Wednesday, October 26, 2011

KPN's broadband market share is down, not up

After assessing the KPN Q3 results,
the question remains: were they good or bad? The organic performance was solid in Mobile International, and weak in the Netherlands. Cable is forcing KPN's broadband market share down. VDSL is no cure, not even interim. FTTH needs an accelerated roll-out, and indeed is now playing the 'captive market' card: Reggefiber has up to now entered no fewer than 155 municipalities, out of the nation's total of 418. KPN's customer base will keep shrinking, but what is left over will take more RGUs per customer. It opens an opportunity to once more grow by acquistition, especially when the broadband market share  goes further down below 40%.
In mobile, Consumer NL is weak, but other areas are strong.

Group revenues
Results were hit by regulation (MTA, roaming) and restructuring (mostly KPN Corporate Market), and benefitted from minor takeovers and release of provisions:


  • Group growth: revenue -3.4%, EBITDA -11.6%
  • Netherlands (includes iBasis and Getronics) growth: revenue -5.2%, EBITDA -13.6%
  • Mobile International growth: revenue flat, EBITDA -4.9%
Underlying (organic):
  • Group growth: revenues +0.8%, EBITDA -0.1%
  • Netherlands growth: revenue -2.9%, EBITDA -1.5%
  • Mobile International growth: revenue +8.3%, EBITDA +5.9%
The Netherlands then perform dismally, obviously a result of cable competition. Mobile International benefits from Rest of World reaching break-even at the EBITDA level, but most of all from playing challenger. It remains to be seen how sustainable that is.

Coming in below market consensus caused a small share price decline. Investors must be wondering: how can free cash flow for 2011 be > EUR 2.4bn when YTD FCF is only EUR 1.5bn? KPN maintains guidance and points to less MTA impact, no payment of any dividend and no share buy-backs in Q4. Of course it has capex and asset (real estate) sales to play with, so when they say they will meet guidance, that probably will happen.

One question remains: why is organic EBITDA growth weaker than organic revenue growth? It must be the price of expanding networks (mobile) and services (IPTV), which take a toll on work contracted out.

Dutch broadband market
KPN lost 11k subs, despite gaining 16k FTTH subs. In other words, 27k DSL subs were lost. Indeed, VDSL is not much of a weapon against cable. FTTH additions are not impressive, but will probably accelerate going forward (unless heavy frost hits the country once again). The total number of BB subs is back to the level of mid 2008. Market share is going down to 40% now, but in fiber areas KPN claims 44%. Overall, the target still is to raise the market share to 45% by 2015. A stretch.

Dutch TV market
The TV market share is up to 17% (in fiber areas 27%), but associated revenues are just EUR 43m this quarter as a result of the low ARPU. Cable ARPU for TV alone is not published, but is probably at least twice this number. Cable is migrating analog subs to digital, at a conversion rate of roughly 80% (i.e. 20% of customers lost are moving to IPTV, FTTH or DTT). KPN is doing a similar thing: migrating DTT subs to IPTV. Dynamics are a bit different, and overall KPN is growing the number of video subs, so the coversion ratio would be something like 500%.

Dutch customers base
KPN doesn't publish customer numbers, like cable does, only RGUs. But it now reports the RGU per customer metric, which must increase to 2.4 by 2015. It now stands at 1.9, which implies roughly 3.5m customers. Compare Ziggo's 3.02m (its network has a population coverage of 57%) and UPC's 1.86m (population coverage 38%).

  • Consumer NL: subs are going down steadily. Contrary to what KPN states, MoU is holding up, but SMS is going down rapidly. ARPU is down slightly. Revenues are down.
  • Business NL: both MoU and SMS/sub are going down, but subs are up strongly. Revenues roughly flat.
  • E-Plus: subs and revenues are up, but MoU is flat/down.
  • Base: subs up strongly, but MoU slightly down and revenues are up only slightly.
  • RoW: no sub numbers, but EBITDA is positive for the first time.

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