14th May 2014 15:05
LONDON (Alliance News) - Telecommunications company TalkTalk Telecom Group PLC is expected to report lower full-year operating profit as investments it is having to make to defend itself against a resurgent BT Group PLC have offset revenue gains driven by price increases and more customers taking its television offering.
The company is operating in a highly competitive sector as more and more players offer triple play services of telephony, broadband and television. TalkTalk is having to invest heavily in its TV offering to compete with the likes of BT, which has seen a recent surge in customer demand after it added a new sports channel offering exclusive football matches.
Its plans for television services and fibre roll-out will be in focus when it announces its full-year results Thursday, according to analysts, particularly after recently announcing a joint broadband venture with British Sky Broadcasting PLC and CityFibre Infrastructure Holdings PLC.
According to analyst consensus estimates provided by the company, TalkTalk is expected to post earnings before interest, tax, depreciation and amortisation of GBP210 million for the year to end-March, down from GBP290 million in the previous year, driven by an increase in non-television advertising and the development of its television platform.
Revenue is expected to be around GBP1.73 billion, up from GBP1.67 billion.
Berenberg said that TalkTalk's price increases have reduced its price advantage compared to BT and the cheaper Plusnet PLC. TalkTalk introduced a new lower price package, Simply Broadband, towards the end of 2013 which has offset the benefits of price increases. The cheaper package added 75% of the company's gross adds in the third quarter, meaning that TalkTalk is gaining cheaper customers, and losing customers from its mid-to-high end.
As a result of this Berenberg expects TalkTalk to begin losing customers in 2015, although revenue could still grow.
"Ultimately, we see TalkTalk as structurally the weakest player in UK broadband, but we see the UK market as structurally one of the best telco markets," Berenberg said.
Nomura disagrees with this suggestion, saying it thinks that "TalkTalk remains largely unchallenged at the value end of the broadband and triple-playmarket."
However, Nomura agreed it will face further competition from BSkyB as it rolls out connected on demand NOW TV boxes, and Plusnet PLC launching a triple-play product later in the year, although it does not expect these to materially increase TalkTalk's churn rates in the near-term.
"Investment in TV set-top boxes distorts the reported profit trend, but robust TV adds should signal that customers are willing to re-contract with TalkTalk, take a TV service from TalkTalk and are less likely to spin down to TalkTalk?s Simply Broadband tariff," Nomura said.
TalkTalk is expected to have net broadband adds of 29,000.
In April TalkTalk announced that, alongside BSkyB, and CityFibre it had entered into a joint venture to establish new broadband services in the city of York, with the aim of building a competing infrastructure to rival BT PLC's Openreach.
"TalkTalk?s recently announced fibre trial with Sky in York does signal that fibre will become increasingly relevant for even TalkTalk?s base," Nomura said. However, Nomura said that as fibre is a lower margin product, rapid demand could be a risk for its medium-term margin aspirations.
"However, we believe the fibre initiative is a sensible way to explore how TalkTalk can continue to be the discount alternative in a high-speed broadband world," Nomura said.
JP Morgan Cazenove also said it expects TalkTalk to flag the new financial year as a big one for television roll-out, and following the new joint venture, also fibre broadband.
"We believe much focus will be on the recent evolution of the TV packages (some Sky content now included within the Plus package), as well as on the recent TalkTalk /BSkyB/CityFibre network trial joint venture in York," the broker said.
Berenberg expressed more scepticism about the joint venture and TalkTalk's fibre plans.
"At the pace of roll-out indicated, it would take the joint venture 10 years to cover 1% of the UK and we find it odd that Bournemouth was excluded from the deal, given it already has 20,000 homes passed," Berenberg said.
"In our view, while this is the right move for TalkTalk, and it has the option to accelerate the pace, it is very late to the party," Berenberg added.
Instead Berenberg suggested that TalkTalk and BSkyB would try and use the trial to demonstrate that BT charges too much for its generic ethernet access, as part of UK Telecoms regulator Ofcom's currently ongoing wholesale broadband access review.
"If connection costs were to sit outside the JV, then at £500 per home passed, the JV could cover debt financing (assuming a 5% interest rate) with a £21/month wholesale fee for 10% take-up or a £5/ month wholesale fee for 40% take-up," Berenberg explained. However, Berenberg said that BT will argue that connections also need to be considered.
Shares in TalkTalk were trading down 1% at 291.90 pence Wednesday, ahead of its full-year results Thursday.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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