a comparable basis³, revenues fell 2.9% in the fourth quarter (-3.7% in 2009), which represented an improvement on the performance in previous quarters (4.7% year-on-year decline in the second quarter and 4.0% year-on-year decline in the third quarter). By item:

•

Traditional access revenues were down 5.2% year-on-year in 2009 while rose 12.6% in the fourth quarter, affected by the booking of revenues associated with the recognition of the Universal Service Obligation amounting to 183 million euros in 2008 (in the third quarter of 2008) and of 223 million euros in 2009 (75 million euros in the first quarter of 2009 and 148 million euros in the fourth quarter of 2009). On a comparable basis3, traditional access revenues declined 7.0% year-on-year in 2009 (-9.1% in the fourth quarter) due to the lower number of accesses (-7.3% year-on-year).

•

Voice service revenues continued to improve on a relative basis, recording a slowdown in the year-on-year decline in the fourth quarter (-9.5%) vs. the previous two quarters (-12.1% in the second quarter and -10.8% in the third). Over the full year, voice service revenues fell by 10.2% on the back of lower fixed-to-mobile and international traffic handled and the growing weight of traffic under flat-rate plans, stemming from consumers’ usage optimization.

•

Internet and broadband revenues fell by 1.9% year-on-year in 2009 (-1.7% in the fourth quarter):

•

Retail broadband service revenues declined 1.7% in 2009 (-2.7% in the fourth quarter), mainly due to slower growth in the total number of accesses and a reduction in effective ARPU (-6.4% in 2009 and -5.5% in the fourth quarter).

•

Wholesale broadband revenues (+3.3% year-on-year for the full year and +7.5% over the fourth quarter) reflect the growth in unbundled loops.

•

Revenues from Data services continued to show significant growth year-on-year (+11.3% in the fourth quarter and +8.7% in 2009), driven by increased revenues from leased circuits to mobile operators, mainly Telefónica Móviles España, as a result of the rapid growth in mobile broadband.

•

Revenues from IT services posted robust growth (+14.7% year-on-year in 2009 and +19.5% in the fourth quarter).

Operating expenses declined by 2.4% in 2009 on a comparable basis³ (down 3.1% in the fourth quarter). Reported operating expenses declined by 2.8% to 6,527 million euros, and break down as follows:

•

External service expenses fell by 2.7% to 1,300 million euros in 2009. In the fourth quarter these expenses decreased by 5.7%, due to lower commercial activity.

•

Personnel costs dropped by 0.9% to 2,052 million euros. Excluding the impact of the revision of the estimates for the adjustment to workforce provision provided for in prior periods, personnel costs rose by 1.9% in 2009, due to a higher year-on-year costs in the fourth quarter of 2009. The positive impact of lower than budgeted CPI for salary revision purposes was accounted for in the fourth quarter of 2008.

•

Supply costs decreased 6.0% to 2,785 million euros in 2009, thanks to lower interconnection costs associated with lower fixed-to-mobile traffic and the reduction in mobile termination rates.

As a result, operating income before depreciation and amortisation (OIBDA) in 2009 reached 5,810 million euros (-4.0% year-on-year), while the OIBDA margin stood at 47.7%. On a comparable basis³, OIBDA was down 4.1% for the full year (-0.5% in the fourth quarter). Meanwhile, on a comparable basis⁴, the OIBDA margin was virtually unchanged, at 47.0% for the year (47.2% in 2008), reaching 46.8% in the fourth quarter.

January — December 2009 Results Telefónica 18

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

WIRELESS BUSINESS

Given the economic climate, Telefónica’s commercial activity in 2009 continued to focus on the highest-value segments of the market, a strategy that enabled the Company to maintain its market leadership in terms of revenues, being the company with the widest gap between revenue share and customer market share in Spain.

At the end of 2009, the Company’s mobile customer base stood at 23.5 million accesses (23.6 million in 2008). It should be noticed that in December the Company recorded the disconnection of 715,000 inactive prepay lines without any impact on the Company’s financial results. Excluding this adjustment, net adds for the full year reached 648,765, 538,027 of which came in the second half (+41.8% year-on-year) and 260,445 in the last quarter (+54.2% year-on-year).

The focus on highest-value customers led to positive commercial results in the contract segment, with net adds amounting to 766,244 in 2009, 639,705 of which came in the second half and 324,921 in the fourth quarter (the best-performing quarter in terms of contract net adds in the last two years). At the end of 2009, contract customers accounted for 65% of the Company’s total accesses.

With regards to mobile portability, during the fourth quarter, and for the third quarter in a row, there was a positive balance in the contract segment, with net adds of 24,975 lines, compared with a negative balance of 20,616 net adds in the fourth quarter of 2008. As a result, the net positive balance in the contract segment in 2009 was 8,078 lines. In terms of total portability, the balance was negative (153,858 accesses), although the trend was much more favourable during the second half (-30,139 in the second half of 2009 versus -123,719 in the first half).

The churn rate stood at 2.3% in 2009 (+0.4 percentage points year-on-year), rising to 3.1% in the fourth quarter (+1.2 percentage points higher than in the fourth quarter of 2008), due to the disconnection of inactive lines mentioned above. Excluding this effect, the churn rate would have been 2.2% in the fourth quarter and 2.1% in 2009. It is worth highlighting that in the highest-value segments churn rate continues to be well below blended ratios, standing at 1.3% in the contract segment in 2009 (+0.2 percentage points versus 2008).

In terms of usage, during the fourth quarter, there was a further slow down in the pace of year-on-year decline in traffic. Traffic was down 2.2% year-on-year in the fourth quarter, compared with a drop of 3.8% in the third quarter and of 4.0% during the first half of 2009. This left 2009 traffic down 3.5% versus 2008, at 42,039 million minutes.

Voice ARPU, affected by mobile termination rate cuts over the last year (-21.7% following the cuts introduced in October 2008, April 2009, and October 2009) and by the change in customer usage patterns due to the economic situation, dropped 12.4% in 2009 to 22.1 euros (-12.6% in the fourth quarter). Outgoing voice ARPU posted a relatively stronger performance in 2009, with a year-on-year decline of 10.3% (10.1% in the fourth quarter).

Data ARPU continued to register positive growth (+3.0% year-on year for 2009 and +2.8% for the quarter), reaching 5.4 euros for 2009, despite smaller contributions from P2P SMS and premium SMS, with the latest being affected by regulatory changes introduced during the fourth quarter.

Given the current climate, the performance of wireless data connectivity revenues is particularly noteworthy, as this revenue continues to show solid year-on-year growth, even accelerating in the fourth quarter. Over the full year, these revenues rose 52.2% versus 2008, driven by a strong demand of flat-rate data plans, which exceeded 1.9 million in December 2009, doubling the year-end 2008 figure. Thus, data ARPU accounted for 19.6% of total ARPU in 2009 (+2.4 percentage points year-on-year).

January — December 2009 Results Telefónica 19

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

This performance was boosted by the increased customer penetration of 3G handsets, which reached 8.9 million (1.4 times the December 2008 figure).

It is also noteworthy that the fourth quarter saw confirmation of the stabilisation in outgoing ARPU, with a very similar performance year-on-year to that of the third quarter in comparable terms, and both quarters showing an improvement over the first half. As a result, outgoing ARPU was down 7.8% in 2009 and 7.3% in the fourth quarter. Total ARPU dropped by 9.7% year-on- year, both in 2009 and in the fourth quarter, to 27.5 euros in 2009.

As a result of these trends, revenues declined 4.4% year-on-year in the fourth quarter, improving by 1.9 percentage points on the third quarter of 2009. This left 2009 revenues down 7.4% at 8,965 million euros (-7.9% year-on-year on a comparable basis⁵). Highlights by revenue item:

•

Service revenues were down 7.4% year-on-year in 2009 to 7,828 million euros. Mobile termination rate cuts accounted for 3.3 percentage points of the year-on-year revenue decline in the quarter and 2.6 percentage points in the full year. On a comparable basis5, service revenues declined 7.7% year-on-year in the fourth quarter but posted a 0.4 percentage points improvement from the previous quarter. The year-on-year decrease in 2009 stood at 8.0%.

•

Customer revenues were down 4.5% year-on-year in the fourth quarter, posting a better performance than in the third quarter (-5.3%) thanks to the slight recovery in usage patterns. Over the year these revenues declined 5.4% from 2008 to 6,571 million euros.

•

Interconnection revenues declined 22.7% year-on-year in the quarter and 19.5% over the year (to 1,001 million euros), due to the cuts in mobile termination rates.

•

Roaming-in revenues fell 27.4% year-on-year in the quarter and by 22.8% in 2009 versus 2008 (to 153 million euros), affected by the continued decrease in wholesale prices.

•

Revenues from handset sales totalled 1,137 million in 2009 (-7.3% versus 2008), having risen 15.8% in the fourth quarter due to the different rates of channel uptake.

January — December 2009 Results Telefónica 20

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

Operating expenses were down 4.0% year-on-year to 5,277 million euros, thanks to the Company’s measures to improve efficiency and adapt to the current economic environment. However, these efforts were partially offset by the increased commercial activity rolled out during the last two quarters (especially in the contract segment), the loss of higher-margin revenues, and the accounting of 68 million euros of expenses to cover Universal Service-related costs (24 million euros in the first quarter and 44 million euros in the fourth quarter), compared with the 59 million accounted for in 2008 (third quarter). Thus, operating costs went down 3.8% on a comparable basis⁵ in 2009 (+5.2% in the quarter). This evolution, mainly in the quarter, is driven by: i) increased commercial activity, ii) increased costs related with leased circuits from the wireline business, due to the boom in data traffic related to mobile broadband and iii) the unfavourable comparison of personnel costs with the fourth quarter of 2008, when the Company recognised the positive impact of lower than budgeted CPI for salary revision purposes.

On the other hand, it should be noticed that the disposal of the stake in Medi Telecom in the fourth quarter of 2009 generated a capital gain of 220 million euros.

As a result, OIBDA for 2009 declined 6.8% to 3,975 million euros (-13.3% on a comparable basis⁵). Reported OIBDA in the fourth quarter was stable versus the same period in 2008, although declining 17.1% on a comparable basis⁶, affected by lower revenues, and the aforementioned expenses evolution. As a result, OIBDA margin in 2009 was 44.3% (+0.3 percentage points). On a comparable basis⁶, OIBDA margin came in at 42.0% in 2009 (-2.6 percentage points year-on-year).

January — December 2009 Results Telefónica 21

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

TELEFÓNICA ESPAÑA
ACCESSES
Unaudited figures (thousands)

		2008				2009
		December				March				June				September				December				% Chg y-o-y
Final Clients Accesses			45,213.6				44,885.7				44,676.7				44,858.6				44,164.2				(2.3	)
Fixed telephony accesses (1)			15,326.3				15,004.9				14,691.4				14,482.5				14,200.1				(7.3	)
Internet and data accesses			5,670.0				5,661.3				5,660.1				5,728.7				5,722.5				0.9
Narrowband			388.0				336.4				297.6				276.5				219.5				(43.4	)
Broadband (2)			5,246.4				5,291.8				5,331.4				5,423.5				5,476.8				4.4
Other (3)			35.6				33.1				31.1				28.7				26.2				(26.3	)
Mobile accesses			23,604.8				23,614.7				23,715.6				23,993.2				23,538.6				(0.3	)
Pre-Pay (4)			9,037.0				9,061.8				9,021.2				8,984.0				8,204.5				(9.2	)
Contract			14,567.8				14,552.9				14,694.4				15,009.1				15,334.1				5.3
Pay TV			612.5				604.8				609.5				654.3				703.0				14.8
Wholesale Accesses			2,136.1				2,271.5				2,369.1				2,418.1				2,614.0				22.4
WLR (5)			9.5				25.9				45.4				55.6				97.4				n.s.
Unbundled loops			1,698.0				1,835.3				1,950.7				2,021.3				2,153.8				26.8
Shared ULL			602.3				584.8				546.1				500.0				447.7				(25.7	)
Full ULL (6)			1,095.7				1,250.5				1,404.7				1,521.3				1,706.1				55.7
Wholesale ADSL			423.8				405.8				368.8				337.2				359.0				(15.3	)
Other (7)			4.7				4.4				4.2				3.9				3.7				(21.6	)
Total Accesses			47,349.7				47,157.2				47,045.7				47,276.6				46,778.2				(1.2	)

TELEFÓNICA ESPAÑA

CONSOLIDATED INCOME STATEMENT
Unaudited figures (Euros in millions)

		January - December												October - December
		2009				2008				% Chg				2009				2008				% Chg
Revenues			19,703				20,838				(5.4	)			5,048				5,132				(1.6	)
Internal exp capitalized in fixed assets			218				213				2.3				70				61				14.0
Operating expenses			(10,402	)			(10,818	)			(3.8	)			(2,825	)			(2,738	)			3.2
Other net operating income (expense)			25				7				n.m.				1				(24	)			c.s.
Gain (loss) on sale of fixed assets			222				54				n.m.				226				(0	)			c.s.
Impairment of goodwill and other assets			(9	)			(8	)			15.9				(4	)			(3	)			51.8
Operating income before D&A (OIBDA)			9,757				10,285				(5.1	)			2,517				2,428				3.6
OIBDA margin			49.5	%			49.4	%			0.2 p.p.				49.8	%			47.3	%			2.5 p.p.
Depreciation and amortization			(2,140	)			(2,239	)			(4.5	)			(542	)			(550	)			(1.6	)
Operating income (OI)			7,617				8,046				(5.3	)			1,975				1,878				5.2

January — December 2009 Results Telefónica 22

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

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

		January - December												October - December
		2009				2008				% Chg				2009				2008				% Chg
Revenues			12,167				12,581				(3.3	)			3,170				3,113				1.8
OIBDA			5,810				6,050				(4.0	)			1,509				1,421				6.2
OIBDA margin			47.7	%			48.1	%			(0.3 p.p.	)			47.6	%			45.6	%			2.0 p.p.
CapEx			1,305				1,498				(12.9	)			513				455				12.8
OpCF (OIBDA-CapEx)			4,505				4,552				(1.0	)			996				966				3.1