KPN Q4: FTTH to migrate to PON technology after 2018

Details from the main release

• Outlook 2018
• Adj EBITDA flat, capex 1.1b, FCF up (excl TEF DE div), div 12 c/share; Telefonica DE stake 8.6%
• IFRS 15
• recognition & measurement of revenues
• different timing of revenue recognition for handset transactions via direct & indirect channels, and a higher threshold probability in revenue related disputes
• revenues for handsets sold via direct channels are recognized in the P&L as nonservice revenues at date of the transaction, matching the associated handset costs. Revenues (nonservice) and fees (SAC) for handsets sold via indirect channels are no longer recognized in the P&L, but reported in the balance sheet. The threshold in revenue related disputes (variable consideration) is raised, meaning that revenues are only recognized when highly probable (>75%), up from >50% under IAS 18)
• impact (from 180101): adj rev -130m, adj EBITDA -100m, FCF unchanged, equity (at 170101) +285m
• Q&A
• RLAH more favorable than expected (wholesale costs, VR income, data usage grew multiple (>3x)), effect 2018 comparable (shorter yoy effect but expanded usage)
• Expects Business Market stabilisation in 1-3 yr
• 3.5 GHz band crucial for 5G
• Technology update
• Fiber reduces latency to 6 ms (DSL 14 ms, LTE 20-26 ms)
• FTTH reaches 2.3m HH, new build FTTH only, AON in 2018, thereafter migration to PON (not for existing lines), plans access on 3rd party FTTH
• Stepped up FTTO (after regulation ended)
• FTTS reaches 80%
• Bonded V Plus roll-out from 18Q2 (>400 Mb/s), cabinets suitable for VDSL & FTTH, local loop typically 150 meters
• Hybrid DSL/LTE has 1400 subs (Nijkerk trial), average download 6 to 73 Mb/s (note: DSL is needed for IPTV & fixed IP address, LTE for peaks & streaming)
• LTE-M nationwide by 18Q2
• Plans 4 5G pilots: urban, rural, transport & logistics, automotive ("4G connects people, 5G connects society")
• Plans VoWiFi
• Network integration
• Access
• 1. Combine (hybrid access): FTTC/FTTH & DSL/LTE
• 2. Massify (facilitate massive device comms)IoT over LoRa, LTE-M and 4G M2M
• 3. Verticalise (5G for verticals): eMBB (broadband), mMTC (massive), URLLC (latency)
• Core
• 4. Rationalise (simplification): all-IP
• 5. Virtualize (increase scalability, reduce time-to-market): NFV (generic cloud hardware, faster time-to-market) & SDN (smart routing)
• 6. Decentralise (content closer to consumer): CDN at 161 metro locations (for content caching, core-network offloading, improves experience), edge computing (for 5G, improves latency for automotive, e-health, smart industry)
• Simplification: phase 3 of simplification will follow (savings 1 & 2 relative to 2016: 570m EUR/yr)
• IT simplification: originally for 80k subs, invisible for customers, focus on a single My KPN app, focus on open source, added 150 developers in 2017 (total 30 nationalities), time-to-market (halved to 7 days) to be halved again

The arbitrariness of RLAH regulation

There is a certain level of arbitrariness to the RLAH (roam-like-at-home) regulation, taking effect 170615, looking at it from this perspective:

• Pricing of mobile services is extremely complex, containing all sorts of elements.
• Operators try to balance pricing with their own return, competitiveness, differentiation and fairness (giving the customer a sense of the-user-pays and usage-based or volume-based pricing).

The result is a high degree of opaqueness.

Now, the EC decided to act on the apparent unfairness of the cost of roaming, singling out one of many elements constituting the monthly bill. (Why not act against extortionist SMS pricing?) Operators will not worry. The have many levers to pull, not least raising fixed-line prices in case of integrated (fixed/mobile) operators.