Dutch telecom market Q4: stabilisation after consolidation and multiplays?

Monday 20 March 2017 | 15:04 CET | Background

The major Dutch operators reported varying performances in the fourth quarter of 2016. KPN showed continued steady improvement, while Ziggo has barely completed the merger with UPC before it starts now on integrating with Vodafone. We still need to wait and see how VodafoneZiggo performs financially compared to its predecessors. The main question is how much the high cable margins will fall after absorbing a mobile operator. T-Mobile is focused on winning market share, with declining profitability as a result. Tele2 is trying just as hard as T-Mobile, but its growth is slowing. All the operators apart from KPN have had a change in management, who now need to face up to the changing market landscape.

In this financial analysis, we leave out Vodafone, as it only reports full results twice a year. In the December quarter, it published only service revenues and no profit figures. For KPN, we exclude iBasis and focus only on its Dutch operations.


Four majors

We look at the major trends based on four parameters available for all four companies: revenue growth, operating costs (from which flows the EBITDA margin); capex (as a percentage of revenue) and free cash flow.

  • Growth improved slightly at KPN and Ziggo and especially at T-Mobile, while Tele2's sales growth was lower.
  • KPN's operating costs are headed in the right direction, leading to an annual increase in its margin towards 40 percent. Ziggo showed some stabilisation, with an EBITDA margin of 54 percent. T-Mobile is sacrificing its margin for sales, with a result of just 21 percent, half its level two years ago. Tele2 shows a similar picture, but its margins are even lower - in negative territory. Tele2 still has a long way to go.
  • Investments (capex) increased again at KPN to 19 percent of revenue, while the longer term trend is downwards. Ziggo's ratio is higher, at 25 percent, the highest since the end of 2014. T-Mobile succeeded in keeping its capex ratio below 10 percent, after a period of a somewhat higher level. Tele2 is past the peak after completing its 4G network roll-out (34% in Q2 2015) and reached 18 percent in Q4. It will likely take until mid-2018 for this to fall further as it's still finishing some network investment.
  • Free cash flow (defined as EBITDA minus capex) was around 20 percent of revenue at KPN. Given the company's targets of a higher EBITDA margin and lower capex, the FCF margin should increase further. Ziggo traditionally has higher free cash flow, but its latest result of 29 percent puts it at the lowest level in two years. At T-Mobile, the margin reached a new low of 13.5 percent, despite its low capex, and Tele2 is still reporting negative cash flow.

The market is waiting to see what the new VodafoneZiggo will bring. The company is expected to launch a new fixed-mobile offering in the near future. With new management at this company, as well as at T-Mobile and Tele2, KPN is the most stable factor in the market. VodafoneZiggo may be busy with its integration, but it can profit from sales and costs synergies. KPN can rely on its market lead as well as wholesale partners that mainly target the customers of its rivals. For example, NLEx, which is targeting Ziggo customers, and Youfone, which is after Vodafone, T-Mobile and Tele2 subscribers. T-Mobile has the support of a parent company that's willing to accept a lower return for a time in exchange for boosting its market share; some might consider this window dressing. Tele2 may have surprises up its sleeve still, with a brand-new CEO who previously worked at Com Hem and Virgin Media.

The top four operators, excluding Vodafone (KPN NL, Ziggo, T-Mobile, Tele2), reported total revenues of EUR 2.675 billion in Q4 2016. After four quarters of decline, this was a small increase of 0.2 percent. Their other indicators are also largely stable. The combined EBITDA margin was 38 percent, capex reached 19 percent of revenue, and free cash flow also was 19 percent of sales. One could think that the growing amount of bundling and consolidation is having its effect and the market is starting to stabilise. 

Dynamic market

In addition to the major changes underway at the company level, the Dutch market faces other challenges, for example:

  • Multiplay. The ACM is currently researching the impact on the market.
  • Unlimited mobile data. T-Mobile's new Go Unlimited offer may result in major changes.
  • NLziet. The broadcast partners (NPO, RTL, SBS) are aiming to launch a live OTT TV service.
  • Amazon. While Amazon is not yet big in the Netherlands, this may change after the global launch of Amazon Prime Video as a competitor to Netflix.
  • 5G. The introduction of a new technology always has a major impact. A new spectrum auction will be required, and bandwidth and latency will no longer form serious barriers in a 5G world.

Consolidation and multiplays have likely contributed to the stabilisation of the Dutch market, but change is still happening, and the market has rarely been so dynamic. The question is whether the new top 4 (KPN, VodafoneZiggo, T-Mobile, Tele2), with their new CEOs, can navigate the landscape wisely. Who will achieve the greatest growth? Who can control costs best? And who will take the smartest investment decisions?

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