Talktalk Group Financial Performance

Directors’ Report – Business Review TalkTalk Group Financial Performance

▪ Revenue down 3% to £1,385m, reflecting a growing broadband base offset by declines in our narrowband and voice-only bases

▪ Headline EBITDA up 56% to £181m, driven by the increasing proportion of on-net customers

▪ Headline EBIT up 80% to £124m, reflecting EBITDA growth partially offset by higher depreciation and amortisation charges

▪ Capex of £106m, down 38% year-on-year after the substantial completion of our network build-out

Operational Highlights

▪ Completed integration of AOL broadband business

▪ Continued migration of customers onto our own network, with 78% of all broadband customers now on-net

▪ 186,000 broadband net adds, before 93,000 AOL base TalkTalk clean-up, taking the total base to 2.8m

▪ Broadband monthly ARPU up 3% to £22.65 Group ▪ Major improvements in customer service, resulting in reduced churn and much more positive customer TalkTalk Group is our UK fixed line telecoms division, perception serving over 3.9m fixed line customers comprising 2.8m broadband and 1.1m voice-only and narrowband customers. It is currently the number 3 player in the UK broadband market, with by far the most extensive unbundled network in the UK, which supports a low-cost operating model that enables strong profitability even on market-leading tariffs. Its B2B operation, branded Opal, is a major player in the small business market. Over the last 12 months we have successfully completed the integration of the AOL broadband business and continued to grow the business organically. The bulk of our network investment is now complete and the business is set to be strongly cash generative going forward.

10 The Carphone Warehouse Group PLC Annual Report 2009 (1 Trends Marketplace Strategy Indicators Key Performance be driven by speed and metered access. metered and by speed driven be to changes pricing we expect time Over months. recent in rises price of signs have been even there and aggressively, less marketing now players weaker financially with rational, is Competition 2006. April in market the repriced and in we came since years, three last the for overall stable remarkably been has pricing bundled and Broadband tariffs Broadband years. 3-4 next the in 80% penetration reach eventually to market the we expect growth slowing the over 65%, despite and reached has Penetration transactions. housing in decline the of aresult as principally 2008, during sharply slowed market broadband UK the in Growth market broadband UK 07 08 09 78% % on-net £124m Headline EBIT (£m) 0 0 09 £181m Headline EBITDA (£m) 09 2.8m Broadband customer base (m) 0 0 ) 7 7 8 8

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29 31 69 116 2.3 67 2.7 181 124 2.8 78 a combined package of calls, line rental rental line calls, of package a combined of provider value best the we are clear: is proposition Our want. don’t they services includes which abundle for odds over the paying of up fed are people that us tells research customer Our simplicity and value on Focusing base. wider a across costs network fixed to spread us enables scale increasing addition, In division. the for value present net high avery generates customer new marginal each churn, low and margins strong With share. our to grow placed well we are value, for look consumers as and have weakened competitors direct our of some have improved, levels service our as that, We believe years. two 16% last the the for around mark at steady been has share market Our share market broadband our growing and Maintaining to customers. experience a positive delivering and products innovative developing quality, network our improving and maintaining on focused absolutely we are so to service, low equate should cost low that believe not We do market. broadband residential UK the in provider value best the as TalkTalk positioned The clearly is Group

£ per month Subscribers 000s 12,000 16,000 20,000 4,000 8,000 10 20 30 40 50 Source: EndersAnalysis Source: EndersAnalysis 25Q305 Q205 0 Sept 07 BT Wholesale(Laxis) TalkTalk 8MbpsBroadband, lineandcalls Virgin Media2Mbps Broadband, lineandcalls,TV Tiscali 8MbpsBroadband, lineandcalls 45Q0 26Q0 46Q0 27Q0 47Q0 28Q0 Q408 Q308 Q208 Q108 Q407 Q307 Q207 Q107 Q406 Q306 Q206 Q106 Q405 Jan 08 Cable (Laxis) LLU (Laxis) from the division in 2009-10. in division the from flow cash free over £100m operating of We atarget have set generative. cash highly is up we have built base customer the and sharply, declining is capex over: now is investment of period That TalkTalkthe years. six last over the Group into over £900m invested has Group The generation cash strong Targeting structure. margin our protecting while this to do us allow will have made we investments The years. three next the over expected demand in increases huge the to manage network our developing have been and trend this anticipated haveWe significantly. increasing is usage internet, the on to do things more and more find customers and ubiquitous more becomes broadband As reliability and performance network improve to Continuing to them. committed contractually being like without they whenever features, other and capacity download greater speeds, higher for up to sign customers allow “Boosts”, of which a range However, extras. we have developed expensive no with broadband, and Jun 08 BT 8MbpsBroadband, lineandcalls Sky 2MbpsBroadband, lineandcalls,TV Orange 8MbpsBroadband, lineandcalls Total marketnetadditions(Raxis) www .cpwplc.com Feb 09 0 240 480 720 960 1,200

11 Net additions 000s additions Net

Directors’ Report – Business Review Directors’ Report – Business Review TalkTalk Group – continued Headline Financials

2009 2008 £m £m Revenue 1,385 1,424 Residential* 1,089 1,112 Business 296 312 EBITDA pre-SAC and marketing 307 280 SAC and marketing (126) (164) EBITDA 181 116 Depreciation and amortisation (57) (47) EBIT 124 69 EBIT % 9.0% 4.8% * Comprises residential customers and small business customers with similar profiles.

Short-Term Risks TalkTalk Group delivered another good During the year underlying growth in the and Challenges performance last year, growing its broadband base was 186,000 customers, customer base, increasing the proportion but as part of the AOL integration of its customers on its unbundled process, we identified a discrepancy ▪ A weak consumer environment could affect network from 67% to 78% and achieving of 93,000 customers and reduced the market growth and increase a substantial reduction in its churn rate. base accordingly at the half year. the level of bad debts Despite the unexpected slow-down in This delivered a net increase of 93,000 the rate of growth in the broadband customers to 2.8m. ▪ We may not be able to pass market, TalkTalk Group still increased in on in full the copper price profitability, with Headline EBIT growing Our base of non-broadband customers, increases allowed by OFCOM by 80% to £124m and Headline EBIT encompassing customers taking our to our customers margins almost doubling from 4.8% to voice-only service or narrowband ▪ Struggling competitors may 9.0%. TalkTalk Group has also started package, continued to decline in line behave irrationally and to deliver strong cash flows, and has with our expectations, ending the year undercut the market significantly increased visibility of these at 1.1m customers. A large number of cash flows going forward. these customers are signing up to our own bundled broadband services. Residential revenues were down marginally in the last financial year, The TalkTalk broadband base made falling 2% to £1,089m (2008: £1,112m). further excellent progress during the year, increasing by 339,000 customers Blended broadband monthly ARPU or 27%. The customer service issues rose by 3% to £22.65. The increase of previous years are now behind us was driven by the greater proportion and our simple value proposition of higher ARPU TalkTalk customers continues to gain traction in the market. within the base. Non-broadband ARPU Growth picked up noticeably towards the rose 18% to £20.93, reflecting price end of the financial year, reflecting what Longer-Term Risks increases in line with BT’s voice price is seasonally our strongest quarter for and Challenges increases during the year. broadband growth but also underlining the brand’s value credentials as B2B revenues declined by 5% to £296m customers increasingly look to save ▪ Some of our competitors (2008: £312m). Opal continued to money in the current economic climate. have much greater financial improve its revenue mix, with an ongoing resources and may choose trend towards higher value services Trends in churn at TalkTalk were also very to use broadband as a offsetting falling premium rate traffic. encouraging, with annualised churn loss-leader for other products In the second half, the business falling materially year-on-year as ▪ Regulation may curb our launched its new suite of data products customers became increasingly satisfied access to fibre infrastructure for the small business market, which is with our service levels, and the housing at fair prices, thus preventing expected to drive moderate revenue market became more subdued. With our us from delivering higher growth in 2009-10. highly efficient, fully-unbundled network, speeds to customers

▪ Network or customer service may deteriorate, increasing our churn rate

12 The Carphone Warehouse Group PLC Annual Report 2009

unbundled competitors. unbundled partially- our than cost lower amuch at services voice and broadband packaged to provide us enables and partnerships, supplier strong our and engineers our of skill to the testament is This work. unbundling full making in succeeded has that provider broadband only the still we are Importantly, lines. unbundled 39% all of representing UK, the in unbundler largest the We remain goal. our with line in base, broadband total 78% or the of to 2.2m customers base unbundled total the year,the taking during customers 372,000 We unbundled population. UK the of 80% coverage approximately us gives Together this to 1,251 network exchanges. unbundled 1,705 partially- our and exchanges to network fully-unbundled our taking 326 exchanges, afurther We unbundled year. the during network telecoms our of resilience and capacity footprint, the on progress substantial further We made team. management residential UK asingle under businesses the combining 2008, AOL of during integration the year. the of completed end Wethe also towards reduced rates AOL churn result, a As areas. those in base cost lower our reflecting tariffs lower offer we can where footprint, exchange unbundled our within living customers on programmes retention our up. We focused signed historically were AOL customers to which tariffs broadband higher the from switching customers and above noted adjustment 93,000 the reflecting customers, 245,000 under by just fell base AOL Broadband the expected, As time. the all increasing is base the of value present net the we believe stable, costs acquisition and lengthening lifetimes customer With market. the in bundles telecoms competitive most the maintaining while margins cash strong to generate able we are service to customers in the years ahead. years the in to customers service enhanced an to provide us enable should which migrations, have commenced and investment platform billing and CRM new our completed substantially we had year the of end the By network. the within capacity backhaul to increase project our of continuation the and exchanges, existing in capacity increased unbundled, exchanges additional the were 2008-09 in network the on expenditure capital the of elements major The year. prior the in investment network of levels high £172m from reduced to £106m, reflecting Capex capital. working underlying in deterioration no was there ends; month to calendar to achange due issues by timing caused was which capital, on working outflow by an offset partially was growth EBITDA £44m).of Strong outflow (2008: of flow £40m cash free operating TalkTalk generated Group (pre-exceptionals) Operating free cash flow Headline EBITDA flow Cash flow. cash our with performance loss and profit our aligning closely more and companies telecoms other of majority the with line in policy our bringing incurred, as SAC 18 expensing now We are months. –typically term contract minimum over acustomer’s it amortised SAC and we have capitalised Historically (“SAC”). costs acquisition subscriber for account way we the we changed end year At the Ca W orking capital pex

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Directors’ Report – Business Review Directors’ Report – Business Review TalkTalk Group – continued

Outlook While overall EBIT growth is likely to The prospects for the coming year are be limited, we are targeting significant good. After many years of investment, free cash flow generation. We are we expect TalkTalk Group to deliver planning for neutral working capital and significant free cash flow and consolidate a further reduction in capex, to £80m in its position in the marketplace. While we the coming year. This allows us to target remain mindful of the tough times many operating free cash flow of over £100m, of our customers are enduring, we a figure which we believe is sustainable believe that residential broadband and in the medium term. telephony are must-have services that customers are unwilling to forego. At the Longer term we are bullish about the same time, as a clear value player with outlook for broadband. The market no unwanted services within the bundle, appears to be consolidating around four we expect to benefit from customers major players, of which we are clearly seeking to save on monthly outgoings differentiated as offering transparent by moving to TalkTalk. value and simplicity. Across both our divisions, we are guided by our view of We expect to achieve 125,000-175,000 the connected world – that customers broadband net adds next year, reflecting will increasingly use mobile and fixed stable market share in a maturing market. broadband connectivity wherever they ARPU growth is expected to be marginal, are, to integrate their entertainment, with some beneficial mix effects and the domestic and business needs sale of additional value-added services seamlessly. This makes the broadband likely to be cancelled out by a slight connection in the home one of great decline in voice traffic. strategic importance and value.

The non-broadband base is likely to However, we remain conscious of the continue to decline but at a slower role of the regulator in ensuring that rate than this year, with ARPUs again where significant investment has been broadly stable. made, it is suitably protected. Fibre networks will come, although we do not Within the B2B operation, we are believe they will reach the mass market budgeting for revenue growth of 3-5%, for five years. When they do, we are driven by the launch of new data services confident that we will be able to access and a renewed strategic focus. EBITDA that infrastructure at fair rates margins in both businesses are expected determined by natural market forces. to be flat to slightly up, driven by operating efficiency and scale benefits.

14 The Carphone Warehouse Group PLC Annual Report 2009