Here are the main points from the group strategy, as presented by KPN´s management board during the Investor Day dedicated to the new 2011-2015 strategy: Strengthen - Simplify - Grow.
Focus op 3 core principles
The Strategic Vision 2015 is based around three core principles: ◦ Strengthen: these are the principles, creating strong market positions, cost leadership and improving quality and reputation in the Netherlands. On a financial level, seeking gains, partly through tax benefits. ◦ Simplify: concerns the organisation. Subsidiary portfolios and innovation must be streamlined, as well as the propositions, processes and the organisation itself. ◦ Grow: growth will be is sought in the challenger role that KPN will take in mobile outside of the Netherlands, but also in data traffic from fixed and mobile. Ultimately, dividend growth should come from here.
The profit warning and mobile data
The immediate cause of the profit warning issued on 21 April was changing consumer behaviour, which will be more fully explained. For example, 48 percent of Hi’s postpaid customer base has a smartphone. Among Android phones, 85 percent had WhatsApp installed in April and 55 percent a flat fee bundle in Q1. All this led to a sharp slowing in outgoing SMS traffic growth, from 13 percent in Q1 2010 to a bit over 1 percent in Q4 2010 and to a negative 8 percent in Q1 2011. KPN indicated that the use of such apps is spreading quickly across its customer base, resulting in many subscribers spending less on call minutes and SMSs outside the bundle. In 2011. this will lead to an EBITDA fall by EUR 30 million; in 2012, the EBITDA effect will be at EUR 60-70 million, after which it will stabilise.
The 5 Strategic Challenges
Based on feedback from the market, management has formulated five strategic challenges for 2015:
◦ Strengthen market positions in the Netherlands; ◦ Boost sustainable profit growth with Germany and Belgium’s ‘challenger’ model; ◦ Implement further cost savings; ◦ Streamline the portfolio; ◦ Simplify the organisation, emphasizing a higher quality and a better reputation.
Strategic objectives 2015
The more quantified goals for 2015 are as follows:
◦ Fixed Consumer Netherlands: a broadband market share >45 procent. The number of RGU (revenue generating units) per connection must rise to 2.4 from 1.8. ◦ Consumer Mobile Netherlands: market share > 45 percent. Migration from voice to data will be implemented and the number of stores expanded. ◦ Business / Getronics: leading player in the Benelux. Further integration of the two units. A new brand will be created for the SOHO/SMB market. Fixed and mobile will be combined. Important verticals will be the healthcare and financial sectors. ◦ Cost Leadership: 4000-5000 FTEs will disappear. Savings on capex savings and purchasing must reach 100 million per year from 2012. ◦ Germany: market share > 20 percent. This implies service revenues at EUR 4 billion (compare to Q1 2011, when service revenues amounted to EUR 736 million). The EBITDA margin must attain 35-40 percent (38.9% in Q1 2011). The HSPA+ will continue to roll out and LTE tested. ◦ Belgium: market share at 20-25 percent, EBITDA margin at 35-40 percent (30.6% in Q1 2011). ◦ RoW (Rest of World): accelerated growth for Ortel. Revenues should rise from roughly EUR 200 million to 400 million. KPN is mulling the future of its MVNO operations in Spain and France. ◦ iBasis: continue value creation. ◦ Simplify and quality on three fronts: ◦ 1. ‘first-time-right ' to 85-95 percent (currently 40-80%), the number of calls to call centers (now at 20 million per year) must go 25 percent lower;
◦ 2. strong improvement in NPS (Net Promoter Score), from -10 to -20 (in line with the sector) to +10 to +15; ◦ 3. KPN must come to rest among the top ten Dutch companies with a good reputation (currently ranked 16 with a score of 63 on a 100-point scale).
Fixed Netherlands
KPN has chosen a hybrid network for VDSL, to answer short term needs with cable and long term needs with FTTH. The operator will embrace the regional deployment model which proved successful in Germany and Belgium. The performance of VDSL will be improved with a trio of techniques (see our background article "The end of network upgrades is not yet in sight"):
o Pair Bonding: up to 90 percent of the copper line consists of a double pair. This doubles VDSL speed. A pilot was positive and pair bonding will be deployed commercially starting later this year. Vectoring: this also significantly improves speed, and will be implemented together with partners Alcatel-Lucent and ZTE. The launch is foreseen for H2 2012. ◦ Phantom mode: This is still in the R&D stage, with implementation expected in 2013.
Cost Savings
The previously announced job cuts of 4000-5000 (20-25% of the Dutch workforce) will be sought mainly at Getronics and Dutch back office operations. A quarter of these (800-1100 jobs) should come from efficiency improvements, 20-30 percent from outsourcing (1400-1700 jobs) and 30-50 percent (1800-2200 jobs) from offshoring, which has been successfully tested at Getronics. The associated effect from the restructured EBITDA and the free cash flow will be EUR 250-300 million, spread out over a number of years. From 2012, KPN wants cost savings at EUR 100 million from capex and purchasing, while a favorable tax environment will lead to savings of EUR 100 million. This will be due to the low tax on innovation. Finally, an improved treasury management should yield savings of EUR 50 million. In total therefore, cost savings will amount to EUR 250 million.
Distribution to shareholders
KPN has put together a number of funding principles, which will let it maintain its distribution policy in the years ahead. These are:
◦ Commitment to bondholders; ◦ A growing dividend, above peer group average; ◦ A strong balance sheet; ◦ The distribution of surplus cash.
Finally, the TSR (total shareholder remuneration) will not go above the net profit rom 2012.