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General

KPN holds it together in Q3 with price increases, cost reductions

Tuesday 1 November 2016 | 11:36 CET | Background

KPN profited in the third quarter from price increases, cost savings and the consolidation of Dekatel. All three are structural effects: price increases will have an impact for the coming year, cost reductions will also continue, and further small acquisitions can be expected, likely on the business market. Also positive in the results is a small improvement in the business market, limited impact from the roaming price cuts and a likely positive effect for KPN while Ziggo and Vodafone Netherlands complete their merger. The subscriber growth on the fixed market was a more negative point, as saturation raises the question of whether new services can contribute substantially to revenue.

The outlook for 2016 was more or less unchanged: stable EBITDA, capex of EUR 1.2 billion and free cash flow of EUR 650 million. The latter now excludes the EUR 52 million from a recent refinancing. In the short term this will lead to extra costs, but this will be compensated over the long term. The net debt ratio was a relatively high 3.0x EBITDA, although this may be offset with the stake in Telefonica Deutschland.

Corporate

Revenues fell 2.6 percent (or -3.0% excluding one-time effects) to EUR 1.72 billion. This is slightly better than previous quarters. The Netherlands (excluding iBasis) showed a similar picture, with a drop of 1.5 percent to EUR 1.53 billion. 

Costs (opex) continued the downward trend, driven by simplification of the company, its systems and market propositions. The number of employees in the Netherlands dropped to 13,421 from 13,924 a year ago, helping sales per employee improve to EUR 113,000 per quarter from EUR 111,000 12 months ago.

This helped improve the EBITDA margin to 38.7 percent, a level not seen in around five years. In Netherlands (excluding low-margin iBasis) the margin increased to 43.3 percent. This puts KPN on track to achieving the improvement promised at its Capital Markets Day in March 2014, of 3 percent points compared to the 38.3 percent in 2015. The company may be able to improve further this target.

Capex in the Netherlands fell to EUR 264 million, something KPN says is thanks to higher investments in the past. This is helping capex drop towards the targeted ratio of 15-17 percent of sales, from 20.8 percent in 2015. In Q3 the ratio was 17.3 percent.

Free cash flow (EBITDA minus capex) at KPN NL subsequently improved to EUR 397 million or 26 percent of revenue, a new record.

At iBasis, the company recorded revenues of EUR 224 million, EBITDA of just EUR 6 million and free cash flow of EUR 5 million. Selling this unit is a clear choice, but it's apparently difficult to find a buyer. 

Consumer

The consumer revenue trend improved further, with growth of 1.5 percent to EUR 802 million. Roaming took EUR 4 million off sales and a tax benefit in Q3 2015 put pressure on growth in mobile, but the price increases in fixed in July offset the negative effects. This led to growth of 3.1 percent in fixed and a drop of 0.6 percent in mobile. The margin rose to 62.1 percent.

The number of customers (households) fell by 29,000 in the quarter to 3.66 million, in line with recent trends. The number of services did less well, coming in unchanged at 7.84 million. This led to an increase in the number of services per household to 2.14 from 2.13 in the previous quarter. KPN lost 12,000 voice customers and 16,000 Digitenne/analoge TV subscribers, while broadband grew by 6,000 and IPTV by 22,000. Thanks to the price increases, ARPU increased to EUR 41.

Mobile showed a similar trend, with 41,000 net additions, of which 36,000 postpaid. Postpaid ARPU ended at around EUR 26, compared to EUR 28 a year ago.

Business

The revenue trend showed little improvement, with sales down 7.0 percent to EUR 569 million, nor did EBITDA, with a margin of 61.2 percent. The LE/Corporate segment did show some improvement, with a revenue drop of 4.3 percent, but the SME segment was still down 12 percent. Growth is coming from New Services such as IoT and Cloud (+7.1%) and 'Other' services such as consulting (+5.0%). The same as at Consumer, the focus is on bundling services in order to increase revenue per customer and reduce churn.

Number three

The market saturation is limiting KPN's growth perspective. The big players - KPN and Ziggo/Vodafone - are unlikely to see much change in their market shares, but KPN can profit from the likely fall-out of the Ziggo/Vodafone integration. Consolidation could create a strong number three on the Dutch market, but for the moment it's still completely unclear who that would be. Various players are for sale: Vodafone Thuis, Caiway, Delta and likely some small cable and fibre operators. On the mobile market, T-Mobile and MVNOs are targets. However, the question is whether the two market leaders could ever get regulatory clearance for takeovers. Both are focused on cost savings and new services, such as IoT and the cloud, in order to sustain growth.



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