Interim Results for 6 months to 30 September 2013

12th November 2013

TalkTalk Telecom Group PLC

Interim Results for the 6 months to 30 September 2013

· H1 EBITDA1 £76m in line with expectations, reflecting an additional £86m investment in growth

· Strong and accelerating TV growth (+167,000 net adds in Q2); now expect y/e base of nearly 1m

· Continuing growth in broadband net adds (+5,000) and ARPU drive Q2 revenue growth of 1.9%

· Raising FY revenue growth guidance to at least 3% from 2%

· Raising medium term revenue growth target to 4% CAGR (FY14-FY17) from 2%

· Targeting 25% EBITDA margin by FY17

H1 Financial Highlights

· Total revenue up 1.8% to £843m (H1 FY13: £828m)

· On-net revenue up 6.8% to £612m (H1 FY13: £573m); Corporate revenue up 1.3%

· Headline EBITDA1 £76m (H1 FY13: £147m) after £86m investment in scaling new products

· Headline1 EPS 0.8p (H1 FY13: 7.8p);

· Interim Dividend 4.00p (H1 FY13: 3.45p)

Q2 Operating Highlights

· Q2 on-net ARPU up 2.8% to £26.08 (Q2 FY13: £25.37)

· 56,000 fully unbundled net adds; total net adds 5,000

· 167,000 TV customers added, base now 557,000; Essentials TV launched

· 34,000 Mobile customers added; 47,000 Fibre customers added

· On-net churn 1.7% (Q1: 1.4%)

· Continued improvement in call volumes and Ofcom complaints

· Corporate revenue +2.5% including 26% growth in Data revenues

1 Excluding exceptional items and amortisation of acquisition intangibles

Dido Harding, Chief Executive of TalkTalk commented:

"We are delighted with the progress we have made in the first half. We have the fastest growing TV business in the UK and we now expect to have nearly 1m TV customers by the end of FY14.

Other new products and TalkTalk Business have also performed well and we delivered our third successive quarter of accelerating revenue growth, allowing us to raise our guidance for full year revenue growth from 2% to at least 3%. We are increasingly confident about the opportunity that we have to deliver sustainable growth by bringing affordable connectivity and innovative new products to Britain's consumers and businesses. As a result we are also raising our guidance for medium term revenue growth, from 2% to 4%.

Our financial performance in the first half reflects the investment we are making in growth. Sustainable revenue growth, a scale TV business and our proven ability to simplify the business to improve our customers' experience will create a more profitable business, and we are now confident of our ability to deliver a 25% EBITDA margin by FY17. "

Analyst and investor presentation

8.30 a.m. at the Andaz Hotel (40 Liverpool St, London EC2M 7QN)

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Webcast

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Analyst and investor enquiries

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Media enquiries

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SUMMARY FINANCIALS

(1) Excluding exceptional charges, amortisation of acquisition intangibles and tax credit - see Note 7 of the interim accounts

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

(3) Excludes loans to related parties in H1FY13 of £2m

Q2 OPERATING REVIEW

Net Adds (+5,000) and on-net ARPU (+2.8%) drive acceleration in y-o-y revenue growth to 1.9%

We added 56,000 fully unbundled customers to our on-net base during the quarter with our legacy broadband only (-22,000) and off-net (-29,000) bases continuing to decline in line with established trends. As a result we grew our total broadband base by 5,000 - the fourth consecutive quarter of net adds growth. The growth in our customer base and continued progress in ARPU (+2.8% y-o-y) helped drive a third consecutive quarter of acceleration in group revenue growth to 1.9% y-o-y (Q1FY14: +1.7%, Q4FY13: +1.4%).

Churn impact from increased customer segmentation

We saw an increase in churn on our on-net base in the quarter to 1.7% against a background of unprecedented advertising and promotional activity in the market ahead of the beginning of the Premier League football season. However, churn peaked towards the end of the quarter and we have since seen a lower churn rate, consistent with leading indicators of customer service improvement such as call volumes, complaints to Ofcom and net promoter scores, all of which continued to improve.

Continued strong growth in take-up of TV (+167,000)

We added 167,000 net new customers to our TV base, with a quarter of these customers new to TalkTalk, taking our total base of TV customers to 557,000. Demand for our proposition accelerated during the quarter despite unprecedented levels of advertising and promotional activity in the market. This is strong testament to the growing appeal of our compelling value proposition, aimed primarily at Freeview users.

Accelerated mobile (+34,000) and fibre take-up (+47,000)

Our mobile base grew by 34,000 to 236,000. The simplicity and value of our handset and SIM-only tariffs, together with ongoing range development, are proving powerful drivers of demand, especially through our online channels.

We added 47,000 fibre customers during the quarter to a still modest 142,000. We were pleased with Ofcom's proposal to introduce a margin squeeze test in 2014. This marks the beginning of a journey that will, in due course, enable us to offer our customers a better value fibre product as it becomes more relevant to more of them.

Strong growth in data revenues drives 2.5% growth in Corporate revenues

We continued to see strong demand for our competitively priced data products for businesses, with 26% revenue growth in the quarter helping drive overall Corporate revenue growth of 2.5% y-o-y.

Launch of Essentials TV - £7.50 per month

At the end of the quarter we launched a TV proposition for our Essentials customers: a free YouView box, totally unlimited broadband and free evening and weekend calls at £7.50 per month plus line rental. Essentials TV is aimed at customers who don't currently subscribe to any Pay TV service, but want to upgrade from Freeview and gain the benefits of catch up TV via services such as ITV Player or BBC iPlayer. It includes a smaller, lower cost YouView box (only one tuner and no PVR) which lets customers enjoy all the search, rewind and catch up functionality of YouView but without recording (our higher tier Plus TV package offers the ability to record with a YouView+ box). In addition, customers will enjoy the same breadth of access as Plus TV customers, to the TalkTalk player and all its flexible pay content. With the launch of Essentials TV, our TV proposition is now accessible to all our customers and we expect it to help drive a significant acceleration in TV net adds in H2. As a result we now expect a base of nearly 1m TV customers by the end of FY14.

Launch of Simply Broadband - £2.50 per month

Also at the end of the quarter, we launched Simply Broadband, an entry level unlimited broadband package with no bundled calling package. Simply Broadband enhances our value credentials (a saving of £250 compared to BT), recognises the needs of modern households that make little use of their fixed line voice service and completes our product and pricing architecture.

H1 Business Review

Headline financial results reflect investment in growth

The H1 financial performance reflects our planned investment in growth as we scale new products. In aggregate we spent an additional £86m during the half on growing our TV, mobile and fibre bases, including some temporary overhead costs associated with the rapid growth in our TV customers. Net of gross margin improvement and cost savings, Headline EBITDA for the half was £76m (H1FY13: £147m), with Headline EPS of 0.8p (H1FY13: 7.8p).

The Board has declared an interim dividend of 4.00p (H1FY13: 3.45p), with the 15.9% growth reflecting our confidence in the strategy, growth prospects and long term cash generation potential of the group.

Sustained growth in customer base and new products drives acceleration in revenue growth

On-net revenues grew by 6.8% to £612m and total revenues by 1.8% as we made progress on each of our revenue drivers:

· modest base growth (+13,000 net adds);

· new product penetration (327,000 new TV customers, 61,000 new mobile customers and 69,000 new fibre customers);

· on-net ARPU (+3.5%); and

· TalkTalk Business (Corporate revenues +1.3%).

Increased confidence in revenue growth drives upgrades to FY and medium term guidance

We are increasingly confident about our sustainable revenue growth prospects. We have seen a sustained acceleration in y-o-y growth over the last three quarters and are already delivering near the +2% guidance for the FY. While our ambitions for total customer growth remain modest, we expect to see continued strong trends in new product take-up, especially TV, and further growth in ARPU. Combined with the impact of bringing Post Office customers onto our base during H2 and strong traction in data revenues in Corporate from contracts signed in H1, we now expect revenue growth of at least 3% for the full year (previously 2%).

We continue to expect modest growth in total customer numbers over the medium term but we are increasingly confident in the opportunity to build scale in TV, mobile and fibre, and the associated opportunities to grow ARPU. We also expect Corporate revenues to grow at a faster rate than the group average. As a result we are now targeting revenue CAGR for FY14-FY17 of 4% (previously 2% over the medium term).

Targeting 25% EBITDA margin by FY17

Revenue growth is a key component of our EBITDA margin target of 25%, which we are now targeting to deliver by FY17. 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 ("MTTS") programme is a key enabler of overhead reductions. MTTS 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 will deliver further savings of £40m by FY17.

RAISING FY14-FY17 REVENUE CAGR GUIDANCE FROM 2% TO 4%

There are four clear drivers of revenue growth over the medium term:

· Continued modest growth in customer numbers from reducing churn and market growth

· Continued progress in ARPU from mix and pricing

· Continued growth in new product penetration

· Continued growth in TalkTalk Business

1. CONTINUING MOMENTUM IN NET ADDS GROWTH

In Q2 we delivered the fourth consecutive quarter of net adds growth in our broadband base. Our value proposition remains the most compelling in the UK market, a position we have enhanced with the launch of Simply Broadband. With c20% of UK households still not online and therefore a source of continuing market growth, we expect to be able to grow our base further. Our value proposition appeals strongly to the digitally excluded, who tend to seek out the most affordable offers in the market for their first broadband experience.

2. MIX AND PRICING WILL CONTINUE TO UNDERPIN ARPU GROWTH

H1 on-net ARPU grew by 3.5%, driven by the take up of our new products, TV, Mobile and Fibre, significant upsell activity on all three products, and price inflation. This growth more than offset the continued decline in voice usage and promotional activity. We expect these influences to persist over the medium term, with our simple yet comprehensive price architecture allowing us to drive successful upsell activity while enabling customers to save more money.

3. Strong take-up of TV underpins confidence in scale opportunity

We added 327,000 new TV customers in H1, taking the base to 557,000. TalkTalk TV continues to be the UK's fastest growing TV service as we further develop the content proposition and support our customers in realising enhanced value from their viewing.

We have extended our relationship with Sky to offer Sky On-Demand to subscribers of our flexible, one-month Sky Movies and Sky Sports Boosts at no extra charge. Customers will be able to access hundreds of box office hits from Sky Movies On-Demand and Sky Sports On-Demand, offering catch up and library content via the TalkTalk Player. We will also be offering Sky Entertainment On-Demand in 2014.

In addition to our affordable TV Boost subscription products, which start at as little as £5 per month, we also offer the latest blockbuster movies to rent on our newly launched TVoD service, TalkTalk Box Office. Over Christmas our customers will be able to watch box office hits such as Wolverine, Monsters University and The Croods as many times as they wish in any 48hr period, from only £3.50.

Essentials TV allows all customers to take TV - c1m TV customers expected by end of FY14

With the launch of Essentials TV, our TV proposition is now accessible by all our customers and we expect it to drive a significant acceleration in TV net adds as we scale the product through H2FY14. As a result we now expect a base of nearly 1m TV customers by the end of FY14.

Positive customer feedback and higher than expected pay content take-up

Our TV customers have continued to report high levels of satisfaction as the base has scaled, with NPS (Net Promoter Score) and churn tracking at materially better levels than for dual play customers. In addition, significantly more TV customers are indicating that they will stay with TalkTalk beyond their initial contract than dual play customers. Independent verification of these characteristics was highlighted by the recent Which? Survey (October 2013) in which customers voted TalkTalk as the best TV service in the UK.

While live-to-air public service broadcast (PSB) and catch-up TV remain the most viewed programming on YouView (behaviour that is also largely reflective of the wider UK population), more of our customers are purchasing paid-for content than we had expected. Transactional Video on Demand (TVoD) remains the single most popular purchase with over 120,000 movies bought in Q2. Customers also bought, in total, over 120,000 other content boosts, with Entertainment, Movies and children's packages the most popular. Premium sports packages continue to prove relatively less popular, with less than 2% of TV customers purchasing in Q2, reflecting our current and target customer segment characteristics.

With around 25% penetration of paid content in our TV base, we are highly encouraged by the longer term ARPU potential of TV.

TV for Everyone - a compelling economic case to build scale

The UK triple play market continues to evolve with growing awareness of the choice of platforms (especially YouView), cost structures and access methods beginning to drive customer segmentation. We believe our well- defined value proposition is strongly placed to appeal to the large number of Freeview homes and those with basic Pay-TV/OTT services that want access to "more than Freeview". In addition, we see strong appeal for the value, functionality and flexible access to paid content offered by our platform to non-premium Pay TV subscribers.

There is therefore significant potential for us to build a scale TV business. This, together with the strong take-up of our TV proposition to date, lower churn and higher ARPU, underpins a compelling economic case for accelerating the growth of TV.

Each TV customer today is more valuable to us than a dual play customer, delivering in-contract payback of SAC and lower early life churn. As we drive take-up with lower cost set-top boxes, as customers buy more content, and as they stay with us for longer (we are benchmarking triple play churn at 0.8-1.2% per month), we expect the average lifetime value of TV customers to be at least double that of dual play customers.

4. Mobile and Fibre

Building strong traction in mobile with increasing evidence of the benefits of quad-play

We have continued to see strong take-up of our mobile offer in line with our developing handset and SIM-only tariff propositions. We added 61,000 customers to our mobile base in the half, taking the total base to 236,000. With handset contracts comprising 60% of the mix of Q2 net additions, we are increasingly being seen by our customers as a credible player in the mobile space. Our mobile customers have continued to report consistently higher NPS than for dual play customers, and demonstrate significantly lower churn.

In October we launched our refreshed tariff set with Britain's Best Price SIM and added further value to our higher tier propositions, both of which we expect to drive continued growth in demand for our mobile proposition.

Fibre growing from modest base; regulatory framework becoming more positive

While fibre penetration and overall demand from our customers remain at relatively modest levels, we saw an acceleration of take-up in Q2 (+47,000) taking the total base to 142,000, driven in part by sales to new acquisition customers (previously our fibre boost was only available to existing customers). Fibre is also proving a useful tool for expanding our TV customer base by allowing customers with slow ADSL speeds to get above the 5Mbps required for receiving premium channels.

5. TalkTalk Business

Corporate revenues building strong traction through Data services

Corporate revenues grew by 1.3% y-o-y in H1, with acceleration in Q2 (+2.5%) as we saw growing demand in Data and Carrier services offsetting declines in legacy voice products. We installed 3,432 Ethernet and EFM lines during the half leading to an installed base at the end of the half of over 13,600 lines.

A strong platform for market share growth

We have entered into a number of strategic partnerships during the half, with specialists 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. These contract wins and other business signed since the end of the half (Fluidata, Redcentric, Silver Lining and Peach Telecom) illustrate the significant opportunity that TTB has to grow market share in the SME, local authority and SoHo markets.

Our network capability allows us to drive innovation and scale. For example, the expansion of our network infrastructure has increased the available Ethernet exchange footprint from 2,199 to 2,980, providing TTB with four times the coverage of BT. By focusing exclusively on flexible connectivity products that leverage our network efficiently, TTB is able to compete very strongly in a market that, outside the incumbent leader, is very fragmented.

a clear roadmap to delivery of 25% EBITDA margin by FY17

Our H1 results reflect the investment we have made in growing a scale TV business and accelerated take-up of our mobile and fibre propositions. The strong demand for TV and our longer term ambition to grow the base, together with continuing growth in mobile and fibre, will see us investing further in H2. As a result FY14 will be a peak year of SAC investment.

Our confidence in the value that this investment will generate is underlined by the EBITDA margin progress we are targeting. Therefore in addition to raising our targeted revenue CAGR for FY14-FY17 to 4% we are now targeting a 25% EBITDA margin by FY17.

We have a clear roadmap for the delivery of this margin target:

1. Revenue growth;

2. SAC reduction; and

3. Overhead savings

1. REVENUE AND GROSS MARGIN

We expect the delivery of our revenue growth target together with modest gross margin progression (with pricing and upsell offsetting growth in lower margin fibre and content), to be a key component of delivering our EBITDA margin target.

2. SAC REDUCTION FROM LOWER CHURN AND FALLING COSTS PER ADD

Lower churn will drive lower requirement for gross adds

We have continued to see improvements in the underlying metrics that determine churn, in particular customer calls and complaints to Ofcom. Customer calls relating to phone and broadband issues fell by 9% y-o-y in H1, helped by improving first-time fix, online help and escalation processes. Complaints to Ofcom fell by 27% y-o-y in H1, primarily as a result of our improved escalation process. We expect both trends to continue to improve as we continue to improve our agent systems and processes. In this context, brilliant self-service, which is a component of our plan to make TalkTalk simpler (discussed below) will be a significant driver of an improved end-to-end customer journey, from sign-up to fault resolution.

In addition to these factors, the early indications from our TV and mobile customers are providing powerful evidence of the customer satisfaction and loyalty that multiple product take-up can generate. NPS scores on both TV and mobile bases are tracking significantly higher than for dual play customers and more importantly, showing a consistently positive trend even as these bases scale. In addition, a much higher proportion of these customers are telling us that they are likely to stay with TalkTalk beyond their contract term, than for the dual play base.

Building a scale TV base rapidly is therefore a key component of our churn reduction plan. We are benchmarking on-net triple play churn of 0.8%-1.2%, which would have a material impact on the cost of maintaining and growing our total subscriber base.

Falling costs of technology to deliver TV will drive lower costs per add

We expect the incremental SAC associated with acquiring TV customers to fall through H2 as the lower cost Essentials box and acceleration of self-install gain. Over the medium term, our development roadmap for delivering TV for Everyone will see further material reductions in the cost of delivering TV as the cost of set-top boxes will continue to fall and over time, router software and network based PVRs will replace the current generation of set-top box technology.

3. Making TalkTalk Simpler will drive overhead reductions of £50m

12 months ago we launched Making TalkTalk Simpler ("MTTS"), the next step in our plan to make TalkTalk a simpler and more efficient business: simpler products and processes for our customers, will allow us to simplify our systems architecture and better utilise data to build a self-service customer engagement model. The result will be to improve significantly the customer experience, thereby reducing churn and costs to serve.

In H2 FY13 we actioned £10m of savings under the first phase of MTTS, which involved restructuring the systems and processes in TTB to remove duplication and better align our sales and service model with our growth ambitions; completed the closure of our Stoke Mandeville site; consolidated the development of our IT systems under one partner; and continued to improve online functionality across the business. These savings were realised during H1FY14.

Also during H1, we have further refined the detailed workstreams that underpin MTTS and the associated cost savings that we expect to deliver by FY17:

· tariff simplification (exiting legacy tariffs and legacy access methods) - £15m

· system and process transformation (for example from rationalising the TTB billing platform and upgrading consumer billing to accommodate quad-play) - £10m

· data leveraging (to improve upsell targeting and payment monitoring) - £5m

· brilliant self-service (majority of sales and problem resolution self-serve) - £10m

Growth opportunity underpinned by our network advantage

Our unbundling programme continued during H1 with 255 new exchanges added extending our reach to 2,979 exchanges and over 96% of the UK population. We plan to unbundle additional exchanges in H2 with potential to extend the programme beyond that as the cost of unbundling exchanges falls and on-net customer ARPU grows, allowing us to continue to profitably extend our geographic reach.

In conjunction with our unbundling programme, we continue to expand the capacity of our network, which we expect to grow by 50-100x over the next 3-5 years. The favourable economics of our network, which allows us to lease dark fibre at very competitive rates, means that we will be able to achieve this capacity expansion within our long run capex guidance of 6% of revenues.

Summary

H1 results reflect the rapid progress in our plans to invest for growth. TV for Everyone, mobile, fibre and TTB present immediate opportunities to accelerate growth and we have upgraded our revenue growth guidance for FY14 from 2% to at least 3% and our CAGR for revenue for FY14-FY17 from 2% to 4%.

We have a proven track record of simplifying the business to reduce cost and improve customer experience. Looking ahead, we have a significant opportunity to reduce churn and costs further, which in combination with our revenue growth, underpin our FY17 EBITDA margin target of 25%.

FY14 GUIDANCE

· Revenue

We expect FY14 revenues to grow by at least 3% (previously 2%)

· Overheads

We expect overheads as a percentage of revenues to be higher than in FY13 (previously flat), 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

· Net debt

Capex is expected to be within our guideline of 6% of revenue and working capital is expected to show outflows of £20m-£25m as we grow the business

Cash exceptional items relating to MTTS 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

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 continue to invest substantially in growing our business during H2, we are reiterating our commitment to grow the FY dividend by a minimum of 15%.

FY15 and beyond

We are raising our FY14-FY17 revenue CAGR target from 2% to 4% and targeting a 25% EBITDA margin by FY17.

FINANCIAL REVIEW

Headline Profit & Loss

Revenue and margin

Revenue increased 1.8% year-on-year to £843m (H1 FY13: £828m), representing the third successive quarter of revenue growth. We continued to see strong growth in On-net revenue, which increased by 6.8% to £612m (H1 FY13: £573m). This was driven by the continued growth in our customer base; ARPU growth from the take up of new products, TV, mobile and fibre, with significant upsells on all three products; and price inflation. This has more than offset the continued decline in voice usage. Corporate revenues at £162m (H1 FY13: £160m) grew by 1.3% year-on-year with strong growth in data products (+27%) offsetting the continued, expected, decline in voice usage. Off-net revenues, at £69m (H1 FY13: £95m) reduced in line with our expectations as a result of the continued decline in the voice-only and Off-net broadband bases.

Gross profit increased 2.6% to £465m (H1 FY13: £453m), delivering a gross margin of 55.2% (H1 FY13: 54.7%). The positive mix impact of more customers taking fully unbundled products, price inflation and the change in regulatory pricing from 1 April 2013, have been partially offset by the decline in voice usage, traditionally a higher margin product, and the take up of lower margin Fibre and TV content.

Headline EBITDA

EBITDA decreased 48% to £76m (H1 FY13: £147m) as we invested an additional £86m in new product growth in the half, representing increased levels of SAC and operating costs as a result of scaling TV.

The additional gross profit of £12m was offset by the rise in operating costs from scaling TV, which principally comprised additional temporary costs to serve as customer numbers increased. We do not expect these costs to recur beyond FY14 as the products become established.

The savings generated by our efficiency programmes have been reinvested in our network spend to deliver a larger exchange footprint and provide additional backhaul capacity.

SAC and marketing spend increased by 78% to £174m (H1 FY13: £98m) reflecting material growth across new products and growth in the customer base. TV SAC of £58m (H1 FY13: nil) includes the cost of set top boxes and associated spend arising from acquiring our TV customers. In the prior year we incurred £8m of fixed launch costs for TV which did not recur in FY14.

Exceptional items

Exceptional costs of £8m (H1 FY13: £9m) were incurred in the period. Spending on the MTTS programme announced in September 2012 was £11m. The first phase of the programme actioned annualised savings of £10m and the current activity is expected to deliver a further £40m of savings by FY17.

Offsetting these exceptional costs, we recognised a further £3m credit in relation to Wholesale Ethernet Services overcharges by BT (FY13: £27m).

Headline EBIT

Headline EBIT of £18m (H1 FY13: £95m) decreased as a result of the significant investment in new products, and an increase in the depreciation and amortisation charge of £5m from continued capital investment in our network over the last year.

Interest and Tax

Finance costs were £1m lower at £9m (H1 FY13: £10m) as a result of lower interest rates over the period.

The effective tax rate of 20% (H1 FY13: 20%) reflects both the increase in tax charge from the impact on deferred tax assets as a result of the reduction in the UK statutory corporation tax rate, and the annual recognition of a further tranche of 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 decreased 7.0p to 0.8p (H1 FY13: 7.8p), driven by the decrease in EBITDA. The basic number of shares has increased year on year, due to shares being issued to settle the Value Enhancement Scheme ('VES') in September last year.

Headline cashflow and net debt

We generated £20m of operating free cash flow in the first half (H1 FY13: £104m), decreasing principally as a result of our planned investment in growth and the phasing of capex.

Capital expenditure of £48m (H1 FY13: £38m) included investments in our resiliency programme, exchange roll outs, and in our customer facing IT systems.

Working capital outflow of £8m (H1 FY13: £5m) in the first half reflects an increase in debtors as a result of revenue growth partially offset by an increase in our creditor position principally from the timing of normal supplier payments.

Net exceptional spend of £8m (H1 FY13: £7m) related primarily to redundancy and associated costs from our Making TalkTalk Simpler programme, and a £3m credit in relation to Wholesale Ethernet services overcharges. We expect further cash costs of c£15m in H2 as we make additional progress on the Making TalkTalk Simpler programme.

Interest is in line with the prior year at £8m (H1 FY13: £8m).

Share purchases were made by the Employee Benefit Trust of £24m (10m shares) in the first half of the year (H1 FY13: nil) to cover anticipated future option exercises; offsetting this, £5m of proceeds were received on the exercise of options by employees.

Acquisition spend of £3m (H1 FY13: £2m) represents £1m of funding for the YouView joint venture and £2m in May 2013 to purchase the remaining 75% share capital of Future Office Communications Ltd.

The dividend cost in the period was £62m, being payment of the final dividend for FY13 of 6.95p per share.

Net cash outflow of £80m during the half resulted in net debt increasing to £473m from £393m at 31 March 2013.

Movement in reserves

The purchase of shares by the Employee Benefit Trust, and the exercise of options by employees, resulted in a net movement in reserves of £19m.

APPENDIX 1 - QUARTERLY METRICS

Condensed consolidated income statement for the 6 months ended 30 September 2013

With 6 months ended 30 September 2012 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 2013

With year ended 31 March 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 statement of comprehensive income for the 6 months ended 30 September 2013

 * Recognised within retained earnings and other reserves.

Condensed consolidated statement of changes in equity for the 6 months ended 30 September 2013

Condensed consolidated balance sheet as at 30 September 2013

Condensed consolidated cash flow statement for the 6 months ended 30 September 2013

1. Basis of preparation and accounting policies

Basis of preparation

The unaudited interim condensed consolidated financial statements for the 6 months ended 30 September 2013 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 2013 do not comprise statutory accounts for the purpose of section 434 of the Companies Act 2006, and should be read in conjunction with the 2013 Annual Report of TalkTalk Telecom Group PLC (the '2013 Annual Report'). The 2013 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 2013 Annual Report can be found on the Group's corporate website www.talktalkgroup.com.

The financial information for the 6 months ended 30 September 2013 and 30 September 2012 has not been subject to audit or review by the Group's auditor.

In the current period the Group also adopted the amendments to IAS 1 'Presentation of Items of Other Comprehensive Income' and IFRS 13 'Fair Value Measurements'. IFRS 13 has impacted the measurement of fair value for certain assets and liabilities as well as introducing new disclosures, as set out in note 11.

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 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 were disclosed in the 2013 Annual Report.

The interim condensed financial statements for the 6 months ended 30 September 2013 have been prepared using accounting policies and methods of computation consistent with those set out in the 2013 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:

4. Taxation

An effective rate of 20% (6 months ended 30 September 2012: 20%; year ended 31 March 2013: 20%) has been applied to Headline profit before taxation from continuing operations. A tax credit at 23% has been recognised in the current period (6 months ended 30 September 2012: 24%; year ended 31 March 2013: 24%) in respect of the amortisation of acquisition intangibles net of any adjustments in respect of prior periods.

On 2 July 2013 a reduction in the UK Statutory rate of Corporation tax was substantively enacted, bringing the tax rate down from 23% to 21% with effect from 1 April 2014 and from 21% to 20% with effect from 1 April 2015. Accordingly the tax assets and liabilities recognised at 30 September 2013 take account of these changes. This has resulted in a tax charge to the income statement as the value of the Group's tax assets has been reduced. In addition 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 £1m has been invested in YouView TV Limited in the 6 months ended 30 September 2013 (6 months ended 30 September 2012: £2m; year ended 31 March 2013: £6m). The share of losses recognised by the Group in the period was £3m (6 months ended 30 September 2012: £2m; year ended 31 March 2013: £4m). The resulting net investment at 30 September 2013 was £7m (6 months ended 30 September 2012: £7m; year ended 31 March 2013: £9m).

On 14 May 2013, the Group paid £2m for the remaining 75% of the share capital of Future Office Communications.

6. Equity dividends

The proposed interim dividend for the year ended 31 March 2014 is 4.0p per ordinary share on 894 million shares (£36m). The proposed interim dividend was approved by the Board on 11 November 2013 and has not been included as a liability as at 30 September 2013. The ex-dividend date is 20 November 2013 and the record date is 22 November 2013. We expect the dividend to be paid on or around 13 December 2013.

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 2013, the Group has continued a review of its operating structure to look for further opportunities to drive process and efficiency improvements over the medium-term.

Initiatives that form part of the Group's new Making TalkTalk Simpler programme were implemented in the 6 months to 30 September 2013: 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 outsourcing partners and rebalancing of the Group's on-shore footprint; as well as a proactive initiative to replace routers in an effort to align the base across the Group. This has resulted in redundancy, dual running, property, project management and router replacement costs. The total charge incurred in the 6 months ended 30 September 2013 was £11m (6 months ended 30 September 2012: £3m; year ended 31 March 2013: £7m).

A total taxation credit of £3m has been recognised in the 6 months ended 30 September 2013 (6 months ended 30 September 2012: £1m; year ended 31 March 2013: £2m).

b) Operating efficiencies - Phase II (Consumer contact centre rationalisation)

On 24 April 2012, the Group announced the second stage of its contact centre rationalisation. This resulted in consolidating and outsourcing operations in Preston and Northampton. Costs were incurred in respect of redundancy, dual running and consultancy. The total charge incurred in the 6 months ended 30 September 2013 was £nil (6 months ended 30 September 2012: £6m; year ended 31 March 2013: £11m).

A total taxation credit of £nil has been recognised in the 6 months ended 30 September 2013 (6 months ended 30 September 2012: £1m; year ended 31 March 2013: £3m).

c) 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 £27m was recognised as an exceptional credit in the year ended 31 March 2013. A further £3m has been recognised in the six months to 30 September 2013.

A total taxation charge of £1m has been recognised in the six months to 30 September 2013 (6 months ended 30 September 2012: £nil; year ended 31 March 2013: £6m).

d) Amortisation of acquisition intangibles

An amortisation charge in respect of acquisition intangibles of £10m was incurred in the 6 months ended 30 September 2013 (6 months ended 30 September 2012: £30m; year ended 31 March 2013: £52m). The tax credit was £2m for the 6 months ended 30 September 2013 (6 months ended 30 September 2012: £7m; year ended 31 March 2013: £12m).

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') - 2013

On 4 June 2013 nil priced share option awards were granted to certain employees and are subject to absolute TSR and EPS performance targets. The options are measured over a performance period to 31 March 2016 and will vest on the publication of the Group's 2016 Annual Report. 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 total of 6,550,946 options were granted under the DSOP in the 6 months ended 30 September 2013. A fair value exercise was conducted for the grant using the Monte Carlo method with the total fair value of the options granted totalling £3 million. The resulting IFRS 2 charge for the 6 months ended 30 September 2013 is £nil.

b) TTG VES and CPW TTG VES

In September 2013 the remaining 40% of both the TTG VES and CPW TTG VES met the 5% TSR performance criteria and vested.

c) IFRS 2 charge

A charge of £3 million has been recognised in the 6 months ended 30 September 2013 (6 months ended 30 September 2012: £3m; year ended 31 March 2013: £6m).

10. Net debt

Analysis of net debt

All movements relate to net cash flows.

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.

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 2013 is a liability of £1m (year ended 31 March 2013: liability of £3m). A gain of £2m (year ended 31 March 2013: loss of £2m) has been recognised in other comprehensive income in the period ended 30 September 2013. As the hedges were fully effective there has been no income statement impact.

12. Provisions

Operating efficiencies provisions relate to the ongoing restructuring projects as set out in note 7.

13. Share Capital

14. Capital commitments

15. Related party transactions