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

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

5

6

1.50% 1.60% 1.70% Q4 12 Q1 13 Q2 13 13.3 10.6 8.3 8.1 6.7 H1'11 H2'11 H1'12 H2'12 H1'13 13,400 14,400 7,900 7,600 4,800 H1'11 H2'11 H1'12 H2'12 H1'13 (27) (43) (50) (13) (19) (4) Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13

*

Net Adds Stabilising Falling Ofcom complaints Reducing Customer service calls Improving Churn

* Excluding Bulldog adjustment

Making Talktalk Simpler: £30m-£50m

• ver 3-5yrs

Material growth Adding incremental value All customers on-net Expand capacity 100x Lower churn Higher ARPU

Expand Margin Grow Revenue

Operating efficiencies B2B Fibre Largest unbundled UK network Value for money quad play

£50m completed; started next phase with £10m savings actioned Strong growth in data services 30,000 customers 94% on-net 2,695 exchanges unbundled Launched TV and mobile handsets

7

Unbundled 187 in H1 Will unbundle a further 300 in FY14 More over time as costs per exchange fall and ARPU grows Attractive fixed line economics support cost-efficient network investment as demand grows: › Invested in resilience and capacity in H1; further investment in H2 › Scaling capacity by 50-100x over medium term

8

1,854 2,007 2,338 2,695 Q1'11 Q4'11 Q3'12 Q2'13 77% 86% 90% 94% Q1'11 Q4'11 Q3'12 Q2'13

Continuing scope to unbundle... ...and increase % of base On-net...

9

Simpler for TalkTalk = Better for Customers = Lower cost to operate Identified further £30m - £50m of incremental savings over next 3-5yrs from improving systems and processes H1 initiatives implemented: › Simplification of IT outsourcing › Restructuring of TTB systems and processes › £10m of annualised savings

£25m Phase 1 £15m Phase 2 £10m Back Office Simplification Improving Customer Service Call Volume Reduction Customer Service Rationalisation

Handset offer launched in August – available

• nly 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

11

Q1 Q2 Q3 Beyond

Proposition for Essentials Ongoing product development Self-install Trialling processes



Testing and de-bugging box



Developing training



Building website



In home trials



Dedicated TV service team



Pre-registration for Plus customers only



All customers require engineers visit



Training of all agents before selling starts



Started connecting 27th Sept 2012



Above the line advertising from YouView and TalkTalk



Good demand since launch 29,000 customers 1,000 per day



Beginning to scale as per plan

12 The ordering process was slick and easy. Communications were great. The catch up TV is great, accessing historical shows via the TV guide is very simple and I have stumbled across quite a few good new TV shows/series this way. The Players, which are available, are great, it is easier than going online to catch up on any programmes, which I have missed. Being able to pause and rewind TV and have so much more choice.

Highly satisfied with installation process3

1 TV Trials Satisfaction Survey, Sample size 384 2 TV Install Survey, Sample size 920

9 out of 10 of customers highly satisfied with YouView and EPG1 8 out of 10 customers highly satisfied with installation process2 8 out of 10 customers highly satisfied with TV from TalkTalk1 +26 points difference in the NPS

• f new TV customers vs. new

phone & broadband customers

13 3.8m 3.2m 4.0m 2.0m

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

0.8m

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

• peration to enable growth across all four customer segments

14

Data Services driving Revenue growth Four distinct customer markets

H1 12 H1 13 Data Carrier Voice +31% revenue growth +20% revenue growth Other

Partner

Enterprise

SoHo SME Carrier

4 7 10 12 3 9 12 H1 11 H2 11 H1 12 H2 12 H1 13

39 360 519 775 952 73 592 1,540 2,071 H1 11 H2 11 H1 12 H2 12 H1 13

15 Ethernet and EFM Installations

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

Contract value of installations in period

Ethernet EFM

£5m £24m £19m £10m

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

17 B2B Operating Efficiencies Fibre Value for money quad play Largest UK Unbundled Network

Base Growth from 20% of UK not online Offnet decline Base Growth from lower churn Plus Mix Mobile + TV, content ARPU Data and Carrier Fibre demand grows with TV Making TalkTalk Simpler: £30m- £50m p.a. Growing Data services Lower gross margin % Growth in fully unbundled mix Lower SAC from lower churn Higher margin Plus Lower costs to serve

2% REVENUE CAGR 25% EBITDA MARGIN

Legacy Voice Investment in network TV Content gross margin % Declining lower margin legacy Voice SAC to build TV and mobile Base growth for TV

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

21 £ 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%

Expected decline in off-net usage continues Continued growth in corporate data products and carrier offsetting voice decline Fully unbundled growth and ARPU expansion close to offsetting off-net decline Expected usage decline Price/Mix driven shift to fully unbundled and pricing changes Upsell driven by Plus penetration, fibre and MVNO take up

22

£66m £10m £6m £6m £18m £30m

H1 12 Off-net decline Corporate Voice Corporate Data Carrier On-Net Base On-Net ARPU H1 13

£828m £844m £24.00

0.40 0.90 0.80

£25.30

H1 12 Usage Price/Mix Upsell H1 13

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

(Average H1 13) £27.50 £15.00 £22.10 £18.10 £9.80 £6.80 £16.00 £8.60 £5.00 Fully Unbundled (MPF) BB Only (SMPF) Off-Net (IPS, Voice, CPS) ARPU Gross Margin Contribution

Full £25m of back office simplification benefit in FY13 - additional £5m benefit from improving Customer Services Network investment in exchange roll out and backhaul

24

Good start to mobile and fibre base growing Increase in dual play connections yoy and modest increase in marketing spend Connection costs from data growth in TTB

£75m £9m £4m £2m £90m H1 12 MVNO & Fibre Dual Play TTB H1 13 £214m £3.5m £19.5m £10m £208m H1 12 OPEX Phasing Operating Efficiencies Network investment H1 13 OPEX SAC SAC

FY13 Exceptional spend significant reduction yoy Purchase of participant shares in VES schemes £56m returned through commitment to dividend growth Net cash outflow of £4m

25

£434m £104m £7m £35m £8m £2m £56m £438m Net Debt b/f FCF Exceptionals Share Purchase Interest Acquisitions Dividend Net Debt c/f

26 Revenue Return to growth Growth H2 weighted Operating Expenses Broadly flat Network investment absorbing Opex efficiencies Underlying EBITDA margin 20 – 21 % H2 weighted Exceptionals Minimal cash Outflow in H1 Inflow in H2 Capex 6% revenue Investment H2 weighted Dividend Minimum 15% growth TV Investment One-Off £15-20m £8m in H1

Continued pressure from usage and Off-net decline from churning higher ARPU, but lower value customers On-net growth from mix (Plus) and fully unbundled base Continued on-net base growth in H2 Additional products start to contribute to ARPU Corporate growth driven by strength in data revenues

27

H1 FY13 Usage Offnet Mix & Price Base Growth TV, Fibre & Mobile Data FY guidance: Revenue growth £828m

28

Benefits of gross margin improvement flow through to EBITDA Opex reductions reinvested in the network in H2 SAC spend (excluding TV) flat H2 on H1 as reducing cost per add funds growth

£155m H1 FY13 Phasing Gross Margin Operating Efficiencies Network investment FY guidance: 20%-21% margin

H1 H2 Phasing as in previous years Mix, upsell and pricing drive revenue growth and margin expansion Base returning to growth

13.6% 17.7% 15.6% 17.3% 20.3% 18.8% 18.7% 21-22% 20-21% H1 H2 FY FY11 FY12 FY13 £155m £146m £171m £317m

*

29

*Excluding £9m profit on disposal of Great Barr Street

£ million H1 13 FY 13 Operating Efficiencies 6 9 Making TalkTalk Simpler 3 11 P&L Charge 9 20 Net Cash Outflow 7

• 30

Full £50m of operating efficiencies now achieved (c. £5m additional benefit in FY14) New Making TalkTalk Simpler programme started in H1; expect annualised cash cost

• f c1x savings

Continue to expect settlement of historic dispute in H2

H1 13 H1 12 Earnings £68m £68m Headline EPS – Basic 7.8p 7.6p Weighted Average Basic 874m 900m Average Share Price 167p 137p Dilution

• VES (TTG & CPW)
• TTG Schemes
• CPW Legacy scheme

50 16 2 29 1 8 Weighted Average Diluted 942m 938m Headline EPS – Diluted 7.2p 7.2p Dividend per share 3.45p 2.6p 31

Weighted average share count includes holding in EBT, expect c.883m at FY13 Interim dividend reflects 15% growth commitment and 1/3 weighting

On track to deliver all FY guidance First half performance › Mix drives margin expansion › Benefits of cost efficiency programmes › Investing for growth Margin expansion strength and phasing drives H2 profitability

32

A brighter place for everyone

Appendices

34 £ million Statutory Headline Comments EBITDA 138 147 P&L exceptional – TV investment Other 3

• Share based payment £3m

Adjusted EBITDA 141 147 Working capital (6) (5) Share based payment: (£3m); Exceptional creditor movement: (£5m); VES Settlement; £6m Capex (38) (38) Operating FCF 97 104 Exceptionals

• (7)

Exceptional cash spend Share buyback (35) (35) Acquisitions (2) (2) Tax and interest (8) (8) Dividends (56) (56) Cash outflow (4) (4)

35

H1 13 FY13 * FY12 Share Count Shares 914 914 914 Issued in Period 17 17

• Total shares in issue

931 931 914 Weighted Average Shares Shares in issue (weighted) 915 923 914 Held in EBT (weighted) (41) (40) (29) Shares for Basic EPS 874 883 885 Dilution Total shares for Basic EPS 874 883 885 VES 50 37 31 TTG Schemes 16 18 3 CPW legacy schemes 2 2 6 Shares for diluted EPS 942 940 925

*Estimated using weighted average Share price of £1.76

36

10 MB EFM MPF & SMPF Broadband SFBB 100 MB Gig < £20 p.m. From £25 p.m. From £1,000 p.m. From £350 p.m. From £100 p.m.

Asymmetric, asynchronous, Contended, business SLAs, <2Meg upstream Symmetric, synchronous, non-contended, business-grade SLAs, high speeds High speed non symmetrical

37

Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 y-o-y On-Net Broadband & Voice 2.827 2.910 2.966 3.066 3.096 3.162 9% Broadband Only 0.815 0.758 0.712 0.689 0.669 0.642 (15%) Total On-net 3.642 3.668 3.678 3.755 3.765 3.804 4% Churn 1.7% 1.6% 1.6% Unbundled 87% 89% 90% 92% 93% 94% Fully Unbundled 68% 70% 73% 75% 77% 78% Plus 0.667 0.764 0.883 1.026 1.092 1.097 44% MVNO 0.027 0.038 0.045 0.061 0.085 0.117 2.1x Homesafe 0.054 0.149 0.228 0.320 0.440 0.518 2.5x Fibre 0.001 0.003 0.005 0.008 0.015 0.030 9.0x Off-net Broadband 0.530 0.461 0.401 0.311 0.282 0.239 (48%) Voice 0.621 0.573 0.525 0.476 0.436 0.407 (29%) Total Broadband 4.172 4.129 4.079 4.066 4.047 4.043 (2%) Revenue On-net 261 263 276 284 285 288 10% Off-net 85 77 67 58 49 46 (40%) Corporate 77 81 79 79 80 80 (1%) Total 423 421 422 421 414 414 (2%) ARPU On-net 24.00 23.99 25.05 25.45 25.27 25.37 6% Off-net 23.41 23.49 22.79 22.57 21.71 22.48 (4%) Exchanges Unbundled in period 30 171 130 170 83 104 Total unbundled 2,037 2,208 2,338 2,508 2,591 2,695

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Collector Node

Copper Fibre

Exchange Backhaul 1Gbps optical circuit supplied by BTOR

• r VM

Unbundled Exchange MSAN & DSLAM Collector Node to extend reach

• f Core Network

Collector Ring 10Gbps optical circuit or dark fibre supplied by BTW, SSE, GEO, VM and Eirecom Core Optical Network 2 separate national DWDW networks with 8Tbps (Huawei) and 1,6Tbps (Infinera) capacity

A brighter place for everyone

Q&A