TalkTalk Drops as UK Broadband Market Fight Hots Up - Update

(Rewrites throughout, adds share price reaction)

By Ed Ballard

LONDON--Shares in TalkTalk Telecom Group PLC (TALK.LN) dropped Wednesday as it warned that a fight for customers is intensifying in the U.K.'s broadband market.

TalkTalk's rivals in the U.K.'s broadband market include BT Group PLC (BT.A.LN), Sky PLC (SKY.LN), Virgin Media PLC and a raft of smaller peers.

"The broadband market was softer than we have seen in recent quarters, with higher promotional activity in the sector," said TalkTalk, which provides internet, mobile and pay T.V. services, in its first-quarter trading update.

The sector is under review by media regulator Ofcom, which said last week that BT may be forced to break up its Openreach broadband network, which serves most of the U.K.'s broadband connections. TalkTalk and Sky have said BT isn't fulfilling an obligation to give competitors access to the infrastructure on equal terms.

TalkTalk posted a 3.5% increase in sales for the three months to June 30 and said it was on track to meet full-year growth targets; shares fell more than 7% in morning trade, their sharpest drop since September 2013.

The company said its earnings will be unusually skewed towards the latter part of this financial year, with revenue growth expected to speed up as the year progresses and cost savings kick in later than usual.

"Delivery of the 25% [a profit margin target for the 2017 financial year] is now even more uncomfortably back-end loaded," said analysts at Jefferies.

The company reported a 6.5% increase in net revenue in the three months to June 30, and a 4.9% rise in corporate sales, offsetting a 47% fall in less lucrative "off-net revenues"--sales from services using BT networks rather than TalkTalk's infrastructure.

TalkTalk said it expects to achieve full-year revenue growth of 5% and strong growth in cashflow and earnings before interest, tax, depreciation and amortization.

At 0900 GMT, shares traded 30 pence, or 7.6%, lower at 361 pence apiece.

Write to Ed Ballard at [e-mail]

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