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TalkTalk- First quarter revenues held flat

George Salmon | 20 July 2016 | A A A
TalkTalk- First quarter revenues held flat

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Talktalk Telecom Group Plc Ord 0.1p

Sell: 97.80 | Buy: 98.00 | Change 0.30 (0.31%)
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TalkTalk have this morning released a trading statement covering the three months to 30 June 2016.

Total revenue is flat year-on-year with corporate revenues up 7.5% and on-net revenues down 2%, reflecting a smaller average on-net base in the quarter. The shares rose by 3.5% this morning.

The Broadband customer base fell by 9,000, with the TV base down by 23,000. The group picked up 48,000 net adds in Mobile and 36,000 net adds in Fibre. The mobile offering is set to be improved during the year via an agreement with Telefonica to provide 4G coverage.

On-net churn is stable quarter-on-quarter (down year-on-year) at 1.36%, with TalkTalk citing improvements in customer service and a 6.8% year-on-year increase in Revenue Generating Units (RGUs) as the group continues to focus on customer engagement.

The Group's trial of ultra-fibre optic broadband in York continues to progress, and TalkTalk are increasingly confident of reaching the targeted penetration rate of 30-40% and potentially expanding beyond York.

TalkTalkBusiness is said to have started the year well, with 2,000 new ethernet connections added and strong order book growth.

Making TalkTalk Simpler (MTTS) is progressing in line with company plans, and is set to deliver £35-40m of savings by the end of the year.

Guidance remains unchanged for the full year, with performance expected to be stronger in the second half. Full year EBITDA (Earnings before interest, tax, depreciation and amortisation) is expected to be in the £320-360m range. This year's dividend is expected to at least be equal to last year's while net debt is expected to be relatively unchanged.

Our View

TalkTalk's last financial year was not a good one for the company. Even though it transpired that the hack was on a much smaller scale than first feared, the headlines generated by the cyber-attack were damaging.

Consequently, customer numbers have dropped year-on-year. However, TalkTalk have been able to cross-sell mobile into the existing customer base, convert more broadband customers to fibre, and grow the corporate business. This has resulted in total revenue being maintained at last year's level.

Offering all customers a free upgrade in the wake of the hack no doubt helped prevent more customers from leaving, and the benefits of the cost saving, service improving, 'Making TalkTalk Simpler' programme are starting to be felt. With churn for the quarter back down to just 1.36%, overall this is an encouraging start to this financial year.

In the near-term, TalkTalk, like others in the sector, will look to cross-sell and get customers taking on as many of their mobile, broadband, TV and phone services as possible. If they can do this, they should be able to build a bank of sticky customers, which will keep churn low as the business matures.

Comparing their offering to their competitors', TalkTalk score points when it comes to pricing, but are behind in other areas. We feel that competing on the content that the larger players can offer, for example the sport packages on BT and Sky, will remain a sizeable challenge for the Group.

After the problems of last year, the dividend was not covered by earnings. Bloomberg estimates imply that it is unlikely that this year's dividend will be covered either, despite profits being set to jump significantly.

TalkTalk offer a provisional yield of 7%. Although this provides some attraction, given the lack of coverage, if the Group encounter any difficulties when executing on their strategy then the sustainability of the payout could well come under question.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.