Press Release

The Carphone Warehouse is today giving its annual strategy presentation to investors and analysts, and financial guidance for the year to March 2008. The highlights of this presentation are summarised below.

• Evolution of Retail proposition to support broader wireless solutions
• Geek Squad to form integral link between products and services
• Roll-out of next generation telecoms network to reach 1,650 unbundled exchanges
• Targeting 3.5m broadband customers and 4.5-5m residential customers in total by March 2010
• Further roll-out of Best Buy mobile in the USA, with 150-200 stores over 18 months

• Confident of continued strong performance
• 250 net new stores planned, with 15% growth in subscription connections
• Capex budget of £220m, reflecting additional exchange roll-out and US expansion
• Strong cash generation substantially invested for growth
• Major revision of divisional reporting structure to reflect key value drivers

Charles Dunstone, Chief Executive Officer, said:

“The needs of our customers and suppliers are changing as the convergence of fixed and wireless technologies gains pace.  The opportunities for the Group are tremendously exciting as we begin to pull together our valuable assets – a powerful distribution platform, strong partner relationships, an advanced telecoms network and a growing broadband customer base – to offer an end-to-end wireless solutions service to our customers.

”Our US trial has been successful and we are today announcing a rapid roll-out of the Best Buy Mobile format, allowing us to penetrate the substantial US market in an effective manner with a world class partner.

“In broadband, we are targeting 3.5 million residential customers by March 2010.  Provisioning times are falling as the unbundling process becomes more streamlined, and we are confident that our increased investment in customer service will deliver a much improved customer experience.  The success of the free broadband proposition and the compelling economics that unbundling delivers have led us to extend our LLU footprint to cover 1,650 exchanges, reaching over 80% of the population.

“We continue to see ample opportunities for long term growth in existing and new business areas, and plan to reinvest a significant proportion of cash generated this year into building this growth platform.”

For the new financial year we are changing the divisional structure of our financial reporting.  The changes have been made to simplify our reporting structure and enable investors to focus on the key value drivers of the business.  The new format reflects how we report internally and more accurately presents our business lines by the key assets that support them.

The new Distribution division will incorporate our Mobile, Dealer and non-UK fixed line operations, reflecting the key role our stores play in recruiting and managing customers for these businesses.  UK Fixed Line operations will form a separate division, reflecting the shared infrastructure base of the Opal network.

In addition, we will be providing a geographical breakdown of revenues and operating profit for the Distribution division, split between the UK, Spain, France, Germany and Other markets, with central support costs and all IT costs directly allocated to specific business units, excluding central PLC costs.

Between now and our preliminary results on 5 June 2007, we will provide a full segmental analysis of results for H1 and H2 for the year to March 2006, and H1 of the year to March 2007, under the new format, and on 5 June we will publish full year numbers in both old and new formats.

The new disclosure will be supported by a simplified quarterly KPI structure focusing on connections, stores, customer numbers and ARPUs.

As part of our presentation to analysts and investors today, we will be giving updated financial guidance for certain business areas in the coming year.  The key elements of this guidance are set out below.

Distribution
Divisional revenue growth is expected to be 11-13%, with EBIT margin increasing by about 70-80 basis points year-on-year to approximately 6.5%.

We continue to see significant opportunities for further expansion of our store portfolio and plan to open 250 net new stores across Europe this year.  In addition, as we begin to move towards an integrated wireless solutions proposition, we are investing in up to 100 major re-sites or refits in major locations across Europe.

We expect subscription connections to grow at approximately 15%, supported by continued demand for new handsets and competition between network operators.  We expect overall connections growth to be 10-12%, reflecting a slower pre-pay market after the exceptional growth of the last 18 months.  Like-for-like gross profit is forecast to be flat, reflecting broadly flat connections per store and stable gross profit per connection on both subscription and pre-pay.  We anticipate that Insurance and Ongoing revenues will track marginally ahead of subscriptions connections growth.

UK Fixed Line
Divisional revenue growth is expected to be approximately 45%, with EBIT margins expanding to approximately 7% from about 1.5% as the business benefits from increasing scale and the migration of customers to unbundled lines.

In our Residential operations we anticipate further strong growth in our broadband customer base as we head towards our three year targets announced today.  We are budgeting for monthly broadband ARPU of £21 for the year as a whole, reflecting the blend between free broadband customers and the AOL base.  ARPU is expected to trend up gradually through the year as free broadband customers become a greater proportion of the overall base. 

The base of other billed customers, comprising CPS and narrowband accounts, is expected to continue to decline during the year through migration to our broadband propositions and natural churn.  Other billed customer monthly ARPU is expected to average £19 but will trend up through the year as the narrowband base is expected to decline more rapidly than the higher-ARPU CPS base.

Residential EBITDA margin will rise sharply year-on-year, to approximately 15%, mainly as a result of the unbundling process.  By March 2008 we aim to have over 50% of our AOL customers on partially unbundled lines, and over 80% of our TalkTalk broadband customers on fully unbundled lines.

In our business-to-business operations, we are planning for revenue growth of 11-12%, through the annualisation of acquisitions and the continued development of our broadband and data proposition for the SME market, and EBITDA margins rising a little but still in the 10-11% range.

New ventures
We are now investing in three areas of future growth potential with joint venture partners.  In France, the initial success and momentum of our Virgin Mobile joint venture has encouraged us to invest further in the coming year in building the customer base and increasing brand awareness. 

In addition, we have been developing plans with Best Buy for the roll-out of two new business ventures.  In the US, our five month trial of Best Buy Mobile has delivered encouraging results and we now plan to expand the concept on a commercial scale, with 150-200 stores to be opened over the next 18 months.  The majority of these will be “store within a store” concepts in existing Best Buy locations.

In the UK, we have recently launched our Geek Squad home technology support service in the London area.  We will expand this over the coming months to cover the whole of the UK with our remote service, and key cities with our home visit service.  We believe that over time, Geek Squad can become a pan-European operation connecting our retail proposition with customers' increasingly complex technology needs.

The increase in costs highlighted earlier this month of £10-15m, combined with the existing expected investment in Virgin Mobile, is expected to result in a total loss from joint ventures of £15-20m in the coming year.

PLC costs
As part of the new presentation of divisional results, we are incorporating the majority of support costs within EBITDA and dispensing with business unit contribution disclosure.  However,  we will now report PLC overhead as a central, unallocated cost, which we expect to amount to £35-40m in the year to March 2008.  This includes a non-cash charge of £15m relating to share options costs.

Group cash flow, balance sheet and dividend policy
This will be a year of continued significant investment for the Group, with total capex amounting to approximately £220m, allocated as follows:

The success of our unbundling strategy, the opportunity that the acquisition of AOL provides us, and the evolving strategy of our retail business both in Europe and the US, have all encouraged us to continue to raise levels of capital expenditure to deliver on our long term goals.  This continued investment, in addition to the launch this year of our new billing and CRM platform, will lead to a rise in depreciation and non-SAC amortisation of approximately 33%.

In addition, we plan to capitalise approximately £110m of subscriber acquisition costs across our mobile and UK residential fixed line businesses, where minimum term contracts apply.  The cash outflow from capitalised SAC is anticipated to exceed the amortisation charge by approximately £20m.  We expect SAC amortisation to reach or exceed annual capitalised SAC expenditure in the following financial year.

We expect to raise the dividend by 30% next year, reflecting the Board's continued confidence in the long term prospects of the Group.

The Board is pleased to announce the appointment of David Grigson as a Non-Executive Director, with immediate effect. David Grigson is Chief Financial Officer of Reuters Group PLC.

There are no further details in respect of this appointment required under LR 9.6.13 of the FSA Listing Rules to be disclosed.

There is a presentation for investors and analysts on Group strategy and guidance for the coming year at the the offices of UBS, 1 Finsbury Avenue, London EC2M 2PP, starting at 10.00am this morning. The event will also be audio webcast live at cpwplc.com.

The Group will publish its preliminary results for the year to March 2007 on 5 June 2007.

For Further Information

Operating Statistics

Connections, mix and store numbers

Customer bases