KPN has not been able to return to sales growth and seems to have accepted that in its current strategy. Can the Dutch operator try anything different? Its share price has been falling since March 2016, with only a small pick up in 2019 on takeover rumours. For the moment, the company's high profitability provides a defense, but management may need to rethink some of its sacred cows, such as vertical integration and convergence. Running out of assets to sell in order to boost cash flow will create a challenge, not to mention the coronavirus impact on the enterprise market.
Lower revenues, record profitability, end to divestments
KPN's revenues in the Netherlands have fallen to EUR 5.45 billion per year (based on past four quarters). In 2014, that figure was almost EUR 1 billion more. At the same time, its profitability, as measured by the EBITDA margin, is at a record high level. This, along with proceeds from divestments, allows the company to invest significant amounts still (around 20% of revenues), pay interest (7% of revenues) and tax (3% percent), distribute dividends to shareholders (9% of revenues) and pay off debt as needed.
The company's recent quarterly reports have not shown much change in the picture. The top line contracts (customers, ARPU, revenues, operating cash flow over four quarters) but management still manages to improve the bottom line (profit, dividend) thanks to cost reductions and asset sales.
KPN can probably continue for years yet with the cost savings, in which it has proven very skilled. At the current rate, the company is shedding around 1,100 jobs per year (in 2020 probably less as restructuring is suspended during the coronavirus crisis). Indirect costs, which are mainly personnel, are falling by 5-10 percent per year as a result.
The asset sales are coming to an end. These made it possible for KPN to pay a growing dividend in recent years and at the same time reduce its debt significantly. It has no major debt payments on the horizon for the next three years (the cash position is sufficient), so no direct threat to the dividend. Assuming interest rates remain law, it can easily refinance the debt.
Small growth factors
Over the longer term, KPN needs to find some growth factors - or it becomes a utility with a stable dividend. Modest growth can come from various factors:
- Annual price increases.
- Population growth.
- The mobile market appears to have bottomed out, with the drop in KPN consumer ARPU limited to 2.4 percent.
- The network upgrade (IP, fibre, 5G, etc.) has a double effect: sales growth through rising ARPU and lower costs thanks to higher efficiency. KPN said at its Q1 report that it expects to fund its fibre roll-out all on its own ("Able to self-fund large scale fiber roll-out"). This appears to point to other European operators starting up fibre joint ventures, such as Iliad and Bouygues in France, which are selling stakes in their networks to help fund the roll-out.
Long term: thinking outside the box
For the moment, there is still no sign of growth; KPN is a stagnating company. This is due to a number of issues, all of which could probably benefit from a rethink. Time to start 'thinking outside the box'.
- Competition from other network infrastructure: Ziggo and small operators of cable and fibre networks; Vodafone and T-Mobile in mobile. KPN has little room for manoeuvre on this front.
- A saturated market with a lack of innovation. Mobile internet is past its high-growth phase, IPTV is no longer able to take market share from cable and satellite, fixed telephony is cannibalised by mobile and OTT services. Services innovation is mainly taking place 'over the top' - from streaming video to hosted VoIP. New markets, such as smart home and IoT services, are not yet taking off or are dominated by internet companies (the bit pipe syndrome: with hardware and a platform (app) from Amazon, Google or Apple, consumers only need a broadband connection from KPN). IoT contributes just 1 percent of group revenues.
- Selling business assets, including some that were once considered growth engines, such as KPN Consulting. KPN is exiting these areas for the sake of simplicity. Units such as KPN Health and KPN Security may follow the same path.
- A one-sided focus on fixed-mobile convergence (FMC). FMC providers point to advantages such as more revenue per household, more customer lock-in, but churn is not really reducing. Ironically KPN is losing customers on all fronts, except in the segment postpaid mobile-only (KPN Consumer). The FMC penetration in the broadband customer base fell for the first time in Q1, from 49.2 to 49.0 percent. It was also down in the postpaid base, from 62.8 to 62.5 percent. KPN is losing around 1.5 percent of its customers each quarter, and this figure is higher than in the past.
- Positive is KPN maintaining its wholesale offer voluntarily, despite the fixed market being deregulated recently in a court appeal. This turns competitors into partners in the fight against Ziggo in fixed and Vodafone and T-Mobile in mobile. Wholesale is still a small business, contributing only 11 percent of revenues. The future will show whether the unregulated tariffs and conditions can tempt wholesale customers.
