KPN reported disappointing quarterly results and once again cut its outlook. Halting the decline in its position on the Dutch market will take longer than expected, more "towards the end of 2014" than "in 2014", as the operator previously said. The group plans further cost reductions, both operational (2,000 more jobs lost) and in capital investments (slower FTTH deployment). This all comes on top of the restructuring announced a quarter earlier, based on the theme of "simplification" (of the portfolio, distribution, processes, systems). As announced previously, the pending sale of E-Plus is Germany is expected to allow KPN to resume paying dividends.
Sales
The big problem is sales. Growth at the Consumer Residential (fixed) division remains solid (+2.5%), but the other divisions are showing significant declines, which are only getting worse. Telecom is known as a late-cyclical sector, and the "growth" at KPN underlines that: while the economy is recovering from the recession, the impact on the telecom sector is only now becoming apparent. The Consumer Mobile division showed an annual drop in revenues of 14.7 percent, versus declines of 9.6 percent in the preceding quarter and 8.6 percent in the year-earlier period. Regulation is not the only problem here. The weak economy is having an impact at various levels, from delayed orders on the business market to customers migrating to cheaper packages and brands, both on the consumer market (Telfort, Tele2, hollandsnieuwe etc.) and the business market (cable operators).
Competition is also intensifying, as rivals reconsider their strategic positions:
- Vodafone wants to build up its position on the fixed-line market ('total communications').
- T-Mobile is going mobile-only.
- Tele2 is changing from a MVNO to a MNO, with its own LTE network.
- Ziggo and UPC are planning to merge.
Costs
Given this background, KPN, as the incumbent, has little choice but to focus on costs. On the TV market, it's still a challenger, and this area is taking a lot of the focus. However, it's not earning much from TV. Revenues in the latest quarter even declinedslightly, from EUR 60 to 59 million, and the activities are still a small part of KPN. Given the rising cost of content for incumbents on the TV market (cable), there will be little left over at the bottom line. A focus on broadband (fixed and mobile) is important, and both the cable operators and KPN are trying to tie their customers in with triple-play subscriptions (Ziggo is also trying a double-play without fixed telephony, while KPN is focusing on quad-play).
As revenues contract quickly, KPN can only adapt its cost structure further. Simplification is nothing to be hesitant over either. The company's focus on network investments is positive, as over the long term these should contribute to stabilising the company's position. On the LTE market, KPN is a year ahead of Vodafone and as much as two years ahead of T-Mobile and Tele2. However, KPN's decision to slow the FTTH roll-out is worrisome, as the deployment will take a long time and focusing on VDSL is a risky move. VDSL has a limited reach, and the technology (vectoring, pair bonding, phantom mode, G.fast) has yet to be proven on a large scale. Ziggo and UPC also will start switching off analogue TV within a few years, freeing up even more capacity to boost bandwidth or add more video services.
Furthermore, the idea that shifting the focus from FTTH to VDSL may also save on costs is questionable: capex for VDSL may be lower than for FTTH, but it's still not a small amount, while FTTH (the same as LTE) offers significant savings on operational costs.
Another unclear point in KPN's strategy is what it plans to do with the proceeds form selling E-Plus, which will also include a 20.5 percent stake in Telefonica Deutschland, and its plans in Belgium. In the end, it's clear that costs must be reduced. However, KPN may not be right to target both opex (simplifcation) and capex (FTTH slowdown) reductions at the same time.
