Talkspace, Inc. Annual Report 2014

FY2014 Annual Report · Talkspace, Inc.

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Annual Report 2014

TalkTalk Telecom Group PLC

TalkTalk Telecom Group PLC Annual Report 2014

Our year at a glance

We are the UK’s leading value
for money provider of fixed line
broadband, voice telephony,
mobile and television services.

Our strategy is delivering
“ We are demonstrating real growth from our investment in TV and with
over 1 million customers today, this is a scale business that is growing
faster than all the other UK TV operators put together.“
– Dido Harding, CEO

In this report

Strategic report: Overview

Governance

Our year at a glance
Chairman’s statement
Financial highlights

Strategic report: Strategy

Our business model
UK telecoms regulation
Our strategy
Chief Executive Officer’s statement
Measuring our performance

Strategic report: Performance

Chief Financial Officer’s statement
People
Principal risks and uncertainties
Sustainability review

IFC
01
01

02
04
05
06
10

11
15
16
18

Board of Directors and advisors
Corporate governance
Directors’ Remuneration Report
Directors’ Report
Directors’ responsibilities statement

Financial statements

Independent auditor’s report
Group income statement
Group statement of comprehensive income
Group statement of changes in equity
Group balance sheet
Group cash flow statement
Notes to the consolidated financial statements
Company balance sheet
Company reconciliation of movement
in shareholders’ funds
Notes to the Company financial statements

Other information

Five year record (unaudited)
Glossary
Financial calendar

20
21
26
40
41

42
46
47
48
49
50
51
80

81
82

86
87
88

TalkTalk Telecom Group PLC Annual Report 2014

Chairman’s statement

This has been a year of significant investment in growth for
TalkTalk, as a result of which we have ended the year with
nearly one million TV customers. TalkTalk Business has
also had a very good year, delivering strong growth in a
market where few other B2B operators are showing growth.

As a result we reported our first full year of revenue growth
since demerger. We saw a substantial improvement in
profitability in the second half of the year which, despite
our investment in TV during the first half, allowed us to
grow the dividend by the 15% we committed to in FY12.
I am pleased to report therefore that for FY14 the Board
has declared a final dividend of 8.00p that, in addition
to our interim dividend of 4.00p, gives a total pay-out
for the year of 12.00p.

These are substantial achievements that highlight the
sustainable power of leveraging our network to deliver
value for money products to consumers and businesses
across the UK, while also creating value for shareholders.
It has been another year of significant change and
challenge for our employees, and the Board and I would
like to thank them for their efforts and for their continuing
commitment to TalkTalk and to our customers.

Sir Charles Dunstone
Chairman

Financial highlights

Headline revenue (£m)

+3.4%

Headline EBITDA (£m)

2014

2013

1,727

1,670

2014

2013

-27%

213

290

Statutory earnings per share (p)

-73%

Dividend per share (p)

+15.4%

2014

3.1

2013

2014

2013

11.3

12.0

10.4

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Our business model

Our network
Our business model is based on leveraging our extensive and cost-efficient next-generation network assets, in which
we have invested c.£1bn to date, to offer consumers and businesses value for money products and services.

At the heart of our network is the state of the art unbundling
equipment (DSLAMs, MSANs and Ethernet switches) that
we have installed in over 3,000 BT exchanges – the largest
such deployment in the UK. This allows us to take control
of the copper line that connects customer premises to
the exchange. The exchanges are connected via collector
nodes and 10Gbps collector rings to our dark fibre core
optical network – a high-speed, high-capacity all-IP national
backbone that enables efficient and flexible routing of voice
and data traffic.

Access to the copper infrastructure that connects UK
premises to BT’s nationwide exchange footprint is price
regulated by Ofcom, while we lease the fibre backhaul
(to connect exchanges to our core network) and dark
fibre (that comprises our collector ring and core network)
on very competitive terms from multiple providers.

This combination of owned and leased assets confers a
structural cost advantage that allows us to offer fixed line
broadband and Ethernet connectivity at significantly
lower retail prices than our competitors.

We have leveraged this cost advantage to build a sustainable
broadband market share at the value end of the UK fixed line
market and, since 2012, have begun to further leverage
our network with fast growing IPTV (for consumers) and
Ethernet products (for businesses). The scale and all-IP
nature of our network also allows us to scale it very
efficiently for growing usage. Over the next five years we
plan to expand the bandwidth capacity on our network by
50–100 times at falling marginal operating costs. This will
allow us to support growing customer demand for high
speeds and greater data consumption, with longer term
opportunities to build fibre to the premise (FTTP) and
converged fixed-mobile products.

Our network coverage
Over the past eight years, we have built one of the UK’s largest broadband and voice customer bases, attracting those
looking for significant bill savings. FY14 saw us continue to grow significantly as we successfully deliver our quad play
strategy, particularly in our value for money TV proposition, built on the YouView platform.

Akamai

Netﬂ ix

Google

Caching
Caches deployed in
our Edge sites, serving
>400Gbps at peak

Unbundled exchange
MSAN and DSLAMs supplying
ADSL, FTTC, EFM and
Ethernet access services

Collector node
Extend reach of
core network

Read more about our
extensive network at:
www.talktalkgroup.com

Exchange backhaul
Nx1Gbps optical circuits
supplied by BTOR and VM

Collector nodes
Dark ﬁ bre, 40Gbps and
10 Gbps optical circuits
supplied by Geo, BTW, BT
Zayo, Hibernia, VM and SSE

OR,

Copper

Optical

Core optical networks
Two separate national networks
with 8Tbps (Huawei) and
1.6Tbps (Inﬁ nera) of capacity

Our network gives us a strong value for
money advantage
We are able to offer our Consumer and Business customers
services at significantly lower cost than our cable and
incumbent competitors. This is because we operate the
UK’s most extensive next-generation network (NGN), which
is comprised of our own advanced, highly cost-effective
equipment. It also means that TalkTalk is able to be the
only ISP that is committed to offering totally unlimited
broadband across all its consumer packages.

Our NGN covers approximately 95% of UK homes, operating
in 3,027 exchanges. These exchanges are connected via
our own high-speed, high-capacity all-IP national network,
enabling us to carry all of our customers’ voice and data
traffic efficiently and cost effectively. Our customers
benefit through optimised broadband speeds and quality
as well as access to our growing range of lower cost, value
add products and services. For example, our all-IP Content
Delivery Network which runs over our NGN puts content
closer to the end user to increase the quality of experience
for our TV customers.

TalkTalk Telecom Group PLC Annual Report 2014

Our customers
We are the UK’s leading value for money provider of fixed line broadband, voice telephony, television and mobile
services. We serve four million residential and business customers under the TalkTalk and TalkTalk Business brands.

Services to businesses
TalkTalk Business continues to drive innovation and
competitive product development that leverages our
NGN capability and is in fact one of the fastest growing
B2B telecom businesses in the UK. We believe there is
significant opportunity to use our network to grow all
our Next Generation products within TalkTalk Business.

In January 2013, we began offering an Ethernet over Fibre
service which delivers high-speed symmetrical services
at a significantly lower price point than traditional Ethernet
technologies. We also launched an 80Mbps product
with generous data allowances and network prioritisation
targeted at small and medium sized businesses. The year
also saw us launch a very competitive Next Generation
Voice service for businesses requiring high performance
data and voice services, which we have made widely
available to channel partners. Our partner channel continued
to grow in FY14, and the migration of over 100,000 Post Office
customers onto our network was a major milestone for
the business.

Services to consumers
TalkTalk is strongly positioned as the leading value for
money phone, broadband and TV provider for UK homes.
We are differentiated by our clear and simple tariff
structure, low prices, flexibility and inclusion of valuable
services, such as our ground-breaking HomeSafe™, our
unique network-based security service, which is available
free of charge for all customers on our network and protects
the whole home from viruses and inappropriate content.

In the prior year we successfully launched our TV proposition
for Plus customers, which included a free YouView set top
box and in FY14 we launched a lower priced TV proposition
for our Essentials customers. TalkTalk is one of seven
partners behind YouView including the BBC, ITV and BT.
YouView is a broadband based television service with
differentiated catch-up and on-demand services, and
an open platform for future application driven innovation.
Our TV offering has enjoyed strong growth during FY14
as it represents a powerful proposition for mass market
value seekers who want flexible access to premium
content without the need to enter into costly long term
subscriptions. We also launched the UK’s lowest priced
totally unlimited broadband proposition, SimplyBroadband,
which is targeted at customers who want a great value
broadband product.

We grew TalkTalk Mobile during FY14. Available exclusively
to TalkTalk customers, TalkTalk Mobile offers simplicity,
range and some of the most competitive prices in the
market for both SIM-only and handsets. As a result, our
mobile offering continues to gain strong traction amongst
our base.

Market overview
Household internet access continued to rise in 2013, with eight in ten households now having broadband access.
The average UK household owns three different types of internet-enabled device, and 86% have at least one. This is
driving significant growth in people accessing the internet from mobile-enabled devices. Significant scope for growth
remains, however, amongst specific demographic groups; 20% of households remain offline, rising to nearly 50% of
those aged 65–74 and two-thirds of those aged 75 and over.

On-net base (million)

On-net customers (%)

2014

2013

4.060

2014

3.870

2013

There are four key players in the broadband and TV market.
BT Retail is the largest broadband service provider, followed
by BSkyB. Virgin Media, the cable provider, is the third largest
player followed by TalkTalk. TalkTalk is the largest unbundler.

BT Retail and Virgin Media are positioned at the premium
end of the market, with significantly higher price points.
They focus on speed and reliability of broadband connection.
BSkyB’s focus is on cross selling broadband and voice to
its pay TV base, providing discounts to customers who
take all three products with them. BT Retail is also now

competing with BSkyB on pay TV content rights,
specifically sports.

Within this context, TalkTalk is clearly positioned as the
leading provider for customers seeking a best value and
reliable voice, broadband and TV service. For TV in particular,
we have a unique proposition for those homes who want
flexible access to premium content without costly long
term subscriptions. We believe this reputation for value
for money puts TalkTalk in a strong position and will only
improve further as we grow our TV and mobile bases.

UK telecoms regulation

The UK telecoms market is regulated by Ofcom, which sets the charges and other terms for wholesale access
to infrastructure and associated services provided by BT Openreach (Openreach), where Openreach is deemed
to enjoy ‘Significant Market Power’. Ofcom’s objective is to ensure that these wholesale products enable effective
retail competition in the market, so that consumers and businesses benefit from a choice of services and retail
service providers. Compliance with regulation is monitored internally by the Regulatory Compliance Committee
as detailed on page 16.

TalkTalk relies upon a number of wholesale products from
Openreach to be able to offer services to its customers. The key
wholesale products we buy are LLU (the copper connections
into homes), GEA (access to BT’s Next Generation Access
(NGA)/Fibre to the Cabinet (FTTC) network) and Ethernet (fibre
links used to connect exchanges to our core network and also to
connect business customers). The price and terms of these are
set by Ofcom though a triennial market review process which,
particularly in the case of LLU, gives us very reasonable certainty
of costs going forward.

LLU Charge Control
TalkTalk appealed Ofcom’s 2012 LLU Charge Control decision
(as did Openreach), which resulted in a £1.12 reduction in the
2013/14 MPF rental charge.

This charge control ended on 31 March 2014. In late May 2014,
Ofcom is expected to publish (for notification to the European
Commission) the new charge control for the period to
31 March 2017. The current proposals are for an annual price
change of between CPI -4.25% and CPI +3.00%.

Next Generation Access
Openreach provides wholesale access to its NGA infrastructure
(predominantly FTTC), on an equivalent basis to all communication
providers. The current Openreach wholesale product is GEA.
TalkTalk uses GEA to provide its fibre broadband products.
At present, neither the price of GEA nor the margin between
the GEA price and BT’s retail price are regulated. In late May 2014,
Ofcom is expected to publish its proposals to impose margin
squeeze regulations and how they will be operated.

In response to a complaint by TalkTalk, Ofcom, in May 2013,
started an investigation of whether BT has breached its

Competition Act obligations by margin squeezing between
its wholesale price for NGA (GEA) and its retail prices.
The threshold for Ofcom for opening an investigation is
if there are ‘reasonable grounds for suspecting (the ‘Act’)
has been infringed’. TalkTalk expects a decision on the future
approach for this investigation later in 2014.

Ethernet dispute appeal
In December 2012, Ofcom published its determination to
resolve a dispute regarding Openreach’s pricing for various
Ethernet services in the period from April 2006 to July 2009,
which required Openreach to repay TalkTalk for its overcharging.
Openreach has appealed that decision to the Competition
Appeal Tribunal (CAT). TalkTalk (and others) has also appealed
the decision arguing that the determination was too low.
Further detail is provided in notes 9 and 27 to the consolidated
financial statements.

Openreach service performance
TalkTalk strives to work closely with Openreach to deliver the
best service for our customers, for example, the timely delivery
of connections. As part of the Wholesale Local Access Market
Review due in late May 2014, Ofcom will set new regulations in
order to provide more effective incentives for Openreach to
provide a high quality service.

SLG dispute
Ofcom has resolved a dispute regarding whether Openreach
should have paid TalkTalk compensation as a consequence of
the late delivery of new MPF lines in 2012. Ofcom determined
that whilst Openreach had breached its obligations, Ofcom did
not as part of its determination require Openreach to pay
TalkTalk any compensation.

Several other areas
of current or
potential legislation
are significant for
TalkTalk:

Appeals framework
The Government is currently considering whether to introduce
changes to the framework of how Ofcom decisions can be
appealed and, in particular, whether the current ‘merits-based’
standard should be changed.

European Commission Single Market Regulation
The EC and European Parliament is currently considering
the Single Market Draft Regulation. If introduced this could
have a number of impacts on the mobile and fixed
telecommunications market. The most relevant area for
TalkTalk is the so-called ‘net neutrality’ regulation.

New Communications Bill
The Government had previously stated it was its intention to
introduce a new Communications Bill by the end of Parliament.
Further to the review work already concluded, the Department
for Culture, Media and Sport (DCMS) published a policy paper
in July 2013 entitled ‘Connectivity, content and consumers:
Britain’s digital platform for growth’ setting out areas for action.

Digital Economy Act
This Act, enacted in 2010, requires ISPs to send notifications to
customers and log which connections have been used for illegal
file sharing. Expectations are that the earliest notifications
could be sent is 2015. In parallel, TalkTalk and other ISPs are
discussing with rights holders alternative approaches.

Pursuant to various court orders, TalkTalk is required to block
access to certain sites that are used for illegal file sharing.

Glossary

CPI:

Consumer Price
Index

FTTC: Fibre to the Cabinet

GEA: Generic Ethernet

Access

ISP:

Internet Service
Provider

LLU:

Local Loop
Unbundling

MPF: Full unbundling

NGA: Next Generation

Access

NGN: Next Generation
Network

RPI: Retail Price Index

SMPF: Partial unbundling

WLR: Wholesale
Line Rental

Communications Data Bill
The draft Communications Data Bill was published in 2012
and would have required communications providers to
retain more communications data than they currently do so.
In April 2013, the Government announced it was dropping the
Communications Data Bill. In the Queen’s speech in May 2013
it was stated that the Government would bring further alternative
proposals to help manage the problem of matching internet
protocol addresses. At this time nothing further has been published.

Voluntary measures on parental controls
Following a formal Government consultation into parental
controls, in June 2013 the Prime Minister announced that the
other three major ISPs would introduce whole home filtering
systems – equivalent to TalkTalk’s HomeSafe™ service. He also
announced that from December 2012 all providers had
voluntarily agreed to ask every new customer if they want to use
parental controls. This requirement was extended to include all
existing customers by the end of December 2014.

In December 2013, the DCMS asked Ofcom to report on
progress made by providers in delivering their commitments.
Its report is due to be published in mid 2014.

As a Board member of the UK Council for Child Internet Safety,
TalkTalk continues to engage actively with the Government about
its policy for protecting children online.

TalkTalk Telecom Group PLC Annual Report 2014Our strategy

Our corporate strategy revolves around six interlinking elements, which combine
leveraging our network to build scale in value for money products for consumers
and businesses, systems and processes simplification, and disruptive innovation.

Our strategy revolves around six main principles

Leveraging the TalkTalk Network

1
TalkTalk has the UK’s most extensive all-IP Next Generation
Network (NGN), covering c.95% of all UK homes with advanced,
proprietary equipment located in over 3,000 exchanges.
By investing in next-generation switching and data transmission
technology we have been able to further extend our network
and cost advantage. The declining marginal cost of bandwidth
allows substantial increases in capacity without compromising
margins or capital expenditure limits. To accommodate
expected future growth, we plan to expand network capacity
by 50–100 times over the next five years, and increase resilience
and flexibility, whilst reducing network downtime. This investment
will be within our long term capex guideline of 6% of revenues.

Simple Systems and Processes

4
To date since demerger, we have delivered over £100m of cost
savings through integration and back-office simplification
programmes. However, as a relatively young business that has
grown very rapidly, we have a significant opportunity to further
simplify our technology platform and customer processes.
Our “Making TalkTalk Simpler” programme comprises detailed
initiatives to simplify tariffs and access methods, simplify and
upgrade our systems, make better use of our data and drive
increasing online self-service by customers. While lowering
the costs of serving and acquiring customers, we also expect
Making TalkTalk Simpler to lower customer churn by improving
customer service and satisfaction.

Value for Money Products

2
We have an established position as the UK’s leading value for
money provider across phone and broadband (for consumers
and businesses), TV and mobile products (for consumers).
We also offer customers high speed Fibre to the Cabinet
through BT’s GEA product. In addition, our extensive Ethernet
presence allows us to offer competitively priced data products
to businesses across the UK. Our value for money positioning
and growing product offer drives customer loyalty and
sustainable revenue growth, and positions us to take advantage
of favourable usage and socio-demographic trends, with a
growing number of older and smaller households in the UK,
growing data usage and growing triple play penetration.

Scale

3
Building on our large and established fixed line phone and
broadband base, we are able to achieve significant scale benefits
from offering our customers additional products such as pay TV,
mobile, fibre and for businesses, high-speed data connectivity.

Disruptive Innovation

5
We have a strong heritage of launching innovative and disruptive
products that leverage our network scale and engineering
expertise to save customers money. We were the first to offer
free fixed line calls between customers, the first to launch free
broadband, the first to offer unlimited downloads to broadband
customers, the first to launch a free TV offer and the first to
offer business broadband at under £5 per month. Our long
term innovation agenda includes the potential to build the first
1Gbps FTTP network in the UK and an advanced fixed-mobile
proposition incorporating femtocells and an in-home 4G network.

A brighter place for everyone

6
Our employees are key enablers in delivering our strategic
priorities and we have implemented structures and policies that
foster and develop a uniquely agile and collaborative culture.

“ TalkTalk is all about giving customers consistently the best value
for money experience in the market”

FY14 Business Review
Summary
Our results for the year clearly demonstrate that our strategy is
driving revenue growth and will create sustainable shareholder
value. In total we invested an incremental £112m in FY14 in growing
the business, primarily through TV, and this is reflected in our full
year EBITDA margin of 12.3%. Our investment in scaling the TV base
had its most pronounced effect in H1 with EBITDA margins of 9.0%
on revenue growth of 1.8% and total subscriber acquisition costs
of £174m. As expected H2 results showed a strong rebound in
profitability with EBITDA margin of 15.5% on 5.0% revenue growth
and after total subscriber acquisition costs of £144m. The year
also highlighted the traction we are gaining in TalkTalk Business
through its focus on value for money data connectivity products.
Corporate revenues grew by 5.6% year on year, accelerating
significantly from 1.3% growth in H1 to 9.9% in H2. The dividend for
the year of 12.0p is in line with our commitment to deliver returns
to shareholders whilst also investing to grow the business.

We expect to deliver further significant progress in FY15, with
Headline EBITDA margin in the range of 16.0%–17.0% and dividend
growth of 15%, and are on track to deliver our medium term financial
targets of 4% CAGR in revenue and 25% EBITDA margin by FY17.
In addition, we see further strong growth opportunities beyond
the medium term from leveraging our network capability and
customer scale.

1. The fastest growing TV business in the UK
Accelerating growth in TV– 687,000 customers added, c.25%
of fully unbundled base
We added 687,000 customers to our fast growing YouView TV base
during the year, more than all the other UK TV operators combined.
The rate of additions accelerated through the year as awareness of
our proposition grew. During Q3 we launched and began gradually
to scale our Essentials TV proposition, expanding the addressable
market for our triple play product. Accordingly we have seen an
increase in the number of new customers coming to TalkTalk,
with a third of TV connections new to TalkTalk.

The Plus TV proposition has continued to prove popular, both for
existing customers wishing to upgrade from their Essentials phone
and broadband packages, and for new to TalkTalk customers,
highlighting the willingness of customers to pay a premium for
differentiated functionality (recording to the local set-top box)
and bundled features (free anytime calls and seven Sky channels).
We have continued to develop our content proposition through
FY15, with some significant new additions to our range such as
Sky on demand (Sky Movies, Sky Entertainment, Sky Sports);
Picturebox (NBC Universal) – new Subscription Video on Demand
(SVOD) service; and new linear channels such as JSTV and Kyknet
(Thema International), Sony Entertainment TV, Sony Asia TV and
Nicktoons. In addition, we reached an agreement with FilmFlex that
will significantly increase our selection of TV on Demand (TVOD) titles.

At the end of the year, just over 25% of our fully unbundled customers
were triple play. We expect to add a similar number of TV customers
in FY15 as we did in FY14, which would take penetration to nearly 40%
of our On-net base. Our primary target market remains the large base
of Freeview households in the UK (c.18m) and we continue to expect
that in time nearly all of our On-net customers will convert to triple
play in line with increasing recognition of the convenience and value
of bundling, and as we drive increased awareness of our compelling
content offer.

TV customers continue to rate the service highly
A range of survey and usage data from our TV customers, including
those that have been with us for over a year now, consistently point
to high levels of satisfaction with our TV service. The vast majority of
our TV customers (both those upgrading from phone and broadband
and those who are new to TalkTalk) have previously used Freeview as
their main TV service. Consequently the integrated IPTV and linear
programming functionality provided by the YouView platform remains
one of the most highly rated features of our service, with the YouView
net promoter score at +25.

While Plus customers value the ability to record programmes for
future viewing, all customers value the ability to seamlessly watch
catch-up TV, without having to exit the YouView programme guide.
This remains the only programme guide currently available in the UK
that offers this powerful functionality. The value our customers place
on this is a direct function of the volume of high quality free public
service broadcast (PSB) programming in the UK. Viewing data across
all platforms shows that the vast majority of TV viewing (even for
pay-TV subscribers) is of live and catch-up free-to-air content.

Other features that all our customers rate highly include the ease
of access to a wide range of flexible, non-subscription pay content.
This is especially so for those customers who have upgraded from
Freeview and are exploring paid for content options for the first time.
Equally, those customers who have switched from other pay TV
platforms report high levels of satisfaction with the range of content
available and the affordability of being able to select and pay for only
the precise content they wish to access.

Content purchasing behaviour encouraging for future revenue
Whilst most of our TV customers have little or no previous experience
of paying for content on their TV sets, their purchasing behaviour to
date is encouraging for future incremental revenues, with an average
ARPU for pay-per-view movies and boosts combined of c.£9.00.
With over 28% of our TV customers buying some form of pay content
every month, the overall TV base is therefore showing an ARPU uplift
of c.£2.50.

With over twelve months of data from our growing base, we are pleased
to report that early purchasing behaviours have proved resilient and
are consistent with our understanding of what our family-orientated,
value-seeking customers want to watch. Pay-per-view movie demand
has grown steadily over the last twelve months, with customers
purchasing on average, just over one movie per month, generating
an incremental ARPU of c.£4.00.

TalkTalk Telecom Group PLC Annual Report 2014Content boost purchases have also remained resilient although
as we had expected, Essentials customers take longer to begin
their pay content journey and, initially, tend to buy fewer boosts.
Nevertheless the average boost ARPU of Essentials and Plus
customers at c.£11.00 is providing good incremental revenue for us.

TV customers’ early-life churn significantly lower than that of
broadband customers
Very few of our earliest TV customers have reached the end of
their first contract term, so it remains too early to assess their
out-of-contract churn behaviour.

However, the high levels of satisfaction with their service that our
TV customers are reporting, and the consistency of their content
purchasing behaviour, has translated into materially lower early-life
churn than for their dual play counterparts. Average monthly churn
on the TV base through FY14 was approximately half that seen from
our dual play base.

The lower early-life churn, significantly higher net promoter score and
lower surveyed propensity to churn give us a great deal of confidence
that mature triple play customers will also churn at a materially lower
rate than dual play customers.

2. Continuing progress in Mobile and Fibre adding
incremental value
7% of On-net customers now taking mobile
We added 109,000 new customers to our Mobile base during the year,
comprising 7% of our On-net base versus 4.5% of the base a year ago.
Mobile customers continue to add incremental value to us through a
combination of standalone economics (each Mobile customer delivers
a positive net present value across the life of the contract), and reduced
churn and higher net promoter scores compared to dual play customers.
As discussed below, developing our mobile proposition is a key element
of our innovation agenda for delivering long term growth, and we see
real opportunity to drive higher levels of penetration and value creation.

5% of On-net customers taking fibre
We added 134,000 new customers to our fibre base during the year,
comprising 5% of our On-net base versus 2% of the base a year ago.
Bandwidth usage continues to grow rapidly: traffic on our network has
almost trebled in the last three years, as customers use more devices
and watch more video content online, and customers downloaded
an average of 34GB of content a month during FY14 – 46% more than
a year ago. However, at current prices and usage levels, demand for
fibre from our customers remains modest because of the scale and
capability of our existing network. With over 50% of fibre customers
also taking TV from us, demand is very much driven by customers
whose overall experience can be transformed by taking fibre, e.g.
where distance from the exchange dictates copper speeds of less
than 3Mbps.

3. TalkTalk business – one of the fastest growing B2B
telecom businesses in the UK
Another year of strong performance
TalkTalk Business has delivered a strong performance, with Corporate
revenues growing by 5.6% year on year and accelerating significantly
through the year (H1: +1.3%, H2: +9.9%). High margin data products
revenues (+37.5% year on year) have been a key driver of this
performance with growth running in excess of the established
decline in traditional voice revenues. Our suite of flexible and
competitive Ethernet products based on our market leading
national Ethernet footprint has helped us win significant new
direct and partner business during the year.

Revenues from wholesale broadband connectivity products through
our partner channel also showed strong growth during the year. In Q3
we completed the migration of 103,000 Post Office customers onto
our base, with revenues from these customers contributing to growth
across On-net, Corporate and Off-net.

With three consecutive quarters of year on year growth in Corporate
revenues, TalkTalk Business is one of the fastest growing B2B telecom
businesses in the UK. This is a powerful testament to the strength of
TalkTalk Business’s strategy, business model and competitive
positioning in its chosen markets.

A focused strategy to grow revenues and profitability
TalkTalk Business’s strategy is consistent with the Group strategy
of leveraging our network scale and capability to build market
share in value for money products, whilst simplifying its systems
and processes and launching innovative new products to deliver
sustained and profitable long term growth.

Our network is scaled for peak evening usage by consumers,
allowing TalkTalk Business to use excess daytime capacity for
business customers. This together with our Ethernet capability
(over 3,000 of our exchanges are Ethernet enabled, with 95%
country coverage) allows TalkTalk Business to offer a wide range
of competitively priced, high-margin, all-IP data connectivity
products. With data revenue growth running faster than the decline
in legacy, low-margin voice revenues, TalkTalk Business is strongly
placed to grow revenues and market share profitably.

A key component of this is a focused approach to growth. We see
three main segments where we are able to offer our customers
significantly better value for money than our competitors.

3. TalkTalk business – one of the fastest growing B2B
telecom businesses in the UK continued
Maintaining our strong partner relationships
Our partner channel has continued to grow through FY14. Of particular
note is the successful migration of Post Office phone and broadband
customers who came onto our base during Q3 as part of our five year
contract with Fujitsu, the lead service integrator for the Post Office.
This agreement, one of the largest of its type in our history, is testimony
to the appeal of our network for partners seeking quality, flexibility
and competitive terms. By working with partners we are able to
leverage the low cost base of our network while not adding the
significant complexity that comes with tailoring services directly
for end customers.

Growing data product penetration in Enterprise
We saw strong growth in our direct business with a number of new
contracts to supply wide area network solutions for medium and
large businesses including Iceland Group (MPLS network covering
840 sites for a six year term); Hutchison 3G (MPLS network covering
360 sites for a three year term); the DX Group (MPLS network covering
72 sites for a five year term); Selfridges (MPLS network covering
twelve sites for a three year term) and Fullers (MPLS network covering
200 sites for a three year term). As a result we ended FY14 with over
17,000 Ethernet lines connected, c.70% more than a year ago.

Growing market share in small businesses
We simplified our connectivity propositions for small businesses
during the year, launching amongst other things, the UK’s most
competitive business phone and broadband package for just £4.00
per month (excluding line rental). In addition, we streamlined our sales
and service processes for this important and growing segment and
see significant opportunity to grow market share.

4. Progress in Making TalkTalk Simpler – a £40m+
cost opportunity
We have made good progress across the detailed programmes behind
Making TalkTalk Simpler during FY14. We have actioned a number of
initiatives across our four major workstreams (Getting Customers
Current, Systems Transformation, Leveraging Data and Brilliant
Self-Service). We commenced a programme to cease provision of
non-core legacy access methods such as IP Stream, built a detailed
roadmap for a Group-wide systems upgrade (some of which has
already been implemented in TalkTalk Business), improved data
standards and executive level reporting, and launched a service and
billing app – MyTalkTalk – on both the iOS and Android platforms that
has been adopted by 100,000 customers in just two months.

These initiatives, together with the continuing benefits of some of
our legacy programmes, delivered £14.5m of savings during FY14.

Looking forward, we expect the four main programmes to drive a
number of major initiatives in FY15 that will unlock further significant
savings through FY16 and FY17. In terms of Getting Customers Current,
we plan to sell our Off-net IP Stream base, rebrand our AOL base
and significantly reduce the number of consumer and B2B tariffs.
Our systems transformation will focus on a significant enhancement
of our CRM systems and upgrading our billing platform. We will be
leveraging our customer data to enable better targeted marketing
activity. There will be significant focus on improving our online customer
journeys to further encourage our customers to self-serve to both
reduce cost and improve customer experience. These initiatives are
expected to contribute towards further cumulative savings of over
£40m by FY17.

5. SAC reduction from lower churn and falling
costs per add
Reducing SAC is one of the key drivers of achieving our 25% EBITDA
margin target. We will reduce SAC through reducing churn, and
therefore will need to recruit fewer new customers, and through
reducing costs per add (CPA). We have made good progress on
both elements during FY14.

We continued to make significant progress in two of the leading
indicators of churn during the second half of the year, with customer
call volumes down 17.3% year on year and complaints to Ofcom down
by 31% year on year. In addition, we have continued to see materially
lower churn from customers taking additional products such as TV,
mobile and fibre. The most important effect is seen in our triple play
customers whose early-life churn is around half that of dual play
customers, with TV customers also reporting higher net promoter
scores and lower intention to churn. We have begun to see the impact
of these effects in our reported On-net churn which, having spiked at
1.7% in Q2, subsequently fell to 1.6% in Q3 and 1.5% in Q4.

As an illustration, reducing churn to 1.2% (the top end of the
0.8%–1.2% range that mature triple play operators report) over
the next three years, primarily by driving TV penetration across
the base and further improving customer service, would lead
to a cumulative saving of c.£30m over the period through fewer
gross adds.

We have also made significant progress in reducing CPA. TV CPA
fell during the year as planned, with the launch of our lower cost
Essentials proposition and growing self-installation of the service.
TV CPA across the second half of the year averaged c.£130 compared
to c.£170 in the first half. Similarly, broadband CPA fell from c.£190
in the first half to c.£180 in the second half as we increased online
recruitment activity and reduced third party commissions. We expect
these trends to continue through FY15 and beyond, with volume
related savings in hardware costs and increasing self-service driving
a cumulative saving in excess of £70m over the next three years.

TalkTalk Telecom Group PLC Annual Report 20146. Longer term opportunities for delivering
sustained growth
In April, we announced that we have joined forces with Sky and CityFibre
to create a new company that will deliver ultra-fast broadband
services in the city of York. The new joint venture company plans to
build a state of the art, city-wide, pure Fibre to the Premise (FTTP)
network to deliver broadband speeds of 1 gigabit (1,000Mbps) direct
to tens of thousands of homes and businesses in York, offering
customers better quality and value than is currently available with
Fibre to the Cabinet (FTTC).

This will be the first time that a UK city has been connected with such
high speeds on a city-wide basis and will give us the opportunity to
fully test a new cost effective approach to building a viable pure fibre
network, independent from BT Openreach’s infrastructure.

Our initial investment in the joint venture, which will see us deploying
to 20,000 homes, will be £5m. Subsequent investment to deploy
across the remainder of the city will be of similar order of magnitude.
We believe the economics of our approach to FTTP could prove highly
attractive, with a combination of scale and low cost build technology
delivering a significantly lower cost per home passed than for the
current FTTC infrastructure.

We expect to announce the process for selecting the next two
cities in due course, and are excited by the long term potential
for a national roll-out.

In conjunction with our plans to build a converged fixed-mobile offer
using our 4G spectrum and femtocells, such a national roll-out would
allow us to offer our customers seamless, unlimited and low cost
connectivity in their homes and businesses, and significant
opportunities to drive growth over the longer term.

Guidance
FY15
ƥ Customer numbers

We expect to deliver modest growth in net adds in FY15 and
a similar number of TV net additions to FY14.

ƥ Revenue, Overheads and Pre-SAC EBITDA

We expect FY15 revenues to grow by at least 4%, driven by modest
growth in customer numbers and ARPU, and growth in TalkTalk
Business revenues. We expect overheads as a percentage of
revenue to fall below the level reported for FY13, driving Pre-SAC
EBITDA margins ahead of those reported for FY13.

ƥ SAC & Marketing and Headline EBITDA

Based on current volume expectations and falling costs per add for
both broadband and TV customers, we expect SAC and Marketing
costs to fall year on year, driving strong growth in Headline EBITDA,
with margin in the range of 16%–17%.

ƥ Net debt

Capex is expected to be within our guideline of 6% of revenue and
working capital is expected to show outflows similar to FY14 as we
see continuing strong growth in FY15 whilst also reducing costs.

Cash exceptional items related to Making TalkTalk Simpler are
expected to be £20m–£25m.

ƥ Dividend

While we shall continue to invest in growth in FY15, we are confident
of achieving our medium term financial targets and, accordingly,
expect to grow the FY15 dividend by no less than 15%.

FY15–FY17
In November 2013, we raised our FY14–FY17 revenue CAGR target
from 2% to 4% and set our medium term EBITDA margin target of 25%
to be achieved by FY17. We remain confident that we are on track to
achieve both our revenue and margin targets.

We expect revenue growth to be supported by modest growth in total
customer numbers, ARPU progress from disciplined pricing and
promotional activity, and growing scale in TV, mobile, and fibre. We
also expect TalkTalk Business revenues to grow at a faster rate than
the Group average, driven by data products and new product innovation.

Revenue growth is a key component of our EBITDA margin target.
There are two other components: SAC and overhead reduction.

We expect to reduce SAC by requiring fewer gross adds to maintain
our customer base as a consequence of lower churn from growing TV,
mobile and fibre penetration and better customer service, and by
reducing costs per add as a result of increased levels of self-service
and, over time, the falling costs of technology to provide TV.

Our Making TalkTalk Simpler programme is a key enabler of overhead
reductions. This will make it simpler for our customers to engage with
us, whether it is to buy products and services, to manage their bills or to
resolve problems. To achieve this simplicity we will reduce the number
of tariffs and access methods we use; reduce the complexity of our
systems; make better use of data; and drive a self-service model.
These initiatives are expected to deliver further savings in excess
of £40m by FY17.

Dido Harding
Chief Executive Officer
14 May 2014

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 2014

Measuring our performance

We use the following key performance indicators (KPIs) to measure our progress against
our key strategic priorities.

NON-FINANCIAL METRICS

Broadband net adds (‘000)

On-net churn (%)

TV net adds (‘000)

Performance

9
1
-

4
-

0
1

8 5

0
1
1

0
1

6
.
1

.
1

4
.
1

.
1

6
.
1

.
1

0
8

0
5
1

0
6
1

7
6
1

5
7
1

5
8
1

Fibre and mobile net
adds (‘000)

Performance

Mobile

Fibre

4
3

5
3

2
3

7
2

3
2

4
42
2

5
1

2
2

1
2

2
2

7
4

5
3

0
3

4
2

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2013

2014

2013

2014

2013

2014

2013

2014

Definition
The net of new broadband
customers joining TalkTalk and
those leaving TalkTalk

Definition
The percentage of our On-net
customer base leaving TalkTalk

Definition
The net of new customers
joining TalkTalk TV and those
leaving TalkTalk TV

Definition
The net of new customers
connecting to fibre and mobile
and those disconnecting from
fibre and mobile

Comment
We have delivered positive net
adds growth in FY14. This is in
line with our stated objective of
modest base growth

Comment
After a spike in Q2, churn has
continued to fall back to levels
seen towards the end of FY13
consistent with improving
leading indicators such as
reduced call volumes and
complaints to Ofcom

Comment
Demand for TV accelerated this
year with the launch of our
Essentials proposition. The
growth reflects the investment
made in FY14

Comment
Growth in fibre remains
modest except where it can
deliver transformational
improvements in a customer’s
broadband experience

FINANCIAL METRICS

Revenue growth (%)

Corporate revenue (£m)

Pre-SAC and Marketing
EBITDA margin (%)

Headline EBITDA
margin (%)

Performance

.
1

.
1
-

1
.
0
-

0
5

4
-

0
4
-

0
8

2
8

0
8

2
8

7
8

1
9

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

6
9
2

1
.
3
3

7
9
2

.
1
3

8
7
1

0
7
1

0
9

5
1

2012

2013

2014

2013

2014

2013

2014

2013

2014

Definition
Total revenue growth on same
period in the prior year

Definition
Revenue from our Corporate
products including voice, data
and carrier services

Definition
Pre-SAC and Marketing EBITDA
as a percentage of revenue

Definition
Headline EBITDA as a %
of revenue

Comment
Acceleration of revenue growth
in FY14 driven by the upsell of
our customers onto TV, mobile
and fibre along with base growth
and price inflation

Comment
Acceleration in Corporate
revenues due to growth in
data products

Comment
Improvement in margin in H2 FY14
due to acceleration of revenue
growth and reduction in opex.
Temporary cost of scaling TV
has led to a decline year on year

Comment
Investment in scaling TV has
led to the reduction in EBITDA
margin in FY14. Investment
during the year was H1 weighted

TalkTalk Telecom Group PLC Annual Report 2014Chief Financial Officer’s statement

Overview
We delivered accelerating revenue momentum during the year as a
result of investing in TV and growth in our Corporate data business.

The benefit of this investment through H2 was an acceleration in
revenue growth from 1.8% in H1 to 5.0% in H2, delivering the first full
year of year on year revenue growth since demerger of 3.4%.

The full year EBITDA margin of 12.3% (FY13: 17.4%) also reflects this
investment in growth. The investment was weighted to the first half of the
year, resulting in an H1 EBITDA margin of 9.0%. The second half of the
year saw a significant improvement in margin, to 15.5%, as the benefits of
investment drove an acceleration in revenue growth and as we reduced
SAC and operating expenses.

Headline financial information

On-net

Off-net

Corporate

Revenue

Gross margin

Operating expenses excluding amortisation and depreciation

EBITDA pre-SAC and Marketing

SAC and Marketing

Headline EBITDA
%

Exceptional items

Statutory EBITDA
Depreciation and amortisation

Non-operating amortisation

Share of joint ventures

Operating profit
Finance costs

Profit before tax
Tax

Profit after tax

The strength in revenue growth this year and the uplift in profitability
in H2 underpins our confidence in achieving our medium term revenue
target of 4% CAGR and medium term EBITDA margin target of 25%.

At the same time as investing to grow the business we have delivered
on our dividend commitments. The proposed dividend for the full
year FY14 represents growth of 15.4% year on year, in line with our
commitment to grow the dividend for the year by a minimum of 15%.

2014
£m

1,259

128

340

1,727

958

55.5%

(427)

531

(318)

213
12.3%

(22)

191
(112)

(21)

(7)

51
(20)

31
(3)

2013
£m

1,170

178

322

1,670

919

55.0%

(395)

524

(234)

290
17.4%

299
(102)

(52)

(4)

141
(19)

122
(22)

100

Growth
(decline)

7.6%

(28.1)%

5.6%

3.4%

4.2%

8.1%

1.3%

35.9%

(26.6)%

(36.1)%
9.8%

(59.6)%

75.0%

(63.8)%
5.3%

(74.6)%
(86.4)%

(72.0)%

Revenue
Revenue grew 3.4% to £1,727m (FY13: £1,670m) and accelerated
during the year as the benefits of our investment in growth during the
first half materialised. Growth increased to 5.0% in H2 from 1.8% in H1,
the fifth successive quarter of revenue growth.

On-net revenues increased 7.6% to £1,259m (FY13: £1,170m). Growth
of 8.4% in the second half of the year (H1: 6.8%) was driven by take up
of TV, fibre and mobile, the increase in the size of the base, and price
inflation. On-net customers, those who are on our network, are able
to get the greatest value from us by taking more of our products and
are our most satisfied customers. The most significant driver of
growth has been through take up of TV, with net adds increasing
to 360,000 in H2 versus 327,000 in H1.

Corporate revenues delivered another strong year of growth, increasing
5.6% to £340m (FY13: £322m). Growth accelerated during the year,
with 9.9% in the second half versus 1.3% in H1. This was driven by the
accelerating growth in data product revenues, which increased from
27% year on year in the first half to 47% year on year in the second as
a result of significant new corporate customer wins during the year.
Overall data revenues grew 37.5% year on year. This has offset the
continued decline in legacy voice revenues driven by a move from
premium rate numbers, and the decrease in regulated call
termination rates.

Off-net revenues continued to decline this year as expected, reducing
by 28% to £128m (FY13: £178m) as a result of the continued decline
in our voice only and Off-net broadband bases.

Gross margin
Gross margin continued to expand during the year, increasing from
55.2% in H1 to 55.8% in H2, increasing our full year gross margin by
50 basis points to 55.5% (FY13: 55.0%) and delivering a gross profit
of £958m (FY13: £919m).

This has been driven by the increased proportion of our customers
on our network, the shift in our TalkTalk Business towards higher
margin data products, the benefit of reduced regulatory pricing from
1 April 2013, alongside price inflation, partially offset by the impact
of declining high margin Consumer voice-only revenues, and the
increase in lower margin fibre, TV content and wholesale services.

Operating expenses
Operating expenses increased to £427m (FY13: £395m). The increase
has been driven by the temporary operating costs of scaling TV, which
principally comprised additional costs to serve that we do not expect
to recur in FY15 as our new products become established. Incremental
annualised benefits of £14.5m have been delivered in the year from our
operating efficiencies programme, Making TalkTalk Simpler. We have
continued to invest in our network capacity to provide the increased
bandwidth and greater resiliency that our customers require.

SAC and Marketing
SAC and Marketing spend increased to £318m (FY13: £234m) as we
invested to deliver revenue growth. The investment was H1 weighted
with a total spend of £174m, reducing to £144m in H2. Spend on acquiring
new TV customers of £53m was no more in H2 FY14 than in H2 FY13,
despite the significantly higher volumes. Cost per add declined with the
launch of Essentials TV and the move to self-install. Broadband cost
per add also declined in H2 as more customers were acquired online.

EBITDA
EBITDA decreased to £213m (FY13: £290m) reflecting an EBITDA
margin of 12.3% (FY13: 17.4%). Incremental investment in growth of
£112m impacted the profile through the year, with a 9.0% EBITDA
margin in H1 improving significantly to 15.5% in H2 as the benefits of
investment drove revenue growth and overall SAC spend declined.

Exceptional items
The net exceptional charge in the year of £22m (FY13: credit £9m)
comprised £20m of investment in our Making TalkTalk Simpler operating
efficiency programme (FY13: £7m), where activity increased during
the course of the year as we began implementations, a charge of £5m
arising from a change in allowable VAT treatment in relation to prompt
payment discounts during the year, offset by the receipt of a credit of
£3m (FY13: £27m) from BT in settlement for the overcharging of
wholesale Ethernet circuits.

Statutory EBITDA
Statutory EBITDA after exceptional items has decreased year on year
by £108m to £191m (FY13: £299m), with the significant improvement
from H1 of £68m to £123m in H2 driven by the improvement in
Headline EBITDA, offset by an increase in our exceptional costs
during the second half of the year as we increased activity on
Making TalkTalk Simpler and from the change in VAT treatment
relating to prompt payment discounts.

Depreciation and amortisation
Depreciation and amortisation charges increased to £112m (FY13: £102m)
as a result of continued capital investment in the network and IT systems.

Amortisation of acquisition intangibles
The amortisation charged on acquisition intangibles decreased to
£21m (FY13: £52m) as the AOL customer base acquired in 2006
became fully amortised in FY13.

Statutory profit before tax
Profit before tax decreased £91m year on year to £31m (FY13: £122m),
reflecting the reduction in statutory EBITDA and the increase in
depreciation, offset by a lower amortisation charge.

Earnings per share

Headline earnings (£m)
Basic EPS

Diluted EPS

Statutory earnings (£m)
Basic EPS

Diluted EPS

2014

61
6.8p

6.6p

28
3.1p

3.0p

2013
132
14.9p

14.0p

100
11.3p

10.6p

Growth
(decline)
(53.8)%
(54.4)%

(52.9)%

(72.0)%
(72.6)%

(71.7)%

EPS on a Headline basis is provided alongside our statutory measures
to allow easier comparison year on year, due to the impact of
exceptional items.

Headline EPS decreased to 6.8p (FY13: 14.9p), driven by the decrease
in EBITDA as a result of investing in growth, with the profile during the year
showing a significant improvement from 0.8p in H1 to 6.8p for the full year.
The basic number of shares increased to 901m (FY13: 884m), driven
primarily by the 23.7m shares which were issued in November 2013.

Statutory EPS decreased to 3.1p (FY13: 11.3p).

Cash flow and net debt

Headline EBITDA

Working capital

Capex

Operating free cash flow
Exceptional items – BES

Exceptional items – VAT

Exceptional items –
Operating effiencies

Acquisitions and disposals

Dividends paid

Interest and tax

Net purchase of own shares

Net cash flow
Opening net debt

Closing net debt

2014

213

(30)

(107)

76
3

(5)

(21)

(8)

(99)

(17)

(33)

(104)
(393)

(497)

2013

290

Growth
(decline)

(27)%

(11)

>100%

(104)

175
27

–

(19)

(4)

(87)

(16)

(35)

41
(434)

(393)

(57)%

11%

100%

14%

(6)%

>100%

(9)%

26%

TalkTalk Telecom Group PLC Annual Report 2014
Working capital
Our working capital outflow of £30m (FY13: £11m) has been driven by
the accelerated revenue growth in the second half of the year offset
by an increase in current liabilities as a result of the weighting of
capital investment and the Group’s investment in growth.

Capital expenditure
Capital expenditure in the year of £107m (FY13: £104m) represents
6.2% of revenue (FY13: 6.2%). During the year we continued to invest
in the network, rolling out to a further 303 exchanges, and increased
network capacity to 1.2tb (FY13: 0.9tb), alongside investing in IT
systems to support continued growth.

Exceptional items
Net spend on exceptional items of £23m (FY13: inflow of £8m) was
driven by £21m of costs associated with our operating efficiencies
programme, Making TalkTalk Simpler, including redundancies, site
closure, consultancy and project team costs, and the £5m payment
to HMRC in respect of the VAT treatment change during the year.
Offsetting this was £3m received from BT in settlement for the
overcharging of certain wholesale Ethernet circuits.

Acquisitions
Acquisitions in the year of £8m (FY13: £4m) represents a £5m investment
in the YouView joint venture (FY13: £6m) and £3m completing the
acquisition of Future Office Communications Limited.

Dividends
Our dividend policy is to return to shareholders 50% of basic Headline
earnings per share in the form of ordinary dividends. As a result of the
impact on Headline earnings of our investment in TV, we committed
to dividend growth at a minimum of 15% for FY14.

Dividends of £99m paid in the year (FY13: £87m) comprised the final
dividend for FY13 of 6.95p and the interim dividend for FY14 of 4.0p.

The Board has declared a final dividend of 8.0p which will be paid,
subject to approval at the AGM on 23 July 2014 for shareholders on
the register at 4 July 2014. The total declared dividend for the year
was 12.0p, which provides dividend cover of 0.6 times (FY13: 1.4 times).

Share purchases
In September 2013, the second tranche of both the TalkTalk Group
Value Enhancement Scheme and the Carphone Warehouse TalkTalk
Group Value Enhancement Scheme (together referred to as ‘VES
schemes’) vested. As part of this, we purchased the participant’s VES
shares in return for a combination of the issue of new PLC shares and
cash resulting in a cash outflow of £15m (FY13: £35m).

Share repurchases totalling £24m (10 million shares) were made
during the year (FY13: £nil) by the Employee Benefit Trust in order
to cover anticipated future options exercises. Offsetting this, the
trust received £6m on the exercise of options by employees.

Net debt
Net debt in the year increased by £104m (FY13: reduction of £41m)
to £497m (FY13: £393m). Our net cash outflow of £104m (FY13: inflow
of £41m) was H1 weighted as we invested for growth and paid the final
dividend for FY13, driving an outflow in H1 of £80m. The H2 outflow of
£24m was driven by the improvement in operating free cashflow as a
result of improved EBITDA.

Taxation and treasury

Operating profit
Finance costs

Profit before tax
Tax

Profit after tax
Headline tax rate

2014

2013

Headline

Statutory

94
(20)

74
(13)

61
18%

51
(20)

31
(3)

Headline
184
(19)

Statutory
141
(19)

165
(33)

132
20%

122
(22)

100

Finance costs
Net finance costs of £20m (FY13: £19m) comprised the blended
interest charge on debt of 3.39% (FY13: 3.58%) alongside the
amortisation charge in relation to facility fees of £3m (FY13: £3m).

Net interest paid in the year increased to £17m (FY13: £16m),
principally driven by higher interest payments as a result of higher
average net debt.

Taxation
Our effective Headline tax rate for the year was 18% (FY13: 20%),
representing a tax charge of £13m (FY13: £33m). The tax charge for
the year on statutory earnings was £3m (FY13: £22m). The principal
differences between the tax charge and the standard rate of corporation
tax are the recognition of deferred tax assets on a further £45m tranche
of acquired Tiscali losses, offset by the impact of a 3% reduction in
the statutory tax rate (21% from 1 April 2014 and 20% from 1 April 2015
– previously 23%). The rate reduction has had the effect of the
revaluation of our deferred tax assets downwards and has therefore
resulted in a £16m charge through the income statement.

We have made no corporation tax payments during the year (FY13: £nil).

Funding
Operations are financed with committed bank facilities, retained
profits and equity. During the year, we made use of overdrafts and
uncommitted facilities to assist with working capital management.
Subsidiaries are funded centrally, with an emphasis on efficient
cash management.

Funding comprises a £560m revolving credit facility, which matures
in November 2015, a £30m bilateral loan facility that matures in
March 2015, and a £75m term loan that matures in November 2015.
The terms of our facilities are similar and the covenants are identical.
At 31 March 2014, £490m (FY13: £400m) had been drawn down under
these facilities.

We are in compliance with the covenant conditions on all funding
facilities at the year end. It is our policy to refinance our facilities
significantly in advance of maturity dates, and we have commenced
re-financing discussions ahead of the expiry of current facilities.

Movement in reserves
The purchase of shares by the Employee Share Ownership Trust and
the exercise of options by employees resulted in a net movement in
reserves of £30m.

Going concern
The Directors have acknowledged the guidance ‘Going Concern and
Liquidity Risk: Guidance for Directors of UK Companies 2009’,
published by the FRC in October 2009.

Policy
We are exposed to limited cross border transactional commitments
and these are hedged using forward currency contracts. Interest rate
risk is managed by the use of interest rate swaps. The Group aims to
fix the interest cost on a proportion of its net debt over a weighted
average period, as agreed from time to time. The Group Treasury
function operates within the framework approved by the Board,
in line with best practice, to ensure effective management of our
interest and foreign exchange risk.

Capital structure
The Board reviews the capital structure of the Group on an annual
basis. Net debt/EBITDA at 31 March 2014 was 2.3 times (FY13: 1.4 times),
driven primarily by the Group’s investment in growth and an increased
dividend pay-out. The Board is confident that this will fall over the
medium term and that such a reduction will make it appropriate
to consider a return of excess capital to shareholders in order
to maintain an efficient capital structure.

Accounting developments
The adoption of accounting standards in the year has had no material
effect on the financial statements.

Our business activities, together with the factors likely to affect
our future development, performance and position are set out
in the Business Review. Our financial position, cash and borrowing
facilities are described within this Chief Financial Officer’s statement.
In addition, note 19 in the financial statements describes how we
manage financial risk, including foreign exchange risk, interest risk
and liquidity risk.

The breadth of our base, our value for money proposition, continuing
improvements in operating efficiency and the largest unbundled
network in the UK mean that the Directors are confident in our ability
to continue to compete effectively in the UK telecoms sector.

We have £665m of committed credit facilities and as at 31 March 2014
the headroom on these facilities was £175m. Our forecasts and
projections, taking in to account reasonably possible changes in
trading performance, indicate that there is sufficient headroom
to our facilities and that this, together with our market positioning,
means that we are well placed to manage our business risks successfully
and have adequate resources to continue in operational existence
for the foreseeable future. The Directors have therefore adopted
the going concern basis of accounting when preparing the
consolidated financial statements.

Stephen Makin
Chief Financial Officer
14 May 2014

TalkTalk Telecom Group PLC Annual Report 2014

People

We have an ambitious approach to engaging with our employees. We have protected
and developed our unique culture, expressed in our mission to ‘Make Britain better off’
and the values by which we do this, our ‘Brighter Basics’ – Customer, Innovate, Value,
People and Community

In FY14 we again saw a significant increase in employee engagement,
a key contributor to our success as a business.

Leadership development
We recognise that the quality of our managers is vital to our future
success and we have continued our commitment to leadership
development through our ongoing programme ‘Leading a Brighter
Business’. A total of 550 of our managers have now completed
four parts of the modular programme and are demonstrating
measurable improvements in leadership capability. The programme
will continue in FY15.

Employee engagement
Our engagement survey and action plan enable us to listen and respond
to our employees and help us to create and sustain an environment
where they are motivated, stay with us and enjoy working for TalkTalk.

Following our first survey in December 2011, we committed to specific
actions that would enable higher levels of employee engagement.
The annual survey was repeated in January 2014 with greater participation
(92% vs 89% in FY13) and a 6% increase in the overall engagement score.

Employee performance and development
We have continued to build tools to support employee development.
TalkTalkU is our online hub for all learning and development and includes
extensive face-to-face and eLearning options. It has now had over
30,000 visits from our employees. Our annual performance management
process has continued to provide a mechanism to drive achievement
with all employees participating in a performance related variable
bonus pay scheme.

Employee recognition
Recognising employees who drive our culture by actively demonstrating
our Brighter Basics is extremely important to us. Our ‘OntheSpot’
award scheme enables senior managers to give instant recognition to
employees, while our highly popular ‘TalkTalk Heroes’ scheme allows
employees to nominate colleagues for their outstanding contribution
in a wide range of areas, from charity work to customer engagement.

Employee benefits and share ownership
We offer a comprehensive range of flexible employee benefits, which
we are continually improving, so employees can make choices to suit
their lifestyles.

Share ownership is an important part of our culture. In September 2012,
we issued every employee, who was not currently part of another
share option plan, with a one-off gift of 1,000 nil priced share options
through the ‘All Employee Share Option Award’. This is in addition
to the annual TalkTalk SAYE Scheme, in which over 50% of our
employees participate.

We believe in our employees being users of, and advocates for,
our products. In FY14, we continued to offer free home phone,
broadband, fibre and TV, as well as half-price mobile packages.

Employee consultation – One Voice forum
One Voice is a consultation and information forum consisting of
80 nominated employee representatives, management and
members of our People Services team. The forum meets regularly
to discuss how the key issues we face as a business might affect
our employees and to discuss relevant employee matters.

Employee communication
We communicate with all employees on a weekly basis via ‘TeamTalk’,
a newsletter that incorporates various updates from across the
business. The weekly blog from Dido Harding continues to be popular
with employees, allowing for communication and feedback on topical
issues in the Group.

In June 2013, we brought every UK-based employee together for a
one day conference, following which 87% of attendees said that they
had a better understanding of TalkTalk’s strategic priorities. We have
repeated this event in May 2014.

The Wire
In FY15, we will be introducing a new intranet site, which we see as a critical
communication and collaboration tool for the business. It will enable
colleagues to find each other easily, keep up to date on Company news
and work together by sharing documents in dedicated workspaces.

Gender and diversity
We benefit enormously from our diverse workforce; our people
come from different backgrounds and cultures, creating a vibrant
working environment that thrives on new ideas and fresh thinking.

The importance of diversity, equality and non-discrimination is
highlighted in our Equality Policy and underpinned by our values,
which guide the respectful way we behave towards each other.
A breakdown by gender of the number of persons who were
Directors of the Company, senior managers and other employees
as at 31 March 2014 is set out below.

Directors

Senior management
team

All TalkTalk
employees

761

1,458

� Male � Female

Effective risk management is essential to the continued successful delivery of our strategy

In common with other organisations, we are affected by a number of risks, not all of which are in our control. Some risks, such as
UK macroeconomic factors, are likely to affect the performance of UK businesses generally, while others are particular to our operations.
This section sets out the material risks to the Group and how we seek to mitigate them in the day to day running of our business.

Competitive
environment

Potential impact: Increased
competition in the UK phone,
broadband and TV (triple play) market
may impact financial performance.

Mitigation: We regularly monitor the
product offerings of our key competitors
as well as the latest market and consumer
trends. This ensures we identify
opportunities to strengthen our

competitive position by broadening
and enriching the products and services
we offer and by finding ways to deliver
greater value for our customers. In FY14,
TalkTalk has continued to build on the
successful launch of its TV service
as part of the YouView joint venture,
having acquired a TV customer base
of close to 1 million by the end of FY14.
The Consumer business also has a

sizeable mobile base of c.280,000
customers through its Mobile Virtual
Network Operator proposition. These
product offerings enable the business to
compete more effectively with other
triple and quad play providers in the
marketplace.

Regulatory
environment

Potential impact: Changes in BT’s
regulated wholesale prices can
significantly impact the Group’s
performance.

Mitigation: We have continued to actively
participate in Ofcom’s consultations
impacting on wholesale prices, especially
the Fixed Access Market Review and

Local Loop Unbundling/Wholesale Line
Rental Charge Control. In particular, we
have provided Ofcom with evidence,
argument and expert opinion to support
the case that competition, consumers’
interests and the development of a mass
market for super-fast broadband will be
best served by reductions in wholesale
prices or, in the case of fibre, a wider

margin between wholesale and retail
prices. In addition, the Group continues
to work with Openreach to develop fibre
products that incur lower set up and
provisioning costs, which will allow
wholesale prices to reduce further.

Regulatory
compliance

Potential impact: Failure to operate
effective processes and controls
across the Group may have an adverse
impact on the services we deliver to
our customers, leading to churn and
non-compliance with regulatory
requirements. The fines that Ofcom
can impose on the Group and the
associated negative publicity
could adversely impact our brand
and reputation.

Mitigation: There has been continued
focus this year on improving processes
and controls and clarifying lines of
accountability both in first line operations
and in our second line assurance function.
There has been significant progress
with delivering improvements in our
complaints handling processes during the
period. This has resulted in a significant
reduction in the overall volume of Ofcom
complaints from our customers and in

our market share of complaints for the
sector. The Group’s Regulatory Compliance
Committee 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 Director
of Quality & Compliance has chaired a
weekly operational Compliance Committee
meeting throughout the year, attended
by senior executives.

Change
management

Potential impact: We continue
to review, rationalise and integrate
our IT infrastructure to simplify the
way in which we operate our business.
This could have an adverse impact on
the services we provide to our customers
and on our financial performance.

Mitigation: The Executive Committee
regularly monitors progress of significant
change programmes and the associated
risks. The Group Change Forum, comprised
of senior managers, is responsible for
establishing and monitoring adherence to
the governance framework within which
change is managed.

TalkTalk Telecom Group PLC Annual Report 20145 Data security

Potential impact: Failure to prevent
the loss or exploitation of personally
identifiable or commercially sensitive
information could result in loss of
competitive advantage, regulatory
fines, damage to the brand and
ultimately churn.

Mitigation: The Group continually
reviews and seeks best practice

external guidance on its data security
capability and invests in and implements
new solutions, both to prevent and detect
security breaches. In FY14, there have
been initiatives including increased
hardware and removable media
encryption, further enhancements
to the Group’s data loss prevention
capability and roll-out of advanced
solutions to protect customer credit

card details. The Group has also adopted
a ‘Ten Steps to Cyber Security’ programme,
to increase protection against intrusion
and attack; improve detection and
management of breaches; and increase
protection against loss of personal data.
The Data Governance Council meets
monthly to review progress against the
risk mitigation plans aligned to the Ten
Steps to Cyber Security.

Network
stability and
resilience

Potential impact: Failure to maintain
sufficient and acceptable levels of network
and system performance for the Group’s
Consumer and Business customers could
lead to complaints and ultimately churn.

Mitigation: There has been significant
focus during the year on ensuring optimum
levels of capacity are delivered and
maintained to ensure no congestion
is experienced by our customers.
We launched a Technical Excellence
programme, which has delivered a number

of significant improvements in the
infrastructure’s ongoing growth
and management.

Key suppliers

Potential impact: The business has
a number of critical suppliers, the
performance of which could significantly
affect the business’s operational and
financial performance.

TalkTalk relies on a number of key suppliers
to provide network, equipment and
services. A failure in their people,
systems or processes or a failure to act
in an ethically responsible manner could
significantly affect TalkTalk’s reputation
and its ability to deliver products and
services to its customers.

Mitigation: We continue to review and
improve our processes and controls
around supplier selection and in-life risk
management. This helps to reduce the
likelihood and potential impact of business
interruption due to supplier failure.

Customer
experience

Potential impact: Failure to deliver
a seamless and positive end-to-end
experience of TalkTalk’s products and
services and to deal with customers’
queries and complaints effectively could
damage our brand and lead to churn.

Mitigation: We are committed to
continually reviewing and improving the
level and quality of customer service we
provide. This financial year, we have
delivered a number of initiatives to i)
reduce the likelihood of customers
experiencing service issues, ii) improve

the ability of our customers to self-help
via the launch of a new Online Service
Centre and associated diagnostic tools
and iii) deliver better training and tools
to our Customer Service teams so that
queries and complaints can be handled
more effectively.

Scaling TV

Potential impact: Now that TalkTalk has
successfully established its TV proposition,
the business must ensure it can continue
to build scale effectively. Failure to closely
monitor our customers’ experience of our
TV service and constantly improve service
performance and the quality and value
of our content offering could adversely
impact our brand and reputation, leading
to churn.

Mitigation: In FY14, we launched a lower
priced TV proposition for our Essentials
customers. As functionality grows, we
continue to focus on maintaining the
speed and performance of the set-top
box through an extensive customer
feedback programme, benchmarking
tests and field research. We continually
develop and renew our partnerships with
over 40 content providers to ensure a

broad range of family entertainment as
we build scale. In addition, our YouView
partnership has been extended for
another five years. Finally, we continue
to improve the customer experience –
our self-install proposition is now our
customers’ preferred set-up method
and we have also developed propositions
and services for customers requiring
wireless connectivity.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 2014Sustainability review

Helping make Britain better off through digital inclusion, environmental
sustainability and stronger communities

Our Community Brighter Basic sets out our belief that it’s not just
about the money. We believe that innovative digital communications
can improve our society and environment and make Britain better off.

Our strategy is to help make our community a brighter place by
motivating our people, our customers and supply partners,
and by creating innovative products and services that empower
our customers.

Child internet safety
Households and businesses are connecting ever more devices to the
internet, and we want to empower our customers to protect themselves
from security risks and inappropriate content. We offer HomeSafe™,
which automatically protects every device on a home broadband
connection, free with all our Consumer broadband packages.
HomeSafe™ is built into our network and prevents users from reaching
sites in categories they deem inappropriate. It is also capable of
automatically blocking access to sites that are believed to harbour
viruses or other security threats. HomeSafe™ was the first of its kind in
the UK and has now been activated by over 1 million TalkTalk customers.
In FY13, we tailored a similar service specifically for Business customers
called WorkSafe. This service is free with all Business Broadband and
Superpowered Fibre Business Broadband services.

As well as offering our customers the safety they deserve online, we
have also trained colleagues on internet safety so they can help their
local communities. We supported Safer Internet Day through our
partnerships with F-Secure, the UK Council for Child Internet Safety
and Mumsnet, and we hosted internet safety workshops at various
UK Online Centres in London and Irlam.

In FY14, we announced that we are joining forces with other ISPs to create
and fund a new multi-million pound campaign aimed at parents, to
raise awareness of how to tackle issues including cyber-bullying and
access to adult content online. This new joint venture, Internet Matters,
will also inform parents about whole-home parental controls like
HomeSafe™, helping them make the right choices for their household.

Digital inclusion
Launching the TalkTalk Digital Heroes Foundation
TalkTalk passionately believes that the internet makes Britain better
off and that no one should be excluded from all the benefits that it
has to offer. Since 2011,TalkTalk has been supporting and celebrating
various projects, charities and individuals who are using digital
technology at a very local level to make a positive social impact.

In November 2013, TalkTalk decided to take this one step further
and launched the TalkTalk Digital Heroes Foundation. Through the
Foundation, we aim to better support TalkTalk’s community initiatives,
including the annual TalkTalk Digital Heroes Awards, our annual Digital
Heroes Auction as well as two annually elected hero projects. We will
also engage our people in supporting the work of the Foundation
through volunteering opportunities as part of our Give Something
Back employee scheme.

TalkTalk Digital Heroes Awards 2013
We continue to run our flagship annual awards in partnership with
charity Citizens Online and the Daily Mirror. The awards aim to reward
and celebrate individuals, nominated by their communities, who use
digital technology in the most socially positive way at a very local level.
This year we awarded over £70,000 in grants and prizes to twelve
regional winners.

The judges were our Chairman, Sir Charles Dunstone, the UK’s Digital
Champion, Baroness Lane Fox, and the editor of the Daily Mirror,
Lloyd Embley. They crowned Scott Freeman of the Cybersmile
Foundation as the national TalkTalk Digital Hero 2013 and awarded
him a £10,000 prize. Scott was recognised for his outstanding work
developing the Cybersmile Foundation, the UK’s first dedicated
cyber-bullying charity. The category of Young Digital Hero, open to
anyone under 18, was won by Chelsi Jade Beale. This important and
coveted prize awarded Chelsi £4,000 funding for her project, which
provides computer training and support to elderly residents living in
sheltered accommodation.

Ambitious about Autism
This year we continued our support for long term partner Ambitious
about Autism, the national charity for children and young people with
autism. They provide services, raise awareness and understanding,
and campaign for change. Talk about Autism is their safe, friendly,
online community where affected families can share their experiences,
get support and help others to understand the condition. We raise
funds for this worthy cause and its online platform through the
TalkTalk Digital Heroes Auction every November, where FY14 saw
a tremendous £300,000 generated (FY13: £220,000).

Apps for Good
One of our Digital Heroes Foundation hero projects chosen this year
is the charity Apps for Good, which works with schools to teach young
people to create mobile and social apps to solve problems that matter
to them. Like us, they believe in the power of using the internet to
make our communities a better place. As part of our partnership, we
fund four schools around our sites to run the Apps for Good course
and we sponsor an awards category in their annual awards. Over
6,000 Apps for Good students enter to compete in six categories
sponsored by TalkTalk and others including Barclaycard and BlackBerry.

Code Club
Code Club, our second annual hero project, connects primary schools
with volunteers who want to run a weekly after school coding club for
nine and ten year olds. Code Club provides the lesson structures for
the volunteers and the aim is that after two years of the course, every
child will be able to build their own website or app themselves. Claire
Sutcliffe, the co-founder of Code Club, was our national Digital Heroes
Award winner in 2012.

TalkTalk Digital Champions
The Digital Champions programme was launched last year as part of
our wider employee community scheme, Give Something Back, which
gives all employees paid time off to volunteer and fundraise for good
causes. Working with UK Online Centres this year, we have trained over
50 employees across the UK to become TalkTalk Digital Champions.
Our Digital Champions are matched with their local UK Online Centre,
so they can pass on their basic online skills to help more people get
online and enjoy the benefits of the internet. Since the programme
was launched we have now fulfilled over 60 volunteering opportunities
in UK Online Centres across Britain.

Environmental sustainability
Greenhouse gas emissions
This section includes our mandatory reporting of greenhouse gas
emissions pursuant to the Companies Act 2006 (Strategic Report
and Directors’ Report) Regulations 2013 (the ‘Regulations’) from
activities for which the Group is responsible.

TalkTalk Telecom Group PLC Annual Report 2014Environmental sustainability continued
Reporting year
Our reporting year is the same as our fiscal year, being 1 April to 31 March.
This greenhouse gas reporting year has been established to align with
our financial reporting year.

Global greenhouse gas emissions data
For the year ended 31 March 2014:

Emissions from:

Combustion of fuel and operation of facilities

Electricity, heat, steam and cooling purchased
for own use

Company’s chosen intensity measurement:
Emissions reported above, normalised to tonnes of
CO2e per average gigabit of bandwidth* (tCO2e/Gb)

Tonnes of CO2e
1,999

15,711

* Average gigabit of bandwidth for the year ended 31 March 2014 is 746Gb/s.

Total CO2e by emission type

11%

89%

� Combustion of fuel and
operation of facilities

� Electricity, heat, steam
and cooling purchased
for own use

Organisation boundary and responsibility
We report our emissions data using an operational control approach
to define our organisational boundary, which meets the definitional
requirements of the Regulations in respect of those emissions for
which we are responsible.

We have reported on all material emission sources, which we deem
ourselves to be responsible for. These sources align with our operational
control and financial control boundaries. We do not have responsibility
for any emission sources that are beyond the boundary of our
operational control.

Methodology
We have used the main requirements of the Department for
Environment Food & Rural Affairs (Defra) updated greenhouse gas
reporting guidance, Environmental Reporting Guidelines, issued by
Defra in June 2013; data gathered to fulfil our requirements under
the CRC Energy Efficiency Scheme; and emission factors from the
Department of Energy & Climate Change/Defra’s 2013 update.

The Group’s journey to improve carbon efficiency began in 2011 when
our Chief Executive Officer set our objective: to reduce our CO2 emissions
intensity, in tonnes of CO2 equivalent per gigabit (tCO2e/Gb), by 25%
by April 2021, relative to FY11.

The scope of emissions captured by this objective is more wide
ranging than those required to be disclosed as part of the Regulations.
The scope is extended to include CO2 emissions from all sources
including those for which the Group is not directly responsible
(including, for example, commercial flights).

Our internal tracking also shows that our approach is working, as
despite growing the network in line with customer usage and volume,
we have improved energy intensity for the third year running:

tCO2e/Gb
Energy(1), transport(2) and hotels

2014

2013
145

2011
317

(1) Primarily electricity, but also some natural gas and back up generator fuel.
(2)

Includes rail, air and car travel.

100% renewable electricity
All of the units of electricity consumed by our NGN, offices and UK
call centres come from renewable sources.

Sustainable forestry
We display FSC and PEFC certification marks on the envelopes of our
consumer direct marketing and bills, recognising our decision to source
paper from certified sustainable sources. In fact, where possible, we
replace printed materials with an online equivalent. This Annual Report
is printed on certified 100% recycled paper.

Community investment
During the year, the Group was responsible for generating £640,800
(2013: £517,700) of income for registered charities, including £340,800
of direct cash donations (2013: £283,200). The Group did not make
any political donations in the current or prior year.

We focus primarily on providing time and money via engagement with
three key stakeholder groups:

Engaging with our supply partners
In November 2013, TalkTalk hosted our fourth annual fundraising
auction on behalf of Ambitious about Autism. This year we re-focused
as ‘the TalkTalk Digital Heroes Auction’: an evening to celebrate
TalkTalk Digital Heroes and benefit Ambitious about Autism’s exciting
digital project, TalkTalk about Autism’ to align with our overarching
sustainability strategy. Our supply partners were invited to attend,
with many donating unique lots for the auction.

Engaging with our customers
We continued three customer driven cause related fundraising
initiatives established last year.

ƥ The first was our commitment to donate to Ambitious about Autism
for every call made to our UK directory enquiries number: 118 111.

ƥ Our second initiative continued to reward customers who return to
us routers that have been diagnosed as end of life. We pay for the
postage, refurbish or safely recycle the equipment and then donate
£1 to charity on their behalf.

ƥ Our third initiative is a donation to the charity Cool Earth when
customers added our unique Global Minutes Boost option to
their phone package. Cool Earth is the only charity dedicated
to protecting endangered rainforests through engagement
with indigenous communities, one of the most effective ways
to minimise CO2 reaching our atmosphere.

Engaging with our colleagues
The Group’s Give Something Back initiative includes Company
donations for our people who raise funds for a registered charity.
Hundreds of our people took part in fundraising over the year.

Other achievements
in the year

We retained both our FTSE4Good Index membership and Carbon Saver Gold Standard certification

Chairman:
Sir Charles Dunstone
Sir Charles is the founder of Carphone Warehouse and created TalkTalk in 2002. He was appointed Chairman of TalkTalk in 2010. Sir Charles has directed
the development of TalkTalk to become one of the leading fixed line telecommunication businesses in the UK. Sir Charles is Chairman of the Prince’s Trust,
YouView TV Limited and Carphone Warehouse Group PLC.

Executives:
Dido Harding
Dido has been Chief Executive Officer of TalkTalk since February 2010. Prior to that,
Dido was Sainsbury’s Convenience Director, having been appointed to Sainsbury’s
operating board in March 2008. Dido joined Sainsbury’s from Tesco PLC where she
held a variety of senior roles. Dido is a Non-Executive Director of The British Land
Company PLC and is a Trustee of Go On UK.

Stephen Makin
Stephen joined the Board as Chief Financial Officer of TalkTalk in 2013. Stephen
is a Chartered Management Accountant with over 15 years of experience in senior
finance roles, most recently at Shop Direct where he was Chief Financial Officer.
Prior to that, he was Chief Executive Officer and Chief Financial Officer of London
listed Umbro PLC, until its acquisition by Nike in 2008. Stephen spent the early part
of his career at Asda, where he held a series of senior finance positions.

Non-Executives:
John Gildersleeve
John joined the Board in January 2010. He is currently Chairman of The British
Land Company PLC and deputy Chairman of Carphone Warehouse Group PLC.
Previously he was an Executive Director of Tesco PLC.

John Allwood
John joined the Board of TalkTalk in 2010. He has spent his entire career in media
and telecoms and held a number of senior executive positions in these sectors
including Chief Executive of Orange UK, between 2000 and 2004. Prior to that
John spent eight years at Mirror Group PLC as Finance Director and Chief
Executive. After leaving Orange he was Managing Director of Telegraph Media
Group, and Chief Operating Officer and Finance Director of Mecom Group PLC.
John is Non-Executive Director of Carphone Warehouse Group PLC and a
Governor of Exeter University.

Sir Howard Stringer
Sir Howard joined the Board in July 2012. Until June 2013, he was Chairman of
the Board of Directors of Sony Corporation. Prior to his appointment as Chairman,
Sir Howard was President and CEO of Sony Corporation. Before Sony Corporation,
Sir Howard had a distinguished 30 year career as a journalist, producer and
executive at CBS Inc. After seven years as President of CBS Inc, Sir Howard
was Chairman and CEO of TELE–TV, the media and technology company
formed by Bell Atlantic NYNEX and Pacific Telesis.

Joanna Shields
Joanna joined the Board in May 2013. She is a Non-Executive Director
of London Stock Exchange Group PLC and Chief Executive of Tech City UK
and Business Ambassador for Digital Industries. She previously held senior
executive roles at Facebook, RealNetworks, Google and Bebo.

Ian West
Ian joined the Board in February 2011. He has been involved in the TMT sector for
around 25 years as a manager, director and investor. Ian held numerous roles at
British Sky Broadcasting over eleven years, latterly as Managing Director of the
Sky Digital subscription business. Ian is also currently an investor in a range of
small and medium sized businesses and co-founded Top Up TV in 2003.
Ian was a supervisory board member of Kabel Deutschland.

Brent Hoberman
Brent joined the Board of TalkTalk in January 2010. Brent co-founded lastminute.com
in 1998, and was its Chief Executive Officer until it was sold in 2005. He has subsequently
founded and is Chairman of mydeco and made.com, and also co-founded
PROfounders and Founders Forum. Brent is a Director of easyCar.com and is a
Non-Executive Director of Guardian Media Group, Time Out Group and Shazam.

James Powell
James joined the Board in July 2012. James is Chief Technology Officer of
Thomson Reuters. In his 14 years at Reuters, James held a number of senior
leadership positions including CTO for Enterprise; CTO and Global Head
of Product Development; Head of Technology Strategy; and CTO for the
Reuters Financial division. He has also held senior leadership positions at
Solace Systems, Citadel Investment Group and TIBCO Finance Technology.

Advisors
Company Secretary
Tim Morris

Advisors
Principal bankers:
Royal Bank of Scotland Group PLC
DNB Bank ASA
Barclays PLC
HSBC Bank PLC
Lloyds TSB Bank PLC

Corporate brokers:
Credit Suisse (Europe) Limited
1 Cabot Square, London E14 4QJ

Barclays Capital
5 The North Colonnade
Canary Wharf, London E14 4BB

Registrars:
Equiniti Limited
Aspect House, Spencer Road
Lancing, West Sussex BN99 6DA

Auditor:
Deloitte LLP
2 New Street Square
London EC4A 3BZ

TalkTalk Telecom Group PLC Annual Report 2014Corporate governance

Introduction
The Board is committed to the highest standards of corporate
governance and in accordance with the Listing Rules of the UK Listing
Authority, the Board confirms that the Company has throughout the year
and as at the date of this Annual Report, complied with the provisions
set out in the UK Corporate Governance Code (the ‘Code’).

This section of the Annual Report, together with the Strategic Report,
provides details of how the Company has applied the principles and
complied with the provisions of the Code. In particular, this section
summarises the Board’s compliance with the five key principles
of the Code, namely: leadership, effectiveness, remuneration,
accountability and relations with shareholders.

Board balance and independence
The Board has ten members, seven of whom, excluding the Chairman,
are considered independent Non-Executive Directors. These are
John Gildersleeve (Deputy Chairman), Ian West (Senior Independent
Director), John Allwood, Brent Hoberman, Sir Howard Stringer,
James Powell and Joanna Shields.

Therefore, at least half of the Board (excluding the Chairman)
are independent and, notwithstanding the changes to the Board
composition during the period, this has been the situation for all of FY14.

The following changes to the Board have been announced during
the year: Amy Stirling stepped down as Chief Financial Officer on
31 May 2013 and was replaced by Stephen Makin with effect from the
same date. Joanna Shields was appointed as a Non-Executive Director
on 16 May 2013. David Goldie stepped down on 27 September 2013.
The Company did not use an external search consultant in the
appointment of Non-Executive Directors during the period.

The Chairman and Executive Directors have service contracts that
can be terminated by either the Company or the Director on twelve
months’ notice.

The Non-Executive Directors are expected to serve for an initial period
of three years, albeit that either party may terminate the appointment
on three months’ notice with no compensation for loss of office. These
initial three year periods commenced on 20 January 2010, with the
following exceptions: Ian West (8 February 2011); Sir Howard Stringer
(26 July 2012); James Powell (26 July 2012); and Joanna Shields
(16 May 2013).

All Directors in any event stand for re-election every year.

Leadership
How the Board operates
The Board has reserved certain matters, and delegated others, to the Group’s Executive Committee, which comprises Dido Harding (Chief Executive
Officer), Stephen Makin (Chief Financial Officer) and other senior employees drawn from across the Group. Reserved matters include approving the
Group’s strategy, annual budgets and other longer term planning.

Number of meetings attended

Number of meetings

Director

Sir Charles Dunstone, Chairman

Dido Harding

Amy Stirling(1)

Stephen Makin(1)

David Goldie(2)

John Gildersleeve

Ian West(3)

John Allwood

Brent Hoberman(4)

Sir Howard Stringer(5)

James Powell

Joanna Shields(6)

(1) Amy Stirling stepped down as a Director and was replaced by Stephen Makin on 31 May 2013.
(2) David Goldie was unable to attend one Board meeting due to a prior business commitment. David Goldie stepped down as a Director on 27 September 2013.
(3) Ian West was unable to attend one Audit Committee meeting due to a prior business commitment.
(4) Brent Hoberman was unable to attend one Remuneration Committee meeting due to a prior business commitment.
(5) Sir Howard Stringer was unable to attend one Board Meeting and four Remuneration Committee meetings due to personal reasons.
(6) Joanna Shields was appointed on 16 May 2013.

Board

Audit

Remuneration

Nomination

Board

Audit

Remuneration

Nomination

—

Leadership continued
How the Board operates continued
As well as the formal meetings during the year, the Board met at other
times as appropriate for approving certain announcements to shareholders.

It is important to the Board that Non-Executive Directors have
the ability to influence and challenge appropriately. To this end all
Non-Executive Directors are given a thorough induction to the Group
and take priority in Board discussions. All Directors receive papers in
advance of meetings. They also receive regular reports and members
of the Group’s executive team are invited to present at Board meetings
so that the Non-Executive Directors keep abreast of developments
in the Group.

The Chairman meets regularly with just the Non-Executive Directors
prior to every other Board meeting. This ensures that any concerns
can be raised and discussed outside of formal Board meetings.
The Senior Independent Director also attends these sessions
where it is possible, if required, to discuss any matters with the
other independent Non-Executive Directors.

The Senior Independent Director also takes responsibility for
performance evaluation of the Board; succession planning for
the Chairman; and chairing Non-Executive Director only meetings.
In addition, he is an alternative point of contact for shareholders
in the event that normal executive channels are not appropriate.
Details of the Senior Independent Director’s role are set out on
the Group’s website (www.talktalkgroup.com).

It is important to the Group that all Directors understand external
views of the Group. To this end regular reports are provided to the
Board by the Group’s Investor Relations Director, covering broker
reports and the output of meetings with significant shareholders.
As stated below, the Board has also delegated certain matters
to a number of Board Committees.

Effectiveness
Performance evaluation and continued development
Each Board member has been subject to an internal performance
review during the year, where the balance of skills, knowledge and
experience of each Director was reviewed. This was undertaken
by each member of the Board completing detailed questionnaires.
The results of these were analysed by the Chairman, Senior
Independent Director and the Board as a whole against the broad
criteria of overall Board effectiveness and individual contributions.

As part of the performance review the ability of each Director,
in particular the Non-Executive Directors, to demonstrate the
required time commitment to the role was assessed.

As a result of this performance evaluation the Chairman confirms that
each of the Directors seeking re-election at the AGM continues to be
effective and has demonstrated the appropriate commitment to
the role.

The Senior Independent Director also met with the other Non-Executive
Directors to assess the Chairman’s effectiveness, taking into account
the views of Executive Directors.

In compliance with the requirements of the Code, NJMD Corporate
Services Limited (NJMD) was instructed by the Company to conduct
an externally facilitated performance evaluation of the Board during
the year. NJMD has no connection with the Company other than a contract
to conduct the evaluation and a contract with one of its Directors to
provide domestic internet services. The key objectives of the evaluation,
which were agreed with the Chairman and the Company Secretary
in advance, were to enhance Board effectiveness and also the

effectiveness of individual Directors. Overall, NJMD’s review found
the Board was effectively run and administered. NJMD found neither
areas of major concern nor any matters which are of particular
concern in relation to individual Directors.

The Company Secretary ensures that the Board is made aware of
new laws, regulations and other information appropriate to the Group
to ensure that all Directors continually update their skills, knowledge
and familiarity of the Group in order to fulfil their roles. Additionally
each Director has access to the advice and services of the Company
Secretary and also has the ability to take independent external advice
if required.

Diversity
The Board understands the importance of having a diverse membership
and recognises that diversity encompasses not only gender but also
background and experience. The Board does not have a formal diversity
policy and is generally opposed to the idea of stated quotas for females.
Our equality policy applies equally to all appointments in the Company,
and the Board believes that appointments should be made solely on
merit, the key criterion being whether or not the appointee can add
to or complement the existing range of skills and experience on the
Board. Notably, the most recent Board appointment was female. This
appointment was made on merit, and not on gender, the appointee
being by far the strongest candidate for the position with her skill set
and overall experience fitting the objective role description approved
by the Board at the outset of the recruitment process.

Board Committees
The Board has established four Committees: Audit, Remuneration,
Nomination and Regulatory Compliance; 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 Committee
During the year, the Committee comprised the following independent
Non-Executive Directors: John Allwood (Chairman), John Gildersleeve,
Ian West and James Powell.

The Chairman of the Committee updates the Board, following each
Committee meeting, on any significant issues that may have arisen.
In addition, the Chairman of the Committee is happy to make himself
available to investors on request. During the year, all requirements of
the Code in respect of the Committee were met.

The Group’s Chief Financial Officer as well as representatives of the
Company’s external auditor and other members of senior management
from Finance, Tax and Treasury, Legal and Business Assurance also
attend these meetings by invitation of the Committee. The external
and internal auditors have direct access to the Committee during
formal meetings and time is set aside for them to have private discussion
with the Committee, in the absence of management attendees.

John Allwood remains the member of the Committee with relevant
and recent financial experience (as recognised by the Consultative
Committee of Accountancy bodies), although all members are
expected to be financially literate and have an understanding of:

ƥ the principles of, contents of and developments in financial reporting,
accounting standards and statements of recommended practice;

ƥ key aspects of the Company’s operations;

ƥ matters that influence or distort the presentation of accounts and

key financial information;

TalkTalk Telecom Group PLC Annual Report 2014Effectiveness continued
Board Committees continued
Audit Committee continued
ƥ the principles of, and developments in, key applicable company

law and other legislation relevant to the Company;

ƥ review the Company’s internal financial controls and its internal control
and risk management systems and to make recommendations to
the Board;

ƥ review the Company’s arrangements by which employees may

raise concerns in confidence;

ƥ the role of internal and external auditing and risk management;

ƥ monitor and review the effectiveness of the Company’s internal

ƥ the regulatory framework of the Company’s business; and

audit function;

ƥ environmental and social responsibility best reporting practices.

During the year, the formal calendar of items considered at each
Audit Committee meeting within each annual cycle embraced
the Code requirements to:

ƥ monitor the integrity of the financial statements of the Company

and any formal announcements relating to the Company’s financial
performance, including reviewing significant financial reporting
judgements contained in them;

ƥ disclose the significant issues that the Committee considered
in relation to the financial statements and how these issues
were addressed;

ƥ confirm that the consolidated financial statements, taken as a

whole, are fair, balanced and understandable, to ensure that the
narrative sections of the Report are consistent with the financial
statements and accurately reflect the Group’s performance;

ƥ make recommendations to the Board in relation to the appointment,
re-appointment and removal of the external auditor and to approve
its remuneration and terms of engagement;

ƥ review the Company’s policy on the engagement of the external

auditor to supply non-audit services;

ƥ review and monitor the external auditor’s independence and objectivity
and the effectiveness of the audit process, taking into consideration
relevant UK professional and regulatory requirements; and

ƥ 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.

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.

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 of
preparing the Group financial
statements for the half year
and full year on a going
concern basis

The treatment of exceptional
items and their presentation
within the Group’s financial
statements

Carrying value of goodwill
and other intangibles

Revenue recognition

The Committee considered papers prepared by management and, taking into account the external auditor’s
review of these papers and its assumptions, concluded that management’s recommendation to prepare
accounts on a going concern basis was appropriate.

The Committee considered management’s presentation of separately disclosed items. The Committee also
considered the views of our external auditor both on management’s policy and its application in FY14. At each
meeting the Committee reviews a paper prepared by management on actual and forecast levels of exceptional
items including the nature of all the items. The disclosure for inclusion in the consolidated financial statements
is reviewed and agreed by the Audit Committee.

The judgements in relation to goodwill impairment testing relate to the assumptions applied in calculating the
value in use of the operating companies 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 is the five year plan, which is approved by the Group’s Executive
Committee and the Board. The Committee reviews and challenges management’s paper on the outcome
of the impairment review.

The key area of judgement in respect of recognising revenue is identifying revenue arrangements including
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. The
Committee reviews management’s papers on proposed accounting treatment for new products. In addition,
the Committee also considers the detailed reporting of the external auditor before agreeing on any potential
changes to the Group’s accounting policies.

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 is based on the five year plan, which is approved
by the Group’s Executive Committee and the Board. The Committee reviews and challenges management’s
paper, which outlines the key principles and judgements used in the calculation.

Fees payable to the Company’s
auditor for the audit of the
Company’s annual accounts

Audit of the Group and its subsidiaries
pursuant to legislation

Audit services provided to all
Group companies

Taxation and other services

Total Group auditor’s remuneration

2014
£m

0.1

0.4

0.5

0.2

0.7

2013
£m

0.1

0.4

0.5

0.1

0.6

In the current year, the Group incurred non-audit fees of £239,000.
Fees relating to tax services of £140,000 principally comprised technical
advice associated with relevant UK and international fiscal law and
regulations. Other fees of £99,000 mainly represented HR consultancy
advice. Having undertaken a review of the non-audit related work, the
Committee has satisfied itself that the services undertaken during
the year did not prejudice the external auditor’s independence.

The Chairman of the Committee updates the Board following each
Committee meeting. The Committee’s terms of reference, which are
available on request from the Company Secretary and are published
on the Group’s website (www.talktalkgroup.com), comply with the Code.

In light of the assessments and review undertaken, the Committee
recommended to the Board that Deloitte LLP be retained as the auditor
of the Company. This recommendation was endorsed by the Board.

Deloitte LLP has expressed its willingness to continue in office as
auditor and a resolution to re-appoint Deloitte LLP will be proposed
at the forthcoming AGM.

Remuneration
Remuneration Committee
During the year, the Committee comprised the following independent
Non-Executive Directors: John Gildersleeve (Chairman), Brent Hoberman,
Ian West and Sir Howard Stringer.

Other Directors including the Chief Executive Officer, the Company
Secretary, the Group Human Resources Director and advisors attend
by invitation of the Committee. A detailed description of the Committee’s
remit and work during the period is contained in the Directors’
Remuneration Report on pages 26 to 39.

The Chairman of the Committee updates the Board following each
Committee meeting.

The Committee’s terms of reference, which are available on request
from the Company Secretary and are published on the Group’s
website (www.talktalkgroup.com), comply with the Code.

Corporate governance continued

Effectiveness continued
Board Committees continued
Audit Committee continued
Statement of Directors in respect of the Annual Report and Accounts
As required by the Code, the Directors confirm that the Annual Report
and Accounts, taken as a whole, is fair balanced and understandable
and provides the information necessary for shareholders to assess
the Company’s performance, business model and strategy. When
arriving at this position the Board was assisted by a number of
processes including:

ƥ the Annual Report and Accounts is drafted by appropriate senior

employees across all areas of the business with overall supervision
being provided by the Director of Group Finance, Tax and Treasury
to ensure the Report is consistent across all sections;

ƥ a comprehensive verification process is undertaken to ensure

the factual accuracy of the entire Annual Report;

ƥ complete reviews of drafts of the Report are undertaken by the

Executive Directors and other members of the Group’s Executive
Committee; and

ƥ the final draft is reviewed by the Audit Committee prior to final

consideration by the Board.

External audit
The Committee is responsible for the development, implementation
and monitoring of the Company’s policy on external audit, which
assigns responsibility for monitoring the independence, objectivity
and compliance by the external auditor to the Committee.

Deloitte was appointed as auditor in 2010 when the Group demerged
from Carphone Warehouse Group PLC. In the year to 31 March 2014,
Sharon Thorne was newly appointed as the Senior Statutory Auditor.
Deloitte has confirmed its independence in a letter addressed to
the Directors.

In the year to 31 March 2014, the Audit Committee adopted a formal
framework to review the effectiveness of the external audit process
and audit quality. An auditor assessment tool is completed annually
by each member of the Audit Committee, the Chief Financial Officer
and other members of senior management who are invited to attend
the Audit Committee meetings. The assessment tool 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 has been considered by the Audit
Committee and is provided to both the auditor and to senior management.
The results in the current year were reviewed at the March Audit
Committee meeting and show that overall the Committee believes
our external auditor is performing as expected. However, if this
situation should change in the future, management will agree an
action plan with the external audit partner, which the Audit Committee
will keep under review.

The policy relating to the provision of non-audit services by the external
auditor specifies the types of work from which the external auditor
is excluded; for which the external auditor can be engaged without
referral to the Committee; and for which a case-by-case decision is
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.
Any work proposed in excess of 50% of the audit fee is referred to the
Committee. Amounts below this are discussed with the Chairman of
the Committee.

TalkTalk Telecom Group PLC Annual Report 2014Accountability
Nomination Committee
During the year, the Committee comprised the following independent
Non-Executive Directors: John Gildersleeve (Chairman), John Allwood
and Ian West.

The Committee is responsible for succession planning at Board
level, overseeing the selection and appointment of Directors,
regularly reviewing the structure, size and composition of the Board
and making its recommendations to the Board. It assists in evaluating
the commitments of individual Directors and the balance of skills,
knowledge and experience on the Board.

The Committee has overseen the appointment of Joanna Shields as
a Non-Executive Director and also the appointment of Stephen Makin
as Chief Financial Officer during the period.

The Chairman of the Committee updates the Board following each
Committee meeting.

The Committee’s terms of reference, which are available on request
from the Company Secretary and are published on the Group’s
website (www.talktalkgroup.com), comply with the Code.

Regulatory Compliance Committee
The members of this Committee are John Gildersleeve (Chairman),
Dido Harding (Chief Executive Officer) and Tim Morris (Company
Secretary).

Other senior executives of the Group attend by invitation
of the Committee.

The purpose of the Committee is to provide the Board with visibility
of how the Group remains compliant with those consumer regulations
affecting its businesses from time to time. Its members therefore
include those senior executives who are operationally responsible
for implementing permanent changes necessary to ensure the
Group remains compliant.

Such members are accountable to the Committee and the Board
for the successful delivery of such changes.

This Committee meets at least four times a year and reports to the
Board accordingly. The Group also operates a weekly Compliance
Committee made up of those senior executives (including the Chief
Executive Officer) responsible for all key areas of compliance across
the Group and is chaired by the Company Secretary. Targets set at
these meetings are monitored against a weekly scorecard.

Risk management and internal control
The Company has established a risk management programme that
assists management throughout the Company to identify, assess
and mitigate business, financial, operational and compliance risks.
The Board views management of risk as integral to good business
practice. The programme is designed to support management’s
decision making and to improve the reliability of business performance.

To ensure that all parts of the Group have a good understanding of risk,
members of this team have conducted risk workshops and reviews
within each of the main functions in the past year, culminating in
an assessment of key business risks by the Executive Directors and
key management. These risk assessments have been wide-ranging,
covering risks arising from the regulatory environment, strategy,
counterparties and organisational change associated with major
projects. The risk management process operates throughout the
Group, being applied equally to the main business units and corporate
functions. A risk report and update is provided at each Board meeting.

The output of each assessment is a list of key strategic, financial,
operational and compliance risks. Associated action plans and controls
to mitigate identified risks are put in place where this is possible and

to the extent considered appropriate by the Board taking account of
costs and benefits. Changes in the status of the key risks and updates
on mitigation are reported regularly at each Board meeting.

The Directors have overall responsibility for the Group’s system of
internal controls and for reviewing their effectiveness. The Board
delegates to executive management the responsibility for designing,
operating and monitoring these systems. The systems are based
on a process of identifying, evaluating and managing key risks and
include the risk management processes set out above. The Company
has channels in place to enable employees to raise concerns about
possible irregularities in financial reporting and other issues and for
those matters to be investigaged.

The systems of internal control were in place throughout the period
and up to the date of approval of the Annual Report. The effectiveness
of these systems is periodically reviewed by the Audit Committee in
accordance with the revised guidance in the Turnbull Report. These
systems are also refined as necessary to meet changes in the Group’s
business and associated risks. The systems of internal control are
designed to manage rather than eliminate the risk of failure to achieve
business objectives. They can only provide reasonable and not absolute
assurance against material errors, losses, fraud or breaches of law
and regulations.

The Board has conducted an annual review of the effectiveness of
the systems of risk management and internal control in operation
during the year and up to the date of the approval of the Annual
Report. This was approved by the Audit Committee and the Board.
The Audit Committee also adopts an internal audit charter each
year in accordance with International Internal Auditing Standards.

This is supported by the Business Assurance and Internal Audit function
through an ongoing process for identifying, evaluating and managing
the risks faced by the Group. No significant weaknesses were identified
in the year.

Relations with shareholders
The Board believes it is important to explain business developments
and financial results to the Company’s shareholders and to understand
any shareholder concerns. The principal communication media used
to impart information to shareholders are news releases (including
results announcements) and Company publications. In all such
communications, care is taken to ensure that no price sensitive
information is released.

The Chief Executive Officer and Chief Financial Officer have lead
responsibility for investor relations. They are supported by an Investor
Relations Director who, amongst other matters, organises presentations
for analysts and institutional investors. There is a full programme of
regular meetings and dialogue with major institutional shareholders,
fund managers, analysts, retail brokers and credit investors, upon which
the Chairman ensures the Board receives 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 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, and
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).

On behalf of the Board, I am pleased to present the Directors’ report
on remuneration for FY14

Introduction
The structure of this Remuneration Report for the year ended
31 March 2014 has been reviewed and amended in line with the
Large and Medium-sized Companies and Group (Accounts and
Reports) (Amendment) Regulations 2013 (‘the Regulations’).

The structure of the report is therefore split into two sections:

ƥ The Remuneration Policy, which sets out the Company’s policy
on remuneration for Executive Directors. This policy will be put
forward to shareholders for a binding vote at our 2014 AGM and
will be effective immediately. It is intended that the policy will
apply from that date for a period of three years.

ƥ The Annual Report on Remuneration, which explains how the

Remuneration Policy was applied in relation to Executive Directors
for the year ended 31 March 2014 and how it will be implemented
for the year ending 31 March 2015.

Aligning the Remuneration Policy with Company
strategy and performance
The Remuneration Committee recognises the importance of linking
its Remuneration Policy and approach to business strategy and this
has continued to be a focus over the past twelve months.

The Group’s remuneration approach applies throughout the
Company and continues to be focused on enabling it to attract,
motivate and retain high quality talent and ensuring there is a
transparent link between remuneration and strategy at all levels,
as well as the long term performance of the Company.

Board changes during FY14
Board resignations
Amy Stirling stepped down from the Board in her role of Chief Financial
Officer, effective from 31 May 2013, and left the Company after 15 years
on 30 September 2013.

David Goldie stepped down from the Board in his role of Group
Commercial Director, effective from 27 September 2013, and left
the Company after 14 years on 30 September 2013.

Board appointments
Stephen Makin joined the Company on 15 April 2013 and was appointed
to the Board as Chief Financial Officer on 31 May 2013. In line with our
pay policy, the Remuneration Committee decided that base pay would
initially be set at the same level as that of the former Chief Financial
Officer, increasing by £25,000 from 1 October 2013.

Joanna Shields was appointed to the Board as a Non-Executive
Director on 16 May 2013.

Remuneration Policy during FY14
Over the course of the past twelve months, the Remuneration
Committee fully reviewed the Remuneration Policy for Executive
Directors to ensure it was appropriate and fit for purpose.

The Annual Bonus scheme pay-out for Executive Directors and
members of the Executive Committee this year has been determined
by the Remuneration Committee to be paid at 64% of base pay.

Remuneration Policy for FY15
The Group aims to achieve its objectives of a simple and transparent
approach to remuneration. The Remuneration Policy is set out on
pages 27 to 32 and details of how this policy will be implemented for
the financial year ahead are set out on pages 33 to 39, with the
following key changes being highlighted:

ƥ base pay award for Dido Harding effective from 1 July 2014, to
reflect both her past and future contribution to the Company;

ƥ introduction of an all-employee Share Match Plan, which was

approved by shareholders at the July 2013 AGM; and

ƥ a further award under the Value Enhancement Scheme.

John Gildersleeve
Remuneration Committee Chairman
14 May 2014

Highlights of FY14

ƥ No changes have been made to the Remuneration Policy

during the year ended 31 March 2014

ƥ We have reviewed and amended the structure of the

Directors’ Remuneration Report in line with new regulations,
to make it simpler and more transparent for our shareholders

Our priorities for FY15

ƥ To review the performance metrics for both our short term
and long term incentive plans to ensure they remain aligned
with both shareholder interests and the strategic growth
plans of the Company

ƥ To make a further awards under the Value Enhancement

Scheme (VES) for Executive Directors and a small number
of senior management, aligned to delivering significant
shareholder value

ƥ To launch the Company’s first Share Match Plan to further

encourage all-employee share ownership

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.

TalkTalk Telecom Group PLC Annual Report 2014

Directors’ Remuneration Report continued
Remuneration Policy

This section sets out the Company’s policy on remuneration for Executive Directors.
The Remuneration Committee intends that, subject to approval by shareholders
and the binding vote, the Remuneration Policy will take immediate effect following
the AGM and will apply for a period of three years

Remuneration components
We define our main fixed and performance related elements
of remuneration as follows:

ƥ base pay, car allowance, benefits and pension contribution

(fixed); and

ƥ annual performance bonus (variable).

In addition, for Executive Directors, Executive Committee members
and other key senior management, there are two long term incentive
plans – the Discretionary Share Option Plan (DSOP) and the Value
Enhancement Scheme (VES).

The VES is an alternative reward mechanism for Executive Directors
and other members of the senior leadership team who will not
participate in the DSOP. The Remuneration Committee intends that,
generally, in any one year, participants may only receive an award
under the VES and no other long term incentive plan.

The Committee reviews, at least on an annual basis, pay-out levels for
Executive Directors at minimum, ‘on target’, ‘stretch’ and ‘super stretch’
levels of performance, in order to ensure alignment with our shareholders.

Malus and clawback
The rules of the annual performance bonus and long term incentive
plans allow the Remuneration Committee to exercise its discretion in
using malus or clawback provisions, should it feel that it is in the best
interests of the Company and its shareholders. The Committee’s
policy on the exercise of its discretion is set out in this Remuneration Policy.

Executive Director shareholding requirement
To ensure that the interests of the Executive Directors are closely
aligned to those of its shareholders, the Company requires Executive
Directors to build over a number of years and retain a shareholding
in the Company of at least 200% of their annual salary.

For the purpose of this requirement the Company requires these
to be in unfettered and beneficially owned shares.

Remuneration Committee
The Remuneration Committee is responsible for making
recommendations to the Board in relation to the individual
remuneration packages for the Executive Directors and the
Chairman. These recommendations comply with the Remuneration
Policy, which is set by the Board and the terms of reference of the
Committee. The Committee works with the Board to determine the
balance of allocation of profits between employee incentives,
shareholder dividends and reinvestment into the Group.

Remuneration approach
The aim of the Remuneration Policy is to support the Group in:

ƥ aligning individual and business performance with the interests of
shareholders through the delivery of clear and stretching targets;

ƥ strengthening the link between employee output and the delivery

of shareholder value;

ƥ supporting the Group’s overarching philosophy, to maintain

its ‘value player’ positioning in the marketplace;

ƥ attracting, motivating and retaining high quality talent;

ƥ maintaining a stable, efficient cost base;

ƥ enabling the Group’s remuneration strategy to be tailored

to its changing circumstances; and

ƥ reflecting corporate governance best practice.

The Company firmly believes that remuneration should be structured
in a fair and competitive way, in order to incentivise individuals to
achieve the highest levels of performance, and takes a consistent
approach throughout the Group.

Packages are designed to be market-competitive with fixed
remuneration set at market median levels. Variable rewards, which
are linked to challenging objectives based on the performance
of the Group, are designed to reward exceptional performance
and for the delivery of shareholder value creation.

Employee and shareholder consultation
The Remuneration Committee did not formally consult with employees
of the Company on the details of the Directors’ Remuneration Policy.
In reaching this decision the Committee is mindful that with its strong
culture of employee share ownership, with over 50% of employees
holding shares in the Company, employees have the opportunity to
comment and vote on all elements of this report and policy in their
capacity as shareholders. Employees are also given the opportunity
to share their views through regular employee surveys and the
all-employee consultation body ‘One Voice’.

The Remuneration Committee consults with major shareholders
when setting the Remuneration Policy. If any of these shareholders
are opposed to the policy, the Committee endeavours to meet with
them, as appropriate, to understand and respond to any issues they
may have.

Summary of remuneration components of Executive Directors

Component

Aim and link to strategy

Description of operation and any performance measures

Further detail on maximum opportunity
and framework used to assess performance

Fixed

Base pay

To attract and retain talent by
ensuring base pay is competitive
in the market.

Set at a level which incentivises
Executive Directors to implement
and deliver our business strategy.

Fixed

Core benefits

Designed to be competitive
in the market.

Paid monthly in cash.

Reviewed annually.

Benchmarked against external market
data from external specialists.

Takes into account the individual’s
skills, experience and performance.

The Remuneration Committee
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.

Reviewed annually relative to
the market.

Pension contributions are made
through salary sacrifice, with the
Company making a contribution of
10% of base pay for the CEO and
the CFO.

If cash is paid in lieu of a pension
contribution this will be subject to
normal tax and NI deductions.

Although the levels of Company
contributions vary, all employees
have the ability to join the Company’s
defined contribution pension scheme.

Core benefits typically include:

ƥ a defined contribution pension scheme,
or a cash payment in lieu of a pension
contribution in certain circumstances;

ƥ private medical insurance for Executive

Directors and their immediate family; and

ƥ car allowance/company car.

Executive Directors are also entitled
to participate on the same terms as
all other employees in respect of
the following benefits:

ƥ four times base pay life assurance;

ƥ income protection; and

ƥ annual leave.

Fixed

Voluntary
benefits

Benefits may vary dependent on
the role of the individual and the
personal choices they make.

These voluntary benefits arrangements
include the purchase of additional holiday
and the ability to participate in all-employee
share plans.

Reviewed periodically relative
to the market.

TalkTalk Telecom Group PLC Annual Report 2014Summary of remuneration components of Executive Directors continued

Component

Aim and link to strategy

Description of operation and any performance measures

Variable

Annual
performance
bonus

Designed to focus Executives
on the business priorities for the
financial year ahead and to align
the individual’s remuneration
with the delivery of superior
business performance.

Variable

Share-based
incentive plans

Discretionary
Share Option
Plan (DSOP)

Designed to reward and
retain Executives over the
longer term whilst aligning
an individual’s interests
with those of shareholders.

The bonus scheme is based on a ‘balanced
scorecard’ that is comprised of financial and
non-financial measures, which are reviewed
annually. Such measures include Group
EBITDA, operating free cash flow, customer
and employee satisfaction measures and
innovation.

The measures and targets are set annually
by the Remuneration Committee, to ensure
they are appropriately stretching for
the delivery of ‘on target’, ‘stretch’ and
‘super stretch’ performance.

At least 40% of the ‘balanced scorecard’
will be based on financial measures.

Discretionary awards of nil-cost options are
granted over TalkTalk Telecom Group PLC shares.

Level of vesting is dependent on achievement
of performance targets, usually over a
three year performance period from the
date of grant.

For awards up to 2013, the performance
measures have been 50% EPS and 50% TSR.

Awards vest after three years from grant. 60%
of the total vested options are exercisable in
the third year with the remaining 40% being
eligible for exercise from the fourth year.

There is no intention to award DSOP awards
for those Executive Directors participating
in the Value Enhancement Scheme (VES).
However, this plan is included in the Remuneration
Policy to give the Remuneration Committee
flexibility to make an award in the case of a
new hire.

Further detail on maximum opportunity
and framework used to assess performance

Payment is typically made in June.

The Remuneration Committee
retains the ability to exercise
discretion to adjust payments up or
down in exceptional circumstances,
where they feel this course of action
is appropriate.

The bonus scheme pays at the
following levels:

ƥ on target awards for Executive

Directors are equivalent to 60%
of base pay;

ƥ stretch awards for Executive

Directors are equivalent to 110%
of base pay; and

ƥ super stretch (maximum) awards

are equivalent to 170% of base pay.

Awards do not vest until the third
anniversary of the date of grant and
may have a deferral element.

If employment ceases during the
vesting period, awards will by default
lapse in full, unless the Remuneration
Committee exercises its discretion.

The maximum level of award is a
200% base pay multiple, unless the
Board determines that exceptional
circumstances exist, which justify
exceeding this limit, in which case
options will not exceed 300% of
base pay.

The DSOP scheme rules were approved
by shareholders in March 2010
as part of the demerger from
Carphone Warehouse.

Awards are discretionary and are
made as a ‘block award’ to last four
years rather than an annual award.

Each participant is entitled to
purchase an agreed number of
Participation Shares, with no
participant being awarded more than
10% of the value of the pool created.

60% of the award vests after three
years, with the remaining 40% of
the award vesting after four years.

A cap on the total value of the awards
that vest at the end of the four year
period applies and total awards will not
result in a dilution of the issued share
capital of the Company of more
than 2.75%.

The VES rules were approved by
shareholders in March 2010 as
part of the demerger from
Carphone Warehouse.

Directors’ Remuneration Report continued
Remuneration Policy continued

Summary of remuneration components of Executive Directors continued

Component

Aim and link to strategy

Description of operation and any performance measures

Variable

Share-based
incentive plans

Value
Enhancement
Scheme (VES)

Designed to reward and retain
Executives over the longer term
whilst aligning an individual’s
interests with those of shareholders
and in turn delivering significant
shareholder value.

The Value Enhancement Scheme (VES)
is designed to enable participants to share
in the incremental value of the Group in excess
of an opening valuation, as determined by the
Remuneration Committee and agreed with
HMRC. Each award entitles the participant to
purchase a fixed number of separate shares
(‘Participation Shares’) in the subsidiary
company, TalkTalk Group Limited, the holding
company for the TalkTalk business.

The number of TalkTalk shares issued
to each participant is determined by the
incremental value pool created above a
7% return to shareholders.

In order to avoid the possibility that value is
created by a ‘rising tide’ rather than management
performance, the Company’s total shareholder
return will also be required to outperform the
FTSE 250 before any vesting is possible.

The vesting of awards will be subject to
continued employment and the satisfaction
of performance conditions and/or other
specified events as determined by the
Remuneration Committee.

Participation Shares that are purchased by
participants are acquired at market value and
participants offered 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.

TalkTalk Telecom Group PLC Annual Report 2014Remuneration 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 VES has intentionally been set at a level higher than this.

Chief Executive Officer
(D Harding)

Chief Financial Officer
(S Makin)

Minimum

100%

£621,000

Minimum

100%

£455,000

On target

65% 35%

£951,000

On target

65% 35%

£695,000

Stretch

Super
stretch

£m

42%

41%

17%

£1,476,000

Stretch

45% 43% 12%

£1,020,000

15%

23%

62%

£4,056,000

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Super
stretch

£m

19%

29%

52%

£2,385,000

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

� Share-based incentive plan (VES) � Annual performance bonus � Base pay, taxable benefits and pension

Notes
(1) Base pay is level of base pay from 1 July 2014, taxable benefits are at the level over the past year and pension is based on a 10% Company contribution/cash in lieu.
(2) 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.
(3) VES outcomes include assumed share price increases over the four year performance term.
(4) As VES 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.

Other share-based remuneration
TalkTalk SAYE Scheme
The Company operates an all-employee, HMRC approved, Sharesave
scheme, which all eligible employees and Executive Directors are able
to participate in. All eligible employees are invited to join the scheme
on an annual basis, subject to maximum participation levels, which
are £500 per month from 6 April 2014, or in line with HMRC limits
if these are increased. Details of current schemes can be found in
the Annual Remuneration section of this report.

TalkTalk Share Match Plan (TTG Share Match)
During the course of the year, the Remuneration Committee approved
the introduction of an all-employee, HMRC approved, Share Match Plan.
This enables eligible employees to purchase market priced shares
by entering into a partnership share agreement and holding such
shares in trust for up to a five year period. The rules of the Plan allow
an employee maximum contribution of £1,800 per annum, or in line
with HMRC limits if these are increased. Approval for the TTG Share
Match was granted by shareholders at the AGM on 24 July 2013.

The Remuneration Committee, at its discretion may award matching
and/or free shares to eligible participants. Matching shares may
be granted up to a maximum ratio of two matching shares for each
partnership share purchased by a participant. Free shares may
be awarded up to a maximum value of £3,600 tax free per annum,
or in line with HMRC limits if these are increased.

It is proposed that employees will be invited to join the TTG Share
Match from June 2014 onwards, with the Company providing one
matching share for each partnership share purchased.

Service contracts and remuneration packages
Service contracts for Executive Directors
Under the Executive Directors’ service contracts both parties are
required to give twelve months’ notice of termination of employment.
At the Company’s discretion they may terminate the contract immediately
and not require the Director to work their notice and instead pay
twelve months’ contractual pay plus benefits. The Executive Directors’
service contracts also include a twelve month non-compete period.

These contracts are available for inspection at the Company’s
registered office.

Recruitment policy for new hires
When hiring a new Executive Director, the Remuneration Committee
will align the remuneration package with the Remuneration Policy
stated above, including the maximum limits for each remuneration
component. The Remuneration Committee will take all relevant factors
into consideration when making a remuneration decision on a new
Executive hire to ensure that these decisions are being made in the
best interests of the Company and its shareholders including, but not
limited to:

ƥ quantum;

ƥ type of remuneration being offered;

ƥ the impact on existing remuneration arrangements for other Directors;

ƥ the remuneration package of any exiting equivalent Director; and

ƥ the remuneration arrangements of the candidate in their previous role.

Service contracts and remuneration packages
continued
Recruitment policy for new hires continued
In hiring a new Executive Director, the Remuneration Committee may
also make a ‘buy-out’ award to an external candidate in compensation
for any remuneration arrangements forfeited on leaving a previous
employer. In making such an award, the Committee will take into
consideration relevant performance conditions, vesting periods and
the form in which the award was made. It is usual that any ‘buy-out’ awards
will be made on a comparable basis. In exceptional circumstances,
the Remuneration Committee may make an exceptional award under
one of the Company’s existing long term incentive plans in order
to compensate a candidate for any remuneration arrangements
forfeited on leaving a previous employer.

The Remuneration Committee would only consider making such
awards where the individual has lost an award as a result of joining
the Group and awards will be subject to continued employment and
performance conditions, as appropriate. Following the appointment
of a new Executive Director the shareholders will be informed of the
details as soon as practicable.

There may be exceptional and unforeseen circumstances where
the Remuneration Committee considers it appropriate to exercise
discretion available under Listing Rule 9.4.2 R to grant an award to
facilitate the recruitment of an Executive Director. Where a variable
or performance related award is made under such circumstances,
the Remuneration Committee confirms that the award will be within
the limits specified in the Remuneration Policy table.

The Remuneration Committee emphasises that such discretion would
only ever be used in genuinely unforeseen and exceptional events
where it would be disproportionate to seek shareholder approval 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.

Relocation packages
There may be occasions when hiring a new Executive Director that a
relocation package is awarded, where a candidate and/or the candidate’s
immediate family relocate either on a temporary or permanent basis
in order to fulfil their role for the best interests of the Company and
its shareholders. In such instances, the Remuneration Committee
retains the right to compensate for reasonable and appropriate
relocation expenses.

Expatriate packages
On appointing a new Executive Director, the Remuneration Committee
may offer assistance where a candidate and/or the candidate’s
immediate family is asked to relocate either on a temporary or
permanent basis, from an overseas location to the UK or from the
UK to an overseas location. In such instances, the Remuneration
Committee retains the right to compensate for reasonable and
appropriate relocation expenses.

Remuneration policy for internal promotions
When an existing employee of the Company is promoted internally
to the role of Executive Director, the Remuneration Committee will
align the remuneration package with the Remuneration Policy stated
above, including the factors it takes into account for new hires.

Any remuneration awarded prior to promotion as an Executive
Director will be retained and will be subject to the previous payment
terms. The shareholders will be informed of any such remuneration
in the Directors’ Remuneration Report following promotion.

Exit payments
The Company operates the following policy in respect of exit payments:

ƥ Executive Directors have a twelve month notice period from the
Company and they in turn are asked to give the Company twelve
months’ notice.

ƥ 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.

ƥ 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.

The default position is for annual bonus amounts and the vesting of
share-based awards for ‘good leavers’ to be pro-rated for time served
from the start date of the scheme to the individual’s exit date and will
be subject to the applicable rules of the scheme. The Remuneration
Committee will have sole discretion to determine the ‘good leaver’
status of an Executive Director. The Committee will determine on
a case by case basis whether any vesting of a share-based award
is appropriate.

Fees for Non-Executive Directors
The Non-Executive Directors do not take part in discussions on their
remuneration. Each of the Non-Executive Directors has a letter of
appointment substantially in the form suggested by the Code, and
each has a three month notice period with no compensation for loss
of office. The Company has no age limit for Directors. The dates of
each contract are set out on page 37.

The fees for Non-Executive Directors are set out on page 37 of this report.
These fees are reviewed (but not necessarily increased) on an annual
basis, taking into account the responsibilities of the role and their
participation in the various governance committees of the Company.

Non-Executive Directors are not entitled to participate in any annual
or long term incentive plans, or any pension arrangements.

External appointments
The Board supports Executive Directors holding Non-Executive
Directorships of other companies and believes that any such
appointments are part of the continuing development of the
Executive Directors from which the Company will ultimately
benefit. The Board has reviewed all such appointments and those
appointments that the Board believes require disclosure pursuant
to the Code are set out on page 38. The Board has also agreed that
the Directors may retain their fees from such appointments.

TalkTalk Telecom Group PLC Annual Report 2014Directors’ 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 2014 and how it will be implemented
for the year ending 31 March 2015

Single figure of remuneration*
To aid shareholders’ understanding and in line with the new Regulations, in the table below we provide a single figure of remuneration for each
Executive Director. The information for Non-Executive Directors is included in the table on page 37.

Year ended 31 March 2014

Executive Director

D Harding

A Stirling(7)

D Goldie(8)

S Makin(9)

Aggregate emoluments

Base pay(1)

£000

500

100

373

1,036

Taxable
benefits(2)

£000

Pension(3)
£000

110

Bonuses(4)

£000

320

LTIP(5)
£000

5,955

—

239

559

—

5,955

SAYE
gain(6)
£000

—

2014
total
£000

6,842

128

665

7,703

(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) Value of VES and DSOP awards which vested during the year and any dividend payments due on these vestings.
(6) Under the 2013 SAYE scheme both D Harding and S Makin were granted 4,687 options on 14 June 2013 at an option price of £1.92.
(7) The figures in this table are for the period A Stirling was a Director to 31 May 2013. The base pay, taxable benefits and pension received for her employment not as a Director

up to 30 September 2013 amounted to £134,000 and LTIP amounted to £3,411,994.

(8) The figures in this table are for the period D Goldie was a Director to 27 September 2013. The LTIP received whilst in employment after that date amounted to £3,411,994.
(9) S Makin’s base pay was £375,000 from his start date to 30 September 2013. It was increased to £400,000 effective 1 October 2013.

Year ended 31 March 2013

Executive Director

D Harding

A Stirling

D Goldie

Aggregate emoluments

Base pay(1)
£000

500

375

200

1,075

Taxable
benefits(2)
£000

Pension(3)
£000

Bonuses(4)
£000

LTIP(5)
£000

110

334

250

133

717

4,716

2,774

10,264

SAYE
gain(6)

£000

—

2013
total
£000

5,617

3,427

3,162

12,206

Base pay
Year ended 31 March 2014
During the course of the year ended 31 March 2014, remuneration for
Executive Directors was reviewed in line with market trends, peer group
benchmarking and current internal practices. Peer group analysis was
conducted by Towers Watson, using a group of 21 companies in the
FTSE, with comparable revenue and market capitalisation. No base
pay increases were made to Executive Directors in the year, except
for Stephen Makin who received a base pay increase to £400,000
effective 1 October 2013, in line with his employment offer.
Dido Harding has received no base pay increase since joining the
Company in 2010.

For the year ended 31 March 2014, average base pay increases for all
other employees was 3%.

Year ending 31 March 2015
Following the Committee’s review of Executive remuneration during
the year ended 31 March 2014, it was decided to increase the base pay
of the CEO to £550,000 effective from 1 July 2014. This increase will
be the first since her appointment in 2010, therefore on an annualised
basis represents an increase of approximately 2.5% per annum, and
is in line with the Group’s policy to set base pay at market median.
In determining this increase the Committee also took into consideration
the contribution the CEO has made to the business. In particular, the
significant strength in leadership, which has resulted in the growth of
the market capitalisation of the Company from £900m to around
£2.8bn since her appointment in February 2010.

For the year ending 31 March 2015, average base pay increases for
all other employees will be 3%. This is applied as a 2.5% all employee
increase with a further 0.5% for performance and market related
increases on a discretionary basis.

Pension contributions*
Year ended 31 March 2014
During the course of the year, Executive Directors received Company
pension contributions in line with the Remuneration Policy. There
were no Directors who were members of a defined benefit pension
scheme during the year.

Dido Harding received a 10% of base pay employer contribution to her
pension and made a contribution of 5% of her base pay up to 1 March 2014
when she left the pension scheme. For the year ended 31 March 2014,
this 10% of base pay was paid partly to the pension arrangement with
the balance being paid as cash in lieu.

Stephen Makin received a 10% of base pay contribution into his
private pension plan.

David Goldie received a cash equivalent of 20% of base pay in lieu
of pension payments.

The pension schemes provided for other employees of the Group
are included in note 4 to the consolidated financial statements.

Year ending 31 March 2015
In the year ending 31 March 2015, pension contributions from the
Company for Dido Harding and Stephen Makin will continue to be
capped at 10% of base pay, in line with the Remuneration Policy.

When determining bonus payments, the Remuneration Committee
takes into account performance against the measures above,
overall business performance and individual performance of
Executive Directors.

Significant investment in the year in our rapidly growing TV business
has resulted in some financial measures being confirmed at below
minimum. Strong performance against the remainder of the scorecard
has resulted in bonus being paid out to Executive Directors at just
above target levels.

The Remuneration Committee has judged that the targets are
commercially sensitive and remain so even on a retrospective basis
as they could give competitors insight into TalkTalk’s business
planning process.

The Remuneration Committee is satisfied that this bonus has provided
an excellent link between reward and operating performance and the
creation of further shareholder value.

Year ending 31 March 2015
During the course of the year, a review of the annual bonus scheme
was conducted to ensure that the performance measures in the
balanced scorecard continue to be aligned to Company strategy.
The performance measures and their weightings for the year ending
31 March 2015 are set out below:

Dido Harding’s pension contribution will be paid as a cash payment in lieu.

Performance measure

Annual performance bonus
Year ended 31 March 2014
For the year ended 31 March 2014, the annual performance bonus was
based on a ‘balanced scorecard’ blend of financial and non-financial
measures as set out in the table below.

Executives had an incentive opportunity in the range of 0% to 170%
of base pay. Performance for the year achieved 106% of the target
bonus potential resulting in a bonus payment of 64% of base pay.

Performance against each of the measures is set out below:

Headline Group EBITDA

Operating free cash flow

Consumer revenue

TalkTalk Business revenue

Net Promoter Score

Churn

TV launch and customer experience

Innovation

Weighting

15%

10%

25%

10%

10 %

Measure

Weighting

Headline Group EBITDA

Operating free cash flow

On-net ARPU

TalkTalk Business revenue

Net Promoter Score

On-net churn

TV launch and customer
experience

Employee engagement

Innovation

20%

10%

20%

10%

Achievement

Missed

Super stretch

Stretch

The Board has determined that the disclosure of performance
targets continue to be deemed commercially sensitive and are
therefore not disclosed in this report. These targets are determined
within the context of a longer term business plan and the disclosure
of these targets could give information to TalkTalk competitors to the
detriment of business performance.

Between minimum
and target

The Committee will disclose performance against all these measures
in next year’s Directors’ Remuneration Report.

There is no change to the annual bonus policy for Executive Directors
which is set out in the Remuneration Policy table, with the exception
of new performance measures and weightings shown above.

Missed

Super stretch

Stretch

Super stretch

TalkTalk Telecom Group PLC Annual Report 2014Share-based incentive plans*
Year ended 31 March 2014
The single figure of remuneration includes amounts for the value of
options to acquire ordinary shares in the Company granted to or held
by the Directors. Details of the options for the Directors who served
during the year are as follows:

TalkTalk Discretionary Shares
The TalkTalk Discretionary Share Option Plan (DSOP) is designed
to provide a long term incentive plan for certain employees of the
TalkTalk Group. It is the intention of the Committee that, generally
in any one year, participants may only receive an award under one
such scheme.

The TalkTalk Group Value Enhancement Scheme
As stated in the Remuneration Policy , the Value Enhancement
Scheme (VES) was designed to enable participants to share in the
incremental value of the Group in the excess of an opening valuation,
as determined by the Remuneration Committee and agreed with
HMRC, with the initial valuation being on 1 April 2009.

As performance conditions are satisfied and the award vests, the
Participation Shares are purchased by TalkTalk through the issue
of TalkTalk Telecom Group PLC shares or satisfied by shares held
by the Group ESOT. Participation Shares, which are purchased by
participants are acquired at market value and participants are
offered a loan from TalkTalk at a commercial rate of interest in
order to fund such a purchase.

60% of the scheme vested in 2012, with the remaining 40% vesting
in 2013.

The Remuneration Committee determined that the performance
condition of a 5% TSR hurdle, once 7% has been returned to
shareholders, had been achieved and therefore the scheme vested,
resulting in a pool shared amongst TalkTalk participants of £42m.
The calculations, which determined the value of this pool have
been independently audited.

Vesting of the remaining 40% of the VES resulted in the Directors
receiving the following share holdings:

Director

D Harding(1)

A Stirling(2)

D Goldie(2)

2014
% share
of pool

2014
Number
of shares

1,881,567

1,210,356

4,302,279

(1) All shares must be held for a minimum of twelve months from receipt.
(2) No holding restriction due to the fact that employment ceased on 30 September 2013.

The remaining percentage of allocated shares in the VES pool is held
by other senior management of the Group.

Interest on outstanding loans was charged at 4% during the year
(2013: 4%) and interest bearing loans, which the Directors had in
relation to the VES were repaid in full when the remaining 40% of
the scheme vested.

There was no clawback in respect of this scheme during the year
ended 31 March 2014 and no Non-Executive Directors participated
in this scheme. In addition, no further VES awards were made in the
year ended 31 March 2014.

Awards under the DSOP granted during the year or where
performance periods ended during the year are set out below.

2010 grant
The DSOP awarded in 2010 was approved by HMRC and the exercise
of the options is subject to continuing employment and performance
conditions, which are set out below.

These awards were made at the time of demerger from the Carphone
Warehouse Group, in order to incentivise senior Directors and other
members of the management population to develop and grow the new
stand-alone business. Therefore, the Board awarded all participants
a multiple of 200% base pay, which vested on achievement of a 5% TSR
hurdle being reached. A further 100% base pay award also vested
providing that the share price of the Company was calculated as at
least £2.40 in the five day period leading up the vesting date. 50% of
the options granted under this award vested on 28 March 2013, but
were exercisable following the announcement of the preliminary
results on 16 May 2013. The remaining 50% vested on 12 November 2013.

Other than the CEO, no Executive or Non-Executive Directors
participated in this scheme.

There was no clawback in respect of this scheme during the year
ending 31 March 2014.

2013 grant
A further DSOP was granted in June 2013 (DSOP 2013), under the
DSOP rules approved by shareholders in 2010 and is an unapproved
scheme. The exercise of these options is subject to continuing
employment and two performance conditions, which are set out
in the table below:

Level of performance

Minimum

Target

Stretch

Super stretch

Vesting
level

25%

40%

70%

100%

EPS
CAGR

50%

TSR
CAGR

50%

Awards are triggered within a range from 18% to 26% for compound
annual growth of EPS and from 5% to 14.7% for compound annual
growth of TSR. If the minimum performance requirement is met,
a total of 25% of the award will vest, rising to 40% for target, 70%
for stretch and 100% for super stretch performance.

Awards under this scheme vest in May 2016. The awards held by
Executive Directors are detailed in the table on the following page.

There was no clawback in respect of this scheme during the year
ended 31 March 2014 and no Non-Executive Directors participated
in this scheme.

The performance conditions for the DSOP 2012 were also based on
an equal split of achieving a compound TSR and a compound EPS measure
over the performance period. Awards being triggered within a range
from 10% to 19% for compound annual growth of both these measures.

Share-based incentive plans continued
Year ended 31 March 2014
Scheme interests awarded in the year

Director

D Harding

S Makin

Total DSOP under option at year ended 31 March 2014

Number
of shares
allocated

452,489

339,367

791,856

Scheme
type

Type
of award

Performance
conditions

apply(4)

Average share
price used
for grant

Face value

of award(1)

Minimum level
of award

Vesting
date

Director

D Harding

DSOP 2012
DSOP 2013

Nil priced unapproved
Nil priced unapproved

S Makin

DSOP 2013

Nil priced unapproved

Yes
Yes

Yes

£1.22
£2.21

£2.21

£1,250,000
£1,000,000

£750,000

£3,000,000

25%
25%

25%

May 2015 (2)
June 2016 (3)

June 2016 (3)

(1) Face value is calculated as the number of options awarded multiplied by the average share price over the five day period prior to grant.
(2) 60% exercisable from May 2015 and remaining 40% exercisable twelve months thereafter.
(3) 60% exercisable from June 2016 and remaining 40% exercisable twelve months thereafter.
(4) Performance conditions are set out on page 35.

Year ending 31 March 2015
The TalkTalk Group Value Enhancement Scheme (VES)
The Company proposes to make a further VES award under the rules
of the VES, already approved by shareholders, as a one-off award to
Executive Directors and a limited number of members of the senior
leadership team.

The Board strongly believes that due to the evolving and dynamic
nature of the Company and its growth aspirations, a further award
under the VES will continue to closely align the senior team to
shareholders’ interests and to further incentivise the Executive team
to create significant value for shareholders for the next phase of
development of the business.

The level of award granted to each individual during the year ending
31 March 2015 will be determined by the Remuneration Committee.
The awards will recognise the individual’s performance, including
exceptional performance, but no individual Executive Director shall
be awarded more than 10% of the VES pool. In addition, the total value
of the VES awards will be subject to the cap set out in the
Remuneration Policy.

It is expected that all Executive Directors will participate in the VES
rather than the DSOP in the year ending 31 March 2015.

TalkTalk discretionary shares
The Remuneration Committee intends to make an award in 2014 under
the DSOP rules approved by shareholders in 2010 to members of the
senior management group.

The exercise of any options awarded under this scheme will be
dependent on continued employment and the achievement of
performance conditions, which have not currently been determined
and will be published in next year’s Directors’ Remuneration Report.

Awards under this scheme will vest in 2017.

All-Employee Share Plans*
All-Employee Share Option Award
The All-Employee Share Option Award was granted in September 2012
and vested in September 2013, under the DSOP rules approved by
shareholders in 2010. A shareholder resolution approved at the 2013
AGM permitted a waiver of the three year vesting period. The award was
designed to reward all employees not currently part of another share
option plan to foster all-employee share ownership. Each qualifying
employee was awarded 1,000 nil priced share options. No awards
were made to Executive Directors, Non-Executive Directors or senior
managers. The exercise of the options was subject to continuing
employment on the vesting date in September 2013 and there were
no performance conditions in relation to this grant. These options
lapsed on resignation of an employee.

On vesting of the scheme, a total of two million shares were awarded
to the Company’s employee population.

TalkTalk SAYE Scheme
The TalkTalk SAYE Scheme is a Save-As-You-Earn share option scheme
and is approved by HMRC. The SAYE Scheme is administrated by a
duly authorised committee of the Board. All UK Executive Directors
and employees of TalkTalk and participating companies within the
Group are eligible to participate in the SAYE Scheme as long as they
have been employed for a qualifying period. To participate in the SAYE
Scheme an eligible employee must enter into a SAYE contract and
agree to make monthly contributions between £5 and £250 (increasing
to £500 per month from 1 April 2014) for a specified period of three
or five years.

Options granted to acquire TalkTalk Shares under the SAYE Scheme
have an option price determined by the TalkTalk Board, which will be
not less than the higher of 80% of the middle market quotation price
or their nominal value.

TalkTalk Telecom Group PLC Annual Report 2014All-Employee Share Plans continued
TalkTalk SAYE Scheme continued
Details of the share options for Executive Directors under the TalkTalk
SAYE Scheme, which were exercised from 1 July 2013 are shown below.
Any unexercised options expired on 1 January 2014. Amy Stirling also
exercised 8,897 options on the same date, but was no longer a Director
of the Company on the date of exercise.

Exercises

D Harding

D Goldie

Shares
under option

8,897

Option price

£1.02

Scheme
maturity date

1 July 2013

No Non-Executive Directors participated in this scheme.

Further details of the features and operations of the SAYE can be
found in note 5 to the consolidated financial statements.

All-employee Share Match Plan (TTG Share Match)
During the course of the year, the Remuneration Committee approved
the introduction of an all-employee, HMRC approved, Share Match Plan.
This enables eligible employees to purchase market priced shares by
entering into a partnership share agreement and holding such shares
in trust for up to a five year period. Approval for the TTG Share Match
was granted by shareholders at the AGM on 24 July 2013.

No awards were made under this scheme during the period.

The Remuneration Committee notes that the TTG Share Match is due
to launch to all employees in June 2014.

Additional information
Shareholding requirements
Executive Directors are required to build and retain a minimum
shareholding in the Company, equivalent to 200% of base pay.
Current shareholdings are set out below for Executive Directors:

Holding
requirement
as a % of
base pay

Actual
holding

Requirement
satisfied

200%

4,253,390

20,000

Yes

Actual share
ownership
as a % of
base pay(2)

2,725%

17%

Director

D Harding

S Makin(1)

(1) Appointed to the Board on 31 May 2013.
(2) Share price on 31 March 2014 used for calculation.

Whilst there are no shareholding requirements for Non-Executive
Directors, this is encouraged within the Company.

Ordinary shares of 0.1p

Director

31 March 2014

31 March 2013

Date of contract

C Dunstone

294,059,396 294,059,396 20 January 2010

J Gildersleeve

I West

J Allwood

B Hoberman

H Stringer

J Powell

J Shields

245,138

346,023

10,000

12,882

10,000

1,000

–

245,138 20 January 2010

346,023 8 February 2011

10,000 20 January 2010

12,882 20 January 2010

–

26 July 2012

16 May 2013

Fees for Non-Executive Directors
Remuneration for Non-Executive Directors is set by the Board, taking
account of the commitments and responsibilities of the role and their
participation in the various governance committees of the Company.

The fees for Non-Executive Directors and their appointment dates
are set out in the tables below. Non-Executive Directors are not
eligible to participate in annual bonus, LTIP and pension arrangements.

Non-Executive Director

C Dunstone

J Gildersleeve

I West

J Allwood

B Hoberman

H Stringer

J Powell

J Shields(1)

Aggregate
emoluments

Fees
£000

360

780

Taxable
benefits
£000

–

2014
total
£000

361

Fees
£000

360

–

781

696

Taxable
benefits
£000

–

2013
total
£000

361

–

697

(1) Appointed to the Board on 16 May 2013.

There were no changes to fee levels for Non-Executive Directors in the
year and no increases are proposed in the year ending 31 March 2015,
except where there are changes in the membership of the various
committees of the Board.

Payments to past Directors
There were no payments made to past Directors in the year ended 31 March 2014 not disclosed elsewhere in the report.

Payments for loss of office
There were no payments made to Executive Directors past or present in the year ended 31 March 2014, in compensation for loss of office.

The 2012 DSOP award of 614,754 options made to Amy Stirling lapsed on 30 November 2013.

Non-Executive Directors’ letters of appointment
The Committees that Non-Executive Directors serve on and dates of appointment are set out below.

Non-Executive Director

Committee membership

C Dunstone

J Gildersleeve

J Allwood

B Hoberman

I West

H Stringer

J Powell

J Shields(1)

—

Audit, Remuneration, Nomination, Compliance

Audit, Nomination

Remuneration

Audit, Remuneration, Nomination

Remuneration

Audit

—

(1) Appointed to the Board on 16 May 2013.

Date first appointed
to the Board

20 January 2010

8 February 2011

26 July 2012

16 May 2013

Effective date of
current letter
of appointment

16 January 2013

20 January 2013

16 May 2013

26 July 2012

16 May 2013

Additional information continued
Fees for external appointments

Director

Organisation

D Harding

British Land PLC, The Jockey Club

D Goldie

Energy Assets Group PLC,
Node4 Holdings Ltd, WHP Holdings Ltd

Relative importance of spend on pay
The difference in actual expenditure between FY13 and FY14 on
remuneration for all employees in comparison to distributions to
shareholders by way of dividends is set out in the graphs below:

2014
£000

Charles Dunstone is also Chairman of Carphone Warehouse Group PLC,
which the Company believes is a significant other commitment for him.

Advice and services provided to the Remuneration Committee
Except when matters concerning their own positions are being
considered, the Chief Executive Officer and the Group Human
Resources Director are normally invited to attend the meetings
of the Remuneration Committee. The Committee may discuss any
matter affecting the Chairman without the Chairman being present.

Dividend paid (£m)

2014

2013

Total employee pay (£m)

Over the course of the year ended 31 March 2014, the Remuneration
Committee appointed and was advised on matters relating to executive
remuneration by Towers Watson. The Remuneration Committee deems
the advisors to be independent from the Company and the advice
they received during the year to be appropriate and objective.

2014

2013

+£12m

£99m

£87m

–£8m

£125m

£133m

Towers Watson is a signatory to the Remuneration Consultants’
Group Code of Conduct in relation to executive remuneration
consulting in the UK.

Towers Watson has also been appointed by the Group HR Director
to advise the Company on other matters in relation to employee
remuneration, such as variable pay plans and organisational pay
band development over the course of the year.

The fees paid for services are set out below:

Company

Nature of service

Towers Watson(1)

Remuneration benchmarking
and long term incentive design

(1) Appointed on 28 November 2013.

2014
£000

Comparing pay to performance
The following tables and chart show a comparison of total pay for the
CEO since the listing of the Company on 29 March 2010, with the
remuneration of all other employees and with TSR.

The Regulations require a comparison with TSR performance over
a five year period, but due to the Company’s listing in 2010, it is only
possible to report for a four year period in this year’s report.

2011
£000

2012
£000

2013
£000

2014
£000

Single figure of
remuneration(1)

Bonus as a %
of maximum
available

Shares vesting
as a % of
maximum(2)

767

967

19.9%

40.0%

5,617

39.2%

6,842

37.6%

—

(1) The increase in the single figure number in 2013 represents the vesting of the first LTIP

award since the listing of the Company.

(2) It is not possible to show this value as the VES does not have a maximum % of shares.
However, for information the 2010 DSOP award vested at 100% of the maximum.

The table below shows the percentage change in remuneration between
2013 and 2014 for the CEO and all other employees of the Group.

CEO

Employees

Base pay
% change

Taxable benefits
% change

Annual bonus
% change

—

(4)%

TalkTalk Telecom Group PLC Annual Report 2014Additional information continued
TSR performance graph
The graph below shows the Group’s performance compared to the TSR performance of the FTSE 250 from the date of the Group’s listing
on 29 March 2010.

The FTSE 250 was selected as it is a broad market index of which the Group is a member.

300

250

200

150

100

TalkTalk Telecom Group PLC

FTSE 250

29 March
2010

31 March
2011

31 March
2012

31 March
2013

31 March
2014

This Remuneration Report has been prepared in accordance with the
Large and Medium-sized Companies and Group (Accounts and Reports)
(Amendment) Regulations 2013 (‘Regulations’) issued under the
Companies Act, the UK Corporate Governance Code, The GC 100
and Investor Group Directors’ Remuneration Reporting Guidance and
the Executive Remuneration Principles published by the Association
of British Insurers in November 2013. The constitution and operation
of the Remuneration Committee are in compliance with the Code.

In framing its Remuneration Policy the Committee has given full
consideration to the matters set out in Schedule A of the Code and
the Regulations. As required by the Regulations, resolutions to
approve the Remuneration Policy Section and the overall Directors’
Remuneration Report will be proposed at the 2014 AGM. Voting
regarding the 2013 Directors’ Remuneration Report was as follows:

Votes for

Discretionary
votes

Votes against

Votes withheld

Total votes

753,604,571

83,850 21,497,951

156,019 775,342,391

97%

—

100%

John Gildersleeve
Remuneration Committee Chairman
14 May 2014

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 2014
Directors’ Report

Suppliers payment policy
It is the Company’s policy to develop and maintain key commercial
relationships with its suppliers, one aspect of which is payment
timing, to obtain mutually agreed payment terms. The Company
has commercially agreed longer credit terms with one of its larger
corporate suppliers. Excluding this supplier, the underlying average
credit period taken on trade payables was 32 days (2013: 39 days).
Including this supplier, the average credit period taken was 42 days
(2013: 48 days).

Contracts with controlling shareholders
There are no material contracts with controlling shareholders, except
as disclosed in the Directors’ Remuneration Report on pages 26 to 39.
No Director is entitled to any compensation for loss of office on a
takeover or change of control of the Company. Details of employee
share schemes are set out in note 5 to the financial statements.
Shares held by the Group ESOT abstain from voting.

Share capital
The rights and obligations relating to the Company’s shares are set out in
the Articles of Association. The Articles of Association can be requested
from the Company Secretary at the Company’s registered office.

There are no restrictions on the transfer of ordinary shares in the capital
of the Company other than those which may be imposed by law from
time to time. In accordance with the Disclosure and Transparency
Rules, certain employees are required to seek approval to deal in the
Company’s shares. The Company is not aware of any agreements
between shareholders that may result in restrictions on the transfers
of securities and/or voting rights.

There is a general right of the Company to purchase its own shares,
as set out at Article 16 of the Company’s Articles of Association.
In addition, at the AGM in 2013, the Directors were granted the right
to acquire 93,124,407 shares. This right expires on the date of the
2014 AGM or 24 October 2014 (whichever is the sooner).

The Articles of Association may be changed by special resolution.

Details in the movements in authorised and issued share capital during
the period are provided in notes 21 and 22 to the financial statements.

Appointment of Directors
The rules relating to the appointment and/or removal of Directors
are contained in Section O of the Company’s Articles of Association.
The powers of the Directors are set out in the Company’s Articles
of Association.

Property, plant and equipment
Movements in property, plant and equipment are set out in note 12
to the financial statements.

Dividends
The Company may, by resolution in a general meeting, declare
dividends in accordance with the respective rights of the members,
but no dividend can exceed the amount recommended by the Board.

Significant shareholdings
At 14 May 2014, the Company had been notified of the following
interests in the Company’s shares:

Name

Charles Dunstone

David Ross

Capital Research
and Management Company

Jupiter Asset Management

Group ESOT

Number
of shares

Percentage
of share capital

294,059,396

116,160,528

30.79%

12.16%

61,162,000

37,379,821

34,130,266

6.40%

3.91%

3.57%

3.21%

3.20%

Fidelity Worldwide Investment (UK) Ltd.

30,634,947

Alken Asset Management LLP

30,564,840

The total interests of the Directors are detailed in the Directors’
Remuneration Report on pages 26 to 39.

Going concern
On the basis of current financial projections and facilities available,
the Directors are satisfied that the Group has adequate resources
to continue in operation for the foreseeable future and consequently
the financial statements continue to be prepared on the going concern
basis, as discussed in the Chief Financial Officer’s statement on
page 14.

Directors’ indemnities
Directors’ liability insurance is provided for Directors.

Equal opportunities
We celebrate diversity and have an equality policy, which ensures that
everyone is provided with the same opportunities for employment,
career development, training and promotion. As part of this policy,
applications for employment by disabled persons are fully considered,
bearing in mind the abilities of the applicant concerned. In the event
of employees becoming disabled during employment a thorough
process is followed and support provided (including income support
insurance) to try to secure their employment.

Audit information
Each of the persons who is a Director at the date of approval of this
Annual Report confirms that:

ƥ so far as the Director is aware, there is no relevant audit information

of which the Company’s auditor is unaware; and

ƥ the Director has taken all the steps that he/she ought to have taken
as a Director in order to make himself/herself aware of any relevant
audit information and to establish that the Company’s auditor is
aware of the information.

This confirmation is given and should be interpreted in accordance
with the provisions of Section 418 of the Companies Act 2006.

By order of the Board

TalkTalk Telecom Group PLC
11 Evesham Street
London W11 4AR

TS Morris
Company Secretary
14 May 2014

TalkTalk Telecom Group PLC Annual Report 2014Directors’ responsibilities statement

The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.

Responsibility statement
We confirm that to the best of our knowledge:

Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors are required to
prepare the Group financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union and Article 4 of the IAS Regulation and have elected to prepare
the Parent Company financial statements in accordance with United
Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law). Under company law the
Directors must not approve the accounts unless they are satisfied
that they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.

In preparing the Group financial statements, International Accounting
Standard 1 requires that Directors:

ƥ properly select and apply accounting policies;

ƥ present information, including accounting policies, in a

manner that provides relevant, reliable, comparable and
understandable information;

ƥ the financial statements, prepared in accordance with the relevant
financial reporting framework, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole;

ƥ the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face; and

ƥ the Annual Report and financial statements, taken as a whole, are
fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance,
business model and strategy.

By order of the Board

ƥ provide additional disclosures when compliance with the specific

requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; and

D Harding
Chief Executive Officer
14 May 2014

S Makin
Chief Financial Officer
14 May 2014

ƥ make an assessment of the Company’s ability to continue

as a going concern.

In preparing the Parent Company financial statements, the Directors
are required to:

ƥ select suitable accounting policies and then apply them consistently;

ƥ make judgements and accounting estimates that are reasonable

and prudent;

ƥ state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and

ƥ prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.

The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of
the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company’s website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 2014

Independent auditor’s report
to the members of TalkTalk Telecom Group PLC

Opinion on financial statements
of TalkTalk Telecom Group PLC

Separate opinion in relation to IFRSs
as issued by the IASB

Going concern

In our opinion:

ƥ the financial statements give a true and fair view of the state of the Group’s and
of the Parent Company’s affairs as at 31 March 2014 and of the Group’s profit for
the year then ended;

ƥ the Group financial statements have been properly prepared in accordance
with International Financial Reporting Standards (IFRSs) as adopted by the
European Union;

ƥ the Parent Company financial statements have been properly prepared in

accordance with United Kingdom Generally Accepted Accounting Practice; and

ƥ the financial statements have been prepared in accordance with the requirements
of the Companies Act 2006 and, as regards the Group financial statements,
Article 4 of the IAS Regulation.

The financial statements comprise the Group income statement, the Group
statement of comprehensive income, the Group statement of changes in equity,
the Group and Parent Company balance sheets, the Group cash flow statement,
the Parent Company reconciliation of movements in shareholders’ funds and the
related notes 1 to 28. The financial reporting framework that has been applied in
the preparation of the Group financial statements is applicable law and IFRSs as
adopted by the European Union. The financial reporting framework that has been
applied in the preparation of the Parent Company financial statements is
applicable law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice).

As explained in note 1 to the Group financial statements, in addition to complying
with its legal obligation to apply IFRSs as adopted by the European Union, the
Group has also applied IFRSs as issued by the International Accounting Standards
Board (IASB).

In our opinion the Group financial statements comply with IFRSs as issued by
the IASB.

As required by the Listing Rules we have reviewed the Directors’ statement
contained within the Chief Financial Officer’s Statement that the Group
is a going concern. We confirm that:

ƥ we have concluded that the Directors’ use of the going concern basis of

accounting in the preparation of the financial statements is appropriate; and

ƥ we have not identified any material uncertainties that may cast significant

doubt on the Group’s ability to continue as a going concern.

However, because not all future events or conditions can be predicted, this
statement is not a guarantee as to the Group’s ability to continue as a going concern.

Our assessment of risks of material
misstatement

The assessed risks of material misstatement described opposite are those that
had the greatest effect on our audit strategy, the allocation of resources in the
audit and directing the efforts of the engagement team.

TalkTalk Telecom Group PLC Annual Report 2014Risk

How the scope of our audit responded to the risk

Revenue recognition

Revenue recognition surrounding:

ƥ the completeness over revenue due to the high
volume of low value data. The majority of the
Group’s revenue is generated from the output
of billing systems; and

ƥ the accuracy and completeness of revenue

recognised on transactions which are outside the
normal billing process, which by their nature carry
a higher level of management judgement.

We tested the operating effectiveness of key IT and business controls over the
customer billing systems. Our tests assessed the operating effectiveness of
controls put in place to ensure all services supplied to customers are input into
and processed through the billing systems.

This enabled us to obtain controls assurance over billing systems accounting for
over 95% of total Group revenue. We subsequently applied a combination of
substantive analytical review procedures and tests of detail to obtain assurance
over the validity and completeness of the reported output of these systems.

We performed substantive testing on a sample of non-systematic adjustments
which are outside of the normal billing process and therefore carry higher levels
of management judgement. These included revenue deferrals and the write back
of historical credits applied to customer accounts to the income statement.

Disclosure of exceptional items and the
presentation of adjusted measures in the
financial statements

The disclosure of exceptional items and their
presentation on the face of the income statement
represents an audit risk given the level of
management judgement involved. Areas of
particular audit focus in the current year are
exceptional costs recognised in relation to dual
running costs, internal labour costs and the “Red
Routers” programme – all of which we deem to carry
a higher level of judgement. The nature of these
costs have been defined in note 9 to the accounts.

Carrying value of goodwill and intangible assets

Management is required to undertake an annual
impairment review, which incorporates judgements
based on assumptions of future cash flows,
including assumptions around revenue growth,
margins and forecast cash flows, the selection
of appropriate discount rates and the assessment
of the Group’s cash generating units.

Treatment and presentation of deferred tax assets

The accounting treatment and presentation of the
measurement of deferred tax assets relating to
losses of Video Networks Limited acquired with
Tiscali which have been disclosed within note 7.
The recognition of these deferred tax assets are
judgemental as a result of their nature and reliance
on management forecasts.

In addition to understanding the composition of exceptional items and agreeing a
sample of items to supporting documentation, we have challenged management’s
rationale for the presentation of items within the income statement as exceptional,
particularly around the areas of higher judgement, such as dual-running, to ensure
the costs recognised as exceptional meet the criteria of the accounting policy
for such items defined by the Group within note 9. This includes assessing the
incremental nature of the costs, the extent to which the costs are non-recurring,
whether they are specific to individual projects and considering whether they
should be classified as part of underlying operations.

Our work has also included a review, on a sample basis, of items included within
the income statement to identify income and expenses which were exceptional
by nature but not separately identified.

We challenged management’s assumptions used in the impairment model
for goodwill and intangible assets, including specifically the determination of
cash generating units, the forecast cash flow projections for each cash generating
unit and the discount rates. In making this critical assessment of the cash flow
projections we assessed historical forecasting accuracy and compared forecast
profit margins to historical margins and benchmarked the discount rate and growth
rates employed to available market data. We critically assessed management’s
position as to whether or not a reasonably possible change to key operating
assumptions could result in an impairment. In doing so we considered the
sensitivity of the asset valuations to these assumptions, in particular changes to
the long term growth rate assumed and the growth of the TV and Fibre customer
bases. We also considered the appropriateness of the related disclosures set out
in note 11 to the accounts.

We have reviewed correspondence with HMRC supporting the availability of these
losses and have challenged management’s forecasts of future taxable profits to
determine the appropriate quantum of Video Network losses to recognise as a
deferred tax asset.

The Audit Committee’s consideration of these risks is set out on page 23.

Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to
express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the
risks described above, and we do not express an opinion on these individual matters.

Our application
of materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable
that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We
use materiality both in planning the scope of our audit work and in evaluating the results of our work.

We determined planning materiality for the Group to be £6m (2013: £8.2m). In determining materiality,
we made allowance for the impact of the subscriber acquisition costs related to TV customers which has
reduced current year profits. Our materiality was therefore set by blending revenue and profit metrics to
take this matter in to account. On the basis of our risk assessment, together with our assessment of the
Group’s overall control environment, our judgement is that performance materiality for the Group should
be 70% of planning materiality, namely £4.2m. Our objective in adopting this approach is to ensure that
total detected and undetected audit differences do not exceed our planning materiality for the financial
statements as whole.

We agreed with the Audit Committee that we would report to the Committee all audit differences in
excess of £120,000, as well as differences below that threshold that, in our view, warranted reporting
on qualitative grounds.

We also report to the Audit Committee on disclosure matters that we identified when assessing the
overall presentation of the financial statements.

Our Group audit was scoped by obtaining an understanding of the Group and its environment, including
Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that
assessment, we focused our Group audit scope primarily on the TalkTalk Consumer and TalkTalk Business
operating units, each of these was subject to a full audit and represent 95% of the Group’s total assets
and revenues. Specific focused audit work was performed over Group functions, including those covering
treasury and taxation. Our audit work at each division was executed at levels of materiality which were
lower than Group materiality.

At the parent entity level we also tested the consolidation process and carried out analytical procedures
to confirm our conclusion that there were no significant risks of material misstatement of the aggregated
financial information of the remaining components not subject to audit.

In our opinion:

ƥ the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance

with the Companies Act 2006; and

ƥ the information given in the Strategic Report and the Directors’ Report for the financial year for which

the financial statements are prepared is consistent with the financial statements.

An overview of the scope
of our audit

Opinion on other matters
prescribed by the
Companies Act 2006

Matters on which we are required to report by exception
Adequacy of explanations
received and accounting
records

Under the Companies Act 2006 we are required to report to you if, in our opinion:

ƥ we have not received all the information and explanations we require for our audit; or

ƥ adequate accounting records have not been kept by the Parent Company, or returns adequate for our

audit have not been received from branches not visited by us; or

ƥ the Parent Company financial statements are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of
Directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be
audited is not in agreement with the accounting records and returns. We have nothing to report arising
from these matters.
Under the Listing Rules we are also required to review the part of the Corporate Governance Statement
relating to the Company’s compliance with nine provisions of the UK Corporate Governance Code.
We have nothing to report arising from our review.
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our
opinion, information in the Annual Report is:

ƥ materially inconsistent with the information in the audited financial statements; or

ƥ apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group

acquired in the course of performing our audit; or

ƥ otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our
knowledge acquired during the audit and the Directors’ statement that they consider the Annual Report
is fair, balanced and understandable and whether the Annual Report appropriately discloses those
matters that we communicated to the Audit Committee which we consider should have been disclosed.
We confirm that we have not identified any such inconsistencies or misleading statements.

Directors’ remuneration

Corporate Governance
Statement

Our duty to read other
information in the Annual
Report

TalkTalk Telecom Group PLC Annual Report 2014Respective responsibilities
of Directors and auditor

Scope of the audit of the
financial statements

As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view. Our
responsibility is to audit and express an opinion on the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with
the Auditing Practices Board’s Ethical Standards for Auditors. We also comply with International Standard
on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality
control procedures are effective, understood and applied. Our quality controls and systems include our
dedicated professional standards review team, strategically focused second partner reviews and
independent partner reviews.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16
of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions
we have formed.

An audit involves obtaining evidence about the amounts and disclosures in the financial statements
sufficient to give reasonable assurance that the financial statements are free from material misstatement,
whether caused by fraud or error. This includes an assessment of: whether the accounting policies are
appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors;
and the overall presentation of the financial statements. In addition, we read all the financial and non-financial
information in the Annual Report to identify material inconsistencies with the audited financial statements
and to identify any information that is apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.

Sharon Thorne FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
14 May 2014

2014

Amortisation of
acquisition
intangibles and
exceptional

items*
£m

(5)
–

(5)

(17)

(22)

–
(21)
–

(43)
–

(43)
10

(33)

Notes

3, 12
3, 11
14

3
6

Before
amortisation of
acquisition
intangibles and
exceptional
items
£m

1,727
(769)

958

(745)

213

(77)
(35)
(7)

94
(20)

74
(13)

10
10

6.8
6.6

Revenue
Cost of sales

Gross profit
Operating expenses excluding
amortisation and depreciation

Headline EBITDA

Depreciation
Amortisation
Share of results of joint venture

Operating profit
Finance costs

Profit before taxation
Taxation

Profit for the year

Attributable to the equity holders
of the Parent Company

Earnings per share
Headline/Statutory
Basic (pence)
Diluted (pence)

After
amortisation of
acquisition
intangibles and
exceptional
items
£m

Before
amortisation of
acquisition
intangibles and
exceptional
items
£m

2013

Amortisation of
acquisition
intangibles and
exceptional

items*
£m

After
amortisation of
acquisition
intangibles and
exceptional
items
£m

1,722
(769)

953

1,670
(751)

919

(762)

(629)

–
–

–

–
(52)
–

(43)
–

(43)
11

(32)

1,670
(751)

919

(620)

299

(76)
(78)
(4)

141
(19)

122
(22)

100

290

(76)
(26)
(4)

184
(19)

165
(33)

132

(32)

100

14.9
14.0

11.3
10.6

191

(77)
(56)
(7)

51
(20)

31
(3)

3.1
3.0

* A reconciliation of Headline information to Statutory information is provided in note 9 to the financial statements.

The accompanying notes are an integral part of this Group income statement. All amounts relate to continuing operations.

TalkTalk Telecom Group PLC Annual Report 2014
Group statement of comprehensive income
For the year ended 31 March

Profit for the year*
Other comprehensive income for the year
Items that may be reclassified subsequently to the income statement:
Derivative financial instruments*
Currency translation differences

Total comprehensive income for the year

Attributable to the equity holders of the Parent Company

* Recognised within retained earnings and other reserves.

The accompanying notes are an integral part of this Group statement of comprehensive income.

Notes

2014
£m

3
–

2013
£m

100

(2)
1

At 1 April 2013
Total comprehensive income for the year
Issue of own shares*
Taxation of items recognised directly in reserves
Purchase of own shares
Settlement of Group ESOT
Adjustment arising from change
in non‑controlling interest
Share‑based payments reserve credit
Equity dividends

At 31 March 2014

At 1 April 2012
Total comprehensive income for the year
Issue of own shares**
Taxation of items recognised directly in reserves
Share‑based payments reserve credit
Equity dividends

At 31 March 2013

Notes

5
8

Notes

5
8

Share
capital
£m

Share
premium
£m

Translation
reserve
£m

618
–
66
–
–
–

–
–
–

(64)
–
–
–
–
–

–
–
–

Demerger
reserve
£m

(513)

–
–
–
–
–

–
–
–

684

(64)

(513)

1
–
–
–
–
–

–
–
–

Share
capital
£m

Share
premium
£m

Translation
reserve
£m

1
–
–
–
–
–

586
–
32
–
–
–

618

(65)
1
–
–
–
–

(64)

Demerger
reserve
£m

(513)

–
–
–
–
–

(513)

Retained
earnings
and other
reserves
£m

400
31
(78)
2
(24)
6

(3)
4
(99)

239

Retained
earnings
and other
reserves
£m

435
98
(63)
11
6
(87)

400

Total
£m

442
31
(12)
2
(24)
6

(3)
4
(99)

347

Total
£m

444
99
(31)
11
6
(87)

442

* On 16 September 2013, the Group’s Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been
satisfied, meaning the VES participants were entitled to exercise the remaining 40% of their options as set out in note 5. The settlement of the schemes resulted in the recognition of
share premium of £66m and a £78m movement in retained earnings and other reserves.

** On 17 September 2012, the Group’s Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been
satisfied, meaning the VES participants were entitled to exercise 60% of their options as set out in note 5. The settlement of the schemes resulted in the recognition of share premium of
£32m and a £63m movement in retained earnings and other reserves.

The accompanying notes are an integral part of this Group statement of changes in equity.

TalkTalk Telecom Group PLC Annual Report 2014
Group balance sheet
As at 31 March

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investment in joint venture
Deferred tax assets

Current assets
Cash and cash equivalents
Inventories
Trade and other receivables

Total assets

Current liabilities
Bank overdraft
Trade and other payables
Loans and other borrowings
Corporation tax liabilities
Provisions

Non-current liabilities
Loans and other borrowings
Provisions

Total liabilities

Net assets

Equity
Share capital
Share premium
Translation reserve
Demerger reserve
Retained earnings and other reserves

Total equity

Notes

11
11
12
14
7

18
15
16

18
17
18

18
20

21, 22
22
22
22
22

The accompanying notes are an integral part of this Group balance sheet.

These financial statements were approved by the Board on 14 May 2014. They were signed on its behalf by:

D Harding
Chief Executive Officer
14 May 2014

S Makin
Chief Financial Officer
14 May 2014

2014
£m

479
141
305
7
107

2013
£m

479
154
295
9
109

1,039

1,046

–
24
260

284

7
23
226

256

1,323

1,302

(7)
(456)
(30)
(14)
(2)

(509)

(460)
(7)

(467)

(976)

347

1
684
(64)
(513)
239

347

–

(431)
(25)
(16)
(5)

(477)

(375)
(8)

(383)

(860)

442

1
618
(64)
(513)
400

442

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 2014

Notes

5
3, 12
3, 11
14
13

13, 14
13

18
18

2014
£m

4
77
56
7
–

195
(36)
(1)
7
(5)

160

–

160

(8)
–
(42)
(65)

2013
£m

141

6
76
78
4
(1)

304
(37)
(20)
46
(6)

287

–

287

(6)
2
(34)
(70)

(115)

(108)

6
(39)
90
(17)
(99)

(59)

(14)
7

(7)

–
(7)

(7)

–
(35)
(35)
(16)
(87)

(173)

6
1

7
–

Group cash flow statement
For the year ended 31 March

Operating activities
Operating profit
Adjustments for non‑cash items:
Share‑based payments
Depreciation
Amortisation
Share of losses of joint venture
Profit on disposal of subsidiaries

Operating cash flows before movements in working capital
Increase in trade and other receivables
Increase in inventory
Increase in trade and other payables
Decrease in provisions

Cash generated by operations

Income taxes paid

Net cash flows generated from operating activities

Investing activities
Acquisition of subsidiaries and joint ventures, net of cash acquired
Disposal of subsidiaries and customer bases
Acquisition of intangible assets
Acquisition of property, plant and equipment

Cash flows used in investing activities

Financing activities
Settlement of Group ESOT shares
Net purchase of own shares
Drawdown (repayment) of borrowings
Interest paid
Dividends paid

Cash flows used in financing activities

Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at the start of the year

Cash and cash equivalents at the end of the year

Cash and cash equivalents for the purpose of this statement comprise:
Cash and cash equivalents
Bank overdrafts

The accompanying notes are an integral part of this Group cash flow statement.

TalkTalk Telecom Group PLC Annual Report 2014
Notes to the consolidated financial statements

1. Accounting policies and basis of preparation
Basis of preparation
TalkTalk Telecom Group PLC is incorporated in England and Wales under the Companies Act 2006.

The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards
(IFRS) as adopted for use in the European Union (EU) and as applied in accordance with the provisions of the Companies Act 2006. These
financial statements therefore comply with Article 4 of the European Union International Accounting Standard regulation. The Company has
elected to prepare its Parent Company financial statements in accordance with UK GAAP.

The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments and
investments. The financial statements are presented in Sterling, rounded to the nearest million, because that is the currency of the principal
economic environment in which the Group operates.

Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company, entities controlled by the Company (its subsidiaries)
and entities which are joint ventures accounted for using the equity method made up to 31 March each year. Control is achieved where the
Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or sold during the year are included from or to the date on which control passed to or was relinquished
by the Group. Intercompany transactions and balances between subsidiaries are eliminated on consolidation.

Where necessary, adjustments are made to the financial statements of subsidiaries and the results of joint ventures to bring accounting
policies in line with those used by the Group.

Going concern
The financial statements have been prepared on the going concern basis. Details of the considerations undertaken by the Directors in reaching
this conclusion are set out on page 14 within the Chief Financial Officer’s statement.

Accounting policies
The Group’s principal accounting policies, which relate to the financial statements as a whole, are set out below. Where an accounting policy
is specific to one note, the policy is described in the note to which it relates. This section also shows new EU endorsed accounting standards,
amendments and interpretations, whether these are effective in the current or later years. In both cases it is explained how they are expected
to impact the performance of the Group.

Revenue
Revenue is stated net of VAT and other sales related taxes and represents the gross inflow of economic benefit generated from the provision
of fixed line, TV and mobile telecommunications services. All such revenue is recognised as the services are provided:

ƥ line rental is recognised in the period to which it relates;

ƥ voice and broadband subscriptions are recognised in the period to which they relate;

ƥ usage including voice and TV content is recognised in the period in which the customer takes the service;

ƥ promotional discounts are amortised on a straight line basis over the minimum contract period subject to an adjustment for in-contract

churn; and

ƥ data service solutions and other service contracts are recognised as the Group fulfils its performance obligations.

Revenue is measured at fair value of the consideration received or receivable. 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. The amount of
revenue the Group recognises for delivered elements is limited to the cash received.

Subscriber acquisition costs
Subscriber acquisition costs include both third party costs of recruiting and retaining new customers as well as device costs. These are
expensed as incurred.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 20141. Accounting policies and basis of preparation continued
Foreign currency translation and transactions
Material transactions in foreign currencies are hedged using forward purchases or sales of the relevant currencies and are recognised in the
financial statements at the exchange rates thus obtained. Unhedged transactions are recorded at the exchange rate on the date of the
transaction. Hedge accounting as defined by IAS 39 ‘Financial Instruments: Recognition and Measurement’ has been applied in the current and
preceding financial year by marking to market the relevant financial instruments at the balance sheet date and recognising the gain or loss
through other comprehensive income in respect of cash flow hedges.

The principal exchange rates against UK Sterling used in these financial statements are as follows:

Euro
United States Dollar

Average

Closing

2014

1.19
1.60

2013

1.23
1.58

2014

1.21
1.67

2013

1.19
1.52

Where a foreign operation is sold, the gain or loss on disposal recognised in the income statement is determined after taking into account the
cumulative currency translation differences that are attributable to the operation.

Leases
Rental payments under operating leases are charged to the income statement on a straight line basis over the period of the lease. Lease incentives
and rent free periods are amortised through the income statement over the period of the lease.

Gains or losses from sale and leaseback transactions are deferred over the life of the new lease to the extent that the rentals are considered to
be above or below market rentals. The remaining gain or loss is recognised within operating expenses in the year in which the sale is completed.

Financial instruments
Financial assets and financial liabilities, in respect of financial instruments, are recognised in the Group’s balance sheet when the Group
becomes a party to the contractual provisions of the instrument.

Trade and other receivables
Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified
as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest rate method, less any impairment.
Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would
be immaterial.

Cash and cash equivalents
Cash and cash equivalents and bank deposits consists of cash in hand.

Trade payables
Trade payables are other financial liabilities initially measured at fair value and subsequently measured at amortised cost.

Financial liabilities and equity instruments
Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements
entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual
interest in the assets of the Group after deducting all of its liabilities and includes no obligation to deliver cash or other financial assets. The
accounting policies adopted for specific financial liabilities and equity instruments are set out below.

Loans and other borrowings
Loans and other borrowings represent committed and uncommitted bank loans, bank overdrafts and loans from related parties. These are
initially measured at fair value (which is equal to cost at inception) and are subsequently measured at amortised cost, using the effective
interest rate method.

Bank fees and legal costs associated with the securing of external financing are capitalised and amortised over the term of the relevant facility.
All other borrowing costs are recognised in the income statement in the period in which they are incurred.

Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash
and cash equivalents for the purpose of the statement of cash flows.

Equity instruments
Equity instruments issued by the Group are recorded at the proceeds received, net of direct issuance costs.

Shares in the Company held by the Group ESOT are shown as a reduction in shareholders’ funds. Other assets and liabilities held by the trust
are consolidated with the assets of the Group.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued1. Accounting policies and basis of preparation continued
Financial instruments continued
Derivative financial instruments and hedge accounting
The Group’s activities expose it to the financial risks of changes in foreign exchange rates and interest rates. The use of financial derivatives
is governed by the framework approved by the Board, which provides written principles on the use of financial derivatives consistent with
the Group’s risk management strategy. Changes in values of all derivatives of a financing nature are included within investment income and
financing costs in the income statement. The Group does not use derivative financial instruments for speculative purposes.

Derivative financial instruments are initially measured at fair value on the contract date and are subsequently remeasured to fair value at each
reporting date.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge
accounting, or the Company chooses to end the hedging relationship.

Cash flow hedges
The Group uses derivative instruments (primarily interest rate swaps) to manage its interest rate risk. The Group designates these as cash flow
hedges. The effective portion of changes in the fair value of these instruments is recognised in other comprehensive income. The gain or loss
relating to the ineffective portion is recognised immediately in the income statement.

Measurement
The financial instruments included on the Group’s balance sheet are measured at fair value or amortised cost. The measurement of this fair
value can in some cases be subjective and can depend on the inputs used in the calculations. The different valuation methods are called
‘hierarchies’ and are described below:

ƥ Level 1: Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities;

ƥ Level 2: Fair values measured using inputs, other than quoted prices included within Level 1 that are observable for the asset or liability either

directly or indirectly; and

ƥ Level 3: Fair values measured using inputs for the asset or liability that are not based on observable market data.

Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements requires management to exercise judgement in applying the Group’s accounting policies. Estimates
and assumptions used in the preparation of the financial statements are continually reviewed and revised as necessary. Whilst every effort
is made to ensure that such estimates and assumptions are reasonable, by their nature they are uncertain, and as such changes in estimates
and assumptions may have a material impact.

The areas involving the most sensitive estimates and assumptions that are significant to the financial statements are set out in more detail in
the related notes:

ƥ tax (note 7);

ƥ exceptional items (note 9);

ƥ impairment of goodwill (note 11);

ƥ capitalisation and useful economic lives of assets (notes 11 and 12);

ƥ impairment of assets (notes 11 and 12); and

ƥ trade receivables (note 16).

Application of significant new or amended EU endorsed accounting standards
Amendments to IAS 1 ‘Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income’ and IFRS 13 ‘Fair Value
Measurement’ became effective in the current reporting period. These new and revised standards and interpretations have no material impact
on the Group.

In addition, the Group has elected to early adopt IAS 36 (revised) ‘Impairment of Assets’ (IAS 36), which is endorsed by the EU, but not effective
until periods beginning on or after 1 January 2014. The amendments to IAS 36 enhance the disclosure requirements arising when recoverable
amounts have been determined on the basis of fair value less costs of disposal. They also limit the requirement to disclose the recoverable
amount of an asset or CGU to periods in which an impairment loss has been recognised or reverses.

We have chosen to adopt the amendments early, as allowed by the standard, with effect from 1 April 2013.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 20141. Accounting policies and basis of preparation continued
Future accounting developments
At the date of authorisation of these financial statements the following significant standards and interpretations that have not been applied
in these financial statements were in issue, but not yet effective (and in some cases had not yet been adopted by the EU):

ƥ IFRS 9

‘Financial Instruments’

ƥ IFRS 10, IFRS 12 and
IAS 27 (amended)

‘Investment Entities’

ƥ IAS 32 (amended)

‘Offsetting Financial Assets and Financial Liabilities’

ƥ IAS 39 (amended)

‘Novation of Derivatives and Continuation of Hedge Accounting’

ƥ IFRIC 21

‘Levies’

The Directors do not expect that the adoption of these standards will have a material impact on the financial statements of the Group
in future periods, except as follows:

ƥ IFRS 9 will impact the:

• measurement and disclosure of financial instruments; and
• disclosure of interest the Group has in other entities.

Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review
has been completed.

2. Segmental reporting
Accounting policy
IFRS 8 ‘Operating Segments’ requires the segmental information presented in the financial statements to be that used by the chief operating
decision maker to evaluate the performance of the business and decide how to allocate resources. The Group has identified the Board as its
chief operating decision maker. The Board considers the results of the business as a whole when assessing the performance of the business
and making decisions about the allocation of resources. Accordingly the Group has one operating segment.

Headline revenue

Headline EBITDA
Depreciation
Amortisation of operating intangibles
Share of results of joint ventures

Headline profit before interest and taxation (note 9)
Amortisation of acquisition intangibles
Exceptional items

Operating profit

2014
£m

1,727

2013
£m

1,670

213
(77)
(35)
(7)

94
(21)
(22)

290
(76)
(26)
(4)

184
(52)
9

141

The Group’s revenue is split by On-net, Off-net and Corporate products as this information is provided to the Group’s chief operating decision
maker. On-net and Off-net comprise Consumer and Business customers that receive similar services.

On‑net
Off‑net
Corporate

2014
£m

1,259
128
340

1,727

2013
£m

1,170
178
322

1,670

The Group has no material overseas operations; as a result a split of revenue and total assets by geographical location has not been disclosed.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued

3. Operating profit before interest and taxation
Group profit before interest and taxation is stated after charging (crediting):

Depreciation of property, plant and equipment
Amortisation of acquisition intangibles
Amortisation of other operating intangible fixed assets
Profit on disposal of subsidiaries and customer bases
Impairment of Shared Band Limited
Impairment loss recognised on trade receivables
Staff costs
Cost of inventories recognised in expenses
Rentals under operating leases
Auditor’s remuneration*

* A breakdown of auditor’s remuneration is disclosed within the Governance section on page 24.

4. Employee costs
The average number of employees (including Executive Directors) was:

Administration
Sales and customer management

The aggregate remuneration recognised in respect of these employees in the income statement comprised:

Wages and salaries
Social security costs
Other pension costs

Share‑based payments (note 5)

2014
£m

77
21
35
–
–
52
125
123
91
1

2014
Number

1,516
792

2,308

2014
£m

104
13
4

121
4

125

2013
£m

76
52
26
(1)
1
33
133
67
79
1

2013
Number

1,517
998

2,515

2013
£m

110
14
3

127
6

133

The Group provides various defined contribution pension schemes for the benefit of a significant number of its employees. These are charged
to the income statement as they become payable in accordance with the rules of the schemes.

Compensation earned by key management personnel is analysed below. The key management personnel comprised the TalkTalk Group
Executive Board and Board of Directors.

Salaries and fees
Performance bonuses
Benefits
Pension costs
Share‑based payments*

2014
£m

3.9
1.8
0.2
0.2
0.7

6.8

Restated
2013
£m

4.0
1.9
0.1
0.2
0.9

7.1

* The prior year share-based payments charge has been restated from £2.2m to £0.9m. This is to reflect the fact that the charge disclosed in the 2013 Annual Report showed the total

charge across the life of the scheme for these employees rather than just the FY13 charge.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 20145. Share-based payments
Accounting policy
The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at
fair value at the date of grant and expensed over the vesting period, based on an estimate of the number of shares that will eventually vest.

Fair value is measured by use of a dividend discount or Binomial model for share-based payments with internal, non-market performance criteria
(for example, EPS targets) and a Black Scholes or Monte Carlo model for those with external, ‘market’ performance criteria (for example, TSR targets).

For schemes with non-market performance criteria, the number of options expected to vest is recalculated at each balance sheet date, based
on expectations of performance against target and of leavers prior to vesting. The movement in cumulative expense since the previous balance
sheet date is recognised in the income statement, with a corresponding entry in reserves.

For schemes with market performance criteria, the number of options expected to vest is adjusted only for expectations of leavers prior to vesting.
The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding
entry in reserves.

If a scheme is cancelled, any remaining part of the fair value of the scheme is expensed immediately. If a scheme is forfeited, no further
expense is recognised and any charges previously recognised are reversed.

Charges arise on loans that are provided to employees to fund the purchase of shares in the Group as part of long term incentive plans.
To the extent to which the loans are not, in certain circumstances, repayable, the cost of such loans is expensed over the course of the relevant
incentive plans. Charges are also recognised on loans provided to employees to settle personal tax liabilities; to the extent to which the loans
are not, in certain circumstances, repayable, the cost of such loans is expensed on grant.

In accordance with IFRS 2 ‘Share-based Payment’ no cost has been recognised in respect of the options granted before November 2002.

Group share schemes
The Group’s share schemes are the Discretionary Share Option Plan (DSOP) and Save-As-You-Earn scheme (SAYE).

In addition, the Group has a number of legacy CPW schemes.

In order to aid the user of the accounts, the dilutive effect on EPS of each of the Group schemes and legacy CPW schemes has been presented.
This has been calculated using an average share price for the financial year of £2.67 (2013: £1.98).

For the CPW legacy schemes, there is no IFRS 2 charge in the current year (2013: £1m). The disclosures are limited to the dilutive effect on EPS
and the number of options outstanding at the end of the year.

In September 2013, the remaining 40% of the TTG VES and the CPW TTG VES vested. Further information is set out in section (vi) of this note.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued5. Share-based payments continued
Summary of share schemes

Year ended 31 March 2014

TalkTalk Telecom Group PLC schemes
All Employee Share Option Award – 2012
DSOP – 2013 grant
DSOP – 2012 grant
DSOP – 2010 grant
SAYE

Total TalkTalk Telecom Group PLC schemes

Legacy Carphone Warehouse schemes
TTG VES and CPW TTG VES
Other employee share option schemes

Total legacy Carphone Warehouse schemes

Total

Year ended 31 March 2013

TalkTalk Telecom Group PLC schemes
All Employee Share Option Award – 2012
DSOP – 2012 grant
DSOP – 2010 grant
SAYE

Total TalkTalk Telecom Group PLC schemes

Legacy Carphone Warehouse schemes
TTG VES and CPW TTG VES
Other employee share option schemes

Total legacy Carphone Warehouse schemes

Total

IFRS 2
charge
£m

Dilutive
effect
millions

Options
outstanding
at end of
the year
millions

2
1
1
–
–

–
–

–

1
3
5
4
2

14
1

–
6
10
2
4

–
1

IFRS 2
charge
£m

Dilutive
effect
millions

Options
outstanding
at end of
the year
millions

2
1
1
1

1
–

1
5
7
3

38
2

2
12
17
6

–
1

TalkTalk Telecom Group PLC schemes
(i) All Employee Share Option Award – 2012
The All Employee Share Option Award – 2012 was granted in September 2012, under the DSOP rules, approved by shareholders in 2010.
The award of 1,000 nil priced share options per qualifying employee was designed to reward all employees who were not part of another
share option plan and to foster all-employee share ownership. The exercise of options was subject to continuing employment at the vesting
date in September 2013 and there are no performance conditions in relation to this award. These options lapse on resignation of an employee.
On 12 September 2013, two million options vested and were exercised by qualifying employees.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 20145. Share-based payments continued
TalkTalk Telecom Group PLC schemes continued
(ii) DSOP – 2013 grant
In June 2013, the Group granted six million nil priced share option awards subject to absolute TSR and EPS performance targets. During December 2013
and January 2014, the Group granted a further 141,000 options under the DSOP – 2013 grant to a number of new senior employees. The options
are measured over a performance period to 31 March 2016 and will vest on the publication of the Group’s 2016 Annual Report. A total of 60% of
the vested options are exercisable from the vesting date, with the remaining 40% of options being exercisable twelve months later. Options are
forfeited if an employee leaves the Group before the options vest. Awards are triggered within a range from 5% to 26% for compound annual
growth of TSR and EPS. If the minimum performance requirement is met a total of 25% of the award will vest, rising to 40% for target, 70% for
stretch and 100% for super stretch.

DSOP – 2013 grant

Outstanding at the beginning of the year
Granted during the year
Forfeited during the year

Outstanding at the end of the year

Exercisable at the end of the year

Valuation method
Share price (pence)
Exercise price (pence)
Expected volatility
Expected exercise (60%/40%)
Risk free rate (three years/four years)
Expected dividend yield
Fair value of options granted (£m)

2014

Number
million

WAEP
£

–
6
–

–

–
–
–

–

Monte Carlo
228
nil
30.00%
3.0/4.0 years
0.50%/0.80%
4.45%
3.0

The weighted average remaining contractual life of the DSOP – 2013 grant is 9.2 years. The TalkTalk DSOP is designed to provide a long term
incentive plan for senior employees of the Group.

(iii) DSOP – 2012 grant
Nil priced share option awards made under the DSOP 2012 grant are subject to absolute TSR and EPS performance targets with a cap and collar
to address volatility in the market, as detailed in the Directors’ Remuneration Report. The options are measured over a performance period to
31 March 2015 and will vest on the publication of the Group’s 2015 Annual Report. A total of 60% of the vested options are exercisable from the
vesting date, with the remaining 40% of options being exercisable twelve months later. Options are forfeited if an employee leaves the Group
before the options vest. Awards are triggered within a range from 10% to 19% for compound annual growth of TSR and EPS. If the minimum
performance requirement is met a total of 25% of the award will vest, rising to 40% for target, 70% for stretch and 100% for super stretch.

DSOP – 2012 grant

Outstanding at the beginning of the year
Granted during the year
Forfeited during the year

Outstanding at the end of the year

Exercisable at the end of the year

2014

Number
million

WAEP
£

2013

Number
million

WAEP
£

12
–
(2)

–

–
–
–

–

11
1
–

–

–
–
–

–

The weighted average remaining contractual life of the DSOP – 2012 grant is 7.9 years (2013: 8.9 years).

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued5. Share-based payments continued
TalkTalk Telecom Group PLC schemes continued
(iv) DSOP – 2010 grant
Awards made under the DSOP – 2010 grant are subject to TSR performance targets and were measured over a performance period to 28 March 2013.
Options were forfeited if an employee left the Group before the options vested. On 28 March 2013, all options vested but they were not exercisable
until after the preliminary announcement on 16 May 2013. The original date of vesting of 29 March 2013 was brought forward to 28 March 2013
due to a bank holiday. During the year ended 31 March 2014, 15 million options were exercised.

DSOP – 2010 grant

Outstanding at the beginning of the year
Exercised during the year
Forfeited during the year

Outstanding at the end of the year

Exercisable at the end of the year

2014

Number
million

17
(15)
–

WAEP
£

1.24
1.23
–

1.27

–

2013

Number
million

20
–
(3)

–

WAEP
£

1.24
–
1.27

1.24

–

The weighted average remaining contractual life of the DSOP – 2010 grant is 6.0 years (2013: 7.0 years). Of the DSOP – 2010 grant, 472,000 options
were nil priced, of which 236,000 vested on 1 September 2012 and a further 236,000 vested on 1 September 2013. All 472,000 of these options
were exercised in the year ended 31 March 2014.

(v) SAYE
The scheme permits the granting of options to employees linked to a bank SAYE contract for a term of three or five years. Contributions from
UK employees range from £5 to £250. Options may be exercised at the end of the three or five year period at an exercise price determined at
the invitation date. The scheme is available for a period each year for employees to join.

Exercise prices for the schemes are set out below:

2013 grant
2012 grant
2011 grant
2010 grant

192p per share
123p per share
119p per share
102p per share

Outstanding at the beginning of the year
Granted during the year
Exercised during the year
Forfeited during the year

Outstanding at the end of the year

Exercisable at the end of the year

Valuation method
Share price (pence)
Exercise price (pence)
Expected volatility
Expected exercise (years)
Risk free rate
Expected dividend yield
Fair value of options granted (£m)

2014

Number
million

6
2
(3)
(1)

–

WAEP
£

1.08
1.92
1.03
1.42

1.52

–

The weighted average remaining contractual life of SAYE options is 2.3 years (2013: 1.6 years).

2013

Number
million

6
1
–
(1)

–

WAEP
£

1.05
1.23
–
1.11

1.08

–

SAYE – 2013 grant

Black Scholes
223
192
26.56%
3.8
1.18%
4.66%
0.8

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 20145. Share-based payments continued
TalkTalk Telecom Group PLC schemes continued
(vi) TTG VES and CPW TTG VES
The TTG VES enables participants to share in up to 7% of any increase in the value of the Group over an opening valuation representing invested
capital at 1 April 2009, adjusted as relevant for changes in invested capital since that date. The incremental value is measured after a minimum annual
rate of return of 7% on this invested capital. The Group advanced loans to participants to enable them to purchase A shares in TalkTalk Group Limited,
the holding company of the Group’s operating business. The CPW TTG VES enables participants to share in 2.24% of any increase in the value of
the Group over an opening valuation representing invested capital at 1 April 2009, adjusted for the change in the Group’s opening share price since
1 April 2009. In line with the TTG VES, the invested capital is adjusted for changes in invested capital since 1 April 2009 and the incremental value
is measured after a minimum annual rate of return of 7%. For the vesting in September 2013, this is capped at the September 2012 amount.
The rules of both schemes have been approved by shareholders.

The Group’s opening share price for this purpose represents an allocation of the share price of CPW at that rate, based on the market capitalisation
of the Group and Carphone Warehouse Group PLC in the five days following demerger. CPW advanced loans to participants to enable them to
purchase C shares in TalkTalk Group Limited, the holding company of the Group’s operating businesses. The Group has an obligation to acquire
the A and C shares if performance conditions are met, to provide to participants the share of value described above.

The fair value of the schemes, which has performance targets based on the growth of the market capitalisation of the Group, was estimated
at the date of grant using a Monte Carlo model to initially value the A shares and then a Black Scholes model to calculate the option value.
The model combines the valuation price of a share at the date of grant with the probability of meeting performance criteria, based on the
expected value of the Group at the date of grant discounted for the lack of marketability of the shares.

On 16 September 2013, the Group’s Remuneration Committee determined that the relevant performance conditions of these VES schemes
(including the 5% TSR requirement) had been satisfied meaning the VES participants were entitled to exercise the remaining 40% of their
VES options. On 19 November 2013, the participants’ options were acquired by the Company for new ordinary shares in the Company and
cash, resulting in a cash outflow of £15m. The net issue of 23.7 million shares in the Company was at a price of £2.78 per share, being the average
closing price of the Company’s shares over the five working days from 12 to 18 November 2013. The settlement of the schemes resulted in a net
movement in reserves of £12m being the recognition of share premium of £66m and a £78m debit in retained earnings and other reserves. The
£78m debit to reserves represents a total cash outflow of £15m and the value of new PLC shares issued of £66m net of the repayment of the
associated VES loans, interest and a reduction in the Group’s liability to settle the schemes.

6. Finance costs and investment revenue
Finance costs are analysed as follows:

Interest on bank loans and overdrafts
Facility fees and similar charges
Unwinding of discount on provisions

2014
£m

16
4
–

2013
£m

14
4
1

During the year ended 31 March 2012, the Group refinanced its revolving credit facility and paid £7m in respect of facility fees. This is being
amortised over the expected life of the loan and is included within facility fees and similar charges above.

7. Taxation
Accounting policy
Current tax, including UK corporation tax and overseas tax, is provided at amounts expected to be paid or recovered using the tax rates and
laws that have been enacted or substantively enacted at the balance sheet date.

Deferred tax is provided on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base.

Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred tax assets represent tax
recoverable in future periods in respect of deductible temporary differences, and the carry-forward of unused tax losses and credits. Deferred
tax is determined using the tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply
when the deferred tax asset is realised or the deferred tax liability is settled.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can
be utilised. Current and deferred tax is recognised in the income statement except where it relates to an item recognised directly in reserves,
in which case it is recognised directly in reserves.

Deferred tax assets and liabilities are offset where there is a legal right to do so in the relevant jurisdictions.

Critical judgements in applying the Group’s accounting policy
The extent to which tax losses can be utilised depends on the extent to which taxable profits are generated in the relevant jurisdictions
for the foreseeable future, and on the tax legislation then in force, and as such the value of associated deferred tax assets is uncertain.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued7. Taxation continued
Tax – income statement
The tax charge comprises:

Current tax:
UK corporation tax
Adjustments in respect of prior years:
UK corporation tax

Total current tax credit

Deferred tax:
Origination and reversal of timing differences
Effect of change in tax rate
Adjustments in respect of prior years – deferred tax recognised

Total deferred tax

Total tax charge

2014
£m

2013
£m

(2)

–

(2)

(7)
16
(4)

–

18
5
(1)

The tax charge on Headline earnings for the year ended 31 March 2014 is £13m (2013: £33m), representing an effective tax rate on pre-tax profits
of 18% (2013: 20%). The tax charge on Statutory earnings for the year ended 31 March 2014 is £3m (2013: £22m). The reconciliation between the
Headline and Statutory tax charge is shown in note 9.

The principal differences between the tax charge and the amount calculated by applying the standard rate of UK corporation tax of 23%
(2013: 24%) to the profit before tax are as follows:

Profit before tax

Tax at 23% (2013: 24%)
Items attracting no tax relief or liability
Effect of change in tax rate
Adjustments in respect of prior years
Movement in unrecognised tax losses during the year

Total tax charge through income statement

Tax – retained earnings and other reserves
Tax on items recognised directly in retained earnings and other reserves are as follows:

Total tax charge through income statement
Deferred tax credit recognised directly in retained earnings and other reserves

Total tax charge through retained earnings and other reserves

2014
£m

7
(1)
16
(4)
(15)

2014
£m

3
(2)

2013
£m

122

29
1
5
(1)
(12)

2013
£m

22
(11)

The deferred tax credit recognised directly in retained earnings and other reserves for the years ended 31 March 2014 and 31 March 2013 relates to
share-based payments.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 20147. Taxation continued
Tax – balance sheet
The deferred tax assets recognised by the Group and movements thereon during the year are as follows:

At 1 April 2013
(Charge) credit to the income statement
Credit to reserves

At 31 March 2014

At 1 April 2012
(Charge) credit to the income statement
Credit to reserves

At 31 March 2013

Share-based
payments
£m

Timing
differences on
capitalised
costs
£m

12
(7)
2

62
(1)
–

Share‑based
payments
£m

Timing
differences on
capitalised
costs
£m

1
–
11

71
(9)
–

Timing
differences on
acquisition
intangibles
£m

Other timing
differences
£m

(6)
5
–

(1)

1
–
–

Timing
differences on
acquisition
intangibles
£m

Other timing
differences
£m

(11)
5
–

(6)

3
(2)
–

Tax
losses
£m

40
(1)
–

Tax
losses
£m

56
(16)
–

Total
£m

109

(4)
2

107

Total
£m

120
(22)
11

109

No deferred tax assets and liabilities have been offset in either year, except where there is a legal right to do so in the relevant jurisdictions.
On 2 July 2013, a reduction in the UK statutory rate of corporation tax was substantively enacted, bringing the tax rate down from 23% to 21%
with effect from 1 April 2014 and from 21% to 20% with effect from 1 April 2015. Accordingly, the tax assets and liabilities recognised at 31 March 2014
take account of these changes. This has resulted in a tax charge to the income statement as the value of the Group’s tax assets has been reduced.

The asset also reflects the annual recognition of a further tranche of the tax losses acquired with Tiscali UK Limited, including Video Networks
Limited, based on the Group’s rolling forecast. This is in line with the Group’s agreement with HMRC in 2012.

At 31 March 2014, the Group had unused tax losses of £702m (2013: £759m) available for offset against future taxable profits. A deferred tax
asset of £39m (2013: £40m) has been recognised in respect of £197m (2013: £172m) of such losses, based on expectations of recovery in the
foreseeable future.

No deferred tax asset has been recognised in respect of the remaining £505m (2013: £587m) as there is insufficient evidence that there will be
suitable taxable profits against which these losses can be recovered. All losses may be carried forward indefinitely.

8. Dividends
Accounting policy
Dividend income is recognised when payment has been received. Final dividend distributions are recognised as a liability in the financial statements
in the year in which they are approved by the relevant shareholders. Interim dividends are recognised in the year in which they are paid.

The following dividends were paid by the Group to its shareholders:

Ordinary dividends
Final dividend for the year ended 31 March 2012 of 6.40p per ordinary share
Interim dividend for the year ended 31 March 2013 of 3.45p per ordinary share
Final dividend for the year ended 31 March 2013 of 6.95p per ordinary share
Interim dividend for the year ended 31 March 2014 of 4.00p per ordinary share

Total ordinary dividends

2014
£m

–
–
62
37

2013
£m

56
31
–
–

The proposed final dividend for the year ended 31 March 2014 of 8.00p per ordinary share on approximately 921 million ordinary shares (£74m)
was approved by the Board on 14 May 2014 and has not been included as a liability as at 31 March 2014.

The Group ESOT has waived its rights to receive dividends in the current and prior year and this is reflected in the analysis above.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued9. Reconciliation of Headline information to Statutory information
Accounting policy
Headline results are stated before the amortisation of acquisition intangibles and exceptional items. Exceptional items are those that are
considered to be one-off, non-recurring in nature and so material that the Directors believe that they require separate disclosure to avoid
distortion of underlying performance and should be separately presented on the face of the income statement.

Critical judgements in applying the Group’s accounting policy
The classification of items as exceptional is subjective in nature and therefore, judgement is required to determine whether the item is in line
with the accounting policy criteria outlined above. Determining whether an item is exceptional is a matter of qualitative assessment, making it
distinct from the Group’s other critical accounting judgements where the basis for judgement surrounds estimation.

Year ended 31 March 2014

Headline results
Exceptional items – Operating expenses (a)
Exceptional items – Operating expenses (c)
Exceptional items – Revenue (d)
Amortisation of acquisition intangibles (e)

Statutory results

Year ended 31 March 2013

Headline results
Exceptional items – Operating expenses (a)
Exceptional items – Operating expenses (b)
Exceptional items – Operating expenses (c)
Amortisation of acquisition intangibles (e)

Statutory results

Profit
before interest
and tax
£m

EBITDA
£m

Profit
before tax
£m

Profit for
the year
£m

213
(20)
3
(5)
–

191

EBITDA
£m

290

(7)
(11)
27
–

299

94
(20)
3
(5)
(21)

74
(20)
3
(5)
(21)

61
(15)
2
(4)
(16)

Profit
before interest
and tax
£m

Profit
before tax
£m

Profit for
the year
£m

184

(7)
(11)
27
(52)

141

165

(7)
(11)
27
(52)

122

132

(5)
(8)
21
(40)

100

Headline information is provided because the Directors consider that it provides assistance in understanding the Group’s underlying performance.

a) Operating efficiencies – Phase III (Making TalkTalk Simpler)
During the year ended 31 March 2014, the Group has continued a review of its operating structure to look for further opportunities to drive
process and efficiency improvements over the medium term.

The initiatives that form part of the Group’s Making TalkTalk Simpler programme, which were implemented in the year ended 31 March 2014, were
continued restructuring of the systems and processes in TalkTalk Business to remove duplication and better align the sales and service model
for future growth; a review and consolidation of the outsourcing partners and rebalancing of the Group’s on-shore footprint; and a proactive
initiative to replace routers to align the estate across the Group. This has resulted in redundancy, dual running, property, system, project
management and router replacement costs. The total charge incurred in the year ended 31 March 2014 was £20m (2013: £7m).

A total taxation credit of £5m has been recognised in the year ended 31 March 2014 (2013: £2m).

b) Operating efficiencies – Phase II (Consumer contact centre rationalisation)
On 24 April 2012, the Group announced the second stage of its contact centre rationalisation. This resulted in consolidating and outsourcing
operations in Preston and Northampton. Costs were incurred in respect of redundancy, dual running and consultancy. The total charge
incurred in the year ended 31 March 2014 was £nil (2013: £11m).

A total taxation credit of £nil has been recognised in the year ended 31 March 2014 (2013: £3m).

c) Wholesale Ethernet services overcharges
In December 2012, Ofcom determined that BT had overcharged the Group for certain wholesale Ethernet services. Accordingly, BT was required
to make repayments to the Group for these overcharges. A total of £3m has been recognised in the year ended 31 March 2014 (2013: £27m).

A total taxation charge of £1m has been recognised in the year ended 31 March 2014 (2013: £6m).

d) Revenue – HMRC VAT ruling
In September 2013, a change to a previously agreed VAT treatment in relation to prompt payment discounts was enforced by HMRC with
immediate effect. The incremental VAT relating to this change in treatment has been paid by the Group; however, the Group has sought external
legal advice on the HMRC decision and has subsequently appealed the decision to the VAT Tribunal. Due to both the unexpected nature, pending
appeal and short timeframe given to comply, a total of £5m has been recognised in exceptional items in the year ended 31 March 2014 (2013: £nil).

The tax credit was £1m in the year ended 31 March 2014 (2013: £nil).

e) Amortisation of acquisition intangibles
An amortisation charge in respect of acquisition intangibles of £21m was incurred in the year ended 31 March 2014 (2013: £52m).

The tax credit was £5m in the year ended 31 March 2014 (2013: £12m).

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 201410. Earnings per share
Earnings per share is shown on a Headline and Statutory basis to assist in the understanding of the performance of the Group.

Headline earnings (note 9)

Statutory earnings

Weighted average number of shares (millions):
Shares in issue
Less weighted average holdings by Group ESOT

For basic EPS
Dilutive effect of share options

For diluted EPS

Basic earnings per share
Headline
Statutory

Diluted earnings per share
Headline
Statutory

2014
£m

938
(37)

901
30

931

2014
Pence

6.8
3.1

2014
Pence

6.6
3.0

2013
£m

132

100

924
(40)

884
56

940

2013
Pence

14.9
11.3

2013
Pence

14.0
10.6

There are no share options considered anti-dilutive in the year ended 31 March 2014 (2013: nil).

11. Goodwill and other intangible assets
(a) Goodwill
Accounting policy
Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing the excess of the fair value of the consideration
given over the fair value of the identifiable assets and liabilities acquired, is recognised initially as an asset at cost and is subsequently measured
at cost less any accumulated impairment losses.

On disposal of a subsidiary undertaking, the relevant goodwill is included in the calculation of the profit or loss on disposal.

Critical judgements in applying the Group’s accounting policy
The Group has two CGUs – Consumer and TalkTalk Business. For the purpose of impairment testing, at the acquisition date, goodwill is allocated
to each of the CGUs expected to benefit from the synergies of the acquisition. The Group’s shared costs and assets relating mainly to infrastructure
and central overheads are allocated across the two CGUs based on the relative future cash flows that those shared costs support.

Determining whether goodwill is impaired requires estimation of the value in use of the CGUs to which the goodwill has been allocated.
The value in use calculation involves estimation of both the future cash flows of the CGUs and the selection of appropriate discount rates,
to use to calculate present values.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued11. Goodwill and other intangible assets continued
(a) Goodwill continued
Impairment of goodwill
Goodwill is not subject to amortisation but is tested for impairment annually or whenever there is an indication that the asset may be impaired;
this review is performed at a CGU level.

Impairment is determined by assessing the future cash flows of the CGU to which the goodwill relates. The future cash flows of the Group are
taken from the Board approved five year plan and extrapolated out to 20 years based on the UK’s long term growth rate. This is discounted by
the CGU’s weighted average cost of capital pre-tax to give the net present value of that CGU. Where the net present value of future cash flows is
less than the carrying value of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU
and then to the other assets of the CGU pro-rata on the basis of the carrying amount of each asset in the unit. Any impairment loss is
recognised in the income statement and is not subsequently reversed.

Sensitivity analysis is performed using reasonably possible changes in the key assumptions.

Opening cost and net book value
Disposal (note 13)

Closing cost and net book value

2014
£m

479
–

479

The goodwill acquired in business combinations is allocated at acquisition to the CGUs that are expected to benefit from that business
combination. The allocation of goodwill across the CGUs is as follows:

Consumer
TalkTalk Business

2014
£m

337
142

479

2013
£m

480

(1)

479

2013
£m

337
142

479

Impairment review
The key assumptions used in the Group’s goodwill impairment review are as follows:

ƥ Long term growth rates

Long term revenue growth rates applied are based on the growth rate for the UK per the Organisation for Economic Co-operation and
Development (OECD). The rate applied in the current year was 1.7% (2013: 1.1%).

ƥ Discount rate

The underlying discount rate for each CGU is based on the UK ten year gilt rate adjusted for an equity risk premium and the systematic risk of
the CGU. The average pre-tax rate for both CGUs used to discount the forecast cash flows is 8.4% (2013: 8.1%). The assumptions used in the
calculation of the CGUs’ discount rate are benchmarked to externally available data. The same discount rate has been applied to both CGUs
due to the similarity of risk factors and geographical location.

ƥ Capital expenditure

Forecast capital expenditure is based on senior management expectations of future required support of the network and current run rate
of expenditure.

ƥ Customer factors

The key assumptions for the forecast cash flows of each of the CGUs are based on expected customer growth rates, ARPU, direct costs,
including acquisition costs and change in product mix. The value assigned to each of these assumptions has been determined based on
the extrapolation of historical trends in the Group and external information on expected trends of future market developments.

Sensitivity analysis has been performed for each key assumption and the Directors have not identified any reasonably possible material
changes in the key assumptions that would cause the carrying value of goodwill to exceed the recoverable amount.

(b) Other intangible assets
Accounting policy
Operating intangibles
Operating intangibles include internal infrastructure and design costs incurred in the development of software for internal use. Internally
generated software is recognised as an intangible asset only if it can be separately identified, it is probable that the asset will generate future
economic benefits, and the development cost can be measured reliably. Where these conditions are not met, development expenditure is
recognised as an expense in the year in which it is incurred. Operating intangibles are amortised on a straight line basis over their estimated
useful economic lives of up to eight years.

Acquisition intangibles
Acquired intangible assets such as customer bases and other intangible assets acquired through a business combination are capitalised
separately from goodwill and amortised over their expected useful lives of up to six years on a straight line basis. The value attributed to such
assets is based on the future economic benefit that is expected to be derived from them, calculated as the present value of future cash flows
after a deduction for contributory assets.

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11. Goodwill and other intangible assets continued
(b) Other intangible assets continued
Critical judgements in applying the Group’s accounting policy
Impairment
At the acquisition date, acquisition intangibles are allocated to each of the CGUs expected to benefit from the synergies of the combination.
The Group’s shared costs and assets relating mainly to infrastructure and central overheads are allocated across the two CGUs based on the
relative future cash flows.

Determining whether the carrying amount of operating and acquisition intangibles have any indication of impairment requires judgement.
If an indication of impairment is identified, further judgement is required to assess whether the carrying amount can be supported by the
value in use of the CGU that the asset is allocated to.

The value in use calculation involves estimation of both the future cash flows of the CGUs and the selection of appropriate discount rates,
to use to calculate present values.

Useful economic lives
The assessment of the useful economic lives of these operating and acquisition intangibles requires judgement. Amortisation is charged
to the income statement based on the useful economic life selected. This assessment requires estimation of the period over which the
Group will benefit from the assets.

Impairment of assets
The Group reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered
an impairment loss at each reporting date. Where an indicator of impairment exists, the Group makes a formal estimate of the asset’s
recoverable amount and the extent of any impairment loss.

The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. In assessing value in use, the estimated
cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time
value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset is estimated to be less than the carrying amount, the carrying amount of the asset or CGU is reduced
to its recoverable amount.

Other intangible assets are analysed as follows:

Opening balance at 1 April 2013
Additions
Amortisation

Closing balance at 31 March 2014

Cost (gross carrying amount)
Accumulated amortisation

Closing balance at 31 March 2014

Opening balance at 1 April 2012
Additions
Amortisation

Closing balance at 31 March 2013

Cost (gross carrying amount)
Accumulated amortisation

Closing balance at 31 March 2013

Operating
intangibles
£m

Acquisition
intangibles
£m

Total other
intangibles
£m

127
43
(35)

135

303
(168)

135

27
–
(21)

98
(92)

154
43
(56)

141

401
(260)

141

Operating
intangibles
£m

Acquisition
intangibles
£m

Total other
intangibles
£m

123
30
(26)

127

260
(133)

127

79
—
(52)

326
(299)

202
30
(78)

154

586
(432)

154

Operating intangibles
Operating intangibles includes internally generated assets of net book value £39m (2013: £31m), which are amortised over a period of up
to eight years. This includes additions of £15m (2013: £10m) and an amortisation charge of £7m (2013: £5m) in the year ended 31 March 2014.

Included within operating intangibles is the following asset, which is material to the Group:

ƥ TRIO, the customer billing system, which has a net book value of £76m (2013: £86m). TRIO is amortised over a period of up to eight years

depending on the release date of the relevant component. The weighted average remaining useful economic life of the components of TRIO
is four years (2013: five years).

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued11. Goodwill and other intangible assets continued
(b) Other intangible assets continued
Acquisition intangibles
Acquisition intangibles are removed from cost in the analysis in the year after they are fully amortised.

All acquisition intangibles relate to customer bases.

The customer bases relate primarily to the Tiscali UK internet access business, which was acquired in July 2009. The valuation of customer
bases is derived from the discounted future cash flows expected from them, after a deduction for contributory assets.

At 31 March 2014, the Tiscali customer base is material to the Group with a net book value of £5m (2013: £23m) and a remaining useful
economic life of three months (2013: 15 months).

12. Property, plant and equipment
Accounting policy
Property, plant and equipment are stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all property,
plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset on a straight line basis over its
expected useful life from the date it is brought into use, as follows:

Short leasehold costs
Network equipment and computer hardware
Fixtures and fittings

10% or the lease term if less than ten years
12.5–50% per annum
20–25% per annum

Critical judgements in applying the Group’s accounting policy
The assessment of the useful economic lives of these assets requires judgement. Depreciation is charged to the income statement based
on the useful economic life selected. This assessment requires estimation of the period over which the Group will benefit from the assets.

Determining whether the carrying amount of these assets has any indication of impairment also requires judgement. If an indication of impairment
is identified, further judgement is required to assess whether the carrying amount can be supported by the value in use of the CGU that the
asset is allocated to. The value in use calculation involves estimation of both the future cash flows of the CGUs and the selection of appropriate
discount rates, to calculate present values (note 11).

Impairment of assets
Property, plant and equipment
The Group reviews the carrying amounts of its fixed assets to determine whether there is any indication that those assets have suffered an
impairment loss at each reporting date. The Group uses the same methodology as set out in note 11 for operating and acquisition intangibles.

Opening balance at 1 April 2013
Additions
Depreciation

Closing balance at 31 March 2014

Cost (gross carrying amount)
Accumulated depreciation and impairment charges

Closing balance at 31 March 2014

Opening balance at 1 April 2012
Additions
Depreciation

Closing balance at 31 March 2013

Cost (gross carrying amount)
Accumulated depreciation and impairment charges

Closing balance at 31 March 2013

Leasehold
improvements
£m

Network
equipment and
computer
hardware
£m

Fixtures
and fittings
£m

5
–
–

6
(1)

290
87
(77)

300

671
(371)

300

–
–
–

–

6
(6)

–

Leasehold
improvements
£m

Network
equipment and
computer
hardware
£m

Fixtures
and fittings
£m

6
–
(1)

6
(1)

286
79
(75)

290

584
(294)

290

–
–
–

–

6
(6)

–

Total
£m

295
87
(77)

305

683
(378)

305

Total
£m

292
79
(76)

295

596
(301)

295

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 2014

13. Non-current asset investments
Accounting policy
Investments, other than subsidiaries, are initially recognised at cost, being the fair value of the consideration given plus any transaction costs
associated with the acquisition.

Investments are categorised as available for sale and are recorded at fair value. Changes in fair value, together with any related taxation,
are taken directly to equity, and recycled to the income statement when the investment is sold or determined to be impaired.

Non-current asset investments at 31 March 2014 related to a 7.3% (2013: 8.4%) interest in Shared Band Limited, a telecommunications
technology provider. During the prior year the Group impaired its investment to £nil.

(a) Principal investments
The Parent Company has investments in the following subsidiary undertakings, which principally affected the profits or losses or net assets of
the Group. To avoid a statement of excessive length, details of investments that are not significant have been omitted. All holdings are in equity
share capital and give the Group an effective holding of 100% on consolidation.

Name

Country of incorporation or registration

Nature of business

TalkTalk Group Limited
TalkTalk Telecom Holdings Limited*
TalkTalk Communications Limited
TalkTalk Telecom Limited
CPW Network Services Limited

* Directly held by the Company.

England and Wales
England and Wales
England and Wales
England and Wales
England and Wales

Holding company
Holding company
Telecommunications
Telecommunications
Telecommunications

(b) Acquisitions and disposals
(i) Acquisitions
On 14 May 2013, the Group acquired the remaining 75% of the issued share capital of Future Office Communications Limited (FOC) (note 22).

There were no acquisitions in the prior year.

(ii) Disposals
There were no disposals in the year.

In the prior year, the Group disposed of its investment in Southern Communications Networks Limited for cash consideration of £2m. Associated
goodwill of £1m was written off, resulting in a £1m profit on disposal. There was no associated acquisition intangible in respect of this business.

14. Interest in joint venture
Accounting policy
Interests in joint ventures are accounted for using the equity method. The Group income statement includes the Group’s share of the post-tax
profits or losses of the joint ventures based on their financial statements for the year.

In the Group balance sheet, the Group’s interest in joint ventures are shown as a non-current asset, representing the Group’s investment in the
share capital of the joint ventures, as adjusted for post-acquisition changes in the Group’s share of the net assets or liabilities less provision for
any impairment.

In addition to the carrying amount of the investment, the Group’s interest in joint ventures includes, where applicable, any long term interests in
the venture that, in substance, form part of the Group’s net investment in the joint venture. An item for which settlement is neither planned nor
likely to occur in the foreseeable future is, in substance, an extension of the Group’s interest in that joint venture.

Any loans advanced to a joint venture that, in substance, do not form part of the Group’s net investment are shown separately in the balance
sheet, as a receivable to the Group. Losses recognised using the equity method in excess of the Group’s investment in ordinary shares are
applied to the other components of the Group’s interest in the joint venture in the reverse order of their seniority (i.e. priority in liquidation).

The Group holds 14.3% of the ordinary share capital of YouView TV Limited, a joint venture with The British Broadcasting Corporation,
ITV Broadcasting Limited, British Telecom PLC, Channel Four Television Corporation, Arqiva Limited and Channel 5 Broadcasting Limited.
The joint venture was set up in order to develop a free-to-air internet-connected TV service to UK homes. The table below sets out the
net additions in the year.

Opening balance at 1 April
Additions
Share of results

Closing balance at 31 March

The Group has reviewed the carrying value of YouView and has concluded that there is no indication of impairment.

2014
£m

9
5
(7)

2013
£m

7
6
(4)

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued14. Interest in joint venture continued
Accounting policy continued
The Group’s share of the results, assets and liabilities of its joint ventures are as follows:

Group share of results of joint ventures

Expenses

Loss before taxation
Taxation

Loss after taxation

Group share of net assets of joint ventures

Non‑current assets

Net assets

2014
£m

(7)

(7)
–

(7)

2014
£m

2013
£m

(4)

(4)
–

(4)

2013
£m

During the year, the Group paid the remaining commitment outstanding of £5m on the initial agreement with YouView TV Limited. During March 2014,
the Group signed heads of terms with the other existing shareholders of YouView TV Limited committing the Group to pay approximately £2m
up to 30 June 2014. It is anticipated that a long term agreement for a further five year term to 31 March 2019 will be signed by 30 June 2014.

During the year ended 31 March 2014, the Group, alongside British Sky Broadcasting Limited, British Telecom PLC and Virgin Media Limited
established an equal membership joint venture, Internet Matters Limited. It is a not-for-profit company, incorporated as a company limited
by guarantee. It has been set up as an industry-led body to promote and educate parents about internet safety for children. The Group is
committed to pay £2m over the period to 31 March 2017.

15. Inventories
Accounting policy
Inventories are stated at the lower of cost and net realisable value, valued on a FIFO basis, and consists primarily of set top boxes, handsets
and routers. Net realisable value is based on estimated selling price, less costs expected to be incurred. A provision is made for obsolete
items where appropriate.

Goods for resale

2014
£m

2013
£m

16. Trade and other receivables
Critical judgements in applying the Group’s accounting policy
Judgement is required in order to evaluate the likelihood of collection of customer debt after revenue has been recognised and hence the
value of the bad and doubtful debt. These provisions are based on historical trends in the percentage of debts which are not recovered.

Trade and other receivables comprise:

Current – trade and other receivables
Trade receivables – gross
Less provision for impairment

Trade receivables – net
Other receivables
Prepayments and accrued income

Trade and other receivables

2014
£m

169
(34)

135
63
62

260

The Directors estimate that the carrying amount of trade receivables approximates to their fair value.

The average credit period taken on trade receivables, calculated by reference to the amount owed at the year end as a proportion of total
revenue in the year, was 30 days (2013: 28 days).

The Group’s trade receivables are denominated in the following currencies:

UK Sterling
Other

2014
£m

146
23

169

2013
£m

156
(33)

123
41
62

226

2013
£m

123
33

156

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 201416. Trade and other receivables continued
Critical judgements in applying the Group’s accounting policy continued
The ageing of gross trade receivables is as follows:

Not yet due
0 to 2 months
2 to 4 months
Over 4 months

* The prior year amounts have been restated to correct ageing profile.

The ageing of the provision for impairment of trade receivables is as follows:

Not yet due
0 to 2 months
2 to 4 months
Over 4 months

Movements in the provisions for impairment of trade receivables are as follows:

Opening balance
Charged to the income statement
Receivables written off as irrecoverable

2014
£m

74
14
17
64

169

2014
£m

(2)
(2)
(4)
(26)

(34)

2014
£m

(33)
(52)
51

(34)

Restated

2013*
£m

71
20
15
50

156

2013
£m

(3)
(3)
(7)
(20)

(33)

2013
£m

(29)
(33)
29

(33)

Trade receivables of £63m (2013: £55m) were past due, but not impaired. These balances primarily relate to Consumer and Corporate fixed
line customers. The Group has made provisions based on historical rates of recoverability and all unprovided amounts are considered to be
recoverable. The ageing analysis of these trade receivables is as follows:

0 to 2 months
2 to 4 months
Over 4 months

* The prior year amounts have been restated to correct ageing profile.

17. Trade and other payables

Trade payables
Other taxes and social security costs
Other payables
Accruals and deferred income

2014
£m

12
13
38

2014
£m

208
15
17
216

456

Restated

2013*
£m

17
8
30

2013
£m

210
10
21
190

431

The Group has commercially agreed longer credit terms with certain suppliers. Excluding these suppliers, the underlying average credit period
taken on trade payables was 32 days (2013: 39 days). Including these suppliers, the average credit period taken was 42 days (2013: 48 days).

The Directors consider that the carrying amount of trade and other payables approximates to their fair value.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued18. Cash and cash equivalents, loans and other borrowings
(a) Cash and cash equivalents are as follows:

Cash at bank and in hand

The effective interest rate on bank deposits and money market funds was 0.7% (2013: 0.7%).

(b) Loans and other borrowings comprise:

Current
Bank overdrafts
Term loan

Non-current
Term loan
Bilateral loan
£560m revolving credit facility

2014
£m

–

2014
£m

7
30

2014
£m

75
–
385

460

2013
£m

–
25

2013
£m

50
30
295

375

Maturity

2015
2015
2015

Details of the current and non-current borrowing facilities of the Group for the year are set out below.

Bank overdrafts
Overdraft facilities are used to assist in short term cash management; these uncommitted facilities bear interest at a margin over the
Bank of England base rate.

£75m term loan
The Group has a committed term loan of £75m (2013: £75m), which matures in November 2015. The interest rate payable in respect of
drawings under this facility is at a margin over LIBOR for the relevant currency and for the appropriate period. The actual margin applicable
to any drawing depends on the ratio of net debt to EBITDA calculated in respect of the most recent accounting period. Covenants included
in this facility restrict the ratio of net debt to EBITDA and require minimum levels of interest cover and fixed charges (interest and operating
lease expenditure) cover.

£560m revolving credit facility (RCF) and £30m bilateral agreement
The Group has a £560m RCF, which matures in November 2015. The interest rate payable in respect of drawings under this facility is at a margin
over LIBOR and for the appropriate period. The actual margin applicable to any drawing depends on the ratio of net debt to EBITDA calculated
in respect of the most recent accounting period. Covenants included in this facility restrict the ratio of net debt to EBITDA and require minimum
levels of interest cover and fixed charges (interest and operating lease expenditure) cover. In addition to the RCF, the Group also has £30m of
bilateral agreements which mature in March 2015.

The Group’s facilities total £665m. The Group was in compliance with its covenants throughout the current and prior year.

Borrowing facilities
The Group had undrawn committed borrowing facilities at the end of the year, in respect of which all conditions precedent had been met,
as follows:

Undrawn available committed facilities

Maturity

2015

The book value and fair value of the Group’s loans and other borrowings, all of which are in Sterling, are as follows:

Less than 1 year
1 to 2 years
2 to 3 years

2014
£m

175

2014
£m

37
460
–

497

2013
£m

265

2013
£m

25
80
295

400

Securities and guarantees
Committed borrowings are guaranteed by Group companies, which make up 75% EBITDA and 75% of gross assets, excluding internal transactions.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 201419. Financial risk management and derivative financial instruments
The book value and fair value of the Group’s financial assets, liabilities and derivative financial instruments, excluding the Group’s loans and
other borrowings shown in note 18, are as follows:

Current assets
Cash and cash equivalents
Trade and other receivables
Non-current assets
Non‑current investments and investment in joint venture
Current liabilities
Bank overdrafts
Trade and other payables*
Derivative financial instruments**

2014
£m

–
260

(7)
(456)

–

(196)

2013
£m

7
226

–
(428)
(3)

(189)

* Deferred income has been included within the financial liabilities above so as to give completeness over the Group’s contractual commitments on future cash outflows.
** Derivative financial instruments are included with other payables in note 17.

(a) Financial instruments
The Group’s activities exposed it to a variety of financial risks including market risk (such as currency risk and interest rate risk), credit risk and
liquidity risk. The Group Treasury function used certain financial instruments to mitigate potential adverse effects on the Group’s financial
performance from these risks. These financial instruments primarily consisted of bank loans and interest rate swaps. Other products, such
as currency options, can also be used depending on the risks to be covered, but have not been used in the current or preceding financial year.
The Group does not trade or speculate in any financial instruments.

The Group has cash flow hedges in place that swap the interest rate risk on the revolving credit facility (RCF) from floating to fixed. These
hedges have been fully effective from inception. The fair value measurement is classified as Level 2, derived from other observable market
data; this means that their fair value is based upon the mark to market valuation at the balance sheet date. Fair value measurement at Level 2
gives consideration to interest rates, yield curves and foreign exchange rates at commonly quoted intervals for relevant currencies. The Group
has also assessed the credit risk within its financial instruments. The fair value of these instruments at 31 March 2014 is £nil (2013: £3m). A gain
of £3m (2013: loss of £2m) has been recognised in other comprehensive income in the year ended 31 March 2014. As the hedges were fully
effective there has been no income statement impact.

(b) Embedded derivatives
No contracts with embedded derivatives have been identified and accordingly no such derivatives have been accounted for separately.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued19. Financial risk management and derivative financial instruments continued
(c) Foreign exchange risk
The Group uses spot and forward foreign exchange trading to hedge transactional exposures, which arise mainly through cost of sales and
operating expenses, and are primarily denominated in Euro and US Dollar. At 31 March 2014, the fair value of outstanding currency contracts
was £7m (2013: £17m).

Borrowings and foreign exchange contracts are sensitive to movements in foreign exchange rates; this sensitivity can be analysed in comparison
to year end rates (adjusted for funding to related parties and assuming all other variables remain constant). There was no material impact of a
10% movement in the UK Sterling/Euro exchange rate on either the income statement or other equity. The effect of foreign exchange derivatives
on borrowings at the year end was as follows:

2014
Borrowings before derivatives
Derivatives

2013
Borrowings before derivatives
Derivatives

UK Sterling
£m

497

(7)

490

UK Sterling
£m

400
(17)

383

Euro
£m

–
10

Euro
£m

–
19

Other
£m

–
(3)

(3)

Other
£m

–
(2)

(2)

Total
£m

497
–

497

Total
£m

400
–

400

During the year, the Group used derivatives for management of foreign currency cash balances held by overseas subsidiaries, which were
inherited from CPW on demerger and foreign currency trading balances.

(d) Interest rate risk
The Group’s interest rate risk arises primarily from cash, cash equivalents and borrowings, all of which are at floating rates of interest and thus
expose the Group to cash flow interest rate risk. These floating rates are linked to LIBOR and other interest rate bases as appropriate to the
instrument and currency. Future cash flows arising from these financial instruments depend on interest rates and periods for each loan or
rollover. As detailed in section (a), the Group has cash flow hedges in place to mitigate its interest rate risk on its borrowings.

Cash and borrowings, as well as some foreign exchange products, are sensitive to movements in interest rates and such movements have been
analysed in the table below by calculating the effect on the income statement and equity of one percentage point movement in the interest
rate for the currencies in which most Group cash and borrowings are denominated. Funding to related parties has been offset against gross
borrowings in calculating these sensitivities. This annualised analysis has been prepared on the assumption that the year end positions prevail
throughout the year, and therefore may not be representative of fluctuations in levels of borrowings.

1% movement in the UK Sterling interest rate
Income statement movement
Other equity movement

2014
£m

3
–

2013
£m

2
–

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(e) Liquidity risk
The Group manages its exposure to liquidity risk by regularly reviewing the long and short term cash flow projections for the business against
facilities and other resources available to it. Headroom is assessed based on historical experience as well as by assessing current business
risks, including foreign exchange movements. Existing facilities do not expire until March 2015 and November 2015; it is Group policy to refinance
debt maturities significantly ahead of maturity dates.

The table below analyses the Group’s financial liabilities into relevant maturity Groupings. The amounts disclosed in the table are the contractual
undiscounted cash flows assuming year end interest rates remain constant and that borrowings are paid in full in the year of maturity.

2014
Loans and other borrowings
Derivative financial instruments –
payable
Derivative financial instruments –
receivable
Trade and other payables

2013
Loans and other borrowings
Derivative financial instruments –
payable
Derivative financial instruments –
receivable
Trade and other payables

Less than
1 year
£m

1 to 2 years
£m

2 to 3 years
£m

3 to 4 years
£m

4 to 5 years
£m

More than
5 years
£m

(37)

(460)

–

–
–

(460)

–

–
–

–

–
–

–

–
–

–

–
–

–

1 to 2 years
£m

2 to 3 years
£m

3 to 4 years
£m

4 to 5 years
£m

More than
5 years
£m

(80)

(295)

–

–
–

–

–
–

(80)

(295)

–

–
–

–

–
–

–

–
–

–

(7)

(456)

(493)

Less than
1 year
£m

(25)

(17)

17
(431)

(456)

Total
£m

(497)

(7)

(456)

(953)

Total
£m

(400)

(17)

17
(431)

(831)

(f) Credit risk
The Group’s exposure to credit risk is regularly monitored. Debt, investments, foreign exchange and derivative transactions are all spread
amongst a number of banks all of which have short or long term credit ratings appropriate to the Group’s exposures. Trade receivables primarily
comprise balances due from Consumer and TalkTalk Business fixed line customers, and provision is made for any receivables
that are considered to be irrecoverable.

TalkTalk Telecom Group PLC Annual Report 2014Notes to the consolidated financial statements continued19. Financial risk management and derivative financial instruments continued
(g) Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return
to stakeholders through the optimisation of the debt and equity balance. Further detail is provided in the Chief Financial Officer’s statement
on page 14.

The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 18, cash and cash equivalents and equity
attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in notes 21 to 22.

The Group’s Board reviews the capital structure on an annual basis. As part of this review, the Board considers the cost of capital and the risks
associated with each class of capital. The Group has a medium term target gearing ratio of 75% to 100% determined as a proportion of net debt
to equity. The gearing ratio at 31 March 2014 is 143% (2013: 89%) driven primarily by the Company’s continued investment in TV combined with
an increased dividend pay-out. The Board is confident that the gearing ratio will return to its target gearing ratio of 75% to 100% in the medium term.

The gearing ratio at the year end is as follows:

Debt
Cash and cash equivalents
Bank overdraft

Net debt

Equity

Net debt to equity ratio

2014
£m

2013
£m

(490)

(400)

–
(7)

7
–

(497)

(393)

347

143%

442

89%

20. Provisions
Accounting policy
Provisions are recognised when a legal or constructive obligation exists as a result of past events and it is probable that an outflow of resources
will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are discounted where
the time value of money is considered to be material.

Provisions are categorised as follows:

Operating efficiencies
Operating efficiencies provisions relate principally to redundancy costs and are only recognised where plans are demonstrably committed
and where appropriate communication to those affected has been undertaken at the balance sheet date. These provisions are expected
to be utilised over the next twelve months.

One Company integration
These provisions relate principally to reorganisation costs and are only recognised where plans are demonstrably committed and where appropriate
communication to those affected has been undertaken at the balance sheet date. These provisions are expected to be utilised over the next
twelve months.

Property
Property provisions relate to dilapidations and similar property costs, and costs associated with onerous property contracts. All such provisions
are assessed by reference to the terms and conditions of the contract and market conditions at the balance sheet date. Onerous property
contracts are expected to be utilised over the next seven years. Dilapidation provisions are expected to be utilised as and when properties
are exited.

20. Provisions continued
Accounting policy continued
Contract and other
Contract and other provisions relate to onerous contracts and contracts with unfavourable terms arising on the acquisition of businesses and
anticipated costs of unresolved legal disputes. All such provisions are assessed by reference to the best available information at the balance
sheet date.

The below tables analyse the Group’s provisions:

Current
Non‑current

2014
Opening balance
Charged to income statement
Utilised in the year

2013
Opening balance
Charged to income statement
Utilised in the year
Unwinding of discount

21. Share capital

Allotted, called-up and fully paid
Ordinary shares of 0.1p each

2014
£m

2
7

Operating
efficiencies
£m

One Company
integration
£m

Property
£m

Contract
and other
£m

2
2
(3)

2
–
(1)

9
1
(3)

–
–
–

–

Operating
efficiencies
£m

One Company
integration
£m

Property
£m

Contract
and other
£m

1
2
(1)
–

2
–
(1)
1

9
1
(1)
–

2014
million

2013
million

955

931

6
–
(6)
–

–

2014
£m

2013
£m

5
8

Total
£m

13
3
(7)

Total
£m

18
3
(9)
1

2013
£m

On 20 November 2013, the Company issued a further 23,722,791 ordinary shares of 0.1 pence each to settle the VES schemes (note 5).

TalkTalk Telecom Group PLC Annual Report 201422. Reserves

Notes

Share
capital
£m

Share
premium
£m

Translation
reserve
£m

At 1 April 2013
Total comprehensive income for the year
Issues of own shares*
Taxation of items recognised directly in reserves
Purchase of own shares
Settlement of Group ESOT
Adjustment arising from change
in non‑controlling interest***
Share‑based payments reserve credit
Equity dividends

At 31 March 2014

5
8

1
–
–
–
–
–

–
–
–

618
–
66
–
–
–

–
–
–

(64)
–
–
–
–
–

–
–
–

Demerger
reserve
£m

(513)

–
–
–
–
–

–
–
–

Retained
earnings and
other reserves
£m

400
31
(78)
2
(24)
6

(3)
4
(99)

239

684

(64)

(513)

Notes

Share
capital
£m

Share
premium
£m

Translation
reserve
£m

At 1 April 2012
Total comprehensive income for the year
Issues of own shares**
Taxation of items recognised directly in reserves
Share‑based payments reserve credit
Equity dividends

5
8

At 31 March 2013

1
–
–
–
–
–

586
–
32
–
–
–

618

(65)
1
–
–
–
–

(64)

Demerger
reserve
£m

(513)

–
–
–
–
–

(513)

Retained
earnings and
other reserves
£m

435
98
(63)
11
6
(87)

400

Total
£m

442
31
(12)
2
(24)
6

(3)
4
(99)

347

Total
£m

444
99
(31)
11
6
(87)

442

** On 17 September 2012, the Group’s Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been
satisfied, meaning the VES participants were entitled to exercise 60% of their options as set out in note 5. The settlement of the schemes resulted in the recognition of share premium
of £32m and a £63m movement in retained earnings and other reserves.

*** On 14 May 2013, the Group acquired the remaining 75% of the issued share capital of FOC. The Group already held 25% of FOC and had control of the business. The cash consideration

paid for the acquisition of £3m has been recognised as a transaction with non-controlling interest.

Group ESOT
The Group ESOT held 34 million shares at 31 March 2014 (2013: 39 million) in the Company for the benefit of employees and former CPW employees.
The Group ESOT has waived its rights to receive dividends and none of its shares have been allocated to specific schemes. At the year end the
shares had a market value of £109m (2013: £107m).

Demerger reserve
The demerger reserve primarily reflects the profits or losses arising on the transfer of investments and net assets of CPW on demerger.

Translation reserve
The results of overseas operations are translated at the average foreign exchange rates for the year, and their balance sheets are translated
at the rates prevailing at the balance sheet date. Exchange differences arising on the translation of opening net assets and results of overseas
operations are recognised in the translation and hedging reserve. All other exchange differences are included in the income statement.

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 2014

Notes to the consolidated financial statements continued

23. Analysis of changes in net debt

2014
Cash and cash equivalents
Bank overdrafts

Current loans and other borrowings
Non‑current loans and other borrowings

Total net debt

2013
Cash and cash equivalents
Bank overdrafts

Current loans and other borrowings
Non‑current loans and other borrowings

Total net debt
Loans to related parties

Total net debt including loans to related parties

Opening
£m

Net
cash flow
£m

7
–

(25)
(375)

(400)

(393)

(7)
(7)

(14)

(5)
(85)

(90)

(104)

Opening
£m

Net
cash flow
£m

2
(1)

(25)
(410)

(435)

(434)

(432)

5
1

–
35

41
(2)

Closing
£m

–
(7)

(7)

(30)
(460)

(490)

(497)

Closing
£m

7
–

(25)
(375)

(400)

(393)

–

(393)

24. Commitments under operating leases
The Group leases network infrastructure and offices under non-cancellable operating leases. The leases have varying terms, purchase options,
escalation clauses and renewal rights. There were no leases which were individually significant to the Group.

The Group had outstanding commitments for future minimum payments due as follows:

Less than 1 year
2 to 5 years
Greater than 5 years

2014
£m

39
61
55

155

2013
£m

37
69
68

174

25. Capital commitments
The Group had entered into the following amount of contractual commitments for the acquisition of property, plant and equipment at the year end:

Expenditure contracted but not provided for in the financial statements

2014
£m

2013
£m

TalkTalk Telecom Group PLC Annual Report 201426. Related party transactions
The Group’s related party transactions are made on terms equivalent to those that prevail in arm’s length transactions.

During the current and prior year, the Group did not have any disclosable related party transactions.

The remuneration of the Directors, who are some of the key management personnel of the Group, is set out in the Directors’ Remuneration
Report on pages 26 to 39. The remuneration of all key management personnel is disclosed in note 4.

27. Contingent liabilities
In the year ended 31 March 2014, the Group received £4m (2013: £29m) relating to an Ofcom determination that BT had overcharged for certain
wholesale Ethernet services. The full amount of £33m has been paid to the Group at 31 March 2014. BT has appealed Ofcom’s determination in
the Competition Appeal Tribunal (CAT). However, the Group and other parties have also appealed the decision arguing that the original Ofcom
determination was too low.

In September 2013, a change to a previously agreed VAT treatment in relation to prompt payment discounts was enforced by HMRC with
immediate effect. In December 2013, following discussions with HMRC, the Group amended the arrangements and has accounted for the
associated VAT benefit in the Group’s VAT return for the three month period ended 31 March 2014. As at 14 May 2014, no decision has been
reached by HMRC on the appropriateness of the new arrangements. In the March 2014 UK Government Budget, a change in the VAT legislation
with respect to prompt payment discounts was announced. The change took effect on 1 May 2014.

28. Events after the balance sheet date
On 15 April 2014, the Group together with Sky announced they have joined forces with CityFibre to create a new company that will deliver
ultra-fast broadband services in the city of York. The Group’s investment in the company will be accounted for as a joint arrangement in
accordance with IFRS 11 ‘Joint Arrangements’.

As part of the agreement, the Group has committed to spend £5m over three years and will recognise through the income statement,
on an annual basis, its share of profit or loss generated by the joint arrangement.

Fixed assets
Fixed asset investments

Current assets
Debtors: amounts due within one year

Total assets

Current liabilities
Creditors: amounts due within one year
Loans

Non-current liabilities
Loans

Total liabilities

Net assets

Equity
Share capital
Share premium
Retained earnings and other reserves

Equity shareholders’ funds

Notes

2014
£m

2013
£m

6
7

8, 9
9
9

1,173

270

1,082

303

1,443

1,385

(49)
(30)

(79)

(460)

(539)

904

1
684
219

904

(81)
(25)

(106)

(375)

(481)

904

1
618
285

904

The accompanying notes are an integral part of this Company balance sheet.

These financial statements were approved by the Board of Directors on 14 May 2014. They were signed on its behalf by:

D Harding
Chief Executive Officer
14 May 2014

S Makin
Chief Financial Officer
14 May 2014

TalkTalk Telecom Group PLC Annual Report 2014

Company reconciliation of movement in shareholders’ funds
For the year ended 31 March

Profit for the period
Equity dividends

Retained loss for the period
Issue of own shares*
Share‑based payments reserve credit
Share‑based payments reserve debit*
Currency translation and cash flow hedges

Net movement in shareholders’ funds

Opening shareholders’ funds

Closing shareholders’ funds

* These amounts arose as a result of settlement of the Group’s VES schemes. Further detail is set out in note 9.

Notes

2
3

2014
£m

28
(99)

(71)
66
4
(2)
3

–

904

2013
£m

12
(87)

(75)
32
6
(3)
(2)

(42)

946

904

1. Accounting policies
Basis of preparation
The separate financial statements of the Company are presented as required by the Companies Act 2006. They have been prepared under the
historical cost convention and in accordance with applicable United Kingdom Accounting Standards and law.

The financial statements have been prepared on the going concern basis. Details of the considerations undertaken by the Directors in reaching
this conclusion are set out on page 14 within the Chief Financial Officer’s statement.

Accounting policies
The Company’s principal accounting policies, which relate to the financial statements as a whole, are set out below. Where an accounting policy
is specific to one note, the policy is described in the note to which it relates.

Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity
instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. The accounting
policies adopted for specific financial liabilities and equity instruments are set out below.

Loans and other borrowings
Loans and other borrowings represent committed and uncommitted bank loans, and bank overdrafts.

These are initially measured at fair value (which is equal to cost at inception) and are subsequently measured at amortised cost, using the
effective interest rate method, except where they are identified as a hedged item in a fair value hedge. Any difference between the proceeds
net of transaction costs and the settlement or redemption of borrowings is recognised over the term of the borrowing.

Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issuance costs.

Share-based payments
The Company issues equity-settled share-based payments to certain employees. Share-based payments issued by the Company to its
subsidiary undertakings are treated as additions to investments based on the fair value of the grant, spread over the relevant vesting period,
with a corresponding credit to reserves. Where the Company recharges the cost of share-based payments to its subsidiary undertaking the
investment is reduced accordingly.

Further details are provided in note 5 to the consolidated financial statements.

Taxation
Current tax is provided at amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantively
enacted at the balance sheet date.

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where
transactions or events that result in an obligation to pay more, or a right to pay less, tax in the future have occurred at the balance
sheet date, with the following exception:

Deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable
profits from which the future reversal of the underlying timing differences can be deducted.

Deferred tax is measured on a non-discounted basis with the tax rates that are expected to apply in the periods in which the timing differences
reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.

The taxation liabilities of certain Group companies are reduced wholly or in part by the surrender of losses by fellow Group companies.

Exemptions
The Company has taken advantage of the exemption under FRS 8 ‘Related Party Disclosures’ not to provide details of related party transactions
with other Group companies, as the Company financial statements are presented together with the consolidated financial statements.

The Company has applied the exemption under FRS 29 ‘Financial Instruments: Disclosures’ so as not to disclose details of financial instruments
held by the Company. Full disclosure of the Group’s financial instruments recognised under FRS 29 (IFRS 7) ‘Financial Instruments: Disclosures’
and IAS 39 ‘Financial Instruments: Recognition and Measurement’ is provided in note 19 to the Group’s consolidated financial statements.

2. Profit for the year
As permitted by Section 408 of the Companies Act 2006, the Company has elected not to present its own profit and loss account for the year.
The Company reported a profit of £28m for the year ended 31 March 2014 (2013: £12m).

The auditor’s remuneration for audit and other services is disclosed in the Corporate Governance Report on page 24.

Detailed disclosures of the Directors’ remuneration and share-based payments are given in the audited section of the Directors’ Remuneration
Report on pages 26 to 39 and should be regarded as an integral part of this note.

In the current and prior year, the Directors’ remuneration was borne by another Group company and not recharged.

The Company has no employees other than Directors.

TalkTalk Telecom Group PLC Annual Report 20143. Dividends
Accounting policy
Dividends receivable from the Company’s subsidiaries and joint venture investments are recognised only when they are approved or paid
by shareholders.

Final dividend distributions to the Company’s shareholders are recognised as a liability in the financial statements in the period in which they
are approved by the Company’s shareholders. Interim dividends are recognised in the period in which they are paid.

Final dividend for the year ended 31 March 2012 of 6.40p per ordinary share
Interim dividend for the year ended 31 March 2013 of 3.45p per ordinary share
Final dividend for the year ended 31 March 2013 of 6.95p per ordinary share
Interim dividend for the year ended 31 March 2014 of 4.00p per ordinary share

Total ordinary dividends

2014
£m

–
–
62
37

2013
£m

56
31
–
–

The expected cost of this dividend reflects the fact that the Group ESOT has agreed to waive its rights to receive dividends.

4. Fixed asset investments
Accounting policy
Fixed asset investments in subsidiaries and joint ventures are recorded at cost, being the fair value of consideration, acquisition charges
associated with the investment and capital contributions by way of share-based payments, less any provision for impairment.

Subsidiaries
Joint venture

Opening net book value
Additions

Closing net book value

2014
£m

1,153
20

1,173

2014
£m

1,082
91

1,173

2013
£m

1,067
15

1,082

2013
£m

1,004
78

1,082

Joint ventures
The Company holds 14.3% of the ordinary share capital of YouView TV Limited, a joint venture with The British Broadcasting Corporation,
ITV Broadcasting Limited, British Telecom PLC, Channel Four Television Corporation, Arqiva Limited and Channel 5 Broadcasting Limited.
Further details relating to the joint venture are disclosed within note 14 to the consolidated financial statements.

Principal Group investments
The Company’s significant investments in subsidiary undertakings are set out within note 13 to the consolidated financial statements.

Additions
The additions in the year comprise:

ƥ £83m relating to the settlement of the VES schemes (note 9);

ƥ £3m relating to share-based payment schemes issued by the Company; and

ƥ £5m relating to the YouView joint venture.

Amounts owed by Group undertakings
Other debtors

2014
£m

262
8

270

2013
£m

299
4

303

Interest on intercompany funding is calculated at the Bank of England base rate plus 2%; intercompany deposits receive interest at the
Bank of England base rate with no margin. Interest is either paid or capitalised monthly as appropriate. Where they exist, currency balances
are calculated at similar rates.

Interest is not charged on balances arising between Group companies as a result of intercompany trading; such balances are settled regularly
in line with agreed terms of trade within 30 to 60 days.

6. Creditors: amounts due within one year

Amounts owed to Group undertakings
Other creditors

2014
£m

48
1

2013
£m

78
3

Interest is not charged on balances arising between Group companies as a result of intercompany trading; such balances are settled regularly
in line with agreed terms of trade within 30 to 60 days.

7. Loans

Current
Loans

Non-current
Loans

2014
£m

460

490

The details of the loans are disclosed within note 18 to the consolidated financial statements and should be regarded as an integral part
of these financial statements.

8. Share capital

Allotted, called-up and fully paid
Ordinary shares of 0.1p each

2014
million

2013
million

955

931

2014
£m

On 20 November 2013, the Company issued a further 23,722,791 ordinary shares of 0.1 pence each to settle the VES schemes (note 9).

2013
£m

375

400

2013
£m

TalkTalk Telecom Group PLC Annual Report 2014Notes to the Company financial statements continued9. Reserves

At 1 April 2013
Profit for the period
Issue of own shares*
Share‑based payment credit
Share‑based payment debit*
Currency translations and cash flow hedges
Equity dividends

At 31 March 2014

At 1 April 2012
Profit for the period
Issue of own shares**
Share‑based payment credit
Share‑based payment debit**
Currency translations and cash flow hedges
Equity dividends

At 31 March 2013

Share
capital
£m

Share
premium
£m

Profit and
loss and
other reserves
£m

1
–
–
–
–
–
–

618
–
66
–
–
–
–

684

285
28
–
4
(2)
3
(99)

219

Share
capital
£m

Share
premium
£m

Profit and
loss and
other reserves
£m

1
–
–
–
–
–
–

586
–
32
–
–
–
–

618

359
12
–
6
(3)
(2)
(87)

285

Total
£m

904
28
66
4
(2)
3
(99)

904

Total
£m

946
12
32
6
(3)
(2)
(87)

904

* On 16 September 2013, the Group’s Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been
satisfied, meaning the VES participants were entitled to exercise the remaining 40% of their options as set out in note 5 to the consolidated financial statements. The settlement of the
scheme resulted in a net increase of £83m in investments (note 4), the recognition of share premium of £66m and a decrease in the net cost of share based payments previously
recognised in reserves of £2m.

** On 17 September 2012, the Group’s Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had

been satisfied, meaning the VES participants were entitled to exercise 60% of their options as set out in note 5 to the consolidated financial statements. The settlement of the scheme
resulted in a net increase of £68m in investments (note 4), the recognition of share premium of £32m and a decrease in the net cost of share-based payments previously recognised
in reserves of £3m.

10. Audit exemption note
The Company is entitled to exemption from audit for its subsidiaries under Section 479A of the Companies Act 2006 for the year ended
31 March 2014.

The Directors have applied this exemption for the following subsidiaries:

Company name

Executel Ltd
Greystone Telecom Ltd
Green Dot Property Management Limited
Tiscali UK Limited

Company number

05227052
04066365
05705868
03408171

The Directors acknowledge their responsibility for complying with the requirements of the Companies Act 2006 with respect to accounting
records and the preparation of accounts.

Headline results
Revenue
Net profit for the year

Net assets employed
Non‑current assets
Net current liabilities excluding provisions
Provisions
Non‑current liabilities excluding provisions
Net assets employed

Headline earnings per share
Basic
Diluted

Statutory earnings per share
Basic
Diluted

2014
£m

1,727
61

1,039
(223)
(9)
(460)
347

6.8
6.6

3.1
3.0

2013
£m

2012
£m

2011
£m

2010
£m

1,670
132

1,687
159

1,765
122

1,686
106

1,046

(216)
(13)
(375)
442

14.9
14.0

11.3
10.6

1,102
(230)
(18)
(410)
444

18.0
17.2

15.6
14.9

1,137
(281)
(46)
(395)
415

13.5
12.8

3.9
3.7

1,204
(275)
(47)
(490)
392

11.8
11.2

(0.3)
(0.3)

Headline earnings represent the Group’s income statement stated before the amortisation of acquisition intangibles and exceptional items.

On 26 March 2010, CPW demerged into Carphone Warehouse Group PLC and the Group. The Company and Carphone Warehouse Group PLC
were separately listed on the London Stock Exchange.

The consolidated financial information of the Group for the year ended 31 March 2010 have been prepared with the objective of presenting the
results, net assets and cash flows of the Group in the form that arose on completion of the demerger, as if it had been a standalone business
during those periods.

TalkTalk Telecom Group PLC Annual Report 2014

Glossary

ADSL

ARPU

CAGR

CGU

Churn

Asymmetric Digital Subscriber Line technology
enables data transmission over existing copper
wiring at data rates several hundred times
faster than analogue modems, providing for
simultaneous delivery of voice, video and data

Average Revenue Per User on a monthly basis

Compound Annual Growth Rate

Cash generating unit

A measure of the number of subscribers
moving into or out of a product or service
over a specific period of time

High Definition

Internet Protocol is the packet data protocol
used for routing and carriage of messages
across the internet and similar networks.
IP performs the addressing function and
contains some control information to allow
packets to be routed through networks

ISP

LLU

Internet Service Provider

Local Loop Unbundling

Mbit/s/Mbps

Unit of data transfer rate equal to 1,000,000
bits per second

The Company

TalkTalk Telecom Group PLC

MPF

Companies Act

Companies Act 2006

Metallic Path Facility provides both broadband
and telephony services to customers from
TalkTalk Group exchange infrastructure

The Carphone Warehouse Group PLC,
its subsidiary companies, joint ventures
and investments

MSAN

MVNO

Multi-Service Access Nodes

Mobile Virtual Network Operator

Customer Relationship Management

Narrowband

The demerger of the The Carphone
Warehouse Group PLC into TalkTalk Telecom
Group PLC and Carphone Warehouse Group
PLC effective on 26 March 2010

Digital Subscriber Line Access Multiplexer

Earnings Before Interest and Taxation

Earnings Before Interest Taxation Depreciation
and Amortisation

Ethernet in the First Mile

Earnings Per Share

Ethernet is a protocol that controls data
transmission over a communications
network often referred to as a family of
frame-based computers

Financial Reporting Council

Gigabits per second

Global Positioning System

The Company, its subsidiaries and entities
which are joint ventures

TalkTalk Telecoms Holdings Employee Share
Option Trust

Headline information represents the Group’s
income statement, stated before the
amortisation of acquisition intangibles and
exceptional items that are considered to
be one-off, non-recurring in nature and so
material that the Directors believe that they
require separate disclosure to avoid distortion
of underlying performance and should be
separately presented on the face of the
income statement

Net debt

NGN

On-net

Telecommunication service that carries voice
information in a narrowband of frequencies

Borrowings net of cash held on deposit at
financial institutions

Next Generation Network

The Group’s unbundled network

Operating free
cash flow

Cash generated from operations before
exceptional items, interest, taxation, dividend
payments and investments

Operating profit

Profit before finance costs and taxation

Quad play

A customer that takes voice, broadband,
TV and MVNO services from the Group

RCF

Revolving Credit Facility

SMPF or partial
unbundling

SME

Triple play

Shared Metallic Path Facility provides
broadband services to customers from
TalkTalk Group exchange infrastructure

Small and Medium sized Enterprises

A customer that takes voice, broadband
and TV services from the Group

UK Corporate
Governance Code

UK Corporate Governance Code published
by the FRC in May 2011

Unbundling

VoIP

WAEP

Wi-Fi

Process by which BT makes available its
local network to third party broadband
service providers

Voice over Internet Protocol

Weighted Average Exercise Price

Trademark of the Wi-Fi Alliance often used as a
general term for wireless networking technology
that uses radio waves to provide wireless
high-speed internet and network connections

CPW

CRM

Demerger

DSLAM

EBIT

EBITDA

EFM

EPS

Ethernet

FRC

Gbps

GPS

The Group

Group ESOT

Headline
information

Strategic report: OverviewStrategic report: StrategyStrategic report: PerformanceGovernanceFinancial statementsOther informationTalkTalk Telecom Group PLC Annual Report 2014Financial calendar

AGM

Ex-dividend date

Record date

Dividend payment date

23 July 2014

2 July 2014

4 July 2014

1 August 2014

TalkTalk Telecom Group PLC Annual Report 2014TalkTalk Telecom Group PLC
Registered in England and Wales No. 7105891
11 Evesham Street, London W11 4AR

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