Between January and September, 2012, the Telefónica Group has achieved a consolidated net profit of 3,455 million euros, implying growth of 26.4% with respect to the same period in 2011. At the close of the year’s third quarter, the Company has consolidated the quarter-on-quarter improvement in returns in all regions and, between January and September, has recorded year-on-year growth of +10.7% and +19.6% in OIBDA (€ 15,782M) and operating result (€ 8,009 M), respectively. In addition, the revenue generated by Telefónica Latin America at the end of September has for the first time in history exceeded the weighting of revenue from operations in Europe to represent 49% of the Company’s total turnover, which has remained stable at 46,519 million euros.

In the management report on the third-quarter results, the Executive Chairman of Telefónica, César Alierta, has underscored the highly visible progress achieved in issues of great priority for the Company over the last few months. In this sense, he stressed that in “the third quarter of the year there has been a consolidation of the recovery trend initiated in the second quarter, with an outstanding sequential improvement in underlying earnings per share, which stood at 0.36 euros per share in the quarter (0.98 euros at the end of September), returning to positive year-on-year growth.” Alierta also points out the strengthening of the financial positioning of the company, thanks to the debt reduction and a proactive refinancing policy. Furthermore, the Executive Chairman of Telefónica has highlighted that “from a strategic standpoint, we continue making progress in our transformation into a “Digital Telco” and we are making further progress in our transformation journey and the results achieved so far make us feel more positive about the future despite tough conditions”.

Greater efficiencies and more financial flexibility
Telefónica’s results in the third quarter of the year showed significant progress in priority areas for the Company.

Earnings per share registered an outstanding improvement in the quarter, delivering positive year-on-year growth in underlying terms. This improvement reflected sequential OIBDA growth in absolute terms across all regions, and a quarter-on-quarter improvement in underlying terms in the consolidated OIBDA margin, reflecting transformational initiatives and cost-reduction measures undertaken in all countries. In this sense, particularly noteworthy were the removal of handset subsidies for new customers acquisition in Spain from March this year -this is already leading to significant savings in commercial expenses-, the gradual reduction of subsidies in the UK, the focus on quality as a key lever to reduce churn, and network-sharing agreements reached with other operators in the UK and Mexico.

Moreover, the higher efficiency reflects the benefits of our scale. Telefónica Global Resources is consistently contributing to higher efficiencies and cost reduction, driven by new ways of sourcing, building and operating our networks and IT.

Meanwhile, the third quarter also featured a considerable reduction in net financial debt, reflecting the Company’s strategy of increasing its financial flexibility and improving its liquidity position.

In addition, the Company advanced further on the capture of new growth opportunities in the digital world in the third quarter, with initiatives such the joint-venture in the UK for mobile payment and advertising approved by the European Union authorities, the agreement signed with Aurasma, the world’s leading augmented-reality platform, and the launch of Amérigo, a 300 million euros network of private equity funds, among others.

Customer base: 314 million accesses
Total accesses increased by 5% year-on-year to 314 million by the end of September 2012, driven by the increase in mobile accesses, fixed and mobile broadband, and pay TV accesses. Noteworthy was the 8% year-on-year increase in accesses at Telefónica Latinoamérica (67% of the total).

Mobile accesses stood at 246 million at the end of the third quarter (+6% year-on-year), driven by a sustained growth in mobile contract accesses (+7% year-on-year), accounting for 33% of total mobile accesses. Mobile net additions in the first nine months totalled 10.5 million accesses (excluding the disconnection of 3.6 million inactive prepay mobile accesses in Spain and Brazil).

The Company's mobile broadband accesses maintained solid growth of 40% year-onyear to 47.7 million at the end of September 2012, and accounted for 19% of mobile accesses (+5 percentage points year-on-year). It should be highlighted the continued smartphone adoption by our customers (with attached data tariffs), with 10.0 million net additions in the first nine months of 2012 (+14% year-on-year).

Telefónica’s retail fixed broadband accesses increased by 4% year-on-year to 18.5 million at the end of September 2012, with 458 thousand net additions, reflecting the sustained growth of Telefónica Latinoamérica. Retail fixed broadband accesses reached a penetration rate of 47% over total fixed accesses.

Analysis of the operating statement
Revenues in the first nine months of 2012 totalled 46,519 million euros, virtually unchanged year-on-year (-0.3%). This performance reflects the Company’s high diversification, a key differentiating factor in the current environment characterised by adverse economic conditions, more intense competition and negative effects of regulation in some countries. Excluding the negative effect of regulation, revenues rose by 1.1% year-onyear vs. the first nine months of 2011.

By region, Telefónica Latinoamérica’s revenues continue to show strong year-on-year growth (+5.9%) and now account for 49% of consolidated revenues (+2.9 percentage points year-on-year), for the first time exceeding revenues from the European operations (48% of the total). Telefónica España’s contribution decreased to 24% of consolidated revenues.

Mobile data revenues continue to post a solid growth during the first nine months of 2012 (+14.2% year-on-year), contributing more than 34% to mobile service revenues during the period. Also, non-SMS mobile data revenues have posted a significant increase (+25.3% yearon-year), representing 57% of total mobile data revenues.

Consolidated operating expenses amounted to 31,663 million euros, down 5.4% vs. the first nine months of 2011 (-21.1% in the third quarter). It should be noted that reported yearon-year comparison is affected by the provision for expenses related to the redundancy program in Spain booked in the third quarter of last year (2,671 million euros).

Supplies in the January-September 2012 period totalled 13,403 million euros and were flat year-on-year in reported terms. Subcontract expenses (10,113 million euros) rose by 5.5% year-on-year compared to the first nine months of 2011 (+5.5% organic), with a sequential decrease in year-on-year growth in the third quarter, mainly due to efficiencies implemented and reflected in a general reduction of commercial costs. Finally, personnel costs stood at 6,507 million euros, down 27.0% year-on-year, affected by the aforementioned provision associated with the redundancy program in Spain.

The average headcount was 286,249 employees (1,186 employees more than the average for the first nine months of 2011), mainly due to the higher workforce at Atento. Excluding Atento, Telefónica's average workforce stood at 132,192 employees.

Gains on sales of fixed assets in the first nine months of the year stood at 289 million euros, similar to the same period of 2011 (293 million euros). This heading in 2012 included mainly the following: the impact of the sale of non-strategic towers, with an impact in OIBDA of 289 million euros; the gain from the sale of applications in the second quarter (39 million euros; 18 million euros in Telefónica España); and the capital loss on the sale of shares of China Unicom (97 million euros in the third quarter).

Telefónica SA