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    Annual Report 2016 TalkTalk Telecom Group PLC 016

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    TalkTalk is the UK’s leading value for money quad play provider. Our mission is to deliver affordable, reliable, simple, and fair telecoms services for everyone. Contents Strategic report Corporate governance Financial statements At a glance ..............................................................................03 Board of Directors Independent auditor’s report .................................... 60 Chairman’s statement ................................................... 04 and Executive Committee................................. 28 Consolidated income statement .............................65 Operational and financial highlights ................. 04 Corporate governance .................................................. 30 Consolidated statement Chief Executive Officer’s review ...............................05 Audit Committee .............................................................. 34 of comprehensive income ...........................................66 Chief Financial Officer’s statement ....................... 08 Directors’ Remuneration Report .............................. 37 Consolidated balance sheet .......................................67 Business model and strategy.......................................12 Other statutory information .......................................56 Consolidated cash flow statement .........................68 Market opportunity ............................................................15 Directors’ responsibility statement........................ 58 Consolidated statement of changes in equity ..........................................................69 Regulatory environment .................................................16 Notes to the consolidated Measuring our performance.........................................18 financial statements ........................................................70 Principal risks and uncertainties................................20 Company balance sheet .............................................103 People.......................................................................................24 Company cash flow statement ..............................104 Corporate social responsibility ..................................26 Company statement of changes in equity ........105 Notes to the Company financial statements..106 Other information Five year record (unaudited) ......................................110 Glossary...................................................................................111 Financial calendar .................................................... 113 Advisers ....................................................................... 113

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    704,000 fibre customers London Manchester 3,996,000 phone and broadband customers (On-net base) 1,389,000 TV customers 35,100 business data lines 699,000 mobile customers (ethernet and EFM) “The business bounced back Services to consumers Services to businesses TalkTalk provides value for money phone, TalkTalk Business (TTB) serves the needs strongly in the final quarter. broadband, fibre, TV, and mobile to UK of over 180,000 businesses from national We recorded our lowest homes, differentiated by a clear and simple retailers to sole traders and public sector tariff structure, low prices, flexibility and customers nationwide. TTB offers a wide ever churn: testimony to the the inclusion of valuable services, such as range of voice, data connectivity products speed with which customer unlimited broadband usage and HomeSafe®, and interconnection services to business our market-leading network-based security customers and other carriers. TTB is one sentiment has recovered, the service. We also offer mobile services to our of only two network providers in the UK to success of our greater focus phone and broadband customers through provide wholesale connectivity services, a Mobile Virtual Network Operator (MVNO) with large national Internet Service Providers on existing customers, and agreement with Vodafone that will transition (ISPs) such as the Post Office and Telecom the growing benefits of our to a new MVNO relationship with Telefónica Plus amongst its customers. UK during 2017. Our TV proposition, which is simplification programme.” TTB also offers competitively priced high uniquely non-subscription based, includes speed connectivity products such as access to the TalkTalk TV Store for all broadband Dido Harding, Chief Executive Officer Ethernet and Ethernet in the First Mile (EFM) customers and a free YouView set top box for that exploit the Group’s significant network those customers taking our bundled phone, capability and reach. Data revenues are broadband and TV packages. YouView is an the fastest growing product set by revenue internet-enabled television service with in the Group’s range to Corporates, with differentiated catch-up and on-demand a significant and accelerating pipeline. services, and an open platform for future TTB’s voice products comprise of legacy application-driven innovation. revenues and the Group’s newly launched, next generation voice over internet protocol (VOIP) product. 01 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report At a glance ...................................................................................03 Chairman’s statement.............................................. 04 Operational and financial highlights ................... 04 Chief Executive Officer’s review ...........................05 Chief Financial Officer’s statement.................... 08 Business model and strategy .................................. 12 Market opportunity......................................................15 Regulatory environment ............................................16 Measuring our performance ....................................18 Principal risks and uncertainties ...........................20 People .............................................................................. 24 Corporate social responsibility .............................26 02 TalkTalk Telecom Group PLC Annual Report 2016

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    At a glance With a network that reaches 96% of the country, TalkTalk is the UK’s leading provider of value for money fixed line voice telephony and broadband services to consumers and businesses. Our fast growing B2B business also offers a wide range of data connectivity and next generation voice products across the UK. Our history TTB has consistently demonstrated significant growth and is the only Created in 2004 as the telecommunications division of The Carphone wholesale provider of broadband and Ethernet connectivity outside Warehouse Group (CPW), a retailer of mobile phones and related of BT Group. It now serves over 180,000 businesses across the UK. products, TalkTalk was demerged and listed on the London Stock Exchange in 2010. Our business model TalkTalk’s network comprises owned equipment that the Company TalkTalk has a long history of positive disruption and challenging has installed in over 3,000 BT exchanges and linked back to a national industry conventions. Having launched a market-beating voice offer high speed fibre backbone through a series of collector rings. The scale in 2004, TalkTalk began building its unbundled local loop network in 2005. and reach of this architecture (the largest unbundled network in the A decade ago this year, the Company launched the UK’s first ever free country) gives the Company geographic coverage of 96% of the UK. broadband offer. This marked a pivotal moment in the evolution of This is a significant competitive advantage and barrier to entry. the UK telecoms sector, and firmly established TalkTalk as the value for money champion in the market. Our business model is underpinned by a sustainable regulatory cost advantage over access to key parts of BT’s network infrastructure; Increased competition and uptake in connectivity services, coupled and a low cost operating model, which together allow us to price with a compelling pricing proposition, fuelled significant growth for competitively. The political and regulatory environment in which the business over subsequent years. Through a combination of this framework evolves is critical to TalkTalk’s business model and acquisitions and organic growth, TalkTalk expanded rapidly, acquiring is currently undergoing a series of reviews which present significant the businesses of AOL UK and Tiscali UK in 2007 and 2009 respectively. opportunities for the Company. In 2010, the business began offering additional consumer services in the form of mobile SIMs. It completed its suite of quad play services Our ambition with the launch of a flexible, value for money pay TV service and TalkTalk believes reasonably priced, reliable telecoms services should mobile handsets in 2012. be available to everyone . We have always aimed to be the leading value TalkTalk also offers fixed line connectivity services to business for money provider for all our products and there has never been a customers (B2B), including high speed Ethernet products and clearer space for a trusted value champion in the market. Our ambition is innovative next generation voice products. Founded in 1995 as to continue to build a scale consumer quad play business that consistently Opal Telecom, TalkTalk Business (TTB) has capitalised on the scale, delivers affordable, reliable, simple and fair telecoms services for performance and reach of the TalkTalk network to create a portfolio everyone. As the value champion in the B2B market we aim to double of business grade connectivity and hosted solutions, available either the size of TTB by growing its presence in the small business market, direct or through a wide range of wholesale partners. Ethernet connectivity and next generation voice products. Our infrastructure For more information see our FY16 business review on page 5 03 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Chairman’s statement In a challenging and eventful year, in which TalkTalk was the victim of a The impact on the business has clearly been considerable, and we have major cyber attack, the business has continued to make operational and been determined to use this experience as an opportunity to take a financial headway, ending the year strongly and well placed for the future. comprehensive look at our organisation. As a result, we have made many positive changes to reinforce governance processes, especially We ended the year with nearly a fifth of our phone and broadband around risk assessment and security – not just in technology and customers taking mobile and fibre, and over a third taking TV, all of which operations, but across our entire corporate culture. These changes will is a testament to our growing credentials as a true value for money drive clearer priorities and strengthen our processes as we build a scale quad play operator. In our B2B business, we saw continued strong quad play business that consistently delivers great value and service growth in revenues from high speed data connectivity as well as good to consumers and businesses. Crucially, they will also help to ensure growth in our wholesale channel. As a result, we reported Group TalkTalk, and our customers, are as well defended as we can be against revenue growth of 2.4%. future threats. Equally, whilst there is much more to do here, our Making TalkTalk There has never been a clearer space in the market for a trusted value Simpler programmes delivered significant improvements to customer champion that puts its customers first and is truly affordable, reliable, experience, and reduced costs. As a result, we delivered profit growth simple and fair. Our employees are excited about delivering this of over 6% across the year and a strong improvement in margins during mission and the Board and I would like to thank them for their efforts the second half. and their continuing commitment to TalkTalk and our customers. I am pleased to report therefore that the Board has declared a final dividend of 10.58p which, in addition to our interim dividend of 5.29p, gives a total pay-out for the year of 15.87p or 15% higher year on year. I am enormously proud of how TalkTalk responded to the cyber Sir Charles Dunstone attack. By communicating honestly with our customers to help them Chairman protect themselves, we not only set a new standard of openness and 12 May 2016 transparency for large businesses dealing with such challenges, we Financial metrics above refer to Headline financials. also demonstrated that TalkTalk is a business brave enough to put our customers’ interests first. Our customers responded positively to this, and have rewarded us with greater trust and loyalty, helping us deliver our best ever quarter of customer loyalty and much improved trust in our brands. Operational highlights • TalkTalk has recovered strongly since the cyber attack, and • Deeper engagement with TV customers; TalkTalk TV Store launched customers have responded well to our open and honest approach • Corporate remains a key engine of profitable growth; data • Churn improved significantly during Q4 and at 1.3%, reaching its connections growing strongly lowest level in our history. Focusing on existing customers is • Making TalkTalk Simpler programme made significant progress delivering benefit for the business in improving customer service, and achieved £21m of cost • Continued acceleration in Mobile and Fibre, with further savings in the year expansion planned Financial highlights Headline revenue (£m) Headline EBITDA (£m) Headline EPS (p) Dividend per share (p) +2.4% +6.1% +2.4% +15.0% 18.0 326 1,838 15.87 1,795 1,727 1,687 1,670 290 13.80 14.9 260 12.00 245 10.40 213 9.00 8.4 8.2 6.8 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 04 TalkTalk Telecom Group PLC Annual Report 2016

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    Chief Executive Officer’s review FY16 business review Mobile We made considerable progress during the year towards our strategic Fast growing quad play penetration; ambition of becoming the UK’s leading value for money quad play 13.5% share of SIM-only market in the year operator and delivered FY revenue growth of 2.4% and Headline The mobile base grew strongly in FY16 with 235k net adds taking the EBITDA in line with our revised guidance of £260m. total base to 699k customers, 19% of the base compared to 12% a year ago. We saw strong take-up of bundled SIMs by our Plus TV The cyber attack in Q3 drove elevated churn for a short period. customers, and further strong growth across our other value for money An extended period through which we were unable to trade effectively SIMs including over the summer, our Unlimited SIM. We also launched, also led to delays in implementing a number of initiatives in the Making in TalkTalk Business, our new O2 mobile proposition for business TalkTalk Simpler Programme (MTTS). However, as expected, H2 still customers. In aggregate these value for money propositions helped showed a strong step up in profitability with Headline EBITDA margin drive our share of the new acquisitions SIM-only market to 13.5% in of 18.4% (H1: 9.9%), helped by the benefits of MTTS coming through the year (FY15: 10.3%), second only to the market leader EE. strongly, and lower SAC and marketing costs. We have a defined three stage plan to build out our mobile business The actions we took following the cyber attack to focus on our which will see further expansion of the base, growing revenues existing customers and to restore normality have more than mitigated and profitability. any lasting impact on the business. This focus, together with the customer experience benefits of MTTS , helped us to stabilise the Phase 1 – FY16/17 broadband base in Q4; drive strong growth in Revenue Generating We began the build of our new billing system and other associated Units (RGUs); and deliver the lowest ever churn in our history (1.3%). functionalities such as CRM and network migration development Equally the learnings from our detailed review of systems and during H1. On completion of the new systems we will be able to launch processes following the cyber attack have helped us to prioritise 4G and national roaming services on our new MVNO agreement with elements of our trading approach and strategy, which will help us Telefónica UK (O2) and extend our full mobile proposition to business deliver material improvements in profitability in FY17. customers. The new system suite will allow us to manage our own number range with TalkTalk SIMs, offer mobile sales and service The Board has recommended a final dividend of 10.58p taking the capability through multiple channels, and provide increased self full year dividend to 15.87p, 15% higher year on year, and in line with service capability for customers. We will complete billing and CRM our commitment. migration in H2 FY17, and begin customer migration from Vodafone to Telefónica UK. This process will involve a SIM swap and we will Broadband take a careful approach to the planning of this transfer in order Base stabilised and significant improvement in churn in Q4 to minimise customer disruption. We ended FY16 with an On-net base of 3,996k customers taking our core phone and broadband service (FY15: 4,177k). The economics of our mobile proposition are expected to improve materially as we move customers from Vodafone to O2, with the full The change in the base reflects two principal effects: benefit being seen in FY18. • an adjustment arising from a change in credit terms from 180 days Phase 2 – FY17/18 to the industry standard of 90 days, which resulted in 72k non-paying Our MVNO agreement with O2 also provides an opportunity to move customers being disconnected during H1; and to a deeper integration with O2’s radio access network through the • a 95k impact in Q3 resulting from the cyber attack, reflecting churn building of a ‘thick’ core system. This will allow us to control much in the immediate aftermath of the attack and much lower additions more of our customers’ mobile experience including real time activity as it took longer than expected to return the business to management of traffic, alignment with our converged (fixed and normal sales effectiveness. mobile) infrastructure for creating truly integrated quad play propositions, and work with other network providers e.g. for national The balance of the fall of 14k reflects underlying activity of -8k in H1 roaming. We have begun to develop our plans for the thick core, and -6k in Q3, with Q4 net adds flat. We also completed the migration including some early testing of the necessary hardware equipment. of Tesco broadband customers, and saw continuing growth in our We shall continue detailed planning and testing through FY17 with profitable B2B wholesale broadband base to 830k (FY15: 737k). a view towards full implementation in early FY18. While average churn across the year was 1.6% (including the cyber Moving our customers onto the thick core will further improve the related churn), we saw a significant improvement in Q4 to 1.3%. economics of our mobile business. 05 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Chief Executive Officer’s review continued Mobile continued opportunity to build a mass market, value for money proposition that Phase 3 – FY18+ delivers value for consumers and shareholders through keen pricing Our thick core will also enable us to roll out femto cells across our and rapid scaling. We expect to review progress and decide on the fixed line base, thus creating an inside-out fixed-mobile network that next phase of development later in the year. will leverage our Guard band spectrum. Ofcom is currently consulting the industry on our request to vary the Guard band licence for 4G TV usage and we expect a resolution in the summer. Femto cells on 4G Over one-third of base taking TV; growing engagement with product spectrum will vastly improve customers’ in-home mobile experience, The TV base declined modestly during the year by 25k to 1,389k as we especially in areas with poor radio network coverage, and will allow us focused on deepening the engagement with our existing TV customers. to offload mobile traffic onto our fixed line network, thus delivering With over a third of our base now taking TV the product has been savings on MVNO costs. We began laboratory testing of femto cells a remarkable success story for us in driving triple play growth with during FY16, and have seen encouraging results on off-load capability 1.4 million customers (38% of our phone and broadband base) from and service quality. We expect roll-out to commence once the thick launch four years ago. Customers genuinely value the YouView core is fully functional. experience that integrates free, Pay, OTT, and premium channels, Over time there will be further opportunities to drive down data costs and we see benefits to engagement, NPS, and churn. In addition, across this inside-out network, potentially by building a larger small-cell we have seen growing purchases of transactional video as customers network combined with suitable high frequency spectrum. become more comfortable and knowledgeable with the range of content on offer, with on-demand usage growing 20% year on year. Fibre We are now evolving the proposition for the future, based on what our Continuing strong growth with 225k net adds in year value conscious customers want, which is access to the widest range and improved customer experience of content, on flexible terms and on multiple devices. Amongst other We added 225k net new fibre customers during the year, taking the developments, TalkTalk TV customers can now sign up and pay for base to 704k, 19% of the broadband base compared to 13% a year ago. Netflix on their TalkTalk bill, and from June 2016, will be able to Demand has been helped by customers’ growing recognition of the subscribe to BT Sport channels in addition to our existing portfolio benefits of higher speeds and bandwidths, and the availability of of all Sky Sports channels. our self-install option which is used by over 90% of customers. Fibre customers are amongst our most satisfied customers with In April we launched the TalkTalk TV store, which enables all of our strong net promoter scores and significantly lower propensity to call, customers, including broadband only customers, to access pay TV which is driving lower churn compared to broadband customers. content on multiple devices. This is an important development on our TV journey, using the technology we acquired from blinkbox, as a set We have continued to improve our customers’ experience of top box will no longer be the only way to gain access to a broad range fibre by investing in our backhaul network and ended the year with of TalkTalk TV content. significant improvements in network performance. Over the next two years we will invest further in enhancing the capability of our TalkTalk Business next generation access and edge networks, which will drive significant Delivering high margin growth through data further improvements in customer satisfaction and reduce our TalkTalk Business revenues account for over 30% of the Group and operating costs. grew by over 5% during the year. It is a significant, profitable and fast We are making significant progress meeting the key operating metrics growing part of the Group and our ambition is to double its size over (cost per home passed, customer experience and penetration) in the medium term driven by continuing growth in data products, next Ultra Fibre Optic (UFO), our fibre to the premise (FTTP) trial in York. generation voice services and broadband customer base growth We completed the build of the first 8,000 homes at a cost of under delivered via our direct and partner (wholesale) channels. £500 per home and are now testing penetration. Customer trials The On-net wholesale base (TTB is one of only two national ended at the end of March, when we launched the proposition wholesalers of broadband and fibre to the cabinet), comprising commercially. Over 90% of the trial participants have chosen to retain the retail customers of businesses such as the Post Office and the service and pay £21.70 per month which is particularly notable, Utility Warehouse, was not directly affected by the cyber attack and as the vast majority were not existing TalkTalk customers. After two therefore grew year on year, as did TTB’s Direct channel On-net base. months TalkTalk UFO penetration stands at 7% of homes passed and continues to accelerate. Feedback from the first customers has Corporate revenues within TTB were up 2.4% against a strong prior been extremely positive and we are polling customers in other York year comparative (FY15: +10.3%), with compound annual growth neighbourhoods to establish interest for the next phase of building. since FY14 of over 6.0%. Based on these experiences, we remain confident about the potential Data revenues once again grew strongly (+23.7%), with over to roll out FTTP at scale. At a build cost of under £500 per premise 9,000 new high speed data lines connected and a strong pipeline passed and 30%–40% take-up, we believe it will be possible to build of orders at the year end. High speed data now accounts for 31% of our a c.10 million household network across the UK. We see UFO as an Corporate revenue. Business demand for high speed data is growing 06 TalkTalk Telecom Group PLC Annual Report 2016

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    fast and TalkTalk Business is well placed to provide value for money The exchanges are connected via collector nodes that aggregate high speed connectivity that is margin accretive. The main constraint all of the 3,000+ exchanges and connect these to the core network. to this growth continues to be BT Openreach’s inability to provision The equipment in these locations (a mixture of BT Openreach exchanges orders on time. and our own data centres) is owned by TalkTalk. The nodes are connected by 10 Gigabits per second circuits to the core network for delivery of Carrier revenues grew strongly in H1 (+34.1%) but as expected, were voice and data services. These circuits are either leased bandwidth flat year on year in H2, with full year growth at 13.3%, and are expected or leased dark fibre, both of which are well-served markets. to remain broadly stable in FY17. Voice revenues continued to decline (-16.2%) in line with market trends. During the year we acquired and Our dark fibre core optical network is the fundamental underlay of the integrated tIPicall, a leader in Next Generation Voice services. Customer network – a high speed, high-capacity all-IP national backbone that reception to the new products launched on the back of this acquisition enables efficient and flexible routing of voice and data traffic. The size has been very positive, and we expect the rate of decline in total voice and all-IP nature of this network allow it to be scaled very efficiently to moderate as this business grows. for growing usage, enabling it to support growing customer demand for high speeds and greater data consumption. Making TalkTalk Simpler We have a defined programme of investment in the network to improve MTTS is our wide ranging transformation programme that is delivering capacity and efficiency in line with the expected growth in demand material improvements to our customers’ experience, driving operating for high speeds and data consumption. In FY16 we completed the first cost savings, and reducing subscriber acquisition costs (SAC) through phase of our backhaul upgrade to deliver significant improvements lower churn and costs per add (CPA). in network performance for fibre customers. Over the next two years We made significant progress in FY16, achieving £21m of cost savings we will invest further in enhancing the capability of our next generation in the year through, amongst other things: access and edge networks, which will reduce our costs to serve for all our customers, and drive significant further improvements in customer • better network performance from improved traffic management satisfaction. In addition we have designed the investments in the and the deployment of faster backhaul circuits; network to future proof three priority areas; the growth in fibre from • fewer missed engineer appointments and improved resolution FTTC to FTTP, the best Ethernet business network of choice, and of problem orders through case management; mobile expansion. We expect these investments to fall within our capex envelope of 6%–7% of revenues. • the implementation of live chat and voice biometrics; and Overall, as we continue to reduce the marginal cost of capacity • improved fault diagnosis and resolution, reducing engineering of our network, we will be able to sustain a cost advantage that cost and unnecessary customer contacts. we can translate into compelling value for money propositions. The cyber attack in Q3 highlighted the need to put our existing customers first and to accelerate the development of even more FY17 guidance secure, simplified and resilient processes. MTTS is at the heart of this Revenue and EBITDA process and whilst we had to reprioritise some work-streams as a We expect FY17 revenues to grow modestly, driven by a broadly result of redirecting online resources to addressing the cyber attack, stable broadband base and continued growth in TalkTalk Business; we exited the year on track to deliver £35m–£40m incremental and Headline EBITDA of £320m – £360m. Consistent with the trends benefits in FY17. In total therefore, we expect cumulative benefits seen in Q4, we expect to see Headline revenue decline in H12017, from the start of the programme in FY13, to reach c.£90m by the reflecting the smaller On-net base, and return to growth in H2 as end of FY17. With considerable further benefits to come from the comparatives ease. programme, savings beyond FY17 are expected to annualise at a In line with this, we expect EBITDA to reflect an H2 bias, with an H1:H2 substantially higher level. weighting of broadly one third:two thirds. TalkTalk network Net debt Leveraging our capability and enhancing customer’s experience We expect Net debt/EBITDA to fall towards our target leverage of 2x Our network gives us a significant competitive advantage as we look by the end of FY17. With capex planned at 6%–7% of revenues and a towards building upon our value for money positioning. At the heart material reduction in cash exceptional costs we expect year end net of our network, is the unbundling equipment (digital subscriber line debt to be broadly similar to that at the end of FY16. access multiplexers, multi-service access nodes and Ethernet switches) Dividend that we have installed in over 3,000 BT exchanges, giving us c.96% We expect the FY17 dividend to be at least in line with that of FY16 coverage of the UK – the largest such deployment in the UK and a and covered by free cash flow. significant barrier to entry. This allows us to take control of the copper line that connects customer premises to the exchange, at a regulated cost that has fallen over time. Dido Harding Chief Executive Officer 12 May 2016 07 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Chief Financial Officer’s statement Overview We delivered FY16 Headline financial results in line with the guidance by the benefits of MTTS coming through (£15m in addition to the £6m we gave at the time of the H1 results. FY revenue grew by 2.4% to £1,838m delivered in H1), and a significant reduction in SAC. In addition, operating (FY15: £1,795) and Headline EBITDA by 6.1% to £260m (FY15: £245m). metrics recovered strongly in Q4 with the customer base returning to The Board has recommended a final dividend of 10.58p taking the stability, strong RGU growth and material churn reduction (1.3%, the total dividend for the year to 15.87p (FY15: 13.80p), in line with our lowest ever churn in our history). Exceptional items amounted to £83m commitment to grow the dividend by 15%. Net debt/EBITDA of 2.6x for the year, of which £42m were related to the cyber attack. As a result (FY15: 2.4x) was in line with the guidance set at H1. of the strong improvement in profitability in H2, net debt/EBITDA at the year end of 2.6x, was, as guided, lower than the 2.8x at the end of H1. H1 saw strong revenue growth (4.7%) but Headline EBITDA was impacted by increased operating costs related to our transformation projects, The business has taken a number of key strategic decisions in the innovation and network investment. In H2 we delivered revenue growth aftermath of the cyber attack which in addition to driving the recovery of 0.2%, reflecting the impact on the customer base of the cyber attack in Q4, have set us up for a robust performance in FY17, with further in Q3, but strong progress in margins (H2 EBITDA margin 18.4%) helped EBITDA growth expected. Financial information 2016 2015 £m £m On-net 1,399 1,333 Off-net 55 87 Corporate 384 375 Headline revenue 1,838 1,795 Gross profit 993 980 % 54.0% 54.6% Operating expenses (473) (426) SAC and Marketing (260) (309) Headline EBITDA 260 245 % 14.1% 13.6% Exceptional items (83) (46) Statutory EBITDA 177 199 Depreciation and amortisation (121) (120) Non-operating depreciation and amortisation (10) (17) Share of results of joint ventures (8) (8) Operating profit 38 54 Net finance costs (24) (22) Profit before taxation 14 32 Taxation (12) 40 Profit after taxation 2 72 Revenue Total revenues grew by +2.4% to £1,838m (FY15: £1,795m), with H1 growth Corporate revenues grew by 2.4% to £384m (FY15: £375m) against of 4.7% and H2 growth of 0.2%. H2 revenues were directly impacted by a strong prior year comparative (FY15: +10.3%). Data revenues the cyber attack which resulted in a spike in churn and an extended continued to grow strongly (+23.7% year on year), driven by 9,000 new period over which we were unable to trade from our online channels. connections to our Ethernet and EFM base. Carrier revenues grew by The impact on Q4 revenues was more pronounced than in Q3 as we 13.3% and as expected, moderated significantly in H2. The growth in entered the quarter with a smaller customer base and it took longer data revenues and carrier helped offset the ongoing decline in legacy than we had originally anticipated to fully restore our online channels. voice revenues (-16.2%). On-net revenues grew by 5.0% to £1,399m (FY15: £1,333m). ARPU Off-net revenues, which comprise less than 3% of total revenues grew by +5.8% year on year driven by 3.9% growth in RGUs and pricing, (FY15: 4.8%), declined by 36.8% to £55m (FY15: £87m), impacted offset by lower usage, mix and promotional activity. principally by the disposal of our consumer Off-net base at the beginning of year. 08 TalkTalk Telecom Group PLC Annual Report 2016

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    Gross profit Exceptional items Gross profit increased by 1.3% to £993m (FY15: £980m) with the The net exceptional charge in the year amounted to £83m (FY15: £46m) gross margin rate falling from 54.6% to 54.0%. As expected we saw and comprises the costs incurred during Q3 FY16 in relation to the cyber an improvement in the gross margin from H1 (53.4%) to H2 (54.5%), attack, and one-off costs related to delivering the MTTS programme. as some of the timing differences related to regular procurement The one-off exceptional costs associated with the cyber attack were benefits that depressed the H1 gross margin, reversed in H2. £42m (FY15: nil) which includes the direct incident response costs The movement in gross margin during the year reflects a number and customer management costs including additional call centre of effects: pricing activity and high margin data revenue growth, agents, communication and marketing costs incurred during October together with the benefits of disconnecting non-pay customers and November; the costs of restoring our online capability with enhanced (c.£5m) and MTTS (c.£2m), were offset by the impact of higher than security features; and the increased retention costs including the cost expected mobile data usage from our Unlimited SIM promotion in of providing free upgrades to those customers who chose to take one. H1, continued reduction in voice revenues, and adverse mix. MTTS continued to gain momentum during the year delivering a further £21m of benefits and we expect to deliver a further £35m–£40m of Operating expenses savings in FY17. £41m of exceptional costs were incurred across these Operating expenses were up by £47m over the prior year to £473m. programmes as a result of improving customer experience systems The increase reflects a combination of our ongoing investment in and processes and implementing changes to the Group’s organisational innovation programmes (mobile, fibre to the premise and blinkbox: structure, exiting office locations and preparing for the move in April 2017 £13m); infrastructure, network and IT (£15m); and transformation from our sites in Irlam and Warrington to a new single location at the costs of £31m (including MTTS, property related costs; and Soapworks, Salford. management overheads) offset by £12m of benefits from MTTS. Although year on year costs were up, we saw a significant reduction Cash exceptional costs of £88m (FY15: £30m) included a number of in opex from H1 to H2, of £17m, with transformation costs lower timing differences between the incurrence of the provision and the than H1 and a step up in MTTS benefits. resulting cash outflow, most notably the timing of broadband base migrations which were provided for in FY15 but completed during SAC and Marketing FY16 and the provision in FY16 for cyber attack related technology SAC and Marketing costs reduced by 15.9% in the year to £260m costs and surplus property costs, which will be incurred in FY17 with H2 expenditure significantly lower than H1. The key drivers of and beyond. Cash exceptional costs for FY17 are expected to the overall reduction in SAC were: reduced volumes in broadband be £30m–£35m. and TV; lower costs per add in fibre year on year from the significant step-up in self-installation; a less SAC intensive mix in mobile compared Depreciation and amortisation to the prior year; and a much improved distribution channel mix. Depreciation and amortisation expense was broadly flat year on year During H2, our focus on existing customers and the benefits of MTTS at £121m (FY15: £120m). helped to reduce churn and enabled us to maintain a stable broadband base with fewer gross additions. This, together with the impact of Non-operating depreciation and amortisation more efficient distribution channels on costs per add, delivered a The amortisation of acquisition intangibles amounted to £10m £31m reduction in SAC. In addition, we refocused marketing spend (FY15: £12m) relating to the acquisitions of the Virgin Media and (£6m reduction) and saw a one-off reduction of £8m as a result of Tesco broadband bases and blinkbox in FY15. In the prior year, the disruption caused by the cyber attack. amortisation of acquisition intangibles included accelerated amortisation of £6m in relation to legacy software. Headline EBITDA Headline EBITDA increased by 6.1% to £260m (FY15: £245m) reflecting Net finance costs an EBITDA margin of 14.1% (FY15: 13.6%), driven by revenue growth, Net finance costs of £24m (FY15: £22m) comprised the blended MTTS benefits and SAC efficiencies. The H2 margin of 18.4% was a interest rate of 3.07% (FY15: 3.00%) on higher levels of average net significant improvement over H1 (9.9%), reflecting the H2 weighted debt during the year. Finance costs in FY17 are expected to be in the delivery of MTTS benefits and SAC reduction. range £26m–£28m. 09 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Chief Financial Officer’s statement continued Profit before taxation Cash flow and net debt Profit before taxation decreased 56% year on year to £14m (FY15: £32m), 2016 2015 £m £m reflecting the increase in exceptional costs offset by the increase in EBITDA. Headline EBITDA 260 245 Working capital 10 (19) Taxation Capital expenditure (166) (112) The effective Headline rate in the year was 26% (FY15: 20%), representing a tax charge of £28m (FY15: £19m). The increased Operating free cash flow 104 114 rate is due to the impact on the deferred tax asset of a reduction Interest and taxation (22) (24) in the UK statutory corporation tax rate from 20% to 17% over the Free cash flow (pre-exceptional) 82 90 period from 1 April 2017 to 1 April 2020. In addition, a £2m tax charge Exceptional items (88) (30) has been recognised in exceptionals reflecting the impact of the same rate change on the deferred tax asset recognised through Acquisitions and disposals (12) (38) exceptional items in the prior year. Dividends (135) (116) Sale of own shares 63 2 Earnings per share Net cash flow (90) (92) 2016 2015 Opening net debt (589) (497) Headline earnings (£m) 79 76 Closing net debt (679) (589) Basic EPS 8.4p 8.2p Diluted EPS 8.3p 8.1p Working capital Statutory earnings (£m) 2 72 The working capital inflow of £10m in the year (FY15: £19m outflow) Basic EPS 0.2p 7.8p reflected a receipt in respect of the historic termination charge Diluted EPS 0.2p 7.7p settlements with mobile network operators. EPS on a Headline basis is provided alongside our statutory measures Capital expenditure to allow easier comparison year on year, due to the impact of exceptional As expected, capex of £166m (9% of revenues) in FY16 was higher items. A full reconciliation to statutory results can be found in note 9 than our long run average of 6%–7% (FY15: 6.2%) of revenues as a to the financial statements. result of the phasing of our investment in innovation projects and some pulling forward of MTTS investment as a result of the cyber Headline EPS increased to 8.4p (FY15: 8.2p) driven by the increase in attack. This expenditure was focused on meeting the forecast EBITDA, with the profile during the year showing significant improvement demands for our network (higher capacity backhaul circuits); from 1.2p in H1 to 8.4p full year. The basic number of shares increased MTTS programmes; and innovation (e.g. hardware equipment for to 946m (FY15: 922m), driven by the ESOT share sale in H1. Statutory the Ultra Fibre Optic trial in York and the build of our new mobile EPS decreased to 0.2p (FY15: 7.8p). billing system and associated functionalities). We expect capex on our network, expenditure related to MTTS programmes and any further spend on completing the build of mobile billing systems to fall back to 6–7% of revenues in FY17. 10 TalkTalk Telecom Group PLC Annual Report 2016

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    Interest and taxation Net debt and capital structure Interest paid in the year was £22m. No cash tax was paid in the year. Net debt in the year increased by £90m to £679m (FY15: £589m) driven by an increase in the dividend, exceptional costs and increased Acquisitions and disposals capex spend, offset by £61m proceeds from the sale of surplus shares Acquisition expenditure in the year of £12m (FY15: £38m) mainly in the ESOT. As a result the net debt to EBITDA ratio increased modestly represents £8m in respect of the YouView joint venture (FY15: £8m), from 2.4x at the end of FY15 to 2.6x at the end of FY16. The Board £1m in respect of the York FTTP joint venture (FY15: £3m) and £5m in regularly reviews the capital structure of the Group and we expect respect of the initial consideration for tIPicall, offset by £2m received leverage to fall towards our target of 2x by the end of FY17. in relation to the disposal of the Off-net broadband customer base. During the prior year, the Group paid £29m in respect of the initial Going concern consideration for the Virgin Media Off-net broadband base and the The Directors have acknowledged the guidance ‘Going Concern Tesco broadband base, and blinkbox. and Liquidity Risk: Guidance for Directors of UK Companies 2009’, published by the FRC in October 2009. Dividends Our business activities, together with the factors likely to affect our Dividends of £135m paid in the year (FY15: £116m) comprised the final future development, performance and position are set out in the dividend for FY15 9.20p and the interim dividend for FY16 of 5.29p. Business Review. Our financial position, cash and borrowing facilities The Board has declared a final dividend of 10.58p which will be paid are described within this Finance Review. on 3 August 2016, subject to approval at the AGM on 20 July 2016 for The breadth of our base, our value for money proposition, continuing shareholders on the register 8 July 2016 (ex-dividend 7 July 2016). improvements in operating efficiency and the largest unbundled The total declared dividend for the year was 15.87p, a year on year network in the UK means that the Directors are confident in our ability increase of 15%, with dividend cover improving to 0.53x (FY15: 0.59x). to continue to compete effectively in the UK telecoms sector. Sale of own shares We have £944m of committed credit facilities and as at 31 March 2016 The £61m inflow from the Employee Share Ownership Trust (ESOT) the headroom on these facilities was £255m. Our forecasts and reflects a decision taken by the trustees of the ESOT to reassess the projections, taking into account reasonably possible changes in number of shares required to satisfy the ESOT’s obligations under the trading performance, indicate that there is sufficient cash and Group’s share award plans. The ESOT continues to hold 9.3 million covenant headroom on our facilities and that this, together with shares (0.97% of total share capital). The remaining £2m relates to our market positioning, means that we are well placed to manage the in-year settlement of Group share schemes. our business risks successfully and have adequate resources to continue in operational existence for the foreseeable future. Funding The Directors have therefore adopted the going concern basis The Group is financed through a combination of bank facilities and of accounting preparing the financial statements. US private placement notes, retained profits and equity. Committed facilities at the year end totalled £944m (FY15: £819m) and further detail is given in note 18 to the financial statements. At 31 March 2016 £689m (FY15: £599m) had been drawn down under these facilities leaving £255m (FY15: £220m) of undrawn facilities. Covenants are substantially the same across all funding facilities and the Group was in compliance with its covenants throughout the current and prior year. 11 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Business model and strategy TalkTalk has consistently proved itself a challenger brand in the telecoms market. Throughout the Company’s history, it has successfully harnessed critical customer and regulatory opportunities capable of giving it a sustainable cost advantage. TalkTalk has then used these effectively to democratise the telecoms sector, driving growth and uptake across its chosen markets. This strategy of pro-competition, positive disruption has paid dividends for the Company, which has delivered shareholder value over a sustained period. TalkTalk has grown rapidly in both scale and diversity of product and ongoing Making TalkTalk Simper programme, TalkTalk will continue service offerings. It has driven both price and product innovation, to deliver meaningful improvements in customer satisfaction. The whilst maintaining a strong position in its core consumer and business Company will look to simplify and clarify its product offerings, ensuring fixed telecoms markets through leveraging its sizeable customer they are as competitive and customer friendly as possible. Customers base, network design and low cost operating structure. Over the last have always saved money when they choose TalkTalk and the five years, TalkTalk has moved into the TV, mobile and fibre markets Company will continue to ensure that they always do. as well as expanding its range of high speed data products. Ten years ago, TalkTalk took advantage of changes in telecoms Central to TalkTalk’s business model is the aim of being a great value regulation which allowed the Company to price very competitively for money provider. The Company keeps a relentless focus on saving in the fixed market and therefore compete effectively against the customers money, whilst delivering an ever better customer experience high priced incumbents. This drove sizeable growth and value for through affordable, reliable, simple and fair products. the business. The market for high speed fibre (both superfast and ultrafast) is now growing rapidly, at the same time as technology The October 2015 cyber attack was a major challenge for the business. and consumer behaviour between fixed and mobile networks begins However, it provided valuable insight and evidence that focusing on to converge. As a result, the regulatory environment is evolving. existing customers yields significant commercial and reputational benefits. As a result of the honesty and openness with which TalkTalk Ofcom is also looking to drive competition and investment into fibre approached the data breach (including the offer of a free upgrade to to the premise (FTTP) and mobile through a combination of tougher all customers in recognition of their loyalty), trust in the brand has regulation of Openreach, dark fibre products and access to poles increased. Customers are now, on average, more willing to trust, and and ducts. TalkTalk is already demonstrating both the considerable buy more products from TalkTalk, than they were before the attack. potential of FTTP (with its ultrafast joint venture in York), and the ability to bundle fixed and mobile products together as the market TalkTalk is more persuaded than ever that delivering on its moves toward fixed/mobile convergence. TalkTalk will capitalise on its commitment to being a great value for money challenger business experience with local loop unbundling, as well as its proven credentials will deliver sustainable growth and value. Through an ongoing focus on in price innovation, to ensure it is ideally placed to benefit as the improving customer experience, already well established through the market for next generation products continues to expand. Our strategy – the customer wheel Our ambition is to be a great value for money quad play provider that consistently delivers affordable, reliable, simple and fair telecoms services for everyone. See the People section on page 24 for further details on Living our Brighter Basics. 12 TalkTalk Telecom Group PLC Annual Report 2016

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    Leveraging our network advantage Value for money products At the heart of the TalkTalk network is the unbundling equipment (digital Our network confers a structural cost advantage that has enabled subscriber line access multiplexers, multi-service access nodes and us to offer fixed line telephony, broadband and Ethernet connectivity Ethernet switches) that we have installed in over 3,000 BT exchanges, at significantly lower retail prices than our competitors. Following the covering c.96% of all UK homes – the largest such deployment in the launch of fixed line phone and broadband services in 2006, we have UK. This structure allows us to take control of the copper line that leveraged our network and fixed line customer base by offering connects customer premises to the exchange at a regulated price additional value for money services to consumers such as Internet that has fallen over time. This gives us a sustainable cost advantage that Protocol television (IPTV), fibre to the cabinet and mobile. In addition, we can translate into compelling value for money propositions. as we have designed our network for peak consumer traffic during the evening, we are able to leverage this capacity during the daytime for The exchanges are connected via collector nodes that aggregate TalkTalk Business (TTB) which offers a wide range of connectivity all of the 3,000+ exchanges and connect these to the core network. products from phone and broadband to high speed Ethernet and The equipment in these locations (a mixture of BT Openreach exchanges generation voice to direct and wholesale B2B customers. and our own data centres) is owned by TalkTalk. The nodes are connected by 10 Gigabits per second circuits to the core network for delivery of TalkTalk has consistently aimed to be a great value for money voice and data services. These circuits are either leased bandwidth challenger brand, always striving to save its customers money and or leased dark fibre. protect their best interests. This is still at the core of the Company’s purpose and strategy, and has been soundly reinforced by the events Our dark fibre core optical network is the fundamental underlay of the of the last year. During the October 2015 cyber attack, TalkTalk was network – a high speed, high capacity all-IP national backbone that determined to look after its customers, ensuring the Company was enables efficient and flexible routing of voice and data traffic. The size open, honest and fair with them throughout. The success of this approach and all-IP nature of this network allow it to be scaled very efficiently can be demonstrated in the strong response to TalkTalk’s offer of a for growing usage, enabling it to support growing customer demand ‘no strings attached’ free upgrade for all customers (regardless of whether for high speeds and greater data consumption. they had been affected by the cyber attack), as well as significantly Access to the copper infrastructure that connects UK premises reduced churn and improved trust in the brand since the attack. to BT’s nationwide exchange footprint is price regulated by Ofcom, Going forward, TalkTalk will build on these learnings to further strengthen while fibre backhaul (the process of transporting data via exchanges the Company’s reputation by championing customers’ interests to the Group’s core network) and dark fibre (the Group’s collector ring against the industry conventions. This approach was exemplified and core network) are leased on competitive terms from multiple recently when the Company became the first provider to announce providers. Access to BT’s fibre to the cabinet (FTTC) (GEA) product, a shift to ‘All-in Pricing’. This industry-leading move is supported by for on-sell to our customers, is provided by BT Openreach. consumer groups, the regulator and the Government. All-in Pricing We have a defined programme of investment in the network to improve offers a radically simpler and more transparent approach for customers capacity and efficiency in line with the expected growth in demand and typifies TalkTalk’s continued efforts to put customers first. for high speeds and data consumption. In FY16, we completed the first phase of our backhaul upgrade to deliver significant improvements in network performance for fibre customers. Over the next two years we will invest further in enhancing the capability of our next generation access and edge networks, which will reduce our costs to serve for all our customers, and drive significant further improvements in customer satisfaction. In addition, we have designed the investments in the network to future proof three priority areas: the growth in fibre from FTTC to FTTP; the best Ethernet business network of choice; and mobile expansion. We expect these investments to fall within our capex envelope of 6%–7% of revenues. Overall, these investments will enable us to reduce the marginal cost of capacity of our network and further strengthen the economics of carrying traffic, especially data traffic. 13 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Business model and strategy continued Scale Simple systems and processes Network capability, cost advantage and the ability to offer multiple Since the Demerger in 2010, we have delivered over £150m of cost value for money services has enabled us to build a large and savings through integration and simplification programmes. However, sustainable share (c.16%) of the UK fixed line broadband market. as a relatively young business that has grown rapidly, TalkTalk has a significant opportunity to further simplify its technology platform We have leveraged this position to drive penetration of TV (38% of and customer processes to deliver a better and more secure phone and broadband base), mobile (19% of phone and broadband customer experience. base) and fibre (19% of phone and broadband base). This quad play approach to driving revenue generating units aligns the Group’s Making TalkTalk Simpler (MTTS) is the Group’s wide ranging long term growth strategy of driving stable customer base, with the transformation programme. MTTS is delivering material customer growing trend amongst UK consumers to save money by taking service improvements; driving operating cost savings; reducing bundled products on top of their fixed line subscriptions. In time, subscriber acquisition costs; and ultimately, creating a simpler, we would expect the majority of our customers to be taking all more secure business and transformed brand reputation. Launched four products, underpinning our scale growth opportunity. in FY13, these programmes are now fully embedded across our business operations and have delivered over £50m of savings to TTB (a scale business, with revenues of over £500m per annum that date. We have made significant progress in FY16: a comprehensive have grown at over 6% compound over the last three years) has rebuilding of our online channels with enhanced security features; multiple further opportunities to grow in the fragmented B2B market. a significant improvement in network performance; improvements We plan, in time, to double its size by growing market share across to order provisioning through case management; improvements in all its product areas. TTB has leveraged the scale and reach of our customer service through implementation of live chat and voice network by offering a wide range of value for money, voice and data biometrics; and improved fault diagnosis and resolution, reducing connectivity products to customers ranging from small office/home engineering cost and unnecessary customer contact. With a further office businesses and small and medium sized enterprises to multi-site £35m–£40m of savings expected in FY17, savings beyond FY17 are national enterprises. TTB is also one of only two network providers in expected to annualise at a substantially higher level. the UK to offer wholesale phone and broadband, fibre and high speed Ethernet services across 96% of the UK. The acquisition of tIPcall in Going forward, as a simpler, nimbler and more focused business 2015 has added a significant new product capability to TTB in the than our competitors, TalkTalk expects to widen the cost advantage form of B2B VOIP (SIP) (voice over internet), with powerful it holds, whilst continuing to improve customer experience. cross-selling opportunities. We are building on our price advantage to become a great value for money provider Better customer Clearer, more Clear price advantage + experience from Making TalkTalk + customer = Great value for money provider friendly bundles Simpler Customers have Quad play Long term We have always begun to see the attractive; simpler sustainable had this improvements, products to come position more to come 14 TalkTalk Telecom Group PLC Annual Report 2016

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    Market opportunity With over eight in ten households having broadband access, but a far smaller proportion taking bundled TV and mobile products, the UK market continues to offer growth opportunities. This is particularly the case at the value for money end of the Disruptive innovation market, both in underlying broadband connectivity and converged products. There is significant scope for growth TalkTalk has a strong heritage of launching innovative and disruptive amongst specific demographics: 20% of households remain products that leverage our network scale, engineering expertise and offline, rising to nearly 50% of those aged 65 to 74 and cost advantage, to give everyone access to new technology and, in two-thirds of those aged 75 and over (Ofcom). TalkTalk is well doing so, saving customers money. placed to compete and grow in this market environment as the We were the first fixed line operator in the UK to offer: leading value for money operator. The Company is consistently able to offer low prices across all products and bundles as a • free fixed line calls between customers; result of our scale, low operating cost model, fixed line network • free broadband; advantage and regulated access to BT’s network. • unlimited downloads to broadband customers; There are four key players in the UK fixed line broadband and TV market. BT is the largest broadband service provider • network level home internet security; (32% share), followed by Sky (22% share), Virgin Media, the • a free TV product (on YouView, an integrated IPTV platform); cable provider, is the third largest player (20% share) followed by TalkTalk (16% share). • business broadband at under £5 per month; and BT and Virgin Media are positioned at the premium end of the • free nuisance and suspicious call blocking. connectivity market, with significantly higher price points than We see two major disruptive opportunities in the future. Firstly, TalkTalk. They focus on speed and reliability of broadband a significant potential to build an integrated fixed and mobile network connection. Sky’s focus is on cross-selling broadband and using our fixed line network and existing owned spectrum to drive voice products to protect and grow its premium pay TV base. down the costs of mobile. We are in the advanced stages of a femto BT also competes with Sky on pay TV content rights, cell testing programme that will lead to the roll-out of active cells in specifically sports. customers’ homes from 2018. These indoor cells will allow mobile There are also four Mobile Network Operators (MNOs) in the traffic to be offloaded onto the Group’s fixed line network, thereby UK mobile market: EE (29% share), O2 (29% share), Vodafone delivering a much improved indoor mobile experience and savings (23% share) and Three (12% share). In an increasingly convergent on the costs payable under the our mobile virtual network operator fixed-mobile market all four fixed line operators also offer or agreement with O2. are about to launch, mobile services through MVNO agreements. Secondly, we are making significant progress towards achieving our TalkTalk is one of the most advanced quad play providers critical success factors (cost per home, customer experience and in the market with a 38% penetration of TV in its phone and penetration) in Ultra Fibre Optic, our fibre to the premise (FTTP) trial broadband base, and 19% penetration of mobile. In addition in York, and are confident about the potential to roll out FTTP at scale. to convergence, the UK market is also consolidating. At a build cost of under £500 per premise passed and 30%–40% Therefore, following its acquisition of EE, BT is now the take-up, we believe it will be possible to build a c.10 million household UK’s largest mobile operator. network across the UK. In contrast to the consumer market, the fixed line business Both these innovations will allow us to deliver disruptive value for money connectivity market is extremely fragmented with BT Group propositions that leverage the economics of our fixed line network. commanding a market share of over 50%, followed at some distance by Virgin Media and Vodafone. TTB’s market share of less than 5% offers significant opportunity for growth through its position as the only alternative national wholesaler of broadband and fibre and Ethernet products. 15 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Regulatory environment The UK telecoms market is regulated by Ofcom which, amongst other objectives, sets the charges and other terms for wholesale access to infrastructure and associated services provided by BT, where BT is deemed to enjoy ‘Significant Market Power’. Most of the wholesale products TalkTalk purchases from BT are provided by BT Openreach (BTOR). Ofcom’s objective is to drive investment and to ensure that these wholesale products enable effective competition in the retail market, so that consumers and businesses benefit from a choice of attractive services and retail service providers. TalkTalk, along with other communication providers is required to comply with various regulation and legislation. TalkTalk’s compliance with regulation is monitored internally by a Regulatory Compliance Committee. Most material areas of regulation: Ofcom is expected to begin consulting in autumn 2016 on the next TalkTalk relies upon a number of wholesale products from BTOR to be LLU charge control which is due to be effective in April 2017. There is a able to offer services to its customers. The key wholesale products material risk that the new charge control will not have been completed are LLU (the copper connections into homes/businesses), GEA by Ofcom before the end of March 2017. Where this has occurred in (access to BT’s fibre to the cabinet (FTTC) network) and Ethernet the past, interim arrangements have been agreed between BT and (fibre links used to connect exchanges to the Company’s core Ofcom to ensure continued price controls. As a result of Ofcom’s network and also to connect some Business customers). The price Cost Attribution Review which ended BT’s practice of loading excessive and terms of these are set by Ofcom though a triennial market review costs onto regulated products, we expect MPF costs and therefore process which, particularly in the case of LLU, gives the Company MPF charges to reduce in future. reasonable certainty of future costs. GEA charge control Ofcom strategic review of digital communications BTOR provides wholesale access to its fibre infrastructure Following a consultation in July 2015, Ofcom published its ‘initial (predominantly FTTC), on an equivalent basis to all communication conclusions’ in February 2016. Though this did not set new regulation, providers. The BTOR wholesale product is called GEA. TalkTalk uses it did provide a high level strategy that included: encouraging more GEA to provide its fibre broadband products. Whilst the price of FTTP investment by BT’s rivals (through improving wholesale access GEA is not regulated, TalkTalk called for Ofcom to introduce margin to BT’s ducts and poles); possible introduction of charge controls squeeze regulation establishing the minimum margin between GEA on GEA; increasing the separation between BT and BTOR (possibly and BT’s retail price. In March 2015 Ofcom confirmed that margin including structural separation) to increase BTOR’s independence; squeeze regulation would come into effect from April 2015, with the and a ‘step change’ in BTOR service quality. Many of these strategic first compliance report published in June 2015. Both BT and TalkTalk changes will be implemented though the market reviews. The question appealed the decision (on different grounds). The Competition of BTOR separation is being considered separately to the market reviews. Appeals Tribunal (CAT) dismissed certain aspects of BT’s appeal. Ofcom is expected to consult on proposals in summer 2016. Ofcom is The Competition and Markets Authority (CMA) is considering assessing whether BTOR should be set up as a wholly owned subsidiary, TalkTalk’s appeal and the remaining aspects of BT’s appeal. A decision though it is keeping open the option of structural separation which it considers may be the cleanest and most clear-cut long term solution. is expected in May 2016. Ofcom’s FAMR will consider regulation of TalkTalk has been vocal in urging the regulator to take a bold approach, GEA from April 2017 onwards, including whether a charge control and the Government has recently called on Ofcom to ‘take whatever should be imposed and, if so, how it is calibrated. In May 2016, Ofcom action is needed to correct the competition problems identified, published a consultation on its proposed approach to modelling the and to promote the growth of the digital economy, however radical costs of GEA (to be used in the event that a charge control is applied). a change that might be’. Whilst both legal and structural separation will We expect some reduction in GEA prices as a result of Ofcom’s reduce BT’s ability to abuse its vertical integration (as accepted by market review. Ofcom) and therefore benefit TalkTalk, we are clear that only structural Duct and pole access separation can deliver the full benefits to the UK market. Ofcom set out in its Strategic Review that it would improve wholesale LLU charge control and service standards access to BT’s ducts and poles so that BT’s rivals could use these In June 2014 Ofcom published its Fixed Access Market Review assets to roll-out their own FTTP networks. Ofcom will likely impose (FAMR), which included the new LLU charge control for the period specific regulation on BT as part of its FAMR including: better to 31 March 2017: as a result MPF charges rose from £83.92 to £90.24. information availability; a requirement on BT to use the wholesale The FAMR also established new minimum service standards on BT products itself; and improved operational processes. Duct and pole for provisioning and repair of copper access lines, as well as a new access could benefit TalkTalk by reducing the cost and increasing the requirement for BT to report a range of key performance indicators. speed of roll-out of our own FTTP network. 16 TalkTalk Telecom Group PLC Annual Report 2016

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    Business Connectivity Market Review Illegal file sharing In May 2016, Ofcom published the final statement of its Business TalkTalk, along with other major ISPs, has voluntarily agreed to send Connectivity Market Review (BCMR) which sets regulation for educational notifications to customers who have an IP address dedicated fibre connections used by businesses, and as backhaul assigned to their account which has been detected as being used connections for LLU and mobile networks. The regulation included: for illegal Peer to Peer (P2P) file sharing. The first notifications are price reductions averaging 40% over the next three years; minimum expected to be sent around late 2016. Pursuant to various court service standards for Ethernet circuits provisioning (where quality orders, TalkTalk is required to block access to certain sites that are has been very poor for over three years); and an obligation for BT used for illegal file sharing and for trademark infringement. to offer a dark fibre access product to be launched by October 2017. Voluntary measures on parental controls The new regulation will benefit TalkTalk in several ways: lower costs In June 2013, following a formal Government consultation into parental for Ethernet services; the opportunity to lower costs further through controls, the Prime Minister announced that the other three major using dark fibre; and an improvement in provisioning quality which ISPs would introduce whole home filtering systems – similar to will increase customer satisfaction. TalkTalk’s HomeSafe® service. He also announced that ISPs would Wholesale Must Offer for sports channels ensure that all new and existing customers faced an unavoidable Ofcom previously imposed a Wholesale Must Offer (WMO) obligation choice about whether to activate filters, which TalkTalk completed in on Sky, requiring it to offer Sky Sports 1 and 2 on a wholesale basis to 2015. The Government is expected to introduce secondary legislation other retailers at regulated prices. In December 2015, Ofcom published in 2016 to support the existing system of parental controls. TalkTalk a statement withdrawing the WMO obligation on Sky since it considered does not anticipate this impacting the business. that it was no longer necessary, though it would reassess the need for The Government is also currently consulting on additional measures regulation if supply did not continue to be provided on reasonable to prevent children accessing pornographic content, with legislation terms. This regulation does not directly affect TalkTalk since TalkTalk expected this year. TalkTalk is working closely with the Government on has commercial arrangements with Sky. these measures, which are not expected to include significant new responsibilities for ISPs. Several other areas of current or potential regulation and legislation are significant for TalkTalk: Along with the other major ISPs, TalkTalk continues to support European Commission’s Directorate General of Competition’s Internet Matters, a not-for-profit online child safety organisation. (DG COMP) review of Three/O2 As a board member of the UK Council for Child Internet Safety, DG COMP has been reviewing the proposed merger of Hutchison TalkTalk continues to engage actively with the Government on Whampoa and Telefónica’s UK mobile businesses (Three and O2 its policies for protecting children online. respectively). The proposed consolidation would have reduced the Switching number of MNOs competing in the UK market from four to three. DG Ofcom is consulting on proposals to reform switching of mobile COMP has now prohibited the proposed merger. communications services. It expects to publish its conclusions in Appeals framework autumn 2016. It is also continuing its work on switching of triple play The Government is currently considering legislative options for the services and is due to publish its next steps in summer 2016. TalkTalk second session of the 2015–2020 Parliament. Bills may include continues to engage with Ofcom on these reforms. Government proposals to change the regime for challenging Ofcom’s decisions is currently considering legislative options for the second session through raising the hurdle for being permitted to make an appeal. of the 2015–2020 Parliament. Bills may include proposals to simplify This would reduce the time for Ofcom to finalise its decisions and switching. TalkTalk is supportive of a simpler, more customer friendly make Ofcom more confident in setting strong regulation. TalkTalk switching regime and is working closely with Government on the issue. is supportive of this proposal. Universal Service Obligation (USO) European Commission Digital Single Market In November 2015, the Prime Minister announced an intention In May 2015, the European Commission published 16 initiatives as to introduce a broadband USO, with the ambition to give people the part of the Digital Single Market agenda. The measures seek to legal right to request a connection to broadband speeds of 10Mbps. strengthen access to digital goods and services across Europe; Government is currently consulting on the legislative powers required improve regulatory frameworks; and strengthen digital growth by and in March 2016 Ofcom launched a consultation on the USO design. tackling issues such as skills shortages. The Commission is currently TalkTalk is working closely with Government and Ofcom on the issue. consulting on the proposals, with major changes unlikely to come EU roaming regulations into force before 2018. In November 2015, the EU passed legislation on the maximum retail Investigatory Powers Bill roaming surcharges that apply from 30 April 2016 and the removal In March 2016 the Government introduced the Investigatory Powers Bill, of roaming surcharges from 15 June 2017. The Commission is reviewing which seeks to consolidate and update existing legislation governing the wholesale roaming market, fair use policies and sustainability the retention and sharing of communications data. The Bill is subject mechanisms required to implement this policy. TalkTalk is engaging to Parliamentary scrutiny and change, but is likely to extend the with the review and implementing the required changes to its volume of data ISPs are required to store. TalkTalk is working with roaming tariffs. Government on the details of the legislation and how it would apply to the business. A version of the Bill is expected to be passed by Parliament by December 2016. 17 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Measuring our performance Financial metrics Headline revenue On-net revenue Corporate revenue (£m) (£m) (£m) 1,795 1,838 1,399 375 384 1,727 1,333 1,687 1,670 1,259 340 1,170 316 322 1,084 702 926 685 196 884 924 647 198 843 842 597 178 162 560 158 844 828 843 871 912 612 648 697 188 573 160 162 177 524 158 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 Definition Definition Definition Total Headline revenue across the business Total revenue across our On-net products Revenue from our corporate products including On-net, Off-net and Corporate. including On-net broadband, TV, mobile including voice, data and carrier services. and fibre. Comment Comment Total revenue was up 2.4% year on year, Comment Corporate revenues grew by 2.4% year with H1 growth of 4.7% and H2 growth of On-net revenues grew by 5.0% year on year. on year, driven by strong growth in data 0.2%. H2 revenues were directly impacted This was driven by ARPU growing by +5.8% revenues, offsetting a decline in legacy by the cyber attack which resulted in a year on year, as a result of +3.9% growth in voice revenues. spike in churn and an extended period RGUs and pricing, offset by lower voice over which we were unable to trade from usage, mix and promotional activity. our online channels. Data revenue Headline EBITDA margin Free cash flow (£m) (%) (pre-exceptional) (£m) 120 19.3 181 17.4 159 97 13.6 14.1 93 66 21.4 16.0 12.3 63 70 50 90 14.6 18.4 82 51 40 15.6 39 59 28 96 59 55 21 54 17.3 18.7 88 47 12.6 47 30 9.0 9.9 18 23 31 27 12 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 Definition Definition Definition Revenues from our data products within Headline EBITDA as a percentage Cash generated after capital expenditure. TalkTalk Business. of Headline revenue. Comment Comment Comment Free cash flow was down year on year Data revenues continued to grow strongly EBITDA margin grew to 14.1% in the year driven by increased capital expenditure (+23.7% year on year), driven by 9,000 with a significant step up in H2 to 18.4%, as a result of our focus on meeting the new connections to our Ethernet and driven by savings from MTTS and reduced forecast demands for our network, MTTS EFM base. SAC and Marketing costs. programmes and innovation projects. Key: H1 H2 18 TalkTalk Telecom Group PLC Annual Report 2016

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    Non-financial metrics Broadband net adds On-net churn TV net adds (On-net) (‘000) (%) (‘000) 190 1.6 1.6 687 1.6 148 1.4 115 132 117 497 360 87 1.6 1.7 66 72 1.5 1.3 197 61 49 58 45 230 -80 327 300 1.6 1.6 1.4 1.5 230 -101 25 -50 -181 -25 FY12 FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16 Definition Definition Definition The net of new On-net broadband The percentage of our On-net customer The net of new customers joining TalkTalk customers joining TalkTalk and those base leaving TalkTalk each month. TV and those leaving TalkTalk TV. leaving TalkTalk. Comment Comment Comment While average churn across the year was The TV base declined modestly during Our On-net broadband base contracted in 1.6% (including the cyber related churn), the year by 25k. With over a third of our the year by 181k. A change in credit terms we saw a significant improvement in Q4 to base now taking TV, the product has been from 180 days to 90 days resulted in 1.3%, representing our lowest ever quarter a remarkable success story for us in 72k non-paying customers being of churn. driving triple play growth with 1.4 million disconnected, and there was a 95k impact customers from launch four years ago. in Q3 from the cyber attack. The balance of the fall of 14k reflects underlying activity. Fibre net adds Mobile net adds EFM and Ethernet net adds (‘000) (‘000) (‘000) 272 235 8.8 8.9 225 7.2 180 103 6.1 4.4 4.6 171 126 3.7 134 114 109 116 3.1 3.5 65 58 48 65 132 4.2 4.5 41 2.4 101 99 3.0 3.5 8 43 8 69 64 23 56 61 5 22 1.1 18 3 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 Definition Definition Definition The net of new customers connecting to The net of new customers connecting The net of new customers connecting to fibre and those disconnecting from fibre. to mobile and those disconnecting data products and those disconnecting from mobile. from data products. Comment We added 225k net new fibre customers Comment Comment during the year, taking the base to 704k, The mobile base grew strongly in FY16 with 9,000 new high speed data lines connected 19% of the broadband base compared 235k net adds taking the total base to 699k in the year. Business demand for high speed to 13% a year ago. customers, 19% of the base compared to data continues to remain very strong. 12% a year ago. We saw strong take-up of bundled SIMs by our Plus TV customers, and further strong growth across our other value for money SIMs, including over the summer, our unlimited SIM. 19 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Principal risks and uncertainties Every organisation faces risks of varying severity as an inherent part of doing business. Some of these are within the control of the organisation and others are not. The Board has identified the following principal risks and uncertainties to the Group, which the Group seeks to proactively manage and monitor on an ongoing basis. The detail of these principal risks, and the controls in place for mitigating them, are outlined below in no particular order of severity. The ‘customer wheel’ is used by TalkTalk to articulate its strategy. A link to the elements of our strategy has been included alongside each risk to highlight how the principal risk relates to the strategic objectives of the organisation. The highlighted sections of the customer wheel show the impacted areas. In addition, the directional arrows reflect the movements in ‘gross risk’ from the prior year. The Group’s risk management framework facilitates continuous and ongoing discussion of risks and associated risk appetite to ensure the appropriate focus is placed on mitigating principal risks. The Board will continue to assess the principal risks and uncertainties faced by the Group and will update the risk register and mitigation plans accordingly. Data and cyber security Risk and impact Mitigation Link to Security of customer, commercial The October 2016 cyber attack has had a significant and lasting impact on TalkTalk strategy and colleague data poses as an organisation. Prior to the attack, the Company was actively implementing an increasing reputational and ongoing programme to build security capability. However, subsequent learnings have financial risk to all businesses. been fundamental in reshaping the Company’s approach to risk and mitigation. Whilst In particular, the sharp rise it is not possible to completely eliminate data and cyber security risk, it is clear that in cyber and data related crime effective mitigation must now go beyond building and operating security controls. presents a significant challenge What is required is a sustained evolution of culture, organisation and ways of working Gross risk in terms of securing data and which embeds security across the business. systems against attack. Failure TalkTalk will therefore continue the Ten Steps to Cyber Security programme, as well as to do so successfully may have maintaining and updating ongoing initiatives (such as monitoring activities, vulnerability a material impact on brand scanning, penetration testing and the data loss prevention solution) to ensure they reputation and financial remain fit for purpose. However, following an extensive independent review of existing performance. Other associated controls and processes, an updated security programme is also now in place, designed costs may also be incurred, to ensure the business itself is optimally configured for security. including potential regulatory A number of other activities have been completed including: fines. As experienced by TalkTalk in October 2015, this is a modern, • the realignment of Board-level responsibilities for technology and security, including rapidly evolving threat requiring the establishment of an additional senior position (Chief Information Security Officer) a new approach to risk which to support focus and oversight on the security plan and security activities; and fully accounts for the scale • the replacement of the previous governance forum for monitoring security progress and complexity of the with a Security Committee. This is a subcommittee of the Board, chaired by ongoing challenge. the Chief Executive, with senior executive representation and including a Non-Executive Board member. In addition to the above, other activities are underway including: • a comprehensive new governance structure to ensure sufficient security practices across systems, risk management, design, Company culture, third parties and internally; • a thorough, high priority review of vulnerabilities of all systems and all data across the existing estate; and • a renewed focus on awareness around data and cyber security, including formal internal and external awareness programmes. Key: Gross risk has increased Gross risk has decreased Gross risk remains broadly the same as prior year 20 TalkTalk Telecom Group PLC Annual Report 2016

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    People Risk and impact Mitigation Link to TalkTalk recognises employees as a key asset As well as a full internal review into corporate culture following the cyber strategy and aspires to be a ‘Great Place to Work’ for attack, TalkTalk also appointed independent advisers PWC to conduct a all colleagues. We understand the increasing thorough assessment of what happened and what learnings might be taken challenges and importance in the market from TalkTalk’s experience. Responding to these learnings, the Company is of attracting and retaining the right talent now implementing an extensive programme of cultural change, including to deliver current performance and future behaviours, values and ways of working. More information on this is available growth aspirations. Failure to attract and retain in the ‘People’ section. Gross risk required talent and competencies may Structured talent forecasting and assessment processes are in place negatively impact our ability to deliver on to ensure required talent is proactively understood. A people scorecard performance targets and strategic objectives. is also in place for ongoing monitoring and oversight of people risk and, TalkTalk has undertaken an extensive where required, actions to further mitigate risk exposures are identified programme to understand and implement and implemented. In addition, a Group-wide engagement survey is the behavioural and values-based changes completed annually to understand the level of employee engagement required for the Company to evolve from a and action plans are developed from the survey to ensure a highly start-up culture to a fully mature, responsible engaged and motivated workforce is maintained. business. Failure to successfully bring The Executive Committee assesses the annual engagement level of the about this change may have a negative workforce and, in addition, performs an annual assessment of talent at impact on the Company’s reputational senior management level to ensure the right leadership is in place for and commercial outlook. motivating, inspiring and leading the workforce to deliver on the corporate objectives. In FY16, TalkTalk announced the move to new office premises in Salford in 2017, reinforcing its commitment to developing a ‘Great Place to Work’ through investment in employees and their workplace. Customer trust and brand reputation Risk and impact Mitigation Link to Customer confidence and trust are critical TalkTalk remains confident of the role for a well-regarded value champion in strategy to TalkTalk’s business, and the Company’s the market and is committed to delivering a positive end-to-end customer operating approach always seeks to do experience. The ongoing MTTS programme is designed to improve customer what is right for the customer. However, as experience through better quality and availability of products and services. a value player in the market, there is a risk Over the last three years, the programme has delivered material improvements that TalkTalk is perceived as a ‘budget’ on congested exchanges and customer complaints handling processes, as provider, associated with price rather than well as improved web chat facilities, shorter call waiting times and router Gross risk quality and service. upgrades. Further significant benefits are scheduled for delivery in FY17. Programme progress and success is monitored via a formal governance Events in the last twelve months have also structure, including senior management representation on the had an impact on brand reputation and Steering Committee. trust, particularly in the case of the Consumer business. Failure to maintain Building trust and confidence in a value brand presents particular challenges, trust, improve brand reputation and offer a particularly for TalkTalk’s Consumer business. One of the key learnings from positive customer experience may result in the October 2015 cyber attack was that putting customers first was critical to increased churn, performance decline and the speedy recovery of the business. Consistent quantitative and qualitative loss of investor confidence. data suggests that the decision to inform customers, and to provide a gesture of thanks in the form of a free upgrade, has increased brand consideration and provided a firm foundation on which to improve trust and reputation. TalkTalk will now move forward with a renewed focus on existing customers, guided by the four key principles we believe are critical to being a value champion – affordability, reliability, simplicity and fairness. 21 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Principal risks and uncertainties continued Change delivery and execution Risk and impact Mitigation Link to Delivery of performance objectives and development of In FY16, TalkTalk formalised its change framework and established strategy the business is reliant on the ability to successfully deliver a centre of excellence Group Change function under the Group innovation and other operational changes required to Change Director. The remit of the function includes overseeing support growth and performance. Failure to effectively and monitoring the progress of significant change programmes deliver change programmes and associated benefits, and embedding a consistent and robust change framework for including MTTS, would result in an inability to deliver delivery of change and innovation. performance objectives and limit TalkTalk’s competitive The Group Change function facilitates prioritisation discussions Gross risk position in the market. to ensure people and financial resources are appropriately engaged, allocated and focused. Performance measures for all key change projects are defined and monitored and benefit tracking is in place and regularly reviewed by Group Change. Monitoring and oversight of key change projects occurs at both the business unit leadership team level and by the Executive Committee on a regular basis. The Group Change Director sits on the Executive Committee, enabling real time consideration of the potential impact of other operational and strategic activities on current change projects. Competitive intensity Risk and impact Mitigation Link to TalkTalk is established as a value for money provider in the A clear pricing strategy is in place with ongoing monitoring of strategy fast growing quad play market. The value proposition is a pricing position and value proposition. The strategy is reviewed key part of the business model and to date has provided to ensure it remains competitive and continues to support our competitor differentiation. Over the last year there has position as a value for money provider against the changing been significant activity in the competitive landscape. competitor activity landscape. In addition, competitor pricing There is a risk that this competitive backdrop makes it activity is monitored to understand customer and market impact difficult for TalkTalk to maintain its value credentials. and plans are revisited if necessary accordingly. TalkTalk uses Gross risk customer communications to promote the value for money provider message and is committed to helping customers understand the best positioned package to meet their needs. Changing market structure Risk and impact Mitigation Link to The UK telecommunications market structure is currently TalkTalk has been a vocal advocate of competition strategy experiencing significant change. Both the regulator and the and is well placed to benefit from an increasing Government have acknowledged a pressing need to promote trend toward a more pro-competition regulatory competition and drive investment across the market, and TalkTalk is framework. This poses a significant risk to well placed participate in the opportunities that may result. incumbent players in the market, whilst presenting The outcomes from the Ofcom Strategic Review of the UK’s digital potentially valuable opportunities for challengers. The business is actively engaging with the Gross risk communications markets (published in February 2016) fell short of recommending a formal split of Openreach from BT. However, mounting necessary external stakeholders to share views and political and public pressure has led to Ofcom considering Openreach attempt to deliver the best market and customer separation as part of a separate consultation process in summer 2016. outcomes, as well as to proactively understand The strategic review also included a commitment by Ofcom to help and respond to the opportunities and challenges improve competition among broadband providers by opening up access presented by structured market changes. to BT’s infrastructure. The outcome of the review also included other proposals such as making it easier for consumers to switch providers. There is a risk that change to the current regulatory regime of Openreach, and future mergers and/or acquisitions proceeding with limited or no remedies, creates a less competitive environment with possible negative impacts in the end customer. Key: Gross risk has increased Gross risk has decreased Gross risk remains broadly the same as prior year 22 TalkTalk Telecom Group PLC Annual Report 2016

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    Regulatory compliance Risk and impact Mitigation Link to The telecommunications sector is highly regulated, There has been continued focus on improving processes and strategy with compliance over key customer-focused regulations controls and clarifying lines of accountability both in first-line monitored by the governing body, Ofcom. The regulations operations and in our second-line assurance function. There that TalkTalk must comply with are designed to support has been significant progress with delivering improvements in customers. Failure to comply with regulatory obligations our complaint handling processes during the period and there may result in negative customer impact and/or significant is continued focus on reducing compliant volumes. The Group’s regulatory fines. Regulatory Compliance Committee, a subcommittee of the Board, Gross risk has continued to convene throughout the year to monitor the mitigation of operational risks which could give rise to customer complaints and regulatory breaches. The Group Counsel and Company Secretary has chaired weekly compliance meetings throughout the year, attended by senior management. Financial Risk and impact Mitigation Link to A key financial risk is the ability to raise required The Group Treasury function is responsible for managing the strategy short and long term funding to enable delivery Group’s liquid resources. Policies and operating procedures of strategic objectives. are in place and these are regularly reviewed to ensure they remain appropriate for the business. In addition, the Executive Committee and the Board oversee the liquidity and funding position of the Group on a regular basis and are required to provide approval on major and significant funding decisions. Gross risk Resilience and business continuity Risk and impact Mitigation Link to TalkTalk is reliant on its infrastructure as well as key third Network resilience is assessed and monitored on regular basis strategy party suppliers and partners in order to deliver quality and, over the last year, network improvements supporting products and services to its customers. Network or third greater resilience have been delivered. Further improvements party failure could result in significant disruption to are in progress and will continue in FY17. Continuous monitoring services or business processes, which may have a of network availability is also in place to ensure any issues are negative impact on customers and therefore damage identified in a timely manner. Where an incident does occur, customer loyalty or drive complaints. It is therefore a robust incident response process is in place and exercised Gross risk important to establish resilience in the network and to ensure effective response in the event of an incident. require resilience from our third parties and partners. Other prioritised critical processes, systems and third parties It is also noted that in the event of an incident, TalkTalk are identified and business owners are assigned accountability must be able to respond in an efficient and effective for assessing resilience and implementing business continuity manner in order to minimise impact on customers plans to enable continuity of operations in the event of an and performance. incident. For third parties, the relationship owners are assigned accountability for requiring critical third parties to have adequate business continuity plans in place and obtaining third party assurance that their plans have been reviewed and tested on a regular basis. 23 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report People TalkTalk has a unique culture founded on our ‘Brighter Basics’ and our mission to deliver affordable, reliable, simple and fair telecoms services for everyone. TalkTalk has been undergoing a wide ranging review of its corporate Although the cyber attack itself was undoubtedly a challenging culture over the last year which has yielded valuable insights into and sobering experience for TalkTalk employees, the business our values, the way we work and the behaviours we role model. showed itself highly capable of maintaining morale, efficiency and These are now being taken forward in an extensive cross-business co-ordination throughout a time of great uncertainty. programme of cultural change which will bring TalkTalk back to its roots as a great value champion. Learnings from the cyber attack As well as a full internal review into corporate culture following the A more mature TalkTalk cyber attack, TalkTalk also appointed independent advisers PWC To kick start our culture work, we required a clear view of our culture to conduct a thorough assessment of what happened and what today. To source this, TalkTalk hosted a cross-Company event called learnings might be taken from TalkTalk’s experience. PWC’s findings a ‘Culture Jam’ where employees were asked four questions about have been critical in helping to identify areas where improvement the Company’s culture, which they answered both on noticeboards or change is required to ensure the Company’s energetic start-up across TalkTalk’s sites and online. This was supplemented with culture is underpinned by a fully mature, responsible set of corporate 40+ workshops including over 300 employees and partners. behaviours. Some of the key learnings from the report include: The Culture Jam presented a thorough and robust view of TalkTalk’s • the need to see security not as a technology problem, but culture today and has led to a suite of proposals for the development as a key element of every project, thus ensuring the whole of our values, behaviours, leadership development and people business understands the risks and is able to make appropriate processes to be implemented over the next year. judgement calls between safety and business opportunity; Recovering from the cyber attack • the need to ensure security concerns are well communicated The events of the cyber attack in October 2015 impacted every up and down the organisation. Security must be a consistently single employee at TalkTalk. To reassure and motivate colleagues prominent and prioritised topic internally and colleagues must through the first few weeks, the business shared daily updates be kept up to date on policies, process and best practice; and with the whole Company, ensuring questions and concerns were • the need to balance TalkTalk’s fast-paced, entrepreneurial addressed as honestly and speedily as possible. In November, the behaviours with an appropriate emphasis on governance Company hosted mini ‘All Hands’ events at our three main sites and rigour. hosted by our CEO and members of our Executive Committee. This was an opportunity to update colleagues on business The most important cultural learning for TalkTalk has been that performance face-to-face, to answer any outstanding questions effective cyber security goes deeper than simply improving our and to publicly thank every employee for the part they played in operating security controls. In fact it requires an evolution of taking care of our customers and stabilising the business. Throughout corporate culture from start-up to fully mature business, in which this challenging time, TalkTalk mirrored its approach of openness reliability and responsibility are valued equally alongside innovation and honesty with customers with employees. As a result, TalkTalk and ‘can-do’ attitude. Responding to these learnings, the Company staff were galvanised and united behind our overarching aim of is now implementing an extensive and exciting programme of protecting our customers. cultural change, including behaviours, values and ways of working. Building A Great Place to Work Last year, the feedback from our engagement survey informed our This year we have taken a new approach to measuring engagement at Great Place to Work Priority, and we started a long term journey to TalkTalk and participated in the Great Place to Work Institute’s Best focus on three key areas: Future Organisation – evolving our structure Workplaces Programme. This saw our employees participate in a and making sure we have the right skills and capabilities for the future; survey to uncover how proud and satisfied they are feeling about Next Generation Working – creating a working environment that is working here. Participation was high, with 90% of our people taking part frictionless, flexible and collaborative; and Culture – being clear about in the survey, and we had an engagement score of 71%, ahead of the the values and behaviours we need to be successful. The journey will engagement national average in the UK of 65%. This is particularly continue in the year ahead, but some of the highlights so far include: striking given that the survey was conducted in January 2016, just three Future organisation: the formation of a single Change Shared Service, months after the cyber attack took place. working with new consistent processes and methodologies, as well as the formation of consolidated audit, risk and compliance; talent and development functions. 24 TalkTalk Telecom Group PLC Annual Report 2016

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    Next Generation Working: we opened our new meeting facility, for the business. The tool supports blogging at all levels of the The Boilerhouse in Salford, and announced that in 2017 we will be organisation, so employees can continue to interact on Dido Harding’s bringing employees from our two North West sites together into one weekly blog, as well as regularly hearing from members of the senior new campus in Media City, Salford, called Soapworks. The site is being management group and all their employees. The Wire proved an developed at the moment and will become a blueprint for all future invaluable tool for us when we experienced the cyber attack last TalkTalk sites, promoting collaboration and supporting a range of October. By means of daily blogs from Dido, we were able to provide different working styles. We have also started to explore next employees with regular updates on the situation and ensure they generation working styles in our London office, moving away from were informed and able to raise questions and concerns. fixed desks to more flexible team ‘neighbourhoods’ and hot desk A new innovation that we launched this year to further encourage use spaces. These new working practices will be further enhanced in of The Wire was ‘WeTalks’ – open Q&A sessions hosted online, where the year ahead, when we introduce Office 365 across the business, employees can ask subject matter experts or senior management providing all TalkTalk employees with Microsoft desktop applications questions on a particular business topic. We provide all employees with that are more secure, whilst enabling enhanced collaboration, an overview of all the key business news from The Wire every Friday, communication and team working. in an email publication called ‘Re:Wired’. We also issue bi-weekly email communications to all People Managers with all the key Colleague performance and development information they need to support their teams. Career development remains a key driver of engagement at TalkTalk and this year we have made further improvements to our e-learning hub, For the past four years we have brought all of our UK-based employees TalkTalk U, ahead of a move later this year to a new Learning Management and partners together for a one-day conference, All Hands, where System, where we will be able to host an even wider range of interactive we communicate our strategic priorities for the year ahead. This year, learning materials for our people. We also continue to offer our people in May, we’ll be hosting a roadshow-style version of the event, touring mentoring and coaching sessions to support their development. all of our sites in the UK and abroad. In the autumn, we also host an annual off-site festival called the Great Getaway, where employees Our annual performance management process continues to drive and their families come together for a day of fun activities and musical achievement, with all employees participating in a performance related acts as means of recognising contribution to the business. variable bonus pay scheme. This year we further aligned the process to our culture, evaluating employees on how well they have demonstrated Colleague recognition our Company behaviours – the TalkTalk Essentials – as part of the Celebrating employees who champion our culture is very important performance management process. During their performance review to us and we continue to recognise the individuals who are living our this year, employees will now be partly evaluated not just on what they Brighter Basics through our On The Spot award scheme. Once a year deliver but on how they deliver it, and their performance will be at our All Hands event, we also recognise the ‘Superheroes’ amongst captured in our HR information system, Workday, for future traceability. our employees and partners who have made an outstanding contribution to the business over the past year. Last year, 15 Superheroes were Colleague benefits and share ownership rewarded with trips to London, Manchester and York, where highlights We continue to offer a comprehensive range of voluntary benefits, so included a dinner with members of our Executive Committee, a chance employees can make choices to suit their lifestyle. We evaluate these to see our Ultra Fibre Optic project come to life in York, and a VIP on an annual basis, and this year we offered our employees even greater experience at Old Trafford. flexibility, with the ability to opt in and out of certain benefits throughout the year as their circumstances change. Our benefits not only drew At the end of last year, we specially recognised those employees praise from our people during our Culture Jam event, but have now who had gone above and beyond during the cyber attack and given also gained external recognition, as we received the award for ‘Most up their personal time outside of work to help us through the crisis. Engaging Benefits Package’ at the 2015 Employee Benefits Awards. We presented those involved with Red Letter Day vouchers, enabling them to choose a special treat for them and their families as a thank Share ownership remains an important part of our culture and over you for their support. 65% of our people currently participate in our Sharesave and Share Match Schemes. Having so many of our people as shareholders Gender and diversity creates great engagement and alignment with the interests of our Our people come from different backgrounds and cultures, creating a investors. We believe in our employees being advocates for our vibrant working environment that thrives on new ideas and fresh thinking. products and continue to offer free home phone, broadband, fibre and TV to all employees, as well as half-price mobile packages and The importance of diversity, equality and non-discrimination is TV content offers throughout the course of the year. highlighted in our Equality Policy and underpinned by our People Brighter Basic – ‘We can be ourselves here’ which guides the respectful way Colleague consultation – One Voice forum we behave towards each other. From our Great Place to Work survey One Voice is a consultation and information forum consisting of we know that 80% of our people feel they can be themselves at work, which we believe gives us a competitive advantage. Furthermore, we 80 nominated colleague representatives, management and scored 90% against the survey’s diversity metrics around the fair members of our People Services team. The forum meets regularly treatment of our people. A breakdown by gender of the number of to discuss how the key issues we face as a business might affect our people who were Directors of the Company, senior managers and employees, to share colleague feedback and discuss other relevant other employees as at 31 March 2016 is set out below: colleague matters. Senior Colleague communications and events Directors management All employees We have a number of formal and informal channels that we use to Female 2 26 771 keep our employees up to date, energised and engaged. Our online Male 10 73 1,461 collaboration tool, The Wire, remains a critical communication tool 25 TalkTalk Telecom Group PLC Annual Report 2016

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    Strategic report Corporate social responsibility At TalkTalk we want everyone to be able to enjoy the benefits of digital technology safely and securely. We believe a civilised digital society is possible and we recognise we We have also joined forces with Get Safe Online, the UK’s leading have an important role to play in helping to get there. For this reason, awareness resource helping to protect people, finances, devices we focus our CSR efforts on three significant challenges: digital skills, and businesses from fraud. We made a £25,000 contribution in digital safety and cyber security. FY16 and we have begun to work with them on national consumer-focused campaign activities designed to change the behaviour of digital citizens, We want to unlock the potential of the digital revolution for the starting with our own customers, so they are less likely to fall victim to the millions of people in the UK who still cannot benefit from increasing growing army of online scammers. connectivity because they lack basic skills; we want to help parents keep their children safe as they spend more of their time online; We joined with the other four leading ISPs in 2014 to form Internet and we want to fight the growing army of criminals looking to exploit Matters, an independent not-for-profit organisation that provides society’s increasing reliance on digital products and services through information, support and advice to help parents keep their children fraud and scams. safe online. This year we invested £500,000 in Internet Matters and generated £4m worth of in-kind marketing value by supporting Digital skills and inclusion awareness and information campaigns in communications. This year we strengthened our partnership with leading digital skills and training charity, the Tinder Foundation. Together we launched Additional activity Internet Start, a subsidised TalkTalk broadband package exclusively Since 2011 we have supported various projects, charities and individuals available to learners attending Tinder Foundation’s UK Online Centres using digital technology at a local level to make a positive social impact. and donated £30,000. For the fourth year running, hundreds of TalkTalk The TalkTalk Digital Heroes Foundation has enabled us to support employees also volunteered as digital champions at participating our community initiatives, including the TalkTalk Digital Heroes local UK Online Centres, helping learners gain the vital digital skills Awards and our annual auction in aid of Ambitious about Autism. needed to share in the benefits of the digital world. The Digital Heroes Awards supports projects which harness technology As a founding partner of Go ON UK, TalkTalk pledged to work with to enhance lives and communities. This year, the judges awarded the Government to help make the UK the world’s most digitally capable £10,000 grand prize to Helen McCabe of HOME, a not-for-profit that nation. This year we supported Go ON UK’s ‘Digital Skills Heatmap’, helps individuals, local community groups and charities with their an important research project to highlight areas of the UK where digital marketing. In total, TalkTalk awarded over £70,000 in grants digital skills are lacking. We also worked with Go On UK to tackle the and prizes. digital skills at local level in the London boroughs of Croydon and Lewisham, directing expertise, financial support and digital champion A key fundraising vehicle for our charitable activity is our annual volunteers to various initiatives. In FY16, we donated £200,000 in charity auction for Ambitious about Autism, now in its sixth year. total to the charity. Ambitious about Autism has had links with TalkTalk for 14 years, over which period we have raised £2m for the charity, with much Digital safety and security having gone towards digital projects. In FY16 the auction raised TalkTalk understands that all ISPs play a very important role in helping £390,000 (FY15: £360,000). to keep customers safe and secure online, and we are committed to Separately, TalkTalk has financially supported a number of other doing what we can to protect them. digital skills organisations with funding and promotion, including Since 2011 we have offered HomeSafe® to all our residential customers Apps for Good (£50,000) and Code Club (£30,000 per annum). at no extra charge, enabling them to quickly and easily protect all the We have also supported The Prince’s Trust, with donations of devices on a TalkTalk broadband connection. We also offer a similar £15,000 per annum since 2012. service specifically for Business customers called WorkSafe, which This year TalkTalk also contributed £50,000 towards Founders is free with all Business Broadband and Superpowered Fibre Business Forum’s inaugural ‘F Factor’ awards, a talent search backed by Broadband services. Charles Dunstone and Simon Cowell that offers a £10,000 prize HomeSafe® has long allowed existing customers network-level to young technology entrepreneurs who pitch their business ideas filtering of the content they believe to be inappropriate for their to high-profile entrepreneurs. families. In FY16, we asked all new customers to make an active choice Additionally, we donated £100,000 to ITV’s ‘Text Santa’ appeal in aid about whether or not to switch on filtering services when they join us. of Macmillan Cancer Support, Make-A-Wish UK and Save the Children. We also remind customers about the service once a year, so that they can adjust their settings if their needs or usage has changed. In total, the Group was responsible for generating £731,000 (FY15: £725,000) of income for registered charities, including This year we extended our security measures, ensuring that our £514,000 of direct cash donations (FY15: £340,800). The Group SuperSafe Boost is available free to all customers. Created with did not make any political donations in the current or prior year. our long term security partner F-Secure, the upgraded Boost gives customers protection from viruses and malware, secure web TalkTalk also retained both our FTSE4Good Index membership browsing and additional security when banking or shopping online. and Carbon Saver Gold Standard certification. 26 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Board of Directors and Executive Committee...................................... 28 Corporate governance............................................. 30 Audit Committee........................................................ 34 Directors’ Remuneration Report ......................... 37 Other statutory information ..................................56 Directors’ responsibility statement .................... 58 27 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Board of Directors and Executive Committee Board of Directors PLC Board Sir Charles Dunstone, Chairman Charles Bligh, Tim Morris, Dido Harding, Iain Torrens, Tristia Harrison, Managing Director of General Counsel Chief Executive Chief Financial Managing Director of TalkTalk Business, and Officer Officer TalkTalk Consumer Technology Company Secretary and Security Non-Executives Ian West, Senior John Brent John Sir Howard James Roger Independent Gildersleeve, Hoberman, Allwood, Stringer, Powell, Taylor, Non- Deputy Non- Non- Non- Non- Non- Executive Chairman Executive Executive Executive Executive Executive Director Director Director Director Director Director Chairman Executives Sir Charles Dunstone Dido Harding, Baroness Harding Tristia Harrison Sir Charles is the founder of The Carphone of Winscombe Tristia is the Managing Director of TalkTalk’s Warehouse and created TalkTalk in 2002. Dido has been Chief Executive Officer of Consumer business. Tristia joined He was appointed Chairman of TalkTalk in TalkTalk since February 2010. Prior to that, The Carphone Warehouse Group in 2000 2010. Sir Charles has directed the development Dido was Sainsbury’s Convenience Director, and has since held a number of senior of TalkTalk to become one of the leading fixed having been appointed to Sainsbury’s operating management and executive positions in line telecommunication businesses in the UK. board in March 2008. Dido joined Sainsbury’s The Carphone Warehouse and TalkTalk Group. Sir Charles is Chairman of Royal Museums from Tesco PLC where she held a variety of Tristia is also a Trustee at Comic Relief and Greenwich, Land Rover BAR and Dixons senior roles. Dido is also a Non-Executive national charity Ambitious about Autism. Carphone PLC. Member of the Court of the Bank of England, Charles Bligh a member of the House of Lords and a Deputy Chairman Charles is the Managing Director of Trustee of Doteveryone. John Gildersleeve TalkTalk Business, Technology and Security John is Deputy Chairman, having joined the Iain Torrens having joined the Group in November 2011. Board in January 2010. He is also currently Iain was appointed Chief Financial Officer During the year, Charles’ role was extended Non-Executive Deputy Chairman and of TalkTalk Group in January 2015. Prior to to include accountability for Technology and Senior Independent Director of Spire joining TalkTalk, Iain served as Group Finance Security. Previously Charles worked at IBM Healthcare PLC and Chairman of British Land. Director of ICAP plc between November 2010 for 22 years where he held a number of senior and December 2014, having previously held executive and board roles working in large a number of senior finance roles for ICAP plc, product and service businesses. Charles has CP Ships Limited and Cookson Group plc. worked internationally in Australia, the US, Iain is a fellow of the Institute of Chartered the UK and emerging markets in Asia. Charles Accountants in Ireland. is also a Trustee of the National Children’s Orchestras of Great Britain. 28 TalkTalk Telecom Group PLC Annual Report 2016

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    Non-Executives General Counsel and Company Secretary Ian West Sir Howard Stringer Tim Morris Ian joined the Board in February 2011 and Sir Howard joined the Board in July 2012. Tim is responsible for all legal matters including is the Senior Independent Director. He has Until June 2013, he was Chairman of Sony acquisitions, corporate governance and been involved in the TMT sector for over Corporation, where previous appointments company secretarial matters at the Group. 25 years as a manager, director and investor. included President and CEO. Prior to Sony Previously he was a Partner at DLA Piper LLP. Ian held numerous roles at British Sky Corporation, Sir Howard had a distinguished Broadcasting over eleven years, latterly as 30 year career as a journalist, producer and Managing Director of the Sky Digital subscription executive at CBS Inc. as well as the Chairman Executive Committee business. Ian is also currently an investor in a and CEO of TELE-TV. In addition to his role range of small and medium sized businesses at TalkTalk, Sir Howard is the Chairman of Dido Harding and co-founded Top Up TV in 2003. Ian the American Film Institute, Said Business Chief Executive Officer was a supervisory board member of School, Oxford, and New York Presbyterian Kabel Deutschland. Ophthalmology Center, as well as being Iain Torrens a board member of the BBC and Time Inc. Chief Financial Officer Brent Hoberman CBE Brent is Chairman and co-founder of Founders James Powell Tristia Harrison Factory and the Founders Forum. Brent is James joined the Board in July 2012. James Managing Director of TalkTalk Consumer Chairman and co-founder of made.com, is Chief Technology Officer of Nielsen, having Charles Bligh he co-founded an early stage venture fund previously spent 14 years at Thomson Reuter Managing Director of TalkTalk Business, as well as co-founding lastminute.com in as CTO. James held a number of senior Technology and Security April 1998, which was sold in 2005. Brent is leadership positions at Thomson Reuter, Chair and co-founder of Smartup and Intros.at. including CTO for Enterprise; CTO and Jeff Dodds Brent sits on the advisory board for LetterOne Global Head of Product Development; Managing Director – mobile Technology, the UK Government Digital Advisory Head of Technology Strategy; and CTO (joined April 2016) Board and he is also a board member of for the Thomson Reuter’s financial division. Max Alexander The Economist. Brent is a YGL and Prime He has also held senior leadership positions Managing Director – TV Minister’s Business Trade Ambassador. at Solace Systems, Citadel Investment (resigned March 2016) Group and TIBCO Finance Technology. John Allwood Nigel Sullivan John joined the Board of TalkTalk in 2010 Roger Taylor Group Human Resources Director and is the Audit Committee Chairman. Roger joined the Board as a Non-Executive He has spent his entire career in media Director in November 2015, having previously Gary Steen and telecoms holding a number of senior been TalkTalk’s Non-Executive Deputy Chairman Chief Technology Officer executive positions in these sectors, between January 2010 and July 2012. Tom Webber including Chief Executive of Orange UK From 1999, Roger served over 16 years as Group Change Director between 2000 and 2004. Prior to that, CEO, CFO and Deputy Chairman of The John spent eight years at Mirror Group plc as Carphone Warehouse and Dixons Carphone Tim Morris Finance Director and Chief Executive. After PLC. Roger is also a founding Partner in both Group General Counsel leaving Orange he was Managing Director of Student Castle LLP and Freston Ventures and Company Secretary Telegraph Media Group, and Chief Operating Investments LLP, which invests directly in Officer and Finance Director of Mecom a number of private businesses, including Group plc. In addition to his role at TalkTalk, Five Guys Europe, MOD Pizza UK and he is Senior Non-Executive Director at Housesimple, in addition to various indirect IMI mobile plc, Chairman of Adgorithms plc private equity and investment funds. and a Director of Creative Education Trust. 29 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Corporate governance Introduction The Board is committed to the highest standards of corporate Therefore, at least half of the Board (excluding the Chairman) governance and, in accordance with the Listing Rules of the UK Listing are independent, notwithstanding the changes to the Board Authority, the Board confirms that the Company has, throughout composition during the period. the year and as at the date of this Annual Report, complied with the During the year, the Board has overseen one change, which was the provisions set out in the UK Corporate Governance Code (the ‘Code’). appointment of Roger Taylor to the Board as a Non-Executive Director This section of the Annual Report, together with the Strategic Report, on 11 November 2015. provides details of how the Company has applied the principles and The Chairman and Executive Directors have service contracts that complied with the provisions of the Code and its five key principles: can be terminated by either the Company or the Director on leadership, effectiveness, remuneration, accountability and relations twelve months’ notice. with shareholders. The Non-Executive Directors are expected to serve for an initial period Board balance and independence of three years, albeit either party may terminate the appointment on The Board has twelve members, six of whom are considered independent three months’ notice with no compensation for loss of office. These Non-Executive Directors. These are John Gildersleeve (Deputy Chairman), initial three year periods commenced on 20 January 2010, with the Ian West (Senior Independent Non-Executive Director), John Allwood, following exceptions: Ian West (8 February 2011); Sir Howard Stringer Brent Hoberman, Sir Howard Stringer and James Powell. Roger Taylor, (26 July 2012); James Powell (26 July 2012) and Roger Taylor also a Non-Executive Director, is not considered to be independent (11 November 2015). After three years, the contracts automatically given he was previously Chief Financial Officer of The Carphone renew. All Directors in any event stand for re-election every year. Warehouse Group PLC from which the Company was demerged in March 2010, and was subsequently Deputy Chairman of the Company from January 2010 to July 2012. Leadership How the Board operates The Board has reserved certain matters, and delegated others to a committee of the Board. Day to day management rests with the Group’s Executive Committee. Matters reserved for the Board include approving the Group’s strategy, annual budgets and other longer-term planning. Board Committees The Board has established the four principal committees below, to which it has delegated certain matters; the first three are as required by the Code, and the fourth is to ensure the compliance of the Group within the consumer regulatory environment in which it operates. Audit Remuneration Nomination Compliance John Allwood (Chair) John Gildersleeve (Chair) John Gildersleeve (Chair) John Gildersleeve (Chair) Ian West Ian West Ian West Dido Harding James Powell Brent Hoberman John Allwood Tristia Harrison Roger Taylor(1) Sir Howard Stringer Charles Bligh Tim Morris (1) Roger Taylor was appointed to the Remuneration Committee on 11 January 2016. The work of each Committee is described in more detail in the section relating to it below: Audit Committee Remuneration Committee A detailed description of the Committee’s remit and work during the A detailed description of the Committee’s remit and work during the period is contained in the Audit Committee Report on pages 34 to 36. period is contained in the Directors’ Remuneration Report on pages Other Directors and senior management, including the Chief Financial 37 to 55. Other Directors, including the Chief Executive Officer, the Officer, the Company Secretary and advisers, attend by invitation of Company Secretary, the Group Human Resources Director and the Committee. advisers, attend by invitation of the Committee. The Chairman of the Committee updates the Board following each The Chairman of the Committee updates the Board following each Committee meeting. Committee meeting. The Committee’s terms of reference, which are available on request The Committee’s terms of reference, which are available on request from the Company Secretary and are published on the Group’s from the Company Secretary and are published on the Group’s website (www.talktalkgroup.com), comply with the Code. website (www.talktalkgroup.com), comply with the Code. 30 TalkTalk Telecom Group PLC Annual Report 2016

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    Nomination Committee Compliance Committee The Committee is responsible for succession planning at Board The purpose of the Committee is to provide the Board with visibility level, overseeing the selection and appointment of Directors, of how the Group remains compliant with those consumer regulations regularly reviewing the structure, size and composition of the Board affecting its businesses from time to time. Its members therefore and making its recommendations to the Board. It assists in evaluating include those senior executives who are operationally responsible the commitments of individual Directors and the balance of skills, for implementing permanent changes necessary to ensure the knowledge and experience on the Board. Group remains compliant. Such members are accountable to the Committee and the Board for the successful delivery of The Committee has overseen the appointment of Roger Taylor such changes. as Non-Executive Director during the period. This Committee meets at least four times a year and reports to the The Chairman of the Committee updates the Board following each Board accordingly. The Group also operates a weekly Compliance Committee meeting. Committee made up of those senior executives responsible for The Committee’s terms of reference, which are available on request all key areas of compliance across the Group. At these meetings from the Company Secretary and are published on the Group’s relevant compliance is monitored against a weekly scorecard. website (www.talktalkgroup.com), comply with the Code. Other senior executives of the Group attend by invitation of the Committee. Number of meetings attended Director Board Audit Remuneration Nomination Number of meetings 7 3 4 1 Director Sir Charles Dunstone 7/7 Dido Harding 7/7 Iain Torrens 7/7 Tristia Harrison 7/7 Charles Bligh 7/7 John Gildersleeve 7/7 4/4 1/1 Ian West 7/7 3/3 4/4 1/1 Brent Hoberman(1) 6/7 3/4 John Allwood 7/7 3/3 1/1 Sir Howard Stringer 7/7 1/1 James Powell 7/7 3/3 Roger Taylor 2/2 1/1 (1) Brent Hoberman was unable to attend one Board meeting due to a prior arrangement. As well as the formal meetings during the year, the Board met at The Chairman meets regularly with the Non-Executive Directors, other times as appropriate for specific matters, including approving usually prior to every other Board meeting. This ensures that any certain announcements to shareholders. concerns can be raised and discussed outside of formal Board meetings. The Senior Independent Non-Executive Director also It is important to the Board that Non-Executive Directors have the ability attends these sessions where it is possible, if required, to discuss to influence and challenge appropriately. To this end all Non-Executive any matters with the other independent Non-Executive Directors. Directors are given a thorough induction to the Group and take part in Board discussions. All Directors receive papers in advance of The Senior Independent Non-Executive Director also takes responsibility meetings. They also receive regular reports and members of the for the performance evaluation of the Board; succession planning for Group’s Executive team are invited to present at Board meetings and the Chairman; and chairing Non-Executive Director only meetings. at the annual strategy meeting so that the Non-Executive Directors In addition, he is an alternative point of contact for shareholders keep abreast of developments in the Group. in the event that normal executive channels are not appropriate. Details of the Senior Independent Non-Executive Director ’s role are set out on the Group’s website (www.talktalkgroup.com). 31 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Corporate governance continued Operational management of the Group Diversity The management of the Group’s business activities is delegated to The Board understands the importance of having a diverse the Chief Executive Officer, who is ultimately responsible for establishing membership and recognises that diversity encompasses not only objectives and monitoring executive actions and performance gender but also background and experience. The Board does not through the Executive Committee. have a formal diversity policy and is generally opposed to the idea of stated quotas for females. The Chief Executive Officer chairs monthly meetings of the Executive Committee. Key responsibilities of the Committee, The equality policy applies equally to all appointments in the Company, led by the Chief Executive Officer, are to: and the Board believes that appointments should be made solely on merit, the key criterion being whether or not the appointee can add to • rigorously assess the Group’s trading performance; or complement the existing range of skills and experience on the Board. • identify and develop to a successful conclusion, those large-scale cross-Group projects which are critical to delivering Risk management and internal control the Group’s strategy and maximises shareholder value; and The Board views management of risk as integral to good business practice. The Company has established an ongoing risk management • provide a cross-functional forum for the discussion of opportunities programme to identify, assess and mitigate business, financial, and risks arising from business activities, as well as to communicate operational and compliance risks. The programme is designed to business performance. support management’s decision making and to improve the reliability of business performance. The risk management process operates Performance evaluation and continued development throughout the Group, being applied equally to the main business Each Board member has been subject to an internal performance units and corporate functions. review during the year, where the balance of skills, knowledge and experience of each Director was reviewed. This was undertaken by The nature of risks identified and assessed are wide ranging, covering each member of the Board completing detailed questionnaires. risks arising from the regulatory environment, strategy, counterparties Next year the Board will undertake an independent Board performance and organisational change associated with major projects. Action evaluation in compliance with its obligations every three years under plans and controls to mitigate identified risks are put in place where provision B.6.2 of the Code. possible and if considered appropriate by the Board, taking account of costs and benefits. A report is provided to the Directors at relevant The results were analysed by the Chairman, Senior Independent Board meetings setting out key risks, changes in the status of the key Non-Executive Director and the Board as a whole against the broad risks and updates on mitigation. criteria of overall Board effectiveness and individual contributions. As part of the performance review the ability of each Director, in The Directors have overall responsibility for the Group’s system particular the Non-Executive Directors, to demonstrate the required of internal controls and for reviewing their effectiveness. The Board time commitment to the role was assessed. As a result of this delegates to executive management the responsibility for designing, performance evaluation the Chairman confirms that each of the operating and monitoring these systems. The systems are based on Directors seeking re-election at the AGM continues to be effective a process of identifying, evaluating and managing key risks and include and has demonstrated the appropriate commitment to the role. the risk management processes set out above and channels to enable employees to raise concerns about possible irregularities in financial The Senior Independent Non-Executive Director also met with the other reporting and other issues and associated processes for those Non-Executive Directors to assess the Chairman’s effectiveness matters to be investigated. during the year, taking into account the views of Executive Directors. The systems of internal control are supported by the Business The Company Secretary ensures that the Board is made aware of Assurance and Internal Audit function. Any significant risks identified new laws, regulations and other information appropriate to the Group in the year were given appropriate priority. to ensure that all Directors continually update their skills, knowledge and familiarity of the Group in order to fulfil their roles. Additionally, The systems of internal control are designed to manage, rather than each Director has access to the advice and services of the Company eliminate, the risk of failure to achieve business objectives. They can Secretary and also has the ability to take independent external only provide reasonable and not absolute assurance against material advice if required. errors, losses, fraud or breaches of law and regulations. The effectiveness of these systems is periodically reviewed by the Audit Committee in accordance with the revised guidance in the Turnbull Report, including ensuring the external audit goes out to tender every ten years in line with the new EU regulations and directive on audit. These systems are also refined as necessary to meet changes in the Group’s business and associated risks. 32 TalkTalk Telecom Group PLC Annual Report 2016

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    The Audit Committee also adopts an internal audit charter each year Viability statement in accordance with International Internal Auditing Standards. In accordance with provision C.2.2 of the 2014 revision of the Code, the Directors have assessed the prospect of the Company over a The systems of internal control were in place throughout the period longer period than the twelve months required by the ‘Going Concern’ and up to the date of approval of the Annual Report. The Board has provision. The Board conducted this review for a period of three years conducted an annual review of the effectiveness of the systems of to March 2019. This assessment has been made taking into account risk management and internal control in operation during the year the current financial position of the Group, the Group’s business and and up to the date of the approval of the Annual Report. This was financial plans and the principal risks and uncertainties faced by the approved by the Audit Committee and the Board. Group, which are disclosed on pages 20 to 23 of the Strategic Report. As outlined on page 20, learnings from the recent cyber attack have The Board reviews the internal controls and risk management policies reshaped the Company’s approach to information security risk and approves the governance structure and code of conduct as outlined management together with the assessment of our internal control on page 32 within the Corporate Governance section of the Annual Report. environment. In accordance with the provisions of the Code, the The focus is largely on improving the long term financial performance Board acknowledge control weaknesses were identified following through becoming the UK’s leading value for money quad play provider. the recent cyber attack, however, the necessary priority mitigation Further detail of the Group’s business model and strategy is outlined has been implemented during the year. The Board will continue to on pages 12 to 15 of the Strategic Report. ensure a sustained evolution of culture, organisation and ways of working which embeds security across the business. The three year review period has been stress tested by considering our existing strategy and the associated principal risks that underpin Relations with shareholders our current three year plan, which the Board reviews at least annually. The Board believes it is important to explain business developments and The Board believes that a three year time horizon is most appropriate financial results to the Company’s shareholders and to understand as it aligns with our normal and well established business planning any shareholder concerns. The principal communication media used processes. This analysis balances the long term nature of investment to impart information to shareholders are news releases (including in the telecommunications industry with a realistic assessment of the results announcements) and Company publications. In all such variability of the key drivers of short term business performance, communications, care is taken to ensure that no inappropriate our strategy, as well as external factors and regulation impacting the information is released. Group. It also reflects our view on access to capital markets and other The Chief Executive Officer and Chief Financial Officer have lead funding requirements. The assumption used within this analysis also responsibility for investor relations. They are supported by an includes consideration to the levels of operational performance, Investor Relations Director who, amongst other matters, organises operational and capital expenditure cash flow requirements and presentations for analysts and institutional investors. There is a full our dividend policy. programme of regular meetings and dialogue with major institutional Based on the results of this analysis, the Directors have a reasonable shareholders, fund managers, analysts, retail brokers and credit expectation that the Company will be able to continue in operation investors, upon which the Chairman ensures the Board receives and meet its liabilities as they fall due over this three year period. regular updates at Board meetings. The Board also receives periodic reports on investors’ views of the performance of the Company. All the Non-Executive Directors and, in particular, the Chairman and Senior Independent Non-Executive Director are available to meet with major shareholders, if such meetings are required. The Company plans also to communicate with shareholders through the AGM, at which the Chairman will give an account of the progress of the business over the last year, and a review of current issues, which provides the opportunity for shareholders to ask questions. The Company’s AGM provides all shareholders with the opportunity to vote on the resolutions put to shareholders. Information relating to votes cast will, following the AGM, be available on the Company’s website (www.talktalkgroup.com). Further financial and business information is available on the Group’s website (www.talktalkgroup.com). 33 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Audit Committee During the year, the Committee comprised the following independent During the year, the formal calendar of items considered at each Non-Executive Directors: John Allwood (Chairman), Ian West and Audit Committee meeting within the annual cycle encompassed James Powell. the Code requirements to: The Chairman of the Committee updates the Board, following each • monitor the integrity of the financial statements of the Company Committee meeting, on any significant issues that may have arisen. and reviewing significant financial reporting judgements contained In addition, the Chairman of the Committee is happy to make himself in them; available to investors on request. During the year, all requirements • disclose the significant issues that the Committee considered of the Code in respect of the Committee were met. in relation to the financial statements and how these issues The Group’s Chief Financial Officer as well as representatives of the were addressed; Company’s external auditor and other members of senior management • confirm that the consolidated financial statements, taken as a from Finance, Legal and Internal Audit and Risk also attend these whole, are fair, balanced and understandable, to ensure that the meetings by invitation of the Committee or Chairman. The external narrative sections of the report are consistent with the financial and internal auditors have direct access to the Committee during statements and accurately reflect the Group’s performance; formal meetings and time is set aside for them to have private discussion with the Committee, in the absence of management attendees. • review the Company’s internal financial controls and its internal control and risk management systems and to make John Allwood remains the member of the Committee with relevant recommendations to the Board; and recent financial experience (as recognised by the Consultative Committee of Accountancy bodies), although all members are • review the Company’s arrangements by which employees may expected to be financially literate and have an understanding of: raise concerns in confidence; • the principles of, contents of and developments in financial reporting, • monitor and review the effectiveness of the Company’s internal accounting standards and statements of recommended practice; audit function and review the output and findings of the internal audit team; • key aspects of the Company’s operations; • make recommendations to the Board in relation to the appointment, • matters that influence or distort the presentation of accounts and re-appointment and removal of the external auditor and to approve key financial information; its remuneration and terms of engagement; • the principles of, and developments in, key applicable company law • review the Company’s policy on the engagement of the external and other legislation relevant to the Company; auditor to supply non-audit services; • the role of internal and external auditing and risk management; • review and monitor the external auditor’s independence and objectivity • the regulatory framework of the Company’s business; and and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; • environmental and social responsibility best reporting practices. • disclose how the Committee has assessed the effectiveness of the external audit process and provide information on the length of tenure of the current audit firm; and • review and approve changes to the Company’s accounting policies. The Committee’s remit requires it to report to the Board, identifying any matters in respect of which it considers that action or improvement is needed and to make recommendations as to the steps to be taken. 34 TalkTalk Telecom Group PLC Annual Report 2016

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    Significant judgements The significant issues considered by the Audit Committee in the current year were as follows: Significant issue considered by the Committee How the issue was addressed by the Committee The appropriateness The Committee considered and challenged papers and analysis prepared by management and, taking into of preparing the Group account management’s assumptions and the external auditor’s review of these papers, concluded that financial statements management’s recommendation to prepare the financial statements on a going concern basis is appropriate. for the half year and full The Committee considered and challenged management’s approach to the viability statement, including the year on a going concern period of review and risk factors and concluded that the disclosure in the statement of viability is appropriate. basis and the statement of viability The treatment of The Committee considered and challenged management’s approach and presentation of separately disclosed exceptional items and items. The Committee also considered and challenged the views of the external auditor on management’s policy their presentation within and its application during the year. At each meeting the Committee reviewed a paper prepared by management the Group’s financial on actual and forecast levels of exceptional items, including the nature of all the items and the balance of income statements and cost between exceptional and Headline. The Audit Committee has reviewed and agreed the disclosure for inclusion in the consolidated financial statements. In addition, the Audit Committee reviewed the Group’s position in relation to the treatment of costs associated with the cyber attack, challenged management assumptions and agreed with the provision and classification made. Carrying value of goodwill The judgements exercised in relation to goodwill impairment testing concern the assumptions used in and other intangibles calculating the value in use of the cash generating units (CGU) being tested for impairment. The key assumptions applied in the calculation relate to the future performance expectations of the business, which are driven by the Group’s calculation of its weighted average cost of capital (WACC) and its assessment of long term growth rates. The business plan used in the calculation has been approved by the Group’s Executive Committee and the Board. The Committee reviewed and challenged management’s paper on the outcome of the impairment review and agreed with the conclusion. Revenue recognition The key area of judgement in recognising revenue is the identification of revenue arrangements with multiple deliverables. When the Group sells a number of products within a bundled transaction, the total consideration from the arrangement is allocated to each element based on their relative fair values and limited to the amounts billed for that element. The Committee reviewed and challenged management’s papers on the proposed accounting treatment for new products and customer credits and agreed with the conclusion. Supplier rebate income The Committee reviewed the level and application of the recognition policy of supplier rebate income during the year, an area of inherent risk due to the complexity of the arrangements and the judgement applied by management to ensure that rebates are recognised over the appropriate financial period. This review required an understanding of the nature of any significant transactions and adherence to the Group’s accounting policies. As a result of the review, the Committee concluded that supplier rebate income had been appropriately recorded within the financial year. Taxation The key judgement in relation to taxation relates to the assumptions made in recognising deferred tax assets. The taxation forecasting model prepared by management has been approved by the Group’s Executive Committee and the Board. The Committee reviewed and challenged management’s paper, which outlines the key principles and judgements used in the calculation, and agreed with the recognition of the asset accordingly. 35 TalkTalk Telecom Group PLC Annual Report 2016

  • Page 38

    Corporate governance Audit Committee continued Statement of Directors in respect of the Annual Report and Accounts In light of the assessments and review undertaken, the Committee As required by the Code, the Directors confirm that the Annual Report recommended to the Board that Deloitte LLP be retained as the and Accounts, taken as a whole, is fair balanced and understandable auditor of the Company. This recommendation was endorsed by the and provides the information necessary for shareholders to assess Board. Deloitte LLP has expressed its willingness to continue in office the Company’s performance, business model and strategy. When as auditor and a resolution to re-appoint Deloitte LLP will be proposed arriving at this position the Board was assisted by a number of at the forthcoming AGM. processes including: The policy relating to the provision of non-audit services by the external • the Annual Report and Accounts is drafted by appropriate senior auditor specifies the types of work from which the external auditor employees across all areas of the business with overall supervision is excluded; for which the external auditor can be engaged without being provided by the Director of Group Finance, Tax and Treasury referral to the Committee; and for which a case by case decision is to ensure the report is consistent across all sections; required. In order to safeguard the auditor’s objectivity and independence, the ratio of non-audit fees to audit fees is monitored by the Committee. • a comprehensive verification process is undertaken to ensure Any work proposed in excess of 50% of the audit fee is referred to the the factual accuracy of the entire Annual Report; Committee. Amounts below this are discussed with the Chairman • complete reviews of drafts of the report are undertaken by the of the Committee. Executive Directors and other members of the Group’s Executive A statement of fees paid or accrued for services from the external Committee; and auditor during the period is set out below: • the final draft is reviewed by the Audit Committee prior to final 2016 2015 consideration by the Board. £m £m External audit Fees payable to the Company’s auditor The Committee is responsible for the development, implementation for the audit of the Company’s Annual and monitoring of the Company’s policy on external audit, which Report and Accounts 0.1 0.1 assigns responsibility for monitoring the independence, objectivity Audit of the Group and its subsidiaries and compliance by the external auditor to the Committee. pursuant to legislation 0.4 0.4 Deloitte was appointed as auditor in 2010 when the Group demerged Audit services provided to all from Carphone Warehouse Group PLC. In the year to 31 March 2014, Group companies 0.5 0.5 Sharon Thorne was appointed as the Senior Statutory Auditor. Taxation and other services 0.1 0.2 Deloitte has confirmed its independence to the Audit Committee. Total Group auditor’s remuneration 0.6 0.7 The Audit Committee considers the appointment of the external auditor annually and has a policy of formally tendering the audit During the year, the Group incurred non-audit fees of £0.1m for tax every ten years. advisory services relating to HMRC enquiries. Having undertaken In the year to 31 March 2016, the Audit Committee discussed the a review of the non-audit related work, the Committee has satisfied effectiveness of the external audit process and audit quality with itself that the services undertaken during the year did not prejudice the other attendees of the Audit Committee. Based on the results of the external auditor’s independence. the auditor assessment carried out in the year, the Audit Committee is satisfied with the effectiveness of the external audit process and quality. No actions are recommended. Following the FY16 audit, the auditor assessment will again be completed by each member of the John Allwood Audit Committee, the Chief Financial Officer and other members of Audit Committee Chairman senior management who are invited to attend the Audit Committee 12 May 2016 meetings. The assessment covers all aspects of the audit process from the audit partner’s interaction with the Audit Committee through to the planning and delivery of the audit. The feedback from this process will be considered by the Audit Committee and provided to both the auditor and to senior management. The results will be reviewed at the next Audit Committee meeting. 36 TalkTalk Telecom Group PLC Annual Report 2016

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    Directors’ Remuneration Report On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for FY16 in TalkTalk Telecom Group PLC’s sixth year as a publicly listed company. Introduction Remuneration Policy during FY16 In line with the Large and Medium-sized Companies and Group In the year ending 31 March 2016 and in line with the binding shareholder (Accounts and Reports) (Amendment) Regulations 2013 (‘the Regulations’), vote at the 2014 AGM, the Remuneration Committee has reviewed the the Remuneration Report for the year ended 31 March 2016 is split Remuneration Policy for Executive Directors and has determined that into two sections: it continues to remain appropriate and fit for purpose. All remuneration arrangements for Executive Directors and Non-Executive Directors • The Remuneration Policy, which sets out the Company’s policy on have been operated in line with the shareholder-approved remuneration for Executive Directors. The policy was accepted by Remuneration Policy. shareholders by a binding vote at the 2014 AGM and is now effective for three years from this date. There have been no amendments to Performance against the Annual Bonus scheme targets would the Remuneration Policy in the year ended 31 March 2016 and the have resulted in a scheme pay-out of 62.4% of base pay for the unchanged policy will remain in effect for the year ending 31 March 2017. Executive Directors. Whilst this would have been significantly lower than the previous years’ pay-out of 80.5%, in the context of the cyber • The Annual Report on Remuneration, which explains how the attack on TalkTalk and after careful consideration, the Remuneration Remuneration Policy was applied in relation to Executive Directors Committee has exercised its discretion and determined that the for the year ended 31 March 2016 and how it will be implemented annual bonus should be at a reduced level of 40% of base pay to for the year ending 31 March 2017. reflect those events. Achievement against the measures set is shown Aligning the Remuneration Policy with Company strategy on page 47 of the report. and performance In line with new Tapered Annual Allowance changes relating to pension The Remuneration Committee understands the importance of linking contributions, which came into force from April 2016, the Company has the Remuneration Policy and approach to business strategy and this written individually to all employees, including Executive Directors, focus has continued over the past twelve months. who currently participate in the pension scheme, who it believes may The Group’s remuneration approach applies throughout the Company be impacted by such a change. The Committee does not propose to and continues to be focused on enabling it to attract, motivate and change any of the current pension arrangements in response to the retain high quality talent and ensuring there is a transparent link between introduction of the Tapered Annual Allowance. remuneration and strategy at all levels, as well as the long term Remuneration Policy for FY17 performance of the Company. The Group strives to achieve its objectives of a simple and transparent Board changes during FY16 approach to remuneration. The Remuneration Policy is set out on Board resignations pages 39 to 45 and details of how this policy will be implemented There have been no resignations from the Board in the year ending for the financial year ahead are set out on pages 46 to 55, with the 31 March 2016. following key changes being highlighted: Board appointments • confirmation of our intention to retrospectively disclose targets Roger Taylor was appointed to the Board as a Non-Executive Director and achievement against targets for the Annual Bonus plan, effective from 11 November 2015. Fees were set by the Remuneration two years in arrears; Committee in line with our pay policy. • to make further awards under the Shareholder Value Plan (SVP) to members of our senior leadership team; and • intention to review and update the Remuneration Policy ahead of a new binding shareholder vote at the July 2017 AGM. John Gildersleeve Remuneration Committee Chairman 12 May 2016 37 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Directors’ Remuneration Report continued Highlights of FY16 Our priorities for FY17 • No changes have been made to the Remuneration Policy • To review the performance metrics for our short term during the year ended 31 March 2016. incentive plans to ensure they remain aligned with both shareholder interests and the strategic growth plans of • We have reviewed the Directors’ Remuneration Report the Company. in line with the Regulations, to ensure that it continues to be simple and transparent for our shareholders. • Launch the 2016 Sharesave Scheme to further encourage employee share ownership. Employee Share ownership • The Company has determined that bonus targets and currently stands at 66%. performance against these targets should be retrospectively disclosed two years in arrears. Targets and performance against • To make further awards under the Shareholder Value Plan these targets are therefore included in this report in relation (SVP) to members of our senior leadership team. to the bonus scheme for the year ending 31 March 2014. • Our continued commitment that no employee of the • It was determined that in relation to the Discretionary Company will be paid below the Alternative Living Wage Share Option Plan (DSOP) award made in 2012, the for the year ending 31 March 2017. Total Shareholder Return performance condition had met its super stretch target, with the earnings per share minimum threshold being missed, which resulted in 50% of the award vesting in May 2015. 60% of the vested options were immediately available to exercise in May 2015 and the remaining 40% of the vested option will be available to exercise from May 2016. • The Company was proud to win Employee Benefits’ ‘Most Engaging Benefits Package’ in June 2015. The current regulations require the Company’s auditor to report to the members on the ‘auditable part’ of this report (marked *) and to state, in its opinion, that this part of the report has been properly prepared in accordance with the Companies Act. 38 TalkTalk Telecom Group PLC Annual Report 2016

  • Page 41

    Remuneration Policy This section sets out the Company’s policy on remuneration for Executive Directors. Following approval by shareholders and the binding vote at the 2014 AGM, the Remuneration Policy took immediate effect following the AGM and will apply for a period of three years from this date. There has been no change to the Remuneration Policy following shareholder approval in 2014. The Policy is restated below for reference purposes, with minor amendments (such as references to page numbers), for ease of reading. The definitive version of the 2014 Policy is available for review on the Company’s website. Remuneration Committee Employee and shareholder consultation The Remuneration Committee is responsible for making The Remuneration Committee did not formally consult with employees recommendations to the Board in relation to the individual of the Company on the details of the Directors’ Remuneration Policy remuneration packages for the Executive Directors and the in the year ended 31 March 2014 when reviewing in line with the new Chairman. These recommendations comply with the Remuneration Regulations. In reaching this decision the Committee is mindful that Policy, which is set by the Board, and the terms of reference of the with the Company’s strong culture of employee share ownership, Committee. The Committee works with the Board to determine with over 65% of employees holding shares in the Company, employees the balance of allocation of profits between employee incentives, have the opportunity to comment and vote on all elements of this report shareholder dividends and reinvestment into the Group. and policy in their capacity as shareholders. Employees are also given the opportunity to share their views through regular employee surveys Remuneration approach and the all-employee consultation body ‘One Voice’. The aim of the Remuneration Policy is to support the Group in: The Remuneration Committee is committed to consultation with major • aligning individual and business performance with the interests of shareholders when setting the Remuneration Policy. If any of these shareholders through the delivery of clear and stretching targets; shareholders are opposed to the policy or any proposed amendments • strengthening the link between employee output and the delivery to the policy, the Committee will endeavour to meet with them, as of shareholder value; appropriate, to understand and respond to any issues they may have. • supporting the Group’s overarching philosophy, to maintain its Remuneration components ‘value player’ positioning in the marketplace; We define our main fixed and performance related elements of remuneration as follows: • attracting, motivating and retaining high quality talent; • base pay, car allowance, benefits and pension contribution (fixed); and • maintaining a stable, efficient cost base; • annual performance bonus (variable). • enabling the Group’s remuneration strategy to be tailored to its changing circumstances; and In addition, for Executive Directors, Executive Committee members and other key senior management, there are two long term incentive plans – • reflecting corporate governance best practice. the Discretionary Share Option Plan (DSOP) and the Shareholder Value The Company firmly believes that remuneration should be structured Plan (SVP), operating under the rules of the Value Enhancement Scheme in a fair and competitive way, in order to incentivise individuals to (VES). These plans do not run concurrently. achieve the highest levels of performance, and takes a consistent The SVP is an alternative reward mechanism for Executive Directors approach throughout the Group. and other members of the senior leadership team who will not participate Packages are designed to be market competitive with fixed in the DSOP. The Remuneration Committee intends that, generally, remuneration set at market median levels. Variable rewards, which in any one year, participants may only receive an award under the SVP are linked to challenging objectives based on the performance and no other long term incentive plan. of the Group, are designed to reward exceptional performance The Committee reviews, at least on an annual basis, pay-out levels for and for the delivery of shareholder value creation. Executive Directors at minimum, ‘on target’, ‘stretch’ and ‘super stretch’ levels of performance, in order to ensure alignment with our shareholders. 39 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Directors’ Remuneration Report continued Remuneration Policy continued Malus and clawback Executive Director shareholding requirement The rules of the annual performance bonus and long term incentive To ensure that the interests of the Executive Directors are closely plans allow the Remuneration Committee to exercise its discretion in aligned to those of its shareholders, the Company requires Executive using malus or clawback provisions, should it feel that it is in the best Directors to build over a number of years and retain a shareholding in interests of the Company and its shareholders. The Committee’s the Company of at least 200% of their annual base pay. policy on the exercise of its discretion is set out in this Remuneration For the purpose of this requirement the Company requires these to Policy. All future long term incentive awards will be subject to malus be in unfettered and beneficially owned shares. Newly appointed and clawback provisions, although no such awards have been made Executive Directors are given the opportunity to build up their to Executive Directors in the year ending 31 March 2016. shareholding over a period of years. Summary of remuneration components of Executive Directors Further detail on maximum opportunity Component Aim and link to strategy Description of operation and any performance measures and framework used to assess performance Fixed To attract and retain talent Paid monthly in cash. Reviewed annually. Base pay by ensuring base pay is Benchmarked against external competitive in the market. market data from external specialists. Set at a level which incentivises Takes into account the individual’s Executive Directors to skills, experience and performance. implement and deliver our The Remuneration Committee business strategy. considers the level of the all-employee pay review when making recommendations and decisions on pay for Executive Directors. Any increase typically takes effect from 1 July annually. Under normal circumstances no Executive Director will receive an increase in excess of 10% of their base pay in any given financial year. Fixed Designed to be competitive Core benefits typically include: Reviewed annually relative to Core benefits in the market. • a defined contribution pension scheme, or a cash the market. payment in lieu of a pension contribution in Pension contributions are made certain circumstances; through salary sacrifice, with the Company making a contribution • private medical insurance for Executive Directors of 10% of base pay for the CEO and their immediate family; and and CFO, which is made as a • car allowance/company car. cash payment in lieu of pension, and 5% base pay for all other Executive Directors are also entitled to participate on Executive Directors. the same terms as all other employees in respect of the following benefits: If cash is paid in lieu of a pension contribution this will be subject to • four times base pay life assurance; normal tax and NI deductions. • income protection; and Although the levels of Company • annual leave. contributions vary, all employees have the ability to join the Company’s defined contribution pension scheme. 40 TalkTalk Telecom Group PLC Annual Report 2016

  • Page 43

    Summary of remuneration components of Executive Directors continued Further detail on maximum opportunity Component Aim and link to strategy Description of operation and any performance measures and framework used to assess performance Fixed Benefits may vary These voluntary benefits arrangements include Reviewed periodically relative Voluntary dependent on the role the purchase of additional holiday and the ability to the market. benefits of the individual and to participate in all-employee share plans. the personal choices they make. Variable Designed to focus The bonus scheme is based on a ‘balanced Payment is typically made in June. Annual Executives on the business scorecard’ that is comprised of financial and The Remuneration Committee performance priorities for the financial non-financial measures, which are reviewed annually. retains the ability to exercise bonus year ahead and to align the Such measures include Group EBITDA, Group discretion to adjust payments up or individual’s remuneration revenue and innovation measures. down in exceptional circumstances with the delivery of superior The measures and targets are set annually by where they feel this course of action business performance. the Remuneration Committee to ensure they are is appropriate. appropriately stretching for the delivery of ‘on target’, ‘stretch’ and ‘super stretch’ performance. The bonus scheme pays at the following levels: At least 40% of the ‘balanced scorecard’ will be based on financial measures. • on target awards for Executive Directors are equivalent to 60% of base pay; • stretch awards for Executive Directors are equivalent to 110% of base pay; and • super stretch (maximum) awards are equivalent to 170% of base pay. Variable Designed to reward and Discretionary awards of nil-cost options are granted Awards do not vest until the third Share-based retain Executives over the over TalkTalk Telecom Group PLC shares. anniversary of the date of grant incentive plans longer term whilst aligning Level of vesting is dependent on achievement of and may have a deferral element. Discretionary an individual’s interests performance targets, usually over a three year If employment ceases during Share Option with those of shareholders. performance period from the date of grant. the vesting period, awards will Plan (DSOP) For awards up to 2013, the performance measures by default lapse in full, unless were 50% EPS and 50% TSR. In 2014 and 2015, the the Remuneration Committee performance measure was a TSR CAGR measure with exercises its discretion. a FTSE 250 tracker underpin. The maximum level of award Awards vest after three years from grant. 60% of the is a 200% base pay multiple, total vested options are exercisable in the third year, unless the Board determines that with the remaining 40% being eligible for exercise exceptional circumstances exist, from the fourth year. which justify exceeding this limit, in which case options will not exceed There is no intention to award DSOP awards to those 300% of base pay. Executive Directors participating in the Shareholder Value Plan (SVP). However, this plan is included in The DSOP scheme rules were the Remuneration Policy to give the Remuneration approved by shareholders in Committee flexibility to make an award in the case March 2010 as part of the demerger of a new hire. from Carphone Warehouse. 41 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Directors’ Remuneration Report continued Remuneration Policy continued Summary of remuneration components of Executive Directors continued Further detail on maximum opportunity Component Aim and link to strategy Description of operation and any performance measures and framework used to assess performance Variable Designed to reward and The SVP, awarded under the VES rules, is designed Awards are discretionary and are Share-based retain Executives over the to enable participants to share in the incremental made as a ‘block award’ to last four incentive plans longer term whilst aligning value of the Group in excess of an opening valuation, years rather than an annual award. Shareholder an individual’s interests with as determined by the Remuneration Committee and Each participant is entitled to Value Plan (SVP) those of shareholders and agreed with HMRC. Each award entitles the participant purchase an agreed number (award under in turn delivering significant to purchase a fixed number of separate shares of Participation shares, with no the VES rules) shareholder value. (‘Participation shares’) in the subsidiary company, participant being awarded more TalkTalk Group Limited, the holding company for the than 10% of the value of the TalkTalk business. pool created. The number of TalkTalk shares issued to each participant is determined by the incremental value pool created 60% of the award vests after three above a 7% return to shareholders. years, with the remaining 40% of the award vesting after four years. In order to avoid the possibility that value is created by a ‘rising tide’ rather than management performance, A cap on the total value of the the Company’s total shareholder return will also be awards that vest at the end of the required to outperform the FTSE 250 before any vesting four year period applies and total is possible. awards will not result in a dilution The vesting of awards will be subject to continued of the issued share capital of the employment and the satisfaction of performance Company of more than 2.75%. conditions and/or other specified events as determined The VES rules were approved by the Remuneration Committee. by shareholders in March 2010 Participation shares that are purchased by participants as part of the demerger from are acquired at market value and participants are offered Carphone Warehouse. a loan from TalkTalk at a commercial rate of interest in order to fund such a purchase. When the awards vest the Participation shares will have a value equal to the corresponding percentage they represent of the incremental value (if any) of the TalkTalk businesses at the time of vesting in excess of the applicable opening valuation and shall then be purchased by the Company for cash and/or by the issue (or transfer) of ordinary shares in the capital of the Company. Any loan made to the participants to acquire Participation shares will be required to be repaid at that time. If the market value of the Participation shares is less than the amount of the outstanding loan (and any accrued interest) then the participant may be required to repay a proportion of the loan, the amount of which the Remuneration Committee may use its discretion to determine. Executive Directors and Executive Committee members will be required to hold 100% of any vested shares for a period of twelve months following vesting. Other participants will be required to hold 50% of vested shares for a twelve month period. Participation shares are generally forfeited to the value of the original loan plus accrued interest in the event that a participant leaves the Company prior to the vesting date. 42 TalkTalk Telecom Group PLC Annual Report 2016

  • Page 45

    Remuneration scenarios The charts below illustrate the level of total remuneration the current Executive Directors could receive under the Remuneration Policy based on four levels of performance to ensure alignment with returns, which are received by our shareholders at: minimum, ‘on target’, ‘stretch’ and ‘super stretch’ levels of performance. The ‘on target’ level of total remuneration represents performance in line with the Company’s expectations and ‘super stretch’ is considered to be the maximum level of total remuneration in practice, but the cap on the SVP has intentionally been set at a level higher than this. Chief Executive Officer Chief Financial Officer (D Harding) (I Torrens) 72% 9% 18% 72% 10% 18% Minimum £759,180 Minimum £590,094 45% 6% 27% 22% 45% 6% 27% 22% Target £1,226,680 Target £951,344 26% 3% 44% 26% 26% 4% 44% 26% Super Super £2,106,680 £1,631,344 stretch stretch £m 0 0.5 1.0 1.5 2.0 2.5 £m 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 Executive Executive (T Harrison) (C Bligh) 74% 7% 19% 74% 7% 19% Minimum £491,180 Minimum £491,180 46% 4% 27% 23% 46% 4% 27% 23% Target £801,430 Target £801,430 26% 3% 45% 26% 26% 3% 45% 26% Super Super £1,385,430 £1,385,430 stretch stretch £m 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 £m 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 � Base pay � Benefits, pension and car allowance � Annual bonus � LTIP Notes (1) Base pay is actual base pay in the year ended 31 March 2016. (2) Taxable benefits are at the level over the year ended 31 March 2016. (3) Pension is based on a 10% Company contribution/cash in lieu for D Harding, and I Torrens and a 5% Company contribution for T Harrison and C Bligh. (4) Annual performance bonus is at 60% of base pay for target performance, 110% of base pay for stretch performance and 170% of base pay for super stretch performance. (5) SVP outcomes include assumed share price increases over the four year performance term. (6) As SVP is a ‘block award’ over a four year term rather than an annual award, we have annualised the potential pay-out over a four year period. 43 TalkTalk Telecom Group PLC Annual Report 2016

  • Page 46

    Corporate governance Directors’ Remuneration Report continued Remuneration Policy continued Other share-based remuneration The Remuneration Committee will take all relevant factors into TalkTalk Sharesave Scheme (SAYE) consideration when making a remuneration decision on a new The Company operates an all-employee, HMRC-approved, Sharesave Executive hire to ensure that these decisions are being made in scheme, which all eligible employees and Executive Directors are able the best interests of the Company and its shareholders, including, to participate in. All eligible employees are invited to join the scheme but not limited to: on an annual basis, subject to maximum participation levels, currently • quantum; £500 per month, or in line with HMRC limits if these are increased in the future. Details of current schemes can be found in the Annual • type of remuneration being offered; Remuneration section of this report. • the impact on existing remuneration arrangements for other Directors; TalkTalk Share Match Plan (SIP) • the remuneration package of any exiting equivalent Director; and The Company operates an all-employee, HMRC-approved Share Match Plan. The TTG Share Match Plan enables eligible employees • the remuneration arrangements of the candidate in their previous role. to purchase market priced shares by entering into a partnership In hiring a new Executive Director, the Remuneration Committee may share agreement and holding such shares in trust for up to five years. also make a ‘buy-out’ award to an external candidate in compensation The rules of the Plan allow an employee maximum contribution of for any remuneration arrangements forfeited on leaving a previous £1,800 per annum, or in line with HMRC limits if these are increased. employer. In making such an award, the Committee will take into The Remuneration Committee, at its discretion, may award matching consideration relevant performance conditions, vesting periods and and/or free shares to eligible participants. Matching shares may be the form in which the award was made. It is usual that any ‘buy-out’ granted up to a maximum ratio of two matching shares for each awards will be made on a comparable basis. In exceptional circumstances, partnership share purchased by a participant. Free shares may be the Remuneration Committee may make an exceptional award under awarded up to a maximum value of £3,600 tax free per annum, or in one of the Company’s existing long term incentive plans in order to line with HMRC limits if these are increased. compensate a candidate for any remuneration arrangements Currently the Company provides one matching share for each forfeited on leaving a previous employer. partnership share purchased by participating employees or The Remuneration Committee would only consider making such Executive Directors. awards where the individual has lost an award as a result of joining the Service contracts and remuneration packages Group and awards will be subject to continued employment and Service contracts for Executive Directors performance conditions, as appropriate. Following the appointment Under the Executive Directors’ service contracts both parties are of a new Executive Director the shareholders will be informed of the required to give twelve months’ notice of termination of employment. details as soon as practicable. At the Company’s discretion they may terminate the contract There may be exceptional and unforeseen circumstances where immediately and not require the Director to work their notice and the Remuneration Committee considers it appropriate to exercise instead pay twelve months’ contractual pay plus benefits. The discretion available under Listing Rule 9.4.2-R to grant an award to Executive Directors’ service contracts also include a twelve month facilitate the recruitment of an Executive Director. Where a variable non-compete period. or performance related award is made under such circumstances, These contracts are available for inspection at the Company’s the Remuneration Committee confirms that the award will be within registered office. the limits specified in the Remuneration Policy table. Recruitment policy for new hires The Remuneration Committee emphasises that such discretion When hiring a new Executive Director, the Remuneration Committee will would only ever be used in genuinely unforeseen and exceptional align the remuneration package with the Remuneration Policy stated events where it would be disproportionate to seek shareholder approval above, including the maximum limits for each remuneration component. at a general meeting. The Remuneration Committee considers that in practice such events would arise highly infrequently, if at all, for the duration of the Remuneration Policy. Where such an event arises, the Remuneration Committee will consult with major shareholders and an explanation on how discretion has been exercised would be provided in the following year’s Remuneration Report. 44 TalkTalk Telecom Group PLC Annual Report 2016

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    Service contracts and remuneration packages continued The default position is for annual bonus amounts and the vesting of Relocation packages share-based awards for ‘good leavers’ to be pro-rated for time served There may be occasions when hiring a new Executive Director that a from the start date of the scheme to the individual’s exit date and will relocation package is awarded, where a candidate and/or the candidate’s be subject to the applicable rules of the scheme. The Remuneration immediate family relocate either on a temporary or permanent basis Committee will have sole discretion to determine the ‘good leaver’ in order to fulfil their role for the best interests of the Company and status of an Executive Director. The Committee will determine on its shareholders. In such instances, the Remuneration Committee a case by case basis whether any vesting of a share-based award retains the right to compensate for reasonable and appropriate is appropriate. relocation expenses. Fees for Non-Executive Directors Expatriate packages The Non-Executive Directors do not take part in discussions on their On appointing a new Executive Director, the Remuneration Committee remuneration. Each of the Non-Executive Directors has a letter of may offer assistance where a candidate and/or the candidate’s immediate appointment substantially in the form suggested by the Code, and family is asked to relocate either on a temporary or permanent basis, each has a three month notice period with no compensation for loss from an overseas location to the UK or from the UK to an overseas of office. The Company has no age limit for Directors. The dates of location. In such instances, the Remuneration Committee retains each contract are set out on page 53. the right to compensate for reasonable and appropriate The fees for Non-Executive Directors are set out on page 52 of this relocation expenses. report. These fees are reviewed (but not necessarily increased) on Remuneration Policy for internal promotions an annual basis, taking into account the responsibilities of the role When an existing employee of the Company is promoted internally and their participation in the various governance committees of to the role of Executive Director, the Remuneration Committee will the Company. align the remuneration package with the Remuneration Policy stated Non-Executive Directors are not entitled to participate in any annual above, including the factors it takes into account for new hires. or long term incentive plans, or any pension arrangements. Any remuneration awarded prior to promotion as an Executive Director External appointments will be retained and will be subject to the previous payment terms. The Board supports Executive Directors holding Non-Executive The shareholders will be informed of any such remuneration in the Directorships of other companies and believes that any such Directors’ Remuneration Report following promotion. appointments are part of the continuing development of the Exit payments Executive Directors from which the Company will ultimately The Company operates the following policy in respect of exit payments: benefit. The Board has reviewed all such appointments and those appointments that the Board believes require disclosure pursuant • Executive Directors have a twelve month notice period from the to the Code are set out on page 53. The Board has also agreed that Company and they in turn are asked to give the Company the Directors may retain their fees from such appointments. twelve months’ notice. • Exit payments in relation to the service contract are limited to no more than one year’s contractual pay plus other benefits, and any contractual notice pay, unless determined otherwise by the Board in exceptional circumstances, or unless otherwise dictated by law. • The Remuneration Committee may use its discretion to determine appropriate bonus amounts and the vesting of any share-based award, taking into consideration the individual circumstances under which an Executive Director is leaving the Company. 45 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Directors’ Remuneration Report continued Annual Report on Remuneration The following sections set out how the Company’s Remuneration Policy was implemented in the year ended 31 March 2016 and how it will be implemented for the year ending 31 March 2017. Single figure of remuneration* To assist shareholders’ understanding and in line with the Regulations, the table below provides a single figure of remuneration for each Executive Director. The information for Non-Executive Directors is included in the table on page 52. Year ended 31 March 2016 Taxable SAYE 2016 Base pay(1) benefits(2) Pension(3) Bonuses(4,5) LTIP(6,7) gain(8) total Executive Director £000 £000 £000 £000 £000 £000 £000 D Harding 550 17 55 220 1,968 – 2,810 I Torrens 425 16 42 170 – 6 659 C Bligh(9) 365 17 18 146 1,023 – 1,569 T Harrison(9) 365 17 18 146 945 – 1,491 Aggregate emoluments 1,705 67 133 682 3,936 6 6,529 (1) Value of base pay received in the year. (2) Value of benefits received by the Director in the year. The components of taxable benefits are as follows: • car allowance – cash amount received in the year; and • private medical insurance – cost to the Company in the year for the Executive Director and their family. (3) Value of pension contribution or cash in lieu made by the Company in the year. (4) Value of annual bonus payable in respect of the year and based on performance for the financial year. (5) D Harding has decided to donate her bonus to charitable causes. (6) Value of LTIP vesting in the year. This relates to the DSOP 2012, 50% of which vested in May 2015, after the TSR performance condition was determined to have exceeded its Super Stretch level. The remaining 50% of the award relating to EPS, immediately lapsed on 14 May 2015. The share price on the date of vesting was £3.841. (7) Original DSOP 2012 award was made as a multiple of base pay. At the time of the award, C Bligh’s base pay was £325,000 and T Harrison’s base pay was £300,000. (8) Under the 2015 SAYE I Torrens was granted 5,863 options on 12 June 2015 at an option price of £3.07. (9) C Bligh and T Harrison’s base pay was increased from £335,000 to £375,000 effective 1 July 2015 as disclosed in last year’s report. Year ended 31 March 2015 Taxable SAYE 2015 Base pay(1) benefits(2) Pension(3) Bonuses(4) LTIP gain(5) total Executive Director £000 £000 £000 £000 £000 £000 £000 D Harding 538 16 58 432 – 3 1,047 S Makin(6) 248 9 25 241 – – 523 I Torrens(7) 106 4 11 85 – – 206 C Bligh(8) 278 14 14 224 – – 530 T Harrison(8) 278 14 14 224 – – 530 Aggregate emoluments 1,448 57 122 1,206 – 3 2,836 (1) Value of base pay received in the year. (2) Value of benefits received by the Director in the year. The components of taxable benefits are as follows: • car allowance – cash amount received in the year; and • private medical insurance – cost to the Company in the year for the Executive Director and their family. (3) Value of pension contribution or cash in lieu made by the Company in the year. (4) Value of annual bonus payable in respect of the year and based on performance for the financial year. (5) Under the 2014 SAYE D Harding was granted 3,750 options on 13 June 2014 at an option price of £2.40. (6) The figures in this table are for the period S Makin was a Director to 13 November 2014. The base pay, taxable benefits and pension received for his employment not as a Director up to 31 December 2014 amounted to £68,348, which included £9,576 in lieu of accrued annual holiday, not taken by his exit date on 31 December 2014. The Bonus figure for S Makin includes the period from 14 November 2014 to 31 December 2014, when he was not a Director. (7) The figures in this table are for the period I Torrens was a Director from 5 January 2015. (8) The figures in this table are for the period C Bligh and T Harrison were Directors from 3 June 2014. C Bligh and T Harrison’s base pay was set at £335,000 on their appointment to the Board, effective from 1 July 2014. 46 TalkTalk Telecom Group PLC Annual Report 2016

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    Appointments in the year ended 31 March 2016 Pension contributions* Roger Taylor was appointed as a Non-Executive Director on Year ended 31 March 2016 11 November 2015 and his fee was set in line with the Remuneration During the course of the year, Executive Directors received Company Policy at £45,000. On 11 January 2016, Roger Taylor was appointed to pension contributions in line with the Remuneration Policy. There the Remuneration Committee and his fee was adjusted accordingly, were no Directors who were members of a defined benefit pension increasing to £50,000. scheme during the year. In line with the Remuneration Policy, the Committee considered both Dido Harding had previously left the pension scheme at the end internal and external factors when setting the remuneration package of February 2014 and therefore a cash payment in lieu of pension, for the newly appointed Non-Executive Director, in order to ensure equivalent to 10% of base pay, was made for the year ending that the decisions taken were made in the best interests of the 31 March 2016. Company and its shareholders. Iain Torrens chose not to join the Company pension scheme on Leavers in the year ended 31 March 2016 his appointment and therefore a cash payment in lieu of pension, There were no leavers in respect of Executive Directors or equivalent to 10% of base pay, was made for the year ended Non-Executive Directors in the year ending 31 March 2016. 31 March 2016. Base pay Pension contributions for Tristia Harrison and Charles Bligh were Year ended 31 March 2016 made by the Company of 5% of their base pay for the year ended As previously disclosed in last year’s report, following the 31 March 2016. Committee’s review of Executive remuneration in the year ended The pension schemes provided for other employees of the Group 31 March 2015, it was agreed that the base pay of both Tristia Harrison are included in note 4 to the consolidated financial statements. and Charles Bligh would be increased to £375,000, which was a 12% uplift and was effective from 1 July 2015. As previously disclosed, in Year ending 31 March 2017 line with the Remuneration Policy, under normal circumstances no In the year ending 31 March 2017, pension contributions from the Executive Director will receive an increase in excess of 10% of their base Company for Dido Harding and Iain Torrens will continue to be capped pay in any given financial year, however, the Committee took into at 10% of base pay, in line with the Remuneration Policy, and will be consideration the contribution the Managing Director of Consumer paid as a cash payment in lieu. Pension payments for Charles Bligh and the Managing Director of TalkTalk Business, Technology and and Tristia Harrison will be capped at 5% of base pay, in line with the Security had made since their appointment to the Board and the Remuneration Policy. increased responsibilities that these positions carry, as well as the Annual performance bonus ongoing contribution that they will continue to make to the business. Year ended 31 March 2016 As previously disclosed, remuneration increases for Executive For the year ended 31 March 2016, the annual performance bonus was Directors were reviewed in line with market trends, peer group based on a ‘balanced scorecard’ blend of financial and non-financial benchmarking and current internal practices. Peer group analysis measures as set out in the table below and in line with the approved was conducted by Willis Towers Watson, comparing against Remuneration Policy, Executives had an incentive opportunity in the FTSE-listed companies with comparable revenue and market range of 0% to 170% of base pay. capitalisation. Performance against the Annual Bonus scheme targets would have For the year ended 31 March 2016 average base pay increases for all resulted in a scheme pay-out of 62.4% of base pay for the Executive other employees was 2%. Directors. Whilst this would have been significantly lower than the previous years’ pay-out of 80.5%, in the context of the cyber attack Year ending 31 March 2017 on TalkTalk and after careful consideration, the Remuneration There are no proposed increases to base pay for Executive Directors Committee has exercised discretion and determined that the annual in the year ending 31 March 2017. bonus should be at a reduced level of 40% of base pay to reflect For the year ending 31 March 2017, average base pay increases for all those events. other employees will be 2%. This year, not all employee increased will Achievement against the measures can be seen in the table below: be applied and business units have had complete discretion to apply Measure Weighting Achievement their pay budget. Within the 2% pay budget, adjustments were made in order to ensure that no employee of the Company is in receipt of Headline Group EBITDA 25% Between Minimum and Target base pay lower than the Living Wage, in line with the commitment Group Revenue 20% Minimum made in April 2015. On-net churn 25% Between Target and Stretch Transformation 20% Between Target and Stretch Innovation 10% Super stretch 47 TalkTalk Telecom Group PLC Annual Report 2016

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    Corporate governance Directors’ Remuneration Report continued Annual Report on Remuneration continued Annual performance bonus continued Year ended 31 March 2016 continued When determining bonus payments, and the resulting adjustment down this year, the Remuneration Committee takes into account performance against the measures above, overall business performance and the individual performance of the Executive Directors. Significant investment in the year in our fibre and mobile propositions, coupled with investment in security following October’s cyber attack has resulted in the majority of financial measures being confirmed at between minimum and target. Considered focus for the year on customer churn, accelerated growth within TalkTalk Business and a strong pipeline for innovation has delivered stronger performance against the remainder of the scorecard, which has resulted in a bonus being paid out to Executive Directors at just below target levels. The Remuneration Committee has carefully considered the strong business recovery which the Company has demonstrated in the wake of recent events and is satisfied that this bonus has provided a significant link between reward and operating performance and the creation of further shareholder value. The Remuneration Committee has judged that the targets are commercially sensitive as they could give competitors insight into TalkTalk’s business planning process, but having discussed the matter at length, has determined that performance against targets should be reported retrospectively, two years in arrears, as the Committee feels that sufficient time has passed from the setting of targets and reporting of achievement against them. Targets and performance against them have therefore been disclosed for the Annual Performance Bonus for the year ending 31 March 2014 in the table below: Actual performance Measure Weighting vs target Achievement Headline Group EBITDA (£m) 20% 87% Missed Group operating free cash flow (£m) 10% 69% Missed On-net churn (%) 20% 84% Missed TV numbers and customer experience (‘000s) 10% 108% Super stretch On-net ARPU (£) 10% 107% Super stretch TTB Revenue (£m) 10% 102% Stretch NPS 10% 95% Minimum Innovation 5% See note 1 Super stretch Employee Engagement 5% See note 2 Stretch (1) Innovation performance measured as – Making TalkTalk Simpler plan in place, Mobile Strategy defined and TalkTalk Business new product development pipeline in place – all delivered at super stretch level; Group innovation Pipeline in place – delivered at Stretch Employee Engagement performance measured as – improve perceptions of career development, address barriers to collaboration and cross- departmental working – all delivered at Stretch level; shift employee perceptions of how we treat our customers – delivered at super stretch level. (2) Employee Engagement performance measured as – improve perceptions of career development, address barriers to collaboration and cross- departmental working – all delivered at Stretch level; shift employee perceptions of how we treat our customers – delivered at super stretch level. Year ending 31 March 2017 A review of the annual bonus scheme was conducted in the year The Board has determined that the disclosure of performance ending 31 March 2016 to ensure that the performance measures in targets continues to be commercially sensitive and they are therefore the balanced scorecard continue to be aligned to Company strategy. not disclosed in this report. These targets are determined within the The performance measures and their weightings for the year context of a longer term business plan and the disclosure of these ending 31 March 2017 are set out below: targets could give information to TalkTalk’s competitors to the Performance measure Weighting detriment of business performance. Headline Group EBITDA 25% The Committee will disclose performance against all these measures Group Revenue 20% in next year’s Directors’ Remuneration Report. Customer (including network performance) 30% There is no change to the annual bonus policy for Executive Directors Innovation 10% which is set out in the Remuneration Policy table, with the exception Transformation 15% of new performance measures and weightings shown above. 48 TalkTalk Telecom Group PLC Annual Report 2016

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