KPN, the Dutch telecom behemoth shows disappointing Q3 results. Surprising?! Not really

Yesterday, the Dutch telecom behemoth presented its Q3 results. And like it could be expected by the steady readers of this blog, the figures were disappointing, or (according to analysts of Morgan Stanley) ‘uninspiring’.

Before I analyse the data of KPN and submit my comments, I first share the highlights of the KPN press release (click this link for an overview of the available KPN press releases):

Message from the CEO, Eelco Blok

“Q3 results were broadly in line with our expectations, with Consumer wireless in a transition period. We made further progress in strengthening the business in The Netherlands, especially in Consumer wireline where we launched multiscreen IPTV and in Consumer wireless where we implemented new tariffs. Within the renamed Corporate Market (Getronics) we have accelerated the restructuring program to align our cost base with a lower revenue level. As per our guidance we have again achieved high underlying service revenue growth in Mobile International with strong margin performances in Germany and Belgium. We remain on track to realize our outlook for the year.”

Highlights:

·    Financial results in line to realize full year outlook

·    Continued strong performances in Germany and Belgium

·    Consumer wireless in transition period; accompanied by lower service revenues

·    Continued growing TV market share in Consumer wireline

·    Corporate Market1 (Getronics) restructuring program in progress; aligning cost base with lower

·    revenue level

Concerning the message of Eelco Blok:

Consumer wireless is indeed in a transitional period. Before 2010, it were the times of shameless excess profits on especially telephone calls and SMS services, and to a lesser extent on mobile internet.

SMS, the goose with the golden eggs had a gross profit of (my estimate) about 99% of its revenues. While the message technique (a 125 byte character-based text message) and infrastructure costed almost nothing, it delivered in general about €0.15 - €0.25 in revenue per message, depending on the kind of subscription you had. Especially adolescents were power users of this service and caused phone bills of sometimes more than €500 per month. Also businesses using SMS as a strategy added to the enormous profits of this technique.

The same was true for phone calls and especially roaming calls (calls made via another provider than your own). Costs per minute for a call could be as high as €2 per minute and many power-callers during holiday, where in for an unpleasant surprise when they returned home. But this all was doomed to change;

The European Commission was not amused about the provider’s profit margins of SMS’s and (roaming) phone calls and put a sturdy cap on some tariffs for domestic and roaming calls and roaming SMS’s.

Also mobile internet, that was earlier hailed as a new ‘goose with golden eggs’, started to become the Waterloo for the big telecom providers. Thanks to (initially) unlimited internet access and free applications like Ping, Skype and Whatsapp, people where capable of avoiding the expensive telephone calls and SMS-services, while maintaining the same possibilities for usage.

The ‘clutching at straws’-attempt of the big telco’s to pinch these applications was doomed, as it generated tons of negative publicity and public outrage.

I wrote already on the consequences of this changing caller behavior in Dutch telecom behemoths KPN listens to its customers. Here are some snippets of this article:

But there is a price to be paid for the flexibility of KPN:

·        all different services like phone calls, SMS´s and mobile internet are now packed together in one package, instead of being calculated separately.

·        the price of this total package is going up (substantially)

·        the prices for smartphones that are purchased at KPN, will rise substantially too, probably up to 40-60% of the gross sales price (i.e. the price without a subscription at a phone company).

o    Now a smartphone is sold for ´free´ or for a token price, in combination with a one or two year subscription at a telecom provider.

I can imagine that KPN takes this measures to save something of their earnings model. But both solutions – raising the price of their mobile services and raising the price of the smartphones that are sold– seem to be doomed.

Concerning the sale of smarthphones: only for the Apple iPhones, I see a possibility to increase the prices, as these are sold exclusively by the large mobile providers, via their flagship stores.

Other popular brands like Samsung, HTC, Blackberry and Nokia are sold at every department store and obscure phone shop and both with or without a subscription. It is impossible to raise these prices, in my opinion.

And concerning the subscription prices for mobile packages? The higher KPN´s prices get, the easier it gets for KPN´s competitors to sell mobile internet for more competitive prices, unless…

In contrary to Eelco Blok, I don’t see much possibility for KPN and other big telco providers to raise prices for mobile services again to a higher level. Rather, in this age of austerity, I see an decrease in smartphone sales and usage, as youngsters (one of the most import user groups in Europe!) will have much less money to spend on smartphones in the coming austere years. The same will be true for companies that are confronted with austerity measures.

Multiscreen IP-tv might be a promising technique, but I have never heard from it yet.

KPN’s wireless digital TV in The Netherlands was, is and will remain a disaster, only suitable for people that really can’t get access to anything else. Therefore it makes sense to look at KPN’s attempts for deploying IP-tv with some healthy distrust.

Getronics has been a bleeder over the last 5 years and I don’t know if any restructuring programme will change this ‘technical ICT consultancy company in distress’ into a healthy company.

It is surprising to see that Germany and Belgium still show ‘strong margin performance’. These countries still might be growth markets for mobile phone usage, but the telco’s will definitely be confronted with the same usage shift from lucrative SMS and telephone calls to usage of free mobile internet services as in The Netherlands and other countries. So please expect also declining results in Germany and Belgium.

Concerning the Consolidated Income Statement

The following Unaudited Consolidated Statement of Income is of course based on KPN data, but slightly edited by me; some cost categories are intentionally left out to make it more concise. Please click the aforementioned link for the complete representation.

(In millions of euro, unless indicated otherwise)	Q3	Q3	% change	YtD	YtD	% change
	2011	2010		2011	2010
Revenues	3256	3335	-2,4%	9727	9954	-2,3%
Other income	7	43		61	55
Revenues and other income	3263	3378	-3,4%	9788	10009	-2,2%
Total operating expenses	2606	2531	3,0%	7675	7530	1,9%
Operating profit [2]	657	847	-22,4%	2113	2479	-14,8%
Profit before income tax	452	520	-13,1%	1562	1745	-10,5%
Income taxes	-84	-114	-26,3%	-189	-425	-55,5%
Profit for the period	368	406	-9,4%	1373	1320	4,0%
Earnings per ordinary share	0,26	0,27	-3,7%	0,93	0,84	10,7%
Weighted average number of shares				1474 mln	1573 mln	-6,3%

Where the revenues and other income were lower by about -2% to -3% in Q3 and YtD, the expenses were higher by about 2% to 3% in Q3 and YtD. This worked like a double whammy on the operating profits, that were slashed in with -22,4% in Q3 and -14.8% this YtD.

Due to a decrease in the costs of financing and especially the income tax, the effect is not so much visible in the profits after taxes in Q3 (-9,4%) and YtD (+4%). Due to a stock purchasing programme, the earnings per share are only down slightly for Q3 and even up by 10.7% YtD.

But please don’t be put to sleep by these last results: KPN’s figures were bad and I don’t see any reason why these figures will be better in Q4. So please hold your horses and see what the future brings.

This article reflects of course my own opinion and cannot be seen as an investment advise.