Preliminary Results 16 May 2013 2 FY10/11 FY12/13 Only Phone and - - PowerPoint PPT Presentation

A brighter place for everyone

Preliminary Results

16 May 2013

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FY12/13 Fastest growing TV business in UK Fastest growing ethernet business in the UK Churn reducing, customer base growing, far fewer complaints and service calls Hugely committed (but smaller) team, focused

• n fewer sites. Everyone a shareholder

EBITDA 21%, DPS 10.4p One consumer billing system, one network, reduced duplication, £105m saving

Now in a great position to drive growth

Only Phone and Broadband No TV, Mobile, Ethernet, Homesafe, or Fibre No one said they worked for TalkTalk but we had sites everywhere EBITDA 16%, DPS 5.6p High churn, losing customers, most complained about telco Complex infrastructure, duplicated operations, networks and multiple billing systems post- acquisition FY10/11

4

£276m £317m £352m

15.6% 21.1% 18.8% +11%

• Excludes £62m of costs relating to investment in TV (FY12: excludes £9m profit on disposal of freehold property), exceptional income (FY12: charge) and amortisation of acquisition intangibles.

Earnings for both years excludes related tax based on Headline effective tax rate, FY12 also includes a one off tax credit.

13.5p 17.2p 20.6p +20%

• 9%

£438m £434m £393m 5.6p 9.0p 10.4p +15%

Underlying* EBITDA and Margin Underlying* EPS Dividend per Share Net Debt

(27) (43) (50) (13) (19) (4) 10 10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1.4% 1.5% 1.6% 1.7% Q4'12 Q1'13 Q2'13 Q3'13 Q4'13

5

FY11 FY12 FY13

Ofcom Complaints Churn Net Adds

FY11 FY12 FY13

Customer Calls

23.8m 13.9m 16.2m 28k 15k 9k

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

Lower churn +ve net adds £10m savings actioned 1.9% Corporate revenue growth y-o-y 29% growth in data 73,000 customers – demand increasing gradually 95% On-net 2,724 exchanges unbundled Launched TV and mobile Strong growth and +ve feedback

FY13 – Returned the business to growth

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

Lower churn +ve net adds £10m savings actioned 1.9% Corporate revenue growth y-o-y 29% growth in data 73,000 customers – demand increasing gradually 95% On-net 2,724 exchanges unbundled Launched TV and mobile Strong growth and +ve feedback Making TalkTalk Simpler £30m - £50m savings Accelerating data growth = revenue & margin expansion Modest but growing demand Expect stronger regulation 300 exchanges in FY14, potential for more Expanding capacity 50x - 100x Scaling TV & mobile = lower churn and higher ARPU

FY13 – Returned the business to growth We have strong momentum to deliver our medium term targets

Added 150,000 TV customers in Q4 25% of customers new to TalkTalk Self-install launched in Q4 to complement engineer install Exited year at 12,000 net adds per week

8 80,000 230,000 Q2 Q3 Q4

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Freeview or Freesat 72% Switchers from Existing PayTV Providers 28% Live and catch-up Freeview channels 89% Pay content 11%

MAJORITY OF TV CUSTOMERS FROM FREEVIEW/FREESAT CUSTOMERS SPEND MOST TIME WATCHING LINEAR TV AND LOVE THE FREE CATCH-UP

Entertainment 40% Movies 22% Kids 15% Sport 6% Other 17%

20% HAVE BOUGHT CONTENT: FAMILY, ENTERTAINMENT, KIDS AND FILMS

20 point improvement in Net Promoter Score vs. Phone & Broadband Our TV customers are very happy with the process of signing up, installation (both engineer and self-install), and the functionality offered by our set top box Improvement in NPS sustained as base has scaled We are seeing lower churn from TV customers than equivalent dual play customers 7 out of 10 TV customers say they are more likely to stay with TalkTalk beyond their contract period than they were on dual play

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TV is improving our customers’ overall satisfaction and loyalty to TalkTalk

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Launch Proposition

FREE YouView Box 7 day catch up Pause, Rewind, and Record Freeview channels Unlimited access to 4,000 shows 69 premium channels including all Sky Sports and Movies available in bundles 1 month at a time Engineer and Self Install Options Broader range of ethnic content Broader choice of TVOD including blockbusters from £3.00 New channels: Digital Theatre, Karaoke Channel HD TVOD

Available Now

Essentials proposition planned for autumn: Makes TV available to whole base No PVR 1 tuner Flexible content More content: More ethnic and specialist channels

Planned for 2013/14

TalkTalk Plus TV Sky Entertainment Virgin Media Essentials Collection & Talk Unlimited BT Unlimited Broadband & TV Essential Unlimited Downloads Unlimited Downloads Unlimited Downloads Unlimited Downloads Anytime Calls Anytime Calls Anytime Calls Anytime Calls

Freeview (70 Channels) Entertainment (40 Channels) TV M+ (100 Channels) Freeview (70 Channels) Catch Up TV Catch Up TV Catch Up TV Catch Up TV TalkTalk Player (VoD) Anytime + (VoD) & Sky Go Fibre Optic as Standard BT Vision (VoD)

Sky Sports 1-5 & F1 add-on available

1m at a time Sky Sports 1-5 & F1 add-on available

• n subscription

Sky Sports 1-5 & F1 add-on available

• n subscription

Sky Sports 1-2 BT Sports Channels inclusive

Triple Play Price

£15.50 £34.00 £34.00 £28.00

Value Line Rental

£9.50 £9.95 £10.00 £10.75

Monthly cost (inc VLR)

£25.00 £43.95 £44.00 £38.75

Up front cost

• £55.95

18 months (inc up front cost)

£450.00 £791.10 £792.00 £753.45 12

Source: TalkTalk management data, TalkTalk Omnibus (Pay TV ARPU data), OC&C analysis

7.0m

Pay TV Lovers

6.5m

Mismatched

3.5m

Rejectors

1.5m

Dis- interested

5.0m

Pay TV Wannabees

2.5m

Price- Aware

Attitudes to Pay TV

Freeview Sky BT FreeSat Virgin Media TalkTalk Plus TalkTalk Essentials 13

Available only to TalkTalk customers Wide range of handsets No upfront handset charges Three simple tariffs starting from £5 per month Pays back within 24m contract term ARPU and EBITDA accretive Handsets launched in August 175,000 customers Mobile customers showing lower churn than dual play

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Who takes mobile from TalkTalk? 21% have previously bought an upsell product from TalkTalk 67% were previously Pay as You Go What they buy: 7 out of Top 10 tariffs are Small - 39% of total sales 3 out of Top 10 tariffs are Medium - 10% of total sales What they’re saying: 65% of over 55’s did not consider any other provider Easy to understand tariffs; easy set-up; clear billing Over 20 points improvement in NPS vs. dual play

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Revenue Margin

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DATA Significant opportunities in all channels Continued expansion of Ethernet family Opportunities with integrators and public sector via partners CARRIER Core revenue and new market growth Continued expansion of international trading New opportunities in data VOICE Continued declining trend in legacy voice Opportunity in next generation products STRONG GROWTH IN HIGH MARGIN PRODUCTS Data vs. Voice Ethernet family New Next Gen Voice MAKING TALKTALK SIMPLER Business and Enterprise Grade service centres Simpler systems and processes

Corporate revenue up 1.9% Strong momentum in data (+29%) and carrier (+10%) revenues Key business wins highlight the benefits of

• ur low-cost, state of the art network:

Post Office contract Virgin Media ethernet deal Iceland Retail Group data and voice network

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Corporate Revenue

FY12 FY13 Data Carrier Voice Data Carrier Voice +29% +10%

• 5%

£316m £322m

£18.0m £20.9m £23.5m £26.8m H1 FY12 H2 FY12 H1 FY13 H2 FY13

18 Ethernet and EF M Installations

Ethernet and EFM gaining real traction – 10,000+ installed base at year-end Fastest growing ethernet provider in UK with highest number of Points of Presence Network capability underpins growth opportunity in all our Next Generation products and enables us to deliver great value for money

Data products and services revenue

5,431 Q1 Q2 Q3 Q4 7,086 8,696 10,261

43,000 customers added in H2 vs. 22,000 in H1, taking base to 73,000 Overall demand in our base is still modest Actively selling 76Mbps product – to sub 3Mbps base to support TV demand Launched fibre for business customers Fibre customers: Revenue and EBITDA accretive Reduced churn and costs to serve Incremental SAC, pays back in 18m contract term Expect stronger regulation to deliver greater certainty over economics, which will make driving take-up more attractive

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Will unbundle a further 300 in FY14 Potential for more over time as costs per exchange fall and ARPU grows Attractive fixed line economics support cost-efficient network investment as demand grows: Investing in resilience and capacity Scaling capacity by 50-100x over medium term

20 Continuing scope to unbundle... …and bring customers fully on-net

1,742 2,007 2,508 2,724 >3,000 53% 66% 75% 81% 74% 86% 92% 95% FY10 FY11 FY12 FY13 Total unbundled Fully unbundled

Rebranded Tiscali customers Migrated email platform Migrated customers onto IP Network Closed legacy networks One billing system

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£55m Tiscali Integration

Restructured back office functions Improved customer service Reduced customer call volumes Consolidated off-shore and

• n-shore contact centres

£50m Back office Simplification and Improving Customer Service £10m actioned in FY13 Further £20m-£40m in 2-4 years Making TalkTalk Simpler

Simplified B2B service centres Consolidated IT development Maximise online self-serve End to end process simplification and automation Fewer calls, better trained and better equipped agents

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

Base Growth from 20% of UK not online Off-net decline Lower churn ARPU growth Content Data and Carrier Making TalkTalk Simpler: £30m- £50m p.a. Growing Data services Growth in fully unbundled mix Lower SAC from lower churn Lower Cost per Add Gross margin % 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 and Lower Churn Lower SAC from lower Churn Building gradually

A momentous year for TalkTalk, returning the business to growth Focused on our heartland of value seeking customers Now the fastest growing new TV service in the UK Good traction in mobile TalkTalk Business building strongly We are making TalkTalk Simpler and will deliver £30-£50m savings

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On track to deliver 2% revenue CAGR and 25% EBITDA margin

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25 £ million FY 13 FY 12 Growth Revenue 1,670 1,687

• 1%

Underlying EBITDA 352 317 +11% Underlying EBITDA Margin 21.1% 18.8% Underlying EPS 20.6p 17.2p +20% Investment in TV (62)

• Sale of freehold property
• 9

Headline EBITDA 290 326

• 11%

Headline EBITDA Margin 17.4% 19.3% Profit Before Tax 165 215

• 23%

Tax (33) (56) Effective Tax Rate 20.0% 26.0% Profit After Tax 132 159

• 17%

Headline EPS 14.9p 18.0p

• 17%

(1,2)

(1) Excludes £62m of costs relating to investment in TV (FY12: excludes £9m profit on disposal of freehold property). Earnings for both years excludes related tax based on Headline effective tax rate (2) Excludes net exceptional income (FY12: charge) and amortisation of acquisition intangibles. Earnings for both years excludes related tax, FY12 also excludes a one-off tax credit

(2) (1,2)

26 £ million FY 13 FY 12 Growth Underlying EBITDA 352 317 11% Investment in TV (62)

• Sale of freehold property
• 9

Headline EBITDA 290 326

• 11%

Working Capital (11) (14) Capex (104) (105) Operating free Cashflow 175 207

• 15%

OFCF margin 10.5% 12.3% Interest and taxation (16) (26) Free Cashflow 159 181

• 12%

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Expected voice usage decline Continued shift to fully unbundled TV, Mobile + fibre take up Off-net now less than 10% of revenue Overall growth in Corporate 66k on-net adds in the half On-net ARPU up 3.5% y-o-y in Q4

£828m £2m £9m £15m £842m £12m £0.81 £0.42 £0.33 £25.47 £26.37

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Declining lower margin Off-net base Improving TTB margin through data products Product mix and price changes Fully unbundled base growth

0.1% 0.8% 0.8% 52.4% 55.0% 0.9%

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£25m of back office simplification benefit, additional Operating efficiencies - £50m now delivered Network investment in exchange roll out and backhaul Reduction in other overheads in line with cost base contraction £3m initial savings from MTTS – part of £10m actioned

£415m £15m £7m £3m £395m £25m

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Continued growth in mobile and fibre Fewer migrations y-o-y reduces dual play SAC Increased connection costs from data growth in TTB Investment in TV One off spend £23m TV SAC at £165 average cost per connection

£152m £4m £172m £23m £234m £21m £3m £39m

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H1 H2 Phasing as in previous years Benefits from margin expansion Cost reductions funding increase in underlying SAC

13.6% 17.7% 20.3% 23.4% 15.6% 18.8% 21.1% 17.3% 18.7%

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FY13 Exceptional credit from Ethernet settlement Purchase of participant shares in VES schemes £87m returned in dividend Building strength for future investment £41m net cash generated in year

£434m £8m £35m £4m £393m £159m £87m

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Continued commitment to minimum 15% dividend growth

Revenue At least 2% + ARPU + Corporate + Base Growth Operating Expenses Flat as a % of revenue

• Investing in Network
• New product support at scale

+ Making TalkTalk Simpler SAC & Marketing Peak Year

• TV growth, - FY of mobile and fibre

+ Reducing cost per TV add Net Debt 6% revenue + Good core cash generation

• Investment in growth
• Exceptional and Tax
• Share Purchase

Capex Headroom for Growth Continued investment in Network Capacity and resilience

FY13 Strong underlying financial performance Returned to revenue growth Step up in gross margin and delivered 21.1% underlying EBITDA Launch of TV £41m net debt reduction to fund future growth FY14 – Year of Growth Strong momentum in new products Healthy balance sheet and capacity to fund Commitment to minimum 15% dividend growth FY15 and beyond – Step up in profitability Strong EBITDA growth Gross Margin Reducing costs Lower SAC Continued commitment to dividend growth

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A brighter place for everyone

Appendices

16 May 2013

36 £ million FY 13 FY 12 Growth Underlying Earnings 182 152 +20% Headline Earnings 132 159

• 17%

Weighted average shares in issue 924 914 Weighted average shares in employee trust (40) (29) Shares for basic EPS calculation 884 885 Underlying EPS – Basic 20.6p 17.2p +20% Headline EPS – Basic 14.9p 18.0p

• 17%

Dilutive Effect of share

• ptions

56 40 Shares for diluted EPS Calculations 940 925 Underlying EPS - Diluted 19.4p 16.4p +18% Headline EPS - Diluted 14.0p 17.2p

• 19%

Underlying earnings of £182m is defined as Headline earnings excluding costs of £62m relating to the investment in TV less an allocation of taxation of £12m based on the Group’s headline effective tax rate. Underlying earnings of £152m for the year ended 31 March 2012 is defined as Headline earnings excluding the profit on sale of a freehold property of £9m less an allocation of taxation of £2m based on the Group’s Headline effective tax rate.

37 Statutory Headline Comments EBITDA 299 290 P&L Exceptional £9m Other 5

• Share based payment £6m;

Profit on disposal (£1m) Adjusted EBITDA 304 290 Working capital (17) (11) Share based payment : (£6m) Capex (104) (104) Operating FCF 183 175 Exceptionals

• 8

Exceptional Cash Share buy back (35) (35) Acquisitions and disposals (4) (4) Tax and interest (16) (16) Dividends (87) (87) Cash inflow 41 41

38 £ million FY 13 FY 12 % Reduction P&L (Credit) / Charge (9) 27 133% Ethernet Settlement (27) Operating Efficiencies 11 Making TalkTalk Simpler 7 Cash (inflow) / outflow (8) 45 118% Ethernet Settlement (27) Operating Efficiencies 14 MTTS 5

Full £50m of Operating Efficiencies now delivered with £25m benefit in FY13 New Making TalkTalk Simpler programme started in FY13; expect £30 – 50m savings to be delivered over 5 years. Similar level of exceptional spend to be incurred

FY12 FY13 On-Net Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Broadband & Voice 2.827 2.91 2.966 3.066 3.096 3.162 3.231 3.295 Broadband Only 0.815 0.758 0.712 0.689 0.669 0.642 0.609 0.575 Total On-net 3.642 3.668 3.678 3.755 3.765 3.804 3.840 3.870 Churn 1.7% 1.6% 1.6% 1.5% 1.5% Unbundled 87% 89% 90% 92% 93% 94% 95% 95% Fully Unbundled 68% 70% 73% 75% 77% 78% 80% 81% Plus 0.667 0.764 0.883 1.026 1.092 1.097 1.109 1.177 MVNO 0.027 0.038 0.045 0.061 0.085 0.117 0.152 0.175 Homesafe 0.054 0.149 0.228 0.32 0.44 0.518 0.730 1.144 Fibre 0.001 0.003 0.005 0.008 0.015 0.03 0.052 0.073 TV 0.080 0.230 Off-net Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Broadband 0.53 0.461 0.401 0.311 0.282 0.239 0.213 0.193 Voice 0.621 0.573 0.525 0.476 0.436 0.407 0.380 0.358 Total Broadband 4.172 4.129 4.079 4.066 4.047 4.043 4.053 4.063 Revenue (£m) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 On-net 261 263 276 284 285 288 292 305 Off-net 85 77 67 58 49 46 43 40 Corporate 77 81 79 79 80 80 80 82 Total 423 421 422 421 414 414 415 427 ARPU (£) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 On-net 24.00 23.99 25.05 25.47 25.27 25.37 25.47 26.37 Off-net 23.41 23.49 22.79 22.57 21.71 22.48 23.13 23.31 Exchanges Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Unbundled in period 30 171 130 170 83 104 22 7 Total unbundled 2,037 2,208 2,338 2,508 2,591 2,695 2,717 2,724

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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