3rd Quarter Results

5th February 2013

TalkTalk Telecom Group PLC

Interim Management Statement - Third Quarter FY 2012/13

·; 10,000 total net adds driven by strong growth in on-net customer base

·; 80,000 TV subscribers at 31st December 2012 with growing momentum in Q4

·; Continuing improvement in on-net churn to 1.5% (Q2 FY13: 1.6%)

·; Reiterating FY13 financial guidance and medium-term targets

Financial Highlights

·; On-net revenue up by 5.8% year on year to £292m; (Q3 FY12: £276m)

·; Corporate revenue up by 1.3% year on year to £80m; (Q3 FY12: £79m)

·; Total revenue down to £415m (Q3 FY12: £422m) driven by ongoing fall in off-net revenue

·; On-net ARPU up by 1.7% year on year to £25.47; (Q3 FY12: £25.05)

Operating Highlights

·; 69,000 fully unbundled net adds (Q2 FY13: +66,000)

·; c30% of TV subscribers new to TalkTalk with balance upsold from Essentials and Plus

·; 35,000 new mobile customers added, taking base to 152,000

·; 22,000 new fibre customers added, taking base to 52,000

·; 25% growth year on year in data products revenues at TalkTalk Business

·; Complaints to Ofcom down 48% year on year

Dido Harding, Chief Executive of TalkTalk commented:

"We have returned our total customer base to growth for the first time in three years - an important milestone on our journey to become a growing and more profitable business. We successfully launched TV and mobile handsets this summer and the growth in take-up by both existing and new customers underlines the scale of opportunity we see in these additional products. With good trading momentum across the business, we have entered the final quarter strongly focused on execution. We are confident of delivering full-year results in line with our guidance, and are making real progress towards our medium term targets of 2% revenue growth and 25% EBITDA margin."

There will be a conference call for analysts and investors starting at 8am

Call details:

UK & International: +44 (0) 20 3139 4830

UK Toll Free: 0808 237 0030

Pin code: 29510818#

Webcast: http://www.talktalkgroup.com/investors/results-centre.aspx

Replay (available for 7 days):

UK & International: +44 (0) 20 3426 2807

UK Toll Free: 0808 237 0026

Pin code: 636295#

Business Review

Customer base returned to growth for the first time in three years

The total broadband customer base increased by 10,000 during the quarter as our strong value-for-money credentials, improving customer service levels and growing product offer continued both to attract new customers and retain existing ones. We achieved this despite continuing delays in provisioning by BT Openreach.

We added 69,000 fully unbundled broadband and voice customers in the quarter, offset by the loss of 33,000 broadband-only customers, leading to net growth in our on-net base of 36,000. The off-net base continued to decline, albeit at the slowest rate in six quarters, with 26,000 fewer customers.

On-net customers now comprise 95% of our total base and the mix of customers has continued to improve, with over 80% (Q3 FY12: 73%) now fully unbundled and therefore delivering our most profitable revenues.

Our upsell propositions have shown strong momentum during the quarter:

80,000 TV subscribers connected and strong momentum in Q4

The successful launch of our TV proposition saw 80,000 subscribers connected in the first three months, with momentum strengthening as expected, through the current quarter. We have increased installation capacity to 10,000 per week as our engineering team has become more familiar with the process. Additionally, we have now begun to trial a self-install process for TV.

Whilst it is still too early to draw conclusions about the mix of TV customers and content take-up, we are highly encouraged by the initial trends and customer feedback*

·; 8 out of 10 TV customers use TalkTalk TV as their main TV service, rather than as a second box

·; Breadth of on-demand content, seven day catch-up and PVR functionality are amongst the most frequently cited features that customers value over their previous TV service

·; 7 out of 10 customers who upgraded from Phone and Broadband said they were more likely to stay with TalkTalk beyond their contract terms than they would have been before taking TV

*ICM Research, January 2013, 1,007 respondents

35,000 mobile customers added

Our base of mobile customers grew to 152,000 as we added 35,000 customers during the quarter, with our simple tariffs and compelling handset range driving strong demand. Contract handset customers comprised c50% of the mobile base at the end of the quarter.

22,000 fibre customers added

22,000 more customers chose to take fibre in the quarter (versus 15,000 in Q2), taking our base of fibre customers to 52,000.

As expected, overall fibre demand among our customer base remains modest. We expect this will continue until the customer benefits of much higher bandwidth become clearer. Nevertheless, there are certain segments of our customer base that can derive clear value today from upgrading to fibre, for example those who are interested in taking TV from us and live in a fibre-enabled area, but who currently do not receive sufficient speed to take our TV product.

We remain actively engaged with Ofcom and government to promote greater competition in fibre through a tighter regulatory framework.

Over 1.1m Plus customers

Our Plus product, which now includes TV, grew by a net 12,000 during the quarter, driven by take-up of our triple-play proposition by new customers, and those upgrading from Essentials, offset by dual-play churn. Including Plus phone and broadband customers, this base now stands at 1,109k.

Nearly 20% of on-net base has activated HomesafeTM

Our customers' growing demand for safe family-friendly internet usage has continued to drive activations of HomesafeTM, our unique network-level security feature. 730,000 customers had activated HomesafeTM by the end of Q3 - nearly 20% of the on-net base. Customers who have activated HomesafeTM value the benefits it delivers, and show a lower propensity to churn.

Further reduction in churn from 1.6% to 1.5%

We saw continuing improvement in churn through the quarter with on-net churn falling to 1.5% (Q2: 1.6%). Our ongoing focus on customer service improvement has continued to have a positive impact with reduced calls to our customer service centre and complaints to Ofcom. Call volumes were down 12% year on year and complaints to Ofcom fell by 48% year on year and by 6% over the previous quarter.

We expect churn to improve further in line with such customer service improvements, and as we see the benefit of more customers taking additional products from us.

Corporate boosted by 25% growth in Data services revenue

We saw growing demand in Data and Carrier services offsetting declines in legacy voice products. Data services revenue grew by 25% year on year and we installed 1,610 Ethernet and EFM lines leading to an installed base at the end of the quarter of over 8,600 lines.

TalkTalk Business ("TTB") continues to drive innovative and competitive product development that leverages our network capability. The reach and flexibility of our network continues to prove attractive to partners, as illustrated by our recent agreement with Virgin Media Business with whom we have entered into a 5 year contract worth over £40m to provide additional choice for its off-net Ethernet connectivity.

Financial Review

On-net revenue of £292m in the quarter was 5.8% higher year on year reflecting growth in the base, and ARPU growth. On-net ARPU of £25.47 was 1.7% higher year on year with unbundling mix, increased Plus penetration, and the benefit of line rental increases being partially offset by planned promotional spend and lower voice usage.

Q3 revenue in Corporate was modestly up year on year as continuing strong momentum in data services (+25% year on year) offset the underlying decline in legacy voice revenues.

Off-net revenue, which now represents just 10% of our total revenue, saw a 36% reduction year on year to £43m. This legacy base, comprising those customers that consume BT Wholesale products such as IPStream (broadband only), Narrowband, CPS and WLR (voice only) continues to reduce.

As a result, total revenue for the quarter declined by 1.7% year on year.

We have continued to make progress with Making TalkTalk Simpler, the next phase of our plan to simplify our operating model through completion of the consolidation of our outsourced IT providers, and the ongoing simplification of systems and processes in TalkTalk Business. As we indicated in our Interim results, these initiatives will deliver £10m of annualised cost savings, with approximately £3m of this falling in FY13.

Full year outlook

We are re-iterating the FY13 financial guidance set out with our Interim Results in November:

Revenue

Return to revenue growth in FY13.

Operating expenses

Broadly flat in FY13 with customer service improvements and back office simplification cost reductions offset by increased investment in network footprint and resilience.

Underlying EBITDA margin

Underlying EBITDA margin excluding investment in TV of 20%-21% in FY13, through continued ARPU growth and mix driven margin improvement.

One-off TV launch costs

We expect to incur £7-12m on the launch of TV in H2, comprising initial above the line marketing expenditure and promotional costs associated with launch.

Variable TV SAC

We expect the incremental SAC per triple play customer to be approximately £140, with total costs in H2 determined by the mix of engineer and self installations.

Cash flow items

We expect no material net exceptional cash expenditure in FY13. Our share of the settlement of the historic BES/Ethernet dispute was received during the quarter and is expected to offset the exceptional spend on our efficiency programmes (H1 FY13: £7m).

Capex is expected to be in line with our stated policy of c.6% of revenue, with no incremental expenditure arising from the launch of TV.

We do not currently anticipate any material adverse working capital movement from the launch of triple play.

Dividend

Full year dividend growth of a minimum of 15%.

Medium term outlook

At our preliminary results in May 2012 we set out new medium term targets of 2% CAGR in revenue and 25% EBITDA margin.

The key components of our revenue growth strategy are: an improving customer mix (from off-net to on-net; and from single and dual play to triple and quad play), continued progress in upsell (Essentials to Plus, mobile, fibre and other boosts), and growth in data products and services for our Corporate customers. We expect this revenue growth to contribute significantly to our profitability target.

Whilst some of this growth will require us to invest in SAC in the short term, for example as we build scale in TV and mobile, we expect the resulting lower churn to deliver material savings in SAC over the medium term. In addition, we expect other operating costs to benefit from our Making TalkTalk Simpler programmes, which we expect to deliver incremental savings over the next 3-5 years of £30m-£50m.

Quarterly Metrics