Investor newsletter

March 2009

From the CEO We feel much happier having Christmas behind us than in front of us: the lack of guidance provided at the interims in November was a true reflection of how difficult we felt it was for us to gauge demand and the health of the consumer. As it turned out, the pattern of the first half of the year continued: we achieved good volume growth and took significant market share, but at the expense of margin. Customers are still out there, but you need to give them a good reason to part with their money, and we did this through a typical Carphone combination of exclusive product and outstanding value for money. The polarisation of the market between high-end “smartphones” and very cheap entry-level handsets has been marked over the last six months. The mobile internet is now really here, not just via USB dongles but also on handsets. This is being driven by WiFi, HSPA and rapidly improving user interfaces. We expect conditions to continue to be tough this year, but one of the bright spots will be the trickle down of these technologies into the middle market, giving that segment a much-needed shot in the arm. At the TalkTalk Group, we have finally been able to move on from fixing the problems of our launch and completing the AOL integration, to concentrate on product and service innovation. Our customers tell us that they only want to pay for what they use, so we have relaunched our proposition offering a range of “booster” services (offering higher speeds, more download capacity and other enhancements) around the core phone-and- broadband tariff. We are also well positioned in this tough economic climate with our very clear value orientation.

Charles Dunstone, CEO From investor relations In our second edition of the newsletter we are going to drill down into some of the early readings from our new “wireless world” store formats to see what customers think of them and how they are performing relative to the rest of the portfolio. We’ll also look back at some of the products that made a difference for us over Christmas. Within TalkTalk, we take a look at some of the customer service innovations we have put in place. We also assess whether mobile broadband is seen as a substitute product by customers and how its performance stacks up versus DSL. Inevitably, investors’ interest has focused recently on the consumer outlook and its likely impact on our businesses. With our trading update in January we took the decision to go a bit further than usual and set out our key operational and financial goals for the next year or so, allowing investors and analysts to measure our performance against a very clear set of objectives. A focus on costs and cash is important at any time in the business cycle, but we recognise that we have a particular obligation to deliver on both given the significant investments made over the last five years. In addition, our exposure to the high street is now less than 25% of group earnings, and market research indicates that home phone and broadband services are seen as essential means of communication that customers would be very reluctant to give up in all but the tightest financial corner. So we believe that we remain relatively well insulated from the current economic turbulence.

Peregrine Riviere, Director of Corporate Affairs Europe Wireless World stores up and running In the run-up to Christmas, we launched the first four of our new “wireless world” Carphone Warehouse stores. The store in Westfield, West , which many of you will have seen, is new to the portfolio, but the other three, in Romford, Portsmouth and , are all refits of existing larger stores. Our main focus for the “small box” estate this year will be the introduction of further wireless world formats in key locations.

Portsmouth White City

Bristol Romford The good news is that these stores are outperforming financially. As the chart shows, year-on-year trading margin growth was significantly higher in the three converted stores than across the rest of the UK portfolio. Trading margin comparison for 16 weeks after new wireless stores opened

250

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0 stores 3 wireless stores In addition, they are also changing customers’ perceptions of CPW. 59% of customers surveyed said that the new stores changed their opinion of CPW (presumably for the better!), and a whopping 84% of customers said they would come back to the store in future. Overall, 49% said they would visit one of these stores more frequently than a traditional Carphone outlet – because of the wider product range, increased interactivity and the strong presence of after-sales service through the Geek Squad. Has this store changed Would you come back you opinion of CPW? to this store in future? Perhaps No 12% 39% No 2%

Yes 59% Yes 84% Perhaps 2% 49% would visit the Wireless store more frequently than other CPW stores Impressive Net Promoter Scores As you know, we recently changed our UK variable retail pay structure from sales-based commission to a bonus based on a store’s Net Promoter Score (“NPS”). NPS is a way of measuring customer service, based on customer interviews, and measures performance by deducting negative customer perceptions from positive ones. The new stores are performing outstandingly well on this measure. As the chart below demonstrates, overall NPS for wireless world stores is more than three times that of existing formats. Perhaps more importantly, for browsers we are turning the perception from a negative one to a strongly positive one, thus making advocates even out of those visitors who didn’t buy from us. Net promoter scores are very high for wireless stores 8 7 6 New 5 formats 4 Wireless 3 stores 2 1 0 -1 Lost Overall Buyers Browser sales What’s selling well? Finally on our retail round-up, just a quick look at what’s been selling well. Although very cheap pre-pay handsets were a big trend over Christmas, with our prices starting at just £2.88 for an entry-level Motorola W180 , the most consistent strong seller was the LG Cookie. We think it scored highly with customers because of its good looks, its touchscreen interface and its price point just under £100 on pre-pay. We expect touchscreen, internet-enabled devices in the mid-range to be big sellers in 2009.

LG Cookie Samsung Tocco Nokia 5800 3rd best selling Prepay Top selling Post pay handset in December 2008 handset in December 2008

On the mobile broadband side, we saw pay-as-you-go dongles really begin to take off in the run-up to Christmas. For those customers not wanting a subsidised laptop, or workers who are away from home or the office only occasionally, PAYG is becoming a very attractive alternative to a contract that they might not use fully.

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save £60 save to just plug it in over r yo ur laptop fo £50 t instantinterne

AS SEEN ON TV Unlimited^ Mobile BroadbandwithT-Mobile

Mobile BroadbandStarter Kitfrom3 Only £1 0 permonth* was£15 permonth Only Pre-loaded with up to 12 months * of usage(12GB data allowance) USBmodem included £97 . 86 Includes prepay USBmodem was£149. 99 *For thefirst 12 months £15per monththereafter Perfectgiftidea (minimum 18 monthcontract) . Billed at £1 5per monthfor thefirst 12 months with £60automatic chequeback afte r6months.

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carphonewarehouse.com0800049 4448visit oneofover800 stores carphonewarehouse.com0800 0494448 visitone of over 800stores *OfferappliestoT-MobileMobileBroadbandPlustariffover18months.Tariffsoverothertenures,orwithlaptops,areexcluded.ForuseintheUKonly. Subjecttocreditcheck.You’llneedacompatible laptop.Automaticchequebackfor£60despatchedafter6months,ifthecontracthasnotalreadybeencancelled.Pleaseallow28 daysforthechequetobereceived.Notuseforinternetphonecalls. Roamingchargesapply. ^‘Thisplancomeswithafairusepolicyof3GBamonth.T-Mobilewillmonitorhowmuchyousendandreceiveeachcalendarmonthsothattheycanprotecttheirnetworkforall *InclusivedataallowanceswithinmobileBroadbandStarterKitsarevalidforupto: 12months(for12GBKit)fromthedateofactivation.OnceyourmobileBroadbandStarterKitdataallowanceisreachedor MobileBroadbandcustomers.Ifyouusemorethanyourfairpolicyamount,T-Mobilewon’tchargeyouanymore,buttheymayrestricthowyoucanuseyourplan,dependingonhowoftenyougooveryour expires,anadditionalmobileBroadbandAdd-onmustbepurchased.Chargesof£1perMBapplyifinclusivedataallowanceisexceeded.CompatiblewithWindows2000,XPorVistaoperatingsystemsand amountandbyhowmuch.†Ifwithin7daysofpurchaseyoufindthesamemakeandmodelUSBdevice,brandnewandboxed,withthesamenetwork,planandallowances,atalowermonthlycost-available MacOS(mayrequireadditionaldrivers).Maximumspeedsofupto2.8mbpson3’sTurbonetworkintheUK.3reservestherighttolimitexcessiveroamingifnecessary.Servicelimitationsandtermsapply. atbothTheCarphoneWarehouseandatanotherhighstreetretailer, thenwe’llpayyou110%ofthedifference.Proofoflowerpriceneedstobepresentedtoclaimthedifference. Seethree.co.ukfordetails.Previouspriceof£149.99includesVATattheoldrateof17. 5%.Newpriceof£97.86includesVATatthelowerrateof15%. TalkTalk Group At TalkTalk we have been busy cementing our credentials as the broadband provider of choice for customers wanting a simple, good value package that’s not bundled with expensive pay TV or any other services that our customers might not want. Back in November we launched our Broadband Boosts packages, giving customers optional add-ons to the core phone and broadband service. So for £4 a month, with no contract, customers can choose to have higher speeds, greater download limits, better computer security or a range of calling features. Speed Calling Boost Features

Download Anytime Plus UK Calls

1 Security /2 Price Calls Boost to Mobiles

At the same time, we are looking to help customers who are having trouble paying their bills. We’ve launched an emergency tariff, for existing customers, which gives them a reduced broadband service and pay-as-you-go call charges for six months, all for a monthly line rental of just £10.50. Through this year, you can expect to see much more product and service innovation from us as we look to differentiate the proposition in a more mature broadband market. A great example of how we are using technology better to engage with customers is through our Chat Live! service at talktalk.co.uk. We have a team of online product specialists who introduce themselves via pop-up messages to people browsing the TalkTalk website. This allows us to answer questions directly and helps potential customers get the answers they need much more quickly. £30

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£0 Market pricing Jul-08 Jun-08 Apr-08 Jan-08 Jan-08 Feb-08 Oct-07 Feb-09 Oct-08 Sep-07 Sep-08 Mar-08 Nov-08 Nov-07 Dec-08 Dec-07 Aug-08 May-08 One of the interesting developments of the last few months is how pricing for broadband and voice bundlesAOL Wireless has stabilised, and isTiscali even on the rise in some cases.Vmed Size There L (10Mbps) has also been a significantSky Mid decrease in the levelBT ofOption short-term 1 promotional O2activity Standard (such as three months’ half price for new customers, for example). Broadband Bundle pricing £30

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Talk Talk Sky Tiscali BT Option 1 Virgin Media The five or six major broadband providers in the marketplace are all occupying slightly different niches and are currently focused on developing their propositions as a means of competitive advantage, rather than using price as a weapon. When we launched our tariffs nearly three years ago, this was our goal – to be disruptive in the marketplace but to set pricing at a level that would be hard to undercut without being irrational. The benefits of our MPF (fully unbundled) network is that we can have the best bundled prices in the market and still generate good returns for shareholders.

Broadband Market share Orange 02/Be 6% 2% Other 6% BT Retail 26% Tiscali 10%

Sky 11% Virgin Media AOL 23% 7% TalkTalk 9% Mobile broadband – a substitute for DSL? Inevitably, investors are asking whether the huge growth in mobile broadband threatens DSL providers as customers seek to substitute one with the other. While mobile broadband has been a great success story for our retail business, it is still a relatively small part of the marketplace. YouGov research shows us that at the moment, it is perceived very much as a complementary product to home broadband, with only 8% of mobile broadband customers using it as a replacement product.

Mobile Broadband complementary to fixed line

In addiction to fixed

No landline

Replaced fixed with mobile

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Source: YouGov Dongle Tracker October 2008

In addition, the same YouGov tracker shows that mobile broadband is still seen as less reliable and slower than DSL. In-building coverage, in particular, is generally poorer in residential areas for all but those very close to mobile base stations, so substitution within the home still seems like a distant threat. Mobile Broadband scores lower than fixed (out of 10) reliability download upload Speed reliability during the staying Speed during the day evening connected fixed 7.1 7.2 8.2 8.0 8.1 mobile 5.3 5.2 6.5 6.4 6.5

Source: YouGov Dongle Tracker October 2008 Opal Business Repositioning and Transformation Opal is the B2B division of our telecoms division, which serves over 100,000 UK Businesses and with over 350 partners. Key Facts: • Dedicated to Business customers • Three channel units focussing on Small Businesses, Large Businesses and wholesale partners Following a number of acquisitions and organic growth within our business-to-business division, Opal has restructured from twelve individual business units into a single brand and operating structure to drive efficiency in terms of costs and customer offering. The new brand positioning which is centred around Opal being the leading provider of ICT (Information Communication Technology) services to UK Businesses. Research has demonstrated that the Business ICT market is worth over £42bn, and we firmly believe that Opal is well and uniquely placed to capitalise on this opportunity. Opal Office Broadband launch On 2nd February we launched our first broadband package, designed exclusively for businesses, utilising the scale of our next generation network. The package features network based prioritisation for our business customers, so they can be assured that they achieve the quality of connection necessary to run businesses today and provide the service necessary to run real-time applications such as voice, over broadband connections. Share price update

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Performance (rebased to CPW) 20 Performance (rebased to 100) 0 1-Sep-08 1-Oct-08 1-Nov-08 1-Dec-08 1-Jan-09 1-Feb-09

CPW -47.1% FTSE 100 -28.3% Retail sector -19.5% Telecoms sector -15.7%

CPW’s share price performance has found more level ground post our Q3 trading statement when we announced our strategic goals for the year to March 2010. Since September last year CPW has fallen -46% but year to date is up 20%, whereas the FTSE 250 is down -5% over the same period. In November last year we felt our performance in the short term would be unpredictable and therefore gave no guidance for the Christmas trading season, which had a negative impact on our share price; since then, a number of other companies have also taken this same approach to guidance given the current poor levels of visibility. Moving into 2009, we wanted to start the new year on the front foot and presented our shareholders and the City with some strategic goals for the coming financial year so that investors can see where our attentions are focused over the coming months and judge our performance against these criteria.

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40 Share price performance to 100) Share (rebased

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CPW FTSE 100