Posted: 1 February 2019

Q3 FY19 Trading Update


01 February 2019

TalkTalk Telecom Group PLC

Q3 FY19 Trading Update

Momentum in customer, revenue and earnings growth

Operational and Financial Highlights

  • Customer base growth of 44k (Q3 FY18: 37k), with double digit growth in both Consumer and B2B, taking the closing base to 4,287k (1)
  • YTD broadband net adds of 148k vs previous net adds guidance of in excess of 150k for the full year
  • Accelerating Fibre uptake with a record 146k net adds in the quarter (Q3 FY18: 89k)
  • YTD Fibre net adds of 338k
  • Ongoing low level of churn at 1.16% (Q3 FY18: 1.25%)
  • 2.3m customers have now taken a Fixed Low Price Plan (“FLPP”) (Q3 FY18: 1.8m)
  • Total Headline (2) revenue (ex-Carrier & Off-net) up 2.9% to £386m (Q3 FY18: £375m (3)); Headline On-net revenue up +4.3% to £316m (Q3 FY18: £303m (3))  
  • Group On-net ARPU of £24.70 (Q3 FY18: £25.18 (3)), with YoY Consumer ARPU growth

FY19 Outlook

  • Underlying business on track, with significant YoY Headline profit growth expected, reflecting a bigger base, stabilising ARPU and meaningful cost reductions
  • IFRS 15 timing adjustment and investment in base growth and Fibre mix impacting FY19 consensus EBITDA 4 £10m-£15m, pre-FibreNation costs
  • FY19 Headline EBITDA range £245m-£250m (FY18: £197m (3)), pre-FibreNation costs
  • £5m-£10m FibreNation costs dependent on JV process, as we complete York build and prepare for roll-out in Harrogate
  • Confident in strong FY20 EBITDA growth, in line with market expectations (4). Growth driven by customer momentum and cost savings (£25m-£30m annualised from reorganisation and HQ move, with approximately two-thirds of this expected in FY20)

Tristia Harrison, Chief Executive of TalkTalk, commented:

“We continue to see strong trading momentum in the business, with customer growth ahead of expectations. Q3 was the eighth consecutive quarter of rising customer numbers and we saw record demand for Fibre.

The underlying business is on track. The change to earnings guidance is due to IFRS 15 timing adjustments and investment in growth. Year on year, we have increased revenue by growing the base and stabilising ARPU, which combined with lower costs is driving improved earnings. Our significant customer momentum, combined with the benefits of our reorganisation and HQ move, gives us confidence in strong earnings growth for FY20.”

1 All customer KPIs relate to the On-net base. The closing Off-net base amounted to 30k at the end of Q3 FY19 (Q3 FY18: 53k), representing less than 1% of the total broadband base.

2 Headline revenue excludes revenue from MVNO proposition during the current and prior period.

3 The current period and prior period has been presented applying IFRS 15 “Revenue from Contracts with Customers and IFRS 9 “Financial Instruments”. Current and prior period restatements are subject to audit.

4 FY19 EBITDA consensus: £259m. FY20 EBITDA consensus: £271m. Source: Bloomberg as at 31/01/2019

Q3 trading – continued base and revenue growth

The underlying business continues to trade well, and we have once again seen good base growth in the third quarter. This represents the eighth consecutive quarter of growth, adding a further 44k to the broadband base (Q3 FY18: 37k, Q2 FY19: 24k), with double digit growth in both Consumer and B2B.

After a record number of Fibre net adds in Q2 (125k), we have seen demand for Fibre continue to grow with 146k net adds in Q3 (Q3 FY18: 89k). This uptick is driven by 66% of new Consumer customers choosing to take one of our higher speed products at the end of December (end of Q2 FY19: 54%). These customers are not only a driver of stabilising ARPU, they also have lower cost to serve and materially lower churn.

In Consumer, we continue to see healthy demand for our FLPP, with 2.3m customers now having taken a plan (Q3 FY18: 1.8m). With a greater proportion of customers in-contract (71% at the end of December) we have been able to keep churn broadly flat at 1.16%.

The TalkTalk Business Ethernet & EFM base grew again, with 1.1k new lines added, taking the total installed base of data connections to 56k. Whilst growth in data connections remains strong, it is increasing at a slower rate. This is countered by a higher volume of 1Gb connections in the mix, which comes with significantly higher ARPU.

Total Headline revenues of £386m excluding Carrier (£12m) and Off-net (£3m) grew by 2.9% year-on-year during the quarter. On-net revenue of £316m (comprising Consumer, Wholesale and Direct B2B broadband) was up 4.3% year-on-year, driven by a larger average base and increased Fibre penetration, offset by moderate On-net ARPU decline (Q3 FY19 ARPU: £24.70 vs Q3 FY18 ARPU: £25.18) largely due to the Wholesale and Retail base mix. These dilutionary effects are expected to stabilise in line with guidance by the end of the full year, as we are seeing YoY ARPU growth in Q3 in Consumer with positive re-contracting behaviour alongside increasing take-up of Fibre. Within Corporate, Data revenue was up 4.8% to £44m driven by a larger average base, as well as upselling customers to higher speed and higher ARPU services.

FY19 Outlook

We continue to see profits grow year on year driven by revenue growth from a bigger base and stabilising ARPU from re-contracting behaviour and Fibre upsell. Alongside this, we have the benefits of lower Fibre input costs and further cost reductions as we continue to simplify the business.

IFRS 15 timing adjustments and additional investment in net adds growth and Fibre mix will have a £10m-£15m impact on FY19 consensus EBITDA. We expect underlying profit to be within the range £245m-£250m (FY18: £197m), pre-FibreNation costs (c.£5m-£10m), representing significant YoY growth.

We remain confident in strong FY20 EBITDA growth, in line with market expectations, driven by our customer momentum and cost savings. The annualised benefit of our reorganisation and HQ move will be £25m-£30m, with approximately two-thirds of this expected in FY20. 

The person responsible for arranging the release of this Announcement on behalf of the Company is Tim Morris, General Counsel and Company Secretary.

There will be a webcast and conference call for analysts and investors at 8.30am.

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