TalkTalk talks up Business business

TalkTalk delivered mixed news at its end of year financial report as the fixed operator continues to recover from last year’s hefty cyber attack, claiming impressive growth in its Business business.

At its year-end reporting broadcast, the cyberattack which took place in October 2015 was a frequently referred-to incident impacting the outlook for the year. Year-on-year revenues rose 2.4% to £1.8bn, but repercussions from last year’s hack sliced pre-tax profit down by more than 50% YoY. The company cited a £14 million pre-tax statutory profit, down from £32 million last year – and attributed the loss to exceptional item expenses of £86 million, nearly double that of the £46 million in 2015.

CEO Dido Harding defiantly explained the telco’s recovery from the attack and claimed a record-low churn level of 1.3% as proof of recovery. “The business bounced back strongly in the final quarter following the cyber attack in October,” she said. “We recorded our lowest ever churn and stabilised the broadband base, testimony to the speed with which customer sentiment towards TalkTalk has recovered, the success of our greater focus on existing customers, and the growing benefits of our simplification programme.”

TalkTalk Business experienced 5% growth YoY and now represents 30% of the entire company’s revenue generation. It cited growth in high-speed data line connections and a 13.3% growth in carrier revenues which it claims successfully managed to offset a 16.2% decline in voice. It looks like TalkTalk will continue to put more faith in its Business division in FY2017, proclaiming it one of the fastest growing B2B providers in the UK.

“TalkTalk Business has a proud history of disruptive innovation to ensure that we offer our SME, corporate, enterprise and channel customers the best and most reliable service possible. We expect to see this growth continue over the next year as we focus on strengthening our next generation network and delivering new services such as MyNet, SIP and unified communications to both our partners and direct customers.”

During the earnings call, CEO Harding also provided an update on the telco’s mobile plans for the next three years. TalkTalk currently runs a thin MVNO build on O2, having recently switched over from Vodafone, and plans to develop elements of its own network infrastructure to boost coverage and monetisation opportunities. The projected flow of events (see below) includes launching 4G services in the new financial year, building out its own core mobile network, introduce national roaming; and looking beyond 2018 it plans to roll out a network of femtocells to boost coverage and enable mobile offloading.

Harding said TalkTalk is talking with Ofcom to negotiate approval to use certain spectrum bands for femtocell-based mobile offloading to fixed access, but provided little in the way of additional information given the master plan is still at least two years away from realisation.

Despite a relatively warm outlook for the year, industry commentators have taken a dim view on TalkTalk’s immediate future in the wake of an attack which harmed the telco’s reputation and profit sheet.

Paolo Pescatore, CCS Insight

“Overall, it has been an extremely tough year for the company following the cyber attack. Though it is trying to paint a positive picture, it is hard to see whether it will fully recover.

“Ultimately, consumers have lost confidence, as shown with fewer total broadband subscribers year-on-year. Despite this, it is still doing a great job of cross selling fibre and mobile into its existing base. The lower base of TV subscribers is a reflection of a shift in strategy to focus on increasing usage rather than acquisition. In addition, the recent initiatives to offer BT Sport will go some way to strengthen its TV offering.

“However, the outlook is going to be challenging for TalkTalk; Vodafone launching a pay TV service, Sky will offer a mobile service, Virgin Media with a new set-top-box and we expect BT and EE to launch new converged multiplay offerings. Therefore, TalkTalk will have to be novel in all areas in order to keep up with the market.”

Dan Howdle, Cable.co.uk

“TalkTalk suffered three major security breaches in 2015, something savvy customers should not easily forgive. That TalkTalk lost only 3% of its existing customer base, however, points to problems both with the switching process itself and with its public perception. Our own research shows that only around half of UK broadband customers have ever switched provider. The key factors tend to be the financial cost of getting out of your contract (TalkTalk allowed no one a free exit), and risk averseness – a feeling of ‘better the devil you know’.

“Clearly the situation needs improvement. If a provider fails in its remit to protect its customers and their data there should be a free get-out clause. There isn’t, and that has allowed TalkTalk to limit the damage the attack caused it. Broadband customers today have an immense amount of choice available. Almost everyone could save money and/or find a better deal if they take just a few minutes to compare what’s out there.”

Cameron Ross, Eckoh

“What’s clear is that a porous approach to customer data, however unwittingly, can have an equally porous impact on profit and reputation. A 50% fall in profits underlines the existential importance of deploying iron-clad security technology. In the past, businesses have been able to rely on customer inertia, but those days are gone. Robust security is vital, as is having the systems to ensure that no unnecessary customer data is held, especially at a time when we are all digital nomads.

“If hackers blow a hole in the security of your customer data, your customers will blow a hole in your profits. Data security is a boardroom issue. If it’s not on the agenda, your risk management strategy is a colander.”

Matthew Kendall, Economist Intelligence Unit

“TalkTalk’s profit performance demonstrates just how important an issue cyber security has become. The issue has moved up the chain in the corporate world and is now talked about and ruminated over at the highest level. But that does not mean that there are still a great number of firms that need to play catch up, with significant consequences if they don’t act swiftly.

“TalkTalk has unfortunately found out the price of such inaction. Despite these problems, TalkTalk’s vitals look good, churn is down and revenue is stable. That should give the company ample room to put its cyber-attack problems behind it over the coming months and years.”