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Author: Dan Bieler
KPN reported its Q2 2006 results this morning. Operating revenues increased 1% to €2.98bn year-on-year. EBITDA increased by 10.1% to €1.28bn (a margin of 43% versus 39.5% a year ago), and free cashflow came in at €654m, an increase of 14%. Cash efficiency reached 30.3%, up from 28.5% from last year. As in the past, mobile acted as the main growth engine, up 12.6%, whilst fixed declined by 4.6%. Net debt increased 7% to €8.76bn (1.8x net debt/annualised EBITDA). ROE reached 39%.
Comment: KPN's results look good on most measures, although there are some aspects that spoil the picture somewhat. But what we like most about the results is the evidence that KPN continues to do what it does best: it puts all the right building blocks in place to tackle a very challenging future and avoids the ostrich approach towards the convergence revolution that many incumbents still display.
No doubt this strategy is causing pain in the medium-term. For example, traffic revenues declined 13% in the consumer segment and 17% in the business segment. Leased lines declined another 16% and frame relay 23%. The migration towards IP-based solutions explains a large part of these declines. However, by embracing IP, KPN also opens new opportunities.
By pushing its naked DSL and VoIP solutions, KPN has successfully entered the VoIP segment, and we estimate that its share now hovers around 23%. Similarly, KPN's TV subscriber base grew 83% last year to reach 230,000. In the business segment, IP-VPN solutions increased by 21%. KPN is also very successfully defending its market share, be it fixed or mobile. On the mobile side, KPN is achieving this despite significant reductions in subscriber acquisition and retention costs in the Netherlands and Germany, although in Belgium they went up - from a very low base.
Whilst fixed cash efficiency went down to 29.1% from 32.3% as part of the investment drive (the capex/sales ratio increased two percentage points to 11.2%), KPN generated more cash in all other divisions, most notably E-Plus, where operating free cashflow increased 180% to reach €141m.
E-Plus's performance is especially encouraging in other respects. Its multi-branding strategy seems to be bearing fruits. E-Plus reported 410,000 net additions, ahead of Vodafone (253,000) and O2 (236,000), thereby increasing its market share to 14.5%. Despite the lacklustre 1.7% revenue growth, the division managed to push up its EBITDA margin by 15 percentage points to 37%. The 37% increase in minutes of use to 107, is part of the ongoing fixed-mobile substitution trend and works in E-Plus's favour. However, with triple-play offerings hitting the market, E-Plus must find an answer to the lack of a fixed arm. A partnership with a fixed or cable operator under a new brand would fit its strategy.
Overall, KPN remains one of the most dynamic telcos in Europe. But one area where we would like to see additional efforts is business services (i.e. managed services and IT solutions). Whilst not necessarily a high-margin activity, it remains an important tool to bind business customers to the telecoms provider. This is all the more important in a world where telecoms and IT are increasingly converging.
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