Friday, October 24, 2014

KPN Q3 ahead: results due October 28

KPN entered the quiet period leading up to the Q3 results, due October 28. Interim CFO Steven van Schilfgaarde will probably be present at the call, since he exits Nov. 1, but new CFO Jan-Kees de Jager may be introduced as well.

Focus is on the question: can KPN maintain its guidance, specifically: can it stand by its previous expectation of 'stabilisation' of consumer trends 'towards the end of 2014'?

It is based on price increases, competitor response and upselling (multiplays).

Consensus: revenue € 1.97 bn, EBITDA € 640 mln, EPS € 0.02, capex € 300 mln.

14Q2 trends:
  • Consumer Mobile organic revenue improved to -9.0% but still in the same magnitude it has been since 12Q1. EBITDA has been going down rapidly in the last 4 quarters and this will probably continue for one more quarter.
  • Consumer Residential organic revenue growth has been negative for 2 quarters and it looks like this could continue. EBITDA growth has been solid, but that may now drop off.
By market:
  • A big issue is competition on the fixed-line market. The Ziggo/UPC merger was approved. It will be followed by ACM's decision on KPN/Reggefiber and regulation of the market until 2018. Europe is now moving toward fixed-voice deregulation, but broadband is a different matter. Vodafone appears to have found its strategy for NL: resale & unbundling. It remains to be seen what Tele2 is up to. Potentially, Vodafone could allow Tele2 access to its unbundled network. Continued unbundling may be a condition for approval of the Reggefiber deal, but then what about cable regulation? And beneath all that is the question: is unbundling good (more sales power, high-margin wholesale revenues, Vodafone not just a competitor but a partner as well) or bad (the message KPN puts forward to the regulator) for KPN?
  • On the TV market the question is what the impact of Netflix is. Are consumers canceling pay-TV yet? What is happening to VOD revenues?
  • On the mobile market, much depends on Tele2 and when it will launch its LTE network.
Recent news:
  • John van Vianen, head of Corporate Market, to exit at the end of 2014. No new job and no successor named.
  • America Movil once more reduced its stake, now by 1.2 pp to 21.4%. Above 20% they retain the right to appoint 2 members of the Supervisory Board.
  • Results Tele2: not impressive. Mobile subs growth slowing. Tele2 hosts an analyst briefing December 12, presumably to launch the Dutch LTE network.
  • Eurofiber was put up for sale by ite PE owner Doughty Hanson. CIF, BT and Zayo may be candidates.
Conclusions: pressure remains in the mobile market (Tele2 launch) and in the business market (Eurofiber takeover, Ziggo/UPC merger).

Thursday, September 25, 2014

Newsletter All Things KPN launches on TidBitts platform

I use the TidBitts subscription platform to manage All things KPN so click Subscribe when you get to my page on their site. It is located here.

All things KPN is a new weekly newsletter, arriving each Friday: weekly assessments of everything related to KPN: strategy, M&A, financials, regulation, competition and much more.

Wednesday, August 06, 2014

KPN's very disappointing road to VDSL, away from FTTH

It's becoming a new reality: KPN no longer is the torchbearer of the fiber community.

This historic chain of events:
  • 2008: acquires 41% of Reggeborgh's Reggefiber FTTH venture, with calls/puts for the remaining 59%. Pays in assets (its own FTTH efforts) + EUR 100m cash. Accepts regulation as part of the deal. At the time, Reggefiber Newco had just 10k HP.
  • 2011: acquires other FTTH assets (mainly ISPs) from Reggeborgh and Reggefiber, alters joint venture agreement with Reggeborgh.
  • 2012: raises Reggefiber stake to 51% for EUR 99m upon reaching 1m HC.
  • Oct. 2013: cuts Reggefiber expansion plans to 250k HP/annum (from 350-400k). Capex per HP down to EUR 800 and falling.
The recent developments:
  • Jan. 2014: to expand Reggefiber stake by 9% to 60% + consolidation & control.
  • Price to be paid (as becomes clear recently) EUR 161m, i.e. at the upper end of the range (EUR 116-161m). This suggest Reggefiber's equity is valued at (at least) EUR 1.789bn.
  • At this time, Reggefiber (passive network) had 1.688m HP and 547k HA. KPN (active network) does not disclose its number of HP anymore, but has 484k HA.
  • When this call option is exercised, Reggeborgh may immediately exercise its put option for selling its 40% stake to KPN. At the above valuation, fair value would be EUR 716m. This suggests, that Reggeborgh will indeed exercise immediately. As a result, KPN will go to 100% of Reggefiber for a total of EUR 877m once ACM approves.
The ACM process:
  • Despite the initital approval by OPTA + NMa (now ACM), going to full control (60%) once again requires ACM approval.
  • ACM reportedly pushes its judgement beyond the EC's judgement on the Ziggo/UPC merger. The latter had a Oct. 17 2014 deadline, but this is pushed back for an unknown period of time. Further, ACM plans its market assessments for regulation until 2018.
  • It is now questionable if ACM can delay its judgement of the full Reggefiber takeover for much longer.
Considerations for ACM:
  • As with Ziggo/UPC, one might primarily expect approval. Not much changes, after all. But looking a bit deeper, reveals that changes may be coming.
  • Originally, KPN acknowledged that FTTH was clearly on its roadmap, with DSL technologies (VDSL, bonding, vectoring) for the interim. Moreover, the open access Reggefiber network enables competition, both from unbundlers (ODF access) and resellers (layer 3). This is all changing now.
  • Recently, KPN decided to:
    • Slow down the FTTH roll-out (see above).
    • Abandon the FTTH USPs (gigabit, symmetry), in order to market broadband and triple plays nationwide, independent of the access network.
      • Despite the clear benefits for ARPU.
      • And despite the fact that years of investments in VDSL (since 2009) haven't delivered yet. DSL net additions are still solidly negative. BB growth is clearly in FTTH.
    • Move focus to VDSL. But it has clear disadvantages:
      • KPN never discloses the capex cost per HP, which are not just a fraction of FTTH capex. Apparently, the true cost of VDSL could be several hundred EUR/HP. The topology is entirely different from what Reggefiber is doing, so there is no re-use of VDSL assets (including inner rings and outer rings).
      • Vectoring is still largely unproven.
      • Performance dropps off sharply at distances larger than 100 meters or so.
      • We all know that "up to 100 Mb/s" really means: "don't expect anything better than 50 Mb/s".
    • As we feared, there are now rumours of KPN switching to GPON technologies on FTTH networks. This means: a shared network (like cable and cellular), slower speeds, no open access. And yes, perhaps a few percent savings per HP.

What does all this suggest:
  • Taking over Reggefiber wasn't about overbuilding with FTTH. With hindsight, is was all about taking out a dangerous newcomer.
  • KPN turns out to be a copper company after all, just like incumbents in surrounding countries (Germany, Belgium, UK). The Netherlands are set to drop in international fiber rankings.
  • Reggefiber was hard to push to include rural areas, imagine what KPN intends to do (hint: LTE).
  • KPN appears to be steering toward a cozy duopoly with New Ziggo - each minimising capex and maximising dividends. Unbundling will become a thing of the past and resellers will be marginalised - unless ACM steps in.
  • This creates opportunities for full fiber companies such as seen in the UK (B4RN, CityFibre, Gigaclear, Hyperoptic).
  • Indeed, Google Fiber! It wanted to work with CityFibre in the UK, but the latter didn't want to give up its plans with Sky and TalkTalk. Google Fiber walked away and could very well be looking at the Netherlands, Belgium and Germany right now.
  • Rumor has it that there is a gentlemen's agreement with Reggeborgh that precludes Reggeborgh's return to the Dutch market as a newcomer on the FTTH market. With a fresh EUR 877m it could clearly do so. Instead, Reggeborgh now focuses on Germany (Deutsche Glasfaser) and (as is rumoured) Belgium.

Tuesday, July 29, 2014

Shifting bargaining power in the NN debate

In the net neutrality debate, this is how bargaining power is shifting:
  1. OTTs are afraid ISPs will extort money from them, hence claim strong NN regulation is needed.
  2. Netflix turned this upside down and hinted at being able to charge ISPs - but added that it won't.
  3. Now, Time Warner Cable appears to be afraid of being charged by OTTs.
  4. Comcast came out as a defender of NN regulation.
And so:
  • Everybody is in favour of weak NN.
  • ISPs and OTTs both have bargaining power.
Conclusion: all regulators need to do is:
  • Keep an eye on weak NN not being violated.
  • Make sure peering is made free (in Google's words: it's a win-win-win not to charge for peering), as long as OTTs and ISPs do their utmost to interconnect in such a way that traffic is not hindered, i.e. OTTs deliver traffic at the ISP and ISPs add capacity when needed.

Tuesday, July 08, 2014

All providers are potential preys in ongoing consolidation

Consolidation is ongoing. International groups consider takeovers, as well as exits. Local companies are acquired.


The hunters:
  • Telcos: DT, Orange, Telefónica, América Móvil
  • Mobile: Vodafone, Hutchison, SoftBank, VimpelCom etc.
  • Cable: Liberty Global
The hunted:
  • Telcos: KPN, Belgacom, Swisscom, TDC, eircom, BT, PT, TI, etc.
  • Mobile: Bouygues Télécom, Yoigo (TeliaSonera), etc.
  • Cable: Com Hem, RCS&RDS, R Cable, Publifin/Voo (formerly Tecteo), etc.
  • Challengers: FastWeb (Swisscom), Eurofiber (Doughty Hanson), Iliad
  • Telcos: TeliaSonera, Telenor
  • Other: Tele2, Altice, M7 Group
Some considerations:
  • A certain required rate of return.
  • Being #1 or #2 in any given market (segment).
  • Owning sufficient mobile licenses and network assets (for minimal COGS, to maximise gross margins).
  • Aternatively: virtual service provider (asset-light).
  • Substantially increased scale and/or synergies.
  • Willingness to incur start-up losses.

Let's look at the Netherlands as an example. There are 7 nationwide groups, consolidating to 6:
  1. KPN: mostly a local telco, with a small operation in Belgium. It will receive EUR 5 bn from selling E-Plus, and a 20.5% stake in Telefónica Deutschland (worth another EUR 1.5 bn). Perhaps it finds ways to expand.
  2. Tele2: among the largest holdings of the group, with a strong core/backbone network and a strong fixed-line business market presence. Tele2 NL is on the ladder of investment that is so central to the group's strategy. Still, T-Mobile could buy Tele2 NL to re-enter the fixed-line market. But as the Tele2 Group is getting out of Norway (after exiting Russia), it is becoming a takeover candidate itself.
  3. Vodafone: it remains to be seen if it can build substantial presence on the fixed-line market. Takeover candidates are Tele2 and Eurofiber. Alternatively, it could partner with these companies, as well as Reggeborgh (once it gets out of Reggefiber) and CIF (which owns a string of small cable companies, which are structurally separated and overbuilt with FTTH - service provider Caiway is for sale) to create a competitor to incumbent FTTH (much like Vodafone is doing in Spain and Ireland). Alternatively, if the fixed-line market is unpenetrable Vodafone may decide to exit.
  4. T-Mobile: it sold off, making it a mobile-only provider. This doesn't sit well with DT's stance, but it could be tolerated (T-Mobile NL being billed as a 'smart attacker' - perhaps evolving into an 'un-carrier'). Otherwise, it could be a takeover candidate for Tele2, Liberty Global or a new entrant (América Móvil, Orange, Iliad, Altice). Or buy Tele2 NL.
  5. Ziggo and UPC are in the process of merging, with ~92% coverage. Liberty Global may subsequently sell the merged entity if it doesn't comply with the group's goals.
  6. M7 Group: controls CanalDigitaal (sat-TV) and and is a 3P service provider on FTTH networks. Could be a takeover candidate for a group that believes in virtual service provisioning: Caiway (= CIF), Scarlet or a large MVNO group such as Lebara or Lyca.
Other companies that could be for sale:
  • Cable: Delta Kabel, Rekam, Kabelnoord, Kabeltex, SKV Veendam, Edam-Volendam, Pijnacker, Waalre, Bleiswijk, Assendorp, Rozendaal, Hoogvonderen; service providers Caiway and Cbizz.
  • Other: Eurofiber, Scarlet, Solcon and a long list of FTTH service providers.
Conclusion: the future is uncertain for all players, but more consolidation seems to be on its way. There are a few dead-certain predators, but even Vodafone, Liberty Global or Tele2 could turn into a prey.

Friday, July 04, 2014

DT's Niek Jan van Damme misleads over wholesale

Niek Jan van Damme, MD of Telekom Deutschland, gave his view on networks after the EC approved the E-Plus/O2 merger.

Van Damme applauds the merger, as part of ongoing consolidation, but has two objections. One is that E-Plus/O2 controls a disproportionate amount of spectrum. The other is that the new company agreed to giving access to wholesale customers at friendlier rates & conditions.

Van Damme's latter argument doesn't seem to make sense:
- Why would retail customers be better for network expansion than wholesale customers?
- Why did E-Plus/O2 agree to this?

Wholesale carries virtually no S&M costs and therefore produces much higher gross margins. Partner marketing (at the wholesale customers) extends the S&M budget of the extended group. As a result, penetration & take-up of new services potentially grow higher/quicker.

In fact, focus on wholesale-only may even yield more cash than focusing on expensive retail services. Who knows. In any case, Telefónica Deutschland appears to have much more faith in wholesale than Telekom Deutschland.

Van Damme's quote even appears to be quite misleading:
`Another problem is that these regulations give an unequivocal advantage to providers who don’t have their own network infrastructure – and that sends the wrong signal entirely. The focus of the competition authorities should not be on strengthening providers without their own infrastructure, but on promoting the network expansion. Our society is continually becoming more digitized and connected, and the necessary infrastructure to support this expansion needs to be built. Marketing existing network capacities will not be sufficient.´

Tuesday, April 15, 2014

Ziggo: preview 13Q1

Ziggo reports on 13Q1 tomorrow, April 16, at 7:30 AM local time.

Relevancy to investors is limited, since the Liberty Global share price drives Ziggo's stock. Apart from the performance relative to consensus and the outlook (can it be maintained?), this is what to look for on the consumer market:
  • Analog TV losses and conversion to digital. Analog penetration will drop below 15%, bringing analog switch-off discussions into the spotlight. It's the last quarter including subscribers on the Kabelnoord network.
  • Network utility rate: dropping to just over 60%.
  • Broadband market: net additions, penetration to cross the 70% mark.
  • Mobile market: not quite reaching 100k (YE 2013: 33k).
  • Organic revenue growth (excl. the Esprit takeover): further improvement expected in line with management goals coming from broadband and telephony.
  • EBITDA margin: may drop after heavy ad spending, but management target is flat for the year.
  • Capex: guidance EUR 370 for the year.
When it comes to the business market, it remains to be seen if there is any growth at all. Excluding Esprit, revenues have been flat for a while.

Further operational details:
  • How is the WiFi network developing. How many homespots? Are public hotspots being added? Usage stats.
  • Usage stats on Ziggo's apps (TV app, voicemail app and the new Bapp VoIP app).
  • Netflix impact, both on traffic and revenues.
  • Other subscriber numbers, such as HBO subs and digital pay-TV subs.
  • Commercial plans, campaigns.

Wednesday, March 19, 2014

Social networks and privacy issues

There have been issues around privacy, in some cases involving social networks:
The questions are: what is privacy, what is a social network and how do they relate?

What is privacy?
  • When personal details are visible to unwanted persons; when a link between details and a person is visible.
  • Personal details in levels: the person, personal identifiers (name, (email) address), aliasses (username, avatar, bank account no, passport no, social security no, member no, registration no), expressions (likes, clicks, cookies, location, availability).
Privacy concerns are about:
  • Social networking: what do we share?
  • Technology: are the data selected & distributed by computers/algoritms alone, or also by editors & sales persons?
  • Advertising: free services cost money and are funded by ads; but are the ads/funds a means to an end (Google: solve all the world's problems with software/hardware), or a goal in itself to maximise profit/cashflow/value (Facebook)?
Why is privacy an issue?
  • Spam, targeted ads, recommendations.
  • Fraud, theft.
  • Stalking, assault, (child) abuse.
  • Information shared with unwanted people (employer, tax office, competitor, enemy, etc.)
  • Information shared among social networks when they cooperate or merge.
There is a low entry barrier to build a social network, but it's difficult to reach scale, build an audience and get the network effect to work for you.

What is a social network?
  1. A service you sign up to.
  2. A service you contribute to.
  3. Allows for sharing (i.e. bank account holders and utility/telco/cableco subs don't count as a social network).
1. How does one sign up?
  • Name
  • Alias
2. What can one contribute?
  • Communication:
    • streaming audio: voice call
    • streaming audio + video: video call
    • text: chat/IM, SMS, email
    • attachment: emoticon, sticker; photo; audioclip; videoclip; doc
    • metadata: tags; url, link; like; location; availability
  • Entertainment/media:
    • print/text
    • music
    • pictures
    • videos
    • games
3. Is one allowed to share?
  • In communication, this is implicit.
  • In media, piracy issues are introduced.
Social networks morph:
  • Google buys Pyra Labs (Blogger); Google buys YouTube; YouTube (UGC) adds professional content; Google buys Waze; Google adds VoIP to Hangouts
  • Facebook: adds Messenger; Facebook Messenger: adds VoIP; Facebook buys WhatsApp; WhatsApp adds VoIP; Facebook buys Instagram; Instagram adds video; Instagram cuts 22 minute sitcom episode into 109 15 second clips
  • Amazon buys IMDB, Goodreads.
  • LinkedIn buys SlideShare, Pulse.
  • Twitter buys Vine.
  • Line: adds VoIP.
  • Yahoo! buys Flickr, Tumblr.
What will be next?
  • All chat apps will add VoIP.
  • Photo sharing apps will add movies and games.
  • Social networks will add communication and media.
What will be the end game?
  • Social network enables sharing anything?
  • Social network focuses?
What is the best strategy to survive in the long term?
  • Build massive scale.
  • Choose your strategy: share anything/everything versus focus.
  • Introduce a subscription fee to lower churn in the longer term. Or stay with advertising.

Friday, February 21, 2014

Facebook/WhatsApp - what's next?

It's easy to be negative about Facebook buying WhatsApp: it's expensive, there are little if any revenues to show for, and there is a lot of competition. Not to mention that Facebook, without acquisitions, would arguably have no future.

But it's much more challenging to find the benefits.

First of all, Facebook is 'only' paying $4bn cash + a 7.9% stake. In other words, they are trading roughly 10% of the company for a new line of business.
Second, they take out a competitor, or to be more precise: they are merging with a competitor to keep their audience on board.
Third, no matter how competitive the market is (or rather: despite), WhatsApp has amassed 450 monthly active users - and growing. So, it is one of a very few services to actually put the network effect to work.
And fourth, monetisation will follow. A thin line need to be treaded if users are not te be alienated, but there are no doubt a plethora of possibilities - with so many users and user stats.

Finally, what's next? What could still be missing in the Facebook/Instagram/WhatsApp portfolio?
  • Vimeo: video
  • SoundCould: music
  • Evernote: notes
  • Flipboard: news
  • Foursquare: location

Monday, February 17, 2014

KPN Capital Markets Day: why a CFO is desperately needed

Ultimately, all stakeholders benefit when a company's management is transparant about its reporting and plans. For commercial reasons, there may be secrets from time to time, but an overall lack of transparancy will in term hurt customers, employees and shareholders. The stock market valuation will show a discount to the peer group valuation.

KPN's reporting leaves little to desire, with a deluge of numbers every quarter. And yet, transparency still is the major weak point at the moment and this explains why KPN desperately needs a new CFO. On February 19, KPN will host a Capital Markets Day and one can only wonder why this is scheduled, absent a new CFO.

Unfortunately, only those financial analysts working at financial institutions are invited (so much for transparency ...). But fortunately, the event will be webcast.

KPN had seen several CFOs come and go since CEO Eelco Blok took over in 2011. The position is vacant currently and filled on an interim basis by Steven van Schilfgaarde (in September 2013 he announced that he would leave the company, but 10 days later he was appointed interim CFO).

Here is why the company is in desperate need for a new CFO:
  • First of all, the position is vacant. Succession has been all too rapid since 2011 and the company needs guidance in more than one way.
  • Second, KPN issued no fewer than 4 profit warnings, lowered the dividend on 3 occasions and announced a rights issue. And all this within a time span of less than 3 years. At 13Q4, the Netherlands business was forecast to 'stabilise toward the end of 2014', rather than 'toward 2014', as it was put as recently as at the 13Q3 results, and so invisibility continues.
  • Once more, management appears to be reverse engineering the bottom line (2011: guidance on dividend; 2013: guidance on free cash flow), without giving guidance on the top line (which deteriorated, just when it was supposed to be improving).
  • The dividend is re-installed, pending the E-Plus sale, but it remains unclear whether the dividend is solely dependent on this sale, or whether it can be sustained by the current business and its cash flow.
  • Months after the rights issue, another EUR 5bn was announced to flow into the company as a result of the E-Plus sale. It remains unclear why KPN would need this extra cash.
  • The dividend policy needs to be run as way to distribute excess cash, not as a way of attracting investors. How come the dividend is reinstated at a time when the business deteriorates? Why is the company speculating about receiving dividends from Telefonica Deutschland? KPN appears to be hopeful that the debt level at TD would be raised to enable it to pay a higher dividend.
  • All this probably translates into guidance at the KPN level that is taken with a grain of salt by the market. Hardly anyone probably takes it all too literally at the moment.
KPN needs a very experienced CFO who can issue trustworthy guidance based on the underlying business progress. This should improve the quality of the company's guidance and bring back stability. KPN really needs to stop issuing profit warnings at just about every single quarter. No wonder America Movil insisted on appointing the CFO, should it acquire KPN. And a strong CFO will be good for the company's valuation.

Finally, here are some questions for the Capital Markets Day:
  • Which initiatives are put in place to turn Consumer Mobile around? What is KPN's response to current market trends? Remember, Tele2 is constructing its own LTE network, Ziggo and UPC will merge and launch a nationwide mobile provider and T-Mobile has a new mobile-only strategy.
  • How much will the expected opex and capex savings be ('hundreds of millions')?
  • What is the cost of VDSL2 + vectoring per home passed, including the cost of laying fiber outer rings? And how does that compare to the cost of FTTH (currently apparently around 850 EUR/HP)? And does it warrant a migration in focus from FTTH to VDSL?
  • Can the fiber outer rings be re-used by Reggefiber for its FTTH architecture, should KPN decide to step up FTTH investments in the future?
  • How do Tele2 and Vodafone (potential FTTH unbundlers) feel about KPN slowing down FTTH? (Let me guess: "You will need to ask them").
  • What are the plans for Belgium? When the planned sale of E-Plus was announced, focus was directed to the Netherlands and Belgium. However, silence around Base was rather deafening and one can only wonder why: is something big in the works (remember, selling E-Plus will deliver EUR 5 bn + a 20.5% Telefonica Deutschland stake)? Or is Base really up for sale again, given that Belgium is a notoriously difficult market?
  • What are the current takeover opportunities? In which part of the value chain is KPN interested?
  • Is iBasis a core holding?