21 November 2018

Interim Results

FY19

Agenda

1

H1 FY19 Overview

Financial Review

Our Plan

Outlook

Tristia Harrison

Kate Ferry

Tristia Harrison

Tristia Harrison

Q&A All

H1 FY19 Overview

Performance on track with strong momentum on KPIs; no change to FY expectations

3

(42)

22 20 26 37

109 80

24

2.2m

Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

BB Net Adds On-net Churn

1.6%1.4%

1.2% 1.4% 1.3% 1.2% 1.3% 1.1%

Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

Fibre Net Adds

74 73 72 89 89 98

67

125

Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

42 43 44 47 48 51 53 55

Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

EFM & Ethernet Base

367 375 375 396 382 389

Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

Revenue ex-Carrier & Off-net+4.1% +3.7%

Total FLPP Base

On-net ARPU

25.1 26.0 25.2 25.1 24.7 25.2

Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

Growing Consumer ARPU

Focus on growth, leading to improving profitability

4

FY18 FY19 Impact FY20

1. Customer Base• Meaningful shift to

higher speed products

• Base growth• Growing in Consumer• Increasing revenue

2. ARPU• Growing Consumer ARPU• Stable Group ARPU and

reducing headwind

3. Cost Base• Central costs• FTTC discounts

• Continued improvements in cost efficiency

4. Regulation• WLA pricing

• Tailwind• Reducing cost base

Plan is working; outlook encouraging

FinancialReview

Growth in revenue and EBITDA in line with expectations

6

H1 FY19£’m

H1 FY18£’m

Headline revenue 808 801

Headline revenue (excluding Carrier and Off-net) 771 742

Gross profit 425 408

Margin 52.6% 50.9%

Operating costs & SAC (324) (333)

Headline EBITDA 101 75

Margin 12.5% 9.4%

Headline profit after taxation 5 (21)

Headline EPS (Basic) 0.4p (2.2p)

Dividend per share 1.00p 2.50p

N.B. The above numbers apply IFRS 15 and 9 to both the current year and the prior year under the full retrospective approach

IFRS 15 – Impact on TalkTalk

Full retrospective approach

Two material impacts:

− Connection Fee Revenue (now deferred over contract length)

− Welcome Credits (brought forwards)

£36m negative impact in FY18 due to strong customer growth (following period of decline in FY17)

c.£5m negative impact in H1 FY19

Phasing

− Timing of recognition has changed

− Total contract value remains the same

− No impact on cash

7

IFRS 15 – Impact on TalkTalk

8

P&L Impact(£)

FY18

P&L Upside

P&L Downside

FY19 FY20 FY21

Phasing impact: timing of recognition has changed, but the total contract value remains the same and there is no impact on cash

Illustrative P&L Impact Illustrative Connection Fee Example

£28 £28 £28 £28 £28 £28 £28

£60

£

24 Months

Connection Fee

Monthly Fee

IAS 18

Total contract value: £732

£28 £28 £28 £28 £28 £28 £28

£

24 MonthsConnection Fee

Monthly Fee

Total contract value: £732

£2.50 per month

IFRS 15

Growth in revenue and EBITDA in line with expectations

9

H1 FY19£’m

H1 FY18£’m

Headline revenue 808 801

Headline revenue (excluding Carrier and Off-net) 771 742

Gross profit 425 408

Margin 52.6% 50.9%

Operating costs & SAC (324) (333)

Headline EBITDA 101 75

Margin 12.5% 9.4%

Headline profit after taxation 5 (21)

Headline EPS (Basic) 0.4p (2.2p)

Dividend per share 1.00p 2.50p

N.B. The above numbers apply IFRS 15 and 9 to both the current year and the prior year under the full retrospective approach

Revenue growth from bigger base and Fibre penetration

Gross profit improvement driven by lower Fibre wholesale pricing and growth in high margin data products

Operating costs reduced due to central cost savings and cost to serve efficiencies

Underlying CPA stable

First half cash flow in line with our expectations

10

H1 FY19£’m

H1 FY18£’m

Opening Headline Net Debt 724 782

Headline EBITDA 101 75

Working Capital (14) 34

Capital Expenditure (59) (63)

Operating Free Cash Flow 28 46

Interest & Taxation (21) (28)

Free Cash Flow 7 18

Non-Headline items (20) (21)

Investments (6) (5)

Dividends (17) (47)

Share Issue - -

Net Cash Flow (36) (55)

Closing Headline Net Debt 760 837

Working capital in line with guidance, with YoY movement driven by timing of supplier payments

Investments represent our continued contribution to YouView JV

FY18 final dividend payment of 1.5p

Debt covenant: 3.2x *

Cash generative in H2

* As calculated for the purposes of the Group borrowing facilities

Capex reducing and in line for FY guidance

11

Network− Maintaining spend on network

Other− Anything non-core increasingly being done in capital-

light way, e.g. Mobile

Looking forward− As per previous guidance cash capex expected to be

c.£110m for the year, excluding FibreNationNetwork:

£54mNetwork:

£54m

Other: £9m Other: £5m

H1'18 H1'19

£63m£59m

Non-Headline items lower year-on-year

12

H1 FY19

P&L

Cash£6m

£20m

P&L – EBITDA − Network transformation (£7m) and MVNO operating

profit (£1m)

Cash− Relates to above P&L costs, as well as timing of Group

restructure payments

− Deemed consent receipt not included

Looking forward− Cash items will continue to exceed P&L items due to

timing of final mobile exit payments in H2

− Both P&L and cash items will be lower YoY

H1 FY18

P&L

Cash

£66m

£21m

Summary

IFRS 15

− Simply phasing

− c.£5m negative impact in H1 FY19

P&L

− In line with expectations

− Revenue growth, costs reducing, EBITDA growth

Cash Flow

− Cash generative in H2

− Confident in medium term net debt reduction

Delivering on our plan and confident in full year expectations

13

Our Plan

Our plan to be the #1 value provider of fixed connectivity

15

LEADING TO: BASE GROWTH, GROWING ARPU AND SUSTAINED EBITDA GROWTH

Consumer

16

Pre-2016 2016-2018 2019 onwards

Approach

• Quad-Play• Bait and switch pricing• In-contract price rises• Lack of differentiation

• Prioritisation of fixed connectivity• Launch of FLPP – now over 2.2m

customers on these plans• Completely unique

• Continued focus on fixed• Future proofing; meaningful shift

from MPF to Fibre• Fairly priced add-ons, e.g. TV,

Mobile and Call Boosts• Continuing FLPP

Impact

• Short-term ARPU increases• Increasing churn• Decreasing CSAT• Front and back book disparity

• ARPU dilution, now growing• Reducing churn• Increasing CSAT• Reducing front v back book gap• Consistent base growth

• ARPU growth• Ongoing low churn• Reducing costs to serve• Continued base growth

Unique propositions driving base growth and growing ARPU

1

Pricing data supplied by

Consumer

17

Competitor front and back book price delta can be up to £15 – as new customers are offered cheaper deals

We have closed the average gap between front and back book to £1-2

This has brought down churn over the last few years, whilst others have seen an increase

We are well positioned in this area; increased regulatory and political focus on ‘loyalty penalty’, with CMA considering a super complaint.

Average price delta between front and back book

1

Fairer Broadband for Everyone

FY17 FY18 FY19

Other UK ISPs

TalkTalk

Churn Impact£15

£0

Monthly Cost

Consumer

18

Consumer ARPU growing, driven by increased Fibre penetration, re-contracting at a higher price and fairly priced add-ons

1

Further FLPP dilution (remaining out of contract base to recontract and new acquisitions contracting at competitive prices)

Fibre penetration

Fairly priced add-ons, e.g. TV, Mobile and Call Boosts

Re-contracting at higher price point

Consumer

19

New Wi-Fi Hub and customer connectivity dashboard driving material CSAT and churn benefits

1

Business

UK’s largest Wholesale Broadband provider

2

c.17%

Wholesale

&

Partner

Direct Real strength in indirect channel – UK’s largest supplier of Wholesale and B2B2C Broadband with over 50% market share

Wholesale and Partner is simple, low cost to serve business. Partners add bespoke, tailored services and absorb cost and complexity

ARPU typically lower in Wholesale Broadband, but low cost to serve means EBITDA contribution is broadly similar to Consumer customers

Ethernet is the real growth engine; high ARPU, high margin, long-term business

20

21

Pre-2016 2016-2018 2019 onwards

Approach

• Revenue predominantly driven by Voice

• Significant lower margin Carrier revenue

• Growing high margin Data revenue• 2nd in Wholesale Broadband Market

• Greater proportion of high margin Data revenue

• Reduced lower margin Carrier revenue

• 1st in Wholesale Broadband Market• Fastest growing Ethernet provider• Best Gb over Gb Ethernet pricing

• Continued growth in high margin Data revenue

• Further reduced lower margin Carrier revenue

• Continued leadership in Wholesale Broadband

• Fundamental shift from MPF to Fibre

Impact• Improving margins• Improving CSAT• Growing base

• Strong margin growth• Reducing churn• Improving CSAT• Very strong base growth

• Strong ARPU and margin growth• Reducing costs to serve• Continued base growth

Reliable and consistent business with sustained growth in high margin data products

2

Shift from Voice to Data

Focus on DataMix shift to higher

speed data

Business

22

30% increase in data usage year-on-year

Customers are upgrading to our higher speed products in both Consumer and Business

OTT video continues to be the largest driver, accounting for 58% of all traffic, due to the popularity of Netflix, YouTube, Amazon and BBC iPlayer

We have enhanced our customers video experience by caching an average of 87% of video content within the network

Unlimited data products for businesses and consumers continue to drive network usage to new record peaks within our Network

Network and connectivity3

Pe

ak T

raff

ic T

b/s

Proportion of Video Traffic

Peak Traffic

Data Usage

0

1

2

3

4

5

6

7

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Network and connectivity

23

3

We continue to enhance our network to support both businesses and consumers

Network Strategy Elements Customer Outcomes

Increase the amount of content and video we “Store and

serve” direct from the network

Continue to expand direct connectivity with the major content providers, e.g. Amazon, Apple, Microsoft

Movement of network to high capacity backhaul and core data transmission

Further adoption of Software Defined Network (SDN) and automation capabilities

A great experience for customers with no buffering or delays

for Netflix and other prime content

A great experience for real-time streaming of sporting events

and gaming content

Reduces our network complexity and reduces our network

operating costs

Increasingly our self-driving network will self-heal and optimize

with less interruptions to customers experience

24

We are driving down the cost per Gb through four key initiatives;

− Adoption of additional high capacity optical products across our network

− Holding more content directly on our network which improves the customer experience and lowers the amount of traffic that has to leave our network

− Deploying our next generation access switching capability that utilises more cost effective backhaul options

− Exploitation of service dashboard to identify and resolve service issues in near real time to avoid customer disruption and engineer dispatch

We are meeting data usage demands, whilst reducing our cost per Gb by evolving our network

Network and connectivity3

Cost reduction

Network – regulatory tailwinds and BTOR pricing

Self-service

External spend

Central costs

25

4

One Salford Campus

26

5

Simplification has led to a leaner, more efficient business

Seen real operational and cultural benefits since we moved to Salford

Want to build on Salford success by creating one main campus for the whole business

Will transition gradually over the course of 2019 and complete by January 2020

TalkTalk’s HQ moving to Salford; creating one main campus and a more efficient operating model

Fibre for Everyone

27

Future proofing our network, both through our partnership with Openreach and with our own infrastructure investment

6

Partnership with Openreach

Service Today

• Holding Openreach to account to improve service

• Particular focus on repair and provisioning

• Underpins higher CSAT, lower churn and lower cost to serve

FTTC Discounts

• Driving scale adoption of part Fibre products

• WLA and commercial deal has reduced wholesale FTTC prices

• Underpins lower churn, lower cost to serve, growing ARPU and EBITDA growth

• Fast adopter of G.Fast – offering higher speeds and improving ARPU

FTTP Future

• Committed to ensuring maximum number of customers have access to full Fibre

• Investing in scale full Fibre network. TalkTalk as anchor tenant

• Will wholesale from Openreach – and potentially others – in remainder of country

Fibre for Everyone

28

Scale FTTP alternative investment, introducing FibreNation

6

Reiterating commitment to investing in scaled Full Fibre network

Launched new company FibreNation

Accelerating roll out plans; 3 new towns and cities – Harrogate, Knaresborough and Ripon

Total footprint of over 100,000 homes

TalkTalk and Sky to be wholesale partners of the new network

In discussions with infrastructure investors on the right long-term capital structure

Outlook

FY19 outlook and guidance

In excess of 150k broadband net adds for the full year

Headline EBITDA in line with expectations, with year on year growth driven by:

− the benefits of a larger base and stabilising Group ARPU

− commercial and regulatory tailwinds for Fibre pricing

− cost reductions as we continue to simplify the business and focus on fewer priorities.

Accelerating full fibre plans

30

Q&A

Appendix

IFRS 15 explained

33

What are the key impacts for TalkTalk?

Connection Revenue

Hardware Revenue

Welcome Credits

Commission Costs

IAS 18Connection fee revenue was recognised upfront, at the point when the customer was connectedIFRS 15Connection fee revenue is now deferred and recognised on a straight-line basis over the contract term ImpactRevenue and profits are recognised later

IAS 18Wholesale broadband welcome credits (discount on connection fee for certain customers) were deferred over average customer tenureIFRS 15Wholesale broadband welcome credits are still deferred, but now over thecontract termImpactCosts are recognised earlier, since contract length is shorter than tenure

IAS 18Hardware revenue was recognised upfront based on the amount the customer paid for the hardware when it was delivered to the customerIFRS 15Hardware delivery is a separate performance obligation. Revenue is based on the standalone selling price of the hardware and is recognised upfrontImpactMore revenue is recognised upfront when the hardware is provided

IAS 18Sales commissions and third-party acquisition costs resulting directly from securing contracts with customers were expensed when incurredIFRS 15These costs are now able to be deferred and recognised over the average customer tenureImpactMinimal impact to TalkTalk since existing distribution agreement already enabled the deferral of certain customer acquisition costs

34

IFRS 15 and 9 restated comparatives (unaudited)

IFRS 15

Headline Financials (£’m) Q1’18 Q2’18 Q3’18 Q4’18 H1’18 H2’18 FY’18 Q1’19 Q2’19 H1’19

Total revenue 399 402 401 405 801 806 1,607 400 408 808

On-net revenue 298 310 303 307 608 610 1,218 309 320 629

Off-net revenue 9 5 6 2 14 8 22 3 4 7

Corporate revenue 92 87 92 96 179 188 367 88 84 172

Data revenue 42 36 42 42 78 84 162 43 43 86

Voice revenue 27 29 30 47 56 77 133 30 26 56

Carrier revenue 23 22 20 7 45 27 72 15 15 30

Total revenue excluding Carrier and Off-net 367 375 375 396 742 778 1,513 382 389 771

EBITDA 75 122 197 101