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General

KPN Q3: consumer growing again, business still weak, focus on multiplay and OTT

Friday 30 October 2015 | 13:13 CET | Background

KPN announced reasonable results for the third quarter. Revenues continue to fall due to the weak business market, but the company maintained its targets. The strategy is unchanged, and OTT is now a core part of that ("By embracing OTT, KPN aims to further improve (the) customer experience.") Streaming video already accounts for 50 percent of internet traffic over KPN's fixed network. The company's primary focus is broadband, followed by upselling services, mainly Sim cards. The strategy is based on convergence of fixed and mobile, both for consumers and business customers. The other structural part of the strategy is reducing costs through simplification. This process still has not reached an end, driven by the continuous technological developments. 

KPN's multi-play strategy aims to attract households as customers and then sell more services per household. This appears to be a healthy strategy, with the positive side effect of reducing churn. We do note a few issues with this though. First, the issue of when the market reaches saturation point, at what level of penetration for triple- and quad-plays. There is also a risk that KPN is missing certain customer segments, such as broadband-only or double plays of TV and broadband, sending potential customers to rival providers. And finally, the multi-play revenues at KPN Business. The company is showing growth in this newly defined segment, but it is actually not new at all - just a different way of tallying up the numbers.

Consumer Residential

Revenues in this division were up 1.9 percent and EBITDA rose 3.7 percent. After a weak 2014, growth has returned in 2015. Of the three revenue components (plus 'other'), fixed telephony showed a sharp decline. Unfortunate given the high margin on this, but a small part of the business (10%). Furthermore part of the revenue resurfaces at other activities, such as VoIP. Revenues from the copper network (56% of the division and relatively stable) rose slightly, by 1.9 percent, while fibre network revenues were up 30 percent (24% of the division). Within the copper revenue, KPN also noted TV revenues, which grew by 12 percent. The remainder, broadband and VoIP, is relatively stable. The division's margin also recovered, to 23.3 percent. 

The customer numbers show the following:

  • Fixed telephony: a net 11,000 lines added, as growth in VoIP offset the drop in traditional telephony. The net growth is notable and is largely thanks to the bundling strategy. The operator counts in total 2.67 million lines. ARPU was up slightly to EUR 28 per month.
  • Broadband: 33,000 connections added for a total 2.87 million. ARPU down slightly to EUR 32.
  • TV: 33,000 subscribers added for a total 2.20 million. Growth of 55,000 customers in IPTV was offset by a loss of 22,000 customers on other platforms (mainly Digitenne).
  • FTTH: 35,000 subscribers added for a total 682,000.
  • Customers: we estimate that KPN had around 3.42 million households as customers. They take an average 2.26 services each, up from 2.14 a year ago, and generate ARPU of EUR 43, stable year-on-year.
  • Triple plays: 50,000 added for a total 1.58 million, or 55 percent of broadband customers.
  • Fixed/mobile: 61,000 new customers taking both fixed and mobile services, for a total 669,000 (23% of broadband customers). Of the total, 518,000 are on a quad-play plan.

Consumer Mobile

Revenues increased 6.2 percent and EBITDA was up 91 percent. Service revenues rose 4.6 percent, with a 4.6 percent increase in retail and 17 percent decline in wholesale, while handset sales advanced 23 percent. After a long period of decline, the division has now shown strong growth for two quarters, as well as an improving margin (23.9%). Revenue growth is supported by a VAT effect, while lower subscriber acquisition costs helped the margin. KPN is showing success on the high end of the market, with 45 percent of postpaid customers taking a data bundle of 5 or 10 GB, compared to 25 percent a year ago, as well as with upselling to its broadband base.

The customer numbers are as follows:

  • Retail market: 8,000 postpaid customers added for a total 3.51 million, while prepaid fell by 8,000 to 1.68 million. Postpaid 4G customers reached 2.23 million, and 4G data use rose to an average 913 MB per customer per month, versus 467 MB a year ago. The average 4G speed increased to 36 Mbps from 20 Mbps a year earlier. ARPU was up slightly to EUR 20 (EUR 28 for postpaid, EUR 3 for prepaid).
  • Wholesale market: 8,000 postpaid and 31,000 prepaid customers added, for a total 2.49 million.
  • Multi-play market: only postpaid retail customers counted. A total 997,000 mobile customers now also take fixed services, equal to 28 percent of the postpaid base. KPN has an average 1.49 SIM cards in each fixed-mobile household, up from 1.41 a year ago.

Business

Revenues down 7.2 percent, and EBITDA down 22 percent. The contraction continues to bite, and the margin has fallen further. The company is suffering from competition from OTT players in telephony, such as Voiceworks and Kwebbl, which are taking a large number of lines from KPN. KPN is offering its own services and those from partner RoutIT (12.5%) to address the competition. In the medium term the aim is to stabilise this division's revenue through growth in new services, multi-play and IT. Mobile revenue (single play) should stabilise, while KPN recognises that the decline in traditional telephony is structural.

The same as in the consumer market, KPN is also using the multi-play as a weapon in the business segment, bundling fixed and mobile. However, it's unclear what the benefits of this will be. The reported multi-play revenue, which doubled to EUR 30 million, is not a new revenue source, but merely adding up existing revenue components. KPN did report, without giving further details, growth of 40 percent in revenue from 'new' services.

The most important business figures:

  • Fixed market: revenue down 15 percent to EUR 218 million. Revenue from internet and telephony fell 14 percent to EUR 147 million, and revenue from data network services was down 15 percent to EUR 71 million. The number of lines fell by 31,000 to 745,000. Every quarter KPN is losing around 5 percent of its lines. Voice traffic per line and telephony ARPU are also falling. The  number of VoIP connections showed a small increase, but DSL and VPN connections were slightly lower. 
  • Mobile market: 2,000 customers added for a total 1.79 million. The number of M2M Sims rose by 119,000 to 1.29 million. Revenue was down 1.6 percent to EUR 180 million, including a 2.2 percent fall in service revenue to EUR 179 million. ARPU declined to EUR 34 from EUR 37 a year ago.
  • IT services: revenue down 4.0 percent to EUR 120 million.
  • Multi-play market. KPN counted 336,000 multi-play subscribers taking both fixed and mobile services, an increase of 33,000 in the quarter. The number of fixed lines bundled with mobile rose by 41,000 to 430,000, equal to 19 percent of the mobile customer base. The associated multi-play revenue doubled to EUR 30 million.

NetCo

Revenues down 1.6 percent, and EBITDA up 9.2 percent, leading to an increase in the margin to 60.6 percent.

The most important figures:

  • Wholesale market: a drop of 6,000 WLR connections to 235,000, 26,000 fewer MDF lines for a total 470,000, and 15,000 more WBA lines to reach 388,000. In total the number of wholesale lines was down by 13,000 to 1.03 million.
  • FTTC network: coverage increased to 31 percent of households from 24 percent a year ago.
  • FTTH network: household coverage rose to 28 percent from 24 percent a year ago. Reggefiber added 26,000 homes passed in the quarter, a new low for the operator. In the year-earlier period it added 72,000 homes passed. Of the total 2.13 million homes passed, 813,000 were taking services (38%). KPN Consumer Residential accounts for 682,000 of those subscribers, and wholesale customers (eg, Vodafone, Tele2, Fiber.nl) 131,000. KPN added 35,000 new subscribers in the quarter, and the wholesale partners 7,000.
  • Taken together, FTTC and FTTH cover 61 percent of households - to which KPN adds "with access to speeds of at least 100 Mbps". This can be taken with a grain of salt, as FTTC may promise maximum speeds, but in practice it often offers less, depending on the length and quality of the line.


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