KPN reports weaker Q3 but keeps FY guidance

KPN reported third-quarter sales below market expectations, with revenues down 3.4 percent to EUR 3.26 billion. Excluding regulation, M&A, and one-offs, revenue grew by 0.8 percent. MTA regulation had a negative effect of EUR 106 million on sales, including EUR 60 million in Germany, with the effects of roaming regulation contributing a negative EUR 10 million. The negative effect on EBITDA was lower. EBITDA 12 percent went lower to EUR 1.25 billion, net profit was off 9.4 percent to EUR 368 million and earnings per share fell to EUR 0.26 on the back of share buybacks. EBIT fell 22 percent to EUR 657 million, a result of the increased network investments and therefore higher depreciation costs. The net profit decline was less sharp  because of lower interest expenses.

However, KPN spoke of a performance in line with expectations and said that the implementation of the strategy the company presented in May was going well. The company therefore reiterated its 2011 targets, excluding restructuring costs.

Results declined on the back of trends which earlier this year led to a profit warning: reduced MTA rates, strong competition (especially from cable) and changing consumer behavior, with the rise of mobile apps putting pressure on voice and SMS revenues. The current economic situation has not helped, especially for the business market at KPN Corporate Market (formerly known as Getronics), where 1,350 jobs were scrapped, leading to a one-off charge of EUR 78 million.

Consumer Mobile service revenues declined by 11 percent ,and it is unclear what effect the revamped pricing structure has had. The number of subscribers decreased by 83,000, including 65,000 in prepaid. ARPU slid 4.0 percent to EUR 24.

At Consumer Home, the company lost 35,000 net connections. On the broadband market, the number of lines decreased by 11,000, despite an increase of 16,000 lines on the optical fibre market. KPN’s TV market share rose to 17 percent with a gain of 73,000 IPTV subscribers. Digitenne however lost 15,000 subscribers.

KPN Business recorded revenues up 1.6 percent , but at KPN Corporate Market they weakened by 5.5 percent. In Germany, E-Plus sales lifted 8.1 percent while at Belgium’s Base, revenues advanced 11 percent.

For the group, the cost of sales (COGS) went up by 1.8 percent. The price of sales (SG&A) also went higher, by 2.5 percent despite a 5.3 percent fall in salary costs, due to restructuring programme but also increased marketing spend in Germany and Belgium. The number of jobs rose on a quarterly basis to 261 on the back of hiring outside the Netherlands (Getronics and Germany). All this put the gross margin under pressure by a negative 0.7 point to 93.0 percent, and the EBITDA margin by negative 3.5 points to 38.2 percent. Taking out restructuring costs at KPN Corporate Market, then the EBITDA margin only fell by 0.9 point to 40.8 percent.

The operating cash flow was at EUR 948 million (-11% y-o-y) and capex at EUR 498 million (+16% more than in Q3 2010). Free cash flow was at EUR 555 million (-19% y-o-y). KPN kept its guidance for both capex and free cash flow.The ratio of net debt and EBITDA increased to 2.5, at the top end of KPN’s goal of 2.0-2.5, due due to the dividend payment for Q2, the accelerated share buybacks and lower EBITDA. Pension coverage, at 108 percent in Q2, fell to 96 percent. In Q1 of next year, KPN will put in an additional deposit of EUR 21 million.

For the full year, KPN is guiding for EBITDA of up to EUR 5.3 billion, with capex at up to EUR 2.0 billion, a higher free cash flow and a dividend per share at EUR 0.85.