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 Directors’ Report – Business Review Best Buy Europe Financial Performance

▪ Revenue up 15% to £3,563m, driven by market share gains and currency movements

▪ Headline EBIT down 33% to £101m, reflecting the tough economic environment and our pursuit of market share gains

▪ £7m of opex relating to the Big Box project

▪ First-time contribution of £8m from Best Buy Mobile, a year ahead of plan

Operational Highlights

▪ Roll-out of laptop proposition to all UK stores and the majority of European stores

▪ Estimated 5% UK laptop share from a standing start

▪ Strong growth in handset market share

▪ Very strong growth in strategically important products such as mobile broadband and smartphones – Report Directors’ Review Business

▪ First new format mid-sized Best Buy stores opened, with a further 30-40 to follow this year Europe Best Buy Europe, in which the Group has had a 50% share since 1 July 2008, encompasses our retail operations across Europe and our share of profits in Best Buy Mobile in the US. During the year we have made significant progress in evolving our existing customer proposition and product mix beyond mobile phones to include mobile broadband, laptops and other connected devices. We have not only broadened the offer in our small stores but also introduced a slightly larger format, “Wireless World”, which embraces gaming and an extended laptop offer, as well as a Geek Squad technology support presence.

We have also laid the foundations for our Big Box consumer electronics format, which we plan to launch in the UK in spring 2010.

www.cpwplc.com 15 Key Performance Indicators Strategy

Connections (m) The Carphone Warehouse has survived Growing our market share of mobile and thrived in a highly competitive connections 12.5m mobile industry by constantly identifying Market share has long been a key 09 12.5 changes in consumer behaviour which element of our strategy. Significant 08 11.5 present opportunities if we address share makes us an important partner them and threats if we do not. Over the to network operators and handset 07 10.0 last two years we have been undergoing manufacturers alike. The opportunity 06 8.2 our biggest evolution yet, as we for market share growth is greater in a address the opportunity presented weak handset market, as more marginal by the “Connected World” – and this players struggle to compete with our Revenues (£bn) governs the main elements of our proposition. We estimate that our market divisional strategy. share improved significantly year-on-year £3.6bn and we aim to deliver further strong gains 09 3.6 Evolving the retail proposition over the next 12 months. to embrace a broader array of 08 3.1 connectivity services Launching a multi-channel consumer 07 2.9 We have been very successful in electronics business 06 2.5 developing our existing store proposition With our partners Best Buy, the to offer a wider range of connected acknowledged global champions of devices, to reflect new services available Big Box consumer electronics retailing, Headline EBIT (£m) in the market and customers’ changing we are planning to launch a major assault technology needs. Mobile broadband, on the UK electricals market. Our first £101m laptops and smartphones have been out-of-town stores are scheduled to open significant contributors to top line growth in spring 2010 and, if successful, we 09 101 this year. Looking ahead, this is set to will roll out a presence across the UK 08 151 continue as we refine the small store supported by a full multi-channel service 07 154 offer and roll out 30-40 of our new, offering. We are confident that the planned mid-sized stores. investments will generate a new and 06 116 material leg of growth for the business.

Marketplace Trends

Handset sales Western Europe* European handset market (units sold, millions) After five years of strong and consistent 08 94.8 growth, 2008 witnessed a slight fall in the 07 95.1 European handset market. A combination of market saturation, the macroeconomic 06 89.1 environment and a lack of new products 05 79.6 in the mid-tier all contributed to this decline. At this stage we expect a similar Source: GFK trend in 2009, followed by stabilisation * For the nine markets in which Best Buy Europe operates. in 2010.

Laptop sales Western Europe* Laptop sales and penetration (units sold, millions) The laptop market is set for continued 08 15.4 strong unit growth as prices fall, 07 10.9 hardware becomes subsidised with mobile broadband, and smaller, 06 7.6 “netbook” type products proliferate. 05 5.4 The market in Western Europe was up 41% in 2008 but is still only a fraction Source: GFK of the size of the mobile phone market. * For the nine markets in which Best Buy Europe operates.

16 The Carphone Warehouse Group PLC Annual Report 2009 Directors’ Report – Business Review Best Buy Europe – continued Headline Financials (100% basis)

2009 2008 £m £m Revenue 3,563 3,091 Gross margin 1,033 940 SG&A (845) (723) EBITDA 188 217 Depreciation and amortisation (87) (65) Joint ventures – (1) EBIT 101 151 EBIT % 2.8% 4.9%

Short-Term Risks Best Buy Europe’s revenues grew Pre-pay connections were up 9% and Challenges 15% to £3,563m, with 9% growth coming to 7.0m. After a slow second quarter, from the strength of the Euro year-on- pre-pay sales picked up in the second year. Headline EBIT fell 33% to £101m half of the financial year as we took ▪ A weak consumer environment and an uncertain (2008: £151m). Although profitability fell significant market share from general outlook mean that the year-on-year, we made significant retailers. Although we initially thought business needs to remain progress in the development of the that the pre-pay business would be flexible in its financial planning business and are well positioned in terms more at risk from a more cautious of market share, product diversification, consumer environment, any effects ▪ The launch of the Big Box an efficient cost base and the strength of were more than offset by our own consumer electronics our relationships with both vendors and strong market share gains. proposition requires mobile network partners. significant upfront investment Like-for-like revenue, stripping out the and a major commitment of During the year, we achieved total impact of new space, was up 7.9% and resource on which we may not achieve a satisfactory return connections of 12.5m, up 8% year-on- at constant currencies, like-for-like year (2008: 11.5m), despite what we revenue was up 1.1%. ▪ Currency movements could estimate to be a year-on-year decline in

have a negative impact on the European handset market. As a result Divisional gross margin fell 140 basis – Report Directors’ Review Business handset prices and erode we estimate that our market share has points year-on-year, from 30.4% to margins grown significantly, reinforcing our belief 29.0%. This decline reflected both a ▪ Failure to improve working in the value of our independent model in more aggressive trading stance, as we capital management could the eyes of the consumer. sought to use our scale and strong increase financing costs financial position to grow our market Subscription connections were also share, and the impact in our product up 8% to 4.8m (2008: 4.5m). Growth mix of lower margin mobile broadband in subscription sales was driven by connections and our drive into the laptop high-end, internet-enabled handsets, market place. Longer-Term Risks and by mobile broadband connections. and Challenges It is clear that mobile data, whether via We opened 180 stores during the year, laptops or handsets, using 3G networks and closed or relocated 132, giving net or WiFi, is really taking off. We have store additions of 48. The total store ▪ Mobile networks may continue positioned ourselves well to capture this base was 2,459 at the year end (2008: to invest in their own rapid growth, as the connections figures 2,411), including 219 franchise stores distribution platforms and demonstrate. In contrast, the market for (2008: 236). Total average selling space seek to deal directly with their mid-tier handsets, the historical “bread excluding franchises was up 8% to customers and butter” of the subscriptions market, 122,470 sqm (2008: 113,438 sqm). ▪ The rate of technological was in decline throughout the year. There Including franchises, total average change may slow, reducing are now signs however, that the features selling space was up 7% to 131,137 sqm the need for customers to available in high-end devices are now (2008: 122,976 sqm). upgrade their handsets cascading into the more mass market mid-tier ranges, and this segment of the During the year we reduced our plans ▪ We may experience significant price competition in the handset market is beginning to show for fresh store openings based on our consumer electronics market, signs of improving. traditional store format after several damaging the economics of years of rapid expansion. We focused our business plan instead on the most significant change

▪ Competition between network operators may subside, reducing incentives to customers

www.cpwplc.com 17 Directors’ Report – Business Review Best Buy Europe – continued

to the in-store proposition achieved in planned for spring 2010. We had the business’s history, which included originally scheduled the first store the introduction of a full laptop offer openings for the second half of 2009, across a significant proportion of the but the highly favourable property portfolio. In October, we opened the first environment has presented us with of our new, mid-sized stores, which are increasingly attractive opportunities, up to 300 sqm, compared to our normal both in terms of locations and lease small store size of around 60 sqm. These terms. As a result, we have chosen not mid-sized stores offer not only a much to rush, but to take our pick of the wider range of laptops, but also areas opportunities and ensure that our launch dedicated to gaming, wireless TV and has the most material impact. We music services, all backed up by an incurred approximately £7m of costs in-store Geek Squad presence. These relating to the launch during the year. stores have performed very strongly, with excellent customer feedback, and we will Best Buy Europe’s Insurance business be introducing a further 30-40 over the continues to be an important contributor coming year, through a mix of new stores to the profitability of the business. and refits. Customers value the protection it gives when they commit to a high value During the year we also trialled a major contract and receive a heavily change to how our sales consultants are subsidised, valuable mobile phone. remunerated, with the introduction of Although performance earlier in the year higher base salaries and bonuses, to was relatively subdued, business picked replace the traditional mix of lower up in the second half. We benefited from salaries and sales-based commissions. the introduction of the laptop proposition Under the trial, bonuses are based on into the stores, and also from the a store’s Net Promoter Score, which development of a combined insurance is a measure of the difference between and Geek Squad assurance policy, giving positive and negative customer customers not only protection against feedback. The trial was a success and loss, but also access to technology we are now progressively introducing assistance from the Geek Squad. this structure across the whole of the UK business. There has been no Cash flow (100% basis) deterioration in sales performance as a 2009 2008 result, and we believe that, over time, it £m £m will create even greater trust in the brand Headline EBITDA 188 217 in the eyes of customers. Working capital (160) (4) Capex (115) (107) In the US, Best Buy Mobile had an outstanding year. This business, in which Operating free cash flow Best Buy Europe have a profit-sharing (pre-exceptionals) (87) 106 White City, London agreement, was launched two years ago We opened four new mid sized store to reposition Best Buy’s mobile retailing Best Buy Europe saw an outflow on formats last year show casing a much operations with the assistance of operating free cash flow of £87m (2008: wider range of laptops and connected devices alongside the core mobile Carphone Warehouse. Over the course inflow of £106m). The adverse movement propositions. of the year its in-store presence has was largely due to working capital, been introduced across all of Best Buy’s particularly in the first half of the year. Big Box stores in the US, delivering near Our working capital position reflected an triple-digit rates of like-for-like growth increasing alignment of our interests with and significant market share gains as a our network partners, with commission result. In addition, Best Buy have opened being deferred over the contract life 33 standalone stores, taking the total rather than paid up front. Whilst not to 39. Our share of profits for the year affecting revenue recognition, this had was £8m and is expected to grow an adverse impact on working capital. significantly in the year ahead. We have been working with the networks and other key suppliers to limit further Since the deal with Best Buy, which absorption of working capital, completed at the end of June, we have experiencing minimal absorption in committed significant resource to the Big the second half of the year, and expect Box consumer electronics retail launch, much-improved cash generation in 2009-10. Best Buy Mobile, USA Best Buy Mobile had an outstanding performance this year. We have opened 33 standalone stores this year, taking the total to 39. Best Buy Mobile’s in store presence is now in every Best Buy Big Box store in the US.

18 The Carphone Warehouse Group PLC Annual Report 2009 www.cpwplc.com visit: document full the For care. customer superior provide to and advice, improve to solutions, product better deliver to business, the across needs customers’ our to better respond to us enable which insights invaluable with business our provides Life Mobile lives. daily customers’ our on phones mobile of impact the understand better to 2006 in Life Mobile We established Mobile Life 2008 Report expected to rise to £20-25m. to rise expected is profits of Europe’s Buy share Best openings. store standalone further and Box stores Big all of out year’s trading full a year, enjoying coming the in strongly profits to grow set is Mobile Buy Best stores. new the on rents pre-opening the and fees consultancy and research team, the of costs the reflects primarily This 2008. October in indicated we figure the with line in £30m, approximately of costs start-up in result will and year the through accelerate will openings Box store Big the for plans Our year. the for space average in 1-2% around in growth result should This stores. format new, mid-sized our of 30-40 opening and proposition retail the developing further on be will focus Our count. store overall the in increase aminimal for planning We are level. EBITDA the at deterioration margin gross the of impact the to offset expected is 2008-09 during have undertaken we which programme saving cost However, mix. revenue the the within sales hardware of increases further and strategy trading our of continuation a reflects This points. basis 25-50 by to decline margin gross We expect growth. revenue for proxy reliable aless become will year, following connections the from that result the with mix, the within revenue related non-connection of proportion increasing an see should proposition retail the of evolution the addition, In flat. approximately connections with gains, share tomarket make continue we will that but slightly fall will market handset the that We estimate effects. in 2009-10,currency flat excluding broadly to be revenues we expect Overall mind. in this with year the for budgets We our have set pressures. wider to these immune be to market handset the expect not do we and 2009, throughout recession in to be set are Europe across Economies uncertain. inevitably is Europe Buy Best for outlook short-term The Outlook next five years. next over the UK the in Box stores Big Buy Best and Mobile Buy Best from growth profits material of prospects good see and model, retail our developing in progress significant have made We improving. is position competitive our and capacity spare out taking at effective are Tough conditions trading positive. very is outlook the term, Longer year-on-year. materially outflow capital working reduce to we aim and openings, store new in decline the with to fall set is business core the for Capex costs. start-up and Box investments Big after £50m, of figure flow cash free operating an targeting we are and year the for focus major be a will division the for flow Cash range. £30-40m the in be to anticipated is division the of profits taxed the of Group’s share The 2.5-3.0%. of margin EBIT an in to result expected is effects these of all of impact The www .cpwplc.com

Directors’ Report – Business Review Directors’ Report – Business Review Other Financial Information

Whilst“ ” profitability has suffered against the economic environment, we have areas of substantial progress for the Group to report.

Roger Taylor, Chief Financial Officer

Joint ventures and associates accelerated a shift in its range of retail reflected in exceptional operating Alongside the results of Best Buy Europe stock away from mobile phones towards expenses. The Best Buy Europe since the transaction with Best Buy, the laptops and other products, resulting in reorganisation is expected to yield Group’s share of results of joint ventures an exceptional charge. Exceptional costs annualised savings for the joint venture of and associates in the income statement associated with these programmes are up to £50m per annum, and has resulted includes our share of post-tax losses reflected in a post-tax charge of £11m in a post-tax charge through the results from Virgin Mobile, our French MVNO. through the results of joint ventures. of joint ventures of £7m. TalkTalk Group also completed the transfer of its AOL Virgin Mobile had a second successful Prior to the transaction with Best Buy, network operations, hosting, billing year of customer growth, adding over the Group conducted a review of its and customer management from a 300,000 customers and bringing its base central support structures, particularly transitional platform provided by AOL to over 1.1m customers, of whom 44% in relation to its retail and distribution Time Warner onto the Group’s own are subscription. Our share of losses business, to achieve greater divisional systems, at a cost of £16m, shown for the year was £8m. The business autonomy and efficiency. This review within exceptional operating expenses. continued to invest significantly in resulted in a reorganisation programme brand-building and customer recruitment, that is expected to yield savings of Additionally, an exceptional foreign and while it will record further losses in £7m per annum. Redundancy and other exchange loss of £85m has arisen in the 2009-10, broadly in line with 2008-09 restructuring costs that have arisen as year following a change in the functional levels, as it continues to invest in growth, a result of the programme are reflected currency of the Group’s brand company we expect it to move to profitability at the in a post-tax charge of £9m in from Swiss Francs to Sterling. The EBITDA level on a monthly basis in the discontinued operations. transaction with Best Buy necessitated second half of this year. a change in the operations of the brand Further to the divisionalisation process, company, which in turn made Sterling Exceptional items both TalkTalk Group and Best Buy the appropriate functional currency. The disposal of 50% of the Group’s Europe have undertaken comprehensive As a result of the change, movements retail and distribution business gave reorganisation programmes in the on the brand company’s Swiss Franc rise to a net gain after tax of £608m, second half of the year. The TalkTalk borrowings, which would have previously which is reflected in the results of Group programme is expected to been recognised through reserves, discontinued operations. Indirect generate annualised savings of were thereafter reflected in the income costs of £6m after tax also arose as approximately £10m per annum, and statement. These borrowings were a result of the transaction. Further has resulted in redundancy and other converted into Sterling before 31 March to the new partnership, Best Buy restructuring costs of £10m, which are 2009. A tax credit of £24m has been Europe commenced the disposal of recognised in respect of this loss. approximately 100 stores, and

20 The Carphone Warehouse Group PLC Annual Report 2009 to provide funding of £293m to Best Buy Buy to Best £293m of funding to provide facilities committed its used had Group the £159m. of year-end addition, the In at debt net underlying had Group The flow cash Group Buy. Best with transaction the on gain the reflecting 61.6p was EPS 8.1p), (2008: Statutory 18%of 15.2p). (2008: year-on-year 12.6p, was EPS Headline areduction (“EPS”) share per Earnings assets. tax unrecognised previously of recognition the from 17% benefited rate 50%). (2008: tax The was ventures joint excluding operations continuing from profits Headline on rate tax Buy. effective The Best with transaction the from proceeds the of aresult 2007-08 as £45m, of for charge the in reduction year,the asubstantial during £4m of payable was interest Net taxation and Interest to AOL. relation to £71m in £75m), (2008: primarily amounted intangibles acquisition of respect in charge amortisation The intangibles acquisition of Amortisation expenses. operating exceptional through £5m of charge anon-cash in resulting investments, internet wireless legacy its impaired fully Finally, Group the Franc. Swiss the in to movements exposure material any has longer no Group The net debt Closing underlying Net cash flow Foreign exchange Tax and interest Opening net debt Other Dividends and shares Acquisitions (net) Ex (cash element) O G Best Buy Europe TalkTalk Group ceptionals ross disposal proceeds ther cash movements

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(84 (15 (61 200 140 (69 (68 (20 (45 (44 (15 (17 £m 6) 8) 3) – 8 ) ) ) ) ) ) )

2.9 (2008: 3.7).2.9 (2008: of cover dividend provides earnings Headline against year, which last and 2% of on increase an represents which to 4.35p, year the for dividend total the taking 3.00p), (2008: share per 3.00p of dividend afinal proposing We are Dividends £53m. of acost at options, share of exercise the from dilution to future avoid year the in earlier Benefit Trust Employee our into shares 24m of Group acquisition the include shares and Dividends to TalkTalkavailable Group. losses tax substantial the reflecting payments, tax minimal continuing and costs, interest year-on-year in reduction sharp a reflects Tax interest and AOL acquisition. the for £70m of payment consideration deferred final the was year the in cost acquisition principal The £34m. of proceeds disposal net with flow, cash together free operating Europe’sBuy Best reflect movements year, cash other prior the In June. since business the in invested capital share and debt, and Europe’s cash Buy Best of debt Group from removal the operations), discontinued as flow cash Group the in (shown transaction the to prior flows cash operating reflect movements cash Buy. Other £1,041m Best with transaction the from of proceeds gross received Group The above. detailed are flows cash Group’s operating TalkTalk of components principal The £182m.therefore was debt, net Europe Buy Best of Group’s the share including debt, net Group’s effective The results. Group our into consolidated not are borrowings other and Europe’s cash Buy net Best £246m; of borrowings other and cash net and £293m of Group the from loans year, the of end comprising the at £47m of debt net had Europe Buy Best Co., Inc. Buy by Best guaranteed is which of half facility, credit revolving a£475m under provided were loans The £452m. therefore was loans these to fund borrowings Group including debt net total and March, of end the at Europe provide working capital flexibility. capital working provide to use in still are facilities overdraft some although constraints, credit banks’ of aresult as terminated have been loans market money uncommitted Most end. year the at facilities both of conditions covenant the with compliance in was Group The identical. are packages covenant the and similar are facilities both of 2012 terms The October respectively. 2013 March in and mature facilities The a £375m loan. and term purposes, capital working for used is which (“RCF”), facility credit revolving a£550m are facilities bank Group’s committed The equity. and profits retained facilities, bank committed by financed are Group’s operations The treasury and Financing year. the of end the by Francs to Swiss Group’sthe exposure eliminated have materially borrowings its of redenomination and year the during to Sterling Francs Swiss from company Group’s the of brand currency functional the in However, change the Francs. Swiss to relation in outflows currency significant caused year the during Sterling of weakening further The TalkTalk for hedges Group. flow cash on and France Mobile Virgin to funding and in Group’s investment the of respect in remain hedges some although hedges, Euro for requirement Group’s the reduced substantially has Europe Buy Best within businesses Euro-denominated the of part-disposal The assets. non-Sterling against hedge a as Francs, Swiss and Euros in held were year the of start the at borrowings Group’s the of proportion A large exchange Foreign sheet. balance the in separately shown are Europe Buy to Best Loans deconsolidation. the of aresult as year-on-year significantly reduced have all liabilities current and assets current equipment, and plant property assets, intangible £651m to £1,116m. other Goodwill, from have increased assets net Group associates. and ventures joint in interests in shown now is Europe Buy Best of Group’s share the and sheet balance Europe Buy Best the of deconsolidation the in resulted has Buy Best with transaction The sheet Balance www .cpwplc.com

Directors’ Report – Business Review Directors’ Report – Business Review Other Financial Information – continued

Funding of our subsidiaries is arranged above. Further details of the Group’s centrally with an emphasis on tight cash financial risk management arrangements control and efficient cash management. are provided in note 22 to the financial All funding is provided on an arm’s length statements. basis and currency risk is ordinarily hedged using foreign exchange swaps The Directors, in their consideration or currency borrowings. Other than of going concern, have reviewed the intercompany loans and capital funding, Group’s future cash forecasts and balance sheet translational risk is not revenue projections, which they believe hedged against adverse movements in are based on prudent assumptions, exchange rates and the results of any and based on those forecasts and such movements are taken to reserves. projections, that it is appropriate to The Group is exposed to limited cross- prepare the financial statements of the border transactional commitments and, Group on the going concern basis. where significant, these are hedged at inception using forward currency In arriving at this conclusion, they have contracts. noted that at 31 March 2009 there was substantial headroom against committed Group committed debt facilities have banking facilities and that these facilities been used to provide a £475m RCF do not start to mature until 2012. to Best Buy Europe. This RCF has terms that are broadly similar to the Group’s Return on capital employed main external facilities, including a Total shareholders’ funds at March 2009 debt:EBITDA covenant, and its final were £1,116m, compared to £651m at maturity date is 13 March 2013. March 2008. After taking into account Under this RCF 50% of drawings are average net debt, excluding debt used guaranteed by Best Buy Co., Inc. to fund Best Buy Europe, and adjusting for the amortisation of acquisition Treasury policy permits the use of intangibles and exceptional items, the long-term derivative treasury products Group generated a return on capital for the management of currency and employed from continuing operations interest rate risk and the Group’s interest of 8.4% (2008: 2.2%). The return on rate exposures are monitored regularly. capital employed from continuing More generally, the Group treasury and discontinued operations was function seeks to follow treasury best 8.4% (2008: 12.0%). practice as recommended by the Association of Corporate Treasurers Assuming a weighted average cost and adheres at all times to their Ethical of capital for the period of 5.8% Code. The Group does not trade or (2008: 6.5%), this represents an speculate in any financial instruments. economic value added in respect of continuing operations of £36m Going concern (2008: -£60m) or 2.6% (2008: -4.3%). A review of the Group’s business Economic value added for all operations activities, together with the factors likely on the same basis was £36m (2008: to affect its future development, £76m) or 2.6% (2008: 5.5%). performance and position are set out elsewhere within this Business Review, including the Risks and Uncertainties section. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are shown in the balance sheet, cash flow statement and accompanying notes to the financial statements. Further information concerning the Group’s financing arrangement and policies are set out in the Financing and treasury section

22 The Carphone Warehouse Group PLC Annual Report 2009 Directors’ Report – Business Review Group Risks and Uncertainties

Group Risk and Business Assurance functions identify, evaluate and manage the risks the Group faces on an ongoing basis. The table below summarises the more material risks to the Group, and how we seek to mitigate them in the day-to-day running of the business.

Specific risk Potential impact Mitigation

Going concern Insufficient funding affects ability to Banking facilities currently provide substantial continue trading. headroom, and do not start to mature until 2012, providing significant time before refinancing is necessary.

Competitive Loss of market share and erosion of margins Our strategy is to reinvest the benefits of scale environment from increased competition. into our customer proposition – to keep barriers to entry high and to maximise value for our customers. We have continued to see market share gains as a result of this strategy. Directors’ Report – Report Directors’ Review Business

TalkTalk brand Weak customer retention as a result of poor We have continued to make significant perception customer service. improvements in customer service, and expect our substantial investment in new CRM systems to enhance service further in the year ahead.

Capacity and Failure to provide a reliable service causes We focus continuously on improving network functionality of customer churn. resilience and performance, and continue to network invest to ensure that we keep pace with infrastructure customers’ growing demands.

Capacity and Failure to provide adequate service levels or to In addition to our substantial investment in functionality of I.T. manage back office processes. CRM systems for TalkTalk Group, we have infrastructure continued to invest to improve the functionality and resilience of our other front and back office systems.

Exchange rates Profits adversely affected by exchange rate Exchange rate exposures have been reduced movements; value of assets and liabilities significantly in the year: our exposure to similarly affected. Swiss Francs has been materially eliminated following the repatriation of our brand management company; our exposure to other European currencies has also reduced as a result of the sale of half of our non-Sterling businesses to Best Buy.