Interim Management Statement

TalkTalk Telecom Group PLC

Interim Management Statement - Third Quarter FY 2013/14

· Strong acceleration in year-on-year revenue growth to +5.1%

· 110,000 net adds including 103,000 Post Office customers

· 175,000 TV customers added in quarter, taking base to 732,000

· On-net churn reduced as expected, from Q2 peak to 1.6% (Q2 FY14: 1.7%)

· Reiterating FY14 guidance and confident of achieving medium term financial targets

Financial Highlights

· Total revenue up 5.1% to £436m (Q3 FY13: £415m)

· On-net revenue up by 9.6% year-on-year to £320m (Q3 FY13: £292m)

· Corporate revenue up by 8.8% to £87m (Q3 FY13: £80m)

· On-net ARPU up by 5.2% year-on-year to £26.79 (Q3 FY13: £25.47)

Operating Highlights

· 107,000 on-net net adds (Q2 FY14: +34,000), including 84,000 Post Office customers

· 197,000 TVOD pay per view movies taken by TV customers (Q2: 123,000)

· 24,000 new mobile customers added, taking base to 260,000

· 35,000 new fibre customers added, taking base to 177,000

· 49% growth year-on-year in data products revenues in TalkTalk Business

Dido Harding, Chief Executive of TalkTalk commented:

We are delighted with the material step up in our revenue growth during the quarter, which shows the powerful effect of combining a modestly growing customer base, disciplined pricing and promotional activity, and strong new product growth particularly in TV. In TalkTalk Business, we saw a strong acceleration in data products growth and successfully migrated Post Office customers onto our network. As a result this has been another quarter of successfully delivering against our objectives; we are confident that we are building a business with strong and sustainable revenue momentum and growing profitability. We are on track to deliver our FY14 guidance and our medium term targets of 4% revenue CAGR (FY14-17) and 25% EBITDA margin by FY17.

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

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Business Review

Strong acceleration in y-o-y revenue growth to 5.1%

On-net revenues grew by 9.6% driven by base growth and ARPU progress (+5.2% y-o-y) from successful pricing activity and new product penetration, partly off-set by the mix impact of Post Office customers and promotional investment. Corporate revenues accelerated strongly to grow by 8.8% y-o-y, driven by accelerating growth in data products (+49% y-o-y) and revenues from Post Office voice customers. Off-net revenues continue to reduce (-33% y-o-y), falling from over 10% of group revenues a year ago, to under 7% in Q3. As a result, group revenues saw a fourth consecutive quarter of acceleration in growth to 5.1% y-o-y.

110,000 total broadband net adds (+7,000 excluding Post Office migration)

Excluding the Post Office base, we grew our fully unbundled base by 49,000 customers. Our legacy partially unbundled and off-net bases continued to reduce by 26,000 and 16,000 respectively, driving total net adds growth of 7,000, which is in line with our stated objective of modest base growth. The Post Office contributed a total of 103,000 customers to our base, comprising 81,000 fully unbundled customers, 3,000 partially unbundled and 19,000 off-net customers.

Continued strong growth in take-up of TV (+175,000)

We added 175,000 net new customers to our TV base (Q2: 167,000), with a quarter of these customers new to TalkTalk, taking our total base of TV customers to 732,000. Demand for our proposition accelerated during the quarter with self-install and our newly launched Essentials proposition both gaining traction against the backdrop of continuing strong demand for Plus TV. We remain on track to have nearly 1m TV customers by the year end.

Penetration of pay content boosts remained strong during the quarter, with over 25% of TV customers choosing to purchase content. TVOD movie volumes also picked up sharply to 196.7k (Q2: 123.4k) as customers responded positively to our Christmas line-up. We remain encouraged by the overall level of pay take-up and its implications for incremental ARPU growth in the future.

In addition to offering subscribers of our Sky Movies and Sky Sports boosts on-demand content at no extra cost, we have extended our wholesale agreement with BSkyB to offer a broad selection of Sky basic Entertainment channels and catch-up on top programmes from these channels, for another 3 years.

Churn reduced to 1.6% from Q2 peak

As we indicated at the time of our H1 results in November, churn peaked towards the end of Q2 and we have seen a lower churn rate in Q3, consistent with improving leading indicators of customer service such as call volumes (down 6% on Q2) and complaints to Ofcom (down 15% on Q2).

Net promoter scores (NPS) from customers taking additional products such as TV, mobile and fibre remained significantly above those from dual play customers, with early life churn materially lower. TV customers in particular, continue to show strong NPS and churn characteristics, supporting our confidence in the prospect for reducing overall churn by scaling the proposition rapidly.

24,000 new mobile and 35,000 new fibre customers added

Following strong promotional activity for our SIM-only product during Q2, Q3 mobile net additions returned to a more normalised pattern of growth. Fibre growth also benefited from promotional activity during Q2 and has since returned to a more regular pattern of growth. 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.

49% growth in data revenues drives 8.8% 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 49% y-o-y revenue growth. We won several new contracts to supply Ethernet and Ethernet First Mile connectivity as a result of which we added over 1,500 new Ethernet and EFM lines during the quarter, taking the installed base to over 15,000.

REITERATING FY AND MEDIUM TERM GUIDANCE

FY14

· Revenue

We expect FY14 revenues to grow by at least 3%

· Overheads

We expect overheads as a percentage of revenues to be higher than in FY13 driven by higher costs to serve, the majority of which are expected to be non-recurring

· 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

· EBITDA margin

We expect FY EBITDA margins to be in the range 12%-13%

· Net debt

Capex is expected to be within our guideline of 6% of revenue and working capital is expected to show outflows of £30m-£40m as we position the business for continuing strong growth in FY15 whilst also reducing costs

Cash exceptional items relating to Making TalkTalk Simpler are expected to be £20m-£25m

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

· Dividend

While we will have invested substantially in growing our business during FY14, we are reiterating our commitment to grow the FY dividend by a minimum of 15%, and at a similar rate in subsequent years.

FY15 and beyond

At the time of our H1 results in November 2013, we raised our FY14-FY17 revenue CAGR target from 2% to 4% and set our medium term EBITDA margin target to be achieved by FY17. We remain confident that we are on track to achieve both our revenue and margin targets.

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 one key component of our EBITDA margin target. There are two other key 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 acquisition costs per add as a result of increased levels of self service and, over time, 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. With £10m of savings actioned to date, these initiatives are expected to deliver further savings of £40m by FY17.

Quarterly Metrics