3rd Quarter Results

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3rd February 2015

TalkTalk Telecom Group PLC

Q3 FY15 trading update

· Accelerating year-on-year revenue growth (4.2%), on track to deliver at least 4% in FY15

· Strongest growth ever in aggregate take-up of new products TV, mobile and fibre

· On-net churn reduced to lowest level in three years - 1.3%

· Corporate revenues up 8.0% year-on-year against strong prior year comparative

Q3 Financial Highlights

· Total revenue up 4.2% year-on-year to £449m (Q3 FY14: £431m1)

· On-net revenue up by 6.0% year-on-year to £334m (Q3 FY14: £315m1)

· Corporate revenue up by 8.0% to £94m (Q3 FY14: £87m)

· On-net ARPU up 2.6% to £27.05 (Q3 FY14: £26.371)

1 Prior year revenue adjusted to reflect exceptional item resulting from HMRC ruling on treatment of VAT

Q3 Operating Highlights

· 15,000 broadband; 50,000 mobile; 88,000 fibre and 115,000 TV net adds

· Strong response to launch of quad-play - over 11% share of SIM-only market in December

· New multi-year MVNO agreement with Telefonica UK to support quad-play growth

· Acquisition of Tesco broadband and blinkbox to accelerate development of TV proposition

· Commencement of fibre to the premise civil engineering work in York

Dido Harding, Chief Executive of TalkTalk commented:

"Today's results demonstrate the strong and growing demand for our value-for-money products, as we saw our strongest ever quarter of TV, mobile and fibre adds with our lowest ever reported churn.

We are excited about the future of quad-play. TalkTalk is ideally positioned to push home its strategic advantage in an industry undergoing major changes. Our customers recognise the significant savings they can make on all four products from TalkTalk. We have the largest unbundled network in the UK, a new long-term mobile access agreement, and one of the broadest ranges of film and TV content, all of which is underpinned by a pro-competition regulatory environment.

We remain confident in our plans for delivering sustainable growth and a more profitable business over the medium term, and remain on track to deliver our FY17 targets."

There will be a conference call for analysts and investors starting at 8.00am

UK & International dial in: +44 (0) 20 3003 2666

http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16532/43868/Lobby/default.htm

Replay (available for 7 days): +44 (0) 20 3350 6902 Pin: 5190458

Analysts and Investors: Mal Patel +44 (0) 20 3417 1037

Media: Alex Birtles +44 (0) 20 3417 1383

Business Review

Accelerating revenue growth (+4.2% y-o-y) - on track to deliver at least 4% growth over full year

On-net revenues grew by 6.0% driven by base growth and ARPU (+2.6%). Year-on-year ARPU development reflects the benefit of pricing activity and new product penetration, off-set by the mix impact of wholesale customers and promotional investment. Corporate revenues grew strongly by 8.0% year-on-year, against a strong prior year comparative, helped by continuing strength in data products (+34% y-o-y). Off-net revenues continue to reduce (-27.6% y-o-y), falling from just under 7% of group revenues a year ago, to under 5% in Q3. As a result, group revenues saw an eighth consecutive quarter of y-o-y growth of 4.2% (6.5% excluding off-net) and full year growth is expected to be at least 4%.

15,000 total broadband net adds and acquisition of Tesco base

We grew our fully unbundled base by 52,000 customers. Our legacy partially unbundled and off-net bases reduced by 29,000 and 8,000 respectively, driving total net adds growth of 15,000. Following the end of the quarter, we acquired Tesco's broadband and voice base (c75,000 broadband and c20,000 voice households) which will enable us to leverage further the superior scale and economics of our national network. We expect to bring these customers onto our network during Q1 FY16.

Strongest quarter in three years for take-up of new products with continued growth in RGUs

In aggregate, we added more TV, mobile and fibre customers during the quarter than at any time in the last three years. Revenue Generating Units (including new phone and broadband customers) per customer grew once again during the quarter, to 1.52 (Q2FY15: 1.46), demonstrating the momentum we are building across our full range of products.

Continued strong growth in take-up of TV (+115,000) and acquisition of blinkbox

We added 115,000 net new TV customers taking our total base of TV customers to 1.3m. Pay content boost penetration and TVOD movie volumes remained strong during the quarter as we benefited from a second year of growing content propositions and a successful Christmas. At the end of the quarter we reached agreement with Netflix to launch to TalkTalk customers on YouView. The agreement will allow us to share in the revenues generated, further demonstrating the appeal of the TalkTalk platform to a growing number of content providers.

Following the end of the quarter we acquired blinkbox, one of the leading on-demand providers of pay content in the UK. blinkbox's established technical expertise in multi-platform, multi-device content delivery and incremental content relationships are highly complementary to our existing TV strategy. blinkbox will help accelerate the development of our platform by delivering a number of key initiatives significantly faster. We have begun the integration of blinkbox with our existing TV business with immediate actions under way to integrate our teams, accelerate product development, and reduce costs in a number of areas. While we will absorb modest operating losses (£3m-£5m) during the current quarter, we expect a positive contribution to our TV business in FY16.

50,000 new mobile customers added; strong response to quad-play; mobile penetration at c10%

As we indicated at the time of our H1 results in November, we have seen strong and growing demand for our mobile proposition and expect continued acceleration through the remainder of the year. In November we launched our first integrated quad-play offer, which allows Plus customers to take a mobile SIM as part of their package (in return for re-contracting for 24 months). The proposition went live in December, helping us to capture 11% of the UK SIM market for the month - ahead of both Tesco and Vodafone.

More recently we have created more choice and additional options with new extra minutes and data options across all our plans, enabling customers taking our mobile proposition to make considerable savings over the life of a contract versus equivalent propositions elsewhere in the market.

Also in November, we announced that we have entered into a new multi-year commercial MVNO agreement with Telefónica UK, a major step forward in our plans to build a scale and profitable quad-play business. Under this agreement, Telefónica UK will provide TalkTalk with access to 4G and national roaming services in the UK. Coupled with our own in-home 4G spectrum and 4m points of presence this will support our strategy to build a small cell mobile network in the medium term.

Accelerating fibre take-up (+88,000) although penetration remains modest at c10%

We added 88,000 fibre customers during the quarter taking the total base to just under 400,000. While it is clear that at the right price, customers see value in the proposition, penetration remains modest at under 10%. In this context we welcome Ofcom's confirmation of a margin squeeze test that will monitor BT's fibre profitability to ensure a more competitive market that better serves consumers and small businesses. We expect that in time, this will lead to lower wholesale fibre costs, which in turn will enable us to drive uptake further.

Our Fibre-To-The-Premise trial in York has continued to make progress during the quarter with the commencement of civil engineering work including the laying of our first microtrenched fibre runs. We remain on track to connect the first customers onto the network later this year, and are excited about the longer term roll-out prospects.

Lowest churn in 3 years (1.3%), driven by new product take-up and customer service improvement

Churn continued to improve during the quarter with on-net churn falling to 1.3%, its lowest level in three years, helped by growing new product take up and improvements to customer service. Complaints to Ofcom (down 10.3% year on year) continued to improve during the quarter, helped by progress on key elements of Making TalkTalk Simpler such as the accelerated migration of AOL customers to fully unbundled propositions; the implementation of new fault diagnostics tools; and 114,000 additional downloads of our service centre app.

8% growth in Corporate despite strong prior year comparative; 34% growth in data revenues

We continued to see strong demand for our competitively priced data products for businesses, with 34% revenue growth in the quarter helping drive overall Corporate revenue growth of 8.0% year-on-year, despite a strong performance in the comparative period last year (Q3FY14: +8.8%). We won further new contracts to supply Ethernet and Ethernet First Mile connectivity as a result of which we added over 2,000 new Ethernet and EFM lines during the quarter, taking the installed base to just under 24,000.

We have seen notable results during the quarter from our above-the-line marketing campaign for Business Broadband aimed at the SoHo and SME markets, which saves customers over £500 vs BT.

Accelerating Making TalkTalk Simpler ("MTTS") to better exploit growth opportunities

At the end of the quarter we reached agreement for the disposal of our off-net broadband base to Fleur Telecom, part of Daisy Group, with the transaction expected to complete before the end of Q4 FY15. This is an important step in simplifying our product portfolio which is a key enabler in MTTS.

MTTS is a complex, multi-year programme designed to drive transformational change in the way we operate and to deliver significant ongoing customer and financial benefits. Whilst we are pleased with the progress we are making in improving customers' experience and the resulting reduction in churn, cost savings in the current year are likely to be £10m-£15m lower than we had previously planned. 

In part this is a direct result of reprioritising some of our teams to focus on integration activities, and in part a result of some programmes being redesigned. Consequently, we have now seconded a team of our most senior operational leaders full-time to work exclusively on MTTS.

GUIDANCE

We expect full year revenues to grow by at least 4%. After including blinkbox losses and the lower cost savings from MTTS as highlighted above, full year EBITDA is expected to be towards the lower end of market expectations.

We remain on track to achieve our medium term financial targets of 4% CAGR in revenues and 25% EBITDA margin.

Quarterly Metrics

1 Prior year revenue adjusted to reflect exceptional item resulting from HMRC ruling on treatment of VAT