KPN Capital Markets Day, 7 November 2023: preview

KPN is organizing a Capital Markets Day on November 7. We expect the board to unveil plans for the period up to and including 2026 and to provide a glimpse into the years to come, possibly up to 2030. The fiber optic renovation is nearing completion, which will have a major positive impact on the financials. However, the network is never finished and further evolution is on its way. Partnerships will be central to this. In the meantime, competition is and remains the greatest risk.

Competition in mobile consists of the other two mobile operators and possibly entrants in Private Wireless. In fixed, fiber optic brings new players to the market. Consolidation is obvious, but there are different scenarios. In services, OTT still drives cord cutting, mostly or communications, but or TV/video as well.

Partnerships are likely to be central in areas where KPN is too small or lacks knowledge to develop solutions itself: ultra-rural coverage, cybersecurity, venture capital and developing a network-as-a-service platform. Where KPN lacks scale, such as in ICT customization (tailored solutions and serving verticals such as healthcare and transport), acquisitions are an obvious solution.

KPN's previous Capital Market Days focused on growth and simplification:

• May 2011: Strengthen - simplify – grow
• February 2014: Building on strong fundamentals
• March 2016: Raising the bar
• November 2018: Organic sustainable growth
• November 2020: Accelerate to grow
• November 2023: Building for the future???
  

General strategy

• Netwerk evolution:
  
• Fixed: FTTP and a partnership (e.g. Starlink) to cover the remaining ~30k ultra rural addresses.
  
• Mobile: 5G/3.5 GHz plans, following the 2024 auction, will mostly be about upgrading the 5G network's capacity. Ultra-low latency may form the basis for new services, e.g. in IoT.
• A jump on the AI bandwagon could look quite differently, if SKT is followed, or rather Iliad.
• New tech such as digital twins and virtualisation will serve network control and maintenance, help enable zero-touch and cloud-native networks.
  
• Network are increasingly seen as platforms-of-platforms (or: network-as-a-platform), for traditional (telephony, television) and new (IoT, etc.) services. Network API's are coming to market to allow developers and enterprises to take advantage of network and subscriber data, see e.g. TIM, DT/Ericsson, Nokia/Dish and BT/Google Cloud.
• Services:
• In fixed, most telcos have embraced the Super Aggregator status for access to and billing of media services (streaming video, music, other). In mobile, it's still early days. Proximus is trying to translate the Super Aggregator to a Super App strategy, for all 'daily services' (Proximus+).
• Some telcos are modestly in the business of developing apps themselves (Proximus, Orange, Verizon). The entry-barrier is low, but it remains a challenge to compete with Big Tech and specialised developers. Maintenance is complicated for a roster of apps (for a range of operating systems) that need to be updated regularly.
  
• Cybersecurity and quantum computing are very important areas and could involve partnering with other telcos. After all, it makes no sense for each telco to develop these solutions on their own.
• Branding could use a little more clarity, now that a single-brand strategy has been abandoned, with current brands KPN, Youfone (takeover pending), Solcon, Simyo, XS4ALL (no longer for new subscribers), Cam IT Solutions, Inspark.
• What is so hard devising a proper loyalty program?
• Financial targets:
  
• KPN's fiber renovation is finally nearing completion. Taking around 30 years in all, it must be regarded a once-in-a-century operation. Benefits will need to be updated, in terms of opex (maintenance, energy, support), revenues (ARPU, customer wins) and capex. When the fiber program was relaunched (Capital Markets Day 2018), KPN said it aimed for 80 percent coverage, which excluded the coverage at the time by third parties (mainly Delta Fiber and other cablecos). With KPN increasingly overbuilding competing fiber operators (such as in Oss), the 20% figure will drop to a lower level.
• The fiber impact will be positive for revenues, margins and free cash flow, exacerbated by sunsetting more legacy systems (copper, 2G, 3G, PSTN, ISDN, etc.). Capex will likely drop below EUR 1b per annum (currently EUR 1.26b), net free cash flow (after interest and tax) may rise above EUR 1b per annum (currently EUR 860m). Still, the impact of higher interest rates on the interest bill is not to be overlooked.

Threats and opportunities:

• New entrants
• Mobile: the 2024 3.5 GHz auction will set aside 100 MHz for Private Wireless. Citymesh is a likely candidate to enter the market.
• Fixed:
• Wholesale-only operators (neutral hosts) of the active layer in fiber networks have already entered (Fiber Crew/Jonaz, Fiber Operator, Weserve).
• Delta and ODF could team up to build the Third Digital Infrastucture. This would put pressure on occupancy rates, but with fierce competition price increases would be unlikely. Ultimately, a shake-out would follow.
• Alternatively, Delta and ODF could acquire Ziggo's HFC-network to construct a Second National Fiber Operator. In this scenario, VodafoneZiggo's retail operations would be combined with its mobile network, mirroring Odido (formerly TMNL).
• FWA is increasingly likely to compete with FTTH, especially in ultra rural areas and in places where KPN deploys PON technology (no physical unbundling and instead high wholesale tariffs). Odido would be very well positioned.
• Disintermediation:
• Communications (Meta, Microsoft) and content (Netflix, Amazon, Disney, WBD, etc.) have already largely gone OTT.
• Hyperscalers have claimed large sections of the cloud market.
• Smart TV manufacturers offer an alternative TV-platform.
• There's always the risk of NOT doing something. New opportunities that must not be missed may include the Super App (Proximus+), speed-based pricing in mobile or FWA.
• Outsourcing carries the risk of losing indepth network knowledge and capabilities. Perhaps KPN needs to clarify where it stands.
• Selling real estate, even if this is not core business, is not wise. It exposes the company to hefty annual price increase and gives it a fake sense of independence. Migrating to a different real estate owner may be possible in theory, but the lock-in is such that this is near impossible. Selling real estate only makes sense in case of an immediate need for cash.
• Structural separation is meant to create two businesses that can each improve their growth profiles. It can be implemented in two different ways: NetCo/wholesale versus ServCo/retail, or Fixed/wholesale versus Mobile/retail. The latter is becoming harder for KPN, now that it is integrating fixed and mobile at the core network level.
• APG could, from a value point of view, swap its 50% Glaspoort stake for roughly a 10% stake in the entire fixed-line network. Who knows, what could happen from there.
• Areas where KPN lacks scale or capabilities:
• ICT (Tailored Solutions).
• Verticals: health (KPN Health), possibly transportation.
• KPN Ventures: its portfolio is of limited size. Theoretically it would be better to participate in a larger and similar investment portfolio, such as DTCP.
• Cybersecurity is of the utmost importance and it doesn't seem to make sense for every telco to develop a cybersecurity unit on its own. Perhaps a partnership would be preferable.
• Takeover
• An LBO can be ruled out, theoretically resulting in a share price discount. It was tried by EQT and KKR, but it only led to KPN creating the option to issue preference shares with high voting power, combined with government oversight.
  
• Only a friendly takeover will be realistic.