Interim Management Statement

23rd July 2014

TalkTalk Telecom Group PLC

Interim Management Statement for the 3 months to 30 June 2014 (Q1 FY15)

· 6th consecutive quarter of year-on-year revenue growth: 3.1%

· 7th consecutive quarter of base growth: 10,000 broadband net adds

· Continuing strong growth in TV: 185,000 net adds taking base to over 1.1m

· On-net churn reduced to 1.4% with continuing improvements in customer experience

· Continuing strong growth at TalkTalk Business driven by data products revenues (+54%)

· On track to deliver FY15 guidance and medium term financial targets

Financial Highlights

· Total revenue up 3.1% year-on-year to £434m (Q1 FY14: £421m)

· On-net revenue up by 5.2% year-on-year to £322m (Q1 FY14: £306m)

· Corporate revenue up by 10.0% to £88m (Q1 FY14: £80m)

· On-net ARPU stable at £26.36 (Q1 FY14: £26.28)

· £819m refinancing completed; new RCF and successful US Private Placement

Operating Highlights

· 23,000 on-net net adds , taking total on-net base to 4.08m

· 24,000 new mobile customers added, taking base to 308,000

· 34,000 new fibre customers added, taking base to 241,000

· 1,800 new EFM/Ethernet lines added, taking base to 19,000

Dido Harding, Chief Executive of TalkTalk commented:

Our strategy for growth continues to deliver according to plan, and we are delighted to report another quarter of base growth and year-on-year revenue progress, including continuing strong momentum in new products such as TV, and data services in TalkTalk Business. Importantly, we have also continued to reduce churn on our on-net base, with a third consecutive quarter of improvement, as we continued to improve our customers' experience and drive increased loyalty through new products. We expect revenue growth to again, build through the year and we are on track to deliver our FY15 revenue and margin guidance, and medium term financial targets.

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

Call and webcast details

UK & International: +44 (0) 20 3139 4830 Toll-Free: 0808 237 0030

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Replay (available for 7 days)

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

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

Business Review

Sixth consecutive quarter of y-o-y revenue growth (+3.1%)

On-net revenues grew by 5.2% driven by base growth and stable ARPU. Year-on-year ARPU development reflects the benefit of pricing activity and new product penetration, off-set by the mix impact of Post Office and other wholesale customers, the impact of a change in VAT treatment and promotional investment. Corporate revenues grew strongly by 10.0% y-o-y, driven by continuing strength in data products (+54% y-o-y) and revenues from Post Office voice customers. Off-net revenues continue to reduce (-31.4% y-o-y), falling from over 8% of group revenues a year ago, to under 6% in Q1. Group revenues saw a sixth consecutive quarter of y-o-y growth to 3.1%.

10,000 total broadband net adds in line with strategy of modest growth

We grew our fully unbundled base by 45,000 customers. Our legacy partially unbundled and off-net bases continued to reduce by 22,000 and 13,000 respectively, driving total net adds growth of 10,000 - in line with our stated objective of modest base growth.

Continued strong growth in take-up of TV (+185,000) and wider content agreement with Sky

We added 185,000 net new customers to our TV base (Q4FY14: 185,000), with a quarter of these customers new to TalkTalk, taking our total base of TV customers to 1.1m. Self-install and Essentials both continued to gain traction with demand for Plus TV remaining firm. Pay content boost penetration and TVOD movie volumes remained strong during the quarter.

Our content offer continues to develop and we have built upon our existing wholesale relationship with Sky. We have 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. 

Continuing improvement in on-net churn to 1.4%

Churn continued to improve during the quarter with on-net churn falling to 1.4%. Leading indicators of customer service such as call volumes (down 5% on Q4FY14) and complaints to Ofcom (down 13% on Q4FY14) also continued to improve during the quarter.

In addition, Net promoter scores (NPS) from customers taking additional products such as TV, mobile and fibre remained significantly above those from dual play customers. TV customers in particular, continue to show strong NPS and early life churn characteristics.

24,000 new mobile and 34,000 new fibre customers added

We saw continuing steady demand for our mobile proposition during the quarter. As expected, demand for fibre from our customers remains modest except when it can deliver transformational improvements in their broadband experience, such as for those customers who currently achieve less than 2Mbps speeds and might wish to take TV. We expect that demand will grow steadily with heightened awareness of the product and growing bandwidth usage. We were pleased to note Ofcom's proposal to introduce a margin squeeze test during 2014, which we expect, will lead to lower wholesale fibre costs in due course.

54% growth in data revenues drives 10.0% growth in Corporate

In addition to a revenue contribution from Post Office voice customers during the quarter, we also continued to see strong demand for our competitively priced data products for businesses, which delivered 54% y-o-y revenue growth. We won further new contracts to supply Ethernet and Ethernet First Mile connectivity as a result of which we added over 1,800 new Ethernet and EFM lines during the quarter, taking the installed base to over 19,000.

Fibre to the Premise

Our plans in York are progressing well. We have completed the initial planning phase for the first area in York and after a successful trial of the micro trenching process we have started recruitment of engineers for a larger trial on the streets of York later this summer. We are on track to begin connecting homes and businesses in 2015

Long term funding

In June 2014 we secured additional long term debt funding of $185m from a US Private Placement programme involving a number of institutional investors and £710m of bank debt. This was in anticipation of existing facilities maturing in 2015. The term of the bank debt is 5 years and maturities under the USPP programme range from 7-12 years. Pricing for the bank debt is significantly lower than the previous facilities. This takes our total secured funding capacity to £819m, a level we consider more than sufficient to support our medium term growth and capital structure plans.

REITERATING FY GUIDANCE

· Customer numbers

We expect to deliver modest growth in net adds during FY15 and a similar number of TV net additions to FY14

· Revenue, Overheads and Pre-SAC EBITDA

We expect FY15 revenues to grow by at least 4%, driven by modest growth in customer numbers and ARPU, and growth in TalkTalk Business revenues. We expect overheads as a percentage of revenue to fall below the level reported for FY13, driving Pre-SAC EBITDA margins ahead of those reported for FY13

· SAC & Marketing and Headline EBITDA

Based on current volume expectations and falling costs-per-add for both broadband and TV customers, we expect SAC and Marketing costs to fall year-on-year, driving strong growth in Headline EBITDA, with margin in the range 16%-17%

· 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 related to Making TalkTalk Simpler are expected to be £20m-£25m

· Dividend

While we shall continue to invest in 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%

FY15 - FY17

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 modest 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.

Quarterly Metrics