KPN Q2 review: bundling effect positive but slowing in Consumer, negative in Business

Monday 31 July 2017 | 12:59 CET | Background

KPN showed little improvement in its sales trends in Q2 2017. Adjusted revenues fell 3.2 percent and were down 2.1 percent at the domestic activities. Profits were still up thanks to a quicker drop in costs, especially direct costs (-7.0%), costs for IT (-9.0%) and personnel costs (-2.3%). The workforce counted 503 fewer employees than a year ago, a drop of 3.7 percent. The second wave of the operator's 'Simplification' programme is also on track, with EUR 65 million in annual savings and planned to rise to EUR 300 million by the end of 2019. More effective marketing also had an impact, as we will see below.

The company's cash flow and balance sheet profited from the sale of shares in Telefonica. KPN earlier swapped part of its shares in Telefonica Deutschland for a stake in Telefonica. The subsequent share sale lifted cash flow to EUR 531 million, and the stake in Telefonica Deutschland is down by 6 percent points to 9.5 percent. The net debt ration improved to 2.5x EBITDA.

KPN maintained its outlook for 2017. We look here below at the results at the two most important divisions: Consumer (fixed and mobile) and Business (SMEs and large corporate).

Consumer: successful marketing

KPN Consumer posted revenues up 2.1 percent, in line with the stable growth underway for some time. Residential (fixed) grew by 1.5 percent, and mobile was up 2.9 percent. Excluding the impact of a VAT benefit and roaming regulation, mobile services revenue would have been flat. The contribution margin is trending gradually higher and reached a record 62.8 percent. 

KPN Consumer postpaid won 21,000 customers in the quarter, but the total postpaid result was a loss of 6,000 subscribers. This means other KPN brands lost 27,000 postpaid customers, of which 15,000 were moved from Consumer to Business. Prepaid customers increased by 3,000. Fixed telephony customers were down by 24,000, and the Digitenne TV service lost another 15,000 subscribers, but KPN added 8,000 broadband subscribers and gained 25,000 IPTV customers. Average revenue per customer rose by 5 percent to EUR 42 per household for the fixed activities and was stable at EUR 26 for postpaid mobile.

The company attributed the growth to a number of marketing-related factors, such as the strength of the KPN brand, the focus on households, an attractive portfolio, an extensive content offering with third-party partners and targeted marketing using data and analytics. The last factor not only helped sales but also benefits costs, due to less mass marketing. The SAC/SRC also were down by 33 percent. Growth should continue next quarter thanks to price rises from the start of July ('more for more') and the consolidation of Solcon (45,000 customers).

Consumer: bundling still increasing, but more slowly

The results show the continued shift to multi-plays. KPN Consumer revenues from fixed-only fell 12 percent, while fixed/mobile grew 4.5 percent. In customer numbers, we see a quarterly drop in postpaid mobile-only (-67,000) and stagnating growth in fixed triple-play-only (+3,000). The number of fixed-mobile households was up by 34,000, and fixed-mobile postpaid subscribers increased by 61,000 - strong growth but slower than previously. Saturation is likely playing a role, but possibly also the attraction of unlimited mobile plans launched at T-Mobile and Tele2, which already reported strong growth on the postpaid market in Q2.

KPN also showed a further increase in the average number of services per household, to 2.19 from 2.13 a year ago, and the number of postpaid Sims per household, to 1.50 from 1.47. 

On the down side, the total number of households served declined by 24,000 in the quarter to 3.572 million (versus 3.684 mln a year ago). The losses are stable since the end of 2014. Based on a total 7.721 million households in the Netherlands at the end of 2016 (source: CBS), the operator has a penetration rate of 46 percent. Rival Ziggo is at 55 percent.

Business: revenue under pressure from fewer customers and bundling

KPN Business reported revenues down 5.9 percent, slightly better than previous quarters but still too soon to talk of a structural improvement. The contribution margin recovered to 56.7 percent, but is still well below its peak of 66.1 percent in Q3 2014.

KPN Business generates slightly more revenue from the large corporate market (EUR 258 mln) than the SME segment (EUR 227 mln). The latter is contracting faster, down 11 percent, while large corporate revenues were only down 3.0 percent. The new segment 'New Services' (IoT, cloud etc.) grew by 14 percent.

KPN's problems are in the SME market. The combined revenues from mobile-only and fixed-only have fallen by EUR 39 million in the past year, while multi-play revenues are up only EUR 6 million. This difference of EUR 23 million is revenue lost to the competition. In reality, it is more, as ARPUs are stable to higher. This raises the question whether the KPN Een offer is successful, as KPN appears unable to hold on to customers.

KPN Business, the same as KPN Consumer, is focused on multi-play offers like KPN Een. The bundling inherently leads to lower revenue, which needs to be offset by upselling IT services (Office 365, cloud, security, IoT). As sales of traditional services fall, new services and technologies need to fill this gap. The result is also a drop in mobile-only customers, with the decline accelerating to 15 percent from 10 percent a year ago. 

In fixed, voice-only is falling at a stable rate of 19 percent, and broadband-only was down 14 percent (compared to -7% a year ago). In total, the number of single-play SME customers fell at a slightly faster rate of 16 percent. The growth came in the number of multi-play seats. With RoutIT now consolidated for over a year, the like-for-like growth is clear, at a strong 42 percent.

In terms of ARPU, KPN Business showed a stabilisation in mobile, at EUR 32, as well as in multi-play (EUR 34 per seat), which has had a structurally higher ARPU since the start of 2016.

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