Interim Management Statement

TalkTalk Telecom Group PLC

Interim Management Statement - First Quarter FY 2013/14

·; Second successive quarter of year-on-year revenue growth (+1.7%)

·; Third successive quarter of positive net adds growth (+8,000)

·; 390,000 TV customers at end of quarter with increasing momentum through quarter

·; On-net churn reduced to 1.4% (Q4 FY13: 1.5%)

·; Reiterating FY14 guidance and on track to achieve medium term financial targets

Financial Highlights

·; Total revenue up 1.7% to £421m (Q1 FY13: £414m)

·; On-net revenue up by 7.4% year-on-year to £306m (Q1 FY13: £285m)

·; Corporate revenue £80m (Q1 FY13: £80m)

·; On-net ARPU up by 4% year-on-year to £26.28 (Q1 FY13: £25.27)

Operating Highlights

·; 24,000 on-net net adds (Q4 FY13: +30,000)

·; 160,000 TV customers added (Q4 FY13: +150,000), taking base to 390,000

·; 27,000 new mobile customers added, taking base to 202,000

·; 22,000 new fibre customers added, taking base to 95,000

·; 28% growth year-on-year in data products revenues at TalkTalk Business

Dido Harding, Chief Executive of TalkTalk commented:

"We are continuing to deliver on our commitment to grow the business with strong progress in customer numbers, revenue and new product penetration. Customers are spending more and staying with us longer because of our strong value-for-money deals. Nine months after launching TalkTalk TV on the YouView platform, we are delighted with our progress in building a great, value-for-money TV business. We are reiterating our full year financial guidance and remain confident about delivering our medium-term financial targets of revenue and margin growth."

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

Call details

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Webcast http://cache.merchantcantos.com/webcast/static/ec2mc/4000/5275/10319/10957/Lobby/default.htm

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

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

Business Review

Growing customer base and reducing churn

The total broadband customer base increased by 8,000 during the quarter as our strong value-for-money credentials, improving customer service levels and broad product offer continued both to attract new customers and retain existing ones. Our ongoing focus on customer service initiatives has continued to have a positive impact with reduced calls and complaints. We saw reduced churn through the quarter with on-net churn falling to 1.4% (Q4: 1.5%). We expect to continue to reduce churn as customer service improvements gain further traction, and as we see the benefit of more customers taking additional products from us.

We added 51,000 fully unbundled broadband and voice customers in the quarter, offset by the loss of 27,000 broadband-only customers, leading to net growth in our on-net base of 24,000. The off-net base continued to decline, with 16,000 fewer customers.

On-net customers now comprise 96% of our total base and the mix of customers has continued to improve, with over 82% now fully unbundled and therefore delivering our most profitable revenues.

Our TV, mobile and fibre upsell propositions have shown further momentum during the quarter:

160,000 TV customers added with momentum strengthening through quarter

Nine months after launching TalkTalk TV on the YouView platform, we have continued to develop the proposition through content additions and a self-install option. We added 160,000 new TV customers during the quarter, taking the base to 390,000 - representing over 10% of our fully unbundled base. Momentum has continued to strengthen as awareness of our proposition has grown, supporting our ambition to build a scale TV base.

The vast majority of our TV customers continue to be ugraders from Freeview and Freesat, who are attracted by the functionality of the YouView platform and flexible access to paid-for content. This is strong testimony to the appeal of our proposition to value seeking customers.

The strength of our triple play proposition has also continued to attract new customers to TalkTalk with 25% of the quarter's additions choosing to switch their phone and broadband to us in order to take TV.

26% of customers on the TV base have bought paid for content with viewing habits continuing to reflect our core family demographic - Entertainment, Kids and Movies remained the most popular paid-for content (over 90% of boosts), with Sports making up a modest 2% of content purchases from across the base.

The positive feedback from our early TV customers has continued as the base has grown and continues to support the rationale of our triple play strategy:

·; High levels of satisfaction with install process for both self-install and engineer-install

·; High levels of satisfaction with YouView platform functionality (catch-up, search and PVR)

·; High levels of satisfaction with pay content choice and value

As a result our TV customers continue to show a materially higher Net Promoter Score than their dual-play counterparts and are exhibiting lower churn.

We have continued to develop our proposition during the quarter with additional ethnic (e.g. Eros Now) and Video on Demand (e.g. Django Unchained) content to complement our already comprehensive offer.

As we develop our proposition further, we are on track to launch a TV product for our Essentials customers in the autumn. This will be a substantially lower priced set top box (no PVR, only one tuner) but with full YouView functionality (catch-up, search, pause & rewind and flexible access to premium content). This will enable all of our customers to access TV and significantly expand our addressable market.

27,000 mobile customers added

Our base of mobile customers grew to 202,000 as we added 27,000 customers during the quarter, with our simple tariffs and compelling handset range driving strong demand. As with TV customers, feedback from our mobile customers remains highly encouraging:

·; High levels of satisfaction with tarrifs, handset choice and sign-up process

·; Lower churn and higher likelihood of staying with TalkTalk after expiry of mobile contract

·; Strong representation in older customers (60% over 45 years old)

22,000 fibre customers added

In keeping with the modest demand trends since we began to offer fibre, 22,000 more customers chose to take fibre in the quarter (Q4 FY13: 21,000), taking our base of fibre customers to 95,000. Whilst the growth in our TV proposition is driving some incremental growth in fibre demand, we continue to believe that overall demand from our customer base will remain modest until the benefits and affordability of this premium product become clearer.

We are pleased that Ofcom has recognised the importance of competition in its most recent Wholesale Local Access review. Importantly, the proposal to introduce an ex ante margin squeeze test should allow more effective competition to develop in this market. Proposals for reducing connection costs, wholesale contract lengths and a self-install product will also help in reducing some of the costs and complexities that surround fibre installation.

1.2m customers have activated HomeSafeTM 

1.2m customers now use Homesafe, our unique, network level home security product. Of this 410,000 customers have chosen to activate Kidsafe, the parental controls feature of Homesafe, a figure which is growing by 30,000 a week. Homesafe users continue to report higher levels of satisfaction with TalkTalk and lower levels of churn.

Strong growth in Data services helping underpin Corporate

We continued to see growing demand in Data and Carrier services offsetting declines in legacy voice products. We installed 1,549 Ethernet and EFM lines during the quarter leading to an installed base at the end of the quarter of over 11,800 lines.

TalkTalk Business continues to drive innovative and competitive product development that leverages our network capability with the reach and flexibility of our network allowing us to gain significant new contract business during the quarter. Thus, we have entered into a number of strategic partnerships with specialist such as Logicalis, Callway One and Imex to extend the market reach of our data products; grown our relationship with Hutchison 3G to include data deployment to 100 H3G stores (with a further 247 stores to be connected in H2); and continued to develop our direct channel through contracts with amongst others, leading parcels and logistics business, DX Group.

Financial Review

On-net revenue of £306m in the quarter was 7.4% higher year on year reflecting growth in the base, and ARPU growth. On-net ARPU of £26.28 was 4% higher year on year with unbundling mix, increased upsell to TV and mobile, and the benefit of line rental increases being partially offset by planned promotional spend and lower voice usage.

Corporate revenue in Q1 was flat as continuing strong momentum in data services (+28% year on year) offset the underlying decline in legacy voice revenues. We continue to expect full year revenues to grow year-on-year driven by recent contract wins (including last year's agreement to supply connectivity to Post Office customers and Iceland Retail Group stores) and a strong pipeline of new business.

Off-net revenue, which now represents just over 8% of our total revenue (Q1 FY13: 12%), saw a 29% reduction year on year to £35m.

As a result, total revenue for the quarter grew by 1.7% year on year, the second consecutive quarter of year-on-year growth and an acceleration from the growth reported in Q4 FY13 (+1.4%).

FY14 Guidance Unchanged

We reiterate our guidance for FY14 as below

·; Revenue

We expect FY14 revenues to grow by at least 2%

·; Overheads

After benefiting from some acceleration of the savings from Making TalkTalk Simpler in FY13, we expect overheads as a percentage of revenues to remain broadly flat in FY14

·; SAC & Marketing

We expect total SAC as a percentage of revenues to peak in FY14 as we invest in building a scale base of TV subscribers, drive further penetration of mobile and fibre into our customer base, and continue to grow TalkTalk Business.

·; Net debt

Capex is expected to be within our guideline of 6% of revenue and working capital is expected to show outflows of £15m-£20m as we grow the business

Cash exceptional items are expected to be in line with the incremental annualised savings benefits from our Making TalkTalk Simpler programme of £10m

The costs of repurchasing shares to satisfy incentive schemes is expected to be similar to that incurred in FY13

We expect to begin making modest cash tax payments during FY14

·; Dividend

We remain firmly committed to dividend growth whilst also investing in the business. This commitment is supported by the profitability of our core business, underlying cash generation and overall financial strength. While we plan to invest substantially in growing our business during FY14, we are reiterating our commitment to grow the dividend by a minimum of 15%.

FY15 and Beyond

We remain on track to deliver our medium term targets of 2% CAGR in revenue and 25% EBITDA margin.

We expect the components of our revenue growth strategy (improving on-net customer mix, growing TV and mobile penetration, and growth in TalkTalk Business) also to contribute to our profitability target, through gross margin over the medium term.

We expect the balance of our profitability target to be delivered through both overhead reduction (driven amongst other things, by our Making TalkTalk Simpler programme), and SAC declining from its FY14 peak (driven by reducing churn and falling costs per addition).

As a result we expect to deliver strong EBITDA growth in FY15 and subsequent years, which will support continued dividend growth at a similar rate to FY14.

Quarterly Metrics