Interim Results 13 November 2012 Chairman 2 Chief Executive 3 - PowerPoint PPT Presentation

A brighter place for everyone Interim Results 13 November 2012

Chairman 2

Chief Executive 3

Best net adds performance in two years Continuing success in upsell › 44% growth in Plus base – 1.1m customers, 29% of on-net base › +32,000 mobile in Q2 – 4% of September contract connections Improving customer experience driving down churn Corporate up modestly but trending strongly in data services TV launched successfully › 29,000 installed base since launch › Currently connecting approx 1,000 customers per day On track to deliver FY13 financials 4

13% 6% EBITDA (£m)* EPS (p)* 8.6 155 7.6 146 121 5.5 H1 11 H1 12 H1 13 H1 11 H1 12 H1 13 7% 33% DPS (p) OFCF (£m)* 104 3.45 97 2.6 61 1.7 H1 11 H1 12 H1 13 H1 11 H1 12 H1 13 * Excluding exceptional items and TV costs 5

Reducing Customer service calls Improving Churn 13.3 1.70% 10.6 8.3 8.1 6.7 1.60% 1.50% H1'11 H2'11 H1'12 H2'12 H1'13 Q4 12 Q1 13 Q2 13 Falling Ofcom complaints Net Adds Stabilising Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 14,400 13,400 (4) 7,900 7,600 (13) (19) 4,800 (27) (43) (50) H1'11 H2'11 H1'12 H2'12 H1'13 * * Excluding Bulldog adjustment 6

Grow Revenue Expand Margin Largest Operating Value for money unbundled UK B2B Fibre efficiencies quad play network Making Talktalk All customers on-net Lower churn Adding incremental Simpler: £30m-£50m Material growth Expand capacity 100x Higher ARPU value over 3-5yrs £50m completed; 94% on-net started next phase Launched TV and Strong growth in data 30,000 customers 2,695 exchanges mobile handsets with £10m savings services unbundled actioned 7

2,695 Unbundled 187 in H1 Continuing scope to unbundle... 2,338 2,007 1,854 Will unbundle a further 300 in FY14 More over time as costs per exchange fall and ARPU grows Attractive fixed line economics Q1'11 Q4'11 Q3'12 Q2'13 support cost-efficient network investment as demand grows: ...and increase % of base On-net... › Invested in resilience and capacity 94% 90% in H1; further investment in H2 86% › Scaling capacity by 50-100x over medium term 77% Q1'11 Q4'11 Q3'12 Q2'13 8

Improving Back Office Customer Service Simplification Simpler for TalkTalk = Better for Customers = Lower cost to operate Phase 2 £10m Identified further £30m - £50m of incremental savings over next 3-5yrs from improving systems and processes £25m Phase 1 H1 initiatives implemented: £15m › Simplification of IT outsourcing › Restructuring of TTB systems and processes › £10m of annualised savings Customer Service Rationalisation Call Volume Reduction 9

Handset offer launched in August – available only to TalkTalk customers › Wide range of handsets from entry price to Galaxy S3 › No upfront handset charges › Three simple tariffs starting from £5 per month Pays back within 24m contract term ARPU and EBITDA accretive Positive churn impact over time 32,000 new customers in Q2, base 117,000 (SIM and handset) c4% share of contract connections in Sept (Gfk) 10

Q1 Q2 Q3 Beyond   Pre-registration for Trialling processes Self-install Plus customers only Above the line  advertising from   All customers YouView and TalkTalk Testing and Proposition for Essentials require engineers visit de-bugging box   Training of all agents Ongoing product Developing training before selling starts development Good demand since launch  29,000 customers   Started connecting 1,000 per day Building website 27th Sept 2012  Beginning to scale In home trials as per plan  Dedicated TV service team 11

9 out of 10 of customers highly The Players, which are available, are great, it is satisfied with YouView and EPG 1 easier than going online to The ordering catch up on any process was slick programmes, which I have 8 out of 10 customers highly and easy. missed. satisfied with installation Communications were great. process 2 8 out of 10 customers highly Being able to pause and satisfied with TV from TalkTalk 1 rewind TV and The catch up TV is great, have so much accessing historical shows via Highly satisfied with installation process 3 more choice. +26 points difference in the NPS the TV guide is very simple and I have stumbled across of new TV customers vs. new quite a few good new TV phone & broadband customers shows/series this way. 1 TV Trials Satisfaction Survey, Sample size 384 2 TV Install Survey, Sample size 920 12

Off-net Partially Unbundled 0.2m < 3 Mbps – not fibre enabled 0.2m < 3 Mbps – in fibre enabled area 4.0m 3.8m 3.2m 2.0m > 5 Mbps 0.8m > 3-5 Mbps TalkTalk Base On-Net/Off-Net Fully/Partially Delivered Speed Unbundled 13

Four distinct customer markets Data Services driving Revenue growth Data +31% revenue growth Carrier Carrier +20% revenue growth SoHo Partner SME Enterprise Voice Other H1 12 H1 13 Corporate revenue £160m (H1 FY12: £158m), real momentum in data and carrier Post Office contract (impact from FY14: 200,000+ customers) highlights ability to partner with major systems integrators to leverage our network Restructuring TTB systems and processes to create a business grade, customer aligned operation to enable growth across all four customer segments 14

£24m Ethernet and EFM Installations Contract value of installations in period 2,071 £19m 12 1,540 9 952 £10m 775 3 592 519 12 £5m 360 10 7 73 39 4 H1 11 H2 11 H1 12 H2 12 H1 13 H1 11 H2 11 H1 12 H2 12 H1 13 Ethernet EFM Ethernet and EFM gaining real traction ISDN 30 and Superfast Business Broadband launched in November, both offering significant cost savings vs. BT Network capability underpins growth opportunity in Next Generation products 15

30,000 customers - acceleration of demand in H1 from a modest base Actively selling 76Mbps product – initial focus on sub 3Mbps base to support TV demand Fibre customers attractive: › Revenue and EBITDA accretive › Reduces churn and costs to serve › Incremental SAC, pays back in 18m contract term More active regulation would deliver greater certainty over economics 16

Largest UK Operating Value for money Unbundled B2B Fibre Efficiencies quad play Network 2% REVENUE CAGR Base Growth Base Growth Data and Fibre demand Plus Mix from 20% of from lower grows with TV Carrier UK not online churn Base growth for TV Mobile + TV, Offnet decline Legacy Voice content ARPU 25% EBITDA MARGIN Growing Data Lower costs to Making TalkTalk Lower SAC from Growth in fully services Simpler: £30m- serve lower churn unbundled £50m p.a. mix Declining Higher margin lower margin Plus legacy Voice Investment in TV Content Lower gross network margin % gross margin % SAC to build TV and mobile 17

Q2 our best trading quarter in 2 years Underlying financial performance for H1 provides strong platform for growth Material progress towards medium term plan › More profitable customers, taking more products › TV launch gone well › Good start in mobile › B2B building momentum › Making TalkTalk Simpler – a continuing opportunity to be more efficient 18

Chief Financial Officer 19

£ million H1 13 H1 12 Growth Revenue 828 844 -1.9% Gross Profit 453 435 4.1% Gross Margin 54.7% 51.5% +320bps Opex (208) (214) -2.8% EBITDA pre SAC & Marketing 245 221 10.9% SAC & Marketing (90) (75) 20.0% Underlying EBITDA 155 146 6.2% Margin 18.7% 17.3% - TV costs (8) - - Headline EBITDA 147 146 0.7% Margin 17.8% 17.3% - 20

£ million H1 13 H1 12 Growth Headline EBITDA 147 146 +0.7% Working capital (5) - - Capex (38) (49) - Operating free cashflow 104 97 +7.2% OFCF margin 12.6% 11.5% - Interest and taxation (8) (9) - Free cash flow 96 88 +9.1% 21

£66m £844m Expected decline in off-net usage continues £30m £828m Continued growth in corporate data products £18m and carrier offsetting voice decline £6m £10m £6m Fully unbundled growth and ARPU expansion close to offsetting off-net decline H1 12 Off-net Corporate Corporate Carrier On-Net On-Net H1 13 decline Voice Data Base ARPU £25.30 Expected usage decline 0.80 £24.00 Price/Mix driven shift to fully unbundled and 0.90 0.40 pricing changes Upsell driven by Plus penetration, fibre and MVNO take up H1 12 Usage Price/Mix Upsell H1 13 22

£27.50 £22.10 £18.10 £16.00 £15.00 £9.80 £8.60 £6.80 £5.00 Fully Unbundled (MPF) BB Only (SMPF) Off-Net (IPS, Voice, CPS) (Average H1 13) ARPU Gross Margin Contribution 44% more Plus customers and increase in unbundled base (+252k) Increase in on net ARPU to £25.30 Impact of new LLU pricing from April 2012 23

£3.5m £19.5m £214m £10m £208m Full £25m of back office simplification benefit in FY13 - additional £5m benefit from improving Customer Services Network investment in exchange roll out and backhaul H1 12 OPEX Phasing Operating Network H1 13 OPEX Efficiencies investment £90m £2m Good start to mobile and fibre base growing £4m £9m Increase in dual play connections yoy and £75m modest increase in marketing spend Connection costs from data growth in TTB H1 12 MVNO & Dual Play TTB H1 13 SAC SAC Fibre 24