KPN’s 4Q results FY 2010 – Improving profitability

KPN presented their results for the fourth quarter and full year 2010 on Wednesday 26 January. Main highlights:

• ‘Back to Growth’ strategy 2008-2010 delivered good results, despite economic headwinds and regulation. Continued increase in profitability at Dutch Telco. Higher service revenue growth in Germany at strong margin. 2010 dividend per share of EUR 0.80, EUR 1bn share repurchase program of 2010 completed
• Outlook 2011 confirmed, new EUR 1bn share repurchase program for 2011

A high level summary of the results obtained and the strategy hot topics for 2011 can be found bellow.

Results

To begin with, the market expectations for Q4 of 2010. These include a turnover of EUR 3.41 billion, an EBITDA of EUR 1.37 billion, a net profit of approximately EUR 480 million and earnings per share of 30 cents. This would add up to annual sales of EUR 13.40 billion, annual EBITDA of EUR 5.48 billion, an EUR 1.82 billion annual profit and earnings per share of 1.16 euros, which implies that the internal KPN targets are virtually met.
At the Q3 results in October, KPN hinted at several aspects of the anticipated Q4 report:

• Capital gains on property are nil. A gain on the sale of towers of EUR 32 million has been shifted to Q1 of 2011. In addition, a deposit is made into the pension fund.
• There was a stronger influence of MTA tariff cuts in Belgium, where the rate was lowered by almost 50 percent, from 10.41 to 5.6 cents per minute. In Germany, the influence is limited, because the reduction (from 7.14 to 3.33 cents) wasn’t introduced until December 1. In the Netherlands the rate (currently 4.2 cents) will be lowered per 1 September 2011 to 2.7 per cent and as of 1 September 2012 to 1.2 cents.
• Getronics 2010 EBITDA margin is set to rise to 8 percent. E-Plus’ margin was targeted between 35 and 40 percent.
• Launch of Ortel in Spain and fast mobile Internet by E-Plus (both in November). There have been 36 t for telecom stores converted to KPN brands.
• The EIB loan for Reggefiber must have been received.
• Improved uptake of FTTH, although the December frost period was a setback.

Further, a layoff in the Netherlands (250 jobs) is expected, as well as an outsourcing project, already delayed several times. The acquisition of Atlantic Telecom has been announced near the end of December.

Strategy

The period covered by the ‘Back to Growth’ plan (2008-2010) has ended and by April Eelco Blok will succeed Ad Scheepbouwer as the new CEO. The question is therefore mainly: will KPN come with a new strategic plan at this point? And for which period?. Issues that the new strategy likely will be focused on include:

• Fiber. Cable companies are the biggest competitors and the deployment of FTTH will have to accelerate.
• VDSL is constructed as an interim, applied from the street cabinet level. By mid 2011 the number thus reached will add 600,000 homes compared to the current amount of 464,000. In addition, ADSL2 + equipment in existing plants (MDF locations) is replaced by VDSL2 equipment.
• TV. KPN will also seek to limit competition from cable by looking at its TV offerings. The question is what exactly KPN will be doing in terms of innovation, such as connected TV.
• LTE. Trials have been announced for 2011. The leading cable companies (Ziggo4 = Ziggo + UPC) have a license, while the auction of lower band spectrum will likely take place late 2011 or early 2012. They might go with an interim MVNO. It remains to be seen whether offering a quad-play will be successful.
• Getronics. Will it remains part of KPN’s core business, or will Eelco Blok put the streamlined company up for sale?
• Last but not least, the results. The market outlook for 2011 is currently with a turnover of EUR 13.36 billion and an EBITDA of EUR 5.42 billion, representing a slight decrease compared to 2010. In 2012, according to market expectations, there will be a marginal increase to an EUR 13.44 billion revenue and EBITDA of EUR 5.43 billion.