Vodafone may be taking the spotlight in the telecoms sector, jumping 5% after a positive update, but TalkTalk Telcom has also reported results, and the reaction has been somewhat different.
TalkTalk is down 11.1p or 3.7% at 285.5p despite reporting a 3.3% rise in half year revenue and a 44.7% jump in earnings. It appears that investments costs will be higher than expected, and this seems to have unsettled markets. Chief executive Dido Harding said:
A third of our customers now take phone, broadband and TV from us, 9% take mobile...
We expect to deliver revenue growth of at least 4% and strong growth in EBITDA for the full year. In the second quarter we delivered our strongest organic broadband, mobile and fibre net additions in four years as well as adding more TV customers than the rest of the market put together.
We expect this growth to accelerate in the second half which means we will invest more in customer acquisition costs than we anticipated at the beginning of the year.
Jerry Dellis at Jefferies said:
It was widely expected that the first half results would reveal year on year margin growth tracking below the run-rate required to achieve full year 2014/15 guidance. But we expected TalkTalk to adhere to guidance, achieving this via less marketing in the second half. Instead TalkTalk will incur higher subscriber acquisiton costs [SACs], implying a 7%-8% reduction in full year EBITDA. Guidance of 25% margins by 2016/17 remains but should be treated with caution, not least given its reliance on around £100m net reduction in SAC costs.
Oriel analyst John Karidis issued a sell not, saying:
TalkTalk does not report retail and wholesale net adds separately. This makes it tough to gauge the impact of competition on its retail customer base (which is in turn responsible for most of its equity value). Also (i) according to TalkTalk, a wholesale customer earns on average less average revenue per user and EBITDA than a retail customer; (ii) retail customers are usually won/lost one at a time, but wholesale customers are won/lost in sizeable groups (e.g. Post Office contract in the third quarter of 2013/14).
We rate TalkTalk a sell and our target price remains 170p per share. In sum, we believe it will have to continue spending significantly to defend the business it has already. Therefore we don’t believe it EBITDA margin will jump to a sustainable 25% level by some time in 2017 (from around 15% in the second half of 2013/14 and 12.6% in the first half of 2014/15). We think TalkTalk will struggle to (i) cut churn to 0.8%-1.2% in a few years; (ii) keep raising prices without also having to spend significantly to add commensurate value. Also, we believe there are many reasons why TalkTalk is not a take-over target for, say, Vodafone or BSkyB.
BESI Research said:
Revenue guidance for growth of 4% for the full year has been maintained but EBITDA guidance has been cut. TalkTalk still expects to deliver growth in the pre-SAC EBITDA, but higher volumes are likely to lead to £20m to £25m of SAC investment more than the company had previously envisaged when it gave its 16% to 17% margin target. This is also likely to undermine confidence in the medium-term target of 25% which, in our view, was already weak.TalkTalk has however reiterated its intention to grow the dividend by 15% despite the likely pressure on cash flow expectations.
