Half Yearly Results

11th November 2014

TalkTalk Telecom Group PLC

Interim Results for the 6 months to 30 September 2014

· Strong year-on-year growth in revenue (+3.3%), EBITDA* (+44.7%) and Operating FCF (+120%)

· Strong TV (+300,000), broadband (+25,000), fibre (+101,000) and mobile (+64,000) net adds

· Significant reduction in year-on-year churn to 1.4%

· Demand for broadband, fibre and mobile stronger than expected earlier in the year

· Expect to invest incremental £20m-25m in SAC to capitalise on stronger volume opportunity

· Expect to deliver at least 4% revenue growth in FY15 and further strong growth in EBITDA

· On track to deliver FY17 financial targets of 4% CAGR in revenue and 25% EBITDA margin

H1 Financial Highlights

· Total revenue up 3.3% to £871m (H1 FY14: £843m)

· On-net revenue up 5.9% to £648m (H1 FY14: £612m); Corporate revenue up 9.3%

· Headline EBITDA* up 44.7% to £110m (H1 FY14: £76m)

· Operating Free Cashflow up 120% to £44m (H1 FY14: £20m)

· Net debt/EBITDA reduced to 2.25x from peak of 2.33x at end of FY14

· Headline* EPS up 263% to 2.9p (H1 FY14: 0.8p)

· Interim Dividend up 15% to 4.6p (H1 FY14: 4.0p)

* Excluding exceptional items and amortisation of acquisition intangibles

Q2 Operating Highlights

· Q2 revenue up 3.6% to £437m (Q2 FY14: £422m); acceleration from Q1 (+3.1%)

· Corporate revenue up 8.5% including 55% growth in Data revenues

· Q2 on-net ARPU up 1.8% to £26.54 (Q2 FY14: £26.08); acceleration from Q1 (+0.3%)

· On-net churn stable quarter-on-quarter and reduced year-on-year to 1.4% (Q2 FY14: 1.7%)

· Broadband net adds +15,000, TV +115,000, Fibre +67,000, Mobile +40,000

Dido Harding, Chief Executive of TalkTalk commented:

"We have made strong financial and operational progress in the first-half of the year with accelerating revenue growth, profits up 45% and operating cash flow up 120%.

We are ideally placed as the market moves to quad-play bundling of fixed phone and broadband, TV and mobile. A third of our customers now take phone, broadband and TV from us, 9% take mobile and we recently announced that mobile will now come as standard for all Plus TV customers. This, coupled with our work to continually improve our customers' experience, has again helped us to reduce churn, which fell to 1.4% from 1.7% a year ago.

We expect to deliver revenue growth of at least 4% and strong growth in EBITDA for the full year. In the second quarter we delivered our strongest organic broadband, mobile and fibre net additions in four years as well as adding more TV customers than the rest of the market put together. We expect this growth to accelerate in the second half which means we will invest more in customer acquisition costs than we anticipated at the beginning of the year. This investment will provide us with a larger customer base to leverage over the medium term, further reinforcing our confidence in achieving our FY17 financial targets."

Analyst and investor presentation

8.00 a.m. at the Lincoln Centre (18 Lincoln's Inn Fields, London WC2A 3ED)

Dial-in details

UK & International Number +44 (0) 20 3003 2666

Participant Pin Code 31518945#

Replay (available for 7 days)

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Audio Playback PIN 1927465

Webcast

http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16532/42120/Lobby/default.htm

Analyst and investor enquiries

Mal Patel +44 (0)203 417 1037

Media enquiries

Alex Birtles +44 (0) 203 417 1383

SUMMARY FINANCIALS

(1) Excluding exceptional charges and amortisation of acquisition intangibles

(2) Operating free cash flow is stated before exceptional costs

BUSINESS REVIEW

Strong year-on-year progress in financial performance

We have made strong progress during the half towards our FY17 financial targets of 4% compound annual revenue growth and 25% EBITDA margin.

H1 EBITDA grew strongly year-on-year (+44.7%) to £110m (H1 FY14: £76m) with EBITDA margin up 360bps to 12.6% (H1 FY14: 9.0%). We grew revenues by 3.3%, with an acceleration to 3.6% in Q2 (up from 3.1% in Q1), helped by higher growth in customer numbers, ARPU growth of 1.8% (up from 0.3% in Q1), and continuing strong growth at TalkTalk Business.

We reduced operating costs as a percentage of revenues by 60bps and SAC by 12%. As a result, operating free cashflow more than doubled to £44m (H1 FY14: £20m) and net debt to EBITDA reduced to 2.25x from its peak of 2.33x six months ago.

The Board has declared an interim dividend of 4.6p (H1 FY14: 4.0p), with the 15% year-on-year increase reflecting our confidence in the strategy, growth prospects and long term cash generation potential of the group.

Moving from selling one product to four

Based on our experience in the last year we made a pro-active decision in Q2 to broaden our trading approach and changed the mix of our SAC and marketing investment to drive growth across all four consumer products - broadband, TV, mobile and fibre. As a result in H1 we added 25,000 broadband customers, 64,000 mobile customers, 101,000 fibre customers and 300,000 TV customers.

As a result of our broader trading strategy we added fewer TV customers in Q2 than in previous quarters. This still represents the fastest growing TV base in the UK - adding more customers than the rest of the market combined. At the same time we have delivered stronger quarterly growth in each of broadband, mobile and fibre than we have done in the last four years. The economics of triple play customers (in-contract payback, modest ARPU uplift and material churn reduction) are compelling and we remain on track for the vast majority of our customers to take TV over the next few years.

This revised trading approach not only gives us immediate ARPU and churn benefits but also gives us greater upsell opportunities for the future from a larger base.

Continuing to improve customer experience and churn

At the same time as growing customer numbers and revenue, we continued to improve our customers' experience, with complaints to Ofcom down by 30% year-on-year in the half and call volumes down 24%. This improvement and the rising proportion of customers taking additional products such as TV, mobile and fibre, enabled us to reduce year-on-year churn in Q2 to 1.4% (Q2 FY14: 1.7%; Q1 FY15: 1.4%).

Driving product growth whilst reducing SAC

We have delivered the accelerating growth in our broadband base and in additional products whilst simultaneously reducing total SAC costs and costs per add. Total SAC and marketing costs peaked in H1 FY14 at £174m and have come down by 12% year on year to £153m.

Cost per add in TV has come down to £125, down from £130 in H2 FY14, which in turn was down from £170 in H1 FY14 thanks to an increase in self install and a higher mix of Essentials TV. Broadband, mobile and fibre cost per add also reduced thanks to greater use of lower cost online sales channels. Online sales now account for 44% of sales, up from 33% a year ago. This gives us a very sound platform to drive further growth at lower cost per add in the second half of the year.

Strongest organic broadband net adds in four years (H1: +25,000, Q2: +15,000)

H1 saw the strongest organic growth in our broadband base in the last four years and reflects a greater focus on our compelling value broadband proposition against a backdrop of intense marketing activity, particularly at the beginning of the UK football season.

We added 86,000 fully unbundled customers to our on-net base during the half with our legacy broadband only (-41,000) and off-net (-20,000) bases continuing to decline in line with established trends. As a result we grew our total broadband base by 25,000.

We continue to see opportunities to grow market share in broadband connectivity by leveraging the scale and superior economics of our network and now expect broadband growth to continue to accelerate through the second half.

Following the end of the quarter, we reached an agreement to acquire Virgin Media's National brand customers. These are DSL customers outside Virgin Media's cable footprint but are substantially on-net for our own unbundled network, and represent a good strategic acquisition that will accelerate the growth of our broadband, TV and fibre bases. The National base stood at 97,700 at the end of September 2014. We expect that a substantial proportion of these customers will be migrated onto our network through 2015.

Accelerated mobile (H1: +64,000, Q2: +40,000), quad-play launched

Our mobile base grew by 64,000 during the half and by 40,000 during Q2 (Q1 FY15: +24,000) to 348,000 driven by strong take-up of both handset and SIM only offers.

With 9.5% of customers now taking a mobile product from us, we are beginning to see the emergence of strong triple (voice, broadband and TV) and quad-play (voice, broadband, TV and mobile) demand in our base. We recently launched our first quad-play bundle in which mobile is included as standard for all Plus TV customers. All new and existing Plus TV customers will receive a mobile SIM worth £90, giving 100 minutes, 250 texts and 200MB of data a month, at no extra cost. The inclusive mobile package will cover the needs of the average TalkTalk Mobile customer, with free calls between family members and to TalkTalk mobiles on the same account

In addition we launched Talk2Go, our proprietary Android/iOS app that allows VOIP calls over customers' fixed line connection. This will allow customers to make full use of their fixed-line minute allowance on mobile devices and with our Follow Me service, customers can pick up landline calls on their mobile when out and about - in the UK or abroad.

Growing fibre take-up (H1: 101,000, Q2: +67,000)

We added 101,000 fibre customers during the half and 67,000 during Q2 (Q1 FY15: +34,000), our strongest ever quarter of fibre growth. With 8.5% of our base now taking fibre, we expect that demand will grow steadily with heightened awareness of the product and growing bandwidth usage. It is clear that at the right price, customers see value in the proposition. We expect the introduction of a margin squeeze test by Ofcom during 2015 to lead to lower wholesale fibre costs in due course, which in turn will enable us to drive uptake further.

Continued strong growth in TV (H1: +300,000, Q2: +115,000)

We added 300,000 net new customers to our TV base and 115,000 during Q2 (Q1 FY15: +185,000), taking the total base to 1.2m or 33% of our fully unbundled customer base. Net adds momentum has been driven by upsell to Essentials TV and customers new to TalkTalk (26.2% of TV additions in Q2). TVOD volumes grew 88% year-on-year to 456k with average ARPU stable at c£4. TV Boost penetration during the half continued to trend down as expected, with the growing mix of Essentials customers in the base, but with average ARPU stable at c£10.

We continued to develop our content offer on YouView during the half and built upon our existing wholesale relationship with Sky. We reached a new multi-year agreement to broaden and extend the distribution of Sky's premium movies and sport content to our TV customers. In addition to the linear channels, this includes the right to offer customers catch up content for both Sky Movies and Sky Sports. It also includes new channel Sky Sports 5 (Champions League and European football) and access to Sky Sports Box Office on a pay-per-view basis. This builds on our existing relationship to offer Sky entertainment content and access to live sports on NOW TV on a day-pass basis. This has led to a material increase in customers watching and purchasing Sky boosts, with TV Starter take-up +660% year-on-year driven by Sky 1 and Sky Living; Sky Sports +250% year-on-year driven by the success of Sky Sports F1 and the introduction of Sky Sports 5; and Sky Movies Boost +155% year-on-year driven by the success of Sky Movies on Demand.

We added 16 further new channels during the half, including Premier Sports, two Brazilian and eight African channels. We also added a number of unique TV boosts not available on any other UK Pay-TV platform, including TV Box (Universal Studios), and Collections from ITV (a boxset proposition offering a great range of comedy, drama and entertainment classics).

Following the addition of Netflix to the YouView platform last week, we expect to rollout Netflix access to all TalkTalk set-top boxes early in the new year, with pre-registration for existing customers already open.

TalkTalk Business - 9.3% growth in Corporate revenue driven by 55% data revenue growth

We continued to see strong demand for our competitively priced data products for businesses, with 55% revenue growth in the half helping drive overall Corporate revenue growth of 9.3% year-on-year (Q2 FY15: +8.5%). We won further new contracts to supply Ethernet and Ethernet First Mile connectivity as a result of which we added over 4,000 new Ethernet and EFM lines during the half, taking the installed base to over 21,500.

In addition we launched our first ever above-the-line marketing campaign for Business Broadband aimed at the SoHo and SME markets, highlighting our compelling price proposition versus BT (£10.50 per month for unlimited data and calls, including unlimited to mobile numbers, compared to £16 per month for the equivalent product from BT). We also launched a free voice app called Talk2Go which allows customers to use existing fixed line minutes on their mobile free of charge as well as free app to app calls, delivering even further value to our Business Broadband proposition. We have seen a strong response which underpins our confidence in the substantial upside opportunity for TalkTalk Business in the Business Broadband market.

We continued to deepen our relationships with existing customers with Iceland expanding its data network to include next generation voice services from TalkTalk Business, and SSE Telecom launching Ethernet into its substantial B2B customer base. In addition with a strategy to sign up business partners that have a sizeable presence in the market but little or no trading with us, we have gained agreement from three large business partners to take our Ethernet and Broadband products, and expect to announce them publicly over the coming months. These wins further demonstrate the value and service our clients/business partners are seeing from TalkTalk Business as an alternative to incumbent carriers.

Making TalkTalk Simpler delivering progress on operating costs, £7m saving

We have made further progress in Making TalkTalk Simpler, with cost savings of £7m in the half.

Tariff simplification

We have accelerated our exit from legacy consumer tariffs such as SMPF. Our AOL customer base will be rebranded to TalkTalk in H2. Supporting infrastructure has been simplified with systems and exchanges decommissioned and we have also made significant progress in TalkTalk Business with 65% of live TTB tariffs eliminated so far.

Systems transformation

TalkTalk Business operational systems have been simplified and our new business CRM systems are now live. In consumer we have delivered billing system upgrades, our new fault diagnostic tools will go live in H2 and we are accelerating the consumer CRM changes.

Leveraging data

We have also made progress in leveraging value from our data. Key dashboard reporting has been launched for our consumer teams, whilst work continues to better assure data in TalkTalk Business. We have also made our supporting infrastructure simpler and cheaper to operate, with 3rd party systems and support decommissioned during H1.

Brilliant self service

300,000 customers have downloaded the service centre App since launch 11 months ago. The App allows customers to view their package details and bills on the go, check their mobile allowance and diagnose faults remotely. Over 84% of our customer base has now registered with MyAccount allowing them the convenience of managing their account online at a time and place that suits them. In Q2 1.4m customers interacted with us online using their MyAccount. Only 6% of those customers subsequently needed to contact us by telephone. Our new online welcome centre helps new customers through the process of joining TalkTalk: it explains the engineer visit, go-live dates and provides contextual help and information to the customer including an explanation of the first bill. This has reduced early life calls and customer satisfaction for this experience is above 70%.

Driving Growth beyond 2017

We are ideally placed to benefit from the market shift to quad play. We already have a strong, and accelerating quad-play proposition, and we are laying the foundations for sustained quad-play growth beyond our FY17 medium term targets.

We have made good progress on our fibre to the premise joint venture in York. Fujitsu has been appointed as the infrastructure contractor and we commenced the first phase of digging to build the network out from our points of presence to our cabinets two weeks ago. We are on track to start connecting customers to our Ultrafast product in York next year. We are excited about bringing affordable 1Gig services to consumers and businesses in York and should the trial be successful, we see the potential to build a pure fibre network to 10 million households.

We expect the proportion of customers taking mobile products in addition to fixed line from us to grow significantly, and over time we expect to use TalkTalk's 4G spectrum to build an in premise small cell mobile network that will both improve our customers' experience and reduce costs.

FY GUIDANCE

· Revenue, Overheads and Pre-SAC EBITDA

We continue to expect FY15 revenues to grow by at least 4%, with H2 seeing the benefits of higher rates of customer growth, pricing activity and continuing growth in data revenues at TalkTalk Business

Overheads as a percentage of revenue are expected to fall below the level reported for FY13, driving Pre-SAC EBITDA margins ahead of those reported for FY13

· SAC & Marketing and Headline EBITDA

We expect strong year-on-year growth in EBITDA and EBITDA margin

We now plan to deliver higher volumes of broadband, fibre and mobile customers and lower volumes of TV than anticipated earlier in the year

This growth is likely to require additional SAC investment of £20m-£25m, which would drive a more modest reduction in year-on-year SAC than envisaged in our previous margin guidance of 16%-17% at the beginning of the year

· Net debt

Capex is expected to be within our guideline of 6% of revenue and working capital is expected to show outflows similar to FY14 as we see continuing strong growth in FY15 whilst also reducing costs

Cash exceptional items relating to Making TalkTalk Simpler and our acquisition of the Virgin Media National base are expected to be £30m-£35m

· Dividend

While we shall continue to invest for growth in FY15, we are confident of achieving our medium term financial targets and accordingly, expect to grow the FY15 dividend by no less than 15% as previously indicated

FY15 - FY17 GUIDANCE UNCHANGED

We remain on track to achieve 4% CAGR in revenues (FY14-FY17) and 25% EBITDA margin by FY17.

We expect revenue growth to be supported by growth in total customer numbers, ARPU progress from disciplined pricing and promotional activity, and growing scale in TV, mobile, and fibre. We also expect TalkTalk Business revenues to grow at a faster rate than the group average, driven by data products and new product innovation.

Revenue growth is a key component of our EBITDA margin target. There are two other components: SAC and overhead reduction.

We expect to reduce SAC by requiring fewer gross adds to maintain our customer base as a consequence of lower churn from growing TV, mobile and fibre penetration and better customer service; and by reducing costs per add as a result of increased levels of self service and, over time, the falling costs of technology to provide TV.

Our Making TalkTalk Simpler programme is a key enabler of overhead reductions. This will make it simpler for our customers to engage with us, whether it is to buy products and services, to manage their bills, or to resolve problems. To achieve this simplicity we will reduce the number of tariffs and access methods we use; reduce the complexity of our systems; make better use of data; and drive a self-service model. These initiatives are expected to deliver further savings in excess of £40m by FY17.

FINANCIAL REVIEW

Headline Profit & Loss

Revenue and margin

H1 revenue grew 3.3% year-on-year to £871m (H1 FY14: £843m) with an acceleration from 3.1% in Q1 to 3.6% in Q2, on track to deliver at least 4% revenue growth in FY15 and our medium term target CAGR of 4% by FY17.

On-net revenue increased 5.9% to £648m (H1 FY14: £612m) with broadband customer growth of 25,000 in H1 and the continued take up of new products including TV, mobile and fibre. This growth in the base combined with price inflation more than offset the continued decline in voice usage and the change in the VAT treatment of value line rental.

Corporate revenue increased 9.3% to £177m (H1 FY14: £162m) with strong growth in data products (+55%) offsetting the continued and expected decline in voice revenues.

Off-net revenues, at £46m (H1 FY14: £69m) reduced in line with our expectations as a result of the continued decline in the voice only and off-net base, and off-net voice usage.

Gross margin increased 3.2% year-on-year to £480m (H1 FY14: £465m) driven by customer growth and price inflation offset by promotional activity and the continued decline in voice usage.

EBITDA

EBITDA increased by 44.7% year-on-year to £110m (H1 FY14: £76m) with EBITDA margin increasing to 12.6% (H1 FY14: 9.0%) and on track to deliver our medium term target of 25% by FY17.

Operating expenses as a percentage of revenue reduced to 24.9% (H1 FY14: 25.5%) driven by our ongoing efficiencies programme Making TalkTalk Simpler which has included a call volume reduction program and engineer efficiencies. These were partly offset by the continued and expected investment in our network to deliver additional backhaul capacity and resilience.

SAC and marketing reduced by 12% year-on-year to £153m (H1 FY14: £174m) despite adding more customers and growth in the take-up of additional products such as mobile, fibre and TV. This was achieved through lower costs per add from higher online sales, and a higher mix of Essentials TV and self-install.

Exceptional items

Exceptional costs of £9m (H1 FY14: £8m) were incurred in the period, all related to the MTTS programme, predominantly redundancy, project management, migration and associated costs. The current planned activity is expected to deliver over £40m of annualised savings by FY17.

Headline EBIT

Headline EBIT of £46m (H1 FY14: £18m) increased by 156% as a result of higher EBITDA offset by an increase in the depreciation and amortisation charge of £7m from continued capital investment in our network over the last year.

Interest and Tax

Finance costs were £3m higher at £12m (H1 FY14: £9m) predominantly as the refinancing activity completed in Q2 resulted in an accelerated amortisation charge for the previous facility fee (£2m).

The effective tax rate of 20% (H1 FY14: 22%) reflects the annual recognition of a further tranche of the tax losses acquired with Tiscali, based on our rolling forecast and in line with our agreement with HMRC.

Earnings per Share

Headline earnings per share increased by 2.1p year-on-year to 2.9p (H1 FY14: 0.8p)

Headline cashflow and net debt

Operating free cash flow increased by 120% year-on-year to £44m (H1 FY14: £20m).

Capital expenditure increased by 14.6% year-on-year to £55m (H1 FY14: £48m) representing 6.3% of revenues (H1 FY14: 5.7%) and included investment in our network and customer facing IT systems as we invested in our Making TalkTalk Simpler programme. Working capital outflow of £11m (H1 FY14: £8m) in the first half reflects the move in consumer payment profile away from the upfront payment of value line rental (VLR) and an increase in stock arising from the growth in our fibre and TV investment.

Interest cost of £13m was higher than the prior year (H1 FY14: £8m) due to payment of facility fees for the new debt facilities of £5m. Acquisition spend of £5m (H1 FY14: £3m) included £3m of funding for the YouView joint venture, and £1m for our Fibre-To-The-Premise joint venture with BSkyB and CityFibre.

Net share repurchases represent £1m of proceeds received on the exercise of options by employees (H1 FY14: £5m). In H1 FY14, share purchases were made by the Employee Benefit Trust of £24m (10m shares) to cover anticipated future option exercises. The dividend cost in the period was £74m, being payment of the final dividend for FY14 of 8.0p per share.

Net cash outflow of £58m during the half resulted in net debt increasing to £555m from £497m at 31 March 2014, while net debt to EBITDA reduced to 2.25x from its peak at the end of FY14.

Refinancing

In H1 FY15, the Group re-financed its debt to secure a £100m term loan, a £560m revolving credit facility (RCF) and a £50m bilateral agreement to replace the existing facilities that were set to mature in March and November 2015. The new term loan has a final maturity date of July 2019 with repayments during the term of £25m in January 2017 and £25m in January 2018. The RCF and the bilateral agreement both mature in July 2019.

In addition, in July 2014, the Group issued US$185m of US Private Placement (USPP) notes maturing in three tranches (US$139m in 2021, US$25m in 2024 and US$21m in 2026). The interest rate payable in respect of drawings under the agreement is at a margin over the US treasury rate for the appropriate period. The fair value of the notes is translated at the spot rate each reporting period. Cross currency swaps were taken out to hedge against foreign exchange rate movements.

Capital structure

The Board is confident that the Group's leverage, as measured by Net Debt/EBITDA, will fall over the medium term and that such a reduction will make it appropriate to consider a return of excess capital to shareholders in order to maintain an efficient capital structure.

APPENDIX 1 - QUARTERLY METRICS

Condensed consolidated income statement for the 6 months ended 30 September 2014

With 6 months ended 30 September 2013 comparatives

* A reconciliation of Headline information to statutory information is provided in note 7 to the interim condensed financial statements.

The accompanying notes are an integral part of this condensed consolidated income statement. All amounts relate to continuing operations.

Condensed consolidated income statement for the 6 months ended 30 September 2014

With year ended 31 March 2014 comparatives

* A reconciliation of Headline information to statutory information is provided in note 7 to the interim condensed financial statements. 

The accompanying notes are an integral part of this condensed consolidated income statement. All amounts relate to continuing operations.

Condensed consolidated statement of comprehensive income for the 6 months ended 30 September 2014

With year ended 31 March 2014 comparatives

 * Recognised within retained earnings and other reserves.

**Recognised within translation reserve.

Condensed consolidated statement of changes in equity for the 6 months ended 30 September 2014

Condensed consolidated cash flow statement for the 6 months ended 30 September 2014

1. Basis of preparation and accounting policies

Basis of preparation

The unaudited interim condensed consolidated financial statements for the 6 months ended 30 September 2014 have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' ('IAS 34') and thereby in accordance with International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board ('IASB') and as adopted by the European Union ('EU').

The interim condensed financial statements for the 6 months ended 30 September 2014 do not comprise statutory accounts for the purpose of section 434 of the Companies Act 2006, and should be read in conjunction with the 2014 Annual Report of TalkTalk Telecom Group PLC (the '2014 Annual Report'). The 2014 Annual Report was audited by the Group's auditor, Deloitte LLP, their report was unqualified and did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report.

The 2014 Annual Report can be found on the Group's corporate website www.talktalkgroup.com.

The financial information for the 6 months ended 30 September 2014 and 30 September 2013 has not been subject to audit or review by the Group's auditor.

The Group's future cash forecasts and revenue projections, which are considered to be based on prudent assumptions, indicate that the

Group will be able to operate within the level of its current committed facilities (see note 10) as disclosed for the foreseeable future and as such the Directors believe that it is appropriate to continue to prepare the financial statements of the Group on a going concern basis. The committed facilities are disclosed in note 10.

The interim condensed financial statements for the 6 months ended 30 September 2014 have been prepared using accounting policies and methods of computation consistent with those set out in the 2014 Annual Report.

2. Segmental reporting

IFRS 8 'Operating Segments' requires the segmental information presented in the financial statements to be that used by the chief operating decision maker to evaluate the performance of the business and to decide how to allocate resources. The Group has identified the Board of Directors as its chief operating decision maker. The Board of Directors considers the results of the business as a whole when assessing the performance of the business and making decisions about the allocation of resources. Accordingly the Group has one operating segment.

The Group's revenue is presented split by its On-net, Off-net and Corporate products as this information is provided to the Group's chief operating decision maker. On-net and Off-net comprise Consumer customers and Business customers that receive similar services.

3. Finance costs

Finance costs are analysed as follows:

Bank fees and legal costs associated with the securing of external financing are capitalised and amortised over the term of the relevant facility. In July 2014, the Group re-financed its debt and so the amortisation of the previously capitalised facility fee was accelerated resulting in a £2m charge to the income statement.

Upon re-financing in July 2014, the Group paid £5m in respect of facility fees. This is being amortised over the expected life of the loan and is included within facility fees and similar charges above.

4. Taxation

An effective rate of 20% (6 months ended 30 September 2013: 22%; year ended 31 March 2014: 18%) has been applied to Headline profit before taxation from continuing operations. A tax credit at 20% has been recognised in the current period (6 months ended 30 September 2013: 23%; year ended 31 March 2014: 23%) in respect of the amortisation of acquisition intangibles net of any adjustments in respect of prior periods.

The tax assets and liabilities have been recognised at 20% at 30 September 2014 (six months ended 30 September 2013: 20%; year ended 31 March 2014: 20%). The asset reflects the annual recognition of a further tranche of the tax losses acquired with Tiscali UK Limited, including Video Networks Limited, based on the Group's rolling forecast and in line with the Group's agreement with HMRC.

5. Acquisitions

A further £3m has been invested in YouView TV Limited in the 6 months ended 30 September 2014 (6 months ended 30 September 2013: £1m; year ended 31 March 2014: £5m).

During the 6 months ended 30 September 2014, the Group together with CityFibre Holdings Limited and British Sky Broadcasting Limited, incorporated Bolt Pro Tem Limited, a limited liability company that will design, develop and operate an ultra-fast fibre network in the city of York. Total payments of £1m were made to the venture by the Group in return for ordinary share capital and associated share premium.

During the year ended 31 March 2014, the Group, alongside British Sky Broadcasting Limited, British Telecom PLC and Virgin Media Limited established an equal membership joint venture, Internet Matters Limited. It is a not-for-profit company, incorporated as a company limited by guarantee. It has been set up as an industry-led body to promote and educate parents about internet safety for children. During the 6 months ended 30 September 2014, the Group made cash contributions of £1m to the company, but as Internet Matters Limited is a not-for-profit organisation, this was immediately impaired.

The share of losses recognised by the Group in the period was £2m (6 months ended 30 September 2013: £3m; year ended 31 March 2014: £7m). The resulting net investment at 30 September 2014 was £10m (6 months ended 30 September 2013: £7m; year ended 31 March 2014: £7m).

6. Equity dividends

The proposed interim dividend for the year ended 31 March 2015 is 4.6p per ordinary share on 922 million shares (£42m). The proposed interim dividend was approved by the Board on 11 November 2014 and has not been included as a liability as at 30 September 2014. The ex-dividend date is 20 November 2014 and the record date is 21 November 2014. We expect the dividend to be paid on or around 12 December 2014.

7. Reconciliation of Headline information to statutory information

Headline information is provided because the Directors consider that it provides assistance in understanding the Group's underlying performance.

a) Operating efficiencies - Phase III (Making TalkTalk Simpler)

During the 6 months to 30 September 2014, the Group has continued to implement further opportunities to drive process and efficiency improvements over the medium-term following a fundamental review in FY14.

The initiatives that form part of the Group's Making TalkTalk Simpler programme, which were implemented in the 6 months to 30 September 2014, were continued restructuring of the systems and processes in TalkTalk Business to remove duplication and better align the sales and service model for future growth; a review and consolidation of the Group's IT systems and processes; rationalisation of the Group's customer tariffs and the exit of legacy products and access methods; and a wholesale review of the methods by which customers resolve issues making commercial and operational changes to drive them online. This has resulted in redundancy, project management and migration costs. The total charge incurred in the 6 months ended 30 September 2014 was £9m (6 months ended 30 September 2013: £11m; year ended 31 March 2014: £20m).

The tax credit was £1m for the 6 months ended 30 September 2014 (6 months ended 30 September 2013: £3m; year ended 31 March 2014: £5m).

b) Wholesale Ethernet services overcharges

In December 2012, Ofcom determined that BT had overcharged the Group for certain wholesale Ethernet services. Accordingly, BT was required to make repayments to the Group for these overcharges. A total of £3m was recognised as an exceptional credit in the 6 months ended 30 September 2013 (year ended 31 March 2014: £3m).

The tax charge was £1m in the 6 months ended 30 September 2014 (year ended 31 March 2014: £1m).

c) Revenue - HMRC VAT ruling

In September 2013, a change to a previously agreed VAT treatment in relation to prompt payment discounts was enforced by HMRC with immediate effect. The incremental VAT relating to this change in treatment has been paid by the Group; however the Group has sought external legal advice on the HMRC decision and has subsequently appealed the decision to the VAT Tribunal. Due to both the unexpected nature, pending appeal and short timeframe given to comply, a total of £5m was recognised in exceptional items in the year ended 31 March 2014. The tax credit was £1m in the year ended 31 March 2014.

7. Reconciliation of Headline information to statutory information (continued)

d) Amortisation of acquisition intangibles

An amortisation charge in respect of acquisition intangibles of £5m was incurred in the 6 months ended 30 September 2014 (6 months ended 30 September 2013: £10m; year ended 31 March 2014: £21m).

The tax credit was £1m for the 6 months ended 30 September 2014 (6 months ended 30 September 2013: £2m; year ended 31 March 2014: £5m).

8. Earnings per share

Basic and diluted earnings per ordinary share have been calculated in accordance with IAS 33 'Earnings per share'. Earnings per share is shown on both a Headline and Statutory basis to assist in the understanding of the underlying performance of the Group.

9. Share-based Payments

a) Discretionary Share Option Plan ('DSOP') - 2014

On 18 June 2014, a total of 7.7 million nil priced share option awards were granted to certain employees under the DSOP rules. These options are subject to TSR performance targets. The options are measured over a performance period from 3 June 2014 to 3 June 2017 and will vest on 18 June 2017. A total of 60% of the vested options are exercisable from the vesting date, with the remaining 40% of options being exercisable twelve months later. Options are forfeited if an employee leaves the Group before the options vest.

A fair value exercise was conducted for the grant using the Monte Carlo method with the total fair value of the options granted totalling £4m. The resulting IFRS 2 charge for the 6 months ended 30 September 2014 is £0.5m.

b) Shareholder Value Plan ('SVP')

On 18 June 2014, the Company made awards in the Shareholder Value Plan ('SVP'), under rules previously approved by shareholders.

The SVP enables participants to share in up to 7% of any increase in the value of the Group over an opening market capitalisation of £2,941 million based on a 5 business day average up to 3 June 2014. The awards are subject to the following performance conditions:

· at least a 7% compound annual increase ('CAGR') in the market capitalisation of the Group from the above valuation over the next 3 and 4 year periods; and

· the Group's TSR outperforms the FTSE 250.

The performance conditions are measured over an initial performance period from 3 June 2014 to the date of announcement of the Group's FY17 annual results after which a total of 60% of the options will vest. The remaining options are measured over a performance

9. Share-based Payments (continued)

period from 3 June 2014 to the date of announcement of the Group's FY18 annual results. Options are forfeited if an employee leaves the Group before the options vest. The Pool also has a maximum cap on incremental value equal to 2.75% of the total issued share capital of TalkTalk Telecom Group PLC.

There is a holding period of 12 months after each vesting date for Executive Directors. All other participants are required to hold 50% of their award for 12 months after the vesting date.

A fair value exercise was conducted for the grant using the Monte Carlo method with the total fair value of the options granted totalling £3m. The resulting IFRS 2 charge for the 6 months ended 30 September 2014 is £0.3m.

c) IFRS 2 charge

A total charge of £1 million for all schemes has been recognised in the 6 months ended 30 September 2014 (6 months ended 30 September 2013: £3m; year ended 31 March 2014: £4m).

10. Net debt

Analysis of net debt

*Included in derivative financial instruments within trade and other receivables at 30 September 2014 (note 11).

In the six months to 30 September 2014, the Group re-financed its debt to secure a £100m term loan, a £560m revolving credit facility (RCF) and a £50m bilateral agreement to replace the existing facilities that were set to mature in March 2015 and November 2015. The new term loan has a final maturity date of July 2019 with repayments during the term of £25m in January 2017 and £25m in January 2018. The RCF and the bilateral agreement both mature in July 2019.

In addition, in July 2014, the Group issued US$185m of US Private Placement (USPP) notes maturing in three tranches (US$139m in 2021, US$25m in 2024 and US$21m in 2026). The interest rate payable in respect of drawings under the agreement is at a margin over the US treasury rate for the appropriate period. The fair value of the notes is translated at the spot rate each reporting period. Cross currency swaps were taken out to hedge against foreign exchange rate movements.

11. Financial Instruments

The book value and fair value of the Group's financial assets, liabilities and derivative financial instruments, excluding the Group's loans and other borrowings shown in note 10, are as follows:

* Deferred income has been included within the financial liabilities above so as to give completeness over the Group's contractual commitments on future cash outflows.

11. Financial Instruments (continued)

The Group's activities exposed it to a variety of financial risks including market risk (such as currency risk and interest rate risk), credit risk and liquidity risk. The Group Treasury function used certain financial instruments to mitigate potential adverse effects on the Group's financial performance from these risks. These financial instruments primarily consisted of bank loans and interest rate swaps. Other products, such as currency options, can also be used depending on the risks to be covered but have not been used in the current or preceding financial year. The Group does not trade or speculate in any financial instruments.

The Group has cash flow hedges in place that swap the interest rate risk on the revolving credit facility (RCF) from floating to fixed. These hedges have been fully effective from inception. The fair value measurement is classified as Level 2, derived from other observable market data; this means that their fair value is based upon the mark to market valuation at the balance sheet date. Fair value measurement at Level 2 gives consideration to interest rates, yield curves and foreign exchange rates at commonly quoted intervals for relevant currencies. The Group has also assessed the credit risk within its financial instruments. The fair value of these instruments at 30 September 2014 is an asset of £2m (6 months ended 30 September 2013: liability of £1m; year ended 31 March 2014: £nil). A loss of £3m (6 months ended 30 September 2013: gain of £2m; year ended 31 March 2014: gain of £3m) has been recognised in other comprehensive income in the period ended 30 September 2014. As the hedges were fully effective there has been no income statement impact.

12. Share Capital

13. Capital commitments

14. Contingent liabilities

During the years ended 31 March 2013 and 31 March 2014, the Group received £33m relating to an Ofcom determination that BT had overcharged for certain wholesale Ethernet services. The full amount has been paid to the Group. BT appealed Ofcom's determination in the Competition Appeal Tribunal (CAT). BT lost their appeal and have applied for permission to appeal the CAT's judgement in the Court of Appeal.

In September 2013, a change to a previously agreed VAT treatment in relation to prompt payment discounts was enforced by HMRC with immediate effect. In December 2013, following discussions with HMRC, the Group amended the arrangements and accounted for the associated VAT benefit in the Group's VAT return for the nine month period ended 30 September 2014, as at 10 November 2014, no decision has been reached by HMRC on the appropriateness of the new arrangements. In the March 2014 UK Government Budget, a change in the VAT legislation with respect to prompt payment discounts was announced. The change took effect on 1 May 2014.

15. Events after the balance sheet date

In October 2014, the Group reached an agreement to acquire National brand customers from Virgin Media. These customers are outside Virgin Media's cable footprint but are substantially on-net for the Group's unbundled network. The National base stood at 97,700 at the end of September 2014 and the final consideration payable is contingent upon the number of customers successfully migrated onto the TalkTalk network through 2015.

16. Other information

In the six months to 30 September 2014, the Group received a credit relating to certain equipment which has been offset against higher costs incurred in relation to that equipment in the period.

Risks and uncertainties

The Board continually assesses and monitors the principal risks and uncertainties that they believe could have a material adverse effect on the Group's reputation, operations or financial performance.

The key risks that could affect the Group's long-term performance, and the factors which mitigate these risks, are set out in detail on page 16 of the 2014 Annual Report. As at 30 September 2014, the Board has not identified any additional key risks to those disclosed in the 2014 Annual Report (see below).

Additional risks and uncertainties of which we are not aware or which we currently believe are immaterial may also adversely affect our business, financial condition, prospects, liquidity or results of operations.

· Increased competition in the UK voice, broadband and TV market may impact financial performance.

· Changes in regulation can significantly impact the Group's performance.

· Failure to operate effective processes and controls across the Group may have an adverse impact on the services we deliver to our customers, leading to churn, and non-compliance with regulatory requirements.

· We continue to review, rationalise and integrate our IT infrastructure and to simplify the way in which we operate our business. Disruption to our operations could have an adverse impact on the services we provide to our customers and on our financial performance.

· Failure to prevent the loss or exploitation of personally identifiable or commercially sensitive information could result in loss of competitive advantage, regulatory fines, damage to the brand and ultimately churn.

· Failure to provide a stable and reliable service may cause customer churn.

· The Group has a number of critical suppliers. Failure of any of these suppliers could significantly affect the Group's ability to continue operations and to maintain its financial performance.

· Failure to deal with customer queries, resolve service faults and other issues in line with our customers' expectations could lead to complaints, damage to our brand and customer churn.

· Having successfully launched a TV service with YouView, there is a risk that TalkTalk is unable to maximise competitive advantage through its failure to scale its network, operations and supply chain efficiently.

Any of the above could impact the assumptions underlying the carrying value of the Group's assets and could result in asset impairments.

Statement of Directors' responsibilities

The unaudited interim condensed financial statements for the 6 months ended 30 September 2014 have been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union and the Disclosure and Transparency Directive Rules ('DTR'). The interim management report herein includes a fair review of the important events during the first 6 months and description of principal risks and uncertainties for the remainder of the financial period, as required by DTR 4.2.7R, and a fair review of disclosure of related party transactions and changes therein, as required by DTR 4.2.8R.

The Directors of TalkTalk Telecom Group PLC are listed on the Group's website www.talktalkgroup.com. On 3 June 2014, Tristia Harrison and Charles Bligh joined the Board as Executive Directors. Joanna Shields stepped down from the Board in her capacity as Non-Executive Director on 22 July 2014. In addition, Stephen Makin will step down from the Board following the announcement of the Group's interim results on 11 November 2014, he will be succeeded by Iain Torrens.

By order of the Board

D Harding S Makin

Chief Executive Officer Chief Financial Officer

10 November 2014 10 November 2014