KPN presented weak results for its third quarter, but the question is: How bad were they? And what was the underlying performance?
If we restrict ourselves to sales, we can see a decrease of 3.4 percent at group level, but at an organic level, growth was +0.8 percent. Compared to market expectations, growth disappointed but management was not surprised. The market is still a bit skeptical about the feasibility of the 2011 free cash flow target of around EUR 2.4 billion, with the figure in Q3 year-to-date at EUR 1.5 billion. KPN however talked of Q4 as an exceptional quarter: no dividends will be paid out and no shares purchased, and the impact of MTA regulation will be smaller.
If we look at the Netherlands, sales declined 5.4 percent and organic sales went down 2.9 percent. So we can see pain there, one suffered apparently by all incumbents (France Telecom reported a decrease in organic sales of 2.8 percent). We must also remember that KPN in the Netherlands includes iBasis, which showed positive growth. So organic growth in the Netherlands was actually even weaker.
Consumer NL appears to be the weak link at KPN, for both mobile and fixed. The mobile market is feeling the impact of communication apps. Their effect on the number of SMS messages per subscriber is high: the figure decreased in one year to 50 from 56 (-12%). The number of subscribers is also falling, but mainly for prepaid (-65,000 net additions) with only a limited effect for postpaid (-18,000 net additions). And that is why the number of call minutes per subscriber only slid back slightly: to 112 now from 113 last year. ARPU went, according to our calculation, down by 2 percent, but service revenue weakened 10.8 percent, partly due to the loss of subscribers. KPN explained how this came to be: -3.8 percent due to regulations, -4 percent due to communications app and -3 percent due to the loss of prepaid customers.
Cable is the bad guy on the fixed market. Where France Telecom estimated it had 35 percent in net additions, KPN lost market share in the broadband market. Ziggo won 38,000 broadband customers while Tele2 Netherlands lost 16,000 and KPN 11,000 (made up of +16,000 for fibre and -27,000 for copper). And so the copper market is the big loser, which does not bode well for T-Mobile Online (figures out on 10 November) and Vodafone (figures out on 8 November). That said, the latter also has fibre subscribers, even though these will still be few in Q3. And for UPC (figures out on 2 November after market close), the signs are positive. In relation to Ziggo and in proportion to the number of homes passed, UPC should have added around 25,000 broadband subscribers in Q3. The loss of DSL to cable is all the more painful because the rollout of VDSL by Tele2 and KPN is largely completed. KPN is coming out next year with additional technologies (pair bonding in Q1, vectoring in H2), but VDSL has so far not been the answer to Docsis 3. KPN's market share has dropped to 40 percent, even though the new strategy (May 2011) said it would increase to 45 percent by 2015. The number of broadband subscribers fell by 0.8 percent to 2.547 million, but sales fell harder on the back of pricing pressure: -2.7 percent to EUR 248 million.And then the TV market. Here, KPN achieved a respectable 17 percent market share. But what revenue has this contributed? We estimate it at only about EUR 43 million in Q3. This is due to KPN’s choice of competing in TV mainly on price. The ARPU of EUR 11 is minimal and the contribution to profit is more likely to be negative. That said, there is a strong “lock-in” advantage, with 607,000 triple play customers (+31% yoy) up to now. Now KPN does not like to disclose the number of customers but only the number of services sold (RGUs: revenue generating units) and the number of RGUs per customer. This figure has risen since the beginning of the year to 1.9 from 1.8 and so is well on its way of achieving the target of 2.4 by 2015. From this number, we can deduce that KPN has roughly 3.5 million customers on its fixed network, with 15 to 20 percent of these subscribing to triple play. At Ziggo, the penetration of triple play is currently at over 40 percent.
The other parts of KPN, all mobile, did pretty well in Q3, as did also Business Mobile. There was a significant gain in subscribers: +64,000 for Business Mobile, +610,000 in Germany, +163,000 in Belgium (Mobistar: +61,000). Rest of World (Spain, France) achieved positive EBITDA for the first time.
Conclusion: KPN has the necessary assets to compensate for weak performance in the Netherlands. Consumer Mobile NL is currently weak but the new tariff structure could be a prelude to recovery. But the Dutch broadband market is doing badly. Cable is killing the DSL market. Neither IPTV nor FTTH is providing a heavy enough counterweight, but they will in the longer run. KPN will at that point be a bit smaller: it will not be able to easily regain lost market share. And we have not even gone into the coming of a fourth mobile player, but then that is also not for the short term.
