Dutch telecom market Q4: revenues down across the board, KPN approaches VodafoneZiggo margin

Friday 23 February 2018 | 11:33 CET | Background

The four biggest Dutch operators generated combined revenues of EUR 2.98 billion in the fourth quarter of 2017. The reason for the lower revenues varied per operator, but regulation player an important role for all of them. In terms of profitability, KPN has achieved a similar level to VodafoneZiggo. Capex investments reached a peak, but were less significant when spread over the past four quarters. The operators suggested they are ready to reduce spending. The question is whether they can, given the continued development in networks and growing importance of content. 

Our analysis focuses on the most important financial figures for the four largest Dutch operators:

  • KPN Netherlands. The international business iBasis is excluded from the figures.
  • VodafoneZiggo. We use historical figures for its predecessors UPC, Ziggo and Vodafone.
  • T-Mobile Netherlands. The acquisition of Vodafone Thuis (now T-Mobile Thuis) gave a boost to results from Q4 2016. At the same time, this was subtracted from VodafoneZiggo's results, so the market totals are unaffected.
  • Tele2 Netherlands.

Revenues down for a variety of reasons

Total revenues of the four companies fell 3.9 percent in Q4 2017. T-Mobile performed in line with the market, while KPN and VodafoneZiggo did marginally better (-3.7%) and Tele2 underperformed (-6.4%). In absolute terms, the market lost EUR 120 million in revenue on an annual basis. Regulation, including RLAH (roam like at home), MTR (interconnection) and WFT (credit bureau registration for expensive phone contracts), played a large role. 

Tele2 achieved slightly higher mobile revenues in Q4 2017, but the rest of the business was weak. T-Mobile's revenues fell across the board and only the non-organic growth in fixed (T-Mobile Thuis) saved it from a worse result. KPN finally saw improvement on the business market, but this was offset by lower revenues in consumer. Both divisions recorded revenue falls of 1.4 percent. VodafoneZiggo found some growth in the business cable market and hardware sales, but mobile was weak, with consumer sales down 7.3 percent and the business segment dropping 14.1 percent. In short, there is no growth, and regulation apart, the reason is different at each operator. 

KPN matches VodafoneZiggo profitability

The combined EBITDA margin of the operators fell to 35.5 percent, from 36.2 percent a year earlier and 39.5 percent in Q3 2017. KPN and VodafoneZiggo are still a couple points above that. Notably, the two market operators are approaching each other in terms of profitability: KPN reached 37.9 percent and VodafoneZiggo 38.3 percent (in adjusted terms, KPN's EBITDA margin is even higher, at 40.1 percent). The integration of Vodafone's mobile business with a traditionally much lower margin than cable means Ziggo's former margin of around 60 percent has fallen by a third. At the same time, KPN is working hard at reducing its costs, pushing its margin higher. 

T-Mobile appears to have accepted a lower margin in exchange for winning new customers and market share. At 27.5 percent, the margin is still decent. In 2014, it reached a peak of around 40 percent, but this was flattered by using adjusted EBITDA figures, excluding one-time items. 

Tele2's margin is improving. After a long period in the red, the operator has returned to the same level as Q1 2014, 12.1 percent. Mobile is still depressing the result as it remains loss-making (-6.1%). Notably the fixed telephony business, once a cash cow, also now have a negative margin. 

Investments still within historic average

Total capital expenditure in the quarter reached EUR 718 million, or 24.1 percent of revenues. To eliminate some of the volatility, we look at the trailing 12-month result, which is a more reasonable 18.3 percent of revenue. That is no record and shows capex is relatively stable in a range of 17-20 percent of revenues.  KPN and VodafoneZiggo are preparing the market for a structurually lower investment level, and the same will hold for Tele2, which has nearly completed its mobile network. The question is whether they can really achieve this, given the continued investments in networks and content. 

Free cash flow (EBITDA  minus capex) fell due to the peak in capex, to just 11.4 percent of revenues. The picture is more nuanced here as well if we look at the 12-month figures; at 19.3 percent, this is in line with the recent period's range of 18-21 percent. 

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