KPN has presented its new strategy for 2021-2023 under the name 'accelerate to grow'. It overlaps the previous plan for 2019-2021 and puts FTTH central. There is little new in the plan, which largely continues its current strategy. Fibre is expected to drive a turnaround in revenues (higher ARPU, gaining market share), and the group continues to cast a wide net for opex savings. Investments will increase slightly to a new peak in 2021 but over the longer term, after the bulk of the FTTH roll-out, capex as a percentage of sales will drop back down to historical levels. At the same, margins and free cash flow improve to support a growing dividend - a sacrosanct pledge from KPN. In short, things are going well for KPN and the risks appear limited.
FTTH accelerating, dividend growing
The FTTH roll-out is approaching 500,000 connections per year, or around 10,000 per week. KPN wants to maintain this pace through the new strategy period, taking its coverage to 50 percent of the country. After that the upgrades will continue at the same rate, to reach 65 percent coverage in 2025 and eventually 80 percent, with the rest left to third parties.
Unlike many other European operators, KPN is able to self-finance the roll-out, helped by falling capex for other investments, ongoing cost savings and the higher returns on FTTH compared to copper. Furthermore, it expects a return to top-line growth for its 'mass market' (large businesses 1-2 years later), further growth in margins and an increase in free cash flow, allowing KPN to promise shareholders a 'progressive' dividend. In the words of KPN's CFO: the dividend is sacrosanct. The outlook is good enough that leverage (target less than 2.5x) can drop to 2.0x, while leaving room for a higher dividend or share buyback.
Revenues higher, costs lower
KPN's plans centre around higher revenues or lower costs. We look first at the revenue side:
- KPN expects a penetration of active subscribers on the FTTH network of around 50 percent, rising eventually to over 60 percent. The operator assumes it can take back the market share it has lost in recent quarters after ending its second brand Telfort.
- The focus on FTTH means a shift towards the high end of the market, so KPN is not out for a major disruption to market conditions or drawing a big response from the competition. Households on fibre generate higher ARPU than copper (Q3: EUR 54 resp. EUR 50), thanks to monetising the higher speeds and more VAS like video services.
- More customer satisfaction is expected from further digitisation of customer service, while the business market will get a new focus based on SME, large corporate and customised. KPN is proud of its new OSS/BSS systems, which facilitate easier sales and delivery.
- In the mobile market, KPN aims to grow the customer base and increase ARPU through more subscribers taking unlimited data (although this also depresses out-of-bundle income).
- The company will act as an aggregator, both for consumers (entertainment) and businesses (with partners for security, cloud, work station). More dedicated KPN Hussel packages are planned for consumers.
- 5G should help create new revenue sources in the industrial market.
- Roaming revenue has disappeared with the coronavirus crisis but this will return eventually, as will delayed IT projects.
In terms of cost savings, KPN has a wide range of plans:
- To start, simplification and digitisation, which has bearing fruit already for some time. This addresses the portfolio, systems and the organisation. Customers migrate from legacy to IP services, and sales channels are digitised.
- The integration of the Telfort business in KPN has been completed, leading to a structural reduction in costs.
- FTTH offers lower maintenance and energy costs than copper.
- A positive side effect of the coronavirus crisis is lower costs due to reduced travel by staff and less office space needed due to home working.
- The current cost targets don't yet take account of plans to shut down the copper network from 2023. This will offer also opportunities to sell real estate.
And finally, the investments (capex):
- A shift is under way from non-fibre to fibre spending, including capex for FTTH, backhaul, FTTS. The total budget will show a very modest increase to EUR 1.2 billion per year in 2021 from EUR 1.1 billion currently.
- This means a peak in capex as a percentage of sales of around 23 percent. Once the fibre roll-out is completed, the ratio will drop back to around 13-15 percent.
- The RAN upgrade underway assumes the eventual release of the 3.5 GHz band once this is available in the Netherlands, so no further investment is needed there.
- Legacy systems will no longer receive any new investment.
Conclusion: all good, only Ziggo might be a problem
The outlook for the coming years looks good for KPN. FTTH will create significant value. The only question is, what are the risks? Realising the value will depend on a good penetration rate on the fibre network and higher ARPU than on copper. That hands the ball to Ziggo.
After the ACM failed to show joint dominance on the Dutch market, the chance appears small that Ziggo will attempt a major disruption of the market, unless FTTH threatens to take too much market share from cable. Ziggo is rolling out Docsis 3.1 already and the Docsis 4.0 standard is ready to make 10 Gbps symmetric speeds possible. With an eye on higher bandwidth and value creation, it could even steal KPN's thunder and go for a complete switch to fibre.
