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TalkTalk counts the cost of biggest ever customer gains

A woman speaks on her phone as she passes a branded logo outside the Talktalk headquarters in London, Britain May 10, 2017. REUTERS/Neil Hall

By Paul Sandle

LONDON (Reuters) - British broadband company TalkTalk (TALK.L) added a record number of customers in its fourth quarter, although the cost of winning those customers with cheaper deals along with its ongoing restructuring saw full-year profits fall 35 percent on Thursday.

Chief Executive Tristia Harrison and company founder Charles Dunstone reset TalkTalk's strategy a year ago, prioritising customer growth above all else.

TalkTalk had been losing customers after it was hit by a high profile cyber attack in late 2015, while its position as a value player had slipped in an increasingly competitive market, where bigger and better funded players like BT (BT.L), Virgin Media (LBTY.O) and Sky (SKYB.L), were increasingly offering bundles of services.

But the shift in strategy at TalkTalk, which aimed to take the company back to its value-for-money foundations, has come at a price.

Having originally anticipated earnings as high as 300 million pounds in 2017, profit dropped to 233 million pounds after the company warned investors in February to expect no more than 230-245 million pounds.

The firm also announced the sale of its direct business-to-business unit to Daisy Group for 175 million pounds on Thursday as it overhauls its business strategy.

The 109,000 record customer additions in its final quarter helped achieve a better-than-expected increase of 192,000 to 4.1 million customers for the full year. Its guidance was for 150,000 to 160,000 net additions.

"We have been very deliberately focused on growth, we delivered that growth in both consumer and in B2B," Harrison said in an interview on Thursday.

The hit to earnings came from restructuring costs and an increase of 48 million pounds in marketing costs year-on-year.

Harrison said churn - a measure of the number of customers switching to other providers - had fallen to its lowest ever level of 1.22 percent against 1.45 percent a year ago, thanks to the popularity of its fixed low price contracts.

The first of the price plans, which typically last 18-24 months, had recently ended, and Harrison said early renewals were encouraging.

"The churn is better than we expected and really importantly on that cohort we are seeing a circa 2-3 percent ARPU (average revenue per user) increase," she said.

Shares in the company, which have lost 46 percent of their value in the last 12 months, were trading up 0.4 percent at 121.8 pence at 1306 GMT.


Investors were encouraged by the subscriber numbers, which analysts at Royal Bank of Canada said were "exceptionally strong" and the company stuck to its guidance that it would grow earnings by 15 percent in the current year.

Harrison said TalkTalk was also making good progress on simplifying its business through the sale of its business-to-business unit to specialist Daisy.

The deal will see about the 80,000 of TalkTalk's 1 million business customers that it bills directly move to Daisy.

TalkTalk said it would continue to grow its wholesale business base, which it serves indirectly through partners such as Fujitsu and Verizon as well as Daisy.

The operator announced an ambition in February to build its own ultrafast fibre-to-the-premise network, connecting three million homes in the next five years.

It is teaming up with M&G Prudential, which is providing some 80 percent of the capital, to build the network. Harrison said on Thursday Paul Reynolds, a former BT and Telecom New Zealand executive, will chair the new company while TalkTalk's chief operating officer Charles Bligh will be chief executive.

Harrison said the company was talking to other operators and investors about the opportunities in full-fibre networks.

"We are having lots of conversations with lots of people," she said.

A report in the Daily Telegraph earlier this month said the TalkTalk had held discussions with Virgin Media about sharing some of the costs of building new networks.

(Editing by Keith Weir and Elaine Hardcastle)