Interim Results FY November 2018

Transcription

1 Interim Results FY19 21 November 2018

2 Agenda H1 FY19 Overview Financial Review Our Plan Outlook Q&A Tristia Harrison Kate Ferry Tristia Harrison Tristia Harrison All 1

3 H1 FY19 Overview

4 Performance on track with strong momentum on KPIs; no change to FY expectations BB Net Adds Total FLPP Base 2.2m On-net Churn Fibre Net Adds (42) % 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 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 EFM & Ethernet Base Revenue ex-carrier & Off-net +4.1% +3.7% On-net ARPU Growing Consumer ARPU Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 3

5 Focus on growth, leading to improving profitability Plan is working; outlook encouraging 1. Customer Base Meaningful shift to higher speed products 2. ARPU 3. Cost Base Central costs FTTC discounts 4. Regulation WLA pricing FY18 FY19 Impact FY20 Base growth Growing in Consumer Increasing revenue Growing Consumer ARPU Stable Group ARPU and reducing headwind Continued improvements in cost efficiency Tailwind Reducing cost base 4

6 Financial Review

7 Growth in revenue and EBITDA in line with expectations H1 FY19 m H1 FY18 m Headline revenue Headline revenue (excluding Carrier and Off-net) Gross profit Margin 52.6% 50.9% Operating costs & SAC (324) (333) Headline EBITDA 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 6

8 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

9 IFRS 15 Impact on TalkTalk Phasing impact: timing of recognition has changed, but the total contract value remains the same and there is no impact on cash P&L Impact ( ) Illustrative P&L Impact P&L Upside P&L Downside IAS Illustrative Connection Fee Example Connection Fee Monthly Fee Total contract value: per month 24 Months Total contract value: 732 IFRS FY18 FY19 FY20 FY21 Connection Fee Monthly Fee 24 Months 8

10 Growth in revenue and EBITDA in line with expectations H1 FY19 m H1 FY18 m Headline revenue Headline revenue (excluding Carrier and Off-net) Gross profit Margin 52.6% 50.9% Operating costs & SAC (324) (333) Headline EBITDA 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 9

11 First half cash flow in line with our expectations H1 FY19 m H1 FY18 m Opening Headline Net Debt Headline EBITDA Working Capital (14) 34 Capital Expenditure (59) (63) Operating Free Cash Flow 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 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 10

12 Capex reducing and in line for FY guidance 63m Other: 9m Network: 54m 59m Other: 5m Network: 54m Network Maintaining spend on network Other Anything non-core increasingly being done in capitallight way, e.g. Mobile Looking forward As per previous guidance cash capex expected to be c. 110m for the year, excluding FibreNation H1'18 H1'19 11

13 Non-Headline items lower year-on-year 66m P&L 21m Cash H1 FY18 20m 6m Cash P&L H1 FY19 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 12

14 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

15 Our Plan

16 Our plan to be the #1 value provider of fixed connectivity LEADING TO: BASE GROWTH, GROWING ARPU AND SUSTAINED EBITDA GROWTH 15

17 1 Consumer Unique propositions driving base growth and growing ARPU Approach Impact Quad-Play Bait and switch pricing In-contract price rises Lack of differentiation Pre onwards Short-term ARPU increases Increasing churn Decreasing CSAT Front and back book disparity Prioritisation of fixed connectivity Launch of FLPP now over 2.2m customers on these plans Completely unique ARPU dilution, now growing Reducing churn Increasing CSAT Reducing front v back book gap Consistent base growth 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 ARPU growth Ongoing low churn Reducing costs to serve Continued base growth 16

18 1 Consumer Fairer Broadband for Everyone 15 Monthly Cost Average price delta between front and back book Churn Impact TalkTalk Other UK ISPs 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. 0 FY17 FY18 FY19 Pricing data supplied by 17

19 1 Consumer Consumer ARPU growing, driven by increased Fibre penetration, re-contracting at a higher price and fairly priced add-ons Fibre penetration Re-contracting at higher price point Fairly priced add-ons, e.g. TV, Mobile and Call Boosts Further FLPP dilution (remaining out of contract base to recontract and new acquisitions contracting at competitive prices) 18

20 1 Consumer New Wi-Fi Hub and customer connectivity dashboard driving material CSAT and churn benefits 19

21 2 Business UK s largest Wholesale Broadband provider c.17% 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 Wholesale & Partner 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

22 2 Business Reliable and consistent business with sustained growth in high margin data products Approach Pre onwards Revenue predominantly driven by Voice Significant lower margin Carrier revenue Growing high margin Data revenue 2 nd in Wholesale Broadband Market Greater proportion of high margin Data revenue Reduced lower margin Carrier revenue 1 st 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 Shift from Voice to Data Focus on Data Mix shift to higher speed data 21

23 Peak Traffic Tb/s 3 Network and connectivity Unlimited data products for businesses and consumers continue to drive network usage to new record peaks within our Network Data Usage Peak Traffic Proportion of Video Traffic FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY % 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 22

24 3 Network and connectivity 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 A great experience for customers with no buffering or delays for Netflix and other prime content Continue to expand direct connectivity with the major content providers, e.g. Amazon, Apple, Microsoft A great experience for real-time streaming of sporting events and gaming content Further adoption of Software Defined Network (SDN) and automation capabilities Increasingly our self-driving network will self-heal and optimize with less interruptions to customers experience Movement of network to high capacity backhaul and core data transmission Reduces our network complexity and reduces our network operating costs 23

25 3 Network and connectivity We are meeting data usage demands, whilst reducing our cost per Gb by evolving our network 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 24

26 4 Cost reduction Network regulatory tailwinds and BTOR pricing Self-service External spend Central costs 25

27 5 One Salford Campus TalkTalk s HQ moving to Salford; creating one main campus and a more efficient operating model 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

28 6 Fibre for Everyone Future proofing our network, both through our partnership with Openreach and with our own infrastructure investment Partnership with Openreach Service Today FTTC Discounts FTTP Future Holding Openreach to account to improve service Particular focus on repair and provisioning Underpins higher CSAT, lower churn and lower cost to serve 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 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 27

29 6 Fibre for Everyone Scale FTTP alternative investment, introducing FibreNation 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 28

30 Outlook

31 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

32 Q&A

33 Appendix

34 IFRS 15 explained What are the key impacts for TalkTalk? Connection Revenue IAS 18 Connection fee revenue was recognised upfront, at the point when the customer was connected IFRS 15 Connection fee revenue is now deferred and recognised on a straight-line basis over the contract term Impact Revenue and profits are recognised later Hardware Revenue IAS 18 Hardware revenue was recognised upfront based on the amount the customer paid for the hardware when it was delivered to the customer IFRS 15 Hardware delivery is a separate performance obligation. Revenue is based on the standalone selling price of the hardware and is recognised upfront Impact More revenue is recognised upfront when the hardware is provided Welcome Credits IAS 18 Wholesale broadband welcome credits (discount on connection fee for certain customers) were deferred over average customer tenure IFRS 15 Wholesale broadband welcome credits are still deferred, but now over the contract term Impact Costs are recognised earlier, since contract length is shorter than tenure Commission Costs IAS 18 Sales commissions and third-party acquisition costs resulting directly from securing contracts with customers were expensed when incurred IFRS 15 These costs are now able to be deferred and recognised over the average customer tenure Impact Minimal impact to TalkTalk since existing distribution agreement already enabled the deferral of certain customer acquisition costs 33

35 IFRS 15 and 9 restated comparatives (unaudited) Headline Financials ( m) Q1 18 Q2 18 Q3 18 Q4 18 H1 18 H2 18 FY 18 Q1 19 Q2 19 H1 19 IFRS 15 Total revenue , On-net revenue , Off-net revenue Corporate revenue Data revenue Voice revenue Carrier revenue Total revenue excluding Carrier and Off-net , EBITDA