Preliminary Results

16th May 2013

TalkTalk Telecom Group PLC

Preliminary results for the 12 months to 31 March 2013 (FY13)

·; 2nd quarter of positive net adds and return to y-o-y revenue growth in Q4 (+1.4%)

·; 150,000 TV subscribers added, taking base to 230,000

·; Underlying EBITDA margin up strongly at 21.1%

·; Full-year dividend up 15.6% to 10.4p and reiterating commitment to 15% growth in FY14

·; On track to deliver medium term targets of 25% EBITDA margin and 2% revenue CAGR

FY 2013 financial headlines

·; Total revenue £1,670m (FY12: £1,687m)

·; On-net revenue +7.9% y-o-y; Corporate revenue +1.9% y-o-y

·; Underlying EBITDA(1,2) up 11% to £352m (FY12: £317m)

·; Underlying earnings per share(1,2) up 19.8% to 20.6 pence (FY12:17.2 pence)

·; Headline EBITDA(2) £290m (FY12: £326m)

·; Net Debt reduced by £41m to £393m (FY12: £434m)

·; Statutory profit before tax £122m (FY12: £127m)

·; Headline earnings per share(2) 14.9 pence (FY12: 18.0 pence)

(1) Excludes £62m of costs relating to investment in TV (FY12: excludes £9m profit on disposal of freehold property). Earnings for both years excludes related tax based on Headline effective tax rate

(2) Excludes net exceptional income (FY12: charge) and amortisation of acquisition intangibles. Earnings for both years excludes related tax, FY12 also excludes a one-off tax credit

Q4 operating highlights

·; Revenue £427m (+1.4% y-o-y); On-net ARPU £26.37 (+3.5% y-o-y)

·; 10,000 total net adds; fully unbundled net adds 64,000

·; Further reduction in on-net churn to 1.5% (Q4 FY12: 1.7%)

·; 230,000 TV subscribers, growing by 12,000 per week as we exited the year

·; 23,000 Mobile customers added, taking base to 175,000

·; 31% y-o-y growth in data services revenue in TalkTalk Business

Dido Harding, Chief Executive of TalkTalk commented:

This has been a momentous year for TalkTalk, which is now a fundamentally better business than it was three years ago. In the year we have returned our customer base to growth, successfully launched TV and mobile handsets, grown TalkTalk Business, and returned to year-on-year revenue growth in the final quarter. We have the UK's fastest growing new TV business and our customers clearly appreciate its comprehensive content and value for money pricing. We will continue to invest in growth and remain confident that having more customers who buy more products and who stay with us longer, puts us firmly on track to achieve our medium term financial targets.

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FINANCIALS

(1) Excludes £62m of costs relating to investment in TV (FY12: excludes £9m profit on disposal of freehold property). Earnings for both years excludes related tax based on Headline effective tax rate

(2) Excludes net exceptional income (FY12: charge) and amortisation of acquisition intangibles. Earnings for both years excludes related tax, FY12 also excludes a one-off tax credit

GUIDANCE

FY14

We have entered the new financial year with growing revenues, a higher gross margin, lower overheads and significant headroom to invest further in growth.

·; Revenue

We expect FY14 revenues to grow by at least 2%

·; Overheads

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

·; SAC & Marketing

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

·; Net debt

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

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

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

We expect to begin making modest cash tax payments during FY14

·; Dividend

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

FY15 and beyond

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

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

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

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

Q4 OPERATIONAL REVIEW

Return to year on year revenue growth (+1.4%)

We returned the business to revenue growth in Q4 with group revenue of £427m, 1.4% ahead of the same quarter in FY12.

On-net revenue of £305m in the quarter was 7.4% higher year on year reflecting sustained growth in the base and ARPU progress. On-net ARPU of £26.37 was 3.5% higher year on year with unbundling mix, increased new product penetration, and the benefit of line rental increases offsetting planned promotional spend and lower voice usage.

In TalkTalk Business, Corporate revenue of £82m in the quarter was 3.8% higher year on year with continuing strong momentum in Ethernet and Data Solutions (+31%) and Carrier (+5%) offsetting an underlying decline in legacy voice revenues (-2%).

Off-net revenue, which represents a decreasing proportion of our total revenue (9.4% vs 13.8% in Q4 FY12), saw a 31% reduction year on year to £40m.

Second quarter of positive net adds (+10,000)

We added 64,000 fully unbundled broadband and voice customers in the quarter, offset by a reduction of 34,000 broadband-only customers, leading to net growth in our on-net base of 30,000. The off-net base continued to decline, with 20,000 fewer broadband customers, leaving our total broadband base at 4,063m - net growth of 10,000 and our second consecutive quarter of positive net adds.

On-net customers now comprise over 95% of our total broadband base and the mix of customers has continued to improve, with over 81% (Q4 FY12: 75%) now fully unbundled and delivering our most profitable revenues.

Further reduction in churn

During the quarter our ongoing focus on customer service improvement has continued to have a positive impact. Complaints to Ofcom fell by 41% year on year and we saw continuing improvement in churn through the quarter with on-net churn at 1.5% (Q4 FY12: 1.7%). We expect churn to continue to reduce from further improvements in customer service and as we see the benefit of more customers taking additional products from us.

Strong momentum in new products and services

Our upsell and new product propositions continued to show strong momentum:

230,000 TV subscribers

We connected 150,000 TV customers in the quarter with the launch of a self-install option strengthening momentum to 12,000 per week as we exited the quarter.

175,000 mobile customers

Our base of mobile customers grew by 23,000 during the quarter, with our simple tariffs and compelling handset range driving strong demand.

73,000 fibre customers

21,000 more customers chose to take fibre in the quarter, taking our fibre base to 73,000.

1.2m Plus customers

The Plus base (including those taking TV), grew by a net 68,000 during the quarter, driven by new customers, and those upgrading from Essentials, offset by dual-play churn.

Over 1m customers have activated HomeSafeTM

414,000 new customers activated HomeSafeTM in Q4, taking the total number of activations to 1,144,000 - nearly 30% of the on-net base. Customers who have activated HomeSafeTM continue to have a lower propensity to churn.

Over 10,000 Ethernet circuits

We installed over 1,500 Ethernet and EFM circuits for our business customers in Q4, leading to an installed base at the end of the year of over 10,000 lines.

FY13 BUSINESS REVIEW

We returned to growth in FY13 and have made strong progress in our key strategic priorities.

Returned customer base to growth in H2

We returned our customer base to growth in the second half of the year seeing resilient demand for our value for money proposition and reducing churn offset the decline in our legacy off-net base.

We added 66,000 net new on-net customers in H2, comprising strong growth of 133,000 in our core MPF broadband and voice product, offset by the net loss of 67,000 legacy SMPF broadband-only customers. Over 81% of our broadband customers are now fully unbundled and able to benefit from our added value products such as Plus TV, mobile, fibre and HomeSafe™. The off-net broadband base, which now comprises less than 5% of our total base, continued to decline, with a reduction in the second half of the year of 46,000. As a result our total broadband base grew by 20,000 during the second half of the year.

For the year as a whole, we added 115,000 net new on-net customers, comprising growth of 229,000 in fully unbundled phone and broadband customers, and a net loss of 114,000 broadband only customers. With the off-net broadband base reducing by 118,000, we ended the year with a total broadband base of 4.063m customers.

We have continued to deliver significant improvements to our customers' experience during the year with a 14% year on year reduction in calls into our contact centres, over 70% of customers now benefiting from first time resolution of their query, and a substantially reduced number of complaints to Ofcom during the year - down 41% year on year. As a result, we delivered improvements in churn through every quarter with monthly on-net churn in Q4 of 1.5% (Q4 FY12: 1.7%).

Strong momentum in value for money quad play

230,000 TV customers in first six months and strong install momentum

We launched our TV proposition for Plus customers at the end of September 2012, featuring a free YouView set top box and no additional monthly fee. In addition to the excellent content on the YouView platform (including seven day catch up and over 70 Freeview channels including some in HD), our service features search, pause & recording of live TV and a huge library of the best films and shows from the US and UK. Our proposition also offers simply priced, easy and flexible access to bundles of over 50 premium channels including all Sky Sports channels (1,2,3,4,5 and Formula 1) and all Sky Movie channels available for one month at a time, with no costly annual subscriptions.

Since launch we have enhanced our proposition with a wide range of transactional and on-demand content through LoveFilm BoxOffice and other studios, and access to blockbuster movies; international on-demand and subscription content such as Star, Star+ and StarOD; and specialist channels such as the Digital Theatre Channel and Karaoke Channel.

In addition to our popular engineer install which gives customers security and peace of mind, we launched a self-install option in Q4, offering free and faster installation for customers. Early feedback on the ease of installation from those customers who have opted to do it themselves is highly positive.

Since launch, when we focused initially on our existing customers, the base has grown rapidly and we ended the year with an installed base of 230,000 customers, around 25% of whom are new to TalkTalk.

Momentum towards the end of the year benefited from the availability of a self-install option and we exited the year with connections running at 12,000 per week.

Targeted at mass market value seeking customers

Our TV proposition is targeted firmly at value-seeking customers who want a little more TV, not a lot. There is a potentially large (c8m) base of customers who currently take Freeview or Freesat, many of whom do not wish to enter into costly long term Pay TV subscriptions. Our proposition is proving to be a powerful new way of watching TV for this segment of the market.

Early data from our installed base is providing strong evidence of the segmented nature of the UK TV market:

·; Customers who have previously been Freeview or Freesat users comprise 72% of the people taking our TV product

·; The majority of viewing by our customers is of the excellent free to air and catch up content on YouView (c19.5 hours per week on average), with the balance (c2.5 hours)on paid-for content

·; 20% of our TV customers have bought one or more paid-for boosts (mainly family and kids entertainment packages and popular films) with many showing a significant propensity to buy content beyond the initial sign-up. We have seen particular success with transactional video on demand for blockbuster movies such as The Hobbit and Life of Pi.

Positive feedback from installed base and lower churn

Survey* results from our customers reveal high levels of satisfaction with the sign-up process, installation and functionality of TalkTalk TV:

·; Integrated catch-up TV on the YouView platform is proving to be the most valuable feature for customers from both pay-TV and Freeview backgrounds

·; Customers with previous experience of Pay TV cite the wide range of paid for content boosts and the flexibility of purchasing without long term subscriptions as very attractive.

·; Content browsing and purchasing reflects the core demographic of our family and value orientated customer base, with Entertainment and Children's packages, and transactional video on demand proving the most popular

*ICM Research, May 2013, 1,025 respondents

As a result, these customers are significantly more likely to recommend TalkTalk than dual play customers, reporting a c20 point higher Net Promoter Score. They are also showing more loyalty and the churn from customers taking TV is materially lower than the churn on our dual play base, with 7 out of 10 customers who upgraded from Phone and Broadband saying they were more likely to stay with TalkTalk beyond their contract terms than they would have been before taking TV.

Strong pipeline of product and content development

Looking ahead, in FY14, we plan to broaden our proposition to appeal to all our customers by launching a value for money Essentials TV product. This will enable us to provide an even better value for money route for Freeview upgraders. The Essentials TV product will consist of a smaller, lower cost set top box with no PVR and only one tuner.

We will also extend our content offering for all customers with a range of specialist channels including foreign language titles, education and entertainment.

175,000 Mobile customers with lower churn

In August 2012, we launched our TalkTalk Mobile contract handset proposition. Available exclusively to TalkTalk customers, TalkTalk Mobile offers simplicity, range and great value plans. All handsets, of which there is a broad range available, are completely free with 24 month contract plans starting from £5 a month. Mobile handset contracts are designed to pay back within the 24 month contract term and are ARPU and EBITDA accretive.

Three plans are available - Small, Medium and Large with different prices depending on the choice of handset. Customers can buy online or over the phone with those buying online getting double the data allowance. This simplicity, coupled with low running costs, means that we can offer the most popular handsets at competitive prices, ranging from basic feature phones to smartphones.

As a result our mobile offering has gained strong traction, with 175,000 customers now taking advantage of our innovative mobile-to-fixed calling offers, competitive call rates, and handsets. As with TV, the feedback from our mobile customers is highly encouraging:

·; Mobile customers are significantly more likely to recommend TalkTalk than dual play customers, reporting a c20 point higher Net Promoter Score

·; Churn from customers taking TalkTalk Mobile is materially lower than the churn on our dual play base, with 7 out of 10 customers saying they were more likely to stay with TalkTalk beyond their contract terms than they would have been before taking mobile

We will continue to develop our mobile proposition with further innovative tariff and bundle offers, and see real opportunities to build a growing and profitable scale base.

Fibre building gradually

Demand for fibre grew gradually during FY13 with 65,000 more customers choosing to take paid-for speed uplifts (versus 8,000 in FY12), taking our base of fibre customers to 73,000.

As expected, overall fibre demand among our customer base remains modest. We expect this will continue until the customer benefits of much higher bandwidth, and the value of accessing that bandwidth, become clearer. Nevertheless, there are certain segments of our customer base that can derive clear value today from upgrading to fibre, for example those who are interested in taking TV from us and live in a fibre-enabled area, but whose copper speed is currently lower than 3 Mbps.

We remain actively engaged with Ofcom and government to promote greater competition in fibre through a tighter regulatory framework. We are pleased to see Ofcom taking the importance of a level playing field increasingly seriously, with the recent opening of an investigation into BT's pricing of fibre.

TalkTalk Business delivering margin accretive growth

TalkTalk Business ("TTB") comprises on-net and off-net basic phone & broadband products and Corporate products and services (data, carrier and voice products). Corporate revenue grew by 1.9% year on year to £322m as strong growth in data services (+29%) and carrier (+10%) offset a 5% decline in lower margin legacy voice related revenues.

Data services, which include ethernet, managed networks and co-location, has built momentum rapidly through the year, as we continued to expand our product set and scale up our volume capability. We connected over 6,000 ethernet circuits during the year, taking our total base to over 10,000. Revenues from this high margin product family tripled during the year to over £15m (FY12: £5.0m) and we expect continued strong demand through FY14.

We made significant progress in our partner channel as we continued to drive innovative and competitive product development that leverages our network reach. In May 2012, TTB as part of a consortium led by Fujitsu, was awarded a contract to provide network services for the phone and broadband customers of the Post Office. The contract, worth over £100m over 5 years, is on track for services to go live during the second half of FY14.

In December 2012, we reached an agreement with Virgin Media Business on a 5 year contract worth over £40m to provide additional choice for its off-net Ethernet connectivity.

Towards the end of the year, we were awarded a 6 year contract by the Iceland retail group to support their Data and Voice requirements across the UK, demonstrating our ability to provide Corporate customers with complete Voice and Data solutions.

In addition to the continued growth of margin accretive data products, we are realising opportunities to grow our carrier revenues and next generation voice products. Together, this is allowing us to offset the established decline in low margin legacy voice revenues.

As with our consumer business, we also have an opportunity to simplify TTB's operations and leverage the cost and technology advantage of our network. The combination of gross margin expansion through data revenue growth and generating cost savings through simplification will enable TTB to contribute meaningfully to the Group's medium term revenue and margin targets.

Largest unbundled network in the UK

Our unbundling programme continued with 216 new exchanges added during the year extending the reach of our value for money proposition to 2,724 exchanges and approximately 95% of the UK population. We plan to unbundle another 300 exchanges in FY14 and now see the 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 guideline of 6% of revenues.

Driving operating efficiencies

During the year we completed our Operating Efficiencies programme which has delivered £50m of annualised cost savings, a more efficient business and a better experience for our customers. The financial benefit of this programme in FY13 was a reduction in overheads of £25m.

We see further opportunity to make TalkTalk simpler to operate, which in turn will improve our customers' experience and reduce our costs, through driving process and efficiency improvements over the medium term. These are a key component of our medium term plan to achieve a 25% EBITDA margin.

During FY13 we began our new Making TalkTalk Simpler programme. We expect that combined initiatives under this programme will drive incremental savings of £30m-£50m over the next 3-5 years, of which £10m has been actioned during 2013. During this first phase of the programme we began the process of 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 initiatives have delivered £3m of savings during the year.

Summary

In summary, FY13 has been a momentous year for TalkTalk. We have returned the business to growth, successfully launched the fastest growing triple play proposition in the UK and a mobile base with real traction, and delivered strong growth in margin accretive data products in TalkTalk Business. At the same time we have continued to make the business simpler to operate and successfully begun to deliver on our third cost saving programme.

FY13 FINANCIAL REVIEW

Overview

We have delivered another strong performance this year, with a return to revenue growth in the final quarter of the year and significant increases in both our underlying profitability and cash generation.

Revenue growth in the latter half of the year has been driven primarily by growth in ARPU, our broadband customer base returning to growth, and the launch of new products for both our Consumer and TalkTalk Business customers.

In launching our new TalkTalk TV service this year we have invested £62m incorporating both the incremental SAC for those taking the service and one-off launch costs. To enable year on year comparisons we have included a measure of Underlying EBITDA, which shows our results before the investment in TV.

Our gross margin has increased as more of our customers are on-net and take both their broadband and voice from TalkTalk. Strengthening gross margin and delivery on our cost efficiency programmes has increased Underlying profitability. The business continues to be strongly cash generative and has this year generated £41m net cashflow after funding a 15.6% growth in the dividend and the additional investment in TV.

Net debt has reduced to £393m (FY12: £434m) providing significant headroom to invest in driving continued growth.

Underlying and Headline financial information

Revenue

We returned to year on year revenue growth in the year, with revenue up 1.4% in the last quarter primarily driven by strong on-net ARPU progress; growth in the customer base; and take up of our new products. Our full year revenue decreased 1% to £1,670m (FY12: £1,687m), with continued growth in On-net and Corporate offsetting the expected decline in our legacy Off-net business.

Growth in On-net revenues, which increased to £1,170m (FY12: £1,084m), has been driven by both the growth in our base and the growth in our On-net ARPU, which increased to £26.37 in Q4 (Q4 FY12: £25.47). This has resulted from upsell activity and price inflation offsetting planned promotional spend and the continued decline in voice usage.

Our Corporate revenue grew in the year to £322m (FY12: £316m), driven by the growth of our new data products and carrier services which more than offset the continued decline in legacy voice services.

In line with the expected decline in our Off-net base, Off-net revenues decreased to £178m (FY12: £287m). Price inflation during the year partly offset the base and usage decline.

Gross Margin

We expanded our gross margin by 260 basis points to 55.0% (FY12: 52.4%) and £919m (FY12: £884m) driven by the improved mix of higher value On-net broadband and voice customers, price inflation, growth in TTB data services revenue, offset by the decline in lower margin Off-net revenues.

Operating expenses

Operating expenses comprising customer service costs, network and IT and management overheads have reduced to £395m (FY12: £415m) and represent 23.7% of revenues (FY12: 24.6%), reflecting the delivery of cost savings from our operating efficiency programmes, offset by the continued investment in our network.

During the year we completed our Operating Efficiency programme delivering a total saving of £50m of which £25m was realised in the year.

SAC and Marketing (excluding TV)

We successfully launched handsets with our Mobile proposition this year, saw a gradual increase in the number of customers taking fibre, and our broadband base returned to growth. TalkTalk Business also had a year of growth driving incremental SAC. The investment in SAC and Marketing resulted in an increase in spend year on year of £20m to £172m (FY12: £152m).

Our total operating expenses for the year were therefore flat overall at £567m (FY12: £567m).

Underlying EBITDA

We have had strong growth in Underlying EBITDA and our margin has increased to 21.1% (FY12: 18.8%), resulting in an 11% increase in our full year result to £352m (FY12: £317m).

In FY12 we disposed of a freehold property at a profit of £9m that was excluded from Underlying EBITDA.

Investment in TV

We have made a significant investment this year to deliver the highly successful launch of our TV service. We have invested £62m, of which £39m is the specific, incremental SAC cost of acquiring the TV customers, and £23m represents the one-off, fixed costs of launch, being the cost of the trial, the project team employed to deliver our TV product, the cost of ramp up of our installation engineers, the marketing spend and content offered to support the launch and other similar costs.

Headline EBITDA

As a result of our investment in TV, Headline EBITDA has decreased £36m to £290m (FY12: £326m).

Exceptional items

The net exceptional credit in the year of £9m comprised a credit of £27m received from BT in settlement for the overcharging of certain Ethernet circuits between April 2006 and July 2009, offset by the investment in the second phase of our Operating Efficiencies programme (£11m) and the beginning of our Making TalkTalk Simpler Programme (£7m). The exceptional costs principally comprise redundancy, site exit and dual running costs incurred in streamlining our IT systems and processes and improving our Consumer and TalkTalk Business service model.

EBITDA

EBITDA after exceptional items is flat year on year at £299m as savings seen in our operating costs and the decrease in spend on exceptional items has been offset by the increased investment in our new products, TV, Mobile, Fibre and Ethernet.

Depreciation and amortisation

The charge for depreciation and amortisation has increased by £10m (10.9%) to £102m (FY12: £92m) as a result of a further year of capital investment in both our network and our IT systems.

Amortisation of acquisition intangibles

The amortisation charged on acquisition intangibles decreased to £52m (FY12: £61m) as the customer base acquired with the acquisition of AOL in December 2006 became fully amortised during the year.

Profit before tax

Profit before tax decreased £5m in the year reflecting the reduction in Headline earnings due to the investment in TV.

EPS

(1) Underlying earnings of £182m is defined as Headline earnings excluding costs of £62m relating to the investment in TV less an allocation of taxation of £12m based on the Group's headline effective tax rate. Underlying earnings of £152m for the year ended 31 March 2012 is defined as Headline earnings excluding the profit on sale of a freehold property of £9m less an allocation of taxation of £2m based on the Group's Headline effective tax rate.

We provide EPS on an Underlying and Headline basis alongside our Statutory measures to allow easier comparison year on year due to the impact of exceptional items, the investment in TV and the disposal of a freehold property in FY12. A full reconciliation to Statutory results can be found in note 3.

Our Underlying Basic EPS has grown significantly year on year, increasing 20% to 20.6p (FY12: 17.2p). Our Headline Basic EPS decreased 17% to 14.9p (FY12: 18.0p), with the growth in our Underlying EBITDA offset by the investment in TV.

Statutory Basic EPS decreased 28% to 11.3p (FY12: 15.6p), principally due to the impact of investment in TV and a tax credit that was recognised in the prior year.

Cashflow and net debt

Capital expenditure

Capital expenditure in the year of £104m (FY12: £105m) was broadly flat year on year, and represented 6.2% of revenue (FY12: 6.2%). During the year, we have continued to invest in our network and have rolled out a further 216 exchanges, significantly increased capacity across the network and invested in improved resilience. We have also continued to invest in our IT systems to support our growing product offerings.

Working capital

Our working capital outflow of £11m was broadly in line with the prior year (FY12: £14m), and resulted from our return to revenue growth, the decrease in our cost base and the continued unwind of Tiscali fair value provisions.

Exceptional items

We had a net inflow on exceptional items this year of £8m (FY12: outflow of £45m) driven by the £27m of cash received from BT in settlement for the overcharging of certain Ethernet circuits between April 2006 and July 2009. Exceptional spend of £14m was incurred in respect of the completion of our Operating efficiencies programmes and £5m relating to the Making TalkTalk Simpler programme.

Acquisitions

Acquisitions in the year of £4m (FY12: £20m) represent a £6m investment in the YouView joint venture offset by £2m of proceeds on the sale of Southern Communications Networks Limited, an immaterial subsidiary company, at the end of the year.

Dividends

Our dividend policy is to return to shareholders 50% of our basic Headline earnings per share in the form of ordinary dividends.

In May 2012, we committed that during 2013 and 2014, when the business will be investing in growing the TV base, our dividend will grow by a minimum of 15%.

Dividends of £87m paid in the year (FY12: £58m), comprised the final dividend for FY12 of 6.4p and the interim dividend for FY13 of 3.45p, which reflects our 15% dividend growth commitment.

The Board has declared a final dividend of 6.95p per share which will be paid on 2 August 2013, subject to approval at the AGM on 24 July 2013 for shareholders on the register at 5 July 2013. The total declared dividend for the year was 10.4p which provides dividend cover (based on Headline Earnings per Share) of 1.4 times (FY12: 2 times).

Share purchases

In September 2012 the first 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. Settlement took the form of purchasing 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 £35m. In the prior period, share repurchases totalling £54m (42 million shares) were made by the Employee Benefit Trust in order to cover anticipated future options exercises.

Net debt

Net debt in the year reduced by £41m (FY12: £4m) to £393m (FY12: including loans to related parties £432m, excluding loans to related parties £434m) as a result of the continuing improvement in the operating cash generation of the business and a reduction in exceptional spend.

Taxation and treasury

Finance costs

Net finance costs charged to the income statement were £19m (FY12: £18m). This comprised the blended interest charge on debt of 3.58% (FY12: 3.17%) and a full year of the amortisation charge in relation to the facility fees incurred on our November 2011 debt refinancing of £3m (FY12: £1m).

Net interest paid in the year decreased to £16m (FY12: £24m), principally due to the facility fees paid in the prior financial year for the refinancing and an overall decrease in our interest charges as a result of lower average debt.

Taxation

Our effective Headline tax rate for the year was 20% (FY12: 26%), representing a tax charge of £33m (FY12: £56m). The tax charge for the year on statutory earnings was £22m (FY12: credit of £11m). The principal difference between the tax charge and the standard rate of corporation tax is the recognition of deferred tax assets in relation to acquired losses.

A reduction in the rate of corporation tax from 24% to 23% in April 2013 has created a charge through the income statement of £5m resulting from the downward revaluation of our deferred tax assets.

During the prior year the Group reached agreement with HMRC over the utilisation of brought forward losses acquired with the Tiscali UK business in 2009, including those of Video Networks Limited. This resulted in the recognition of deferred tax assets of £45m, in addition to those that were recognised at the acquisition date.

We have made minimal corporation tax payments during the year. Payments of £2m made in the prior year related to the final corporation tax assessment for our AOL Luxembourg entity prior to its liquidation.

Funding

We finance our operations with committed bank facilities, retained profits and equity. During the year, we were able to make use of overdrafts and uncommitted facilities to assist with working capital management. Our subsidiaries are funded centrally, with an emphasis on efficient cash management.

Our total Group funding of £665m comprises £560m of revolving credit facilities, which mature in November 2015, £30m of bilateral loan facilities that matures in March 2015 and November 2015, and a £75m Term loan that matures in March 2015. The terms of our facilities are similar and the covenants are identical. At 31 March 2013 £400m (FY12: £436m) 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.

Hedging policy

We are exposed to limited cross border transactional commitments, but where significant 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.  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 and considers that our medium term target gearing is 75% to 100%. Gearing at 31 March 2013 was 89% (FY12: 98%).

Accounting developments

The adoption of accounting standards in the year, as disclosed in note 1, 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 Operational and Business Reviews. Our financial position, cash and borrowing facilities are described within this Financial Review.

Whilst the current economic climate remains uncertain, the breadth of our base, our value for money proposition, continuing improvements in operating efficiency and the largest unbundled network in the UK together with the launch of our competitive TV and Mobile offerings 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 2013 the headroom on these facilities was £265m. 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 preparing the financial statements.

Board changes

The Company is pleased to announce the following Board changes with effect from today. Joanna Shields joins the Board as a non-executive director. Joanna is the Chief Executive Officer and Chair of Tech City Investment Organisation, prior to this she was Vice President and General Manager of Facebook in EMEA. John Gildersleeve becomes Deputy Chairman and will be replaced as Senior Independent Director by Ian West.

Group income statement

For the year ended 31 March 2013

* Operating expenses excluding amortisation and depreciation also includes other exceptional income (note 3).

** Underlying EBITDA is defined as Headline EBITDA excluding any costs relating to the investment in TV (2012: excluding the profit on sale of a freehold property).

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

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 2013

*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 2013

*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 as set out in note 7. 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

For the year ended 31 March 2013

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

Group cash flow statement

For the year ended 31 March 2013

* Bank overdrafts are disclosed within Loans and other borrowings less than one year.  

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 15 May 2013.

Basis of preparation

The financial information set herein does not constitute the Group's statutory accounts for the years ended 31 March 2013 or 2012, but is derived from those accounts. Statutory accounts for 2012 have been delivered to the Registrar of Companies and those for 2013 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 2012 Annual Report of TalkTalk Telecom Group PLC, can be found on the Group's corporate website www.talktalkgroup.com and the 2013 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 2012 Annual Report of TalkTalk Telecom Group PLC, except in relation to the new standards which have been adopted in the year with no significant impact on the results for the current or prior year.

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.

* As restated. During the year, the Group's changed its revenue disclosure by product from Broadband, Non-broadband and Corporate to On-net, Off-net and Corporate as the information provided to the Group's chief operating decision maker to run the business was changed.

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 performance excluding acquisition intangibles and exceptional items.

a) Operating efficiencies - Phase III (Making TalkTalk Simpler)

During the year ended 31 March 2013, the Group has continued a review of the operating structure to drive process and efficiency improvements over the medium term. The initiatives that form part of the Group's Making TalkTalk Simpler programme implemented in the year were: a restructuring of the systems and processes in TalkTalk Business to remove duplication and better align the sales and service model for future growth; and a review and consolidation of the outsourcing partners and rebalancing of the Group's on-shore footprint.

This has resulted in redundancy, dual running, property and project management costs. The total charge incurred in the year ended 31 March 2013 was £7m (2012: £nil).

A total taxation credit of £2m has been recognised in respect of this item in the year ended 31 March 2013 (2012: £nil).

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 2013 was £11m (2012: £nil).

On 7 September 2011, the Group announced the closure of the Group's contact centre in Waterford, Ireland, which resulted in redundancy, consultancy and onerous property lease costs. The total charge incurred in the year ended 31 March 2012 was £14m.

A total taxation credit of £3m in respect of this item has been recognised in the year ended 31 March 2013 (2012: £3m).

c) Operating efficiencies - Phase I (Back office restructuring)

On 26 January 2011 a major restructure of the Group was announced to integrate technology and IT capabilities and consolidate back office functions. The reorganisation principally resulted in a reduction in headcount, and required project management and consulting costs to deliver these benefits. The programme also resulted in onerous contract and dual running costs relating to a number of technology contracts where, services previously provided externally are now being provided in-house. The total charge incurred in the year ended 31 March 2013 was £nil (2012: £11m).

A total taxation credit of £nil in respect of this item has been recognised in the year ended 31 March 2013 (2012: £3m).

d) 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 has been recognised as an exceptional credit in the year ended 31 March 2013 (note 10).

A total taxation charge of £6m in respect of this item has been recognised in the year ended 31 March 2013 (2012: £nil).

e) Other

In April 2013, Ofcom fined the Group £750,000 as a result of a contravention of certain provisions of The Communication Act 2003 relating to silent and abandoned calls. The full amount has been recouped from the relevant suppliers with a net impact of £nil on the Group's results. This has been accounted for in the year ended 31 March 2013 in accordance with IAS 10, 'Events after the Reporting Period'. No taxation credit was recognised in respect of this fine.

During the prior year Ofcom fined the Group £3m as a result of a contravention of General Condition 11 under section 94 of The Communication Act 2003. No taxation credit was recognised in respect of this fine. In addition, a credit of £1m was recognised in the year ended 31 March 2012 in respect of a provision release for costs no longer anticipated to be incurred.

f) Amortisation of acquisition intangibles

An amortisation charge in respect of acquisition intangibles of £52m was incurred in the year ended 31 March 2013 (2012: £61m). A tax credit at 24% has been recognised in respect of the amortisation of acquisition intangibles, net of any adjustments in respect of prior periods.

A total taxation credit of £12m has been recognised in the year ended 31 March 2013 (2012: £16m).

g) Exceptional items - taxation

During the year ended 31 March 2012, the Group reached agreement with HMRC over the utilisation of brought forward tax losses acquired with the Tiscali UK business in 2009, including those of Video Networks Limited. This resulted in the recognition of deferred tax assets of £45m, in addition to those recognised at the acquisition date.

4. Taxation

The tax charge comprises:

The tax charge on Headline earnings for the year ended 31 March 2013 is £33m (2012: £56m) representing an effective tax rate on pre-tax profits of 20% (2012: 26%). The tax charge on Statutory earnings for the year ended 31 March 2013 is £22m (2012: £11m credit). 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 3 July 2012 a reduction in the UK Statutory rate of Corporation tax was substantively enacted, bringing the tax rate down from 24% to 23% with effect from 1 April 2013. Accordingly the tax assets and liabilities recognised at 31 March 2013 take account of this change. This has resulted in a tax charge to the income statement as the value of the Group's tax assets have been reduced.

The Government intends to enact further reductions in the main tax rate, down to 21% effective from 1 April 2014 and to 20% from 1 April 2015. As these tax rates were not substantially enacted at the balance sheet date, the rate reduction is not reflected in these financial statements.

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, reached in the previous financial year, following which the immediate increase in the deferred tax asset of £45m was recognised as an exceptional credit (note 3).

At 31 March 2013, the Group had unused tax losses of £759m (2012: £873m) available for offset against future taxable profits. A deferred tax asset of £40m (2012: £56m) has been recognised in respect of £172m (2012: £232m) of such losses, based on expectations of recovery in the foreseeable future.

No deferred tax asset has been recognised in respect of the remaining £587m (2012: £641m) 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 2013 is 6.95p per ordinary share on approximately 892 million shares (£62m), which was approved by the Board on 15 May 2013 and has not been included as a liability as at 31 March 2013.

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.

*Underlying earnings of £182m is defined as Headline earnings excluding costs of £62m relating to the investment in TV less an allocation of taxation of £12m based on the Group's headline effective tax rate. Underlying earnings of £152m for the year ended 31 March 2012 is defined as Headline earnings excluding the profit on sale of a freehold property of £9m less an allocation of taxation of £2m based on the Group's Headline effective tax rate.

The number of shares that could be issued but that are not considered to be dilutive at 31 March 2013 is 5 million (2012: 20 million).

7. Share-based payments

In accordance with IFRS 2, a charge of £6m (2012: £4m) 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) The All Employee Share Option Award - 2012

Granted in September 2012, under the approved DSOP rules, the award of 1,000 nil priced share options per qualifying employee is designed to reward all employees who are not currently part of another share option plan and to foster all employee share ownership. The exercise of options is subject to continuing employment on the vesting date in September 2013 and there are no performance conditions in relation to this award. These options lapse on resignation of an employee. A total of 2m options were granted.

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 1m options were granted with an exercise price of £1.23.

Vesting

c) DSOP - 2010 grant

On 28 March 2013 16m options vested but they are not exercisable until after the preliminary announcement on 16 May 2013. The original date of vesting of 29 March 2013 was amended to 28 March 2013 due to a bank holiday.

d) VES Schemes

On 17 September 2012, the Group's Remuneration Committee determined that the relevant performance conditions of these VES schemes (including the 5% TSR requirement) had been satisfied, meaning the VES participants were entitled to exercise 60% of their VES options. The remaining 40% will vest in September 2013 subject to on-going performance conditions being met. The participants' options were acquired by the Company for new ordinary shares in the Company and cash resulting in a cash outflow of £35m. The net issue of 17 million shares in the Company was at a price of £1.86 per share being the average closing price of the Company's shares on 18 and 19 September 2012. The settlement of the schemes resulted in a net movement in reserves of £31m, being the recognition of share premium of £32m and a £63m debit in retained earnings and other reserves. The £63m debit to reserves represents a total cash outflow of £35m and the value of new PLC shares issued of £32m 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 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 as set out in note 7. 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 £63m debit to reserves represents a total cash outflow of £35m and the value of the new PLC shares issued of £32m net of the repayment of the associated VES loans, interest and a reduction in the Group's liability to settle the schemes.

9. Analysis of changes in net debt

10. Contingent Liabilities

Included within the Group's results for the year is a credit of £29m relating to an Ofcom determination that BT had overcharged for certain wholesale Ethernet services. The full amount has been paid to the Group by 31 March 2013.

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.

APPENDIX 1 - QUARTERLY METRICS