KKPNY Stock | Koninklijke KPN NV Q3 2021 Earnings Call

Thank you, Rhinos, and good afternoon everyone. Today's results show another important proof point of our strategic progress. Mass market service revenues grew again in the third quarter, supporting service revenue growth for the group as a whole. And this time, growth was visible in all our mass market segments, most notably in the SME segment. We delivered service revenue growth in SME ahead of our commitment to stabilize the four-year out, and this is an important milestone for us as it provides confidence to deliver the turnaround for the entire business segment during our current strategic period. We've seen strong momentum of mobile inflow in recent quarters, and this accelerated further to 67,000 net adds across consumer and business this quarter. Consumer mobile service revenues continue to grow, supported by strong performance of our unlimited propositions. And with solid adjusted EBITDA growth in the third quarter and a strong year-to-date free cash flow, we remain on track and confident that we will deliver on our full year 2021 outlook. At the second quarter results, we announced the 200 million share buyback, reflecting our confidence in the successful execution of our strategy, and we've nearly completed this share buyback program, which we see as the first step to structurally return additional capital to our shareholders in the coming years. We continue to make good progress against the strategic and financial ambitions of our strategy 'Accelerate to Grow,' and we remain confident that the strategy will create long-term sustainable value for all our stakeholders.

We rolled out fiber to 93,000 households in the third quarter, a figure slightly lower than other quarters as a result of the August holiday period. This year we've rolled out to 313,000 homes, and over the last 12 months we have added 424,000 homes. We continue to successfully add new fiber customers and upgrade existing copper customers in fiber areas. This will be a key driver for sustainable revenue growth. The joint venture Glassport is now fully up and running and has recently started its wholesale broadband access services for wholesale providers. Together with Glassport, we're going to jointly reach 80% of Dutch households by the end of 2026, and after reaching that point, capex will come down to a lower, more sustainable level. After returning to growth in the second quarter, we've been able to show continued growth in mobile service revenues this quarter, and this was mainly driven by an acceleration of the commercial performance of the last quarter and the higher ARPU level. Fixed mobile revenues increased 3.5%, and total consumer service revenues grew slightly by 2 million euros. Customer satisfaction remains one of our top priorities, and the progress in the last two quarters has been encouraging. Following a few tougher quarters, it's been pleasing to see our efforts in this area are paying off. NPS recovered strongly to plus 15, and this is a reflection of the success of our attractive KPN and Simyo lineup, the quality of our products and services, and the customer journey improvements in several areas such as customers moving into new homes, complementary fiber upgrades of copper customers in fiber areas, and the new KPN Wi-Fi Manager we introduced for our customers.

Now let's take a deeper look into our consumer KPIs. Broadband net adds were again relatively stable this quarter. Within the mix, we see a positive inflow on our KPN brand. This was supported by solid fiber inflow, which level was seasonally lower at 36,000 fiber households but fully in line with our expectations. Fiber ARPU remains significantly higher compared to copper due to the take-up of higher speeds, more value-added services, and more SIMs per household. And importantly, for the first time, our fiber service revenue growth was higher than the copper decline. We've delivered 27,000 postpaid net adds in the third quarter in consumer markets, and together with 1.7% higher postpaid ARPU, this led to mobile service revenue growth of 2.4%.

Let's now move to the B2B segments. This year we started to run the business segment by focusing on three distinct customer segments: SME, LCE, and Tailored Solutions. At our strategy update last November, we committed to stabilization of SME service revenues by the end of this year, and we've delivered on that commitment well ahead of plan, driven by solid commercial momentum in both broadband and mobile. This was the main driver for the improvement in the business service revenue trend to a decline of 2.7% year-on-year, compared to a level of around minus 5% in previous quarters. The performance in LCE and Tailored Solutions was aligned with our expectations, and as we highlighted earlier, it will take us some more time than SME to deliver the turnaround there. Business NPS remained at a positive level of plus 3, as customers continue to value KPN for the stability, reliability, and quality of our networks and services.

Let's dive a little bit deeper into the drivers of the SME turnaround. Our strong focus on acquiring new and retaining existing customers by migrating to KPN 1 is paying off with solid base trends. This in turn provides a strong platform to increase density of product take-up by our customers as we leverage up- and cross-sell opportunities. Looking at the revenue development of the three product groups within SME, we can conclude the following: we see healthy broadband base developments, also supported by fiber and self-employed inflow, and this resulted in strong growth of broadband and network service revenues. The mobile market remains competitive, resulting in continued price pressure. However, strong inflow of new mobile customers, among others driven by unlimited, is now offsetting that effect, and this led to stabilization of mobile service revenues in SME in the third quarter, an improving trend compared to minus 11% in Q1 and minus 4% in Q2. And finally, in fixed voice, the pace of the decline here moderated from around minus 20% to approximately minus 10%, and this is partly due to the annualization of the phase-out of ICN-2 last year, which reduced the year-on-year headwinds. All in all, good performance in SME, which gives me confidence that we will also deliver a similar turnaround in LCE and Tailored Solutions, the other parts of B2B.

In wholesale, revenues increased by more than 7% in the third quarter, supported by our successful open access policy. In mobile, we added 33,000 customers, and that's making total postpaid growth for the group, including consumer and B2B, of 100,000 this quarter. Wholesale providers continue to strongly outperform the two incumbents in terms of broadband base growth. In this third quarter, 18,000 broadband lines were added, reflecting the attractive access terms we offer to service providers. Recently, we entered into several long-term agreements with some of the larger broadband service providers in the Dutch market. ACM is currently conducting its fixed access review, and we strongly believe that we are operating a highly competitive market, and with our open wholesale access model, we guarantee sufficient room for wholesale providers to grow and to compete. And customers in the Dutch market get high-quality services, can easily switch, and choose from a wide range of service providers that offer value for money. Now over to Chris for our financial performance.

Yeah, always to start with your second question. Of course, our strategy is not only focused on fiber but also on broadband in general. The more fiber we roll out, the better it gets because we strengthen our weakest areas first. Because on one hand, we have low quality on copper; on the other hand, we have high quality on copper in certain areas, especially in the largest cities we can do 200 to 500 megabits per household via double copper line. So what we now saw is that for the first time, we were able to more than compensate the loss on copper by fiber. And by pushing this further and by focusing even more on our copper steering as well, we think in the quarters to come we will have to grow in broadband, both in business and in the customers, by the strategy. So there is a lag there. There's a churn on copper on one hand and there's growth from fiber on the other end, and it's our focus area to run that balance and optimize that balance better along the road. So that's what our whole strategy is about. So last quarter, or a couple of quarters ago, we were still in decline; the copper loss was much higher than the fiber gain. Now it's more or less break-even, and on the revenue side we do better. So yeah, step by step we improve this run rate. I would say on mass market growth rate, I would say before I hand over to Chris that it's also a step-by-step run rate improvement here. And we identified mass market as the most important focus point for this year because that's where 90% of our EBITDA comes from: consumer, wholesale, and SME. And we, looking at the run rate, we saw the growth coming in SME, but I'm of course happy that it's really visible now. And I would say that yeah, it's our job to run the run rate in a better way in the quarters to come as well.

The mass market, I mean, we lost some, we gained something on interconnect revenues, you know, on interconnect mobile calls people calling like 0800 cover numbers, and at the same time due to the pandemic we lost roaming revenues, without arguing, and that's of course a much higher margin business. So I would argue that revenue-wise has been flat to slightly negative, EBITDA margin probably slightly highly negative, perhaps a bit of cost benefits to cover it, but the revenue has not been that much affected by the pandemic. If you look at the coming quarters, if I look at where we are today, and the upcoming comparisons, I think we are well set to grow well into next year, so we'll show year-on-year growth numbers well into next year simply looking at the current run rate of service revenues, the underlying growth rate, and then the upcoming comparables. As we said, Q4 will be a bit funny because, for example, there is a revenue correction that we booked. It was an unfortunate event in Q4 last year and a correction Q1 this year. For example, I think Q4 expect mass market service revenue growth to be about 0.3 to 0.4 simply because of that comparison, and going back to 2% or even a bit higher in Q1 simply because of those technicalities. But the underlying growth probably around 1.5% to 2% in the coming two quarters, and I can see it growing well into next year.

Yes, I will do the first question. Um, yeah, so we migrated all our customers to KPN One in the SME segment. That was not done quickly but took too long, as far as I'm concerned, by the way, but we're there now. And by doing that, migrating them to the future-proof portfolio, enabling ourselves to sell up again to that customer base, now makes it possible and doable to grow in the SME segment. So the dynamics in LC are completely different, although the idea is the same. In LC we will migrate the larger customers to a new environment, and once they're there we're in a much better shape to upsell and make our business grow. It's not that we had to start on that; we already migrated 80% of our LCE base to that new environment. And the difference between how we will follow the last 20% compared to SME is that we found out that the last 20% is the most difficult part, and the first 20% is the most easy part to migrate when it comes to customers. So on LC we are following a more delicate migration scheme to avoid that we really move customers against their wishes to a new kind of platform. So the dynamics are different. We're the largest workspace provider in the Netherlands, so there's a lot of workspace for large customers in that base. And it's not only migrating customers but also really moving them up to a better, more protected, higher quality, safer, faster service. So maybe it will take some more time, but we're super focused on not losing too much business there when we have to migrate the last 20%. But already 80% has been done on LC. Um, yeah, Conrad, on the share buyback, as you pointed out correctly, the 2020-21 program is nearly finished. I guess it will happen probably in the coming weeks. That standard 2021 program, as in this year we effectively return all of the free cash flow we generate this year, we return to our shareholders. We said this is a structural part of our shareholder remuneration policy. That means we're going to continue this. It doesn't mean we're going to announce another one every quarter, but we have to announce the 2021 version. The 2022 one will announce an event. It is a continuous and constant part of our reward program in which we take free cash flow into account, our balance sheet into account, with the objective to make it a structural, repetitive part of our shareholder reward. And we'll design it like that. The exact number, I have to keep the spirits up, tension high. We'll let you know when we get there. Probably be communicated at the year results, and we keep the outlook for next year.

Well, when it comes to COVID effect on our top line, we are not benefiting that much from COVID. We think there's a lot more to upgrade to do in the Netherlands than we currently see. This is the Netherlands. So when we started on fiber, people started to buy 50 megabits. Currently 100 is more the average. So we don't think that during the pandemic people asked for an upgrade and later in time they will ask for a downgrade again. Once you're up on the hundred or 200 and you found out the difference, people will not move back. By the way, we also priced our speed on fiber more attractively last quarter because we really tried to motivate our customers to do an upgrade. But we didn't see a real relation between the pandemic kicking in and upgrades being asked. It's a more delicate line we see there. So we think, now we roll out fiber and we move to HGSpon which is enabling us to upgrade to 10 gigabits per household, we think there's far more potential in upgrading our customers in the years to come. And on B2B, well, we announced that we are going to stabilize our SME business second half of this year. So we're a bit ahead of the track with slight growth in that segment, so that's good. And of course now the jury is out: first of all, keep the growth in SME, and secondly how to inflect the other parts of that B2B business, and when. We aim for that and we're ready for an update on that when we release our annual figures next year. And for us that of course is a super important milestone because then we have full top line growing again. But we're confident we're going to do it, but we don't want to overpromise now. It's the first quarter we see the SME market growing, so first keep that under control, and then soon we will come back to you on how to inflect the other part of B2B.

Yes, Luigi. Last year when we announced our strategic plan we were fully aware of the fact that we were increasing our capex to a level of between 1.1 and 1.2 related to the rollout of more fiber in the Netherlands. And with that capex envelope we think we stretch the level of investments in the Netherlands, and it's a huge amount of capex for a country like the Netherlands. What we expect is that after 2026, when we're done – because then we rolled out 80% and we expect other initiatives to cover the other 20% in the Netherlands, so the whole Netherlands is connected to fiber – then it makes sense to put in the program that we will step down significantly on capex. Now in our industry there's always a promise of a short-term step-up in capex and a longer-term step-down, and we are aware of that as well. So it is for us super important that we stick to the program and we keep our promise. 5G is something we are really very prudent on. There's an auction coming up next year. We already rolled out the network; the network is 5G ready on 5000 sites which covers the Netherlands. But we're not trigger happy to start rolling out a more dense network, thousands of sites in the Netherlands, because we are really working there business case based. So we have some field trials out there, and we're scanning all over the world what's happening on 5G. It's super fantastic what one can do on 5G on certain locations, but it really should pay back before we do the investments we've seen in other countries. Many investments in such doubtful business cases – we really are prudent there. And so I don't think we will start to work on a network that's covering 5G 3.5 gigahertz spectrum speeds through the Netherlands. It really is going to be business case by business case.

Yeah, thanks for your question. Good to hear you speak a bit Dutch as well nowadays. Um, when it comes to wholesale agreements, I mean, we have these long-term relationships with several service providers out there in the Dutch market, not only T-Mobile but a lot more. And the reason why we have a good relationship is that we try to optimize the business model on both sides. So we make it doable for the smaller service providers to plug in on one or two locations in the Netherlands, and via that we can serve them on broadband through the whole country, which makes it far more efficient on their side, and for us a bit better as well because it's on the active layer of the network and therefore generating a bit more margin. So it's a win-win kind of situation. And I think that's why – it's not only a storyline we tell to convince our regulator that everything is working in the Dutch market, but that open network model, that open access network model, is really working quite well for both our customers and ourselves. Um, yeah, the copper switch-off and the migration to fiber in those areas is of course very important for us. We've been talking further on that topic for four years now. Also there we use ACM's guidelines to announce switch-off from certain areas three years in advance, if I'm not mistaken. But also these areas are not new; they are older areas, so already five to eight years old in some cases. So it's known that we have to at the end switch off the legacy network. It used to be tougher, but we changed our fiber model a bit. So when we roll out fiber, we're more focusing on migrating our customer base to fiber in the early stage, sell up and migrate, complementary fiber upgrades earlier in the process than we did in the past to make that migration possible. And also the other providers, the wholesale providers, most of them are following that because it's also of course important to sell fiber in those areas. So we did a switch-off of I think you're right, 40,000 lines, something like that. That was more of a pilot in a couple of areas. We're very satisfied that we really switched off the whole MDF and the number exchange in those areas. And in 2023 the real program kicks off; then we are really going to disconnect several areas with a large base of copper. And that is important because of the cost related to the copper network. The service tickets on copper are much higher than on fiber; it's more expensive to maintain a copper network in general in the Netherlands than fiber. So when it comes to efficiency, it's important to do the copper switch-off. And we really will start a real program in 2023. And your point on forced migrations: not really. I mean, we learned from these copper pilot discoveries – very important to start early, communicate early and frequently to customers. If you communicate early on that it is going to happen, are very clear and repeat that, customers eventually will move from copper to fiber. And as you know, we've got an offer where for the same speed from copper to fiber, you don't pay extra for the same speed. So for a client, actually, if he or she wants to stay at that current speed level, it's no additional cost. Just to make sure, there are always customers who do not respond; then you have to chase and make sure you connect with them. It's not the unwillingness of the customer; it's sometimes that customers don't pick up the phone, don't read their emails on time. So it's more about pointing them to it and then having the last bunch of customers that you actually have to personally connect, go door to door, rather than forced migration. It's about making sure you connect with customers on time, and it's all about preparation. And we see if you prepare well and early on, those transitions actually go pretty smooth. And where you are late or later, you've got much more work to do to migrate those customers.

No, they're multi-year contracts. They vary by customer, but they tend to be multi-year contracts.

Yeah, so on B2B, what I mentioned when I said the last 20% is difficult – there are always customers that just don't want us to touch anything. And sometimes they're right, by the way. So that's always the toughest part of the whole migration program. It doesn't mean that we're going to push our business additionally down, so I don't see the trend worsening related to the migration in B2B. We're not super happy with the current developments; it's our aim to inflect to positive growth. So the whole migration is about improving the run rate at the end and keep it where it is in the short term. So I don't see the trend worsening. On Vodafone and the outages in the Dutch market, there is an old habit of not making jokes about computational failures because before you know it, it bites you in the neck. But the only thing I can say is this is super important to invest in quality of your network, and that's what we are doing. So we're focused on our own, and we decided to upgrade our core mobile network, to migrate it to Ericsson. We're investing in our core and access networks intensively. And we're focused on that. But we never think that we can benefit from bad news on competition. That is a negative business model and not good for the business in general, I would say.