Preliminary Results

15th May 2014

TalkTalk Telecom Group PLC

Preliminary results for the 12 months to 31 March 2014 (FY14)

· Over 1m TV customers at 12 May 2014; fastest growing TV business in the UK

· One of the fastest growing B2B telecom operators in the UK; FY Corporate revenues +5.6%

· 6th consecutive quarter of net adds growth (+10,000) delivers on-net base of over 4m

· 5th consecutive quarter of y-o-y revenue growth (+4.9%) delivers full year growth of 3.4%

· H2 EBITDA margin up 650bps to 15.5% (H1 9.0%); FY margin 12.3% (FY13: 17.4%)

· Dividend per share 12.0p (+15.4%) in line with commitment

· On track to deliver 4% CAGR in revenue and 25% EBITDA margin by FY17

FY14 Financial Highlights

· Total revenue up 3.4% to £1,727m (FY13: £1,670m); H2 +5.0% vs H1 +1.8%

· Corporate revenue up 5.6% to £340m (FY13: £322m): H2 +9.9% vs H1 +1.3%

· Headline EBITDA £213m (FY13: £290m) after £112m of incremental investment in growth

· Headline Earnings Per Share 6.8p (FY13: 14.9p); Statutory Earnings per Share 3.1p (FY13: 11.3p)

· Dividend Per Share 12.0p (FY13: 10.4p)

Q4 Operating Highlights

· Total revenue up 4.9% year-on-year to £448m (Q3 FY14: £436m)

· On-net revenue up 7.2% year-on-year to £327m (Q3 FY14: £320m)

· On-Net ARPU up 2.1% year-on-year to £26.93 (Q3 FY14: £26.79)

· Corporate revenue up 11.0% year-on-year to £91m (Q3 FY14: £87m)

· On-net net adds 25,000 (Q3 FY14: +107,000 including 84,000 Post Office customers)

· Accelerating TV growth; 185,000 TV customers added, taking FY14 closing base to 917,000

· On-net churn reduced to 1.5% (Q3 FY14: 1.6%)

Dido Harding, Chief Executive of TalkTalk commented:

I am delighted to report our first full year of revenue growth since demerger demonstrating that our strategy for growth is delivering. We have built a TV business with over one million customers in just 18 months - a quarter of our total customer base. We continue to grow faster than all the other UK TV operators put together and are confident that in time, all our customers will take TV. Our focus on data products for businesses is also delivering very strong growth and as a result, TalkTalk Business is one of the fastest growing B2B telecom operators in the UK.

Following investment in the first half, we delivered a sharp rebound in profitability in the second half combined with accelerating revenue growth. We are on track to deliver our financial targets by FY17, and are increasingly excited about the longer term growth opportunities beyond. As a result we are committing to another year of growing the dividend by no less than 15% in FY15.

There will be a presentation for analysts and investors starting at 9.00am, at the Andaz Liverpool Street; 40 Liverpool Street, London, England EC2M 7QN

Call and webcast details

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Enquiries

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

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

Financials

(1) Pre-SAC EBITDA represents Headline EBITDA excluding SAC and Marketing expenses

(2) Excludes net exceptional charge (FY13: income) and amortisation of acquisition intangibles.

Q4 Business Review

Fifth consecutive quarter of year-on-year revenue growth (+4.9%)

On-net revenues grew by 7.2% driven by base growth (including Post Office customers), ARPU progress (+2.1% y-o-y) from disciplined pricing and new product penetration, partly off-set by mix and promotional investment. Corporate revenues accelerated strongly to grow by 11.0% y-o-y, driven by continued acceleration of growth in data products (+45% y-o-y). Off-net revenues continue to reduce as planned (-25% y-o-y), falling from over 9% of group revenues a year ago, to under 7% in Q4. Overall, group revenues saw a fifth consecutive quarter of growth to 4.9% y-o-y and contributed to our first full year of year-on-year revenue growth.

Sixth consecutive quarter of net adds growth (+10,000)

We grew our fully unbundled base by 38,000 customers. Our legacy partially unbundled and off-net bases continued to reduce by 13,000 and 15,000 respectively, driving total net adds growth of 10,000 - in line with our stated objective of modest base growth.

Added 185,000 TV customers in Q4, growing faster than all other UK TV operators put together

We added 185,000 net new customers to our TV base (Q3: 175,000), with a third of these customers new to TalkTalk, taking our total base of TV customers at 31st March to 917,000 and to over 1m at 12th May. Demand accelerated with self-install and our Essentials proposition both gaining traction against the backdrop of continuing strong demand for Plus TV.

Penetration of TVOD (pay per view movies) and content boosts remained strong during the quarter. TVOD volume of 228k was up by over 15% on Q3 and over 21% of TV customers chose to purchase boost content. We remain encouraged by the overall level of pay content take-up and its implications for incremental revenue growth in the future.

Churn reduced to 1.5% from 1.6%

On-net churn reduced to 1.5% during the quarter, consistent with improving leading indicators such as call volumes (down by over 15% year-on-year) and complaints to Ofcom (down 31% year-on-year), and new product take-up. 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, demonstrating the potential for value creation by scaling the base.

24,000 net new mobile and 30,000 net new fibre customers added

Q4 mobile net additions maintained the pattern of growth reported in Q3 as did fibre growth. Our mobile base continued to grow well with 284,000 customers at y/e representing 7% of our on-net base vs 4.5% of the on-net base last year. Demand for fibre from our customers remains modest except when it can deliver transformational improvements in their broadband experience e.g. for customers whose copper speed is too low for them to take TV, as demonstrated by the 50% of our 207,000 fibre customers who take TV.

45% growth in data revenues drives 11% growth in Corporate

We continued to see strong demand for our competitively priced data products for businesses, which delivered 45% y-o-y revenue growth. We won several new contracts to supply Ethernet and Ethernet First Mile connectivity (e.g. a 3 year contract for MPLS services covering 360 sites for Hutchison 3G) as a result of which we added over 2,000 new Ethernet and EFM lines during the quarter, taking the installed base to over 17,000.

Launch of 1 Gig ultra-fast broadband

In April we announced that we have joined forces with Sky and CityFibre to create a new company that will deliver ultra-fast broadband services in the City of York. The new joint venture company plans to build a state of the art, city-wide, pure fibre-to-the-premise (FTTP) network to deliver broadband speeds of 1 Gigabit (1000 Mbps) direct to tens of thousands of homes and businesses in York, offering customers better quality and value. This will be the first time that a UK city has been connected with such high speeds on a city-wide basis and will give us the opportunity to fully test a new cost effective approach to building a viable pure fibre network, independent from BT Openreach's infrastructure. We intend to bring ultrafast broadband to two further cities in due course and are excited by the long term potential for a national roll-out.

GUIDANCE

FY15

· Customer numbers

We expect to deliver modest growth in net adds in 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

In November 2013, we raised our FY14-FY17 revenue CAGR target from 2% to 4% and set our medium term EBITDA margin target of 25% 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 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.

FY14 Business Review

Summary

Our results for the year clearly demonstrate that our strategy is driving revenue growth and will create sustainable shareholder value. In total we invested an incremental £112m in FY14 in growing the business, primarily through TV, and this is reflected in our full year EBITDA margin of 12.3%. Our investment in scaling the TV base had its most pronounced effect in H1 with EBITDA margins of 9.0% on revenue growth of 1.8% and total subscriber acquisition costs of £174m. As expected H2 results showed a strong rebound in profitability with EBITDA margin of 15.5% on 5.0% revenue growth and after total subscriber acquisition costs of £144m. The year also highlighted the traction that we are gaining in TalkTalk Business through its focus on value for money data connectivity products. Corporate revenues grew by 5.6% year-on-year, accelerating significantly from 1.3% growth in H1 to 9.9% in H2. The dividend for the year of 12.0p is in line with our commitment to deliver returns to shareholders whilst also investing to grow the business.

We expect to deliver further significant progress in FY15, with Headline EBITDA margin in the range 16.0%-17.0% and dividend growth of 15%, and are on track to deliver our medium term financial targets of 4% CAGR in revenue and 25% EBITDA margin by FY17. In addition, we see further strong growth opportunities beyond the medium term from leveraging our network capability and customer scale.

1. The fastest growing TV business in the UK

Accelerating growth in TV- 687,000 customers added, c25% of fully-unbundled base

We added 687,000 customers to our fast growing YouView TV base during the year, more than all the other UK TV operators combined. The rate of additions accelerated through the year as awareness of our proposition grew. During Q3 we launched and began gradually to scale our Essentials TV proposition, expanding the addressable market for our triple play product. Accordingly we have seen an increase in the number of new customers coming to TalkTalk, with a third of TV connections new to TalkTalk.

The Plus TV proposition has continued to prove popular, both for existing customers wishing to upgrade from their Essentials phone and broadband packages, and for new to TalkTalk customers, highlighting the willingness of customers to pay a premium for differentiated functionality (recording to the local PVR) and bundled features (free anytime calls and seven Sky channels). We have continued to develop our content proposition through FY15, with some significant new additions to our range such as Sky on demand (Sky movies, Sky Entertainment, Sky sports); Picturebox (NBC Universal) - new SVOD service; new linear channels such as JSTV and Kyknet (Thema International), Sony Entertainment TV, Sony Asia TV and Nicktoons. In addition we reached an agreement with FilmFlex that will significantly increase our selection of TVOD titles.

At the end of the year, just over 25% of our fully unbundled customers were triple-play. We expect to add a similar number of TV customers in FY15 as we did in FY14, which would take penetration to nearly 40% of our on-net base. Our primary target market remains the large base of Freeview households in the UK (c18m) and we continue to expect that in time nearly all of our on-net customers will convert to triple play in line with increasing recognition of the convenience and value of bundling, and as we drive increased awareness of our compelling content offer.

TV customers continue to rate the service highly

A range of survey and usage data from our TV customers, including those that have been with us for over a year now, consistently point to high levels of satisfaction with our TV service. The vast majority of our TV customers (both those upgrading from phone and broadband and those who are new to TalkTalk) have previously used Freeview as their main TV service. Consequently the integrated IPTV and linear programming functionality provided by the YouView platform remains one of the most highly rated features of our service, with YouView Net Promoter Score at +25.

While Plus customers value the ability to record programmes for future viewing, all customers value the ability to seamlessly watch catch-up TV, without having to exit the YouView programme guide. This remains the only programme guide currently available in the UK that offers this powerful functionality. The value our customers place on this is a direct function of the volume of high quality free public service broadcast (PSB) programming in the UK. Viewing data across all platforms shows that the vast majority of TV viewing (even for pay-TV subscribers) is of live and catch-up free-to-air content.

Other features that all our customers rate highly include the ease of access to a wide range of flexible, non-subscription pay content. This is especially so for those customers who have upgraded from Freeview and are exploring paid for content options for the first time. Equally, those customers who have switched from other pay TV platforms report high levels of satisfaction with the range of content available and the affordability of being able to select and pay for only the precise content they wish to access.

Content purchasing behaviour encouraging for future revenue

Whilst most of our TV customers have little or no previous experience of paying for content on their TV sets, their purchasing behaviour to date is encouraging for future incremental revenues, with an average ARPU for pay per view movies and boosts combined of c£9.00. With over 28% of our TV customers buying some form of pay content every month, the overall TV base is therefore showing an ARPU uplift of c£2.50.

With over 12 months of data from our growing base, we are pleased to report that early purchasing behaviours have proved resilient and are consistent with our understanding of what our family-orientated, value-seeking customers want to watch. Pay per view movie demand has grown steadily over the last 12 months, with customers purchasing on average, just over one movie per month, generating an incremental ARPU of c£4.00.

Content boost purchases have also remained resilient although as we had expected, Essentials customers take longer to begin their pay content journey and initially, tend to buy fewer boosts. Nevertheless the average boost ARPU of Essentials and Plus customers at c£11.00, is providing good incremental revenue for us.

TV customers early life churn significantly lower than that for broadband customers

Very few of our earliest TV customers have reached the end of their first contract term, so it remains too early to assess their out-of-contract churn behaviour.

However, the high levels of satisfaction with their service that our TV customers are reporting, and the consistency of their content purchasing behaviour, has translated into materially lower early life churn than for their dual play counterparts. Average monthly churn on the TV base through FY14 was approximately half that seen from our dual-play base.

The lower early-life churn, significantly higher NPS and lower surveyed propensity to churn, give us a great deal of confidence that mature triple-play customers will also churn at a materially lower rate than dual-play customers.

2. Continuing progress in Mobile and Fibre adding incremental value

7% of on-net customers now taking Mobile

We added 109,000 new customers to our Mobile base during the year, comprising 7% of our on-net base versus 4.5% of the base a year ago. Mobile customers continue to add incremental value to us through a combination of standalone economics (each Mobile customer delivers a positive net present value across the life of the contract), and reduced churn and higher Net Promoter Scores compared to dual play customers. As discussed below, developing our mobile proposition is a key element of our innovation agenda for delivering long term growth, and we see real opportunity to drive higher levels of penetration and value creation. 

5% of on-net customers taking Fibre

We added 134,000 new customers to our Fibre base during the year, comprising 5% of our on-net base versus 2% of the base a year ago. Bandwidth usage continues to grow rapidly: traffic on our network has almost trebled in the last three years, as customers use more devices and watch more video content online, and customers downloaded an average of 34GB of content a month during FY14 - 46% more than a year ago. However, at current prices and usage levels, demand for fibre from our customers remains modest because of the scale and capability of our existing network. With over 50% of fibre customers also taking TV from us, demand is very much driven by customers whose overall experience can be transformed by taking fibre e.g. where distance from the exchange dictates copper speeds of less than 3Mbps.

3. TalkTalk Business - ONE OF the fastest growing B2B telecom businesses in the UK

Another year of strong performance

TalkTalk Business has delivered a strong performance, with Corporate revenues growing by 5.6% year-on-year and accelerating significantly through the year (H1: +1.3%, H2: +9.9%). High margin data products revenues (+37.5% year-on-year) have been a key driver of this performance with growth running in excess of the established decline in traditional voice revenues. Our suite of flexible and competitive Ethernet products based on our market leading national Ethernet footprint, have helped us win significant new direct and partner business during the year.

Revenues from wholesale broadband connectivity products through our Partner channel also showed strong growth during the year. In Q3 we completed the migration of 103,000 Post Office customers onto our base, with revenues from these customers contributing to growth across on-net, Corporate and off-net.

With three consecutive quarters of year-on-year growth in Corporate revenues, TalkTalk Business is one of the fastest growing B2B telecom businesses in the UK. This is a powerful testament to the strength of TalkTalk Business's strategy, business model and competitive positioning in its chosen markets.

A focused strategy to grow revenues and profitability

TalkTalk Business's strategy is consistent with the Group strategy of leveraging our network scale and capability to build market share in value for money products, whilst simplifying its systems and processes and launching innovative new products to deliver sustained and profitable long term growth.

Our network is scaled for peak evening usage by consumers, allowing TalkTalk Business to use excess daytime capacity for business customers. This together with our Ethernet capability (over 3,000 of our exchanges are Ethernet-enabled, with 95% country coverage) allows TalkTalk Business to offer a wide range of competitively priced, high margin, all-IP data connectivity products. With data revenue growth running faster than the decline in legacy, low margin voice revenues, TalkTalk Business is strongly placed to grow revenues and market share profitably.

A key component of this is a focused approach to growth. We see three mains segments where we are able to offer our customers significantly better value for money than our competitors.

Maintaining our strong partner relationships

Our Partner channel has continued to grow through FY14. Of particular note is the successful migration of Post Office phone and broadband customers who came onto our base during Q3 as part of our 5yr contract with Fujitsu, the lead Service Integrator for the Post Office. This agreement, one of the largest of its type in our history, is testimony to the appeal of our network for partners seeking quality, flexibility and competitive terms. By working with partners we are able to leverage the low cost base of our network while not adding the significant complexity that comes with tailoring services directly for end customers. 

Growing data product penetration in Enterprise

We saw strong growth in our direct business with a number of new contracts to supply wide area network solutions for medium and large businesses including Iceland Group (MPLS network covering 840 sites for a 6 year term); Hutchison 3G (MPLS network covering 360 sites for a 3 year term); the DX Group (MPLS network covering 72 sites for a 5 year term); Selfridges (MPLS network covering 12 Sites for a 3 year term) and Fullers (MPLS network covering 200 sites for a 3 year term). As a result we ended FY14 with over 17,000 ethernet lines connected, c70% more than a year ago.

Growing market share in small businesses

We simplified our connectivity propositions for small businesses during the year, launching amongst other things, the UK's most competitive business phone and broadband package for just £4.00 per month (excluding line rental). In addition, we streamlined our sales and service processes for this important and growing segment and see significant opportunity to grow market share.

4. Progress in Making TalkTalk Simpler - a £40m+ cost opportunity

We have made good progress across the detailed programmes behind Making TalkTalk Simpler during FY14. We have actioned a number of initiatives across our four major workstreams (Getting Customers Current, Systems Transformation, Leveraging Data and Brilliant Self-Service). We commenced a programme to cease provision of non-core legacy access methods such as IP Stream, built a detailed road-map for a group-wide systems upgrade (some of which has already been implemented in TalkTalk Business), improved data standards and executive level reporting, and launched a service and billing app - MyTalkTalk - on both the iOS and Android platforms that has been adopted by 100,000 customers in just two months.

These initiatives, together with the continuing benefits of some of our legacy programmes, delivered £14.5m of savings during FY14

Looking forward, we expect the four main programmes to drive a number of major initiatives in FY15 that will unlock further significant savings through FY16 and FY17. In terms of Getting Customers Current, we plan to sell our off-net IP Stream base, rebrand our AOL base and significantly reduce the number of consumer and B2B tariffs. Our systems transformation will focus on a significant enhancement of our CRM systems and upgrading our billing platform. We will be leveraging our customer data to enable better targeted marketing activity. There will be significant focus on improving our online customer journeys to further encourage our customers to self-serve to both reduce cost and improve customer experience. These initiatives are expected to contribute towards further cumulative savings of over £40m by FY17.

5. SAC reduction from lower churn and falling costs per add

Reducing SAC is one of the key drivers of achieving our 25% EBITDA margin target. We will reduce SAC through reducing churn, and therefore needing to recruit fewer new customers; and through reducing costs per add ("CPA"). We have made good progress on both elements during FY14.

We continued to make significant progress in two of the leading indicators of churn during the second half of the year, with customer call volumes down 17.3% year on year and complaints to Ofcom down by 31% year on year. In addition, we have continued to see materially lower churn from customers taking additional products such as TV, mobile and fibre. The most important effect is seen in our triple play customers whose early life churn is around half that of dual play customers, with TV customers also reporting higher net promoter scores and lower intention to churn. We have begun to see the impact of these effects in our reported on-net churn which, having spiked at 1.7% in Q2 subsequently fell to 1.6% in Q3 and 1.5% in Q4.

As an illustration, reducing churn to 1.2% (the top end of the 0.8%-1.2% range that mature triple-play operators report) over the next three years, driven primarily by driving TV penetration across the base and further improving customer service, would lead to a cumulative saving of c£30m over the period through fewer gross adds.

We have also made significant progress in reducing CPA. TV CPA fell during the year as planned, with the launch of our lower cost Essentials proposition and growing self-installation of the service. TV CPA across the second half of the year averaged c£130 compared to c£170 in the first half. Similarly, broadband CPA fell from c£190 in the first half to c£180 in the second half as we increased online recruitment activity and reduced third party commissions. We expect these trends to continue through FY15 and beyond, with volume related savings in hardware costs and increasing self-service driving a cumulative saving in excess of £70m over the next three years.

6. Longer term opportunities for delivering sustained growth

In April we announced that we have joined forces with Sky and CityFibre to create a new company that will deliver ultra-fast broadband services in the City of York. The new joint venture company plans to build a state of the art, city-wide, pure fibre-to-the-premise (FTTP) network to deliver broadband speeds of 1 Gigabit (1000 Mbps) direct to tens of thousands of homes and businesses in York, offering customers better quality and value than is currently available with Fibre to the Cabinet (FTTC).

This will be the first time that a UK city has been connected with such high speeds on a city-wide basis and will give us the opportunity to fully test a new cost effective approach to building a viable pure fibre network, independent from BT Openreach's infrastructure.

Our initial investment in the joint venture, which will see us deploying to 20,000 homes will be £5m. Subsequent investment to deploy across the remainder of the city will be of similar order of magnitude. We believe the economics of our approach to FTTP could prove highly attractive, with a combination of scale and low cost build technology delivering a significantly lower cost per home passed than for the current FTTC infrastructure.

We expect to announce the process for selecting the next two cities in due course, and are excited by the long term potential for a national roll-out.

In conjunction with our plans to build a converged fixed-mobile offer using our 4G spectrum and femtocells, such a national roll-out would allow us to offer our customers seamless, unlimited and low cost connectivity in their homes and businesses, and significant opportunities to drive growth over the longer term.

FY14 Finance Review

Overview

We delivered accelerating revenue momentum during the year as a result of investing in TV and growth in our Corporate data business.

The benefit of this investment through H2 was an acceleration in revenue growth from 1.8% in H1 to 5.0% in H2, delivering the first full year of year on year revenue growth since demerger of 3.4%.

The full year EBITDA margin of 12.3% (FY13: 17.4%) also reflects this investment in growth. The investment was weighted to the first half of the year, resulting in an H1 EBITDA margin of 9.0%. The second half of the year saw a significant improvement in margin, to 15.5%, as the benefits of investment drove an acceleration in revenue growth and as we reduced SAC and Operating Expenses.

The strength in revenue growth this year and the uplift in profitability in H2 underpins our confidence in achieving our medium term revenue target of 4% CAGR, and medium term EBITDA margin target of 25%.

At the same time as investing to grow the business we have delivered on our dividend commitments. The proposed dividend for the full year FY14 represents growth of 15.4% year on year, in line with our commitment to grow the dividend for the year by a minimum of 15%.

Headline financial information

(1)

Revenue

Revenue grew 3.4% to £1,727m (FY13: 1,670m) and accelerated during the year as the benefits of our investment in growth during the first half materialised. Growth increased to 5.0% in H2 from 1.8% in H1; the fifth successive quarter of revenue growth.

On-net revenues increased 7.6% to £1,259m (FY13: £1,170m). Growth of 8.4% in the second half of the year (H1: 6.8%) was driven by take up of TV, fibre and mobile, the increase in the size of the base, and price inflation. On-net customers, those who are on our network, are able to get the greatest value from us by taking more of our products, and are our most satisfied customers. The most significant driver of growth has been through take up of TV, with net adds increasing to 360k in H2 versus 327k in H1.

Corporate revenues delivered another strong year of growth, increasing 5.6% to £340m (FY13: £322m). Growth accelerated during the year, with 9.9% in the second half versus 1.3% in H1. This was driven by the accelerating growth in data product revenues which increased from 27% year on year in the first half to 47% year on year in the second as a result of significant new corporate customer wins during the year. Overall data revenues grew 37.5% year on year. This has offset the continued decline in legacy voice revenues driven by a move from premium rate numbers, and the decrease in regulated call termination rates.

Off-net revenues continued to decline this year as expected, reducing by 28% to £128m (FY13: £178m) as a result of the continued decline in our voice only and off-net broadband bases.

Gross Margin

Gross margin continued to expand during the year, increasing from 55.2% in H1 to 55.8% in H2, increasing our full year gross margin by 50 basis points to 55.5% (FY13: 55.0%), and delivering a gross profit of £958m (FY13: £919m).

This has been driven by the increased proportion of our customers on our network, the shift in our TalkTalk Business towards higher margin data products, the benefit of reduced regulatory pricing from 1st April 2013, alongside price inflation, partially offset by the impact of declining high margin Consumer voice only revenues, and the increase in lower margin Fibre, TV content and wholesale services.

Operating expenses

Operating expenses increased to £427m (FY13: £395m). The increase has been driven by the temporary operating costs of scaling TV which principally comprised additional costs to serve, and which we do not expect to recur in FY15 as our new products become established. Incremental annualised benefits of £14.5m have been delivered in the year from our operating efficiencies programme, Making TalkTalk Simpler. We have continued to invest in our network capacity to provide the increased bandwidth and greater resiliency that our customers require.

SAC and Marketing

SAC and Marketing spend increased to £318m (FY13: £234m) as we invested to deliver revenue growth. The investment was H1 weighted with a total spend of £174m, reducing to £144m in H2. Spend on acquiring new TV customers of £53m, was no more in H2 than in H2 FY13, despite the significantly higher volumes. Cost per add declined with the launch of Essentials TV and the move to self-install. Broadband cost per add also declined in H2 as more customers were acquired online.

EBITDA

EBITDA decreased to £213m (FY13: £290m) reflecting an EBITDA margin of 12.3% (FY13: 17.4%). Incremental investment in growth of £112m impacted the profile through the year, with a 9.0% EBITDA margin in H1 improving significantly to 15.5% in H2 as the benefits of investment drove revenue growth and overall SAC spend declined.

Exceptional items

The net exceptional charge in the year of £22m (FY13: credit £9m) comprised £20m of investment in our Making TalkTalk Simpler operating efficiency programme (FY13: £7m), where activity increased during the course of the year as we began implementations, a charge of £5m arising from a change in allowable VAT treatment in relation to prompt payment discounts during the year, offset by the receipt of a credit of £3m (FY13: £27m) from BT in settlement for the overcharging of wholesale Ethernet circuits.

Statutory EBITDA

Statutory EBITDA after exceptional items has decreased year on year by £108m to £191m (FY13: £299m), with the significant improvement from H1 of £68m to £123m in H2 driven by the improvement in Headline EBITDA, offset by an increase in our exceptional costs during the second half of the year as we increased activity on Making TalkTalk Simpler and from the change in VAT treatment relating to prompt payment discounts.

Depreciation and amortisation

Depreciation and amortisation charges increased to £112m (FY13: £102m) as a result of continued capital investment in the network and IT systems.

Amortisation of acquisition intangibles

The amortisation charged on acquisition intangibles decreased to £21m (FY13: £52m) as the AOL customer base acquired in 2006 became fully amortised in FY13.

Statutory Profit before tax

Profit before tax decreased £91m year on year to £31m (FY13: £122m), reflecting the reduction in statutory EBITDA and the increase in depreciation, offset by a lower amortisation charge.

Earnings per share

EPS on a Headline basis is provided alongside our statutory measures to allow easier comparison year on year, due to the impact of exceptional items.

Headline EPS decreased to 6.8p (FY13: 14.9p), driven by the decrease in EBITDA as a result of investing in growth, with the profile during the year showing a significant improvement from 0.8p in H1 to 6.8p full year. The basic number of shares increased to 901m (FY13: 884m), driven primarily by the 23.7m shares which were issued in November 2013.

Statutory EPS decreased to 3.1p (FY13: 11.3p).

Cashflow and net debt

Working capital

Our working capital outflow of £30m (FY13: £11m) has been driven by the accelerated revenue growth in the second half of the year offset by an increase in current liabilities as a result of the weighting of capital investment, and the Group's investment in growth.

Capital expenditure

Capital expenditure in the year of £107m (FY13: £104m) represents 6.2% of revenue (FY13: 6.2%). During the year we continued to invest in the network; rolling out to a further 303 exchanges and increased network capacity to 1.2tb (FY13: 0.9tb), alongside investing in IT systems to support continued growth.

Exceptional items

Net spend on exceptional items of £23m (FY13: inflow of £8m) was driven by £21m of costs associated with our operating efficiencies programme, Making TalkTalk Simpler, including redundancies, site closure, consultancy and project team costs, and the £5m payment to HMRC in respect of the VAT treatment change during the year. Offsetting this was £3m received from BT in settlement for the overcharging of certain wholesale Ethernet circuits.

Acquisitions

Acquisitions in the year of £8m (FY13: £4m) represents a £5m investment in the YouView joint venture (FY13: £6m) and £3m completing the acquisition of Future Office Communications Limited.

Dividends

Our dividend policy is to return to shareholders 50% of basic Headline earnings per share in the form of ordinary dividends. As a result of the impact on Headline Earnings of our investment in TV, we committed to dividend growth at a minimum of 15% for FY14.

Dividends of £99m paid in the year (FY13: £87m) comprised the final dividend for FY13 of 6.95p and the interim dividend for FY14 of 4.0p.

The Board has declared a final dividend of 8.0p which will be paid, subject to approval at the AGM on 23 July 2014 for shareholders on the register at 4 July 2014. The total declared dividend for the year was 12.0p, which provides dividend cover of 0.6 times (FY13: 1.4 times). The ex-dividend date is 2 July 2014 and the expected payment date is 1 August 2014. 

Share purchases

In September 2013 the second tranche of both the TalkTalk Group Value Enhancement Scheme and the Carphone Warehouse TalkTalk Group Value Enhancement Scheme (together referred to as "the VES schemes") vested. As part of this, we purchased the participant's VES shares in return for a combination of the issue of new PLC shares and cash resulting in a cash outflow of £15m (FY13: £35m).

Share repurchases totalling £24m (10 million shares) were made during the year (FY13: nil) by the Employee Benefit Trust in order to cover anticipated future options exercises. Offsetting this, the trust received £6m on the exercise of options by employees.

Net debt

Net debt in the year increased by £104m (FY13: reduction of £41m) to £497m (FY13: £393m). Our net cash outflow of £104m (FY13: inflow of £41m) was H1 weighted as we invested for growth and paid the final dividend for FY13, driving an outflow in H1 of £80m. The H2 outflow of £24m was driven by the improvement in operating free cashflow as a result of improved EBITDA.

Taxation and treasury

Finance costs

Net finance costs of £20m (FY13: £19m) comprised the blended interest charge on debt of 3.39% (FY13: 3.58%) alongside the amortisation charge in relation to facility fees of £3m (FY13: £3m).

Net interest paid in the year increased to £17m (FY13: £16m), principally driven by higher interest payments as a result of higher average net debt.

Taxation

Our effective Headline tax rate for the year was 18% (FY13: 20%), representing a tax charge of £13m (FY13: £33m). The tax charge for the year on statutory earnings was £3m (FY13: £22m). The principle differences between the tax charge and the standard rate of corporation tax are the recognition of deferred tax assets on a further £45m tranche of acquired Tiscali losses, offset by the impact of a 3% reduction in the statutory tax rate (21% from 1 April 2014 and 20% from 1 April 2015 - previously 23%). The rate reduction has had the effect of the revaluation of our deferred tax assets downwards, and has therefore resulted in a £16m charge through the income statement.

We have made no corporation tax payments during the year (FY13: £nil).

Funding

Operations are financed with committed bank facilities, retained profits and equity. During the year, we made use of overdrafts and uncommitted facilities to assist with working capital management. Subsidiaries are funded centrally, with an emphasis on efficient cash management.

Funding comprises a £560m revolving credit facility, which matures in November 2015, a £30m bilateral loan facility that matures in March 2015, and a £75m term loan that matures in November 2015. The terms of our facilities are similar and the covenants are identical. At 31 March 2014 £490m (FY13: £400m) had been drawn down under these facilities.

We are in compliance with the covenant conditions on all funding facilities at the year end. It is our policy to refinance our facilities significantly in advance of maturity dates, and we have commenced re-financing discussions ahead of the expiry of current facilities.

Movement in reserves

The purchase of shares by the Employee Share Ownership Trust, and the exercise of options by employees, resulted in a net movement in reserves of £30m.

Policy

We are exposed to limited cross border transactional commitments and these are hedged using forward currency contracts. Interest rate risk is managed by the use of interest rate swaps. The Group aims to fix the interest cost on a proportion of its net debt over a weighted average period, as agreed from time to time.  The Group Treasury function operates within the framework approved by the Board, in line with best practice, to ensure effective management of our interest and foreign exchange risk.

Capital structure

The Board reviews the capital structure of the Group on an annual basis. Net Debt/EBITDA at 31 March 2014 was 2.3x (FY13: 1.4x) driven primarily by the Group's investment in growth and an increased dividend pay-out. The Board is confident that this 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.

Accounting developments

The adoption of accounting standards in the year has had no material effect on the financial statements.

Going Concern

The Directors have acknowledged the guidance 'Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009', published by the FRC in October 2009.

Our business activities, together with the factors likely to affect our future development, performance and position are set out in the Business Review. Our financial position, cash and borrowing facilities are described within this Finance review.

The breadth of our base, our value for money proposition, continuing improvements in operating efficiency and the largest unbundled network in the UK means that the Directors are confident in our ability to continue to compete effectively in the UK telecoms sector.

We have £665m of committed credit facilities and as at 31 March 2014 the headroom on these facilities was £175m. Our forecasts and projections, taking in to account reasonably possible changes in trading performance, indicate that there is sufficient headroom to our facilities and that this, together with our market positioning, means that we are well placed to manage our business risks successfully and have adequate resources to continue in operational existence for the foreseeable future. The Directors have therefore adopted the going concern basis of accounting when preparing the financial statements.

Quarterly Metrics

Group income statement

For the year ended 31 March

* A reconciliation of Headline information to Statutory information is provided in note 3 to the financial statements.

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

Group statement of comprehensive income

For the year ended 31 March

*Recognised within retained earnings and other reserves.

The accompanying notes are an integral part of this Group statement of comprehensive income.

Group statement of changes in equity

For the year ended 31 March

* On 16 September 2013, the Group's Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been satisfied, meaning the VES participants were entitled to exercise the remaining 40% of their options as set out in note 7. The settlement of the schemes resulted in the recognition of share premium of £66m and a £78m movement in retained earnings and other reserves.

** On 17 September 2012, the Group's Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been satisfied, meaning the VES participants were entitled to exercise 60% of their options. The settlement of the schemes resulted in the recognition of share premium of £32m and a £63m movement in retained earnings and other reserves.

The accompanying notes are an integral part of this Group statement of changes in equity.Group balance sheet

As at 31 March

The accompanying notes are an integral part of this Group balance sheet.

Group cash flow statement

For the year ended 31 March

The accompanying notes are an integral part of this Group cash flow statement.

1. Accounting policies and basis of preparation

Directors' responsibilities

The Directors of TalkTalk Telecom Group PLC are responsible, in accordance with the listing rules of the Financial Services Authority, for preparing and issuing this preliminary announcement, which was approved on 14 May 2014.

Basis of preparation

The financial information set herein does not constitute the Group's statutory accounts for the years ended 31 March 2014 or 2013, but is derived from those accounts. Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 will be filed in due course. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006. The 2013 Annual Report of TalkTalk Telecom Group PLC, can be found on the Group's corporate website www.talktalkgroup.com and the 2014 Annual Report will be included on the website shortly.

The financial information is prepared on the basis of the accounting policies set out in the 2013 Annual Report of TalkTalk Telecom Group PLC, except in relation to the new standards which have been adopted in the year.

Application of significant new or amended EU endorsed accounting standards

Amendments to IAS 1 'Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income' and IFRS 13 Fair Value Measurement' became effective in the current reporting period. These new and revised standards and interpretations have no material impact on the Group. In addition, the Group has elected to early adopt IAS 36 (revised) 'Impairment of Assets' (IAS 36), which is endorsed by the EU but not effective until periods beginning on or after 1 January 2014. The amendments to IAS 36 enhance the disclosure requirements arising when recoverable amounts have been determined on the basis of fair value less costs of disposal. They also limit the requirement to disclose the recoverable amount of an asset or CGU to periods in which an impairment loss has been recognised or reverses. We have chosen to adopt the amendments early, as allowed by the standard, with effect from 1 April 2013.

2. Segmental reporting

Accounting policy

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 decide how to allocate resources. The Group has identified the Board as its chief operating decision maker. The Board 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 split by 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 and Business customers that receive similar services.

The Group has no material overseas operations; as a result a split of revenue and total assets by geographical location has not been disclosed.

3. 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 year ended 31 March 2014, 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.

The initiatives that form part of the Group's Making TalkTalk Simpler programme which were implemented in the year ended 31 March 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 outsourcing partners and rebalancing of the Group's on-shore footprint; and a proactive initiative to replace routers to align the estate across the Group. This has resulted in redundancy, dual running, property, system, project management and router replacement costs. The total charge incurred in the year ended 31 March 2014 was £20m (2013: £7m).

A total taxation credit of £5m has been recognised in the year ended 31 March 2014 (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 year ended 31 March 2014 was £nil (2013: £11m).

A total taxation credit of £nil has been recognised in the year ended 31 March 2014 (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 £3m has been recognised in the year ended 31 March 2014 (2013: £27m).

A total taxation charge of £1m has been recognised in the year ended 31 March 2014 (2013: £6m).

d) Revenue - HMRC VAT ruling

In September 2013, a change to a previously agreed VAT treatment in relation 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 has been recognised in exceptional items in the year ended 31 March 2014 (2013: £nil).

The tax credit was £1m in the year ended 31 March 2014 (2013: £nil).

e) Amortisation of acquisition intangibles

An amortisation charge in respect of acquisition intangibles of £21m was incurred in the year ended 31 March 2014

(2013: £52m).

The tax credit was £5m in the year ended 31 March 2014 (2013: £12m).

4. Taxation

The tax charge comprises:

The tax charge on Headline earnings for the year ended 31 March 2014 is £13m (2013: £33m), representing an effective tax rate on pre-tax profits of 18% (2013: 20%). The tax charge on Statutory earnings for the year ended 31 March 2014 is £3m (2013: £22m). The reconciliation between the Headline and Statutory tax charge is shown in note 3.

No deferred tax assets and liabilities have been offset in either year, except where there is a legal right to do so in the relevant jurisdictions. 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 31 March 2014 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.

The asset also 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. This is in line with the Group's agreement with HMRC in 2012.

At 31 March 2014, the Group had unused tax losses of £702m (2013: £759m) available for offset against future taxable profits. A deferred tax asset of £39m (2013: £40m) has been recognised in respect of £197m (2013: £172m) of such losses, based on expectations of recovery in the foreseeable future.

No deferred tax asset has been recognised in respect of the remaining £505m (2013: £587m) as there is insufficient evidence that there will be suitable taxable profits against which these losses can be recovered. All losses may be carried forward indefinitely.

5. Dividends

The following dividends were paid by the Group to its shareholders:

The proposed final dividend for the year ended 31 March 2014 of 8.00p per ordinary share on approximately 921 million ordinary shares (£74m) was approved by the Board on 14 May 2014 and has not been included as a liability as at 31 March 2014.

The Group ESOT has waived its rights to receive dividends in the current and prior year and this is reflected in the analysis above.

6. 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.

There are no share options considered anti-dilutive in the year ended 31 March 2014 (2013: nil).

7. Share-based payments

In accordance with IFRS 2, a charge of £4m (2013: £6m) in respect of equity settled share based-payments has been charged to the income statement. The significant changes to the Group's share based-payment schemes are set out below.

Grants

During the year the following options were granted:

a) DSOP - 2013 grant

In June 2013, the Group granted six million nil priced share option awards subject to absolute TSR and EPS performance targets. During December 2013 and January 2014, the Group granted a further 141,000 options under the DSOP - 2013 grant to a number of new senior employees. 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.

b) Save-As-You-Earn

During the year the Group offered its employees a Save-As-You-Earn scheme with the option to enter into a three or five year contract. A total of two million options were granted with an exercise price of £1.92.

Vesting

c) DSOP - 2010 grant

Awards made under the DSOP - 2010 grant, subject to TSR performance targets were measured over a performance period to 28 March 2013. Options were forfeited if an employee left the Group before the options vested. On 28 March 2013 all options vested but they were not exercisable until after the preliminary announcement on 16 May 2013. The original date of vesting of 29 March 2013 was brought forward to 28 March 2013 due to a bank holiday. During the year ended 31 March 2014 15 million options were exercised.

d) VES Schemes

On 16 September the Group's Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been satisfied meaning the VES participants were entitled to exercise the remaining 40% of their VES options. On 19 November 2013, the participants' options were acquired by the Company for new ordinary shares in the Company and cash, resulting in a cash outflow of £15m. The net issue of 23.7 million shares in the Company was at a price of £2.78 per share being the average closing price of the Company's shares over the five working days from 12 to 18 November 2013. The settlement of the schemes resulted in a net movement in reserves of £12m being the recognition of share premium of £66m and a £78m debit in retained earnings and other reserves. The £78m debit to reserves represents a total cash outflow of £15m and the value of new PLC shares issued of £66m net of the repayment of the associated VES loans, interest and a reduction in the Group's liability to settle the schemes.

8. Reserves

* On 16 September 2013, the Group's Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been satisfied, meaning the VES participants were entitled to exercise the remaining 40% of their options as set out in note 7. The settlement of the schemes resulted in the recognition of share premium of £66m and a £78m movement in retained earnings and other reserves.

** On 17 September 2012, the Group's Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been satisfied, meaning the VES participants were entitled to exercise 60% of their options. The settlement of the schemes resulted in the recognition of share premium of £32m and a £63m movement in retained earnings and other reserves.

9. Analysis of changes in net debt

10. Contingent Liabilities

In the year ended 31 March 2014 the Group received £4m (2013: £29m) relating to an Ofcom determination that BT had overcharged for certain wholesale Ethernet services. The full amount of £33m has been paid to the Group at 31 March 2014. BT has appealed Ofcom's determination in the Competition Appeal Tribunal (CAT). However, the Group and other parties have also appealed the decision arguing that the original Ofcom determination was too low.

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 has accounted for the associated VAT benefit in the Group's VAT return for the three month period ended 31 March 2014. As at 14 May 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.

11. Events after the balance sheet date

On 15 April 2014, the Group together with Sky announced they have joined forces with CityFibre to create a new company that will deliver ultra-fast broadband services in the City of York. The Group's investment in the company will be accounted for as a joint arrangement in accordance with IFRS 11 'Joint Arrangements'.

As part of the agreement, the Group has committed to spend £5m over three years and will recognise through the income statement, on an annual basis, its share of profit or loss generated by the joint arrangement.