Preliminary Results FY19 23 May 2019 Agenda 2. Financial Review - - PowerPoint PPT Presentation

Preliminary Results FY19

23 May 2019

Agenda

5. Q&A 1. FY19 Overview

Tristia Harrison

3. Our Plan

Tristia Harrison

4. Outlook

Tristia Harrison

2. Financial Review

Kate Ferry

1 1 TalkTalk Group PLC

FY19

Overview

Good momentum with year on year base, Fibre, revenue and EBITDA growth

Strong market position Total Headline revenue (ex-Carrier & Ofg-net) up 2.2%, with On-net revenue up +3.9% Headline EBITDA growth of 16.7% to £237m Year on year growth driven by a larger average base, increased Fibre penetration and a materially lower cost base Increasing Fibre mix with 490k net adds ; 150k broadband net adds Continued momentum in FibreNation roll-out and investment partner process

3 TalkTalk Group PLC - Overview

Financial Review

Strong momentum on KPIs; acceleration of Fibre; EBITDA in line with guidance

Growing Consumer ARPU

Q4’17

Data Revenue On-net Churn On-net ARPU

Q1’18 Q1’18 Q2’18 Q2’18 Q3’18 Q3’18 Q4’18 Q4’18 Q1’19 Q1’19 Q2’19 Q2’19 Q3’19 Q3’19 Q4’17

Fibre Net Adds

Q1’18 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19 Q4’19 Q4’19 Q4’17

Total FLPP Base

BB Net Adds

Q1’18 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19

+2.2% +6.8%

Revenue ex-Carrier & Ofg-net

Q1’18 Q1’18 Q2’18 Q2’18 Q3’18 Q3’18 Q4’18 Q4’18 Q1’19 Q1’19 Q2’19 Q2’19 Q3’19 Q3’19 Q4’19 Q4’19

1.4% 1.2% 1.4% 1.3% 1.2% 1.3% 1.1% 1.2% 1.2% 22 20 26 37 109 80 24 44 73 72 89 89 98 67 125 146 152 2 25.1 26.0 25.2 24.9 24.7 25.2 24.7 24.7 42 36 42 42 43 43 44 43 367 375 375 396 382 389 386 387

5 TalkTalk Group PLC - Financial Review

FY19 (£m) FY18 (£m) Headline revenue 1,609 1,605 Headline revenue (excluding Carrier and Ofg-net) 1,544 1,511 Gross profit 850 831 Margin 52.8% 51.8% Operating costs & SAC (613) (628) Headline EBITDA 237 203 Margin 14.7% 12.6% Headline profit after taxation 69 (7) Headline EPS (Basic) 6.0p (0.7p) Dividend per share 2.50p 4.00p

Revenue growth from bigger base and Fibre penetration Gross profit improvement driven by lower Fibre wholesale pricing and growth in high margin data products Operating costs reduced due to central cost savings and cost to serve efficiencies Underlying CPA stable

Year on year revenue and EBITDA growth

N.B. The above numbers apply IFRS 15 and 9 to both the current year and the prior year under the full retrospective approach

6 TalkTalk Group PLC - Financial Review

2.2% growth in Headline revenue excluding Carrier and Off-net

Fibre penetration Larger average base Uptake of sensibly priced add-ons, i.e. call boosts and Wi-Fi Hub Data revenue growth from larger base and higher bandwidth product uptake Voice usage revenue decline in Consumer and B2B

6.8%

Data revenue growth

3.9%

On-Net revenue growth

7 TalkTalk Group PLC - Financial Review

Lower costs of goods sold; increasing gross profit and margin

Higher average base leads to greater gross profit Existing Fibre base benefiting from lower input costs from WLA and BTOR discounts Data revenue growth from larger base and higher bandwidth product uptake Voice usage revenue decline in Consumer and B2B

Gross profit margin of

52.8%

up 100bps Gross profit of

£850m

up 2.3%

8 TalkTalk Group PLC - Financial Review

Significantly reduced cost base with lower cost to serve and management overheads

FTE reduction from FY18 redesign of organisational structure Move to self-service model has seen fewer calls and engineer visits driving lower cost to serve Lower outsource partner costs Driving down cost per Gb FibreNation costs recognised within Group structure in FY19 Data usage increasing exponentially increasing traffic on the network Higher SAC costs associated with the exit of a previous distribution agreement

Operating costs

£15m

lower than last year More

savings

to come

9 TalkTalk Group PLC - Financial Review

Estimated cost savings from move to one Salford campus and associated re-organisation

Announcement made to employees in November 2018 We now have clear visibility of the efficiencies and headcount reduction Many roles relocating, in particular Consumer commercial teams Significant recruitment drive has started for roles in North West, with opportunities for existing employees Employees are leaving in phased approach, with first cohort in March 2019, and then September and December 2019 FY20 £21-£26m

£16m-£20m £5m-£6m

£25-£30m Annualised Cash Savings

£19m-£23m £6m-£7m People & Property Capex

10 10 TalkTalk Group PLC - Financial Review

Cash flow in line with our expectations

Cash generative in H2 Working capital inflow principally due to the receipt

• f supplier compensation

relating to prior years and timing of supplier payments Investments represent our continued contribution to YouView JV FY18 final dividend payment

• f 1.5p

Debt covenant: 3.1x *

FY19 (£m) FY18 1 (£m)

Opening Headline Net Debt 745 819 Headline EBITDA 237 203 Working Capital 11 (3) Capital Expenditure (113) (128) Operating Free Cash Flow 135 72 Interest & Taxation (50) (47) Free Cash Flow 85 25 Non-Headline items (47) (73) Investments (7) (8) Dividends (28) (71) Share Issue

• 201

Net Cash Flow 3 74 Closing Headline Net Debt 742 745 Finance Leases 39 31 Closing Net Debt 781 776

1

As part of the adoption of IFRS 15, net debt at March 2018 has been restated by £21m to reflect an inventory repurchase programme previously in place. This programme ended during FY19 and no such arrangement was in place at March 2019.

* As calculated for the purposes of the Group borrowing facilities

11 11 TalkTalk Group PLC - Financial Review

Cash Capex continuing to reduce

FY17 £133m FY18 £128m FY19 £113m

FibreNation FibreNation £13m

£105m-£115m FY20

Network & Fibre Connectivity Systems Other (Compliance, Consumer CPE, etc.)

12 12 TalkTalk Group PLC - Financial Review

Doing fewer things, with focus fully

• n fixed

connectivity

Non-Headline items lower year-on-year

P&L – EBITDA

• HQ move and associated re-organisation

(£22m), Network transformation (£15m) and MVNO operating profit (£3m)

Cash

• Exceeds above P&L costs due to timing of

prior year mobile exit payment and Group restructure payments related to prior year activity

Looking forward

• Cash items will continue to exceed P&L

items due to timing of final mobile exit payments in FY20 and HQ move and associated re-organisation cash payments FY19 FY18 P&L £93m Cash £73m P&L £34m Cash £47m

13 13 TalkTalk Group PLC - Financial Review

Exceptional items relating to HQ move and associated re-organisation

People costs relate predominantly to redundancy payments, as well as recruitment and relocation costs Dual running costs relate to salary costs during the transition period Onerous costs from facilities contracts Indicative timing FY19 FY20 P&L Charge £22m £3m-£8m Cash £2m £23m-£28m People Dual Running Consultancy costs Onerous costs £25m-£30m Exceptional Items

14 14 TalkTalk Group PLC - Financial Review

IFRS 16

IFRS 16 Leases is the new accounting standard to cover lease accounting and replaces IAS 17 For TalkTalk the main area this impacts is arrangements within our network, e.g. Backhaul circuits, Data centres Certain assets are considered outside the scope of IFRS 16, e.g. space in exchanges, last-mile IFRS 16 is effective from 1 April 2019:

• Expect to recognise discounted lease liabilities of between £215m-£225m (unaudited)
• EBITDA to increase
• Net debt to increase as it will include lease liabilities
• Treatment of leases within capex and normalised free cash flow will be unchanged

Covenant calculations unaffected by IFRS 16 (continue under IAS 17) We won’t be restating FY19 under IFRS 16, and will provide numbers throughout FY20 under both IFRS 16 and IAS 17

15 15 TalkTalk Group PLC - Financial Review

Summary

Good momentum on customer metrics, with accelerated Fibre take-up leading to revenue growth Regulatory pricing and commercial discount agreements saw improvements to both gross profjt and gross profjt margin year on year Lower operating costs due to FTE reduction and move to self-service model 16.7% growth in Headline EBITDA Cash generative in the year and strong in H2

16 16 TalkTalk Group PLC - Financial Review

Our Plan

Market context validates strategy

A number of structural factors changing our market:

• Rapid rise in demand for data; 30-40% year-on-year, of which 58% is video
• Premium TV being replaced by growth of streaming services (e.g. Netflix and YouTube)
• Businesses, as well as Consumers, using more and more data with rise of voice over

internet (e.g. Skype) and cloud services

• Price and fairness really matter – regulators challenging traditional telco business models built on ‘loyalty

penalties’

TalkTalk well positioned to benefjt:

• Scale in B2B and Consumer (barriers to entry are high)
• Single minded focus on fixed connectivity, unencumbered by having to defend premium TV or mobile
• Structural pricing advantage in both segments
• Delta between front and back book pricing is minimal
• Reducing cost base

18 18 TalkTalk Group PLC - Our Plan

There has never been such demand for reliable and affordable fixed connectivity

Medium term shape; acceleration in higher speed and bandwidth products, structural price advantage,

• ngoing cost reductions

FY19 £m Over the medium term Drivers Revenue 1,609 Revenue Modest growth

Fibre penetration, Sensibly priced add-ons

Costs of Sales (759) Costs of Sales Modest increase

Increased Fibre mix offset by lower Wholesale pricing

Gross Margin 850 / 52.8% margin Gross Margin % Stable Operating expenses (613) Operating expenses Signifjcantly lower Cost to Serve Lower

Self service

Management Overheads Lower

HQ move and

• rganisational structure

Network & IT Flat

Increased usage offset by reduced cost per Gb

SAC & Marketing Lower

Shift to digital marketing

EBITDA 237m / 14.7% margin EBITDA Ongoing growth

Underpinned by vast majority of customers on Fibre products

19 19 TalkTalk Group PLC - Our Plan

Our plan remains the same and consists of six clear priorities

4

Cost Reduction

1

Consumer

2

B2B

3

Network & Connectivity

5

One Salford Campus

6

Fibre for Everyone

20 20 TalkTalk Group PLC - Our Plan

Simple, clear plan; leading to growth in ARPU and EBITDA, and cash generation

Our unique, fairer Fixed Low Price Plans continue to have real resonance with a 10-15% price delta vs competitors Continue to improve in-home connectivity to cope with rising demand for data Our new router, the Wi-Fi Hub, provides our fastest, strongest, most reliable Wi-Fi signal A higher mix of customers are now taking Fibre products; up to 70% of new Consumer customers and 40% of total base (Consumer and B2B) Leading to lower cost to serve and improved churn

Consumer - Structural price advantage, accelerating Fibre mix and reducing cost to serve

21 21 TalkTalk Group PLC - Our Plan

Fairer broadband for everyone

TalkTalk - Average Front v Back Book (£) Many of our competitors are at c.£10-£15 delta

22 22 TalkTalk Group PLC - Our Plan

FY19 FY20 Back Front Back Front £1-2 £1-2

Well positioned for future regulation

• n pricing

Acceleration of Fibre mix; lower churn, improving NPS, lower cost to serve and improving ARPU and Gross Margin

Legacy products Improving customer NPS VOICE COPPER FIBRE 40 FIBRE 80 G.Fast/FTTP 150 G.Fast/FTTP 300 FTTP 1GB 2025 Future proofed products 2019 Improving ARPU - £25 up to £40

23 23 TalkTalk Group PLC - Our Plan

Fibre customers double the lifetime value with c.50% lower CTS and lower churn

Further Consumer ARPU opportunities outside of Fibre (capital light, relevant add-ons)

TV Mobile Enhanced Security Voice

24 24 TalkTalk Group PLC - Our Plan

Industry-leading self-service tools; ‘My Service Centre’ rolled out at scale

TalkTalk slow broadband

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Your Usage

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Your Router

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Your Local Area

There are no known incidents in your local area affecting your connection

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• 7Mb. Your Actual Speed 5Mb

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Our health check shows that your internet has been disconnecting

Your broadband connection overview

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Your Usage

Your speed is struggling to cope with your recent usage: 42Gb Find out more

Your Router

Our health check shows you’re using one of our latest routers and its firmware is up to date Find out more

Your Local Area

There are no known incidents in your local area affecting your connection

Your Account

Your acount is active and you have no open cases

Your Line Speed

Your Estimated Speeds 4Mb -

• 7Mb. Your Actual Speed 5Mb

Find out more

Your Stability

Our health check shows that your internet has been disconnecting

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Your line is giving you connectivity problems. Upgrade to fibre broadband for a faster, more reliable connection.

Our health check’s showing that your line is causing connectivity issues with your broadband. It could be to do with how far you are from the exchange or the quality of the line. Your broadband uses older copper cables which can struggle to keep up with you and your online usage. There’s an easy fix though. By upgrading to fibre you’ll get up to 3x more speed than with your current plan, and because fibre uses modern fibre optic cabling you’ll enjoy a much more reliable connection too.

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31 31

‘My Service Centre’ is leading to a material improvement in cost to serve metrics

Improves customer experience:

• 45% reduction in complaints and 20% reduction in

customers leaving after a repair

Reduces contact centre demand and costs:

• 10% reduction in repeats calls and 25% reduction in

escalations

Reduces engineer demand and cost:

• 40% reduction in in-home engineers and fewer

chargeable BT Openreach engineer visits

32 32 TalkTalk Group PLC - Our Plan

The use

• f data driven

diagnostics has seen an increase in self-service and reduced costs to serve

Strong momentum in B2B (Direct and Wholesale)

B2B Direct B2B Wholesale

Customer Base Over 100k SME, corporate and enterprise Direct customers Britain’s largest provider of wholesale broadband with over 50% market share. 650 active partners, including resellers, Wholesalers and Carriers – serving over 1m end customers Target End Customers SOHO, SME, Corporate & Enterprise Consumer, SOHO, SME, Corporate & Enterprise, FTSE, Public Sector Our services TTB Direct offers a wide range of data connectivity solutions, from business broadband and fibre, through to high-value Ethernet circuits and Wide Area Networks A full suite of ethernet products allow us to serve business from SMEs to Enterprise as well as Public Sector and our unrivalled exchange footprint gives us the reach and scale to deploy nationwide full fibre at great value

Wholesale & Partner Direct c.17%

Highly resilient Tier 1 network

33 33 TalkTalk Group PLC - Our Plan

Structural price advantage, accelerating higher bandwidth product mix

B2B; a wide range of customers

Partners & Carriers Direct

plus SOHO, SME and Corporate

34 34 TalkTalk Group PLC - Our Plan

We work with some of the leading partners, carriers and Direct customers in the industry

Shift to higher bandwidth B2B products

Product Upgrades Shift to Higher Bandwidth products

Strong ARPU and margin growth | Reducing costs to serve | Continued base growth

Contribution to Broadband Access Margin Contribution to Data Access Margin

ADSL FTTC inc SOGEA G.Fast & FTTP Ethernet <1Gb Ethernet =>1Gb

FY19 B2B2C Business Grade FY20

Next Gen Ethernet Ethernet EoFTTC EFM ADSL FTTC/SoGEA G.Fast FTTP Upgrade Path Upgrade Path

Speed

FTTP

35 35 TalkTalk Group PLC - Our Plan

30-40% increase in data usage year-on-year Customers are upgrading to our higher speed products in both Consumer and Business

Exceptional data usage driven by OTT Video and Cloud services

Peak Traffic Proportion of Video traffic FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 7 1.75 5.25 3.5

Peak Traffjc Tb/s

Data Growth

Browsing Video

42% 58%

36 36 TalkTalk Group PLC - Our Plan

Unlimited data products for businesses and consumers continue to drive network usage to new record peaks within our Network

We have enhanced our customers video experience by caching an average of 87%

• f video content within the

network

Leveraging our network and optimising costs and service for both B2B and consumer segments

FY17 FY18 FY19 FY20 FY21 FY22

Not Cached Cached

13% 87%

Driving down cost per Gb

37 37 TalkTalk Group PLC - Our Plan

Cost per Gbps peak traffic (£)

We are meeting data usage demands, whilst reducing

• ur cost per

Gb by evolving

• ur network

Simpler, leaner cost base - optimisation continues

Making good progress resetting TalkTalk as a simpler, lower cost business Now deliver non-core products (TV and mobile) in capital light way Significantly reduced the cost of core products – meaningful reductions in wholesale FTTC we pay Openreach Relentless focus on reducing central costs – as simplify the business, have a smaller, lower cost

• perating model

Rigorous review of all external spend – ensure it aligns with smaller set of priorities Transitioning to self-serve model. New digital tools, such as ‘My Service Centre’, enable customers to diagnose and fix issues without contacting us. Improves customer satisfaction whilst reducing

• ur costs

38 38 TalkTalk Group PLC - Our Plan

Cost reduction - material shift towards digital marketing

Transition to more targeted marketing that delivers lower CPA and an IRR on every £1 spent Replacing traditional advertising with investment in digital channels Enables us to target customers with right CLV profile Reduce use of price comparison websites – effective at driving volume, but can be lower CLVs and higher propensity to churn Allows more rigorous targeting of the right customer cohorts, whilst reducing our SAC costs and churn

39 39 TalkTalk Group PLC - Our Plan

One TalkTalk Team

Our simplification has led to us being a leaner, more efficient business Enables further consolidation to one main campus. Further reduces complexity and cost. Annualised cash savings of c. £25-30m Transition over 2019. Hiring underway and ahead of schedule;

• c. 50% of roles filled or offer made

Partnering with local universities to recruit specialist tech talent. Significant expansion of apprenticeship and graduate talent Recruiting for a wide range of highly skilled roles - technology, digital, commercial, product, billing Launched significant employer brand campaign in the North West to attract the best talent

40 40 TalkTalk Group PLC - Our Plan

With the TalkTalk HQ moving to Salford; we are creating one main campus and a more efficient

• perating model

Fibre for Everyone - today

Driving scale adoption of part Fibre products WLA and commercial deal has reduced wholesale FTTC prices Underpins lower churn, lower cost to serve, growing ARPU and EBITDA growth

41 41 TalkTalk Group PLC - Our Plan

Acceleration to Fibre products in Consumer and B2B

Fibre for Everyone - FibreNation

Full Fibre (FTTP) rollout is only viable where networks can secure high, fast take-up. With 4.3m customers, TalkTalk is one of a few providers than can use its position in the market to accelerate FTTP investment at scale Accelerating roll out plans; three new towns and cities – Harrogate, Knaresborough and Ripon Total footprint of over 100,000 homes in these towns and cities (including York) TalkTalk and Sky to continue to be wholesale partners of the new network In discussions with infrastructure investors on the right long-term capital structure to enable roll out to target of 3m homes. Teaser document released in 2019 IM (Information Memorandum) released this week

42 42 TalkTalk Group PLC - Our Plan

Fibre for Everyone - Openreach

Openreach’s scale rollout is only viable if it can secure high, fast take-up from companies such as TalkTalk While FibreNation has a critical role to play, we want all consumers and businesses to enjoy the benefits of faster, more reliable connectivity We are therefore ready to be a wholesale partner for Openreach and other providers in the areas FibreNation does not reach Subject to fair, sensible pricing, we can provide scale volume commitments to Openreach

43 43 TalkTalk Group PLC - Our Plan

Outlook

Looking forward, FY20 EBITDA growth with Headline EBITDA (including FibreNation costs) in line with market expectations

FY20 growth driven by:

Accelerated Fibre growth, coupled with modest base growth, benefitting revenue and ARPU, offset by Voice usage decline Regulatory and commercial tailwinds reducing Fibre Wholesale costs Lower cost to serve, as we benefit from the implementation of our ‘My Service Centre’ and a self-service model Lower central costs, due to our HQ move to Salford (£16m-£20m in FY20) Significantly lower FibreNation costs

Beyond FY20 - continued EBITDA growth driven by:

Increasing Fibre mix in the base, with shift to higher speed Fibre products, driving higher ARPU Fibre mix will also lead to reduced churn and lower cost to serve Further central cost reductions as we become leaner, more efficient business

45 TalkTalk Group PLC - Outlook

A very simple business; medium term look forward

Reducing debt levels Simpler, leaner cost base Improved ways

• f working

Fairer pricing - £1-2 front vs back book delta

Materially lower cost base Move to self-service model with Data Driven Diagnostics Fewer priorities Structural price advantage – meaningful savings over contract life

Revenue and ARPU growth Fibre acceleration Single Salford campus Price certainty – Fixed Low Price Plans

Sustainable EBITDA and cashflow growth Focused business model Capable, energised team Unique customer

• ffer

x x

46 TalkTalk Group PLC - Outlook

Summary

Summary

Our plan is on track and working We have strong structural positions in both of our segments; Consumer and B2B, underpinned by Fibre acceleration Simplifjcation is leading to signifjcant cost reductions and we’re not fjnished yet Our network optimisation and plans for FTTP mean we’re well positioned for the future

48 48 TalkTalk Group PLC - Financial Review

Q&A

Appendix

IFRS 15 and 9 restated comparatives

IFRS 15 Headline Financials (£’m) Q1’18 Q2’18 Q3’18 Q4’18 H1’18 H2’18 FY’18 Q1’19 Q2’19 Q3’19 Q4’19 H1’19 H2’19 FY’19

Total revenue 399 402 401 403 801 804 1,605 400 408 401 400 808 801 1,609 On-net revenue 298 310 303 305 608 608 1,216 309 320 316 318 629 634 1,263 Off-net revenue 9 5 6 2 14 8 22 3 4 3 3 7 6 13 Corporate revenue 92 87 92 96 179 188 367 88 84 82 79 172 161 333

Data revenue 42 36 42 42 78 84 162 43 43 44 43 86 87 173 Voice revenue 27 29 30 47 56 77 133 30 26 26 26 56 52 108 Carrier revenue 23 22 20 7 45 27 72 15 15 12 10 30 22 52

Total revenue excluding Carrier and Off-net 367 375 375 394 742 776 1,511 382 389 386 387 771 773 1,544 EBITDA 74 129 203 101 136 237

51 51 TalkTalk Group PLC