TalkTalk Telecom Gp (TALK) - Interim Results RNS Number : 9445Q TalkTalk Telecom Group PLC 13 November 2012 13^th November 2012 TalkTalk Telecom Group PLC Interim Results for the 6 months to 30 September 2012 · Strong on-net additions and best quarter for total net adds in two years · Continued strong take-up of broadening range of additional products · Next phase of simplifying business to deliver incremental savings of £30m-£50m · On track to deliver all FY13 financial guidance Financial Highlights · Total revenue £828m (H1 FY12: £844m); Corporate revenue £160m (H1 FY12: £158m) · On-net revenue £573m (H1 FY12: £524m); Q2 on-net ARPU £25.37 (Q2 FY12: £23.99) · 320bps improvement in gross margin to 54.7% (H1 FY12: 51.5%) · Underlying EBITDA^1£155m, margin 18.7% (H1 FY12: £146m, margin 17.3%) · Operating Free Cashflow^2£104m (H1 FY12: £97m) · Headline^2 EPS 7.8p (H1 FY12: 7.6p); Interim Dividend raised to 3.45p (H1 FY12: 2.6p) Q2 Operating Highlights · 66,000 fully unbundled net adds; total net customer loss of 4,000 · 44% year on year growth in Plus customers, now 29% of on-net base · 32,000 Mobile customers added, base now 117,000 · Data products trending strongly in TalkTalk Business ^1 Excluding exceptional items and one-off TV launch costs ^2Excluding exceptional items Dido Harding, Chief Executive of TalkTalk commented: These results show real trading momentum and are a strong platform from which to build towards our medium term growth targets. We have successfully launched our TV proposition and have installed 29,000 customers to date. Customer feedback has been positive and we are growing the base according to plan, at 1,000 per day. Meanwhile, our mobile handset proposition is growing meaningfully in the contract handset market. The demand we are seeing for additional products from our increasingly profitable and stable customer base, the progress we are making in TalkTalk Business, and the savings we expect from the next phase of simplifying the business, underpin our confidence in delivering our targeted 2% CAGR in revenues and 25% EBITDA margin in the medium term. Analyst and investor presentation: The Lincoln Centre, 18 Lincoln's Inn Fields, WC2A 3ED at 10.30am Dial-in and Replay details Listen only: Replay: Available for 7 UK/International: +44 (0) 203 140 0724 UK/International days Access code: +44 (0) 20 3140 0698 387756# Webcast available from 10.30 at http://www.talktalkgroup.com/investors/results-centre.aspx Analyst and investor enquiries Media enquiries Mal Patel +44 (0)203 417 Mark Schmid +44 1037 (0)75 1503 4676 SUMMARY FINANCIALS 6 months ended 6 months ended Headline Profit & Loss (£m) 30 September 2012 30 September 2011 Change Revenue 828 844 -1.9% Underlying EBITDA ^(1) 155 146 +6.2% Underlying EBITDA margin 18.7% 17.3% Headline EBITDA ^(2) 147 146 Headline EBITDA margin 17.8% 17.3% Profit after tax 68 68 Headline Earnings per share 7.8p 7.6p +2.6% Dividend per share 3.45p 2.6p +32.7% 6 months ended 6 months ended Headline Cash flow (£m) 30 September 2012 30 September 2011 Change EBITDA ^(2) 147 146 Working capital (5) 0 Capital expenditure (38) (49) Operating free cashflow ^(3) 104 97 Interest and Tax (8) (9) Free cash flow 96 88 Exceptional items (7) (23) Acquisitions and other items (2) (15) Share repurchase (35) (54) Dividends (56) (35) Net Debt 438 477 (1) Excludes £8m investment in launch of TV proposition (H1 FY12: £nil) and exceptional charges (2) Excludes exceptional charges and tax credit and amortisation of acquisition intangibles (3) Operating free cash flow is stated before exceptional costs but after £8m investment in launch costs of TV proposition 6 months ended 6 months ended Statutory Profit & Loss 30 September 2012 30 September 2011 Growth EBITDA (£m) 138 126 +9.5% EBIT (£m) 56 49 +14.3% Profit before tax (£m) 46 41 +12.2% Profit after tax (£m) 38 73 Earnings per share (p) 4.3 8.1 Q2 OPERATING REVIEW Best customer net adds numbers in two years We have seen strong growth in the number of customers on our network, adding 66,000 net new customers to our more profitable fully unbundled (MPF) base, 36,000 more than we added in Q1, driving growth in our on-net base to 3.8 million customers. With a reduction in the partially unbundled base of 27,000 and the continuing decline in our off-net base, our total broadband customer base was 4,000 lower at the end of the quarter than at the end of Q1 - our best quarterly net adds performance in two years, demonstrating that before the scaling of our TV proposition, we are returning our base of phone and broadband customers to stability. Growing take-up of Plus and Mobile; successful launch of TV The number of customers taking our premium Plus product grew by 44% year on year and now comprises 29% of our on-net base. We began connecting TV customers from the end of September and during October we launched our above the line marketing campaign. Demand from existing and new customers has been good. The current base of installed customers (including trialists) stands at 29,000 with installation rates currently running at 1,000 per day. We are getting positive feedback from our initial customers with net promoter scores from TV customers significantly ahead of phone and broadband only customers and we are now beginning to scale the base according to plan. Our mobile proposition, which we enhanced by introducing handsets during the summer, saw strong demand, with 32,000 TalkTalk customers adding a mobile connection to their service during the quarter (3.9% of all contract additions in the UK during September - Gfk), taking the base to 117,000. Year on year growth in On-net Revenue and ARPU On-net revenue of £288m in the quarter was 10% higher year on year reflecting growth in the base and ARPU growth. On-net ARPU of £25.37 was 6% higher year on year with unbundling mix, increased penetration of Plus, and the benefit of line rental increases being partially offset by planned promotional spend and lower usage. Q2 revenue in Corporate was broadly flat but we have seen strong momentum in Ethernet, Data Solutions and Carrier Trading offsetting a seasonal and underlying decline in legacy voice revenues. Off-net revenue, which represents a decreasing proportion of our total revenue, saw a 40% reduction year on year to £46m as this legacy base, comprising those customers that consume BT Wholesale products such as IPStream (broadband only), Narrowband, CPS and WLR (voice only) continues to reduce. As a result, total revenue for the quarter declined by 2% year on year. Continued service improvements drive 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 complaints to Ofcom fell by 38% year on year and by 18% over the previous quarter. We saw continuing improvement in churn through the quarter with on-net churn at 1.6%. We expect churn to continue to reduce from further improvements in customer service and as we see the benefit of more customers taking additional products from us. H1 BUSINESS REVIEW We have continued to make progress across all elements of our strategy during the first half. Strong growth in profitable customers and expanding network reach In the first half, we added 49,000 net new on-net customers, comprising strong growth of 96,000 in our core MPF broadband and voice product, offset by the net loss of 47,000 legacy SMPF broadband-only customers. 78% of our broadband customers are now fully unbundled and able to benefit from our added value products such as Plus TV, mobile, fibre and Homesafe™which in turn will lead to lower customer churn. The total broadband base was 23,000 lower at the end of H1 as we continued to see a reduction in the off-net broadband base (-72,000), both as a result of migration to on-net and churn. The increase in the on-net base combined with the expansion of fully unbundled customers and positive take-up of Plus has led to a significant increase in on-net revenue and margin. Our unbundling programme continued at pace with 187 new exchanges added in the period extending the reach of our value for money proposition to 2,695 exchanges and approximately 94% of the UK population. We are on track to unbundle a further 30 or so exchanges in H2. We plan to unbundle another 300 exchanges in FY14 and now see an opportunity to extend the programme beyond that as the cost of unbundling exchanges falls and customer ARPU grows, allowing us to profitably extend our geographic reach. Value for money Quad play We have made significant progress in delivering our value for money quad play proposition. TalkTalk TV At the end of July we announced our TV product for Plus customers, featuring: · Free YouView set top box and no additional monthly fee · Seven day catch up, over 70 Freeview channels including some in HD, search pause & record live TV, a huge library of the best films and shows from the US and UK · Free 12 month subscription to LOVEFiLM Instant · 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 As planned, we began connecting customers from the end of September and have seen good demand following the launch of our marketing campaign in October, with an installed base of 29,000 (11^th November) and connections running at 1,000 per day. The positive feedback from our summer trials and the recent engineer-installed base, demonstrates a high level of customer satisfaction with the technology and the installation process giving us confidence in our plans for scaling the base. TalkTalk Mobile In August, we launched our TalkTalk Mobile contract handset proposition. Available exclusively to TalkTalk customers, TalkTalk Mobile offers simplicity, range and great value plans - all handsets, of which there is a broad range available, are completely free with plans starting from £5 a month. Three plans are available - Small, Medium and Large with different prices depending on the choice of handset. Customers can buy online or over the phone with those buying online getting double the data allowance. This simplicity coupled with low running costs means that TalkTalk can now offer the most popular handsets at competitive prices, ranging from basic feature phones to smartphones. As a result our mobile offering has gained strong traction, with 117,000 customers now taking advantage of our innovative mobile-to-fixed calling offers, competitive call rates, and now handsets. We expect the growing mobile base to drive ARPU growth and over time, reduce churn. TalkTalk Business Services Corporate revenue primarily comprises our growing business data services (c15% of revenue) and carrier services (c25% of revenue), and our declining legacy voice services (c60% of revenue). Business data services, which include Ethernet, managed networks and co-location, have continued to build momentum, delivering a 31% increase in revenue year on year as we continue to expand our product set and start to scale up our volume capability. With customers increasingly looking to us for additional value for money solutions, we have recently launched an 80Mbps fibre product with generous usage allowances, network prioritisation for data traffic and business grade routers. For businesses requiring high performance data and voice services, we now offer a very competitive alternative toBT's ISDN30 service with our Next Generation Voice service, which we are making widely available to channel partners. From January 2013, we shall also offer an Ethernet over Fibre variant of the service which will deliver high speed symmetrical services at a significantly lower price point than traditional Ethernet technologies. The launch of Fibre for our business customers is a significant milestone for us in the development of both our Broadband and Ethernet families of products. Carrier services, which provides UK termination for international mobile operators saw revenue growth of 20% year on year. As expected, lower margin legacy voice related revenues declined by 14% year on year, driven by the impact of mobile termination rates and continuing fixed line voice minutes decline, offset by the growth in data services and Carrier. In May, TalkTalk Business ("TTB") as part of a consortium led by Fujitsu was awarded a contract to provide network services for the phone and broadband customers of the Post Office. The 5-year contract will see services go live in the summer of 2013 and will give Post Office customers access to our advanced Next Generation Network. This is a significant step forward in our strategy of growing TTB and highlights the opportunities that our network is capable of delivering by working with major systems integrators. With a less than 5% share of its core SME and small corporate markets, we believe TTB has an excellent opportunity to leverage the strength and capability of our extensive network and drive a welcome element of competition into this market. In order to fully leverage the growth potential of TTB, we are implementing an extensive restructuring of systems and processes as part of our new Making TalkTalk Simpler programme. This will create among other things, a Business Grade delivery platform allowing the business to grow scale, and will enable TTB to contribute materially to the Group's medium term revenue growth and profitability targets. Operating efficiencies We have continued to deliver significant improvements to our customers' experience in the first half with a 19% year on year reduction in calls into our contact centres and over 70% of customers now benefitting from first time resolution of their query. This is reflected in the substantially reduced number of complaints to Ofcom during the half - down 38% year on year. In April 2012 we announced Phase 2 of our contact centre rationalisation programme with the outsourcing of our operations in Preston and Northampton. This is expected to deliver savings of c£5m during H2 FY13, with total annualised savings from FY14 of £10m. These initiatives completed our Operating Efficiencies programme, with £50m of annualised benefits. There remain significant further opportunities for us to drive process and efficiency improvements over the medium term. In September 2012, we began our new Making TalkTalk Simpler programme. We expect that combined initiatives under this programme will drive incremental savings of £30m-£50m over the next 3-5 years. In the first phase of this programme we are restructuring the systems and processes in TTB to remove duplication and better align our sales and service model with our growth ambitions; and reviewing and simplifying our IT outsourcing. We expect these initiatives to deliver incremental annualised cost savings of £10m from FY14, with around a third of this benefit to be delivered in H2 FY13. We see considerable opportunities to make TalkTalk simpler, better for customers, and therefore less costly to operate. Making TalkTalk Simpler is therefore a key component of our medium term plan to achieve a 25% EBITDA margin. Fibre Access We saw an acceleration of demand for fibre in the first half, with 22,000 more customers choosing to take paid-for speed uplifts (versus 5,000 in the second half of FY12), taking our base of fibre customers to 30,000. We expect demand to grow from here, for example from customers who are interested in taking TV from us and live in a fibre-enabled area, but who currently do not receive sufficient speed to take our TV product (at least 3Mbps for standard definition content and greater than 5Mbps for premium/high definition content). Nevertheless, we expect overall fibre demand among our customer base to remain modest until the value for money benefits become clearer and the installation process simpler. GUIDANCE As we indicated in July, we expect to see a return to year on year revenue growth in FY13 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. In line with previous years, we expect to see underlying EBITDA margin growth to be second half-weighted. As a result we are re-iterating the FY13 financial guidance set out with our Preliminary Results in May and our Q1 update in July: Revenue Return to revenue growth in FY13. Operating expenses Broadly flat in FY13 with customer service improvements and back office simplification cost reductions offset by increased investment in network footprint and resilience. Underlying EBITDA margin Underlying EBITDA margin excluding investment in TV of 20%-21% in FY13, through continued ARPU growth and mix driven margin improvement. One-off TV launch costs We expect to incur £7-12m on the launch of TV in H2, comprising initial above the line marketing expenditure and promotional costs associated with launch. Variable TV SAC We expect the incremental SAC per triple play customer to be approximately £140, with total costs in H2 determined by the take up of the product. Cash flow items We expect no material net exceptional cash expenditure in FY13, with the cash benefit of the historic dispute with BT expected to offset the exceptional spend on our efficiency programmes (H1 FY13: £7m; FY13: c£20m). Capex is expected to be in line with our stated policy of c.6% of revenue, with no incremental expenditure arising from the launch of TV. We do not currently anticipate any material adverse working capital movement from the launch of triple play. Dividend Full year dividend growth of a minimum of 15%. Medium term outlook At our preliminary results in May we set out new medium term targets of 2% CAGR in revenue and 25% EBITDA margin. The key components of our revenue growth strategy are: an improving customer mix (from off-net to on-net; and from single and dual play to triple and quad play), continued progress in upsell (Essentials to Plus, fibre and other boosts), and growth in data products and services for our Corporate customers. We expect this growth to contribute significantly to our profitability target. Whilst some of this growth will require us to invest in SAC in the short term, for example as we build scale in TV and mobile, we expect the resulting lower churn to deliver material savings in SAC over the medium term. In addition, we expect other operating costs to benefit from our Making TalkTalk Simpler programmes, which we expect to deliver incremental savings over the next 3-5 years of £30m-£50m. FINANCIAL REVIEW Headline Profit & Loss Revenue Revenue decreased by 2% to £828m in H1 FY13 (H1 FY12: £844m). We continued to see growth in on-net revenue, increasing by 9.4% to £573m (H1 FY12: £524m), driven by an increase in both our on-net base and ARPU as a greater proportion of our customers take our Plus package, MVNO and Fibre products, offset by the continued decline in voice usage. Off-net revenue at £95m (H1 FY12: £162m) reduced in line with our expectations, reflecting the contraction in the base and voice usage. Corporate revenue increased by £2m to £160m (H1 FY12: £158m) with strong growth in new data products and carrier services offsetting the decline in voice usage. Gross margin Gross profit increased to £453m (H1 FY12: £435m), a gross margin of 54.7% (H1 FY12: 51.5%). Two thirds of this margin improvement was driven by an improved customer mix as off-net and broadband only customers are replaced by higher value on-net broadband and voice. The remainder of the margin improvement was driven equally by the change in LLU line rental pricing from 1 April 2012, and a combination of line rental increases and new products. EBITDA Underlying EBITDA improved by 6.2% to £155m (H1 FY12: £146m), with underlying EBITDA margin growing to 18.7% (H1 FY12: 17.3%). This reflected the margin benefit from higher on-net revenues and the delivery of cost savings from operating efficiencies and our reorganisation programme, offset by investment in our network roll out and the SAC associated with growth in on-net and new products. After TV launch costs of £8m, headline EBITDA remained broadly flat at £147m (H1 FY12: £146m). Exceptional items Exceptional income statement charges of £9m (H1 FY12: £20m) have been incurred in the period. In April 2012 we announced the outsourcing of our operations in Preston and Northampton (the second phase of our Operating Efficiencies contact centre rationalisation programme), with an associated exceptional income statement charge for the period of £6m. This programme is expected to generate annualised cost savings of approximately £10m from FY14, of which half is expected to be realised in the second half of this financial year. In September 2012 we announced the 'Making TalkTalk Simpler' programme. As part of this programme, we are consolidating the systems and processes within TTB to align our sales and service model for growth; implementing a review and consolidation of our outsourced partners, and rebalancing our on-shore footprint. Associated exceptional income statement charges of £3m have been recognised for the period. We expect this phase of the programme to deliver annualised cost savings of £10m from FY14, and expected around one third of this benefit to be delivered in H2 FY13. Headline EBIT decreased by £5m to £95m (H1 FY12: £100m) as a result of the investment in TV, and higher depreciation and amortisation charges of £6m from the continued investment in our exchange roll out. Interest and tax Finance costs were slightly higher at £10m (H1 FY12: £8m) due to the amortisation of the facility fees arising on the refinancing in November 2011. Our effective headline tax rate was 20% (H1 FY12: 26%) reflecting both the increase in the tax charge from the impact on the deferred tax asset of the reduction in the UK statutory corporation tax rate, and the annual recognition of a further tranche of the tax losses acquired with Tiscali, based on our rolling forecast, in line with our agreement with HMRC. Earnings per share Underlying basic earnings per share grew from 7.6 pence to 8.6 pence principally as a result of the improved underlying profitability of the business. The full period effect of the purchase of shares by the Employee Benefit Trust in H1 FY12, is reflected in the weighted average number of shares for the period, which has reduced to 874 million (H1 FY12: 900 million). Net of the investment in TV, profit for the period has remained flat however the weighted average number of shares, as noted above, has reduced to 874 million (H1 FY12: 900 million). As a result headline EPS increased by 2.6% to 7.8p (H1 FY12: 7.6p). Dividend The Board has declared an Interim Dividend of 3.45p per share, in line with our commitment to grow the full year dividend by at least 15%. The ex-dividend date is 21 November 2012 and the record date is 23 November 2012. We expect the dividend to be paid on or around 14 December 2012. Headline Cashflow and Net Debt We generated £104m of operating free cash flow in the first half, an increase of 7.2% on the prior year (H1 FY12: £97m). This represents 12.6% of revenue, and an increase on the prior year (H1 FY12: 11.5%). Capital expenditure in the first half was £38m (H1 FY12: £49m), representing 4.6% of revenue (H1 FY12: 5.8%). Investment in the first half included the majority of our exchange rollout programme for this year and continued development of our billing systems. Our investment is second half weighted, with the majority of our network resilience programme delivered in H2, alongside continued investment in our core network and IT infrastructure. We had a working capital outflow of £5m in the first half (H1 FY12: neutral). This reflects an increase in carrier trading debtors and an increase in stock in preparation for the launch of TV, partially offset by an increase in creditors as a result of both of these factors. Net cash exceptional spend in the first half was £7m (H1 FY12: £23m), this predominantly related to redundancy and project management costs for the outsourcing of operations in Preston and Northampton. We expect full year exceptional cash to be neutral, with the cash costs associated with the operating efficiencies and Making TalkTalk Simpler programmes being offset by an inflow relating to the historic BES dispute. Interest and tax paid in the period were in line with the prior year at £8m (H1 FY12: £9m). In September 2012 the first tranche of both the TalkTalk Group Value Enhancement Scheme and the Carphone Warehouse TalkTalk Group Value Enhancement Scheme (together referred to as "the VES") vested. As part of this, we purchased the participants' VES shares in return for a combination of the issue of new PLC shares and cash resulting in a cash outflow of £35m. In the prior period, share repurchases totalling £54m (42 million shares) were made by the Employee Benefit Trust in order to cover anticipated future option exercises. Net acquisition expenditure in the period was £2m in relation to our continued investment in the YouView joint venture (H1 FY12: £2m). In the prior year we invested £11m on TalkTalk Business acquisitions. The dividend paid in the period was £56m, being the final dividend for FY12 of 6.4 pence per share. Net cash outflow was £4m and net debt at the end of the first half increased modestly to £438m from £434m as at 31 March 2012 reflecting the dividend payment, VES settlement, exceptional items and investment in YouView. Movements in share capital and reserves The settlement of the VES schemes resulted in a net movement in reserves of £31m being the recognition of share premium of £32m and a £63m debit in retained earnings and other reserves. The £63m debit to reserves represents the cash outflow of £35m and the issue of 17 million new PLC shares at a value of £32m, net of the repayment of the associated VES loans, interest and a reduction in the Group's liability to settle the schemes. APPENDIX 1 - QUARTERLY METRICS Q1 11/12 Q2 11/12 Q3 11/12 Q4 11/12 Q1 12/13 Q2 12/13 KPIs On-Net Broadband & Voice 2.827 2.910 2.966 3.066 3.096 3.162 Broadband Only 0.815 0.758 0.712 0.689 0.669 0.642 Total On-net 3.642 3.668 3.678 3.755 3.765 3.804 Churn 1.7% 1.6% 1.6% Unbundled 87% 89% 90% 92% 93% 94% Fully Unbundled 68% 70% 73% 75% 77% 78% Plus 0.667 0.764 0.883 1.026 1.092 1.097 MVNO 0.027 0.038 0.045 0.061 0.085 0.117 Homesafe 0.054 0.149 0.228 0.320 0.440 0.518 Fibre 0.001 0.003 0.005 0.008 0.015 0.030 Off-net Broadband 0.530 0.461 0.401 0.311 0.282 0.239 Voice 0.621 0.573 0.525 0.476 0.436 0.407 Total Broadband 4.172 4.129 4.079 4.066 4.047 4.043 Revenue On-net 261 263 276 284 285 288 Off-net 85 77 67 58 49 46 Corporate 77 81 79 79 80 80 Total 423 421 422 421 414 414 ARPU On-net 24.00 23.99 25.05 25.47 25.27 25.37 Off-net 23.41 23.49 22.79 22.57 21.71 22.48 Exchanges Unbundled in period 30 171 130 170 83 104 Total unbundled 2,037 2,208 2,338 2,508 2,591 2,695 Condensed consolidated income statement for the 6 months ended 30 September 2012 With 6 months ended 30 September 2011 comparatives Before Amortisation After Before Amortisation After amortisation amortisation amortisation amortisation of of of of of of acquisition acquisition acquisition acquisition acquisition acquisition intangibles intangibles intangibles intangibles intangibles intangibles and and and and and and exceptional exceptional exceptional exceptional exceptional exceptional items items ** items items items ** items 6 months ended 30 September 2012 6 months ended 30 September 2011 (Unaudited) (Unaudited) Notes £m £m £m £m £m £m Revenue 828 - 828 844 - 844 Cost of sales (375) - (375) (409) - (409) Gross profit 453 - 453 435 - 435 Operating expenses excluding amortisation, depreciation and investment in TV 7 (298) (9) (307) (289) (20) (309) Underlying EBITDA* 155 (9) 146 146 (20) 126 Investment in (8) - TV (8) - - - Headline 138 126 EBITDA 147 (9) 146 (20) Depreciation (39) - (39) (32) - (32) Amortisation 7 (11) (30) (41) (12) (31) (43) Share of results of joint venture (2) - (2) (2) - (2) Profit before interest and taxation 95 (39) 56 100 (51) 49 Finance costs 3 (10) - (10) (8) - (8) Profit before taxation 85 (39) 46 92 (51) 41 Taxation 4, 7 (17) 9 (8) (24) 56 32 Profit for the period 68 (30) 38 68 5 73 Attributable to the equity holders of the parent company 68 (30) 38 68 5 73 Earnings per share Underlying Basic (pence) 8 8.6 7.6 Diluted (pence) 8 8.0 7.2 Headline Basic (pence) 8 7.8 4.3 7.6 8.1 Diluted 7.2 4.0 7.2 7.8 (pence) 8 * Underlying EBITDA is defined as Headline EBITDA excluding costs relating to investment in TV. ** 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 2012 With year ended 31 March 2012 comparatives Before Amortisation After Before Amortisation After amortisation amortisation amortisation amortisation of of of of of of acquisition acquisition acquisition acquisition acquisition acquisition intangibles intangibles intangibles intangibles intangibles intangibles and and and and and and exceptional exceptional exceptional exceptional exceptional exceptional items items** items items items** items 6 months ended 30 September 2012 Year ended 31 March 2012 (Unaudited) (Audited) Notes £m £m £m £m £m £m Revenue 828 - 828 1,687 - 1,687 Cost of sales (375) - (375) (803) - (803) Gross profit 453 - 453 884 - 884 Operating expenses excluding amortization, depreciation and investment in TV 7 (298) (9) (307) (558) (27) (585) Underlying EBITDA* 155 (9) 146 326 (27) 299 Investment in (8) - TV (8) - - - Headline 138 299 EBITDA 147 (9) 326 (27) Depreciation (39) - (39) (65) - (65) Amortisation 7 (11) (30) (41) (27) (61) (88) Share of results of joint venture (2) - (2) (1) - (1) Profit before interest and taxation 95 (39) 56 233 (88) 145 Finance costs 3 (10) - (10) (18) - (18) Profit before taxation 85 (39) 46 215 (88) 127 Taxation 4, 7 (17) 9 (8) (56) 67 11 Profit for the period 68 (30) 38 159 (21) 138 Attributable to the equity holders of the parent company 68 (30) 38 159 (21) 138 Earnings per share Underlying Basic (pence) 8 8.6 18.0 Diluted (pence) 8 8.0 17.2 Headline Basic (pence) 8 7.8 4.3 18.0 15.6 Diluted (pence) 8 7.2 4.0 17.2 14.9 * Underlying EBITDA is defined as Headline EBITDA excluding costs relating to investment in TV. ** 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 2012 6 months 6 months Year ended ended ended 30 September 30 September 31 March 2012 2011 2012 (Unaudited) (Unaudited) (Audited) £m £m £m Profit for the period 38 73 138 Other comprehensive income for the period Currency translation and cash flow hedges (2) (1) - Total recognised income for the period 36 72 138 Attributable to the equity holders of the 36 72 138 parent company Condensed consolidated statement of changes in equity for the 6 months ended 30 September 2012 Share Share Translation Demerger Retained Total capital premium reserve reserve earnings and other reserves £m £m £m £m £m £m At 1 April 2012 1 586 (65) (513) 435 444 Total comprehensive income for the period - - - - 36 36 Issue of own shares* - 32 - - (63) (31) Taxation of items recognised directly in reserves - - - - 4 4 Share-based payments reserve credit - - - - 3 3 Equity dividends (note 6) - - - - (56) (56) At 30 September 2012 1 618 (65) (513) 359 400 Share Share Translation Demerger Retained Total capital premium reserve reserve earnings and other reserves £m £m £m £m £m £m At 1 April 2011 1 586 (65) (513) 406 415 Total comprehensive income for the period - - - - 72 72 Net purchase of own shares - - - - (54) (54) Share-based payments reserve credit - - - - 2 2 Share-based payments reserve debit - - - - (1) (1) Equity dividends (note 6) - - - - (35) (35) At 30 September 2011 1 586 (65) (513) 390 399 Share Share premium Translation Demerger Retained Total capital reserve reserve earnings and other reserves £m £m £m £m £m £m At 1 April 2011 1 586 (65) (513) 406 415 Total comprehensive income for the year - - - - 138 138 Net purchase of own shares - - - - (54) (54) Settlement of Group ESOT shares - - - - 1 1 Share-based payments reserve credit - - - - 4 4 Share-based payments reserve debit - - - - (2) (2) Equity dividends (note 6) - - - - (58) (58) At 31 March 2012 1 586 (65) (513) 435 444 * On 17 September 2012, the Group's Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been satisfied meaning the VES participants were entitled to exercise 60% of their options as set out in note 9. The settlement of the schemes resulted in the recognition of share premium of £32m and a £63m movement in retained earnings and other reserves. Condensed consolidated balance sheet as at 30 September 2012 30 September 30 September 31 March 2012 2011 2012 Notes (Unaudited) (Unaudited) (Audited) £m £m £m Non-current assets Goodwill 480 478 480 Other intangible assets 172 232 202 Property, plant and equipment 280 289 292 Non-current asset investments 1 1 1 Investment in joint venture 5 7 4 7 Deferred tax assets 116 145 120 1,056 1,149 1,102 Current assets Cash and cash equivalents 2 28 2 Inventories 13 3 3 Trade and other receivables 205 176 184 Loans to related parties 2 2 2 222 209 191 Total assets 1,278 1,358 1,293 Current liabilities Trade and other payables (404) (395) (379) Loans and other borrowings (25) - (26) Corporation tax liabilities (17) (20) (16) Provisions 11 (8) (28) (8) (454) (443) (429) Non-current liabilities Loans and other borrowings (415) (505) (410) Provisions 11 (9) (11) (10) (424) (516) (420) Total liabilities (878) (959) (849) Net assets 400 399 444 Equity Share capital 12 1 1 1 Share premium 618 586 586 Translation and hedging reserve (65) (65) (65) Demerger reserve (513) (513) (513) Retained earnings and other reserves 359 390 435 Funds attributable to equity shareholders 400 399 444 Condensed consolidated cash flow statement for the 6 months ended 30 September 2012 6 months 6 months Year ended ended ended 31 March 30 September 30 September 2012 2011 2012 Notes (Unaudited) (Unaudited) (Audited) £m £m £m Operating activities Profit before interest and taxation 56 49 145 Adjustments for non-cash items: Share-based 9 payments 3 2 4 Depreciation 39 32 65 Amortisation 41 43 88 Share of losses of joint venture 2 2 1 Profit on disposal of property, plant and equipment - - (9) Profit on disposal of customer base - (3) (3) Operating cash flows before movements in working capital 141 125 291 Increase in trade and other receivables (23) (19) (20) Increase in inventory (10) - - Increase in trade and other payables 28 20 13 Decrease in provisions (1) (8) (29) Cash generated by operations 135 118 255 Income taxes paid - (1) (2) Net cash flows generated from operating activities 135 117 253 Investing activities Acquisition of subsidiaries and joint venture, net of cash acquired (2) (13) (20) Disposal of customer base - 3 3 Acquisition of intangible assets (11) (15) (28) Acquisition of property, plant and equipment (27) (34) (78) Profit on disposal of property, plant and equipment - - 9 Cash flows from investing activities (40) (59) (114) Financing activities Settlement of Group ESOT shares - - 1 Net purchase of own shares (35) (54) (54) Repayment of borrowings 4 75 5 Refinancing fees - - (7) Interest paid (8) (8) (17) Dividends paid (56) (35) (58) Cash flows from financing activities (95) (22) (130) Net increase in cash and cash equivalents - 36 9 Cash and cash equivalents at the start of the period 1 (8) (8) Effect of exchange rate fluctuations 1 - - Cash and cash equivalents at the end of the period 2 28 1 Cash and cash equivalents for the purposes of this statement comprise: Cash and bank balances 10 2 28 2 Bank overdrafts * 10 - - (1) 2 28 1 * 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 2012 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 financial statements for the 6 months ended 30 September 2012 do not comprise statutory accounts for the purpose of section 434 of the Companies Act 2006, and should be read in conjunction with the Annual Report 2012 of TalkTalk Telecom Group PLC (the 'Annual Report 2012'). The Annual Report 2012 was audited by the Group's auditor, Deloitte LLP, their report was unqualified and did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report. The Annual Report 2012 can be found on the Group's corporate website www.talktalkgroup.com. The financial information for the 6 months ended 30 September 2012 and 30 September 2011 has not been subject to audit or review by the Group's auditor. 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 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 committed facilities were disclosed in the Annual Report 2012. The interim condensed financial statements for the 6 months ended 30 September 2012 have been prepared using accounting policies and methods of computation consistent with those set out on pages 37 to 39 of the Annual Report 2012. 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 to 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. The Group's revenue is presented split by its On-net, Off-net and Corporate products as this information is provided to the Group's chief operating decision maker. On-net and Off-net comprise Consumer customers and business customers that receive similar services. 6 months ended 30 6 months ended 30 Year ended 31 September September March 2012 2011 2012 £m £m £m On-net 573 524 1,084 Off-net 95 162 287 Corporate 160 158 316 828 844 1,687 3. Finance costs Finance costs are analysed as follows: 6 months ended 30 6 months ended 30 Year ended September September 31 March 2012 2011 2012 £m £m £m Interest on bank loans and overdrafts 8 6 14 Facility fees and similar charges 2 1 3 Unwinding of discount on provisions - 1 1 10 8 18 4. Taxation An effective rate of 20% (6 months ended 30 September 2011: 26%; year ended 31 March 2012: 26%) has been applied to Headline profit before taxation from continuing operations. A tax credit at 24% has been recognised in the current period (6 months ended 30 September 2011: 26%; year ended 31 March 2012: 26%) in respect of the amortisation of acquisition intangibles net of any adjustments in respect of prior periods. On 3 July 2012 a reduction in the UK Statutory rate of Corporation tax was substantively enacted, bringing the tax rate down from 24% to 23% with effect from 1 April 2013. Accordingly the tax assets and liabilities recognised at 30 September 2012 take account of this change. This has resulted in a tax charge to the income statement as the value of the Group's tax assets have been reduced. In addition the asset reflects the annual recognition of a further tranche of the tax losses acquired with Tiscali UK Limited, including Video Networks Limited, based on the Group's rolling forecast and in line with the Group's agreement with HMRC. 5. Acquisitions and disposals A further £2m has been invested in YouView TV Limited in the 6 months ended 30 September 2012 (6 months ended 30 September 2011: £2m; year ended 31 March 2012: £4m). The share of losses recognised by the Group in the period was £2m (6 months ended 30 September 2011: £2m; year ended 31 March 2012: £1m). The resulting net investment at 30 September 2012 was £7m (6 months ended 30 September 2011: £4m; year ended 31 March 2012: £7m). 6. Equity dividends 6 months 6 months ended ended Year ended 31 March 30 September 30 September 2012 2011 2012 £m £m £m Ordinary dividends Final dividend for the year ended 31 March 2011 of 3.9p per ordinary share - 35 35 Interim dividend for the year ended 31 March 2012 of 2.6p per ordinary share - - 23 Final dividend for the year ended 31 March 2012 of 6.4p per ordinary share 56 - - Total dividends 56 35 58 The proposed dividend for the 6 months ended 30 September 2012 is 3.45p per ordinary share on 891 million shares (£31m). The proposed interim dividend was approved by the Board on 12 November 2012 and has not been included as a liability as at 30 September 2012. 7. Reconciliation of Headline information to statutory information Profit before interest and Profit before Profit for EBITDA taxation taxation the period 6 months ended 30 September 2012 £m £m £m £m Headline results 147 95 85 68 Exceptional items - Operating (3) (3) (3) (2) expenses (a) Exceptional items - Operating (6) (6) (6) (5) expenses (b) Amortisation of acquisition - (30) (30) (23) intangibles (e) Statutory results 138 56 46 38 6 months ended 30 September 2011 Headline results 146 100 92 68 Exceptional items - Operating expenses (c) (3) (3) (3) (2) Exceptional items - Operating expenses (b) (14) (14) (14) (14) Exceptional items - Operating expenses (d) (3) (3) (3) (3) Amortisation of acquisition intangibles (e) - (31) (31) (23) Exceptional items - taxation (f) - - - 47 Statutory results 126 49 41 73 Year ended 31 March 2012 Headline results 326 233 215 159 Exceptional items - Operating expenses (c) (11) (11) (11) (8) Exceptional items - Operating expenses (b) (14) (14) (14) (11) Exceptional items - Operating expenses (d) (2) (2) (2) (2) Amortisation of acquisition intangibles (e) - (61) (61) (45) Exceptional items - taxation (f) - - - 45 Statutory results 299 145 127 138 Headline information is provided because the Directors consider that it provides assistance in understanding the Group's underlying performance. a) Operating efficiencies - Phase III (Making TalkTalk Simpler) During the 6 months to 30 September 2012, the Group has continued a review of operating structure to look for further opportunities to drive process and efficiency improvements over the medium term. Initiatives that form part of the Group's new Making TalkTalk Simpler programme were implemented in the 6 months to 30 September 2012: a restructuring of the systems and processes in TalkTalk Business to remove duplication and better align the sales and service model for future growth; and a review and consolidation of the outsourcing partners and rebalancing of the Group's on-shore footprint. This has resulted in redundancy, dual running, property and project management costs. The total charge incurred in the 6 months ended 30 September 2012 was £3m (6 months ended 30 September 2011: £nil; year ended 31 March 2012: £nil). A total taxation credit of £1m has been recognised in the 6 months ended 30 September 2012 (6 months ended 30 September 2011: £nil; year ended 31 March 2012: £nil). b) Operating efficiencies - Phase II (Consumer contact centre rationalisation) On 24 April 2012, the Group announced the second stage of its contact centre rationalisation. This resulted in consolidating and outsourcing operations in Preston and Northampton. Costs were incurred in respect of redundancy, dual running and consultancy. The total charge incurred in the 6 months ended 30 September 2012 was £6m (6 months ended 30 September 2011: £nil; year ended 31 March 2012: £nil). On 7 September 2011, the Group announced the closure of the Group's contact centre in Waterford, Ireland, which resulted in redundancy, consultancy and onerous property lease costs. The total charge incurred in the 6 months ended 30 September 2011 was £14m (year ended 31 March 2012: £14m). 7. Reconciliation of Headline information to statutory information (continued) A total taxation credit of £1m has been recognised in the 6 months ended 30 September 2012 (6 months ended 30 September 2011: £nil; year ended 31 March 2012: £3m). c) Operating efficiencies - Phase I (Back office restructuring) On 26 January 2011 a major restructure of the Group was announced to integrate technology and IT capabilities and consolidate back office functions. The reorganisation principally resulted in a reduction in headcount, and required project management and consulting costs to deliver these benefits. The programme also resulted in onerous contract and dual running costs relating to a number of technology contracts where, services previously provided externally are now being provided in-house. The total charge incurred in the 6 months ended 30 September 2012 was £nil (6 months ended 30 September 2011: £3m; year ended 31 March 2012: £11m). A total taxation credit of £nil has been recognised in the 6 months ended 30 September 2012 (6 months ended 30 September 2011: £1m; year ended 31 March 2012: £3m). d) Other During the 6 months ended 30 September 2011, Ofcom fined the Group £3m as a result of contravention of General Condition 11 under section 94 of The Communication Act 2003. No tax credit was recognised in respect of the fine. For the One Company integration, implemented during the year ended 31 March 2010, a credit of £1m was recognised in the year ended 31 March 2012 in respect of a provision release for costs no longer anticipated to be incurred. e) Amortisation of acquisition intangibles An amortisation charge in respect of acquisition intangibles of £30m was incurred in the 6 month period ended 30 September 2012 (6 month period ended 30 September 2011: £31m; year ended 31 March 2012: £61m). A tax credit at 24% in the 6 month period ended 30 September 2012 (6 months ended 30 September 2011: 26%; year ended 31 March 2012: 26%) has been recognised in respect of the amortisation of acquisition intangibles, net of any adjustments in respect of prior periods. The tax credit was £7m for the 6 month period ended 30 September 2012 (6 month period ended 30 September 2011: £8m; year ended 31 March 2012: £16m). f) Exceptional items - taxation During the 6 month period ended 30 September 2011 the Group reached agreement with HMRC over the utilisation of brought forward tax losses acquired with the Tiscali UK business in 2009, including those of Video Networks Limited. This resulted in the recognition of deferred tax assets of £47m (year ended 31 March 2012: £45m), in addition to those recognised at the acquisition date. The recognition of the deferred tax asset has been recognised in exceptional items as it is both material and one-off in nature, and does not relate to the underlying performance of the business. 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. 6 months ended 6 months ended Year ended 31 March 30 September 30 September 2012 2011 2012 £m £m £m Underlying earnings* 75 68 159 Headline earnings (note 7) 68 68 159 Statutory earnings 38 73 138 Weighted average number of shares (millions) Shares in issue** 915 914 914 Less weighted average holdings by Group ESOT (41) (14) (29) For basic earnings per share 874 900 885 Dilutive effect of share options 68 38 40 For diluted earnings per share 942 938 925 Basic earnings per share Underlying (pence) 8.6 7.6 18.0 Headline (pence) 7.8 7.6 18.0 Statutory (pence) 4.3 8.1 15.6 Diluted earnings per share Underlying (pence) 8.0 7.2 17.2 Headline (pence) 7.2 7.2 17.2 Statutory (pence) 4.0 7.8 14.9 * Underlying earnings of £75m is defined as headline EBITDA excluding costs of £8m relating to the investment in TV less an allocation of taxation of £1m based on the Group's effective tax rate (6 months ended 30 September £68m; year ended 31 March 2012: £159m). ** The number of shares in issue increased by 17 million on 21 September 2012 as set out in note 12. 9. Share-based Payments a) TTG VES and CPW TTG VES On 17 September 2012, the Group's Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been satisfied meaning the VES participants were entitled to exercise 60% of their VES options. The remaining 40% will vest in September 2013 subject to on-going performance conditions being met. Further details on the VES schemes are set out on page 44 of the Annual Report 2012. The participants' options were acquired by the Company for new ordinary shares in the Company and cash resulting in a cash outflow of £35m. The net issue of 17 million shares in the Company was at a price of £1.86 per share being the average closing price of the Company's shares on 18 and 19 September 2012. The settlement of the schemes resulted in a net movement in reserves of £31m being the recognition of share premium of £32m and a £63m debit in retained earnings and other reserves. The £63m debit to reserves represents a total cash outflow of £35m and the value of new PLC shares issued of £32m net of the repayment of the associated VES loans, interest and a reduction in the Group's liability to settle the schemes. b) IFRS2 charge A charge of £3m has been recognised in the 6 month period ended 30 September 2012 (6 months ended 30 September 2011: £2m; year ended 31 March 2012: £4m). 10. Net debt Analysis of net debt 31 March 30 September 30 September 2012 2011 2012 £m £m £m Cash and cash equivalents 2 28 2 Bank overdrafts* - - (1) Current loans and other borrowings (25) - (25) Non-current loans and other (415) borrowings (505) (410) Net debt excluding loans to related (438) parties (477) (434) Loans to related parties 2 2 2 Total net debt (436) (475) (432) * Bank overdrafts are disclosed within Loans and other borrowings less than one year. All movements relate to net cash flows. 11. Provisions Operating One Company Contract and efficiencies integration Property other Total £m £m £m £m £m At 1 April 2012 1 2 9 6 18 Charged to income - - - 2 statement 2 Utilised in the year - - - (3) (3) At 30 September 2012 3 2 9 3 17 Operating One Company Contract efficiencies integration Property and other Total £m £m £m £m £m At 1 April 2011 12 10 9 15 46 Charged to - 1 - 11 income statement 10 Utilised in (10) (4) (1) (3) (18) the year Released in - - - (1) (1) the year Unwinding of - - - 1 1 discount At 30 12 6 9 12 39 September 2011 Operating One Company Contract efficiencies integration Property and other Total £m The story has been truncated, [TRUNCATED]
TalkTalk Telecom Gp TALK Interim Results
Press spacebar to pause and continue. Press esc to stop.