Preliminary Results 17 MAY 2012 Agenda 1. Introduction Charles - - PowerPoint PPT Presentation

Preliminary Results

17 MAY 2012

Agenda

1. Introduction Charles Dunstone (Chairman) 2. Review of the year Dido Harding (CEO) 3. Financial review Amy Stirling (CFO)

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4. Longer term strategy Dido Harding (CEO) 5. Q&A

Charles Dunstone

Chairman

Introduction

Dido Harding

Chief Executive

Review of the year

Significant strategic progress

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

EXPAND MARGIN GROW REVENUE

1 5 5

20% EBITDA margin achieved in H2 H2 on H1 Revenue stable

93% on-net 93% on-net £40-50m £40-50m BB, Voice, TV, Mobile BB, Voice, TV, Mobile Exploit network advantage Exploit network advantage Future proof service delivery Future proof service delivery 92% on-net, 3m customers fully unbundled £50m actioned More profitable and stable base, ARPU growth, TV launch Q2 Revenue stable, Data growing 80/20 launched, commercials attractive

Target Actual

Delivering the strategy

EBITDA (£m) EPS (p) 6 DPS (p) OFCF (£m)

Real improvement in customer numbers

Total Net Adds 7 Fully Unbundled (MPF) Net Adds

Considerably more valuable customers

Broadband ARPU Growth Unbundled customers 8 Improved customer mix

Successful upsell propositions

FY10 FY11 FY12 % Growth Plus base 130k 580k 1,020k 76% Mobile base – 34k 72k 112%

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Paid Boosts base 690k 1,060k 1,320k 25% HomeSafe activations – – 320k N/A

Improving customer experience

Customer Service Calls Complaints to Ofcom 10 1st Time Fix Online customer interaction

£50m cost savings actioned

Back Office Simplification Improving Customer Service

Phase 1 Phase 2

• Restructured Technology,

Finance, HR and other back

• ffice functions
• 540 headcount reduction
• Call volume reduction
• Consolidated offshore

sites

• Closed Waterford call
• Call volume reduction
• On-shore consolidation

Operating efficiencies Annualised

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FY12 £50m £23m

centre

£25m £18m £15m £5m £10m –

(Proposals announced April 2012)

On track for TV launch in Q2

APPROVED DEVELOP TRIAL PILOT LAUNCH

Sept 2010 Sep-Dec 2011 Jan-Mar 2012 Apr-Jun 2012 Jul-Sep 2012

BBC trust and Ofcom approves YouView Shareholders committed Huawei Set-top Box Youview Software Platform Provisioning flows CRM Compatibility Operational Readiness E2E trial Customer Experience Friends and Family Recruiting engineers Extension of the trial to test: a) Scale b) Resilience Gradual ramp-up of activity to ensure great customer experience Above the Line from September 12

TalkTalk Business in a good position to grow

B2B Revenue

(£m)

New Ethernet Connections

• B2B revenue stable over the year

→ MTR reductions → Legacy voice decline as expected → Acquisitions to plan

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• New ethernet connections growing

strongly

• FY12 ethernet exit revenue run rate
• f £8.4m per annum
• Investment in systems and process

to scale high growth

A growing and profitable role in fibre

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• 9,000 customers
• ARPU – Positive
• Gross Margin% – Negative
• Gross Profit – Positive
• Minimal Capex
• ROIC accretive
• Self-install/integrated

routers/wires-only

• Demand will grow
• Lower costs to serve
• Ofcom has a clearly

stated role to prevent margin squeeze

Current economics Future potential

Significant strategic progress

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

EXPAND MARGIN GROW REVENUE

1 5 15

20% EBITDA margin achieved in H2 H2 on H1 Revenue stable

93% on-net 93% on-net £40-50m £40-50m BB, Voice, TV, Mobile BB, Voice, TV, Mobile Exploit network advantage Exploit network advantage Future proof service delivery Future proof service delivery 92% on-net, 3m customers fully unbundled £50m actioned More profitable and stable base, ARPU growth, TV launch Q2 Revenue stable, Data growing 80/20 launched, commercials attractive

Target Actual

Amy Stirling

Chief Financial Officer

Financial Review

Strengthening profitability and earnings (1)

£ million FY12 FY11 % Growth

Revenue 1,687 1,765

• 4%

Headline EBITDA 326 276 +18%

Headline EBITDA margin 19.3% 15.6%

Underlying EBITDA (2) 317 276 +15%

Underlying EBITDA margin 18.8% 15.6% 17

Profit before tax 215 174 +24% Tax (56) (52)

Effective tax rate 26.0% 29.9%

Profit after tax 159 122 +30% EPS 18.0p 13.5p +33%

(1) Excludes exceptional charges and tax credit, and amortisation of acquisition intangibles (2) Excludes exceptional charges and tax credit, amortisation of acquisition intangibles and profit on disposal of freehold property asset

Significant cash flow growth

£ million FY12 FY11 % Growth

EBITDA (1) 326 276 +18% Working capital (14) (10) Capex (105) (110) Operating free cash flow 207 156 +33%

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Operating free cash flow 207 156 +33%

OFCF margin 12.3% 8.8%

Interest and taxation (26) (19) Free cash flow 181 137 +32%

(1) Excludes exceptional charges and amortisation of acquisition intangibles

Increased shareholder return

• First year of 50% payout ratio
• Final dividend 6.4p per share
• Total FY12 cash cost £58m

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• Total FY12 cash cost £58m
• 2x dividend cover

Stabilised revenue, ARPU increasing

• H2 revenue stabilised
• Improving BB ARPU offsets

decline in non BB and volume

• Corporate data solutions growth
• ffsets legacy voice decline

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• Voice usage decline continues as

expected

• Mix improving, benefits of price

changes

• Upsell to Plus and boosts

Growing customer profitability

21 FY12 FY11 Change MPF 3,066 75% 2,751 66% +315k SMPF 689 17% 856 20% (167k) IPStream 311 8% 592 14% (281k)

Reducing operating expenditure

Cost to serve 32%

• 7%

22

Strengthening EBITDA margin

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• H1 H2 Phasing
• Stabilising revenue & ARPU increasing
• BB Margin growth offsetting NBB decline
• GM increase to 52.4% (FY11: 50.3%)
• Reducing opex

Exceptional spend reducing

£ million FY12 FY11 % Reduction

P&L charge 27 48 44% Cash 45 59 24%

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• Spend in FY12 in line with guidance
• FY13 impact expected to be nominal:

– costs to deliver contact centre consolidation + expected credit on historic BT dispute (subject to Ofcom determination)

• Significant cash generation creates

the flexibility to invest and return

• Exceptionals deliver customer service

benefits and back office simplification

• £54m share buyback for future share

Cash utilisation – significant headroom for investment and return

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• ptions exercises
• £20m invested in B2B acquisitions
• £58m returned through enhanced

dividend policy

• Net cash inflow of £4m in year

FY13 Financial Guidance

• Guidance excludes investment in TV (variable SAC & marketing)

Revenue Operating Expenses EBITDA

Return to growth Return to growth Broadly flat Broadly flat

+ ARPU + Base returns to growth + ARPU + Base returns to growth + Customer service improvements + Back office simplification – Network footprint – Network capacity and resilience + Customer service improvements + Back office simplification – Network footprint – Network capacity and resilience + ARPU growth + ARPU growth

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• Dividend growth minimum 15% – confidence in growth and cash generation

margin Exceptionals Capex

20 – 21 % 20 – 21 % Minimal cash Minimal cash 6% sales 6% sales

+ ARPU growth + Margin improvement + ARPU growth + Margin improvement + Credit from historic BT dispute – FY13 contact centre consolidation + Credit from historic BT dispute – FY13 contact centre consolidation + Reduced spend on footprint – Capacity and resilience + Reduced spend on footprint – Capacity and resilience

Dido Harding

Chief Executive

Longer Term Strategy

Four meta trends shaping UK telecoms

• 1. Device proliferation
• 2. Always on-demand
• 3. Bandwidth demand

TT homes connect on average 7 unique devices per month How many devices in 10 Downloading video in all its forms will drive demand from consumers for Instant video available

• n demand for

consumers

• 4. Sluggish economic

growth Digital connectivity will save consumers, businesses, years? Expected to work whenever needed Won’t want: multiple contracts, complex set- up, security issues bandwidth Cloud services will drive demand from businesses for reliable, uncontended bandwidth

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Instant access to Cloud services for businesses government and NGO’s money Savvy customers will look for the value

• ption

What these trends mean for TalkTalk

Fixed line networks are significantly advantaged over mobile Our network is a key competitive asset:

• Points of connectivity for businesses and consumers
• Exchange footprint sustainable
• Ability to optimise network for video, security etc
• Cost efficient scalability of backhaul

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• We can afford to scale x100 over next 5 years

Large installed customer base and billing relationship will allow us to add additional products in the future Enduring value for money credibility in an increasingly essential service Regulatory risk, but history shows UK competition authorities value choice in essential services

A clear pipeline of growth

MOBILE TV FIBRE

• Revenue growth and

margin expansion

• Stickier customers buying

more products

• Leverage existing

distribution channels

Hosted Services PLUS Future Subscription Services

TalkTalk Benefits

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ESSENTIALS Phone & BB Voice Only Broadband VOIP Voice/BB ONLY PLUS Phone & BB

• Greater savings vs competitors
• Cost savings from being online
• Simpler and easier to manage

CONSUMERS BUSINESSES

Customer Benefits

EFM + Ethernet

TV– a substantial market opportunity

5.0m Pay TV 2.5m

1.5m Not

3.5m 6.5m 7.0m

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Source: TalkTalk management data, OC&C analysis

Pay TV Wannabees Price Aware

Not interested

Rejectors Mis-Matched Pay TV Lovers

Unique opportunity to build a low cost operating model

SIMPLER Continuing to simplify our

• perations, automate

processes and maximise online interaction BETTER FOR CUSTOMERS Implementing effective processes that enhance customer service and right first time ethos

LOWER COST OPERATING MODEL

CHEAPER TO RUN Effective use of outsourcing,

• ptimising our property estate

and targeted cost reductions

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Customer and shareholder value creation

• A materially more profitable and stable customer base
• A leaner, more efficient cost structure
• A competitively advantaged network and customer base
• Growth from additional services to consumers and businesses
• Unique opportunity to be the low cost provider

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• Unique opportunity to be the low cost provider
• A strategy to deliver medium term growth:
• Revenue: 2% CAGR
• EBITDA margin: 25%

Q&A

Appendices

EPS

£ million FY12 FY11 % Growth Headline Earnings 159 122 +30% Shares in issue 914 914 Weighted average shares in employee trust (29) (7) Shares for basic EPS calculation 885 907 885 907 Headline EPS - Basic 18.0p 13.5p +33% Dilutive effect of share options 40 45 Shares for diluted EPS calculation 925 952 Headline EPS - Diluted 17.2p 12.8p +34% 36

Reconciliation of statutory to headline cash flow

£ million Statutory Headline Variance EBITDA 299 326 (27)

P&L exceptionals

Other (8)

• (8)

Profit on disposal: (£12m); Share based payment: £4m

Adjusted EBITDA 291 326 (35) Working capital (36) (14) (22)

Exceptional provision movement: (£19m); Share based payment: (£4m); Exceptional creditor movement: £1m

Capex (97) (105) 8

Proceeds on sale of freehold: £9m

Operating FCF 158 207 (49) 37 Exceptionals

• (45)

45

Exceptional cash spend

Share buyback (54) (54)

• Acquisitions

(20) (20)

• Tax and interest

(26) (26)

• Dividends

(58) (58)

• Other

4

• 4

Profit on disposal of customer base: £3m

Cash inflow 4 4

Tax

FY12

• Effective headline tax rate of 26%
• Reached agreement with HMRC on utilisation of VNL tax losses from Tiscali acquisition

– Recognition of a £45m deferred tax asset (5 years) – Associated credit in exceptional tax line – Anticipated discount cash tax value of c£75m (10 years)

• Impact of tax rate change is c£10m, broadly offset by prior year credits

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• Closing deferred tax asset of £120m
• Cash tax paid £2m final payment, closure of Luxembourg

FY13

• Expect effective tax rate to broadly track the statutory rate
• Cash tax outflow begins in FY13 (< 10%)

Quarterly metrics

BROADBAND Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 NET ADDS ('000) On-Net 157 174 130 36 35 26 17 77 Of which: MPF 223 173 79 65 76 83 63 100 SMPF (66) 1 51 (29) (41) (57) (46) (23) Off-net (124) (156) (155) (61) (62) (69) (60) (90) TOTAL 34 18 (25) (25) (27) (43) (43) (13) BASE (millions) On-net 3.267 3.441 3.571 3.607 3.642 3.668 3.685 3.755 Adjustment (0.007) Closing on-net 3.267 3.441 3.571 3.607 3.642 3.668 3.678 3.755 Of which: MPF 2.434 2.607 2.686 2.751 2.827 2.910 2.966 3.066 % of On-net 75% 76% 75% 76% 78% 79% 81% 82% FY11 FY12

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SMPF 0.833 0.834 0.885 0.856 0.815 0.758 0.712 0.689 Off-net 0.964 0.808 0.653 0.592 0.530 0.461 0.401 0.311 TOTAL 4.231 4.249 4.224 4.199 4.172 4.129 4.079 4.066 On-net (%) 77% 81% 85% 86% 87% 89% 90% 92% ARPU (£) 23.9 24.7 24.9 25.0 24.7 24.7 25.3 25.6 EXCHANGES New LLU 112 149 4 30 171 130 170 Total LLU 1,854 2,003 2,007 2,007 2,037 2,208 2,338 2,508 NON-BROADBAND Total Base (m) 0.910 0.838 0.755 0.678 0.621 0.573 0.525 0.476 ARPU (£) 19.3 18.1 20.1 17.7 18.8 18.1 18.8 19.4 REVENUE (£m) Broadband 301 314 316 316 310 307 312 313 Non-BB 56 47 48 38 36 33 31 29 B2B 87 82 80 80 77 81 79 79 Total Revenue 444 443 444 434 423 421 422 421