TalkTalk cuts profit target despite accelerating customer growth

TalkTalk reported further good growth of customer numbers in the third quarter but trimmed its full-year profit guidance.

For the full year the telecoms company lowered its guidance for earnings before interest, tax, depreciation and amortisation by £10-15m for an IFRS 15 accounting adjustment to £245-250m, which does not include £5-10m of costs from the FibreNation joint venture.

Chief executive Tristia Harrison said "the underlying business is on track" and that the guidance cut was partly due to higher subscriber acquisition costs and price cutting, as well as "timing adjustments and investment growth" from IFRS 15 accounting changes. While guidance indicated EBITDA growth of 5-7% for the year, it was well below the £261m previous guidance and the average analyst estimate of £258m.

For the third quarter, total revenue rose 2.9% compared to the same period a year ago, with on-net revenue up 4.3% in line with forecasts at £316m. Disappointingly, on-net average revenue per user of £24.70 was down 2% compared to the second quarter.

The customer base grew by 44,000 compared to 37,000 this time last year and 24,000 in the second quarter, with double-digit growth in both consumer and business accounts, taking the closing base to 4.3m.

Harrison said customer growth was ahead of expectations as the period was the eighth consecutive quarter of rising customer numbers, with record demand for Fibre as 146,000 homes added the high-speed broadband compared to 89,000 in the same period last year and already verging on the full-year target of more than 150,000. In the year to date, there have been fibre 338,000 net additions.

"Year on year," she said, "we have increased revenue by growing the base and stabilising ARPU, which combined with lower costs is driving improved earnings. Our significant customer momentum, combined with the benefits of our reorganisation and HQ move, gives us confidence in strong earnings growth for FY20."

She said added that annualised cost savings of £25-30m would be extracted from a reorganisation and headquarters move, with approximately two-thirds of this expected in the next financial year.

Shares in TalkTalk fell almost 8% to 103p on Friday, earlier hitting their lowest level in almost a year, when the dividend was cut last February.

Analysts at Credit Suisse agreed it was a "strong" quarter customer growth for TalkTalk with TalkTalk, but missed its revenue estimate by 2.6% and lamented the cut to EBITDA guidance.

"While we believe TalkTalk has executed very well on subscriber growth over the past few quarters, we have seen the company miss our revenue forecasts for the past 3 quarters and its EBITDA guidance for FY19 has been cut again.

"The key question for us remains how much TalkTalk is discounting price and spending in acquisition costs to achieve this strong subscriber growth."

After Friday's conference call, Morgan Stanley noted that management "were keen to highlight the positives around customer momentum" and while analyst were sceptical around higher leverage management said they have more than enough dividend capacity.

Morgan Stanley noted that there were higher restructuring costs of £25-30m to execute the simplification plan.

"Management say they are comfortable with FY20 EBITDA consensus estimates, but the market is understandably concerned given numerous downgrades in recent years (with the latest downgrade only this morning)."