TALK.L Regulatory News (TALK)

Tuesday 16 November 2010

TalkTalk Telecom Group PLC

Interim Results for the 6 months to 30 September 2010

·; Good financial performance. Reiterating full-year guidance

·; Rapid expansion of unbundled customer base

·; Medium-term outlook - targeting 20% EBITDA margin

Headlines

·; 81% of broadband base unbundled - ahead of full-year target

·; Q2 broadband ARPU grew to £24.70 (Q1'11: £23.90) - full-year guidance achieved

·; Q2 broadband customer base increased by 18k - reflecting migration disruption

·; H1 broadband revenue grew 24.0% to £615m (H1'10: £496m)

·; H1 total revenue up 12.4% to £887m (H1'10: £789m)

·; H1 EBITDA(1) up 17.5% to £121m (H1'10: £103m)

·; Interim dividend 1.7 pence per share

(1) Unaudited; excludes exceptional charges and amortisation of acquisition intangibles.

All H1'10 comparators include CPW costs and 3 months Tiscali results.

Outlook

Full-year 2011

·; H2 focus on completing integration, expected benefits increased to £55m exit run-rate; 85% of broadband base unbundled

·; Broadband customer base expected broadly flat in H2

·; Reiterating FY 2011 financial guidance

o 6-8% revenue growth

o EBITDA margin 14.5% - 15.5%

o Operating FCF margin 8.5% - 9.5%

o EPS 12.5 - 13.5p, DPS 5.4 - 5.6p

Medium-term

·; Extending network footprint and our leading position to 2,700 exchanges and 93% customers unbundled

·; Targeting 20% EBITDA margin through unbundling and further £40-50m efficiencies

·; Driving 2% revenue CAGR through value-for-money quad-play services including YouView

Dido Harding, Chief Executive of TalkTalk commented:

"We have delivered another good half year, we are reiterating our financial guidance for the full year and we are setting targets for sustained revenue growth and a materially increased EBITDA margin over the medium term. All of this is driven by our commitment to deliver best value-for-money services for our customers.

"TalkTalk now has by far the UK's largest Next Generation Network, a base of 4.25 million broadband and voice customers, and an innovative and growing brand. It has achieved this by entrepreneurial initiative, organic growth and acquisition. Now TalkTalk is able to start fully realising the potential of this scale, for the benefit of shareholders as well as customers. Accordingly we have developed our strategy to do just this.

"At the heart of the strategy is unbundling. Our fully unbundled Next Generation Network enables us to deliver more products and better service to our customers, and is the key driver of our improving customer mix and growing ARPU. We have therefore accelerated our rate of network expansion and unbundling. 81% of our broadband customers are now on our network and we are going to add 700 new exchanges, and aim to put 93% of our customers onto our network, in line with the extended population coverage.

"We are well on track to complete our 'One Company' integration programme by the end of the year. Our integration programme is delivering higher than expected synergy benefits and we are now raising our synergies target to £55 million.

"Like all companies that have grown as quickly as TalkTalk, there are considerable opportunities to improve the efficiency and effectiveness of the business. We see real opportunities to deliver an additional £40-50 million of operating efficiencies, and over the medium term to drive our EBITDA margin to 20%. Over the same time frame we will drive sustained top line growth, adding innovative and attractive new services, to become the UK's best value provider of quad-play phone, broadband, mobile and TV services."

(1) Unaudited; excludes exceptional charges and amortisation of acquisition intangibles.

(2) Includes 3 months Tiscali results; includes CPW costs.

BUSINESS REVIEW

During the second quarter we accelerated the roll-out of our Next Generation Network and migration of our customers onto our network, and ended the first half with 2,003 exchanges and 81% of our broadband customer base unbundled, ahead of our full year target. We will now roll out our network to an additional 700 exchanges over the medium term, to achieve 93% population coverage, and are targeting 93% of our customers onto our own network.

Unbundling our broadband customers increases the margin per customer we achieve and reduces churn. We migrated and up-sold a total of 250k customers onto our fully unbundled network in the first half of the year. The one-off cost to unbundle these customers was £10m and we expect to incur a further £7m in the second half of the year to complete the migration components of the integration programme. We are also seeing the benefits of our One Company integration programme start to deliver and we expect the full year run rate benefit from the programme to be approximately £55m rather than the £40-£50m originally guided. 

Broadband ARPU in the second quarter grew strongly to £24.70, from £23.90 in the previous quarter. This reflected our improving customer mix, as the majority of new customers who join us are fully unbundled, and we have been increasingly successful at driving our premium product "Plus", which now represents 9% of our total broadband base. Re-pricing of the acquired Tiscali customers also contributed towards the increase in ARPU in the quarter. Broadband revenue in the second quarter grew 4% over the previous quarter to £314m, driven by the higher ARPU.

We ended the second quarter with a total broadband customer base of 4.25 million, 130k higher than at the same point last year. Our total broadband customer base grew by 18k in the second quarter, as TalkTalk sales continued to deliver growth and low levels of churn. Churn among our AOL customers has continued to reduce, as the base matures and services are upgraded. We saw an increase in churn in our acquired bases in the second quarter, as some customers experienced disruption during migration of their network access and e-mail servers. However this migration enables us to deliver significant benefits to customers, and we are seeing higher ARPU and lower churn trends among those customers who have been successfully migrated. We are well on track to complete the full migration process on schedule by the end of the year.

Our non-broadband business continued to decline as expected, with revenue in the second quarter of £47m, compared to £71m last year (excluding £4m of revenue from the businesses in Ireland and Belgium sold earlier this year). ARPU from our non-broadband base fell in the quarter to £18.10 reflecting the seasonal profile of voice-only usage in the base, as seen last year.

Our Opal business delivered revenue in the second quarter in line with last year of £82m (Q2'10: £82m), as growth of our data products and services continues to offset the decline in fixed line voice revenues.

We continued to make good progress towards our target of offering our customers best value-for-money quad-play services. At the end of the second quarter we launched our initial range of value-for-money mobile propositions, with two SIM-only voice packages and one mobile data proposition targeted at our existing broadband customers. The YouView joint venture has now been incorporated and the project remains on-track to deliver internet-connected TV services that we can offer to our customers by the middle of 2011. We expect to offer fibre-based services to our customers during the fourth quarter.

FINANCIAL REVIEW

Profit & Loss

Total revenue grew 12.4% to £887m (H1'10: £789m), reflecting underlying broadband revenue growth, as well as growth through the acquisition of Tiscali at the beginning of July 2009, partially offset by the decline of non-broadband revenue and the disposal of our business in Ireland and Belgium at the start of the year.

Our gross margin was 49.3%, compared to 49.8% in the first half last year, with the benefit of our One Company integration programme being more than offset by the dilutive effect of the Tiscali acquisition and the decline in non-broadband revenue.

Headline EBITDA increased by 17.5% to £121m (H1'10: £103m) and the EBITDA margin increased to 13.6% (H1'10: 13.1%) reflecting the additional quarter of Tiscali profitability, benefits from our integration programme and improvements in ARPU and customer mix, partially offset by the decline in our non-broadband base and migration costs incurred.

SAC and marketing costs increased to £87m in the first half (H1'10: £69m) representing 9.8% of revenue (H1'10: 8.7%). This increase was driven primarily by the additional costs of migrating customers onto our network.

Headline EBIT increased by 15.9% to £80m (H1'10: £69m) resulting from the improvement in EBITDA offset by an increase in depreciation and amortisation resulting from our continued investment in our exchange roll-out and billing systems.

Interest and Taxation

Net interest costs were £10m (H1'10: £1m) reflecting the post-demerger financial structure of the Group.

An effective rate of taxation of 29% (H1'10: 31%) has been applied to headline profit before tax. Tax assets and liabilities recognised at 30 September 2010 take account of the reduction in the UK corporation tax rate of 1% enacted on 27 July 2010, and recognition of a further £5m deferred tax asset on losses.

Exceptional Items

Exceptional charges of £21m (H1'10: £4m) comprised the costs incurred in respect of the One Company integration programme.

Dividend

The Board has declared an Interim Dividend of 1.7 pence per share. This will be paid on Friday 17 December 2010 to shareholders on the register on 26 November 2010. The ex-dividend date is 24 November 2010.

Cash-flow & Net Debt

Capital expenditure in the first half was £50m (H1'10: £41m), representing 5.6% of revenue, in line with our guidance. The investment programme in the first half included the build-out of our unbundled exchanges, as well as ongoing investment in our billing systems.

The working capital outflow of £10m (H1'10: £9m inflow) was primarily due to the unwinding of fair value provisions and the normalisation of specific creditors acquired through the Tiscali acquisition.

Operating free cash-flow in the first half was £61m, 6.9% of revenue, compared to 9.0% of revenue in the first half of last year, reflecting the impact of the customer migration programme on our first half EBITDA margin and on working capital.

Net cash exceptional and other items in the first half was £18m. The cash costs of our separation and demerger of £8m were more than offset by net cash receipts of £14m following agreement with Tiscali regarding the final purchase price for our acquisition of their UK assets. The cash costs of the One Company programme in the first half were £20m. Other cash outflow of £4m included the first tranche of our investment in the YouView joint venture.

Net cash-flow was £32m and net debt at the end of the first half improved to £476m.

Presentation

A presentation for investors and analysts will be held at The Lincoln Centre, 18 Lincoln's Inn Fields, London WC2A 3ED, starting at 9.00am.

The dial-in details are +44 (0)20 7138 0845 (UK & International excl. USA) and +1 718 247 0879 (USA). The passcode is 1543452#.

A replay will be available for one week on +44 (0)20 7111 1244 (UK & International excl. USA) and +1 347 366 9565 (USA). The passcode for replay is also 1543452#.

The event will also be audio webcast at www.talktalkgroup.com.

Next Trading Update

The Group will announce its third quarter trading update in February 2011.

For Further Information

For analyst and institutional investor enquiries:

David Boyd 44 203 417 1037

Mark Schmid 07515 034 676

Anthony Carlisle (Citigate Dewe Rogerson) 07973 611 888

020 7638 9571

www.talktalkgroup.com

(1) Prior to acquisition of Tiscali

(2) Includes acquisition of Tiscali base and customer base adjustment

(3) Not previously disclosed on quarterly basis

Condensed consolidated income statement for the 6 months ended 30 September 2010

With 6 months ended 30 September 2009 comparatives

* A reconciliation of Headline information to statutory information is provided in note 7 to the interim condensed financial statements. 

The accompanying notes are an integral part of this condensed consolidated income statement. All amounts relate to continuing operations.

 Condensed consolidated income statement for the 6 months ended 30 September 2010

With year ended 31 March 2010 comparatives

* A reconciliation of Headline information to statutory information is provided in note 7 to the interim condensed financial statements. 

The accompanying notes are an integral part of this condensed consolidated income statement. All amounts relate to continuing operations.

Condensed consolidated statement of comprehensive income for the 6 months ended 30 September 2010

Condensed consolidated statement of changes in equity for the 6 months ended 30 September 2010

In March 2010 the share premium relating to the ordinary shares was reduced by £400m by way of a court-approved capital reduction. This had the effect of creating distributable reserves which may be released at the discretion (and upon the resolution) of the Board of Directors. During the year ended 31 March 2010 equity dividends of £251m were paid by TalkTalk Telecom Holdings Limited (formerly 'The Carphone Warehouse Group PLC'), including £69m of dividends paid to its Shareholders and an intercompany dividend of £182m paid as part of the demerger (note 6). Further details are provided in the non-statutory financial statements for the year ended 31 March 2010 which can be found on the Group's corporate website www.talktalkgroup.com.

Condensed consolidated balance sheet as at 30 September 2010

Condensed consolidated cash flow statement for the 6 months ended 30 September 2010

* Bank overdrafts are disclosed within Loans and other borrowings less than one year.

1. Basis of preparation and accounting policies

Basis of preparation

The unaudited interim condensed consolidated financial statements for the 6 months ended 30 September 2010 have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' ('IAS 34') and thereby in accordance with International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board ('IASB') and as adopted by the European Union ('EU').

The interim condensed consolidated financial statements for the 6 months ended 30 September 2010 do not comprise statutory accounts for the purpose of section 435 of the Companies Act 2006, and should be read in conjunction with the Non-Statutory Financial Statements of TalkTalk Telecom Group PLC for the year ended 31 March 2010 (the 'Non-Statutory Financial Statements'). The Non-Statutory Financial Statements were audited by the Group's auditors, Deloitte LLP, their report was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report.

The Non-Statutory Financial Statements can be found on the Group's corporate website www.talktalkgroup.com.

The financial information for the 6 months ended 30 September 2010 and 30 September 2009 has not been subject to audit or review by the Group's auditors.

The Group's future cash forecasts and revenue projections, which are considered to be based on prudent assumptions, indicate that the Group will be able to operate within the level of its current committed facilities as disclosed in the Non-Statutory Financial Statements for the foreseeable future and as such the Directors believe that it is appropriate to continue to prepare the financial statements of the Group on a going concern basis.

The interim condensed financial statements for the 6 months ended 30 September 2010 have been prepared using accounting policies and methods of computation consistent with those set out on pages 6 to 15 of the Non-Statutory Financial Statements except as noted below.

Changes in accounting policy

In the current financial year, the Group has adopted:

·; IFRS 1 (Revised) 'First-time Adoption of International Financial Reporting Standards';

·; IFRS 3 'Business Combinations' (revised 2008);

·; IAS 24 'Related party disclosures' (revised 2009);

·; IAS 27 'Consolidated and Separate Financial Statements' (revised 2008);

·; IAS 28 (Revised) 'Investments in Associates';

·; IFRIC 17 'Distribution of Non-cash Assets to Owners'; and

·; Improvements to IFRS (April 2009).

The adoption of IFRS 1, IAS 28, IFRIC 17 and Improvement to IFRS (April 2009) have had no material impact on the Group.

IFRS 3 'Business Combinations' (revised 2008) and IAS 27 'Consolidated and Separate Financial Statements' (revised 2008)

The most significant changes to the Group's previous accounting policies relate to business combinations. These are: acquisition related costs are included in operating expenses as they are incurred rather than capitalised; any changes to the cost of an acquisition, including contingent consideration, resulting from an event after the date of acquisition are recognised in profit or loss rather than as an adjustment to goodwill; and where a step acquisition occurs the Group will remeasure its previously held equity interest at acquisition date fair value and recognise the resulting gain or loss, if any, in the income statement or other comprehensive income.

The adoption of IFRS 3(2008) and the subsequent changes to the accounting policies have resulted in the Group recognising a gain of £1m within its income statement in respect of the fair value of the equity interest previously held for the 6 months ended 30 September 2010 (note 5).

Any adjustments to contingent consideration of acquisitions made prior to 1 January 2010 which result in an adjustment to goodwill continue to be accounted for under IFRS 3(2004) and IAS 27(2005), for which the accounting policies can be found in the Non-Statutory Financial Statements.

IAS 24 'Related party disclosures' (revised 2009)

The Group has early adopted IAS24 'Related party disclosures' (revised 2009), which was endorsed by the EU in July 2010 and, as such, can be adopted for the year ending 31 March 2011. The impact of the standard is that it simplifies the definition of a related party, with shared person or entity (director, shareholder or otherwise) no longer automatically implying the existence of a related party relationship. Under the revised standard this only occurs where the person or entity can exert significant control over both entities. The impact is that following the demerger of the Group from TalkTalk Telecom Holdings Limited and the adoption of IAS 24 (Revised), Best Buy Europe and Other New Carphone Warehouse Group are no longer considered related parties.

2. Segmental reporting

IFRS 8 'Operating Segments' requires the segmental information presented in the financial statements to be that used by the chief operating decision maker to evaluate the performance of the business and decide how to allocate resources. The Group has identified the Board of Directors as its chief operating decision maker. The Board of Directors considers the results of the business as a whole when assessing the performance of the business and making decisions about the allocation of resources. Accordingly the Group has one operating segment.

During the previous financial year the Group incurred costs in respect of the former Carphone Warehouse Group ('CPW costs'). These costs are not reflective of the ongoing costs of the Group and have been disclosed separately, the costs of the demerger (note 7) are shown within CPW costs.

* Comprises £32m of amortisation on acquisition intangibles (6 months ended 30 September 2009: £41m; year ended 31 March 2010: £83m) and £4m of exceptional amortisation(6 months ended 30 September 2009: £nil; year ended 31 March 2010: £4m) (note 7).

Capital expenditure is wholly incurred by the Group's Operations.

2. Segmental reporting (continued)

The Group's revenue is presented split by Broadband, Non-Broadband and Corporate products as this information is provided to the Group's chief operating decision maker. Broadband and Non-Broadband comprise residential customers and business customers that receive similar products.

The Group entered into an agreement to sell its operations in Belguim and Ireland to the Digiweb Group on 31 March 2010 and 19 April 2010 respectively. In the previous financial year these operations contributed revenue of £4m in the 6 months to 30 September 2010 and £9m for the year ended 31 March 2010 to the non-broadband channel.

3. Finance costs

Interest expense is analysed as follows:

Interest income is analysed as follows:

4. Taxation

An effective rate of 29% (6 months ended 30 September 2009: 31%; year ended 31 March 2010: 28%) has been applied to Headline profit before taxation from continuing operations. A tax credit of 28% has been recognised in all periods in respect of the amortisation of acquisition intangibles, net of any adjustments in respect of prior periods.

In the June 2010 budget it was announced that the UK statutory corporation tax rate would decrease from 28% to 24% at the rate of 1% per year for the four years from 1 April 2011. On 27 July 2010 the relevant legislation for the first 1% reduction was substantively enacted. Accordingly tax assets and liabilities recognised at 30 September 2010 take account of this impact. An additional deferred tax asset of £5m has been recognised in the period in respect of deferred tax losses. Total deferred tax assets recognised at 30 September 2010 were £147m (6 months ended 30 September 2009: £149m; year ended 31 March 2010: £155m).

5. Acquisitions and disposals

Goodwill

(a) Tiscali UK

On 3 July 2009, the Group acquired the entire issued share capital of Tiscali UK Ltd for a gross cash consideration of £238m, comprising £236m of cash consideration and £2m of fees. Adjustments to the provisional fair value estimates reported at 30 September 2009 of £19m were included in the Non-Statutory Financial Statements for the year ended 31 March 2010. On 2 August 2010 a net adjustment in respect of working capital and customer numbers was agreed between the Group and Tiscali S.p.A.. This resulted in an adjustment to goodwill of £14m. The carrying value of goodwill in respect of the Tiscali acquisition is now £162m. There have been no subsequent changes to the fair value adjustments disclosed in the Non-Statutory Financial Statements for the year ended 31 March 2010.

(b) Other acquisitions

The Group acquired 2 Circles Communications Limited on 12 April 2010 for cash consideration net of cash acquired of £1m and deferred consideration of £1m, which resulted in acquisition intangibles of £1m and goodwill of £2m. The impact of this acquisition on the results of the Group for the 6 months ended 30 September 2010, and had the business been acquired on 31 March 2010, is immaterial. The Group has recognised a gain of £1m within its income statement in respect of the increase in fair value of the equity interest held at the acquisition date.

The Group paid cash consideration of £1m in respect of both V Networks Limited deferred consideration, acquired in 2008, and dealer buyouts which resulted in goodwill and acquisition intangibles of £1m.

In the year ended 31 March 2010, the Group acquired UK Telco Limited on 5 November 2009 for cash consideration of £5m and deferred consideration of £2m, which resulted in acquisition intangibles of £2m and goodwill of £5m. The impact of this acquisition on the results of the Group for the year, and had the business been acquired on 31 March 2009, were immaterial. The goodwill of £5m was recognised relating to the future opportunities arising from the nature of UK Telco Limited's business and fit with the Group's existing operations.

(c) Disposals

On 19 April 2010 the Group entered into an agreement to sell its operations in Ireland to the Digiweb Group for a consideration of £2m, net of closure costs. The profit on sale of the business has been offset by the impairment of goodwill recognised on the acquisition of Tele2 Ireland in 2006, resulting in nil profit or loss on disposal. The payment from Digiweb to the Group will be received over 12 months with £1m being received in the 6 months to 30 September 2010.

Investments

On 10 September 2010 the Group entered into a joint venture agreement with The British Broadcasting Corporation, ITV Broadcasting Limited, British Telecom plc, Channel Four Television Corporation, Arqiva Limited and Channel 5 Broadcasting Limited to form YouView TV Limited (formerly Canvas Pro Tem Limited). The joint venture has been set up in order to develop a new free-to-air internet-connected TV service to UK homes in 2011. An initial investment of £2m has been recognised in respect of the Group's contribution to 30 September 2010.

6. Equity dividends

The proposed dividend for the 6 months ended 30 September 2010 is 1.7p per ordinary share on approximately 905 million shares (£15m) (6 months ended 30 September 2009: 1.45p per ordinary share on 900 million shares (£13m)). The proposed interim dividend was approved by the Board of Directors on 15 November 2010 and has not been included as a liability as at 30 September 2010.

7. Reconciliation of Headline information to statutory information

7. Reconciliation of Headline information to statutory information (continued)

Headline information is provided because the Directors consider that it provides assistance in understanding the Group's underlying performance.

a) One Company integrationFollowing the acquisition on 3 July 2009 of Tiscali UK Ltd, the Group has revisited its overall operating structure in order to both integrate the Tiscali business and deliver efficiencies in existing operations. This has resulted in the One Company integration programme. The programme is expected to yield significant synergies, both through the elimination of duplicated costs and through network and operational efficiencies. Operating reorganisation costs of £17m were incurred during the 6 months ended 30 September 2010, principally comprising redundancies and site closures, an integration project team and consulting costs (6 month period ended 30 September 2009: £4m; year ended 31 March 2010: £29m). Costs of £4m were incurred in respect of redundant software and fixed asset write downs (6 months ended 30 September 2009: £nil; year ended 31 March 2010: £5m). A total taxation credit of £4m has been recognised in respect of these costs (6 months ended 30 September 2009: £nil; year ended 31 March 2010: £6m).

b) Demerger and other separation costsDuring year ended 31 March 2010, the Carphone Warehouse demerged the Company and it was separately listed on the London Stock Exchange (LSE). The separation required substantial costs to be incurred, both for managing the process internally, for meeting the external requirements for a company to list and for separating from IT activities managed by the Carphone Warehouse Group. Operating costs of £18m and banking fees of £1m were incurred in the year ended 31 March 2010. A taxation credit of £1m was recognised in respect of these costs.

c) Amortisation of acquisition intangibles

A tax credit of 28% has been recognised in all periods in respect of the amortisation of acquisition intangibles, net of any adjustments in respect of prior periods, this was £9m for the 6 month period ended 30 September 2010 (6 months ended 30 September 2009: £11m; year ended 31 March 2010: £20m).

8. Earnings per share

Basic and diluted earnings per ordinary share have been calculated in accordance with IAS 33 'Earnings per share'. Earnings per share is shown on both a Headline and Statutory basis to assist in the understanding of the underlying performance of the Group.

9. Net debt

Analysis of net debt

* Bank overdrafts are disclosed within Loans and other borrowings less than one year.

All movements relate to net cashflows and foreign exchange of £1m (6 months ended 30 September 2009: £1m; year ended 31 March 2010: £nil).

10. Share-based payments

In accordance with IFRS 2, a charge of £1m (6 months ended 30 September 2009: £1m; year ended 31 March 2010: £4m) in respect of equity-settled share based-payments has been charged to the income statement.

During the 6 months ended 30 September 2010 the Group introduced a Discretionary Share Option Plan ('DSOP') which uses share options to provide long-term incentives to senior management of the Group. Awards made under the DSOP are subject to TSR performance targets and are measured over an initial performance period to 29 March 2013 and a subsequent performance period to 29 March 2014. Total options awarded were 27.7 million, with an exercise price set at market price at the date of grant, £1.27.

During the 6 months ended 30 September 2010 the Group offered its employees a Save As You Earn share option scheme with the option to enter into a 5 year or a 3 year scheme. A total of 1.3 million options were granted in the former and 6.4 million under the latter with an exercise price of £1.02.

11. Provisions

12. Capital commitments

13. Related party transactions