Q3 FY16 Trading Update

2nd February 2016

TalkTalk Telecom Group PLC

Q3FY16 trading update

· Q3 revenue growth of 1.8%; On-net net adds -101k

· Business returning to normal - positive RGU growth in January

· Free upgrade offer more successful than expected

· Cyber attack - trading impact £15m; exceptional costs £40m-£45m

· FY16 EBITDA guidance £255m-£265m; expect to grow final dividend by 15%

· FY17 EBITDA guidance £320m - £360m, with dividend no lower than in FY16

Q3 Highlights

· Good on-net revenue performance despite impact of cyber attack

· On-net revenue +4.5%; On-net ARPU + 6.3% and RGU penetration (+9.2%)

· On-net net adds -101k (of which estimated cyber attack impact of 95k)  

· On-net churn 2.1% (of which estimated cyber attack impact of 0.6%)

Dido Harding, CEO commented:

It is encouraging to see the business returning to normal after a challenging quarter that was dominated by the cyber attack. Our customers have responded well, with almost half a million customers choosing to take up our unconditional offer of a free upgrade. Both churn and new connections recovered during December and January and independent external research has revealed that customers believe that we acted in their best interest. In fact trust in the TalkTalk brand has improved since just after the attack and consideration is higher now than it was before the incident.

Looking forward, we expect to deliver a material step up in profits in H2, with full year results in line with market consensus. With a renewed focus on our existing customers and the benefits of our transformation programme, we expect to deliver a further material improvement in profits in FY17. As the value for money telecoms provider we are well placed to benefit from the current regulatory reviews in the sector and expect to see quad play driving sustainable long term growth.

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Enquiries

Investor Relations: Mal Patel: +44 (0) 20 3417 1037

Media: Isobel Bradshaw: +44 (0) 75 8470 8351

Returning to normal after a challenging quarter - positive RGU growth in January

Q3 was dominated by the cyber attack. Although it took longer than expected to return the business to normal operational effectiveness, customer sentiment improved much more quickly as a result of the actions we took. The unconditional free upgrade offer that we made available to all customers drove high levels of engagement with a 14% (489k) take-up rate, improved trust in the brand (+14%), and increased brand consideration (+22%). Key internal metrics such as gross connections and churn, and external survey data on customer sentiment have also been on an improving trend since December and the trading evidence of this is illustrated by the return to positive growth in revenue generating units in January.

Q3 on-net net adds -101k; RGUs -70k but continued growth in RGU/customer

On-net net adds of -101k reflect the combined impact of lower gross connections and higher churn. We added fewer new customers to the base as we closed down our online sales and service channels as part of our response to the cyber attack, and took longer than expected to restore these channels to full operational effectiveness. We also experienced higher churn in the immediate aftermath of the attack, driving on-net churn for the quarter of 2.1% - c0.6% of which we estimate was caused by the cyber attack. We estimate that lower connections and higher churn contributed in roughly equal measures to the 95k of the overall decline in the on-net base.

The period of online shut-down also affected our ability to upsell Mobile, Fibre and TV. Mobile in particular, is primarily purchased online, and we did not restore full functionality to our mobile sales site until January. We continued to fulfil new connections and upsell demand through our contact centres with strong volume growth in Fibre (+54k) and more modest growth in mobile (+13k, excluding SIMs taken up as part of the free upgrade offer), helping to drive year-on-year growth in RGUs of 6.2% and growth in RGU/customer of 9.2%. Total RGUs declined by 70k.

On-net revenue + 4.5% and ARPU +6.3%; Corporate revenues stable with Data +23%

On-net revenues grew by 4.5% year on year reflecting strong ARPU growth of 6.3% during the quarter driven by the benefits of pricing and RGU growth. On-net revenue was reduced by the higher churn and loss of upsell and connection activity, which we estimate impacted on-net revenue by c4%. Within TalkTalk Business, Corporate revenues were stable year on year, with strong growth in Data (23.2%) driven by over 2.1k new connections. Carrier revenues grew modestly (+1.1%), and legacy voice revenues declined 14.8%, in line with the historic trend, while off-net revenue declined by 33% reflecting the impact of the disposal of our consumer off-net base at the end of FY15. Total revenue grew by 1.8%, with an estimated cyber impact of c3%.

Outlook

As a result of a c£15m trading impact arising from Q3 disruption (higher churn and foregone revenues, offset by SAC savings on lower connections) and a c£20m impact from the lower customer base with which we entered Q4 and reprioritisation of certain Making TalkTalk Simpler activities, we now expect FY16 EBITDA of £255m - £265m. The exceptional costs of restoring our online capability with enhanced security features, associated IT, incident response and consultancy costs, and free upgrades, are expected to total £40m-£45m.

Leverage, expressed as Net Debt/EBITDA, is expected to be lower at the end of FY16 than it was at the H1 stage. Therefore, as guided at the H1 results, and reflecting our confidence in the future performance of the group, we expect to grow the final dividend by 15% year on year.

We are on track to deliver a material step up in EBITDA during FY17. We expect FY17 EBITDA of £320m - £360m and capex of 6%-7% of revenues, with leverage falling further towards our medium term Net Debt/EBITDA target of 2.0x. We expect the FY17 dividend to be no lower than in FY16 and for this dividend to be covered by free cashflow, with net debt reducing during the year.

We remain very confident in the long term outlook for the group: in addition to our own focus on existing customers' experience and improving TalkTalk's brand reputation, we see regulatory opportunities that will support both the profitable growth of our fixed line business, and our ambitions in mobile.