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) 4. Longer term strategy Dido Harding (CEO) 5. Q&A 2
Charles Dunstone Chairman Introduction
Dido Harding Chief Executive Review of the year
Significant strategic progress EXPAND MARGIN GROW REVENUE 1 5 Largest Operating Value-for-money B2B Fibre unbundled efficiencies quad-play services access UK network BB, Voice, TV, BB, Voice, TV, Exploit network Exploit network Future proof Future proof Target 93% on-net 93% on-net £40-50m £40-50m Mobile Mobile advantage advantage service delivery service delivery More profitable and 92% on-net, 80/20 launched, Revenue stable, stable base, ARPU Actual 3m customers £50m actioned commercials Data growing growth, fully unbundled attractive TV launch Q2 20% EBITDA margin achieved in H2 H2 on H1 Revenue stable 5
Delivering the strategy EBITDA (£m) EPS (p) DPS (p) OFCF (£m) 6
Real improvement in customer numbers Total Net Adds Fully Unbundled (MPF) Net Adds 7
Considerably more valuable customers Unbundled customers Broadband ARPU Growth Improved customer mix 8
Successful upsell propositions FY10 FY11 FY12 % Growth Plus base 130k 580k 1,020k 76% Mobile base – 34k 72k 112% Paid Boosts base 690k 1,060k 1,320k 25% HomeSafe activations – – 320k N/A 9
Improving customer experience Customer Service Calls Complaints to Ofcom 1 st Time Fix Online customer interaction 10
£50m cost savings actioned Improving Customer Service Back Office Simplification Phase 1 Phase 2 • Restructured Technology, • Call volume reduction • Consolidated offshore Finance, HR and other back Operating • Call volume reduction office functions sites • On-shore consolidation efficiencies • 540 headcount reduction • Closed Waterford call centre £15m £10m Annualised £25m £50m – £18m FY12 £5m £23m (Proposals announced April 2012) 11
On track for TV launch in Q2 Apr-Jun 2012 Jul-Sep 2012 Sept 2010 Sep-Dec 2011 Jan-Mar 2012 APPROVED DEVELOP TRIAL PILOT LAUNCH Gradual ramp-up of Recruiting engineers BBC trust and Huawei Set-top Box E2E trial activity to ensure Ofcom approves Youview Software Customer Experience great customer Extension of the YouView Platform experience trial to test: Shareholders Friends and Family Provisioning flows a) Scale committed Above the Line b) Resilience CRM Compatibility from September Operational Readiness 12
TalkTalk Business in a good position to grow New Ethernet Connections B2B Revenue (£m) • B2B revenue stable over the year • New ethernet connections growing strongly → MTR reductions • FY12 ethernet exit revenue run rate → Legacy voice decline as expected of £8.4m per annum → Acquisitions to plan • Investment in systems and process to scale high growth 13
A growing and profitable role in fibre Current economics Future potential • Self-install/integrated • 9,000 customers routers/wires-only • ARPU – Positive • Demand will grow • Gross Margin% – Negative • Lower costs to serve • Gross Profit – Positive • Ofcom has a clearly • Minimal Capex stated role to prevent • ROIC accretive margin squeeze 14
Significant strategic progress EXPAND MARGIN GROW REVENUE 1 5 Largest Operating Value-for-money B2B Fibre unbundled efficiencies quad-play services access UK network BB, Voice, TV, BB, Voice, TV, Exploit network Exploit network Future proof Future proof Target 93% on-net 93% on-net £40-50m £40-50m Mobile Mobile advantage advantage service delivery service delivery More profitable and 92% on-net, 80/20 launched, Revenue stable, stable base, ARPU Actual 3m customers £50m actioned commercials Data growing growth, fully unbundled attractive TV launch Q2 20% EBITDA margin achieved in H2 H2 on H1 Revenue stable 15
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% 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 17
Significant cash flow growth £ million FY12 FY11 % Growth EBITDA (1) 326 276 +18% Working capital (14) (10) Capex (105) (110) Operating free cash flow Operating free cash flow 207 207 156 156 +33% +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 18
Increased shareholder return • First year of 50% payout ratio • Final dividend 6.4p per share • Total FY12 cash cost £58m • Total FY12 cash cost £58m • 2x dividend cover 19
Stabilised revenue, ARPU increasing • H2 revenue stabilised • Improving BB ARPU offsets decline in non BB and volume • Corporate data solutions growth offsets legacy voice decline • Voice usage decline continues as expected • Mix improving, benefits of price changes • Upsell to Plus and boosts 20
Growing customer profitability FY12 FY11 Change MPF 3,066 75% 2,751 66% +315k 689 856 SMPF 17% 20% (167k) IPStream 311 8% 592 14% (281k) 21
Reducing operating expenditure Cost to serve 32% -7% 22
Strengthening EBITDA margin • H1 H2 Phasing • Stabilising revenue & ARPU increasing • BB Margin growth offsetting NBB decline • GM increase to 52.4% (FY11: 50.3%) • Reducing opex 23
Exceptional spend reducing £ million FY12 FY11 % Reduction P&L charge 27 48 44% Cash 45 59 24% • 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) 24
Cash utilisation – significant headroom for investment and return • 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 options exercises • £20m invested in B2B acquisitions • £58m returned through enhanced dividend policy • Net cash inflow of £4m in year 25
FY13 Financial Guidance • Guidance excludes investment in TV (variable SAC & marketing) + ARPU + ARPU Revenue Return to growth Return to growth + Base returns to growth + Base returns to growth + Customer service improvements + Customer service improvements Operating + Back office simplification + Back office simplification Broadly flat Broadly flat – Network footprint – Network footprint Expenses – Network capacity and resilience – Network capacity and resilience EBITDA + ARPU growth + ARPU growth + ARPU growth + ARPU growth 20 – 21 % 20 – 21 % + Margin improvement + Margin improvement margin + Credit from historic BT dispute + Credit from historic BT dispute Exceptionals Minimal cash Minimal cash – FY13 contact centre consolidation – FY13 contact centre consolidation + Reduced spend on footprint + Reduced spend on footprint Capex 6% sales 6% sales – Capacity and resilience – Capacity and resilience • Dividend growth minimum 15% – confidence in growth and cash generation 26
Dido Harding Chief Executive Longer Term Strategy
Four meta trends shaping UK telecoms 4. Sluggish economic 1. Device proliferation 2. Always on-demand 3. Bandwidth demand growth Instant video available on demand for TT homes connect on consumers average 7 unique Downloading video in devices per month all its forms will drive Digital connectivity will demand from save consumers, consumers for businesses, How many devices in 10 bandwidth government and NGO’s years? money Instant access to Cloud Cloud services will services for businesses Expected to work drive demand from Savvy customers will whenever needed businesses for reliable, look for the value uncontended option bandwidth Won’t want: multiple contracts, complex set- up, security issues 28
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 - 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 29
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