KPN CMD 2018: no revenue growth; EBITDA and FCF growth from savings

General

• Strategy
• organic sustainable growth (note: growth refers to EBITDA, FCF, not to rev)
• based on innovative operating model and commercial approach
• based on premium, vlaue, focus, lean
• value over volume (esp. in LE segment)
• not competing for market share
• consumer: grow the converged base
• business: stabilise service rev & EBITDA (mid 2020) (note: adj e2e EBITDA, i.e. incl Networks portion (not reported after 2016))
• lean operating model
• to accelerate strategy for 2019-'21
• new technology
• fiber, 4G/5G, virtualisation/cloud
• faster, higher customer satisfaction, lower costs
• enables service switch-off (from all-IP) and copper network switch-off (from FTTH)
• targets lean, faster & more agile company, more flexible, faster time-to-market, faster innovation
• 3 prios
• best smart converged infra (add 1m FTTH HP by 2021)
• focus on profitable growth (add 300k converged HH, convergence to 70% of postpaid; stabilise adjusted e2e EBITDA on business market)
• accelerate simplification and digitalisation
• Financial targets
• progressive dividend
• based on sustainable FCF growth
• based on organic EBITDA growth and stable capex
• plans cost savings 350m by 2021 (not run-rate, i.e. run-rate 350m is reached mid 2021; opex only, this time; net of restructuring costs and incidentals)
• opex savings large part from restructuring; effect on FCF: cash out after 6 months (pay out severance), accreditive after 12 months)
• maintains 2018 guidance
• capex
• remains 1.1b EUR/yr (excl. spectrum)
• shift to access networks (FTTH, 5G), from 33% to over 50%
• IT/TI lower, CPE lower
• invest in future-prof technology
• growing FCF (for progressive dividend and deleveraging)
• mid term target leverage below 2.5 (incl. spectrum)<2 .5="" font="" incl.="" spectrum="">
• service revenues to stabilise
• Other
• 100 developers in Amsterdam (eliminate 5 Indian developers for 1 in Amsterdam)
• sustainability: green energy (2011), CO2 neutral (2015), 25% energy redux (2020), circular (2025)
• T-Mobile/Tele2 merger: no substantial change expected; solid players are good for the market
• open cable: no short-time effect due to long-running existing contracts with wholesale customers
• Main risks
• execution
• declining revenues
• cord cutting (FT, TV): no
• engineering capacity for FTTH roll-out: no

Networks

• Best networks, enable innovative tech, accelerate (simplification, digitalisation)
• FTTP
• currently 2.35m FTTH HP (30%), FTTC coverage 50%, FTTS 80%, accelerate FTTO
• target +1m to 3.4m FTTH HP (over 40%) by YE 2021
• regional approach, no nationwide coverage (complement with copper and FWA)
• trusted relationships with 8 or 9 construction companies for complete service package
• speeding up from end 2019
• improvements
• roll-out 650 EUR/home (cheaper labour and equipment, optimised engineering), to be reduced further
• design in 20 hr (down from 2 yr)
• raises utilisation 8 pp
• pay-back time 50% shorter (result of lower capex, higher utilisation, higher ARPU, lower churn)
• Copper
• to finalise copper upgrade 2019 (2500 cabinets for 500k HH on FTTC)
• plans to switch off copper from 2019, customers to be migrated to FTTP (first in 6 areas)
• Gigabit
• to add Gfast (FTTB, 1 Gb/s)
• total reach 1 Gb/s 45% YE 2021 (40% from FTTH, 5% from Gfast), 200 Mb/s 70%
• Hybrid
• for rural
• to add 200k additional subs with DSL/LTE hybrid (50 Mb/s)
• 5G
• plans 5G-ready network (i.e. software upgradeable)
• massive MIMO
• "4G connects people, 5G connects society"
• 5G mostly for B2B
• 5G field labs (agro in Drenthe, urban in Amsterdam, automotive in Helmond, harbour in Rotterdam)
• government decision on 3.5 GHz band expected 181218
• Other
• single core network, from 5 currently (rationalise, centralise, virtualise (NFV, SDN))
• decentralised CDN at 160 metro core locations (offload 70% of core traffic, low latency)
• all-IP 100% by YE 2021; enables legacy switch-off (PSTN (450k users), ISDN (160k users), SDH, 3G)
• plans 28 GWh power savings 2019-'21
• target 50% virtualisation YE 2021 (currently 5%)
• reduce 20 to 2 IT stacks (1 for consumer, 1 for business)

Consumer

• strategy: best access, grow converged base, value
• targets
• add 300k converged HH by YE 2021, 70% of postpad base converged in 2021
• to raise SIMs/HH 10%
• FTTH raises NPS 15%, ARPU by EUR6, BB share 9pp, lowers churn 34%
• we are the best, so we don't need exclusive content

Business

• targets: stabilise service revenues, stabilise EBITDA (adj, e2e) by mid 2020
• grow in profitable segments; compete for profitable tenders (in LE segment) only
• total customers: 350k SoHo, 225k SME, 2k LE
• to reduce portfolio 50% by 2021
• to raise connectivity at business parks: 100 Mb/s to 70% (currently 52%)
• KPN EEN (platform for SME and LE)
• target penetration to 100% in SME (currently 35%)
• raises NPS 10 points
• time-to-market x2
• low churn (5%)
• cost to serve -25%
• 75% fewer IT systems
• simplified organisation
• revenue growth SoHo positive, bottoming at SME, still declining in LE

Finance

• targets 2019-'21: organic EBITDA growth, capex stable (1.1b), FCF growth, progressive dividend
• past FCF growth from low cash tax (continues), decreased interest (continues; 55% lower o/w 30% result of lower debt, 25% result of lower interest rates), capex (now fixed)
• now EBITDA growth from opex savings & stabilising rev
• targets "cable-like margin"
• opex redux to continue "for a decade"
• portfolio: rationalise, simplify
• e2e digitalisation front and back-end
• all-IP and virtualisation (incl. CPE)
• IT landscape rationalisation
• organisational effectiveness
• execution strategy ESSA (eliminate simplify standardise automate)
• to provide guidance on FCF, restructuring costs, div with Q4 results (each year)

Mobile Broadband

There is a lot going on in mobile broadband. I plan to cover that over the next few weeks. But first, off on hoilday for a week.

Some issues:

• Enablers: IP (i.e. 4G), VAS (such as LBS and payments for consumers, full access through laptop cards for workers), data tariffs coming down. Is the data over service revenues fianally taking off (settling above 20% at AT&T, Verizon and KPN)?
• Per IP: the Broadband Incentive Problem.
• MTA: comparing minutes of use in Europe and the US reveals that there is a lot of price elasticity.
• Fixed line replacement? (think 16d)
• Outsourcing, network sharing and separation to further lower costs.
• New entrants: Nokia, Apple, Google, Yahoo!
• Offloading (that's whta it is, no more!): mobile TV, femtocells.
• 4G Standards war: LTE, WiMAX (and Gaiacomm?).

Belgacom and FTTH in the Netherlands

Yesterday I had a short meeting with my contact at Tiscali Wholesale (now a unit of KPN). Always a pleasure and always good new insights.

Here are my takeaways.

• The future of Tiscali NL. Most of it is rebranded to Telfort. Tiscali Wholesale however will be folded into KPN Wholesale, but more or less as a separate unit. Some ISP customers may not like to be dealing with the incumbent now, but nothing really changes for them. The Tiscali people will still be their point of sales contacts. Besides, there are not very many other shops to go to, and probably not of Tiscali's quality.
• eHealth. We agreed that here lies a big market opportunity. The value chain is vast, something I plan to dig into.
• IP. The perennial thing behind so much that is going on right now. (I plan on mapping an 'IP cloud'). Here Tiscali seems to be further advanced than KPN. Tiscali Wholesale clients are offered much more than just 'naked access'. IP allows for modular compounding of services.
• FTTH. Things are probably speeding up in the Netherlands (but availability of construction workers is a bottleneck and VDSL may be an intermediary step that cannot be skipped for that reason). One caveat: an all open model, with dozens of service providers, carries the risk of confusing consumers. They simply get too many marketing messages. Apparently, Amsterdam's Citynet (3 layers: GNA monopoly at the passive layer; bbned monopoly at the active layer; many SPs) has lost an SP because the market was overcrowded. Compare that to the new Powell (Wyoming) network plan, which has agreed on a service provider monopoly for the first 6 years of operation.
• Belgacom. Rumour has it that 'a Belgian operator' plans an assault of the Dutch market. I cannot think of any other viable option than Belgacom. To get back at KPN (which bought Tele2 Belgium), they first took over Scarlet. Scarlet NL may not be for sale after all, and the operation could be beefed up by acquiring Orange Broadband (put up for sale by T-Mobile NL). And how about Reggefiber and Telecom Italia's Dutch assets (bbned, Alice)? The strategy would mirror the Swisscom/FastWeb deal, as well as Telefonica's O2/Be deal, to name a few.

Regulation 2.0 in the Netherlands delayed

KPN and its competitors have asked OPTA for a delay of 1 month; now they have to come up with a 'Full Alternative' to LLU by July 15. Subsequently, OPTA will publish its new ruling by the end of the year.

Should the parties involved fail to reach an agreement, then OPTA has set itself a deadline for publishing a market analysis and proposed rulings by October 15.

I've written many times before about this extremely important topic. KPN is building its 'All-IP' network (including a nice headstart), which includes the closure of MDF-locations (of which there are 1300) and the extension of fiber to the street cabinet (of which there are 24k) level (FTTC). The consequenses include:

• Heavy investments for KPN, to be financed from the sale of the related real estate, coupled with opex savings.
• The ability to offer VDSL2 services for IPTV (and triple play). So far, the 'Mine' (IPTV) product is barely marketed, obviously because very few households are located near enough to an MDF (for top ADSL2+ bandwidth) or are covered by VDSL2 pilots.
• Competitor DSLAMs will be rendered worthless, unless the MDF locations would be kept open after all. However, that in turn would cause interference problems (between KPN's VDSL and any altnet's ADSL services) and it would also give KPN a big advantage (VDSL v. ADSL performance).

Therefore, the closure of MDF locations signals the end of LLU. Sub-loop unbundling (SLU) is the obvious successor, but not economically feasible (according to Analysys). In other words, a 'Full Alternative' (other than resale) is hard to dream up. We will see.

In the meantime, KPN was allowed to buy yet another ISP (Tiscali NL), and T-Mobile is close to acquiring Orange NL. I am sure T-Mobile is interested in the mobile assets of Orange only, which effectively puts the former Wanadoo BB unit on the market. Any lack of interest among the remaining players (Tele2/Versatel and bbned/Telecom Italia):

• May signal the end of infrastructure-based intramodal competition on the KPN-network, as it would put Tele2's and TI's commitment to the Dutch market in doubt.
• Which would lead to a duopoly market (cable having near 100% coverage).
• Which would highlight regulatory asymmetry (no resellers on cable networks).
• Which would lead to open access to cable networks (OPTA will publish its cable market analysis in 07Q3).

Does anybody want to compete in the Netherlands?

As I've written before, LLU is coming to and end in the Netherlands. France Telecom yesterday in a way referred to this, meandering on its strategy regarding Orange NL.

The consequences of the next stage in copper-based competion:

• KPN thinks it's so clever, forcing the competition out of the market. Only a player like KPN can afford to build a FTTC + VDSL network ('All-IP'). However, the plans could backfire: OPTA could go the separation route; OPTA could allow UPC to merge with @Home to form an MSO with near-national coverage (and create a duopoly US style); altnets could band together Australian style (the G9 consortium, proposing a FTTN network of its own).
• OPTA, the local NRA, together with all market participants, is studying a Full Alternative for LLU. Could it be SLU (FTTC + unbundling from the street cabinet)?
• Altnets have invested very little over the past two years or so. Coverage of their ADSL-networks has not expanded.
• Municipalities are cleverly moving in, building FTTH. There seems to be kind of an arms race between KPN (also buying up ISPs) trying to get involved and Reggefiber (the Dick Wessels company).
• Orange NL was put up for sale in February (rumours, but I had them sort of confirmed). Then in March, at the final 2006 results, it was denied. Now, at the Q1 results, France Telecom acknowledges all options are open. The same happened to Telecom Italia subsidiary bbned: for sale, and then all of a sudden it wasn't. This can only mean one thing: FT and TI want out, but they can't. And with market regulator NMa still studying the KPN takeover of Tiscali NL (report due May/June), KPN is no longer a buyer.

No potential buyers and LLU coming to an end - do I hear monopoly? Is duopoly the simplest answer to this? Or can altnets overcome their cultural differences and build a joint G9-style network?

More corporate action to trigger the telco sector

Continuing on this post, I dug up some more ongoing business dealings.

Operators for sale:

• Alltel
• Pipex (and C&W?) in the UK; possibly Lycos Germany, Jazztel (Spain), and PT's PT Multimedia unit
• FastWeb (Italy) could attract a counterbid (next to Swisscom's).
• Telefonica not only has Endemol up for sale (late March), but Airwave (UK) as well.
• Deutsche Telekom is shopping Ya.com (Spain) and Club Internet (France) around.
• TDC's owners are looking for buyers for HTCC (Hungary), sunrise (Switzerland) and Talkline (Germany).
• Both Lebanon and Libya are selling two state-owned mobile operators.
• Stakes in state-owned PTT's may change hand: OTE, TI, DT, PT, TeliaSonera, as well as the operators of Bulgaria, Uganda, Botswana and Algeria.

IPOs:

• Infamous Versatel (Germany) and Flag Telecom may re-enter.
• Several wireless operators: MetroPCS, Colombia Movil, GrameenPhone, Safaricom and Spice Telecom.

Licenses:

• Fixed line, SNO: Saudi Arabia and Kenya.
• Wireless (2G and/or 3G): Iceland, Germany (2008), France (2008), Canada (2008), Russia (2007 and 2008), Vietnam, Norway (2007), Sweden (2007)
• WiMAX: Ireland (2007), Italy (2007), Portugal (2007), Sweden (2007), UK (2007).

Product/service launches:

• DT will launch a secondary brand in Germany, aimed at the youth market (summer 2007).
• Handsets: Apple's iPhone (June) and perhaps news around the 'Google Phone'
• FTTN may come to Australia.
• FTTH in Paris will be launched by Neuf and Iliad.
• MVNOs from KPN and BT may come to Spain.
• Wireless VoIP tests at Vodafone (Starfish) and StarHub (pfingo) may have some impact.
• Breaking down the wireless walled garden at Hutchison 3G (X-Series) will be followed by Amp'd Mobile's launch of the MOTO Q (with Sling and Orb).

Regulation:

• EC on international roaming (June)
• EC v. Germany regarding DT's FTTN/VDSL network (any day?)
• OPTA on KPN's All-IP network (June)

Regulation 2.0 coming to Ireland

Battling cable, eircom apparently has similar plans to KPN: pushing fiber deeper into its network (to street cabinets), going from FttExchange + ADSL2+ (with LLU as an option) to FttCabinet + VDSL (with SLU as a theoretical option), thereby:

• creating the option of closing COs, savings costs;
• moving DSLAMs closer to end users, expanding available bandwidths;
• frustrating altnets who have DSLAMs in those COs as well but lack the scale to move them to the street cabinet level, making SLU unfeasible;
• forcing regulators to come up with some other alternative to LLU.

We have seen this in the Netherlands, and now it is spreading to Ireland. Watch out for regulation 2.0 coming to Europe in the next few years.

The market will decide on regulation 2.0 in the Netherlands

OPTA, in its 'late February' (February 30, aka March 2) letter, has decided to let the market come up with an alternative for LLU. KPN will not be separated, neither functionally (Openreach style) nor structurally.

(As fiber is pushed deeper into the network, LLU will be replaced by SLU.)

Market parties (KPN, the ACT body (excluding bbned), bbned and Reggefiber) responded to OPTA's January 24 letter and are in talks. OPTA will monitor the process and expects a solution within 3 months. By 07Q2 it will publish both findings and rulemakings.

Further, OPTA has asked NERA to look into options for Openreach-style separation of KPN in the Netherlands. Unsurprisingly, NERA concludes that there are some large differences between the Dutch v. the British market: national cable coverage; Dutch regulators legally cannot force structural separation upon KPN (Ofcom threatening BT to refer the case to the Competition Commission was instrumental in getting the company to cooperate); service-based competition on the PTT-network takes away the stimulus for both altnets & PTT to invest in the local loop (FTTH).

In other words, the reach of cable and KPN's willingness to work with altnets stave off the threat of separation (functional or structural).

Deutsche Telekom: strategy update brings little news

Deutsche Telekom has a strategy update and investor day, which unfortunately bring little real news.

Summary:

A. Four key areas.

1. Improve competitiveness in Germany.

• IP-technology.
• Productivity in customer care.
• Savings targets remain: EUR 2.0bn for 2007; EUR 4.2-4.7 mrd for 2010 relative to 2005.
• Broadband for IPTV and triple play:
  Available to 17m homes by year-end 2007. Target 1.5m IPTV-subs by late 2010.
  VDSL (50 Mbps) for HDTV: 50 cities by end of 2008.
  ADSL2+ (16 Mbps) for SDTV: 750 towns and villages.
• T-Mobile:
  Focus on existing products web'n'walk and @Home.
  New products, such as MyFaves (personalisation, proven success in the US)
• Branding:
  T-Home for the home, T-Mobile for on the road, T-Systems for businesses.
  A second brand, to be launched before the summer, for basic products, F/M bundles, low tariffs, young demographics.
  T-Mobile for outside of Germany.

2. Growth abroad with mobile, possibly with acquisitions.

• FMS.
• Data: WiFi, data handsets/terminals, web'n'walk handsets.
• Takeovers, both in existing and new markets.

3. Mobilizing the internet and the Web 2.0 trend.

• Personal & social networking, like mobile blogging.
• Open, multiportal internet access.
• Partnerships.

4. Developing key ICT accounts with a strategic partner.

• International footprint & scale are essential.
• A partner.

B. The planned sale of non-core assets:

1. T-Systems Media & Broadcast
2. DeTeImmobilien and Sireo (real estate)
3. Club Internet and Ya.com (triple play providers in France and Spain)
4. Tower business in Germany (Deutsche Funkturm) and the US (US Towers).
   

Comments:

1. The German fixed network is where the trouble is. Moving to IP and increased efficiency is all fine and dandy, but almost meaningless when the associated cost savings are hard to reap.
2. Germany gave its go-ahead to the VDSL-network, including a regulatory holiday, but the EC started a procedure to hault it. Also, the target of 1.5m IPTV subs looks uninspiring (cf. BT aiming for 2-3m in the mid-term).
3. Will the regulator allow DT to introduce a new F/M convergence brand? I'm not sure about this (over here in the Netherlands, OPTA wouldn't allow KPN to do this, but apparently the German governent is much more lenient on the local PTT).
4. Abroad, DT aims for a purely mobile approach (unlike FT/Orange in the UK and Spain). That makes a lot of sense: mobile markets are larger and more profitable than broadband markets. Acquisitions could be expensive though. Focus must be on Easter Europe and France, where a fourth UMTS license will be auctioned off.
5. T-Mobile is leading the way, with 3UK and Vodafone, in opening it's network for internet access and web 2.0 partnerships. As long as they can do the rebalancing act, that looks OK.
6. The planned sale of Club Internet and Ya.com is not a surprise. It is part of the new mobile focus. Should T-Mobile buy Orange NL, it will sell-on the DSL-network. FT/Orange will not bid for Club Internet (giving it too much market share), but Ya.com certainly makes sense. Similarly, Telefonica will not buy Ya.com but may look at entering France through both Club Internet and the new UMTS license.
7. DT is committed to the ICT-market, which will add to growth. Therefore, no sale of T-Systems, but no acquisition either, as the unit is now looking for a partner.
   

KPN RESULTS://New definitions used to hide worsening performance

Results 06Q4: somewhat weaker than expected. Even mobile is down. Net line loss, as concocted by KPN, is down to 130k for the quarter, but regular line loss (as defined previously by KPN) is up to 357k (from 267k the previous quarter)! Access lines (PSTN + ISDN) are down 9% qoq and 21% yoy!

Guidance 2007: weaker than expected. Revenue and EBITDA to be flat. Share buy-back EUR 1bn as expected. Dividend LOWERED to EUR 950m (from EUR 1bn over 2006). Free cashflow EUR 2bn v. EUR 2.4 bn in 2006.

All-IP Network: real estate value lowerd to EUR 1bn (from 1.0-1.5), capex 2007 lowered to 0.9bn (from 1.0-1.5).

POST-LLU REGULATION://What about VDSL and Openreach in the Netherlands?

Coming back to OPTA's timeline note (summarized before and here also) and publication of the Analysys study, I can add a few remarks after having talked with OPTA and KPN. OPTA was rather candid about acknowledging that this would not exactly be what KPN presumably likes to hear at this stage. It looks like OPTA is backtracking, having been a little bit too generous for KPN. They should have awaited Analysys and competitor responses.

• OPTA will not enforce the Openreach model on KPN (to be announced mid February). This is what I 'read between the lines' talking to OPTA. There are two important factors behind this. Most of all, cable is hurting KPN much more than it (NTL/Virgin) does in the UK. In fact, it looks like there are only few countries where cable has this kind of strength (Belgium; Germany in due course, once the analogue/digital upgrade is done). In other words, only PTTs of Portugal and Spain et al could be at risk for having an Openreach kind of regulation. Second, KPN is mirroring Openreach as it is, judging its carrier portfolio (range of services and pricing).
• Late February really is the 'date' to watch. By then, OPTA will come up with some sort of Fully-fledged Alternative for LLU. Personally, I have a lot of sympathy for the Australian model, where 9 altnets have come together. Other than that, the situation appears pretty much deadlocked.
• KPN's official plan still is to launch VDSL services on May 1. Will OPTA block this?

REGULATION://Setback for KPN regarding closure of MDF locations

nwrjAs I have posted before, moving from FTTEx + ADSL2+ to FTTN + VDSL requires a Full Alternative to LLU. This is exactly what is happening in the Netherlands, where KPN is building its All-IP network. OPTA, the local regulator, today published a brief note on how it will proceed.

Back in October, OPTA was generous in recognizing that it should support KPN in moving forward, i.e. it planned to allow KPN to close many of its MDF locations. The trouble is, that is exactly where competitors' DSLAMs are colocated.

Today OPTA publishes the timeframe for how it will proceed. The note seems to include a big setback for KPN: OPTA will, for now, not proceed in making formal Policy Rules. It seems to acknowledge that SLU is not a Full Alternative to LLU. Things seem to be pretty much deadlocked.

The main points from today's note:

• Market analyses to be published 07Q2.
• The report from Analysys may be published (what does that mean?). The main conclusion is: SLU is not economically viable as an alternative to existing LLU players (unless such a network would be limited to 1000 street cabinets in the most densely populated areas).
• SLU + SDF backhaul doesn't seem to be a Full Alternative to MDF access. It appears that MDF access cannot be withdrawn (unclear is under which circumstances KPN would still be allowed to close any locations). OPTA is pondering what a Full Alternative could be and thinks it will publish the result late February.
• The NERA report on applicability of the British model (Openreach, equivalence) is to be published mid February.
• Making rules on jointly laying fiber has no priority.

REGULATION://IP networks in the Netherlands and Germany

OPTA has published a time schedule, as a follow-up to its Position Paper on KPN's All IP network:

• Conversations with all market participants: January 2007, follow-ups in February/March 2007.
• Market research from Analysys et al: still on-going.
• Decision-making (or drafts): 07Q2.

Uncertainty persists. While KPN keeps working on its All-IP network, altnets are on the sidelines. KPN plans to launch VDSL service May 1.

Related news: in Germany the regulator just opened a consultation on IP-interconnection. It closes February 26, 2007.