Tuesday, January 15, 2008

KPN: preview 07Q4 and strategy update

Yesterday KPN mailed its invitation for the upcoming analyst meeting in London, February 5. They added that it will contain a 'strategy update'.
My employer isn't so generous as to let me attend the meeting in person, so I will be following the webcast. Too bad KPN has shifted focus to London, after its previous IR manager left (he steered those meetings to the home country, in order to fortify relations with local analysts).

Anyway, the meeting will be quite interesting. KPN is a company in flux, but some major milestones were realized or at least determined. Hence, the need for an update and some new targets. Let me summarize how KPN responded to the telecom woes of recent years:
  • Consolidate the markets by acquisition: Telfort (mobile NL), Tiscali NL (altnet), Tele2 Belgium (altnet), iBasis (international voice), Digitenne (DTT in the Netherlands) and Getronics (international ICT, but currently refocussing), to name just the big ones. I think KPN has reached its limits for growth by acquisition in the Netherlands. The result is a much more friendly market, with only 3 MNOs and cash constrained (but extensive) cable competition. In Belgium it could buy a company like Scarlet. Germany is wide open for consolidation. Further, KPN is trying to create an MVNO business into interesting European markets, first in Spain. Last year, market rumours circulated about KPN being interested in buying Bouygues (#3 mobile in France), but KPN denied. ICT obviously is a market that KPN could expand into also.
  • Deploy new technology: swith to IP, under the All-IP banner; extend fiber (FTTC + VDSL2, as well as some FTTH); HSPA as the next evolutionary step in the GSM networks. These will bring both cost efficiencies and new revenue opportunities (mobile data, IPTV, convergence services, bundles, ehealth, telecommuting, etc.).
  • Shrink the company: revenue growth, on an organic basis has been negative for a long time. At the same time, KPN is aggresively cutting jobs, buying back shares, outsourcing.
  • Plant seeds for growth. Expansion in mobile, broadband and ICT, enabled by acquisitions, new technology and new services.
  • Improve relations: job cuts have been done pretty quietly, and new contracts were recently negotiated; competitors are now seen as partners as well (co-opetition), as KPN is embracing wholesale revenues; OPTA (the national NRA) has been approving most of KPN's actions, thanks to the company's transparancy (accounting separation) and attractive wholesale portfolio.

For its strategy update KPN could focus on these issues:

  • Technology (All-IP (FTTC + VDSL2), FTTH, HSPA): roll-out, real estate sales, service launches.
  • Integration of recent takeovers: Getronics, Tiscali NL, iBasis.
  • Sharing, outsourcing.
  • Regulatory: mobile termination (currently to mid 2010 in NL and to March 2009 in Germany) and international roaming (voice was agreed upon through 2009; SMS and data may follow).
  • Acquisitions, MVNO launches.
  • Dividend, share buy-back.

I expect the following:

  • Overall: Dutch market conditions improved considerably. Mobile markets will see lower margins and more regulatory rate cuts. KPN is very much capable of integrating acquisitions and cutting jobs and has large opportunities for more cuts, outsourcing, sharing and real estate sales. This is very important, as organic growth remains very low. IPTV, mobile TV and mobile data take a long time to really take off. Debt will remain at such levels where the balance sheet is healthy but not overly so. From time to time takeover rumours emerge. In short, not a very pretty picture, with growth coming mainly from successful shrinking.
  • Revenue growth: Getronics and iBasis will add 20% or so, but organically growth will remain very low.
  • EBITDA growth: low growth and Getronics will lower the overall margin ('up the value chain' nonetheless, according to KPN).
  • Capex: will likely remain around the same level (12.7% in 07Q3).
  • FCF: a big drop in 2008 as a result of a hike in cash tax payments (despite the lowered Dutch corporate tax rate), but growth thereafter.
  • I suppose KPN will keep raising its dividend. A new share buy-back is likely, but it remains to be seen if it will be worth of a half or a whole billion euros.

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