Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Ad Scheepbouwer – Chairman and CEO

Carla Smits-Nusteling – CFO

Eelco Blok – Head, International Division

Baptiest Coopmans – Head, Dutch Telcom

Title: Royal KPN NV (KPN) Q2 2010 Earnings Conference Call July 27, 2010 9:00 AM ET

Unidentified Company Speaker

Good afternoon everyone, thank you for coming over. Warm welcome to all of you here. For those of you who are with (inaudible) webcast. On the platform here today, I have brought the CEO Ad Scheepbouwer, the CFO Carla Smits-Nusteling and head of the international division Eelco Blok, as well as Baptiest Coopmans, heading the Dutch Telcom business.

Before I give the floor to the speakers today, I would like to point out to you that we have a lot of topics to discuss today. They are all in the deck you have in front of you and also on the presentation available via our website. But we made a selection of the slides that we would like to discuss with you today to also include the (inaudible) topics that we wanted to share with you.

Finally, let me briefly point out to you that the Safe Harbor slides of this presentation, any forward-looking statements made here today do not differ from those already made in the press release this morning.

I would like to now handover to Ad Scheepbouwer.

Ad Scheepbouwer

Good afternoon. (inaudible) of 2010, I will take you through the highlights, Carla will take you through the financials, Eelco through international and Baptiest through the Dutch business and I will do future (ph) later.

If we take the highlights then, I think that we continue to have (inaudible) focus. Topline is slightly improving, the reduction this quarter of 1% if you take out the business that we sold and we expect that for the next couple of quarters we have some growth and then topline, I mean slowly moving in the right direction but the main focus has been on cost, customer value and market shares.

In the Dutch Telco, the cost has lead to another pretty good quarter. If we look at international Mobile International, then you see that we started well. Again in Germany we continue to grow well and in Belgium, these gross numbers are combined (inaudible) profitability numbers.

Eelco will take you through the German spectrum and so we think we have got a pretty good deal there and we got mobile data will be a growth in not only the Netherlands but also particularly in Germany and in Belgium and we have of course (inaudible) the outlook again for 2010 and 2011. The items that we gave in April call and the interim dividend is EUR0.27.

On the financial side, EUR3.354 million, down 1.7% and that’s if you take out the businesses (inaudible) 1%. EBITDA, up nearly 5%, CapEx still in line with the (ph) second quarter, free cash flow EUR707 million, EUR35 million year-to-date and that’s up EUR200 million (ph) and last year for the six months. Earnings per share EUR0.29, up 32%. As you can see we continue to also look out (inaudible) shareholders, we have 58% completed 1 billion share buyback, the final dividend of EUR0.46 per share (inaudible) in April. Total cash through shareholder returns in the first half year is up 8% year-on-year and the interim dividend is up 17% compared to last year.

Now going to the outlook, in the second half, we expect higher revenues than the second half last year. Actually in this (inaudible) the EBITDA growth was EUR300 million, where we said last year that (inaudible) we will expect it to be that for one third in the first half and two thirds in the second half. It turns out to be still a 50% in the first half and we have of course, and actually moving the business (inaudible) value market share with customers that (inaudible) balancing the profitability with market shares, but our (inaudible) that market shares stay stable or grow and (inaudible) we have a slight erosion (inaudible) and we will try and correct that in the near future.

If we look at 2011, we said EBITDA and free cash flow and dividend will continue to grow and we have flow of EUR0.85 for 2011. Well, for the remainder of 2010, the revenues will be in line with last year, the 5.5 is there. We will spend less EUR2 billion on CapEx and free cash flow will be at least EUR2.4 billion and our dividend for this year is meant to be EUR0.80.

That’s what I would like to say. So let’s (inaudible) and to conclude the presentation. So I will now handover to Carla.

Carla Smits-Nusteling

Thank you, good afternoon everyone. If we flip to the first one, the group results, revenue topline Ad just already mentioned minus 1.7%, which is improving trend compared to the first quarter. If we take out some businesses sold (inaudible) this year and last year like S&T and part of Getronics and minor ones, the revenue decline actually is a bit better with minus 1% and in line (ph), we see still decline in the Dutch Telco as well as Getronics and we see substantial growth in our American (inaudible) iBasis and profitable growth in international units.

Operating expenses decline is, well actually we are more or less are used to, for, well I think at least last eight quarters and debt (ph) on those reports, of course, (inaudible) profit like operating profit, profit before tax, profit after tax earnings per share, all substantially up year-over-year if you look through the second quarter as well as the first half year.

EBITDA supported by some incidentals (inaudible) may conclude my remark for the first half year just over the EUR150 million and Ad referred already to a former guidance we gave for is at the one third first half year to the second half year, we are a bit ahead in mobile international at this moment in time.

If we continue with the group cash flow, next overview, if you look at the second quarter and you compare all the lines (inaudible) where they are, well any highlights to mention to you actually in the second quarter (inaudible) to bring to your attention and that is that last year in the second quarter we had a tax (inaudible) EUR16 million; for the rest is more or less the same pattern as we see last year.

Year-to-date we are ahead. You might recall in the first quarter that we made actually a good start and that means that after the first half year we were 250 ahead of last year. And of course, this is also supported by lower CapEx to debt towards the end of the year has to do more with phasing within the year. We are on track to meet the full year guidance of 2.4.

Regulatory, we have received the final proposals as well for the Netherlands and for Belgium. Belgium by the way was hardly changed compared to the original. For the Netherlands, they absolutely were some changes. First of all, the tariffs were lower at the starting point (inaudible) start. Well, I can for you as we sit here, of course, to give you a few for the financial impact, this is also what you look for and the maximum exposure, which we expect from these decisions, I would like to take you through some numbers and I would like to stress that if we did the maximum, so we have of course not calculated through that one might make an impact (inaudible) and increase the number of minutes and we have a natural health in fixed or those underlying things, which will meet (ph) the actual next year especially in Netherlands a little bit different. But having said that over the last year’s, the impact on the revenue side has been about EUR100 million and on the EBITDA side EUR20 million to EUR50 million and that’s almost of course a negative impact.

If we look through next year, what we expect is that the revenue impact could significantly improve and could even be as high as double, although and this important EBITDA will not double and we think where we spend today that will be a maximum of EUR50 million depending again to be a bit lower depending on the natural hedge we have in fixed. For Belgium, I would like to give you two numbers, one for the second half year for 2010 and also the impact to which we expect for 2011. The 2010 approximately impact on revenue is EUR30 million, EBITDA EUR20 million. 2011, the impact will be around EUR50 million on revenues, EUR35 million on EBITDA.

Just before Ad confirm the outlook and (inaudible) which I gave in this slide are, we took that into account when we confirmed the outlook again. Two special topics before I close with the financial profile, one is pension update, the second one is the collective labor agreement we have negotiated in Netherlands. Pension to start off with, what we are seeing in the Netherlands is that if markets (inaudible) the interest rate and impact together made that the average coverage rate was below the threshold of 105% and that for us is a magic thresholds (inaudible) based on agreements in place. That means we are going to make extra cash contribution to the pension fund. For this year the impact is, well, rather limited, that will be around EUR11 million in the fourth quarter. As for the coming years, and that all depends on assumptions that the coverage will stay below, the 105%, we have agreed on the cap for a five year period. So that’s more or less 70 a year and to contribute to the pension fund.

Analysts

Labor agreement, in the manner we have to – well, collective labor agreements (inaudible) people working in the former Getronics organization and one for the KPN, people although we now are altogether at KPN, there is still a difference here in conditions for KPN people, smaller increase in sellers both fixed as well as variable and also employees are going to pay a little bit more for their pensions. Getronics, we didn’t agree on structural increase and instead we agreed on the onetime payment of EUR300 per employee this year.

So let me finish with group financial profile, my last slide. I think I would draw your attention to the top left slide where it shows that the net debt, the blue line, increased this quarter from EUR11.4 million to EUR12.1 million and that of course results on the right to a little bit higher ratio, net debt of EBITDA, that is for the largest part temporary difference and this quarter we paid out more to the shareholders than on average over all the quarters and that is because of the final dividend payments of EUR600 million to EUR700 million next to an acceleration of the share buybacks (inaudible) and we paid the license in Germany and that altogether was only partially offset by the (inaudible) company.

For the redemption profile, left on the bottom, first upcoming redemption is in October this year, that’s already (inaudible) cash flow on our balance sheet as you are used to with the prudent financing that we have in place. And for the next thing I would like to highlight is that this quarter we don’t have any confirmation of Standard and Poor’s that our rating is still is BBB+ for the stable outlook.

Average maturity is 6.6 and average interest rate is 5.4, about that percentage and credit facility, which we also have in place of $1.5 billion, we haven’t drawn on that one.

This concludes the financial review. I would like now to handover to Eelco for international.

Eelco Blok

Good afternoon. Thank you, Carla. I would like to start with the highlights of the second quarter in Mobile International. In June, E-Plus moved back to service revenue growth with record high margin of 43% and we acquired a unique combination of spectrum at low cost compared to the other operators in Germany. In Belgium, BASE continues to outperform the market, addresses the growth. We see continued growth and iBasis is firmly back on tech.

It has all been achieved through relentless focus on our key priorities and disciplined execution. Let’s now move to Belgium and go into some details of the Belgium performance. BASE is leveraging other strong quarter in terms of service revenues with 6% – 6.6% year-over-year growth driven by the regional focus and the BASE brand continues its uptake at high valued customers.

Total revenues of Belgium were slightly down due to the divestment of the B2B activities at the end of last quarter. The possibility (ph) reached record high margin of 40%, (inaudible) supported by release of $11 million and without this release EBITDA margin is still strong at close to 35%. Our service revenue market share is estimated to have increased by about 1% for year-on-year to over 18% and we expect to continue to outperform in the Belgium market.

Postpaid net adds amounted to 10,000 in Q2 following the continued traction of the simplified BASE portfolio and the strength of distribution and partnerships with our regional focus. Prepaid net adds were driven by continued growth in wholesale and recently independently verified, the BASE brand continues to be considered as the leading value for money operator with high awareness and high customer satisfaction in Belgium market.

Let’s move onto the review of the German activities. In the second quarter, the first quarter increase is commercial efforts we started in Q1 2010 to support the launch of Mein BASE. The theme in Germany has established regional organizations making analysis on a city-by-city level and the first quarter results are now starting to show within key targeted cities in Germany. We gained 300,000 net adds in Q2 with a strong improvement in postpaid net adds to 51,000 and the total customer base now stands at 19.6 million.

Mein BASE has been highly visible and recent data shows that new customers have the highest satisfaction in the German mobile market. We’re also very encouraged by the good uptake we have seen in postpaid gross adds at Mein BASE specifically through our owned captive channels. Third is revenues were up 2% year-on-year and improving trends compared to Q1 2010 and we expect this trends to continue in the next quarter.

In Q2 2010, the margin reached a record high of 43% and in the second half of 2010 we expect a margin of around 40% and in the medium term we expect an EBITDA margin in the upper end of the rise 35% to 40%. Increased cost from commercial activities around the re-launch of Mein BASE and the implementation of the regionalization have been offset by optimizing the right BASE channels and the renewed focus on cost and clearly this has paid off.

With this slide, I would like to give you a better understanding of how we position Mein BASE and explain to you how we execute the regionalization. The re-launch of Mein BASE is centered around four objectives, being grow postpaid adds, keep subsidies low, strengthen the sales via our owned sales channels and to reduce complexity both for our customers and ourselves. We have various marketing initiatives ranging from national TV ads to plans for locally targeting specific customer groups.

One example is our Ambassador program where we recruit students who recommend Mein BASE to family and friends and we have recently done this in specific cities and we could clearly see the growth there in our local shops in that specific city more than doubled following the launch of this program. Regionalization focuses on identifying areas that have different characteristics from the process point of view and a difference between the regions are based on a few key elements. Network coverage, point of sale coverage and the productivity of the sales channels and E-Plus postpaid subscriber share in that specific region.

On the slide you’ll find an example of how we look into opportunities for improving sales, sales in cities have two sales channels, one productivity of sales channels and is specific (inaudible) and combined with network coverage and possible upgrades we had found sales channels in certain areas, relocate them and paying start to improve productivity.

Before we dive into some of these speedy topics in a minute, let’s conclude this part of the review with rest of world. All operations contributed to growth in rest of world and we continue our focus on further stimulating growth in the markets where we operate. Customer numbers in the Spain grew to some 400,000 in Q2 likely driven by the Simyo brand due to the renegotiation of the house network conditions in Spain we expect profitability in Spain to further improve in the next coming quarters.

Simyo was also the main contributor of revenue growth in France in Q2 and Ortel was launched in France in March and signed several agreements as cultural distribution channels leading to an impressive uptake of more than 1000 customers per day. Overall the customer number in France total was announced on 200,000 and similar to Spain we focused on a continuous improving the house network conditions.

Ortel has shown growth in Belgium, Germany and the Netherlands and we expect to grow Ortel further by expanding to Spain before the end of this year. Let me now move onto the strategic topic highlighting our challenger strategy in few of where we stand today. The challenger business model comes down to making clear choices of our services we want to offer to which customers and the timing thereof.

We segment markets with our multi brand approach combined with lending and distribution partnerships and we base our service offering on customer demand. We also have operational partnerships for network rollout and maintenance with such agreements we benefit from leveraging the capabilities of partners who are best-in-class in their field of expertise. Another very important element of challenger strategy is that Mobile International is a smart follower even when it comes to technology. By investing later in the cycle and improving technologies we have lower risk and considerable lower cost. Result is that Mobile International starts offering new services like mobile data, a bit later than your average incumbent which we can offer the services much cheaper because we had a structurally lower cost to share.

This strategy has served as well in the past whereby we use Belgium as our test market and we had refined our strategy with regionalization and the re-launch of the BASE brand in both Belgium and Germany and we are now getting ready to start exploiting the opportunity that mobile data brings us. Before taking you in some more details about mobile data opportunity let me now briefly touch open the outcome of the German spectrum marketing.

With the opportunity from data around the corner, it’s very important to have sufficient network capacity. Being a smart following having sufficient capacity in standardized bands is key for E-Plus. We are very pleased with the outcome of the auction as we have the highest capacity in the most standard spectrum for mobile data now acquired and now holds most spectrum in standardized bands in general and we have doubled our capacity and now holds about a quarter of the total spectrum in the German mobile market.

We have not obtained any 800 Megahertz spectrum which would have been interesting for national coverage if the price was right. We now focus on our target regions and to best supportability of using a part of our 900 Megahertz spectrum for coverage in the less than populated areas. Let’s now go into some more detail. Looking at the outcome of the auction in more detail we conclude that E-Plus has acquired a unique combination of spectrum perfectly suiting our challenger strategy.

Unique combination specifically centered around the four blocks in a row of 2.1 Gigahertz. These four blocks provides the highest possible capacity while we can stick to our existing rollout plans. The spectrum has also been acquired at low cost compared to similar spectrum options in France and India. The acquired 2.1 Gigahertz spectrum is particularly suited for mobile data as it is the most standard frequency for mobile data. The 2.1 Gigahertz further more provides flexibility in use of technology so we can easily equate to for instance LTE when it is required.

Another very important element is that we can make use of our current 1800 network infrastructure and that we initially don’t have to build additional locations for coverage. Equally important the handsets are also rightly available in this specific spectrum band. Lastly, we don’t have any rollout obligations so we can concentrate on upgrade our current network and further expanding our data network in the regions where our customers are.

E-Plus and BASE has the right capabilities to benefit from the mobile data opportunity to which I referred earlier. Our cost to serve is lower than that of any other operator in the markets where we operate due to our partnerships, specific customer focus and use of standardized technologies. To further support our low cost to serve, we have now expanded our partnerships with ZTE and our other suppliers for the rollout of mobile data in both Germany and Belgium. E-Plus has also in the mean time obtained additional efficient spectrum and therefore we are able to accelerate the rollout of mobile data results materially changing our CapEx guidance.

We can provide data services at low cost and consequently remain the most profitable number three operator. Combined to the availability of affordable smartphones, that are accessible to the mass market we believe that we can continue to grow our market share to 20% to 25% and we are happy to say that we our initiatives we will start offering high speed mobile data services at the end of the year in Belgium and a few quarters later in Germany.

The challenger strategy has so far being focusing on voice and SMS. We firmly believe that we can continue to grow our voice and SMS revenues via fixed mobile substitution via our wholesale partners and via our regionalization that’s improved performance in low market share regions. We now see demands for mobile data services picking up. This leads to a material growth opportunity for our international business and is becoming an integral part of our challenger strategy.

Likely voice mobile data can be a substitution for the fixed data connection and several of our partners have already shown interest in exploring the opportunities that mobile data brings. Region specific targeting will be key with data whereby we first deploy services in those regions where we have a strong (inaudible) voice followed by other regions based on our network rollout.

In the medium term, mobile data as a percentage of service revenue at both BASE and T-Plus is expected to grow from low and mid-single digits to market efforts. And the reason past we have been working on putting everything in place to accelerate data as it drives growth for Mobile International. On the network side, we have completed negotiations with our infrastructure partners and suppliers, realigned our rollout services partners and vendors for exhilarating the data network upgrade to HSPA+ and agreed a clear ultimate with very tight milestones with all our partners.

The next step is to execute on the accelerated rollout plan of increasing the number of HSPA sites from the 200 to-date to 12,000 by 2012. In line with the challenger strategy thinking we are opened to partnerships to potentially benefit from lower cost and on the commercial side our objectives is to make mobile data more affordable and accessible to a wide group of consumers by offering a range of smartphones and proposition that match this data needs and process (ph).

We are set partnerships and develop a regional action plan and we further continue to explore additional partnerships. Today I also want to point out a significant opportunity that we have with machine-to-machine services. In Q2, we signed a strategic partnerships with Jasper Wireless, an independent machine-to-machine platform provider that provides a highly flexible global machine-to-machine solution. Machine-to-machine is a scale business and by leveraging this independent machine-to-machine platform with various leading network operators that cover all parts of the world we can provide a true global solution at low costs. An important element of the strategic partnership is to exchange leads with the other operators that make use of the platform with KPN representing Europe. At KPN, we have adopted a Group wide strategy for Machine-to-Machine with local teams and local markets and a pan-European teams and services, large clients as we find a solution covering multiple markets. We are already seeing the first success of this new approach with the contract wins for pan-European and global solutions for Garmin, Konica Minolta, and Pandigital.

Let me now move on to the review of iBasis. In the second quarter, iBasis showed a strong improvement in both its operational and financial performance. We can clearly see the impact of the turnaround by the new management that has further emphasized to focus on Belgium revenue growth with profitability. Revenues were 237 million, up 34% in Q2, of which 4 million was supported by currency effects.

EBITDA reached 9 million, which is an improvement of 50% year-on-year. We increased traction of iBasis as turnaround is supported by more stability and focus, following the 100% takeover by KPN. In the second quarter, iBasis captured a record number of minutes in the history of the company with six days in the all time top 10 traffic data. This has also resulted in an improved market share.

To conclude, we are very pleased with the performance in the second quarter. In Germany, E-Plus moved back in service revenue growth with a record high margin and we acquired a unique combination of spectrum at low costs. In Belgium, BASE continued to outperform the markets and rest of the world we see continued growth and iBasis is firmly back on track.

All the key elements have an important place. It’s now all about exclusive focusing on from continued profitable growth based on our challenger strategy, leveraging the outcome of the German spectrum option together with our partners, the network rollout, and adding mobile data as the next area of growth in the Belgium and German market.

We have proven in the past that we are among the best of that and we believe that we can meet all the targets that we have set for Germany and Belgium.

Thank you. Let me now hand over to Baptiest.

Baptiest Coopmans

Good afternoon to all of you. Eelco, thank you very much. The Dutch Telco; back in 2008, we set ourselves the aim to strengthen the position of the Dutch Telco. This strategy is based on six pillars. This strategy is reflected on this slide. Since then, we’ve improved the profitability of the Netherlands. We’ve carefully managed market share, we’ve improved the quality for our customers, we’ve improved the productivity of the operator and we’ve invested in the future.

Today, I would like to take you through the Q2 results and I would like to address four specific themes. One, I would like to say a bit more about our managing for value strategy, I would like to elaborate on the cost reduction programs and our consumer wireline strategy, I would like to talk some words about the growth – mobile data growth we see for the future.

The second quarter, we’re pretty happy with the second quarter results. The revenues were down 4.3%, but this includes the 2.2 negative impacts from regulation. We experienced continuous pressure on traditional business and we see the economic situations still impacting our business segment.

The EBITDA is stable versus a very strong comparable last year. The graph shows that we compared to a very strong second quarter last year and then the EBITDA is stable, based on the continuous cost reduction programs, based on our managing for value strategy and benefiting from some incidentals. EBITDA is now up 2 points up to 52% EBITDA margin, sole margin.

The next chart is a chart reflecting the three big segments. The consumer revenues were impacted by decrease in voice wireline and by the regulation in wireless. EBITDA is strong with 29%. And while we managed the market for value, we still have manageable net line losses with 45,000 this quarter. In the business segment, we saw a satisfactory performance in wireless, but continues negative strengths in wireline. And as I mentioned, difficult economic situation (inaudible) EBITDA margin of 32%.

In wholesale operations, we continued to cost reduction and we improved operational excellence. The EBITDA is pulled (ph) up again around 59%. In the set, you will find some detailed slides with operational reviews. I would only like to touch upon one and then skip the other.

This is the consumer wireless segment. And in the consumer wireless segment, we see a revenue decline of 6% and this has been – yes, okay, I don’t have it back here, but it’s back there. The revenues declined 6%. It has been impacted by regulation for 4.6%. What I also would like to remind you that last year we bought a company called debitel and there’s also a small 0.8 effect of the migration of customer bases in it and then at least a small minus.

The reason for this small minus is because we’ve been focusing on high value customers. We’ve been focusing on high value customers leading to lower subscriber acquisition cost, leading to lower net ads, but also to higher ARPU. The strategy has led to soon thrash the consumer (inaudible) in market share, which I would like to address later in my presentation.

The next slide is the managing for value, which is key slide 30 in your pack. My first important theme, on the slide, you see two triangles. Now with these triangles, we would like to explain how we look at our strategy managing for value. As you know, we are the market leader with market shares between 45% and 70% in all segments.

The first triangle shows how we look at the profitability of the market as a whole. We are carefully balancing our own market share, the subscriber acquisition costs that go into the whole markets and the price level.

In the second triangle, we reflect the individual value of an individual customer. And here we are carefully managing multi-brand propositions, volume to right distribution channel and detailed customer lifecycle management. This way, we look at total market value, our market share, especially also the value of the individual customers. And this has been a big growth driver in our EBITDA.

On the right side of this slide, you see the EBITDA for Dutch Telco inflecting from 2007 till to date. I could have stated this that the market value is stable, that our television sale had growth and that we see slightly eroding in our broadband shares and in our wireless share which we will address.

From examples of the actions we take to manage the market for value, you see three columns. The first column is about pricing. We have step-by-step increased prices in several propositions and we’ve been able over the years to maintain if not grow all average revenues per user in our customer base, both in broadband, traditional voice, wireless, and television, you see our average revenue per user is stable if not lower, a very important driver of our profitability.

The second driver is spending subscriber acquisition costs down. Second column shows the subscriber acquisition cost of the mobile part of the Dutch Telco over the last five years and you see the subscriber acquisition costs go down. In a way, sometimes if we think it’s necessary to include the subscriber acquisition cost again and if the markets can take it, (inaudible) again. May I remind you that in these figures is now a big uptake of smartphones. We are able to sell smartphones and still our subscriber acquisition cost tends to go down.

The third element, the third column is our distribution power. We strongly believe that we can manage our business for value not only with multiple brands, but also with a strong distribution footprint. This quarter we decided to buy a third independent retail chain called t for telecom. We bought 80 shops we will convert 55 to our own shops, including our footprints up to 213 shops and is giving us the opportunity to manage the market for value even more in the future.

My second strategic theme, continuous cost reduction. We’ve taken out hundreds of millions of costs over the last year. We talk about areas like procurement, consultancy and for lease network, IP. I talked about the subscriber acquisition cost. But an important driver was also first time right quality. Meanwhile, we have also invested in new services. Our television numbers, mobile data numbers, fiber optic and IP connectivity services.

How do we look at this going forward? We still see opportunity to further reduce costs. We use best-in-class benchmarking across the world and we now see new areas for our company like network rationalization, billing systems, server delivery streets, centralization, and simplification in our Dutch organization. And we believe that as an extra out of the human cost savings is possible.

My third theme is our way we look at the consumer wireline business and the strategy going forward. As presented before, we have six tables. The first one is that in the long run, fiber-to-the-home can deliver the superior service. Secondly, if you talk about competing in the medium term, is all about the television proposition. Thirdly, that for this television proposition, our corporate infrastructure still is competitive. Fourthly, we believe in an open excess model, maximizing return on investment. We know that fiber-to-the-home rollout and it takes time, which means that in the long run, we will play with a mix of infrastructures. And around these six key beliefs, we set our strategy.

Our strategy is to maintain and to secure a mid-term position, exploiting Copper and secure a long-term position with fiber-to-the-home. We are upgrading and expanding our VDSL network and we are upgrading and accelerating IPTV, while rolling out fiber. And meanwhile we truly exploit, unique and differentiating assets, we at Dutch Telco has versus the competition being a strong distribution power, multi-brands, and extensive fixed mobile database and very low entry model for television and our operational excellence. And we believe that this combination is a unique and effective set of strategies.

Where are we now on Copper? We’re now at 80% IPTV coverage and we have 70% HDTV coverage in the Netherlands. This quarter, we’ve started national television for IPTV and we see our first of those net adds accelerating up to 4000 a week at the end of the quarter. We now have 1.1 million television customers. We are on track to go for 1.5 million television customers at the end of 2012. We will continue to upgrade our network leading to 88% IPTV coverage, beginning next year.

We have aligned fiber-to-the-home and VDSL as an approach since we have learned that the consumer experience is similar. And by doing it the same way, we can use national marketing model. Meanwhile, our growth and base is stable, supported by this IPTV net adds. And that brings me to fiber-to-the-home.

The Reggefiber joint venture makes good progress rolling out fiber. We now have reached 570,000 homes in the Netherlands. Off these homes, 186,000 homes are actually activated. 85 are controlled, 93% own Reggefiber and we at KPN own 41% of it. Off this 570,000 homes, 288,000 are ready to be reached with a KPN retail fiber offer and there we have activated 26,000 homes. Regional differences in penetration levels and differences in effective sales months are experienced.

We’ve had some operational issues in the past. And at the sales side, we now learn how important customer call filing is and that notes all our sales methods we are taking. We have adjusted our fiber approach at the end of the quarter. We’ve reintroduced new pricing models and new propositions. We’ve improved the area selection going forward. And we’ve decided in a fiber area to start fully deploy full sales channels of KPN instead of dedicated fiber channel and we will further optimize the delivery process.

We carefully managed the rollout of fiber through Reggefiber. And it’s important for you to notice that while new areas are built and penetration starts in these areas, previous areas go to next site. So the figures in terms of penetration you see is always a weighted average of new areas and old areas.

We still target 1.1 million to 1.3 million homes by the end of 2012. We will rollout fiber in the areas where we are convinced that in an end states we can get to 60% penetration. And taking into account, a weighted average of penetration and the uptake over the years, we will have a minimum of 250,000 active customers on this fiber network by the end of 2012.

As stated, we’ve had use of pricing and propositions not only on fiber, but also on Copper. We believe that it’s a buildup of all kind of propositions. What have we done? The (inaudible) we now have lower lease prices and we’ve changed from all inclusion bundle for fiber into basic bundles with add-ons. And for instance, unlimited voice is now an add-on instead of five of the bundle. With this, we have more competitive price bundles and we still believe that the ARPU will remain stable going forward.

My final and fourth theme is the growth of mobile data. We experienced a very strong uptake of mobile data. 50% of all phones leaving our shops today is a smartphone, Internet-enabled with the data contract. We see that the average data use per phone is going up. But we also experienced that the number of applications on a phone is growing, which means, that for the future, we will have exponential data and signaling traffic growth.

We at KPN will continue to invest in a high-quality network, in superior customer experience, best in capacity, best in active traffic controls, and we will start pricing differentiation in order to monetize this growth.

Looking at our network, we have the highest number of 3G sites in the Netherlands. We are upgrading the connection to the site with fiber and we have additional traffic control too in place. All this will only leads to limited additional CapEx into building from a high quality base.

We started actively informing Dutch customers that in the future that flexi bundles will change into pay-per-volume bundles in order to monetize the data growth. We will go with further differentiation in packages, different speeds and different using packages.

Concluding, I’m pretty happy with the Q2 results of the Dutch Telco. We continue to increase profitability by using our managing for value strategy. Our cost reductions are on track, whilst investing in new service. The continuous upgrades we do in our corporate network supports a stable broadband base and supports the ambition to grow to 1.5 million television customers at the end of 2012.

The adjusted fiber approach leads to 1.1 million to 1.3 million homes with a minimum of 250,000 homes at the end of 2012. We see mobile data as a growth opportunity, our network is ready, and we are actively informing customers that as they use more, they have to pay more.

And, with that, I would like to leave you and hand over to Ad. Thank you very much.

Ad Scheepbouwer

Okay, just to conclude, Getronics. Getronics continues to have top line pressure that we see in the third quarter that income – revenues were down 10% and that was basically the Netherlands 12% and international more or else stable. The Netherlands is as a market lagging behind to the rest of Europe, it’s probably because the recession is far to sooner than later in the Netherlands (inaudible) with Getronics and with the other major operators they all have similar revenue numbers.

We do however expect that in the second half this will significantly change, because last year, Q3 and Q4 were particularly down in the expected current revenue trends for the first half, slightly improved in the second half, have a maybe still a (inaudible) of revenue, but in more percentages in the second half. EBITDA in the second quarter increased to 40 million, the margin year-to-date is the same and we still sync that in the 8% for the whole year as we fully expect an improved margin in the second half.

So to conclude, where are we? We are watching cost, customer value, and market shares, those are the guardian lights to make sure that we retain our market position and we improve our earnings. Top line growth is perking up a little bit. The multi-brand and partner approaches is still there and is working.

We have a number of real growth areas in IPTV, fiber, and particularly also mobile data. Eelco told you all about spectrum option, Carla told you the financial framework, while we’re still well within our own (inaudible) limits, sustainable cash flow is there and will continue to be there and our returns I think are excellent and the outlook is confirmed for this year and next year and the dividend has been confirmed.

Now, it’s over to you for question.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Royal KPN NV Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts