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TalkTalk Telecom

TalkTalk Telecom Group deliver robust FY20 performance

TalkTalk Telecom Group plc (LON:TALK) have provided preliminary results for the year ended 31 March 2020 (FY20).

Headline EBITDA growth of 9.7% (pre-IFRS 16); 34% Fibre customer base growth

Strong FY21 cash conversion; Dividend of 2.5p maintained

MetricFY20IFRS 16 1FY20Pre-IFRS 16 1FY19Pre-IFRS 16 1
Headline 2 revenue (ex-Carrier and Off-net)£1,518m£1,518m£1,544m
Statutory revenue£1,569m£1,569m£1,632m
Headline 2 EBITDA£308m£260m£237m
Statutory operating profit£197m£202m£47m
Statutory profit/(loss) before taxation£131m£146m(£5m)
Net Debt 2,3£954m£775m£781m
Fibre net adds605k605k490k
Fibre closing base2,370k2,370k1,765k
Closing On-net broadband base4,220k4,220k4,289k
On-net ARPU£24.35£24.35£24.98
On-net churn1.20%1.20%1.20%
TalkTalk Group Headline figures FY2020

Tristia Harrison, Chief Executive of TalkTalk, commented: “Our priority throughout the COVID-19 pandemic has been to keep the nation connected, while keeping employees safe. Access to reliable, affordable connectivity has never been so important – and low prices matter now more than ever before. As the only scale, value provider, TalkTalk continues to be well positioned to meet this demand. Our strong and resilient network has kept families, friends and communities connected nationwide; and provided vital services for the NHS, care homes and supermarket distribution centres.

Our FY20 performance has been robust. We have grown our Fibre Broadband base by 34% and grown our Headline EBITDA by 9.7%. Whilst industry wide Voice usage declines and the continued re-contracting of the legacy copper base has led to some revenue decline, this has been more than made up by ongoing cost reduction and simplification. The completion of our HQ move from London to Salford and the sale of our Fibre Assets Business to CityFibre for £206m has made us a simpler and more resilient business.

Looking ahead to FY21, we remain in a robust operational and financial position, with levers in our control to manage costs further, whilst having not required any furlough or government assistance. While the uncertainties of COVID-19 mean we will not be providing formal guidance, based on current trends we would expect to deliver stable Headline EBITDA year on year, after assuming a c.£15m COVID-19 impact. We also expect strong cash conversion and will therefore be maintaining the dividend at 2.5p.”

Operational highlights

Sale of Fibre Assets Business to CityFibre for £206m completed on 27 March 2020, underpinned by a long-term, competitive wholesale agreement
Closing Fibre base 34% higher year on year at 2,370k (FY19: 1,765k) with net adds of 605k (FY19: 490k), accounting for 32% share of all new Openreach Fibre to the Cabinet (FTTC) lines in FY20 (FY19: 22%)
Strong Fibre uptake in both Consumer and B2B throughout FY20, with 78% of new Consumer customers taking a Fibre product (FY19: 58%) and 58% of new Partner connections taking Fibre (FY19: 42%)
The overall broadband base contracted by 69k to 4,220k, as we continued our strategy of growing the Fibre base and taking a customer lifetime value (CLV) approach to base management, which saw some of our low-value legacy copper customers churn. The base returned to growth in Q4 with 7k net additions
Ongoing low level of average monthly churn at 1.20% (FY19: 1.20%), with Q4 the lowest ever at 1.04%
Completed operational transition of HQ from London to Salford, consolidating our employees in a single northern campus with material increases in engagement and productivity, whilst delivering cost savings in line with plan

Financial highlights 1,2,3

Headline revenue (ex-Carrier and Off-net) and On-net ARPU down 1.7% and 2.5% respectively, largely due to the lower base and lower Voice usage and call boost revenue across Consumer and B2B. We also accelerated our strategy of re-contracting of our remaining higher ARPU legacy Copper customers onto a Fixed Low Price Plan (FLPP), ahead of regulatory and industry commitments on out of contract pricing, increasing our in-contract base to 71% (Q4 FY19: 68%). These effects were partly offset by increased Fibre penetration
Statutory revenue contracted by 3.9% mainly due to declining Carrier revenue and lower non-Headline MVNO revenue as we wind down this business
Headline EBITDA (pre-IFRS 16) grew 9.7% to £260m (FY19: £237m) driven by lower cost to serve due to a reduction in faults and contact centres calls as a result of an increase in more reliable Fibre connections, and the efficiencies from the move to our Salford campus and our new distribution agreement leading to a materially lower cost base
Statutory operating profit improvement reflects the profit on disposal of the Group’s Fibre Assets Business, Headline EBITDA growth and fewer non-Headline items
Net debt (pre-IFRS 16) broadly flat year on year with the sale of the Group’s Fibre Assets Business offset by significant working capital outflows due to settling a key supplier monthly invoice earlier than forecast (resulting in an additional payment year on year), a change in distribution model and accelerated Fibre growth, as well as the cash cost of our HQ move
Re-financed the Group’s borrowings in February 2020 with issuance of £575 million 3.875% senior notes due 2025 (replacing previous £400m 5.375% senior notes due 2022); reduction of RCF from £640m to £430m in April 2020
Final dividend of 1.50p (FY19: 1.50p); total 2020 dividend of 2.50p (2019: 2.50p)

1 IFRS 16 has been applied using the modified retrospective approach. Accordingly, the comparative information has not been restated, with FY20 results presented both including and excluding IFRS 16 to allow year on year analysis on a consistent basis. This alternative performance measure (APM) will be presented for one year only until the comparatives also include the adoption of IFRS 16. See note 1 for more information.

2 See note 1 for an explanation of APMs and non-Headline items and note 4 for a reconciliation of Statutory information to Headline information.

Total net debt includes £217m lease liability, under IFRS 16, of which £38m relates to finance leases (FY19: £39m finance leases).

Looking forwards

Whilst we do not expect a significant deviation from our previous FY21 objectives, given the COVID-19 uncertainty, we do not feel it is appropriate to give formal guidance for the year at this stage
However, based on current trends we would expect to deliver stable Headline EBITDA year on year, assuming a c.£15m COVID-19 impact. The expectation is ongoing flexibility in the cost base, accelerated by COVID-19, should offset any potential negative impact on bad debt or revenues
We expect strong cash conversion as we continue to de-lever towards our medium term target of 2.0x net debt/Headline EBITDA. This will be driven by materially lower working capital, reduced Capex, lower interest and significantly fewer re-organisation costs. We will therefore maintain the dividend at 2.5p and we will review our dividend policy as we continue to de-lever over the medium term

FY20 financial results 1,2

Headline revenue (excluding Carrier and Off-net) contracted by 1.7%, with ongoing Voice decline and ARPU dilution partly offset during the year by a continued strong increase in Fibre penetration. Headline EBITDA increased to £308m (including the impact of IFRS 16). Prior to the adoption of IFRS 16, Headline EBITDA grew by 9.7% to £260m (2019: £237m) reflecting the continued focus on reducing the cost base of the business and the lower cost of serving our increasing Fibre customers. Due to the disposal of our Fibre Assets Business, resulting in a profit on disposal of £127m, our Statutory profit before tax increased to £131m (pre-IFRS 16: £146m) from a £5m loss in the prior year. The Board has recommended a final dividend of 1.50p (2019: 1.50p) in line with our stated dividend policy.

Q4 trading – increasing momentum in Fibre base growth and penetration 1,2,4 

MetricQ4 FY20Q4 FY19
Headline revenue (ex-Carrier and Off-net)£371m£387m
Headline On-net revenue£306m£318m
Headline Off-net revenue£3m£3m
Headline Corporate revenue£70m£79m
Headline Data revenue£40m£43m
Headline Voice revenue£25m£26m
Headline Carrier revenue£5m£10m
Fibre Net Adds165k152k
On-net ARPU£24.19£24.72
On-net churn1.04%1.21%
Ethernet Net Adds1.5k1.3k

Highlights

Acceleration of Full Fibre strategy
On 27 March 2020 TalkTalk announced the completion of the sale of its Fibre Assets Business for £206m to CityFibre
Continued focus on Fibre in Consumer and B2B
Strong momentum in Fibre net adds continued with 165k during Q4 (Q4 FY19: 152k), accounting for 33% share of all new Openreach Fibre to the Cabinet (FTTC) lines in Q4 (Q4 FY19: 24%)
83% of new Consumer customers took a Fibre product (Q4 FY19: 70%) with 76% of these taking the faster, higher ARPU 80Mbps product (Q4 FY19: 31%)
69% of new Partner customers in our B2B division took a Fibre product (Q4 FY19: 41%)
Fibre customers benefit from faster, more reliable connectivity, and are accretive to CLV with lower churn and lower cost to serve, as well as higher ARPU compared to Copper customers
Fibre penetration contributing to lowest ever churn
Q4 churn at 1.04% represents our lowest ever monthly churn figure, reflecting higher Fibre penetration of the base, with these customers getting a faster, more reliable service and churning less. COVID-19 also had an impact on customer behaviour, with the closing weeks of the year seeing lower churn as people were confined to their homes and unwilling to lose connectivity by switching providers
Consistent strategy in Data business
The Ethernet base grew by 1.5k (Q4 FY19: 1.3k), with 38% of orders for higher ARPU 1Gb lines (Q4 FY19: 29%)
Ethernet circuits are high margin products and the 1Gb product has materially higher ARPU and lower churn
Revenue and ARPU
Revenue (ex-Carrier and Off-net) contracted by 4.1% year on year due to the industry-wide decline in Voice revenue, a lower average base, the competitive environment and accelerated re-contracting of some higher ARPU legacy customers offset by increased Fibre penetration
On-net ARPU was down 2.1% year on year due to legacy Voice decline, ARPU dilution from legacy base re-contracting and the retail/wholesale mix of the base, offset by Fibre penetration
Both revenue and ARPU experienced a small impact from COVID-19 with lower sales, the removal of call usage caps and a number of people pausing or cancelling their TV sports boosts when the Premier League stopped

1 IFRS 16 has been applied using the modified retrospective approach. Accordingly, the comparative information has not been restated, with FY20 results presented both including and excluding IFRS 16 to allow year on year analysis on a consistent basis. This alternative performance measure (APM) will be presented for one year only until the comparatives also include the adoption of IFRS 16. See note 1 for more information.

2 See note 1 for an explanation of APMs and non-Headline items and note 4 for a reconciliation of Statutory information to Headline information.

Since EFM is a legacy product, we are no longer including EFM connections in our Data KPIs, and instead will report Ethernet only.

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