TalkTalk Top 4.1M Broadband Subs, Update on FTTH and Sell B2B

UK ISP TalkTalk has today published their latest half year results to 31st March (FY 2018), which saw them add +109K new on-net broadband subscribers in the final quarter to total 4,139,000. We also got an update on their “full fibre” FTTH/P plans and they’re selling their direct B2B business to Daisy for £175m.

The past few months have been quite busy for TalkTalk. During this period the ISP has started a trial of their new Multi-Room TV service (here), launched their new 150Mbps and 300Mbps G.fast based home broadband packages (here) and introduced a new Sagemcom based “Wi-Fi Hub” router with faster WiFi (here).

Elsewhere the ISP noted that demand for their largely FTTC (VDSL2) based faster “fibre broadband” service remains strong and the ISP added +188,000 new fibre customers during the six months (up from +160k in the previous 6 months). Some 45% of new customers choose to take their fibre services (up from 40% in H1).

However by far and away the biggest development has been their proposal to rollout a 1Gbps capable Fibre-to-the-Home (FTTH) network to 3 million UK premises, which is supported by an investment £1.5bn (here). This requires them to establish a new company, which would be 20% owned by TalkTalk and 80% by Infracapital; the latter will contribute £400m and TalkTalk £100m (plus they will then take on c.£1bn in debt).

Outside of that TalkTalk’s only other real foray into the realm of ultrafast home broadband has been via their separate 1Gbps capable FTTH/P network in the city of York (details), which is being conducted with infrastructure builder Cityfibre. Sky Broadband also played a part during the initial deployment phase and they currently retain wholesale access to the network during its on-going extension.

Today’s results include a small update on the progress of these two fibre optic network developments, although we’re still awaiting some solid details on their coverage and time-scale plans.

Full Fibre (TalkTalk Statement)

We have made good progress in positioning TalkTalk to be one of the biggest beneficiaries of the transition to full fibre. We remain on track to establish an independent infrastructure company with Infracapital. Through this partnership we intend to build a new full fibre network, reaching 3 million homes and businesses. The partnership builds on our successful trial in York and takes advantage of the strong regulatory and political support for infrastructure competition. We see real opportunity to leverage our customer base to ensure TalkTalk is at the heart of Britain’s full fibre future.

We are delighted to announce that Paul Reynolds has been appointed to Chair the new company Infraco. Paul brings extensive experience of leading major telecoms and infrastructure businesses. As CEO of Telecom New Zealand, he oversaw the world’s first structural separation of retail and network companies and led the rollout of full fibre services. Prior to that he held senior roles at BT, including serving on the Board as CEO of BT Wholesale. He led the creation of BT Openreach as a functionally separate business, as well as BT’s network strategy and global technology functions. He served as Chair of AAPT, one of Australia’s largest telecoms companies and was on the board of Japanese telecoms company, eAccess. Most recently Paul served on the Board of Eir in Dublin.

We are also pleased to announce that Charles Bligh will become the CEO of the new independent company. Charles currently serves as Chief Operating Officer of TalkTalk. He has also served on the TalkTalk PLC board since 2014. Prior to this he was the Managing Director of TalkTalk Business, Technology and Security. Charles was also responsible for the initial TalkTalk JV starting the FTTP journey 4 years ago. Charles worked at IBM for almost 22 years where he held a number of senior executive and board roles and has worked internationally in Australia, US, China and Japan. He will remain on the TalkTalk Board until the end of June and leave TalkTalk once the new entity has been formed.

We are currently making good progress on the third phase of our full fibre trial in York. When completed the network will reach 54,000 premises. We have begun trialling the use of Openreach ducts and poles to ascertain the potential to further reduce build costs.

The new company and its shareholders have begun detailed planning for future cities and will say more about city selection in due course.

In terms of funding for all this, TalkTalk noted that it’s supported by their recent £201m equity raise (net of issue costs), as well as the reduction in dividend and the new sale of their direct B2B business, which they claim will “strengthen the balance sheet and reduce net debt. In turn, that enables us to continue investing in sustainable growth and our full fibre strategy.”

Speaking of that B2B development. TalkTalk said they plan to sell their direct B2B business to The Daisy Group (“Daisy”) for £175m and the two have already signed a ‘Heads of Terms‘ for the deal, which will transfer all existing TalkTalk direct B2B customers to Daisy. The deal includes around 80,000 SoHo, SME and large enterprise clients, and represents less than 20% of TalkTalk’s B2B revenues.

The transaction is subject to contract with the intention to complete in late July 2018. Daisy is an existing strategic partner of TalkTalk, “meaning all customers would continue to be served by the TalkTalk network.” As a result TalkTalk will retain and continue to grow its core strategic Partner and Wholesale business.

Tristia Harrison, CEO of TalkTalk, said:

“When we reset TalkTalk a year ago, we said we would focus on delivering sustained customer growth whilst radically simplifying the business. One year into the strategy, we are making good progress on both. Our customer base grew by 192k in FY18, underpinned by our unique propositions and our lowest ever churn. We have also made real progress in simplifying the business to focus on core, fixed connectivity. This will continue into FY19 with the sale of our direct B2B business, as we focus on cementing our position as the market leader in our core B2B markets, Partner and Wholesale, which represent over 80% of our B2B business and continues to grow strongly.

As expected, our decision to invest in growth has come with short-term implications for EBITDA, but positions us well for FY19, where the benefits of a bigger base, regulatory tailwinds and ongoing cost reduction mean we remain on track for EBITDA improvement of 15% (before Daisy) and Headline revenue growth.

We have also set out our strategy to be at the heart of Britain’s full fibre future, in partnership with Infracapital. I am delighted to announce that Paul Reynolds will Chair the new company, with Charles Bligh having been appointed CEO, to oversee the roll out of a full fibre network to over 3 million homes and businesses, guaranteeing our long-term position as Britain’s leading value provider of fixed connectivity.”

On the financial front TalkTalk reported total headline revenue of £1,564m for the year (2017: £1,555m) and EBITDA of £233m (2017: £361m). The company’s headline net debt currently stands at £724m (better than £782m last year).

Sadly the ISP also reported a statutory operating loss of £18m (2017: profit £95m) and statutory loss before taxation of £73m (2017: profit £70m), after £119m of one-off costs associated with re-organising and simplifying the business.

NOTE: The closing off-net broadband base amounted to 43k at the end of FY18 (2017: 62k), representing c.1% of the total broadband base. Including this we can get to around 4.2 million broadband customers.