TALK.L Regulatory News (TALK)

26th July 2012

TalkTalk Telecom Group PLC

TV update and Q1 IMS

·; Launching Free TV for Plus customers, the UK's best value triple play

·; Free set top box, No additional monthly cost, Flexible premium content

·; Value accretive during lifetime of contract, with material value creation thereafter

·; Reiterating all FY13 and medium term financial guidance given in May

Creating shareholder value with an extraordinary TV proposition

·; Available to all TalkTalk Plus customers with pre-registration from today

·; For no additional monthly cost*, Plus customers will receive a free set top box, access to all YouView content, the TalkTalk Player, 12 months free subscription to LOVEFiLM Instant, unlimited calls and unlimited data downloads

·; Incremental cost of acquiring new triple play customers of £140 will deliver positive EBITDA over lifetime of contract. Thereafter, we expect TV to reduce churn materially, expand our broadband market share, grow ARPU, and drive incremental value

·; Commercial agreement with BSkyB to offer all Sky Sports channels (including Live Formula 1TM), Sky Movies and Sky basic channels on a flexible, monthly basis

·; Access to a TV product for the vast majority of our customers over time and a natural upgrade path for the 7.5m Freeview customers

*Requires a new contract - 24 months for existing Plus customers,18 months for new Plus customers including upsold

Q1 - an encouraging start to the year

·; 10% growth year on year in fully unbundled customers

·; Continued strong take-up of Plus (+66,000 in Q1)

·; Positive net adds in June; -19,000 in Q1 overall, reflecting soft gross adds environment and longer lead times on connections

·; Total revenue £414m, on-net revenue £285m (+9.0% year on year)

Dido Harding, Chief Executive of TalkTalk commented:

"It has been an encouraging start to the year. We continue to improve customer service and this has been reflected in a further reduction in complaints and churn. We returned to customer growth in June, despite longer lead times on connections, and our base of fully unbundled customers grew by 10% year on year in the quarter.

This is a great base from which to launch our groundbreaking, free, TV service. TalkTalk Plus customers will, from today, be able to pre-register for their free YouView set top box with no additional monthly subscription. This compelling offer is the UK's best value triple play package. It will give our customers more reasons to stay with us for longer and attract new broadband customers. It will also deliver significant value for shareholders. This is TalkTalk at its disruptive best."

Q1 operating metrics

COMPELLING TRIPLE PLAY PROPOSITION

Extraordinary TV

We have today opened pre-registration for our TV product: The key features are:

·; Free YouView set top box (worth £299), no additional monthly fee

·; Seven day catch up, over 70 Freeview channels including some in HD, search pause & record live TV, huge library of the best films and shows from the US and UK

·; Free 12 month subscription to LOVEFiLM Instant subscription

·; Simply priced, easy and flexible access to premium content including all Sky Sports channels and Sky Movies one month at a time, with no costly annual subscriptions

Available to all Plus customers initially

TalkTalk TV is initially available to all of our Plus customers who have access to line speeds of 3MBps or more. TalkTalk Plus costs £14.50 per month (and from £9.50 per month line rental) and includes unlimited downloads and unlimited anytime calls to UK landlines. Existing Plus customers will be required to re-contract for 24 months and new Plus customers for 18 months when taking our triple play proposition. Next year we expect to launch a TV product for our Essentials customers and over time we expect the vast majority of our customers to have access to a triple play proposition.

A carefully managed launch with a focus on operational excellence

We want our customers to have a good set-up experience for TV and therefore we shall provide an engineer assisted installation (at a fee of £50 to the customer) during the initial rollout phase. Our engineers will ensure that customers' in-home configurations are optimised for TV and broadband and they are made fully aware of the rich functionality of our set top boxes. Whilst this will inevitably limit the rate at which we can satisfy demand, it will ensure that we fully test and adjust our operational processes ahead of a scaled build that in due course, will allow customers to install their set top boxes themselves.

A highly disruptive proposition with a substantial market opportunity

YouView brings together IPTV and linear broadcast content in a simple easy to navigate Electronic Programme Guide (EPG) for the first time in the UK. With no additional subscription to pay above our standard Plus price of £14.50 per month, our offer represents the best value way to access YouView in the UK triple play market. For the current 7.5m Freeview users, it will bring a comprehensive library of historic Public Service Broadcast (PSB) content and catch-up TV, PVR functionality and access to simple and flexible pay content on a network optimised for delivering video. We believe the incremental utility that this delivers, for no extra cost, will be a key driver of take-up among this audience.

For current pay TV subscribers who want to access premium sports and movie content, our proposition allows tailored and flexible bundles that will not require the obligatory purchase of basic packages as a prerequisite. In addition, our proposition allows individual premium content and channel subscriptions one month at a time.

Creating shareholder value

The incremental cost of acquiring each new triple play customer is approximately £140 over our existing dual play SAC. This incremental investment comprises set top box and peripherals costs and the cost of an engineer's visit. We expect to reduce these costs as we build scale.

A triple play customer will have a longer contract length than our current dual play customers, allowing us to recover the cost of our investment. As a result, each triple play customer, whether new to TalkTalk or an existing Plus or upsold Essentials customer, will generate positive EBITDA within the contract term.

Beyond the contract period we expect TV to reduce materially customers' propensity to churn, thus extending the average lifetime of each customer beyond that of a dual play customer, and delivering further incremental EBITDA. We expect our triple play proposition to expand the size of the broadband market and our share of it and over time, to drive modest incremental growth in ARPU from pay content take-up.

In providing our customers with more reasons to stay with us for longer, and by cost effectively attracting new broadband customers, we believe our triple play strategy will add significant value to shareholders. The rate at which we drive triple play penetration into our customer base will therefore be one of the key components in delivering our medium term financial targets of 2% CAGR in revenue and 25% EBITDA margin.

Q1 Operating Review

To reflect more accurately the key drivers of value for TalkTalk, we have changed our customer metric reporting structure to differentiate between on-net and off-net customers.

10% growth in fully unbundled customers and total customer growth in June

It has been an encouraging start to the year. Our base of more profitable fully unbundled customers grew by 10% year on year to 3.096m and by 30,000 in the quarter reflecting the combined effects of continued improvements in churn, and a slower quarter for connections versus Q4. We returned to positive total customer growth in June but poor weather impacted the rate at which we were able to connect new customers through the quarter, with significantly longer lead times between sign-up and go-live. As a result, our total customer base was 19,000 lower in the quarter than in Q4.

The legacy broadband-only base continued to decline with 146,000 fewer customers than a year ago.

Strong take-up of Plus and incremental services

The number of customers taking our unlimited product, Plus, grew by 64% year on year and by 66,000 in the quarter, and now comprises 35% of our fully unbundled base. HomeSafeTM activations grew to 440,000 with the service now also available to our AOL branded customers. Our mobile offering has continued to gain traction, with 85,000 customers now taking advantage of our innovative mobile-to-fixed calling offers and competitive call rates. Demand for fibre amongst our customers remains modest and we now have 15,000 customers choosing to take their broadband service with a paid speed uplift.

9% growth in On-net Revenue, 5% growth in On-net ARPU

On-net revenue in the quarter grew 9% year on year reflecting growth in the base, the mix benefits of full unbundling, and ARPU growth. ARPU grew 5% year on year with unbundling mix and increased penetration of Plus, being partially offset by planned promotional spend and lower usage.

Corporate revenue increased 4% year on year with growth in Ethernet and Data Solutions and Carrier Trading more than offsetting decline in legacy voice revenues. This is an encouraging start to the year for our B2B operations.

Off-net revenue, which represents a decreasing proportion of our total revenue, saw a 42% reduction year on year as this legacy base comprising those customers that consume BT Wholesale products such as IPStream (broadband only), Narrowband (broadband only), CPS and WLR (voice only) continue to reduce.

Continued service improvements driving reduction in churn

During the quarter our ongoing focus on customer service improvement has continued to have a positive impact with both total calls to our customer service centre and complaints to Ofcom reducing. Call volumes were down 19% year on year and by 417,000 in the quarter. Complaints to Ofcom fell by 28% in the quarter. First time fix rate has remained robust at over 70% despite completing the reorganisation of our on-shore contact centre operations in the quarter.

These improvements have driven a reduction in churn in our broadband base, with monthly on-net churn in Q1 of 1.6% (Q4 FY1.7%).

Outlook and Guidance

With the launch of pre-registration for our new triple play offer today we are re-iterating all the financial guidance set out with our Preliminary Results in May:

Revenue

Return to revenue growth in FY13

Operating expenses

Broadly flat in FY13 - customer service improvements and back office simplification cost reductions offset by reinvestment in increased network footprint and resilience.

EBITDA margin

EBITDA margin of 20%-21% in FY13 through continued ARPU growth and mix driven margin improvement.

Cash flow items

No material net exceptional cash expenditure in FY13.

Capex is expected to be in line with our stated policy of c.6% of revenue.

Dividend

Dividend growth of a minimum of 15% in each of FY13 and FY14.

As we indicated in May, the majority of our investment in TV will take the form of variable SAC and marketing costs, determined by the take up of the product, with minimal capital expenditure requirement. Guidance on these elements is as follows:

One-off Launch costs FY13

We expect to incur costs of £15-20m on the launch of triple play in FY13. This comprises initial above the line marketing expenditure, scaling the engineering resource to minimise customer set up issues and promotional costs associated with launch.

Variable SAC

We expect the incremental SAC per triple play customer to be approximately £140.

Incremental capex

We do not expect to incur additional capex over the c.6% sales guidance given in May 2012 as a result of the launch of TV.

Working Capital

We do not currently anticipate any material adverse working capital movement from the launch of triple play.

H1/H2 Phasing

We expect to see a return to total revenue growth in the second half of the year as the continued growth in the on-net base, ARPU increases and modest improvements in Corporate revenue offset the overall decline in off-net revenue.

As in previous years, we expect to see underlying EBITDA margin growth to be second half-weighted.

Exceptional Spend

As indicated in May, we expect to incur £15m to £20m of exceptional spend in the reorganisation of our on-shore customer service footprint in H1. The historic dispute with BT is expected to broadly offset this with the cash benefit expected to be realised in H2.

APPENDIX 1 - QUARTERLY METRICS