KPN chooses for copper network

Tuesday 27 October 2009 | 16:21 CET | Market Commentary
KPN saw its third-quarter sales fall 5 percent, but EBITDA rose 4 percent, net profit 12 percent and EPS 25 percent. The Dutch operator maintained its outlook for 2009 and 2010. Important anouncements included the planned upgrade of its copper network and the expectation that Reggefiber, the joint venture for KPN's FTTH activities, should obtain external financing by the first half of next year.

To start with, the results show that the share buyback programme has been very effective. As a result, the net profit increase could be translated into 25 percent growth in EPS. KPN keeps its eye focused on the shareholder's interest.

Next, the company's plans for FTTC and FTTH. The figures from the Wholesale & Operations division show that not only is traditional telephony declining, but also the number of DSL connections. While KPN was able to grow in Q3 in the DSL market thanks to to the Compuserve acquisition, the entire DSL market lost 9,000 lines to a total 3.751 million. The Docsis 3.0 services from the cable operators are having a clear effect on the market, and probably more quickly than either the operators or their rivals expected.

Just as the DSL market starts to contract, KPN has chosen to upgrade its copper network. While KPN doesn't exactly admit this, the choise for FTTC (with VDSL2 on the copper connection lines) appears to be winning out over FTTH in KPN's strategy. Officially, trials for both technologies are still underway, with an evaluation set for end-2009, but in order to roll out the IPTV service Interactieve TV in 2010 on a large scale, KPN has chosen explicitly for upgrading the existing copper network. The implicit message seems to be that FTTH is dependent on Reggefiber attracting external capital in the first half of next year. If this doesn't happen (KPN says only that it expects the financing to come), then a big question mark appears over Reggefiber's future.

Of course, KPN is likely to respond that VDSL2 can compete with Docsis 3.0, but that's still an open question. Docsis 3 is available almost nationwide already, while the market's still waiting to see what VDSL2 offers.

Finally, we can say something about the leverage in KPN's figures as a whole, where a negative sales development lead to higher EBITDA and accelerated net profit growth. How long can KPN continue to draw on cost savings? And what can be expected in the way of sales development in the coming period? All things considered, there are few parts of KPN's business showing growth. The crisis, saturation, regulations and Docsis 3.0 are bleeding the company. KPN can save its bottom line only by cutting costs. In the short term, that situation won't change much, and KPN can continue with the cost-cutting. The operating costs were down 13 percent in the last quarter, while personnel costs are still good for 15 percent of revenues. While the EBITDA margin is almost at 40 percent, there is still room for improvement.

Looking ahead, we have to wait for the evaluation of the FTTx trials at the end of 2009. Then KPN will be able to make a decision over whether to spend its free cash flow on more share buybacks or maybe choose to invest in its network or a takeover. That also means waiting to see if Reggefiber succeeds in finding financing.

In conclusion, the results picture shows that KPN continues with its proven, conservative path of cutting costs and milking the copper network. The company appears convinced that VDSL2 will be enough to compete with cable. The risk is that KPN in its efforts to please shareholders does not invest enough in its network (and strategic takeovers). And there's already enough dark clouds circling over the sector, from the costs of new spectrum and builing out LTE to continued price pressure and competition from over-the-top providers. KPN would do best to invest in those areas where it has a distinctive position: its network and its customer relationships.

Free Headlines in your E-mail

Every day we send out a free e-mail with the most important headlines of the last 24 hours.

Subscribe now

::: add a comment