KPN Q1: Consumer growth continues, Business starts to stabilise

Tuesday 3 May 2016 | 13:28 CET | Background

KPN saw a pick-up in results in the first quarter. While revenues were still down 3.9 percent, much of this was due to the sale of SNT Germany (-1.3%) and lower sales at wholesale provider iBasis (-5.3%). With EUR 215 million in revenue, iBasis has a clear impact on the group sales (EUR 1.689 billion). However, the unit has a very low return, with just a few million in free cash flow. In the Netherlands, revenue was down 2.0 percent, which is not bad given the background of the past few quarters. KPN Consumer recorded a small increase of 2.8 percent, while the drop at KPN Business slowed to 6.8 percent. 

The transition from single to multi-play households at the Consumer division is similar to the migration among cable operators from analogue to digital TV. While the operator is losing customers (households), it's selling more services and generating higher ARPU among the remaining customer base. The business market meanwhile is showing signs of stabilisation, as KPN predicted at the start of the year in its outlook for 2016. Small acquisitions should contribute to growth. 

The EBITDA result was hit by extra IT costs to accelerate the simplification of systems, but the margin was only down slightly. Capex also declined, which KPN says is thanks to benefits from high investment in the previous period. Free cash flow (defined as EBITDA minus capex) rose as a result to 14.3 percent of revenue from 12.8 percent in the previous quarter. 

Consumer: multiplay

KPN Consumer is putting the household central, with broadband the carrier for multi-play subscriptions. Revenue from multiplays (three-quarters of the fixed network) showed good growth, compensating the decline in single-plays. The number of households served is still declining, at 3.70 million versus 3.95 million two years ago, but the higher value households remain and the number is growing quickly (+60% year-on-year), to almost a quarter of the total base. The number of services per household is also increasing, to 2.10 versus 1.82 two years ago, as is the ARPU per household (from EUR 36 to EUR 40 over the same period).

The conversion from single to multi-play households is similar to the benefits Ziggo has seen for years, but which are now coming to a standstill for the cable operator in the transition from analogue to digital. Its digital base is growing slowly from the current 81 percent, and once it reaches 95 percent in the next couple years, we expect that will mean the end of analogue TV. At KPN, the service-bundling trend will no doubt continue, but also stagnate at certain point. At the same time, single-play broadband subscriptions may become more popular in the coming years among certain types of consumer, who will cancel their fixed-line and pay-TV plans. At that point KPN will need to turn to other services, such as smart home, to sustain growth.

On the mobile market, KPN is maintaining the upward trend, as growth in postpaid more than compensates the decline in prepaid. It's unclear at what level the split in postpaid vs prepaid, currently at 70-30, will settle. The customer growth for now is outpacing the falling trend in ARPUs.

Business: new services

KPN Business had its best (least weak) quarter since mid-2013, with revenues down 6.8 percent. The SME market remains very weak (-13%). Mobile-only and fixed-only are declining quickly there, while multiplay is not yet compensating. This suggests KPN is losing market share.

On the large enterprise market, the picture is a bit better, despite the continued decline in network/IT services. Customised solutions are almost stable (-0.7%), while growth in new services, especially IoT and cloud is strong at 47 percent. However, the contribution from the latter is still small (5%). Small takeovers are expected to contribute to growth. 

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