FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Commission File Number: 001-09531

Telefónica, S.A.

(Translation of registrant’s name into English)

Gran Vía, 28
28013 Madrid, Spain
3491-459-3050
(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 – June 2010			1

TELEFONICA GROUP

Financial Highlights

•

Consolidated revenue rose 5.4% year-on-year in the first half of 2010 to 29,053 million euros, with a significant acceleration during the second quarter (+1.7% to the end of March) and improvements across all regions:

•

The solid revenue performance reflects the Company‘s priority to focus on capturing the growth opportunities in its markets.

•

Organic growth in revenues was 2.0% (+0.9% in the first quarter), driven by the pickup in commercial activity in the last few quarters. Stripping out impacts from regulatory measures, organic revenue growth reached 3.3%.

•

Telefónica maintains its commercial momentum across all its markets, reaching 278 million accesses, 5.2% more than a year ago (+7.2% in organic terms):

•

The growth in accesses accelerated compared to previous quarters (+6.1% organic growth in March).

•

Total gross adds rose 16.2% year-on-year in the first half, while churn decreased year-on-year by 0.1 percentage points to 2.2%.

•

Mobile telephony continued to post strong growth, with organic net adds (8.9 million customers) 1.8 times higher than in the first half of 2009. There was also a significant improvement in the quality of the new customers: 56% of organic total net adds were contract, compared to 46% in the first half of 2009.

•

Total broadband accesses reached 38 million, with significant growth rates in both retail fixed broadband (+9.2% year-on-year organic growth; +25.2% reported) and in mobile broadband accesses (+84.6%).

•

OIBDA totalled 10,905 million euros in for the first six months, virtually flat on June 2009 (+0.04% year-on-year), after recording a growth of 4.0% in the second quarter of 2010. The OIBDA margin reached 37.5% in the first half, a sequential improvement of 0.8 percentage points:

•

In organic terms, OIBDA grew in the second quarter of 2010, showing a clear improvement relative to the first three months of the year (-3.4% in the first quarter; -2.3% in the first half). The negative impact of regulatory measures and non-recurring items dragged 2.7 percentage points from year-on-year OIBDA growth in the first half.

•

The Group continues to diversify its operations, and now generates 67% of its revenues and 60% of its OIBDA outside Telefónica España, despite the sharp devaluation of the Venezuelan bolivar.

•

Cash generation remains strong, with operating cash flow (OIBDA-CapEx) reaching 7,989 million euros in the first six months excluding spectrum acquisition (-1.7% year-on-year):

	•		In organic terms, operating cash flow dropped 3.4%, but rose in Telefónica Latinoamérica (+6.3% year-on-year) and Telefónica Europe (+3.1% year-on-year).
	•		Telefónica strengthened its competitive position with the acquisition of spectrum in Germany (1,379 million euros).

•

Net income totalled 3,775 million euros in the first six months of the year (+9.4% year-on-year).

•

The ratio of net debt + commitments to OIBDA stood at 2.3x at the end of June, reflecting the Company’s financial strength.

•

The Company reiterates all its financial targets for this year and through 2012, including dividends.

January — June 2010 Results Telefónica

TELEFÓNICA GROUP

Financial Highlights

•

Telefónica España’s revenues continue to recover gradually, thanks to increased commercial activity and improved traffic volumes. As a result, the year-on-year decrease in revenues slowed to 3.4% in comparable terms in the first half of the year.

•

In Latin America, revenues registered organic growth of 6.2% in the first six months, 0.8 percentage points more than in the first quarter, driven by the improved performance of both the wireline and wireless businesses, while OIBDA rose 3.9% in organic terms (+0.5 percentage points compared to the first three months of the year).

•

Telefónica Europe’s year-on-year revenue growth ramped up to 6.5% in organic terms and excluding regulatory effects (+5.4% in the first quarter), with healthy growth in the UK and German markets driven by the growing contribution from the mobile internet business.

Organic growth: in financial terms, it assumes constant average exchange rates as of H1 09, excludes changes in the consolidation perimeter and impacts from hyperinflationary accounting. OIBDA excludes the impact of the capital gain from the sale of Manx Telecom recorded in the second quarter of 2010. CapEx excludes investment in spectrum in Germany made in the second quarter of 2010 (1,379 million euros). In terms of accesses, it excludes changes in the consolidation perimeter; net adds figures exclude the disconnection of customers made in the second quarter of 2010.

Growth ex-regulatory impacts: the impact from MTR cuts is excluded.

Revenue growth in comparable terms in Spain: excludes the impact from the Universal Service Obligation in the first quarter of 2009 and revenue from Telyco Morocco in the first half of 2009.

January — June 2010 Results Telefónica

TELEFÓNICA GROUP

Financial Highlights

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

		January - June								% Chg
																		Guidance
		2010				2009				Reported				Organic				Criteria
Revenues (1)			29,053				27,565				5.4				2.0				3.3
Telefónica España (2)			9,321				9,757				(4.5	)			(4.1	)
Telefónica Latinoamérica			12,063				10,946				10.2				6.2
Telefónica Europe (1)			7,278				6,571				10.8				3.2
OIBDA (1)			10,905				10,900				0.0				(2.3	)			(1.2	)
Telefónica España (2)			4,377				4,838				(9.5	)			(9.5	)
Telefónica Latinoamérica			4,490				4,233				6.1				3.9
Telefónica Europe (1)			2,035				1,879				8.3				(0.4	)
OIBDA margin (1)			37.5	%			39.5	%			(2.0 p.p.	)			(1.7 p.p.	)
Telefónica España			47.0	%			49.6	%			(2.6 p.p.	)			(2.8 p.p.	)
Telefónica Latinoamérica			37.2	%			38.7	%			(1.4 p.p.	)			(0.9 p.p.	)
Telefónica Europe (1)			28.0	%			28.6	%			(0.6 p.p.	)			(1.0 p.p.	)
Operating Income (OI) (1)			6,456				6,493				(0.6	)			0.2
Telefónica España			3,388				3,771				(10.2	)			(10.1	)
Telefónica Latinoamérica			2,586				2,409				7.4				12.5
Telefónica Europe (1)			552				428				29.0				10.5
Net income			3,775				3,452				9.4
Basic earnings per share (euros)			0.83				0.76				10.1
OpCF (OIBDA-CapEx) (1)(3)			6,610				8,125				(18.6	)			(3.4	)
Telefónica España (2)			3,547				4,099				(13.5	)			(13.4	)
Telefónica Latinoamérica			3,239				3,018				7.3				6.3
Telefónica Europe (1)(3)			(100	)			1,130				c.s.				3.1

January — June 2010 Results Telefónica

Quarterly results

January — June 2010

TABLE OF CONTENTS

TELEFÓNICA GROUP
Market Size			2
Consolidated Results			4
Financial Data			9
RESULTS BY REGIONAL BUSINESS UNITS			15
Telefónica España			15
• Wireline Business			16
• Wireless Business			18
Telefónica Latinoamérica			23
• Brazil			25
• Argentina			27
• Chile			29
• Peru			31
• Colombia			33
• México			35
• Venezuela			36
• Central America			37
• Ecuador			37
Telefónica Europe			48
• Telefónica O2 UK			49
• Telefónica O2 Germany			50
• Telefónica O2 Ireland			51
• Telefónica O2 Czech Republic			52
Other Companies			60
• Atento Group			60
ADDENDA			62
Key Holdings of the Telefónica Group and its Subsidiaries			62
Significant Events			63
Changes to the Perimeter			64

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 — June 2010 Results Telefónica 1

TELEFÓNICA GROUP

Market Size

(Data in thousands accesses)

January — June 2010 Results Telefónica 2

TELEFÓNICA GROUP

Market Size

TELEFÓNICA GROUP
ACCESSES
Unaudited figures (thousands)

		January - June
		2010				2009				% Chg
Final Clients Accesses			273,513.3				260,105.6				5.2
Fixed telephony accesses (1)			41,743.5				41,952.8				(0.5	)
Internet and data accesses			18,117.0				14,878.1				21.8
Narrowband			1,599.0				1,654.0				(3.3	)
Broadband (2)			16,351.8				13,059.5				25.2
Other (3)			166.1				164.6				0.9
Mobile accesses			210,978.3				200,853.1				5.0
Prepay			146,628.4				144,548.9				1.4
Contract			64,349.9				56,304.2				14.3
Pay TV			2,674.5				2,421.6				10.4
Wholesale Accesses			4,249.0				3,808.5				11.6
Unbundled loops			2,382.2				2,003.2				18.9
Shared ULL			324.8				546.1				(40.5	)
Full ULL			2,057.4				1,457.1				41.2
Wholesale ADSL (4)			577.6				475.0				21.6
Other (5)			1,289.2				1,330.4				(3.1	)
Total Accesses			277,762.3				263,914.1				5.2

Notes:

January — June 2010 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. 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 have been excluded from the operating results for each Group region. At the same time, the impacts derived from projects managed at a centralized level are included at a regional level. In any case, these effects do not have an impact on consolidated results.

In line with this reorganisation, Telefónica has included in Telefónica España, Telefónica Latinoamérica and Telefonica Europe all the information related to the fixed, mobile, cable, Internet and pay tv businesses, in accordance with its geographic allocation. The “Other companies” heading includes the Atento Business and other holding companies and eliminations in the consolidation process.

Also, in the context of the organisation and integrated management of the fixed and wireless businesses in Spain, and with the objective of facilitating understanding and monitoring of the financial performance of the Company’s operations in this market and avoiding distortions which, without affecting the consolidated results of Telefónica España, may result in an erroneous interpretation of the individual performance of each of the businesses — especially at the level of operating expenses and investment —, from the first quarter of 2010 the Company has decided to publish the selected consolidated financial data corresponding to Telefónica España, providing breakdown by business only at a revenue level. The Company will continue to report all the operating metrics previously reported.

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 according to International Financial Reporting Standards (IFRS) led to consider as hyperinflationary from January 1st, 2009. As a result, the financial results of Telefónica Group and, therefore, those of Telefónica Latinoamérica and the Atento Group published related to the fiscal year 2009 were restated taking into consideration the above mentioned effects.

Defintions:

Organic growth, in financial terms, assumes constant exchange rates as of H1 09 (average fx) and excludes the consolidation of HanseNet (since mid February) and Jajah (January-June) in 2010. Telyco Morocco results are excluded in January-June 2009, after its exclusion from the perimeter of consolidation since January 1^st, 2010. OIBDA and OI figures do not include the impact of the capital gain registered in the second quarter of 2010 from Manx Telecom disposal. It excludes hyperinflationary accounting in Venezuela in both years. CapEx excludes investment in spectrum in Germany made in the second quarter of 2010 (1,379 million euros). In terms of KPI’s, HanseNet accesses are excluded, being this asset included in the Group consolidated perimeter from mid-February 2010. On the other hand, accesses from Medi Telecom are excluded from Group’s mobile accesses, after its disposal in the fourth quarter of 2009. On the other hand, organic and reported net adds exclude the disconnections of inactive customers made in the second quarter of 2010.

Growth ex-regulatory impacts: Mobile termination rate cuts are excluded.

Comparable growth in T. España: Since January 1^st, 2010 Telefónica España’s consolidation perimeter does not include Telyco Morocco. The comparable basis excludes the following effects: Universal Service Obligation: +75 million euros in revenues and +22 million euros in OIBDA in the first quarter of 2009; property capital gains: +0.4 million euros in OIBDA in the first quarter of 2009; exit of Telyco Morocco from the consolidation perimeter: +17 million euros in revenues and +0.7 million euros in OIBDA in the first quarter of 2009 and +16 million euros in revenues and +0.6 million euros in OIBDA in the second quarter of 2009; revision of the estimates for the adjustment to workforce provision provided for in prior periods to 2009: +90 million euros in OIBDA in the second quarter of 2009, and TV tax: -38 million euros in OIBDA in the first quarter of 2010 and -35 million euros in the second quarter of 2010.

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.

January — June 2010 Results Telefónica 4

TELEFÓNICA GROUP

Consolidated Results

During the first half of 2010, Telefónica made progress with the priorities it had set for the full year, with a significant pick up in growth in financial results, both in terms of revenues and OIBDA, in line with the Company’s internal expectations.

With a gradual economic recovery in those markets in which Telefónica operates, and thanks to a major commercial push over the last few quarters, total accesses reached 277.8 million by the end of June 2010, with year-on-year growth at 7.2% in organic terms (reported +5.2%). By region, of particular note are the expansion of the customer base at Telefónica Latinoamérica (+9.5% year-on-year) and Telefónica Europe (+6.1% year-on-year in organic terms; +14.6% reported).

As a result, the Company has added more than 13.4 million new customers since the beginning of the year (9.0 million in organic terms; 2.4 times higher than in the first half of 2009). Particularly noteworthy are the net adds posted in the second quarter, which reached 4.7 million accesses (4.8 million in organic terms; 2.2 times higher than the figure for the same period last year).

This performance reflects not only the increased commercial efforts of the different Group companies, which increased the total number of gross adds by 16.2% year-on-year in the first six months of 2010 (+15.6% in the second quarter), but also the continued improvement in total churn, which has dropped to 2.2% up to June 2010 (-0.1 percentage points versus the first half of 2009). The lower churn across all services was driven by quality improvements and successful customer loyalty and retention programmes.

By access type:

•

Mobile accesses of the Telefónica Group rose 9.7% year-on-year in organic terms (+5.0% reported) to 211.0 million by the end of June 2010, with 8.9 million organic net adds in the first six months of 2010 (+76.2% compared to the same period in 2009). Organic net adds over the last three months were particularly significant at 4.5 million accesses, 1.7 times the figure registered in the second quarter of 2009, in organic terms.

For the second quarter in a row, and as a result of the Company focus on higher-value customers, there was a significant rise in contract net adds to account for 59% of total net adds in the second quarter (56% in the first half vs. 46% in the first half of 2009). This has left a total of 64.3 million contract customers (+14.9% year-on-year in organic terms), which represents 31% of Group mobile accesses (vs. 29% last year, excluding Medi Telecom).

At the same time, mobile broadband accesses continue to grow strongly, reaching 17 million (+84.6% year-on-year) as of June 30th.

By region, it is worth highlighting that 2010 first-half net adds increased year-on-year across all regions, with a particularly solid performance at Telefónica España, where the figure was more than 4 times higher, reaching 453 thousand accesses over the six-month period (264 thousand in the second quarter).

Net adds in Latin America exceeded 7.2 million accesses, almost tripling the first-half figure in 2009. Net adds in the second quarter of 2010 reached 3.5 million.

•

Retail fixed broadband accesses totalled 16.4 million, with organic growth of 9.2% year-on-year (+25.2% reported). There were 0.8 million net adds in organic terms in the first half (2.9 million in reported terms), 30.4% more than during the same period in 2009 (4.9 times higher in reported terms). Especially noteworthy were the first-half net adds at Telefónica Latinoamérica, which rose 71.5% year-on-year to almost half a million accesses thanks to the consolidation of the improving trend in Brazil and Colombia and continued growth in Peru, Argentina, and Chile. Meanwhile, Telefónica España net adds for the first six months of 2010 reached 143 thousand, 1.7 times the figure for the same period last year.

Bundles of voice, broadband, and TV services remain key to Group strategy and churn control. In Spain, nearly 90% of retail fixed broadband accesses are bundled as part of either a dual or triple service package, while in Latin America 57% of broadband accesses are bundled as part of a dual or triple package.

•

Pay TV accesses stood at 2.7 million at the end of June 2010, up 8.0% year-on-year in organic terms (+10.4% reported).

•

Fixed telephony accesses exceeded 41.7 million (-4.7% year-on-year in organic terms), recording a better performance in the last three months (-5.3% in organic terms in the first quarter). In reported terms, these accesses remained virtually flat year-on year (-0.5%).

January — June 2010 Results Telefónica 5

TELEFÓNICA GROUP

Consolidated Results

Increased commercial activity over the last few months boosted accesses and usage growth, enabling the consolidation of the acceleration in Group revenue growth in the first half. Revenues rose to 29,053 million euros in the first six months, a year-on-year organic growth of 2.0% (+0.9% in the first quarter), with an improved performance in the second quarter across all regions. Stripping out regulatory impacts, organic growth in revenues would be 3.3% versus the first half of 2009.

Organic revenue growth has been driven by significant increases at Telefónica Latinoamérica and Telefónica Europe, which contribute 2.5 percentage points and 0.8 percentage points to organic growth respectively, showing an acceleration in their year-on-year growth rates compared to the first three months of the year. Meanwhile, Telefónica España year-on year decline in revenues, in comparable terms, slowed slightly in the second quarter to -3.4% in the first half of the year, with a better performance in both the wireline and wireless businesses.

In reported terms, revenues were up 5.4% year-on-year in the first half of 2010 (+1.7% in the first quarter of 2010). This performance reflects the positive contribution from foreign exchange rates (+2.2 percentage points) despite the sharp depreciation of the Venezuelan Bolivar and the consolidation of Hansenet and Jajah from the first quarter of 2010 (positive contribution of 1.1 percentage points).

It is important to highlight the fact that Telefónica Latinoamérica and Telefónica Europe account for 67% of Group revenue, and that Telefónica España now only accounts for 32%.

By service, broadband connectivity revenues (both fixed and mobile) and revenues from applications and new services continue to increase their contribution to the Group figure.

Telefónica Group’s operating expenses amounted to 18,763 million euros over the first six months of the year, 5.5% more than in the same period in 2009 in organic terms (+10.0% in reported terms). By component:

•

Supply expenses in the first half of 2010 rose 3.9% year-on-year to 8,334 million euros. In organic terms, they were virtually flat (+0.3% year-on-year). This performance is mainly explained by the higher interconnection costs at Telefónica Latinoamérica and by the handset costs in all three regions on the back of the high commercial activity. These partially offset the drop in interconnection expenses at Telefónica Europe and the flat figure at Telefónica España.

•

Personnel expenses amounted to 3,793 million euros for the first half, an organic growth of 11.7% year-on-year (+16.4% in reported terms). The average number of employees over the first six months was 261,649 (+6 thousand versus June 2009), mainly due to the larger workforce at the Atento Group. Excluding Atento, Telefónica Group’s average workforce rose 0.7% year-on-year to 125,792.

It is worth noting that in the first half of 2009 the Company revised its estimates made in previous years relating to workforce restructuring programmes in various countries, being recognised as lower costs (97 million euros). In the first half of 2010 there were recorded restructuring charges, mainly at Telefónica Europe (23 million euros).

•

External service expenses amounted to 5,611 million euros over the first six months, a 10.8% year-on-year growth in organic terms (+17.5% reported). This increase is largely due to the higher commercial costs in the three regions and increased network and systems management expenses at Telefónica Latinoamérica and, to a lesser extent, at Telefónica Europe.

Elsewhere, within Telefónica Group’s strategy framework of launching global initiatives, it is worth highlighting that in the first half of 2010 the Group recorded a positive contribution from the centralization of processes within the Group, reaching 90 million euros at the revenue level and 85 million euros in terms of OIBDA.

Gains on sale of fixed assets amounted to 99 million euros in the first half of 2010, and were mainly the result of the disposal of Manx Telecom at the end of June, which generated a capital gain of 61 million euros.

As a result, operating income before depreciation and amortization (OIBDA) totalled 10,905 million euros in the first six months (+0.04% year-on-year in reported terms) after a significant uptake in growth in the second quarter to 4.0% (-4.1% in the first quarter). Foreign exchange rates explain 1.3 percentage point of the year-on-year change, while changes to the consolidation perimeter add another 1.1 percentage points.

OIBDA margin reached 37.5% over the six-month period, with a 0.8 percentage point improvement versus the first quarter (-2.0 percentage points year-on-year in reported terms; -1.7 percentage points in organic terms).

OIBDA fell 2.3% year-on-year in organic terms over the first six months, showing an improvement of 1.1 percentage points on the first quarter (-3.4%). The year-on-year comparison is skewed by increased commercial activity across all regions, with a strong focus on the contract segment in the mobile business, and the negative impact of regulatory measures and non-recurrent effects, which account for 2.7 percentage points of the year-on-year change.

January — June 2010 Results Telefónica 6

TELEFÓNICA GROUP

Consolidated Results

By region, the highlights are the solid OIBDA growth at Telefónica Latinoamérica, which rose 3.9% in organic terms (+6.1% reported) versus the first half of 2009 (+3.4% to March) and more than offsets the lower contribution from Telefónica España (-5.8% in comparable terms; -9.5% reported), which has been hit by the adverse economic conditions and the increased commercial activity. As a result, 60% of Group OIBDA was generated outside Spain in the first half of 2010.

Depreciation and amortization in the first half of 2010 reached 4,449 million euros, a year-on-year decrease of 4.8% in organic terms, in line with the performance posted in the first quarter, with reductions recorded at Telefónica España and Telefónica Latinoamérica. In reported terms, depreciation and amortization rose 0.9% year-on-year.

This left Operating income (OI) for the first six months at 6,456 million euros (-0.6% in reported terms), showing an organic growth of 0.2% year-on-year, an improvement on the -2.4% posted in the first quarter.

First-half profit from associates rose to 72 million euros, compared to 30 million euros over the same period last year. This improvement is largely due to the better results from the Company’s stake in Telco S.p.A and the inclusion of China Unicom’s results (in the first half of 2009 the latter was not consolidated under the equity method).

Net financial expenses at the end of June 2010 amounted to 1,254 million euros (-13.7% year-on-year).Year-on-year performance is explained mainly by:

•

Changes in the foreign exchange gains and losses up to June 2010 yielded a lower expense of 37 million euros in comparison with June 2009.

•

A 24 million euros decrease in expenses due to interest rate drops captured throughout last year mainly in European currencies.

•

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 expense of 68 million euros in comparison with the same period of the previous year.

•

Changes in Venezuela’s hyperinflation effect yielded a lower expense of 137 million euros.

•

An increase of 6.0% in the average debt has generated expenses of 67 million euros.

Interest related financial expenses during first half of 2010 amounted to 1,172 million euros, a cost of 4.9% over total average financial debt of 47,840 million euros. Total average financial expenses over total average financial debt totalled 5.3%.

Free cash flow generated by the Telefónica Group up to the end of June 2010 amounted to 2,467 million euros, of which 2,938 million euros were assigned to Telefónica S.A. dividend payment, 730 million euros were devoted to the acquisition of Telefónica treasury shares and 427 million euros to commitment cancellations derived mainly from the pre-retirements plans. In addition, there was a net payment of 1,025 million euros due to financial investments and divestments. As a result, net financial debt increased by 2,653 million euros. On the other hand, net debt increased by an additional 2,208 million euros because of the foreign exchange impact, changes in the consolidation perimeter and other effects on financial accounts. All this has led to an increase of 4,861 million euros with respect to the net financial debt at the end of 2009 (43,551 million euros), leaving the final figure at June 2010 at 48,412 million euros.

The leverage ratio, net debt over OIBDA, is maintained at 2.2x, stable vs. March.

During the first half of 2010, the financing activity of the Telefónica Group, excluding short term Commercial Paper Programmes activity, rose to over 5,400 million equivalent euros considering the euro dollar forex rate at the end of June, with the main objective of financing in advance 2011 debt at the Holding level. To highlight the 5 years Euro-denominated bond issue for an amount of 1,400 million raised in March and the US dollar-denominated bond issue for an amount of 3,500 million dollars raised in April, distributed in three tranches: 3 year 1,200 million dollars, 5 year 900 million dollars and a 10 year tranche of 1,400 million dollars. It is also worth mentioning the loan facility for telecom equipment purchases for an amount of nearly 500 million dollars with the guaranty of the Swedish Export Credit Agency (EKN) signed in February.

During the first half, we have proceed to pay back banking debt (syndicate facility) maturing in 2011 for an amount of 2,200 million euros.

January — June 2010 Results Telefónica 7

TELEFÓNICA GROUP

Consolidated Results

Telefónica S.A. and its holding companies have continued active during the first half of the year under its various Commercial Paper Programmes (Domestic and European), for an outstanding balance of approximately 1,400 million euros at June.

Regarding Latin America, Telefónica subsidiaries have tapped the capital markets up to June for an amount of nearly 800 million equivalent euros, mainly for refinancing 2010 maturities.

At the end of June 30^th, bonds and debentures represented 67% on the consolidated financial debt breakdown, while debt with financial institutions reached a 33% weight.

In the first of 2010 corporate income tax reached 1,428 million euros, implying a 27.1% accrued tax rate.

Losses attributable to minority interests reduced net profit in the first half of 2010 by 71 million euros (-64 million euros in the first half of 2009), mainly due to minority interests in the profits of Telesp, Telefónica O2 Czech Republic and in the losses of Telefónica Telecom. The year-on-year growth of 10.8% is explained by the increased profits attributable to minority interests at Telesp and Brasilcel.

As a result, consolidated net income in the first half of 2010 reached 3,775 million euros, an increase of 9.4% versus the same period last year. Basic earnings per share stood at 0.83 euros, 10.1% higher than in the first six months of 2009.

First-half CapEx (excluding spectrum acquisitions) totalled 2,916 million euros (+0.9% year-on-year in organic terms and +5.1% in reported terms excluding spectrum acquisitions), with investment in growth and transformation projects remaining a priority (77% of total investment, excluding spectrum acquisitions, at the end of June 2010), particularly those aimed at meeting demand for fixed and mobile broadband services.

It should be highlighted that in the second quarter of 2010 Telefónica 02 Germany acquired additional spectrum for 1,379 million euros (2 blocks of 800MHz, 1 of 2.0GHz, and 4 of 2.6GHz), which left first-half CapEx (including the investment relating to this spectrum acquisition) at 4,295 million euros.

As a result, operating cash flow (OIBDA-CapEx) for the first six months (excluding the spectrum acquisition) remained very strong, at 7,989 million euros (-3.4% year-on-year in organic terms; -1.7% in reported terms excluding spectrum acquisition). The solid growth at Telefónica Latinoamérica (+6.3% in organic terms to 3,239 million euros) and at Telefónica Europe (organic growth of 3.1% to 1,279 million euros) did not offset the decline at Telefónica España, whose operating cash flow dropped 9.2% in comparable terms to 3,547 million euros. If we include the CapEx related to the spectrum acquisition in Germany, operating cash flow would be 6,610 million euros.

Finally, economies of scale and efficient management of operating expenses and CapEx led to an efficiency ratio of 75.3%.

January — June 2010 Results Telefónica 8

TELEFÓNICA GROUP

Financial Data

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

		January - June												April - June
		2010				2009				% Chg				2010				2009				% Chg
Revenues			29,053				27,565				5.4				15,120				13,867				9.0
Internal exp capitalized in fixed assets			334				319				4.8				184				163				12.7
Operating expenses			(18,763	)			(17,062	)			10.0				(9,742	)			(8,475	)			15.0
Supplies			(8,334	)			(8,023	)			3.9				(4,309	)			(3,996	)			7.8
Personnel expenses			(3,793	)			(3,258	)			16.4				(1,951	)			(1,565	)			24.7
Subcontracts			(5,611	)			(4,777	)			17.5				(2,951	)			(2,429	)			21.5
Bad Debt Provisions			(434	)			(432	)			0.5				(218	)			(217	)			0.2
Taxes			(592	)			(572	)			3.4				(314	)			(267	)			17.3
Other net operating income (expense)			145				86				68.3				122				22				n.m.
Gain (loss) on sale of fixed assets			99				(3	)			c.s.				95				(9	)			c.s.
Impairment of goodwill and other assets			37				(5	)			c.s.				12				(3	)			c.s.
Operating income before D&A (OIBDA)			10,905				10,900				0.0				5,791				5,566				4.0
OIBDA margin			37.5	%			39.5	%			(2.0 p.p.	)			38.3	%			40.1	%			(1.8 p.p.	)
Depreciation and amortization			(4,449	)			(4,407	)			0.9				(2,264	)			(2,231	)			1.5
Operating income (OI)			6,456				6,493				(0.6	)			3,527				3,336				5.7
Profit from associated companies			72				30				140.8				36				25				43.0
Net financial income (expense)			(1,254	)			(1,453	)			(13.7	)			(681	)			(679	)			0.4
Income before taxes			5,274				5,070				4.0				2,882				2,682				7.4
Income taxes			(1,428	)			(1,554	)			(8.1	)			(714	)			(819	)			(12.8	)
Income from continuing operations			3,846				3,516				9.4				2,167				1,863				16.3
Income (Loss) from discontinued ops.			0				0				(40.5	)			(0	)			0				c.s.
Non-controlling interests			(71	)			(64	)			10.8				(47	)			(33	)			42.8
Net income			3,775				3,452				9.4				2,120				1,830				15.9
Weighted average number of ordinary shares outstanding during the period (millions)			4,532				4,560				(0.6	)			4,521				4,553				(0.7	)
Basic earnings per share (euros)			0.83				0.76				10.1				0.47				0.40				16.7

Notes:

January — June 2010 Results Telefónica 9

TELEFÓNICA GROUP

Financial Data

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

		REVENUES												OIBDA												OIBDA MARGIN
		January - June												January - June												January - June
		2010				2009				% Chg				2010				2009				% Chg				2010				2009				% Chg
Telefónica España (1)			9,321				9,757				(4.5	)			4,377				4,838				(9.5	)			47.0	%			49.6	%			(2.6 p.p.	)
Telefónica Latinoamérica			12,063				10,946				10.2				4,490				4,233				6.1				37.2	%			38.7	%			(1.4 p.p.	)
Telefónica Europe (2)			7,278				6,571				10.8				2,035				1,879				8.3				28.0	%			28.6	%			(0.6 p.p.	)
Other companies and eliminations			390				291				34.2				2				(50	)			c.s.				n.m.				n.m.				n.m.
Total Group (2)			29,053				27,565				5.4				10,905				10,900				0.0				37.5	%			39.5	%			(2.0 p.p.	)

		OPERATING INCOME												CAPEX												OpCF (OIBDA-CAPEX)
		January - June												January - June												January - June
		2010				2009				% Chg				2010				2009				% Chg				2010				2009				% Chg
Telefónica España (1)			3,388				3,771				(10.2	)			831				739				12.3				3,547				4,099				(13.5	)
Telefónica Latinoamérica			2,586				2,409				7.4				1,252				1,215				3.0				3,239				3,018				7.3
Telefónica Europe (2)(3)			552				428				29.0				2,135				749				185.0				(100	)			1,130				c.s.
Other companies and eliminations			(70	)			(115	)			(38.7	)			78				72				8.4				(76	)			(122	)			(37.8	)
Total Group (2)(3)			6,456				6,493				(0.6	)			4,295				2,776				54.7				6,610				8,125				(18.6	)

January — June 2010 Results Telefónica 10

TELEFÓNICA GROUP

Financial Data

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

		June 2010				December 2009				% Chg
Non-current assets			91,507				84,311				8.5
Intangible assets			17,816				15,846				12.4
Goodwill			20,489				19,566				4.7
Property, plant and equipment and Investment property			33,824				32,003				5.7
Non-current financial assets and investments in associates			13,116				10,925				20.1
Deferred tax assets			6,262				5,971				4.9
Current assets			23,477				23,830				(1.5	)
Inventories			1,130				934				21.0
Trade and other receivables			11,769				10,622				10.8
Current tax receivable			1,385				1,246				11.1
Current financial assets			2,059				1,906				8.0
Cash and cash equivalents			6,654				9,113				(27.0	)
Non-current assets held for sale			480				9				n.m.
Total Assets = Total Equity and Liabilities			114,984				108,141				6.3
Equity			21,990				24,274				(9.4	)
Equity attributable to equity holders of the parent			19,375				21,734				(10.9	)
Non-controlling interests			2,615				2,540				2.9
Non-current liabilities			55,537				56,931				(2.4	)
Non-current financial debt			45,734				47,607				(3.9	)
Deferred tax liabilities			3,631				3,082				17.8
Non-current provisions			4,983				4,993				(0.2	)
Other non-current liabilities			1,189				1,249				(4.8	)
Current liabilities			37,457				26,936				39.1
Current financial debt			15,876				9,184				72.9
Trade and other payables			8,375				7,365				13.7
Current tax payables			3,142				2,766				13.6
Current provisions and other liabilities			10,063				7,621				32.0
Financial Data
Net financial Debt (1)			48,412				43,551				11.2

Note: 2009 and 2010 reported figures include the hyperinflationary adjustments in Venezuela in both years.

January — June 2010 Results Telefónica 11

TELEFÓNICA GROUP

Financial Data

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

				January - June
				2010				2009				% Chg
I		Cash flow from operations			9,537				9,954				(4.2	)
II		Net interest payment (1)			(1,215	)			(1,268	)
III		Payment for income tax			(1,213	)			(1,344	)
A=I+II+III		Net cash provided by operating activities			7,109				7,343				(3.2	)
B		Payment for investment in fixed and intangible assets (2)			(5,004	)			(4,082	)
C=A+B		Net free cash flow after CapEx			2,105				3,260				(35.4	)
D		Net Cash received from sale of Real Estate			14				233
E		Net payment for financial investment			(1,039	)			(141	)
F		Net payment for operations with minority shareholders and treasury stock (3)			(3,733	)			(2,806	)
G=C+D+E+F		Free cash flow after dividends			(2,653	)			548				c.s.
H		Effects of exchange rate changes on net financial debt			2,972				1,005
I		Effects on net financial debt of changes in consolid. and others			(764	)			865
J		Net financial debt at beginning of period			43,551				42,733
K=J-G+H+I		Net financial debt at end of period			48,412				44,055				9.9

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

		January - June
		2010				2009				% Chg
OIBDA			10,905				10,900				0.0
- CapEx accrued during the period			(4,295	)			(2,776	)
- Payments related to cancellation of commitments			(427	)			(422	)
- Net interest payment			(1,215	)			(1,268	)
- Payment for tax			(1,213	)			(1,344	)
- Results from the sale of fixed assets			(99	)			3
-Investment In working capital and other deferred income and expenses			(1,550	)			(1,834	)
= Net Free Cash Flow after CapEx			2,105				3,260				(35.4	)
+ Net Cash received from sale of Real Estate			14				233
- Net payment for financial investment			(1,039	)			(141	)
- Net payment for operations wirh minority shareholders and treasury stock			(3,733	)			(2,806	)
= Free Cash Flow after dividends			(2,653	)			548				c.s.

		January - June
Unaudited figures (Euros in millions)		2010				2009				% Chg
Net Free Cash Flow after CapEx			2,105				3,260				(35.4	)
+ Payments related to cancellation of commitments			427				422
- Operations with minority shareholders			(65	)			(41	)
= Free Cash Flow			2,467				3,642				(32.3	)
Weighted average number of ordinary shares outstanding during the period (millions)			4,532				4,560
= Free Cash Flow per share (euros)			0.54				0.80				(31.8	)

January — June 2010 Results Telefónica 12

TELEFÓNICA GROUP

Financial Data

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

				June 2010
		Long-term debt (1)			46,250
		Short term debt including current maturities			15,876
		Cash and cash equivalents			(6,654	)
		Short and Long-term financial investments (2)			(7,060	)
A		Net Financial Debt			48,412
		Guarantees to IPSE 2000			71
B		Commitments related to guarantees			71
		Gross commitments related to workforce reduction (3)			3,942
		Value of associated Long-term assets (4)			(821	)
		Taxes receivable (5)			(1,108	)
C		Net commitments related to workforce reduction			2,013
A + B + C		Total Debt + Commitments			50,496
		Net Financial Debt / OIBDA (6)			2.2x
		Total Debt + Commitments/ OIBDA (6)			2.3x

DEBT STRUCTURE BY CURRENCY
Unaudited figures

		June 2010
		EUR				LATAM				GBP				CZK				USD
Currency mix			69	%			16	%			7	%			4	%			4	%

CREDIT RATINGS

		Long-Term		Short-Term		Perspective		Date of last rating change
Moody’s		Baa1		P-2		Positive		17/02/2009
JCR		A		—		Stable		17/12/2008
S&P		A-		A-2		Stable/ CW Negat.		08/06/2010
Fitch/ IBCA		A-		F-2		Stable		25/11/2008

January — June 2010 Results Telefónica 13

TELEFÓNICA GROUP

Financial Data

TELEFÓNICA GROUP
EXCHANGES RATES APPLIED

		P&L and CapEx (1)								Statement of Financial Position (2)
		Jan - Jun 2010				Jan - Jun 2009				June 2010				December 2009
USA (US Dollar/ Euro)			1.324				1.331				1.227				1.441
United Kingdom (Sterling/ Euro)			0.870				0.894				0.817				0.888
Argentina (Argentinean Peso/ Euro)			5.128				4.836				4.824				5.474
Brazil (Brazilian Real/ Euro)			2.379				2.915				2.211				2.508
Czech Republic (Czech Crown/ Euro)			25.730				27.126				25.695				26.465
Chile (Chilean Peso/ Euro)			695.396				780.031				671.456				730.460
Colombia (Colombian Peso/ Euro)			2,576.808				3,076.923				2,347.627				2,941.176
Guatemala (Quetzal/ Euro)			10.704				10.690				9.855				12.035
Mexico (Mexican Peso/ Euro)			16.769				18.433				15.531				18.812
Nicaragua (Cordoba/ Euro)			27.943				26.746				26.200				30.023
Peru (Peruvian Nuevo Sol/ Euro)			3.767				4.133				3.467				4.165
Uruguay (Uruguayan Peso/ Euro)			26.039				31.442				25.915				28.275
Venezuela (Bolivar Fuerte/ Euro) (3)			5.277				3.097				5.277				3.097

January — June 2010 Results Telefónica 14

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España¹

Over the first half of 2010, Telefónica España has recorded a far higher level of commercial activity compared to the same period last year, focusing on growth services and contract customers, thereby consolidating its market leadership, in a quarter marked by a higher advertising activity, linked to the launch of the Movistar brand across the Company’s product and service range (both wireline and wireless).

In a challenging economic environment that keeps on affecting business performance, over the second quarter of 2010, the Company’s financial results continued to cement the gradual recovery witnessed in recent quarters in both revenue and OIBDA performance, with an improvement in year-on-year trends compared to the previous quarter, both on reported and comparable basis.

The slow but gradual recovery in revenue performance was underpinned by higher net adds over the first half of the year (453 thousand accesses, excluding 113 thousand disconnections in May due to the process of prepay customers identification), driven by higher gross adds (+19.7% year-on-year) and churn contention, as well as by better traffic behaviour. In the second quarter, net adds under the same criteria totalled 205 thousand accesses, similar to the previous three months. As a result, at the end of June 2010 the Company had 47.1 million accesses, with a noteworthy growth in retail broadband Internet accesses (fixed and mobile), in the pay TV business, and also in the contract segment of the wireless business.

Retail fixed Internet broadband customers posted a solid year-on-year growth of 5.4% at June 2010 to over 5.6 million accesses, recording 143 thousand net adds in the first half of 2010, 1.7 times the figure in the first half of 2009. Meanwhile, Pay TV customers rose 22.7% on June 2009 (+21.2% year-on-year to March 2010) to reach 748 thousand. Retail fixed telephony accesses at the end of June 2010 declined 7.0% year-on-year.

In the wireless business, the number of contract customers grew by 7.4% year-on-year (+6.7% to March) to reach 23.9 million wireless customers, having registered 453 thousand net adds over the first six months (excluding the disconnection of prepay customers already mentioned). Mobile broadband accesses surpassed the 3.8 million mark, 2.2 times the June 2009 figure, driven by the positive evolution of monthly wireless flat-rate data plans.

As a result, revenues amounted to 9,321 million euros in the first half of 2010, a 4.5% year-on-year decline (-3.2% in the quarter), negatively affected by the recognition of revenues associated with the Universal Service Obligation in the first quarter of 2009 (75 million euros), and the exit from the consolidation perimeter of Telyco Morocco (revenue contribution in the first half of 2009 of 33 million euros).

On a comparable basis, in the first six months of 2010 revenues declined 3.4% year-on-year. In the second quarter the comparable year-on-year decline narrowed to 2.9% (vs. -3.9% to March), thanks to the gradual recovery in wireless and wireline businesses.

It is worth highlighting the strong performance year-to-date in revenues from IT services (+10.7% year-on-year) and data services (+8.0% year-on-year) in the wireline business, as well as from wireless connectivity revenues (+64.4% year-on-year) and handset sales (+19.8% year-on-year) in the wireless business.

Operating expenses totalled 5,091 million euros in the first six months of 2010, virtually stable year-on-year (+1.4% year-on-year reported, -0.2% on a comparable basis). In the second quarter operating expenses on a comparable basis fell 0.8% year-on-year. By component on a comparable basis:

January — June 2010 Results Telefónica 15

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

•

External service expenses were similar to those in the first half of 2009 (-0.5% year-on-year both in comparable and reported basis) despite increased commercial activity. These expenses in the second quarter decreased 0.9% year-on-year.

•

Personnel expenses over the first six months increased 2.3% year-on-year (+3.7% in the second quarter), with the Telefónica España Group headcount standing at 35,286 at the end of June. In reported terms these expenses rose 10.6% year-on-year to June 2010, negatively affected by the revision of the estimates for the adjustment to workforce provision provided for in prior periods to 2009 (90 million euros), recorded in the second quarter of 2009.

•

Supply costs were flat year-on-year in the first half (-1.5% reported), as the higher mobile equipment costs were offset by lower interconnection expenses. In the second quarter, supply costs decreased 2.0% year-on- year, affected by the reduction in mobile termination rates in force since April.

•

Taxes decreased 3.1% year-on-year in the first half (-3.7% in the second quarter), but rising 6.4% on a reported basis, affected by the recognition in the first quarter of 2009 of 54 million euros relating to the Universal Service Obligation, compared with the recognition in the first half of 2010 of 73 million euros related to the TV tax.

•

The initiatives undertaken by the Company to improve bad debt levels paid off with a 22.4% year-on-year drop in bad debt provisions over the first six months, on both reported and comparable basis (-20.3% in the second quarter).

Operating income before depreciation and amortization (OIBDA) amounted to 4,377 million euros in the first half, posting a 9.5% year-on-year decline (-10.4% year-on-year to March), and leaving a margin of 47.0% (-2.6 percentage points year-on-year), affected by the loss of higher-margin revenues associated with wireline and wireless voice traffic and traditional access, and by the increased commercial activity over the period. Likewise, year-on-year performance was affected by the revision of the estimates for the adjustment to workforce provision provided for in prior periods to 2009, recorded in the second quarter of 2009.

OIBDA in comparable terms declined 5.8% year-on-year in the first half of 2010, with an improved performance in the second quarter (-3.7% year-on-year vs. -7.9% to March) explained by the ongoing recovery in revenue and the higher efficiencies captured. OIBDA margin on a comparable basis stood at 47.7% in the first half (down 1.2 percentage points on the first half of 2009), reaching 48.2% in the second quarter (-0.4 percentage points year-on-year).

CapEx totalled 831 million euros in the first half, up 12.3% year-on-year, reflecting the increased investment, specially focused on the development of the mobile broadband service.

Operating cash flow (OIBDA-CapEx) was 3,547 million euros to June 2010, posting on a comparable basis a year-on-year decline of 9.2% (-13.5% reported).

COMMERCIAL ACTIVITY AND REVENUE PERFORMANCE BY BUSINESS UNIT

WIRELINE BUSINESS²

The wireline access market remained virtually stable year-on-year over the first six months. Against this backdrop, Telefónica’s total wireline accesses (retail wireline telephony access, wholesale line rental-AMLT-, fully unbundled loops, and naked wholesale ADSL) continued to slow down its pace of year-on-year decline to 0.9% at the end of June (versus -1.4% to March).

Retail wireline telephony accesses, affected by ongoing loop unbundling, stood at 13.7 million at the end of June 2010 (14.7 million in June 2009), which represents an estimated market share of around 71%. Once again this quarter, it is worth noting the slowdown in the pace of access net losses both year-on-year and quarter-on-quarter, as evidenced by the net loss of 259 thousand lines in the second quarter (-17.5% year-on-year). As a result, net line losses in the first six months of 2010 (536 thousand) were 15.5% smaller than a year earlier. It should be also noted that this loss of retail wireline accesses is partially offset by net growth in wholesale accesses, which continue to generate revenue for the Company.

January — June 2010 Results Telefónica 16

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

The number of pre-selected lines continued to decline (by almost 111 thousand in the second quarter and by 240 thousand over the first six months), to around 817 thousand lines by the end of June.

Telefónica remains market leader in wireline broadband Internet accesses with more than 5.6 million accesses at the end of June 2010 (+5.4% year-on-year) and an estimated market share over 54%. Net adds in the first half reached 143 thousand, 1.7 times the amount recorded in the same period last year. This performance was underpinned by higher gross adds and by the reduction in churn, which reflects the Company’s continued focus on a quality proposition, being worth highlighting the increase in upload speed in the 6 and 10 Mb services. At the end of June, the total estimated market topped 10.3 million accesses, extending the improving trend seen in recent months, with an estimated 8.6% year-on-year growth.

Driven by naked wholesale ADSL accesses, the Company’s wholesale indirect broadband accesses registered first-half net adds of 105 thousand, leaving a total of 464 thousand accesses at the end of June (+25.9% year-on-year). In the second quarter net adds were 45 thousand accesses, 24.4% lower than in the first quarter of the year.

Total unbundled loops rose 19.5% year-on-year to 2.3 million at the end of June, of which less that 14% were shared loops, and the remainder full unbundled loops (including 530 thousand naked shared access loops). However, a slow down in the second quarter performance was witnessed, with net adds of approximately 71 thousand, down 33.3% on the previous quarter (178 thousand in the first half of 2010). Shared access loops decreased by 55 thousand in the second quarter of 2010 (-123 thousand in the first six months), while quarterly net adds of full unbundled loops (127 thousand accesses, of which 32% are shared naked access loops) were 27.4% fewer in the second quarter than in the first. Full unbundled loops net adds in totalled 301 thousand in the first six months, flat year-on-year.

Pay-TV accesses, meanwhile, posted close to 45 thousand net adds in the first half (compared to a net loss in the first half of 2009), leaving the total customer base around 748 thousand (+22.7% year-on-year) and its market share at an estimated 18%.

The total number of Dúo and Trío accesses accounted for nearly 90% of the Company’s retail broadband Internet accesses at the end of June 2010.

Revenues stood at 5,687 million euros in the first six months of the year, down 6.0% year-on-year, marking an improvement on the first-quarter performance (-7.7% year-on-year to March). On a comparable basis, revenues declined 4.3% year-on-year in the first half (-3.8% year-on-year in the second quarter). Breakdown by item:

•

Traditional access revenues to June 2010 decreased 9.1% year-on-year, slightly improving versus the first-quarter performance (-8.8% in the second quarter), mainly affected by the lower number of accesses (-7.0% year-on-year) and lower average revenue per line. On a reported basis, revenue was down 14.1% year-on-year, with a significant impact from the booking of 75 million euros revenues associated with the recognition of Universal Service Obligation in the first quarter of 2009.

•

Voice service revenues in the first half declined 10.1% year-on-year, as a result of lower fixed-to-mobile and international traffic, and the growing weight of traffic under flat-rate plans, albeit they had a better performance in the second quarter (-9.1% year-on-year) driven by a slightly improved traffic behaviour.

•

Internet and broadband revenues were stable year-on-year compared to June 2009 (+0.3% in the quarter):

•

Retail broadband revenues narrowed 2.3% year-on-year in the first half, mainly driven by the drop in effective ARPU (-7.4% year-on-year to June). In the second quarter (-2.7% year-on-year) revenues were affected by promotions in an increasing competitive market.

•

Year-on-year growth in wholesale broadband revenues ramped up (+24.2% year-on-year over the first six months of 2010, +30.3% in the second quarter), reflecting the higher number of unbundled loops and wholesale ADSL accesses.

•

Revenue from data services posted a year-on-year growth of 8.0% in the first half (+7.6% in the second quarter), primarily driven by increased revenue from circuits leased to mobile operators, mainly Telefónica Móviles España, as a result of the rapid growth in mobile broadband. Stripping out intra-group revenue, growth in these revenues would be 0.9% year-on-year in the first half of 2010.

•

Revenue from IT services continued to perform strongly, posting a year-on-year growth of 10.7% for the first six months, following a significant pick up in the second quarter (+14.0% year-on-year).

January — June 2010 Results Telefónica 17

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

WIRELESS BUSINESS

At the end of June 2010, penetration in the Spanish wireless telephony market was estimated at 122%, a year-on-year increase of 3 percentage points.

Telefónica maintained its high level of commercial activity over the second quarter of 2010, reaching similar levels to those seen over the first three months of the year, with a 13.2% year-on-year increase in the first half of the year compared to the same period last year. This positive commercial performance is mainly the result of a significant increase in the number of gross adds (+27.0% year-on-year in the first six months, +23.3% in the second quarter), which has been specially focused on contract customers, as reflected by the 36.7% year-on-year increase in contract gross adds in the first half of 2010. This focus allows the Company to maintain its revenue market share leadership, being the company with the widest gap between revenue and customer market share in Spain.

The churn rate stood at 2.3% both in the first half and the second quarter, slightly above last year’s levels (+0.4 percentage points to June 2009). Churn rate in the contract segment remains well below the blended ratio, at 1.4% both in the first half and in the second quarter, broadly flat year-on-year.

As a result of the significant effort on the commercial front and churn contention, net adds in the first half amounted to 453 thousand, excluding the disconnections made in May due to the process of identification of prepay customers, a significant increase on the 111 thousand registered in the first half of 2009. Under the same criteria, second quarter net adds stood at 264 thousand, compared with 101 thousand in the same period last year. In both cases, growth was driven by the good performance in the contract segment, where net adds reached 253 thousand in the second quarter (141 thousand in same period last year) and 449 thousand in the first half (127 thousand in the first six months of 2009). It is worth highlighting the improved quarterly performance in number portability relative to recent quarters. The Company managed to significantly reduce the loss registered in the previous quarter, achieving positive net adds in the contract segment (over 7 thousand accesses) similar to the figure recorded along the year 2009.

In all, the Company’s mobile customer base at the end of June 2010 stood at 23.9 million accesses, (+0.7% year-on-year), affected by the disconnection of 715 thousand inactive prepay accesses in December followed by a further 113 thousand in May, due to the identification process on prepay customers, with no material impact on the Company’s financial performance.

The strong growth in the contract customer base over the last twelve months (+7.4% with an acceleration of 0.7 percentage points compared to March 2010 figure), drove the contract segment to account for over 66% of the Company’s total mobile accesses, 4 percentage points more than in June 2009.

The year-on-year improvement in traffic is also worth to highlight, rising 0.6% year-on-year over the second quarter, notwithstanding heavy promotional campaigns throughout 2009, and leaving traffic up 0.4% year-on-year in the first half of 2010.

Total ARPU stood at 25.6 euros in the first half (-7.2% year-on-year), slightly improving on the previous quarter, affected by lower mobile termination rates (-21.3% following the cuts implemented in October 2009 and April 2010). Total ARPU in the second quarter declined 7.1% year-on-year.

Voice ARPU (-9.2% year-on-year in the first half, -9.1% in the quarter) continues to be eroded by lower mobile termination rates and changes in customer usage patterns, reaching 20.3 euros in the first half. Outgoing ARPU performed relatively better than total ARPU, narrowing in the first half of 2010 by 6.9% year-on-year (-7.1% in the second quarter).

Data ARPU was 5.3 euros in the first six months of the year (+1.3% year-on-year), with an improved trend in the second quarter (+1.6% year-on-year) thanks to a better performance from interpersonal communications revenues despite the drop in Premium SMS following the regulatory changes introduced in the fourth quarter of 2009, and the lack of “Superconcursos” compared to the second quarter of 2009.

It is worth highlighting the outstanding performance of wireless connectivity revenues, which continued to rise at a similar year-on-year rate to the first quarter (+60.7% in the second quarter; +64.4% in the first half). This solid growth is being driven by strong demand for mobile broadband services, where accesses had passed the 3.8 million mark by June 2010, 2.2 times the June 2009 figure. As a result, data ARPU accounted for 20.7% of total ARPU in the first half of 2010 (+1.7 percentage points year-on-year).

January — June 2010 Results Telefónica 18

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

In all, revenues amounted to 4,213 million euros in the first six months of 2010, with a sustained slow down in the year-on-year pace of decline (-3.4% in the first half, -3.2% in the second quarter). By item:

•

Service revenues totalled 3,613 million euros over the first six months, a drop of 6.4% versus the first half of 2009 and a decrease of 5.7% in the second quarter, improving by 1.3 percentage points versus the previous quarter (-7.1% year-on-year). It is worth noting that the reduction in mobile termination rates accounted for 3.2 percentage points of the year-on-year decline in the second quarter, and 3.4 percentage points over the first six months.

•

Customer revenues were 3.8% lower year-on-year in the first half at 3,120 million euros, following a better performance in the second quarter (-3.4% year-on-year) relative to the first quarter (-4.2% year-on-year), thanks to slight improvement in customer usage patterns.

•

Interconnection revenues declined 21.7% year-on-year to 407 million euros in the first half (-20.5% in the quarter), due to cuts in mobile termination rates.

•

Roaming-in revenues dropped 15.0% year-on-year to 59 million euros in the first six months of the year (-11.5% in the quarter), affected by the continued decrease in wholesale prices.

•

Revenue from handset sales totalled 600 million euros in the first half, which represented a 19.8% year-on-year growth, slightly below the increase recorded in the first quarter of 2010.

January — June 2010 Results Telefónica 19

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

TELEFÓNICA ESPAÑA
ACCESSES
Unaudited figures (thousands)

		2009												2010
		June				September				December				March				June				% Chg
Final Clients Accesses			44,676.7				44,858.6				44,164.2				44,181.1				44,113.8				(1.3	)
Fixed telephony accesses (1)			14,691.4				14,482.5				14,200.1				13,922.5				13,663.9				(7.0	)
Naked ADSL			0.0				0.0				14.7				30.3				37.0				n.m.
Internet and data accesses			5,660.1				5,728.7				5,722.5				5,797.8				5,823.0				2.9
Narrowband			297.6				276.5				219.5				194.8				179.6				(39.7	)
Broadband (2)			5,331.4				5,423.5				5,476.8				5,578.6				5,620.3				5.4
Other (3)			31.1				28.7				26.2				24.4				23.2				(25.5	)
Mobile accesses			23,715.6				23,993.2				23,538.6				23,727.8				23,879.1				0.7
Prepay (4)			9,021.2				8,984.0				8,204.5				8,197.2				8,095.6				(10.3	)
Contract			14,694.4				15,009.1				15,334.1				15,530.6				15,783.5				7.4
Pay TV			609.5				654.3				703.0				733.0				747.8				22.7
Wholesale Accesses			2,369.1				2,418.1				2,614.0				2,844.3				3,004.1				26.8
WLR (5)			45.4				55.6				97.4				161.3				205.1				n.m.
Unbundled loops			1,950.7				2,021.3				2,153.8				2,260.5				2,331.8				19.5
Shared ULL			546.1				500.0				447.7				380.1				324.8				(40.5	)
Full ULL (6)			1,404.7				1,521.3				1,706.1				1,880.5				2,007.0				42.9
Wholesale ADSL			368.8				337.2				359.0				419.0				464.4				25.9
Other (7)			4.2				3.9				3.7				3.3				2.8				(32.8	)
Total Accesses			47,045.7				47,276.6				46,778.2				47,025.4				47,117.9				0.2

January — June 2010 Results Telefónica 20

RESULTS BY REGIONAL BUSINESS UNITS

Telefónica España

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

		January - June												April - June
		2010				2009				% Chg				2010				2009				% Chg
Revenues			9,321				9,757				(4.5	)			4,688				4,844				(3.2	)
Internal exp capitalized in fixed assets			123				97				26.6				65				53				23.5
Operating expenses			(5,091	)			(5,023	)			1.4				(2,546	)			(2,457	)			3.6
Supplies			(2,041	)			(2,071	)			(1.5	)			(1,008	)			(1,044	)			(3.4	)
Personnel expenses			(1,222	)			(1,105	)			10.6				(614	)			(503	)			22.1
Subcontracts			(1,508	)			(1,516	)			(0.5	)			(765	)			(773	)			(1.0	)
Bad debt provision			(87	)			(112	)			(22.4	)			(45	)			(57	)			(20.3	)
Taxes			(234	)			(220	)			6.4				(114	)			(82	)			39.5
Other net operating income (expense)			21				17				24.2				16				2				n.m.
Gain (loss) on sale of fixed assets			6				(7	)			c.s.				3				(4	)			c.s.
Impairment of goodwill and other assets			(2	)			(3	)			(27.1	)			(1	)			(1	)			(17.9	)
Operating income before D&A (OIBDA)			4,377				4,838				(9.5	)			2,224				2,437				(8.7	)
OIBDA margin			47.0	%			49.6	%			(2.6 p.p.	)			47.5	%			50.3	%			(2.9 p.p.	)
Depreciation and amortization			(990	)			(1,067	)			(7.3	)			(497	)			(536	)			(7.4	)
Operating income (OI)			3,388				3,771				(10.2	)			1,728				1,900				(9.1	)

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

		January - June												April - June
		2010				2009				% Chg				2010				2009				% Chg
Traditional Access (1)			1,196				1,391				(14.1	)			593				650				(8.8	)
Traditional Voice Services			1,826				2,030				(10.1	)			908				999				(9.1	)
Traffic (2)			1,031				1,136				(9.3	)			511				548				(6.8	)
Interconnection (3)			412				459				(10.3	)			205				230				(10.6	)
Handsets sales and others (4)			384				435				(11.8	)			192				221				(13.4	)
Internet Broadband Services			1,490				1,490				(0.0	)			754				752				0.3
Narrowband			10				20				(50.5	)			4				10				(55.6	)
Broadband			1,481				1,471				0.7				750				742				1.0
Retail (5)			1,278				1,307				(2.3	)			640				658				(2.7	)
Wholesale (6)			203				163				24.2				110				84				30.3
Data Services			666				617				8.0				341				317				7.6
IT Services			259				234				10.7				137				120				14.0
Subsidiaries and eliminations			249				286				(12.7	)			126				148				(15.3	)
Revenues			5,687				6,049				(6.0	)			2,859				2,987				(4.3	)