1 11/05/2016 18:35 Strong recovery in Q4 post cyber attack Lowest - - PowerPoint PPT Presentation

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11/05/2016 18:35

Strong recovery in Q4 post cyber attack › Lowest ever churn › Flat net adds › Strongest quarter of RGU growth +148k FY EBITDA £260m in line with guidance; material step up in H2 margin to 18.4% Reiterating FY17 guidance: modest revenue growth and £320m-£360m Headline EBITDA Net debt /EBITDA reduced to 2.6x (H1: 2.8x) Dividend per share up 15% to 15.87p in line with commitment FY17 dividend expected to be at least in line with FY16

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Q4 Q3 On-net Net Adds

• 101k

On-net Churn 1.3% 2.1% RGUs 148k

• 70k

Lowest ever churn

› Broadband base stabilised › Focus on existing customers › Making TalkTalk Simpler benefits coming through

Strongest quarter of RGU growth in the year

› 90k mobile net adds › 72k Fibre net adds › -14k TV net adds

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On-Net Revenue £351m Flat Corporate Revenue £101m

• 2.9%

Off-Net Revenue £15m

• 25%

TOTAL £467m

• 1.7%

Lower on-net base post cyber attack Strong ARPU growth +3.9% year on year RGU/customer +9.0% year on year Strong comparative (Q4FY15: +14.3%) Strong Data revenue growth +40% Carrier flat in line with plan Continuing legacy voice trend -30% Off-net disposal to Fleur Telecom at end of FY15

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119 129 (70) 148 Q1'16 Q2'16 Q3'16 Q4'16

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Revenue Generating Units Added (k) Satisfaction with Customer Service

* Adjusted for bad debt disconnects (72k)

69% 72% 72% 72% 74% 69% 66% 64% 64% 70% 71% 73% May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 1.3% 1.4% 1.3% 1.3% 1.4% 1.6% 2.1% 1.3% Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16

Lowest ever monthly churn

34 34 41 37 36 38 35 37 35 30 36 30 45 47 Nov-14 Nov-15

TalkTalk is a brand I trust (%)

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£170m

H1 FY16

Gross Profit growth

£31m £56m

Lower Opex as transformation costs fall out Lower SAC from better channel mix and lower CPA

£28m

Materially higher Making TalkTalk Simpler Benefits

£15m

Cyber Impact

9.9% 18.4%

H2 FY16

£90m £170m £35m

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8 £76m £110m

Y-O-Y Revenue Growth

£110m £90m

Dividend per share

+15%

FY15 FY16 13.8p 15.9p

EBITDA

FY15

Y-O-Y Revenue Growth

FY16 H1 H2 FY £1,795m £1,838m £871m £912m £926m £924m +4.7% +0.2% +2.4% FY15 FY16 H1 H2 FY £245m £260m £110m £90m £170m £135m

• 18.2%

+25.9% +6.1%

Net Debt / EBITDA

H1 Year End 2.8x 2.6x

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Retail 3,440k 3,187k

4,177k 3,996k

95k Cyber Impact 72k Disconnections for change in credit policy 6k Trading

Mar 15 Dec 15

8k Trading

3,326k

4,097k Sept 15

830k

3,996k Mar 16

Wholesale

737k 771k 809k 3,166k

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Lessons from last 6 months Implications for FY17 and beyond Customers valued our open and honest approach during the cyber attack:

• Vast majority (73%) believe we looked

after them

• 14% (489k) took free upgrade
• Brand trust (47%) and consideration

(57%) higher than they were before the cyber attack Our relentless focus on improving customer experience is paying off:

• Satisfaction growing
• Calls to contact centres down
• New systems working well

Value for money Quad-play is working If we look after our customers they return that loyalty in spades Customers know that we save them money, and protecting that position is always important Making TalkTalk Simpler is key to transforming from cheap to value for money:

• Starting to deliver meaningful benefits
• Critical to long term future

More work to do to simplify products and propositions to help customers make informed choices

• Abandoning line rental
• Taking learnings from free upgrade offer

into ongoing marketing

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30 73 142 207 308 479 578 704 H1'13 H2'13 H1'14 H2'14 H1'15 H2'15 H1'16 H2'16 117 175 236 284 348 464 596 699 H1'13 H2'13 H1'14 H2'14 H1'15 H2'15 H1'16 H2'16

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90k mobile net adds in Q4 19% of base vs 12% at end FY15 SIM-only continues to grow strongly – 13.5% market share in FY16, Q4 share 14.9%

19% 19%

72k fibre net adds in Q4 19% of base vs 13% at end of FY15

• Mobile and Fibre customers have higher Net Promoter

Scores and lower churn than phone and broadband customers

• Are significantly more valuable

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0k 230k 557k 917k 1,217k 1,414k 1,439k 1,389k H1'13 H2'13 H1'14 H2'14 H1'15 H2'15 H1'16 H2'16

13 38%

Year end base 25k lower than at end of FY15

• 20% growth in year on year on-demand usage

TV customers generate higher Net Promoter Scores and lower churn than phone and broadband customers

• Drives strong engagement and low churn
• Distinct proposition with significant value

YouView integration of Free to Air, Pay, Over the Top and premium, linear and catch up channels highly valued by customers

• Netflix searchable in YouView; on TalkTalk bill
• Full range of sport including all Sky Sports and BT Sport

Blinkbox capabilities have enabled launch of TalkTalk TV Store

• access to pay content on multiple devices
• another path to upsell proposition as content

accessible without set top box TalkTalk TV Store

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80 82 87 91 88 89 94 104 93 95 95 101 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 7.1 10.2 13.7 17.4 21.6 26.2 30.7 35.1 H1'13 H2'13 H1'14 H2'14 H1'15 H2'15 H1'16 H2'16 FY15 FY16

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Corporate Revenue Ethernet & EFM Lines (‘000)

+2.4% Data Carrier Voice £375m £384m

Continuing strong demand for Ethernet, base of over 35,000 business Data lines connected Carrier and Voice in line with expectations VOIP proposition (powered by tiPicall) launched in October 2015; gaining traction and expected to deliver strong growth in FY17 Main constraint on data growth continues to be Openreach’s inability to keep pace with orders

+23.7% +13.3%

• 16.2%

Sustained revenue progress

FY14 FY15 FY16

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15 ON-NET CORPORATE

Data & Next Gen Voice Phone & BB (retail and w’sale) Carrier Legacy Voice Growth Gross Margin 20%+

• 20%

TalkTalk Group

Carrier

Over 30% of FY16 Group revenue

Off-Net

Corporate On-Net

Phone & BB (retail and w’sale) Data & Next Gen Voice Legacy Voice

Continue to expect TalkTalk Business to grow faster than the group, doubling in size over time

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FY 16/17 FY 15/16 Simpler fault management Simpler order provisioning Omni-channel service Simpler credit and billing

Harmonised trouble ticketing Improve processes Exception mgmt. PEGA foundations Case managed end to end order experience Webchat Re-platformed website Credit scorecards Complaints on PEGA Retire legacy CRM Service fixes, e.g. address

FY 17/18 Simpler network

New network design More capacity for Fibre DLM upgrade Agent diagnostics Omni-channel fault mgmt Pro-active fault mgmt Router Replatform current provisioning systems Simpler billing Collections on PEGA Non-Pay disconnects

1 2 1 2 1 2 1 2 1 2

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Making TalkTalk Simpler benefits in FY16 Benefits in FY17 and beyond £21m incremental savings from:

• Fewer complaints
• Fewer, shorter calls
• Fewer engineer visits
• Lower churn

c2.5m customers’ experience improved Expecting £35m - £40m incremental benefits in FY17 £90m delivered from programme in total since FY14 Annualising at substantially over £90m from FY18 Pivotal to brand and financial transformation

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FY16 FY15 Year on Year £’m £’m Headline Revenue 1,838 1,795 +2.4% Gross Profit 993 980 +1.3% Margin 54.0% 54.6% Operating costs (473) (426) +11.0% SAC & Marketing (260) (309)

• 15.8%

Headline EBITDA 260 245 +6.1% Margin 14.1% 13.6% +50bp Profit after tax 79 76 +3.9% Headline EPS 8.4p 8.2p +2.4% Dividend per Share 15.87p 13.80p +15.0%

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On-net revenue growth of 5.0% supported by ARPU growth, offset by declining voice usage and mix Continuing growth of Data and Carrier in Corporate, offset by Legacy Voice H2 reflects impact of cyber in Q3 and lower base in Q4 Off-net decline reflects sale of consumer off-net base to Fleur

+3.5% +5.9% +0.2% Q1 16 Q2 16 +2.2% Q3 16

• 1.7%

Q4 16 +4.7% £1,795m £1,838m £32m £28m £66m £23m £14m FY15 On-Net Data Carrier Off-Net Voice FY16

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1.04 1.12 1.24 1.35 1.46 1.56 1.64 1.70 H1'13 H2'13 H1'14 H2'14 H1'15 H2'15 H1'16 H2'16

RGU / On Net Base

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Growing RGU penetration and pricing offsetting mix and declining voice usage

Impact of SIMs given

• ut in Free Upgrade

£26.97 £28.53

£0.57 £0.24 £1.51 £0.86 FY15 Price and proposition New products Voice Mix FY16

Minimal impact on RGU/Customer from Free Upgrades post cyber

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Significant step up in H2 gross margin and gross profit Mix impact includes phasing of some procurement savings into FY17 Lower mobile data usage impact in H2 compared to H1

H2: £506m 54.5% H1: £487m 53.4%

54.6% 54.0% 1.0% 0.3% 0.1% 1.0% 0.6% 0.6% 1.8% FY15 Pricing & Proposition Non-Pay Disconnections MTTS Corporate Data Mobile Data Usage Usage Mix FY16

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£245m £228m £2m £2m £19m £1m

FY16 H1 Transformation Infrastructure Innovation MTTS FY16 H2

£426m £473m £31m £13m £15m £12m

FY15 Transformation Innovation Infrastructure MTTS FY16

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Transformation costs include MTTS, property related costs; and management overheads and

• perational resourcing

Innovation costs: mobile, FTTP and blinkbox £17m reduction from H1 to H2

• Transformation costs lower than H1

Year on Year H2 on H1

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£152m £108m £24m £6m £7m £8m FY16 H1 SAC Marketing MTTS Cyber Attack FY16 H2

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Reduced volumes in Broadband and TV CPAs down across all products Channel mix improvement MTTS benefits of £7m from improvements in provisioning process and reduced churn / leakage Cyber impact £8m Lower volumes Reduced marketing spend

Year on Year H2 on H1

£309m £260m £3m £9m £29m £7m £7m FY15 Broadband TV Fibre MTTS Mobile FY16

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Opex £12m SAC £7m £21m FY16

Gross Margin £2m

FY17e £35m-£40m FY15 FY14 £15m £17m £90m+

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Cyber £42m

£83m £88m FY16 FY17e Beyond £30m - £35m Cyber costs in line with guidance MTTS costs in line with indication at H1 FY17 charge expected to be significantly lower Cyber cash expense lower than P&L charge due to timing of certain technology costs FY17 and beyond will also see run-off of payments under exited property leases

MTTS £41m Cyber £32m Migrations £17m MTTS £34m

£25m-£30m FY16 FY17e

P&L Charge Cash Expense

Other £5m

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MTTS £37m Innovation £34m £166m FY16 Network expansion and resilience MTTS:

• Some brought forward spend as a result of

cyber attack Innovation:

• mobile billing and CRM systems build
• first phase of thick core equipment
• Ultrafast (FTTP) systems

Expect FY17 capex to return to 6-7% of revenue Underlying £95m

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£589m £679m £166m £88m £22m £12m £135m £260m £10m £63m FY15 Net Debt EBITDA Working Capital Share Sale Capex Exceptionals Interest & Tax Acquisitions Dividends FY16 Net Debt

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Net Debt / EBITDA 2.4x Net Debt / EBITDA 2.6x

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FY16 Results in line with our guidance in February – strong recovery in Q4 metrics and strong uplift in H2 EBITDA margin Year end gearing lower than at H1 FY17 Modest revenue growth EBITDA £320m-£360m Dividend at least in line with FY16 and covered by Free Cashflow Net debt at year end broadly similar to that at year end FY16 Net Debt / EBITDA expected to continue to fall towards 2x target

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Quad-play an offensive move Fast growing B2B Making TalkTalk Simpler delivering Mobile and Fibre to the Premise

Focused on execution

Great Value For our Customers

Fixed line economics bring cost advantage

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Owned equipment in 3,000+ Unbundled Exchanges – 96% coverage Exchange Backhaul 10Gbps upgrade completed in FY16

Reducing the cost of capacity, and strengthening the economics of carrying data traffic

Street cabinet Fibre to the Cabinet Exchange Collector Node Ethernet

Regulatory cost advantage All IP National Optical Network:

• Planned investment in edge and access topology (within

capex at 6%-7% of revenue)

• Improving customer experience and reducing costs
• scaling efficiently to future proof for growth in fibre,

ethernet demand and mobile

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Package Bundle Simply broadband Unlimited £7.5 Sky Broadband Unlimited £10 Broadband & Calls 50 Mb £19 Unlimited Broadband + Weekend calls £20 Line Rental £17.70 £17.40 £17.99 £18.99 Monthly non – promo cost(incl LR ) £25.20 £27.40 £36.99 £38.99 One off costs £6.75 £6.95 £9.99 £7.95 18 month Total £460.35 £500.15 £675.81 £709.77 Saving with TT £39.80 £215.46 £249.42 Benefits of TalkTalk package

• Better router
• Free privacy features
• Anytime TalkTalk to TalkTalk

calls

• 1 Security license for free
• No calls
• Privacy features

£8.60p/m

• Inferior router
• £10 Price hike after

12 months

• Only weekend calls
• £69.95 security renewal
• Inferior router
• Privacy features £7.20p/m
• £11 price hike after 12 months
• Only weekend calls
• Weaker security option with less

devices covered

• Inferior router
• Privacy features £13.55p/m

Prices correct 27/04/16

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Clear Price Advantage Better Customer Experience from Making TalkTalk Simpler Clearer, more customer friendly bundles Great Value for Money Provider We have always had this Customers have begun to see the improvements, more to come Quad play attractive; simpler products to come Long term sustainable position

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THIN MVNO WITH VOD THIN MVNO WITH O2 THICK MVNO WITH O2 FEMTO ROLLOUT WITH TT SPECTRUM

• Reseller

economics based

• n new entrant

volumes

• 3G
• 700k customers
• New SIM market

share 14%

• Improved

reseller economics reflecting scale and growth of base

• 4G
• Unbundled

economics (similar to LLU) from building own core mobile network

• National roaming
• Better customer

experience

• Offload drives

down cost/Mb

• Better in-home

experience

• Integrated inside
• ut network
• Units in testing
• Ofcom spectrum

approval underway 2013-16 FY17 FY18 FY18+

Improved economics will enable us to drive volume

• Inside out

mobile network

• Structurally

lower costs

• Significantly

better customer experience

700k customers 4m customers

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Progress to date 8,000 homes passed and ready for service Costs significantly below plan (<£500 per home) Customer trial completed at end of March › Excellent feedback on product, service and process › 90% of trial participants chose to stay and pay £21.70pm (two-thirds were not originally TalkTalk customers) › Commercial sales to date have delivered c7% take- up in 2 months Next steps Voting in other areas of York for next phase of build Expect to trial poles using Openreach passive access Delivering take-up (30%-40%) Review next phase roll-out in H2 Longer term Potential to roll-out to c10m homes in 2nd tier cities with population 50k-150k

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Openreach Business products falling in price after Business Connectivity Market Review › Ethernet prices down by over 35% › Introduction of dark fibre will reduce costs over time › Service Level Guarantees should drive better performance from Openreach Next Ofcom review of Wholesale Local Access likely to reduce input costs in FY18 and beyond › Applying latest cost attribution review should bring down MPF costs › Expect a VULA charge control which should reduce fibre costs over time Openreach separation being seriously considered › All options will reduce BT Group’s ability to abuse vertical integration Switching regulations will help TalkTalk drive quad play growth

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TalkTalk has recovered strongly since the cyber attack › Our open and honest approach has been appreciated by customers › Making TalkTalk Simpler and growth in quad play are delivering measurable benefits for customers and the business › Resulting in churn at its lowest level Continuing strong performance from TTB, driven by profitable data revenues FY16 financials in line with guidance › Significant step up in EBITDA in H2 › Net debt/EBITDA reduced from H1 as expected Reiterating FY17 guidance Value for Money strategy unchanged, focus is on better execution as demonstrated in Q4

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£m FY16 HEADLINE FY16 EXCEPTIONALS FY16 STATUTORY EBITDA 260 (83) 177 Depreciation (72) (72) Amortisation (49) (10) (59) Share of JV’s (8) (8) Interest (24) (24) PROFIT BEFORE TAX 107 (93) 14 Tax (28) 16 (12) Effective Tax Rate 26% PROFIT AFTER TAX 79 (77) 2 EPS 8.4p 0.2p DPS 15.87p 15.87p

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As at 6 May 2016

Revenue (£m) EBITDA (£m) EBITDA % Net Debt FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY17 FY16 FY17 FY18 1,849 1,821 1,774 225 263 279 12.2% 14.4% 15.7% 716 818 814 1,840 1,868 1,887 242 285 303 13.2% 15.3% 16.1% 703 774 784 1,833 1,888 1,981 259 347 415 14.1% 18.4% 20.9% 725 732 706 1,837 1,873 1,945 249 318 356 13.6% 17.0% 18.3% 708 740 710 1,865 1,909 1,980 259 326 374 13.9% 17.1% 18.9% 677 695 667 1,837 1,865 1,918 262 345 401 14.3% 18.5% 20.9% 689 714 679 1,849 1,920 2,029 258 341 393 14.0% 17.8% 19.4% 722 744 713 1,852 1,866 1,900 260 360 393 14.0% 19.3% 20.7% 1,862 1,920 1,982 257 303 317 13.8% 15.8% 16.0% 693 747 795 1,843 1,876 1,902 258 325 369 14.0% 17.3% 19.4% 739 772 743 1,844 1,878 1,949 260 332 332 14.1% 17.7% 17.0% 681 722 758 1,858 1,907 1,963 263 298 337 14.2% 15.6% 17.2% 730 798 834 1,849 1,860 1,946 252 327 432 13.6% 17.6% 22.2% 746 835 812 1,851 1,905 1,958 254 336 398 13.7% 17.6% 20.3% 658 685 676 1,844 1,867 1,925 260 273 294 14.1% 14.6% 15.3% 676 775 856 1,840 1,849 1,899 257 299 345 14.0% 16.2% 18.2% 722 753 688 1,836 1,887 1,998 263 341 419 14.3% 18.1% 21.0% 651 682 633 1,856 1,882 1,882 265 320 320 14.3% 17.0% 17.0% 1,847 1,880 1,934 256 319 360 13.8% 17.0% 18.6% 702 749 742 +2.9% +1.8% +2.9%

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Simply BB Simply BB w/Fibre Essentials TV Plus TV £460.35 £690.35 £498.60 £678.60 £500.15 £715.15 £870.15 £1050.15 £709.77 £866.77 £830.77 £1264.77 £675.81 £675.81 £765.81 £945.81

Unlimited Broadband & PayT Fibre Unlimited & PayT Original TV & Unlimited Broadband & PayT Variety TV & Unlimited Broadband & PAYT Unlimited Broadband & Weekend Calls Unlimited Infinity 1 & Weekend Calls Starter TV & Unlimited Broadband & Weekend Calls Entertainment Plus & Unlimited Infinity 1 & Weekend Calls SuperFibre 50 & Calls SuperFibre 50 & Calls Big Easy Big Bang UL BB and UL TalkTalk to TalkTalk calls UL Fibre (38mpbs) and UL TalkTalk to TalkTalk calls Unlimited BB, YouView TV and Eve & Weekend Calls Unlimited BB, YouView +TV, Sky entertainment channels, and UL Calls

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FY13 FY14 FY15 FY16 H1 H2 H1 H2 H1 H2 H1 H2

KPIs On-Net Broadband & Voice (m) 3.162 3.295 3.402 3.570 3.656 3.775 3.728 3.658 Broadband Only (m) 0.642 0.575 0.526 0.490 0.449 0.402 0.369 0.338 Total On-net Base (m) 3.804 3.870 3.928 4.060 4.105 4.177 4.097 3.996 On-net Churn (p.m.) 1.6% 1.5% 1.6% 1.6% 1.4% 1.3% 1.5% 1.7% Mobile (m) 0.117 0.175 0.236 0.284 0.348 0.464 0.596 0.699 Fibre (m) 0.030 0.073 0.142 0.207 0.308 0.479 0.578 0.704 TV (m) 0.000 0.230 0.557 0.917 1.217 1.414 1.439 1.389 Ethernet and EFM lines 7,100 10,200 13,700 17,400 21,600 26,200 30,700 35,100 Off-net Broadband (m) 0.239 0.193 0.148 0.136 0.116 0.106 0.092 0.076 Voice (m) 0.407 0.358 0.315 0.282 0.242 0.226 0.209 0.205 Total Broadband (m) 4.043 4.063 4.076 4.196 4.221 4.283 4.189 4.072 Revenue (£m) On-net 573 597 612 642 648 685 697 702 Off-net 95 83 69 59 46 41 27 28 Corporate 160 162 162 178 177 198 188 196 Total 828 842 843 879 871 924 912 926 On-net ARPU (£) 25.27 25.93 26.16 26.79 26.45 27.57 28.08 28.63

1 FY14 H2 revenue adjusted to reflect exceptional item resulting from HMRC ruling on VAT treatment 1 1