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 Best Buy 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 London, which many of you will have seen, is new to the portfolio, but the other three, in Romford, Portsmouth and Bristol, 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 250 200 150 100 Margin growth (rebased to 100) 50 0 Retail 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. we won’tbe MOBILEBROADBAND beatenonprice† theperfect gift AT THECARPHONEWAREHOUSE AT THEPERFECT PRICE 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. Broadbandsubject to availabiltyinyourarea. Subjecttoavailabilityinyourarea. FORTHEPERFECTGIFT SIMPLEIMPARTIALADVICE 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