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

Executives

Hans Sheridan – Acting Head of IR

Eelco Blok – CEO

Carla Smits-Nusteling – CFO

Analysts

Paul Sidney – Credit Suisse

Ann – Joseph Demofete

Matthew Bloxham – Deutsche Bank

Lowder Yumsun – UBS

Hugh McCaffrey – Goldman Sachs

Mondin Singh

Steve Malcolm – Evolution Securities

Jab Thorne – RBS

John Keefe – Edgar Bernstein

Maurice Patrick – Barclays

Luigi Minerva – HSBC

Guy Petty – Macquarie

Dmitri Canneloni [ph] – Citi

Frederic van Daele – Kempen

James Britton – Numera

Koninklijke KPN N.V. (KPN) Q1 2011 Earnings Call April 28, 2011 4:00 PM ET

Operator

Good morning ladies and gentlemen, and welcome to the KPN conference call. (Operator Instructions). I would like to hand over the conference now to Mr. Hans Sheridan, acting Head of Investor Relations. Go ahead please, sir.

Hans Sheridan

Good morning everyone. Seated beside me are Eelco Blok, CEO, and Carla Smits-Nusteling, CFO. We’ll take you through the Q1 results presentation which we published this morning. The presentation, as usual, will be followed by Q&A. let me briefly point out that the Safe Harbor applies to this presentation and that any forward looking statements made in this presentation won’t differ from those already made in the press release. Now I would like to hand over to Eelco Blok.

Eelco Blok

Good morning and welcome to the conference call in which we will present our Q1 2011 results earlier than expected and announce a revised EBITDA outlook. The results will be presented by myself and our CFO, Carla Smits-Nusteling. I will start with the revised outlook and the highlights before Carla takes you through the group financial review. After that I will provide you with an operating review for the Netherlands and international. Before handing it over to you for Q&A I will make a couple of concluding remarks.

Let me start with a summary. Q1 has seen lower than expected revenues in the Netherlands mainly in consumer and business segments. I have decided to accelerate a new strategy to strengthen the Dutch businesses. I’m very pleased to see that Germany and Belgium are firmly on track and we will keep investing in portfolio growth both in Germany and Belgium. The trends in the Dutch businesses and the investments related to the acceleration of our new strategy plans lead to the early publication of our Q1 results and a downward adjustment of 2011 EBITDA outlook. We confirmed the free cash flow outlook proposal of more than €0.85 per share and the continuation of our €1 billion share repurchase program for 2011. I will further explain the trends leading to lower revenues in the Netherlands.

In consumer mobile we have been surprised by the acceleration in usage of free alternatives for SMS and voice. Customer behavior is rapidly changing as a result of smart phones and new applications leading to substitution of SMS and voice by data. This trend is especially recognizable amongst young people and results in strong growth of data usage and substantially less SMS and voice messages. Our bundles are currently not positioned to fully compensate the loss in SMS and voice usage by monetizing data. This trend has a negative impact on SMS and voice revenues.

In our business segment we see increasing price pressure as a result of the competitive market. Customer rationalization is ongoing and we see accelerated migration from high margin traditional services to new services. The key actions focus mainly on consumer. We are making portfolio adjustments in Dutch Telco Wireless on the wide scale. We implement commercial actions on the short term and introduction of new bundles are planned. In the longer term we will move to a data-centric portfolio. I will share more details with you later in this presentation.

Now I will explain the acceleration of the new strategy implementation. Following the accelerated trends in the Dutch businesses I have decided to accelerate the new strategy for the Netherlands and the planning investments to strengthen our businesses. We will invest in holding our marketing positions in consumer mobile and business wire line improving our broadband and TV market share, expanding distribution capability and upgrading our fiber network. Furthermore we will adjust our cost base by an (inaudible) reduction program in the 2011-2015 period for the larger part by outsourcing and off shoring projects. The program comprises 4,000-5,000 (inaudible) which accounts for 20% to 25% of the workforce in the Netherlands. We are confident that all of this will strengthen our market positions in our Dutch businesses. 2011free cash flow is supported by a case contribution resulting from tax facilities which allows KPN to accelerate the investments to strengthen its businesses.

I will now inform you on the outlook for 2011. Two factors require us to lower our EBITDA outlook around 50%. Because of the lower than expected revenues in the Netherlands and the other 50% is driven by the accelerated implementation of the new strategy to strengthen the Dutch businesses. Our revised EBITDA outlook stands at more than 5.3 billion, excluding the 2011 part of the multi-year reorganization costs. CAPEX outlook stays at less than 2 billion including the 100 million additional CAPEX in the Netherlands as we maintain our free cash flow outlook of growing free cash flow defined as growth compared to the 2010 free cash flow of 2.4 billion. Furthermore we remain committed to a dividend share of at least €0.85 and will continue our 1 billion share repurchase program. Let me now hand over to Carla.

Carla Smits-Nusteling

Thank you, Eelco. Good morning everyone. The group results, let me zoom in on the EBITDA at the bottom of the slide since that first is the focus point of our adjustment in the guidance. I would like to give you a view on what happened in the Q1. In the Q1 year on year decline is minus 50, around 50. When we started the year we expected for this quarter a minus of 30 because of investments in growth in our international businesses and those investments came through and we have a very good top line results for that. Next to that we expected flat for the Dutch Telco and flat for the Dutch Telco didn’t work out and the Dutch Telco EBITDA is a minus of 20 instead of flat. Important to say that all of our other business except for the Dutch Telco performed as we expected and where we based the guidance for the full year on.

Our cost reduction programs are successful but as you might recall already had to compensate to severe MTA reductions. For the year 2011 EBITDA level the impact from the MTR reduction this year was around 200 million. That means that the lower revenues from changed customer behavior in mobile and price pressure and rationalization in the business market resulted in a lower EBITDA. We adjust our full year EBITDA not only because of these trends in the Q1 but also to partly accelerate our investment plans resulting from our new strategy. Therefore we will announce this year a market position in the Netherlands.

When I go to group cash slow I would like also to bring the group cash flow in a yearly perspective. The accelerated investment plans in the Netherlands do not only impact the EBITDA but also the CAPEX and although CAPEX guidance stays below the 2 billion on the line we will spend an extra 100 million. For the full year free cash flow we will meet a guidance of growth since lower EBITDA of minus 200 and higher CAPEX of 100 are compensated, but positive proceeds from text facilities of around 300 million.

This allows us to accelerate investments to strengthen the business in the Netherlands. Let’s continue with the financial profile. We have not seen significant changes in the quarter and I would like to stress that our solid financial profile enables us to respond to the changing market conditions that we can strengthen our business in the Netherlands by accelerating our strategic plans and keep growing and investing in our international businesses. I’ll now hand over back to Eelco for the operational review.

Eelco Blok

Thank you, Carla. I will skip the slide and start with the Mobile International Overview by segment at slide 14. Service revenues in Germany were up 1% year on year despite the impact from MTA. The EBITDA market was lower at 38.9% as the result of the regulatory impact and increased commercial efforts focusing on further strengthening the base brand and specifically those cities that are covered by high speed data. In Belgium revenues were impacted by severe MTA regulations and the divestment of the B2B activities at the end of Q1 2010.

Wireless service revenues were down by 5.3% in Q1 however base is expected to have again outperformed competition. The EBITDA margin was slightly lower at 30.6%. Growth at rest of world continued driven by Ortel and our MBNO’s in Spain and France. Ortel Spain has been successfully launched on the new international MBN platform benefitting from much shorter time to market. I will now move on to the operating review of the different segments starting with Germany.

E Plus has continued to perform very well this quarter evidenced by the strong customer additions. We gained 553,000 customers with, again, a particularly strong performance in post-paid net ads of 190,000 in Q1. The total number of customers is now more than 21 million. The regionalization strategy is paying off and we are pleased to see that the mine-base proposition is performing strongly. We have launched high speed data in 12 additional urban areas bringing the total number of areas covered to 21. The focus of up selling additional bundle options is resulting in an encouraging take up of data. Around 38% of mine-based growth ads take a data bundle now. Service revenues increased with 1% despite the severe MTA impact of 53 million. Underlying service revenues corrected for the negative regulatory impact and positive impact from the inside group transfer of multi-connect grew by nearly 8% in Q1. E Plus is relatively more impacted by tariff cuts than its competitors resulting in only a slight expected market share increase year on year to 15.2%.

Next I will focus on Belgium. Base delivered another strong quarter in terms of service revenue with more than 8% underlying growth year on year yet due to a significant MTA impact of 21 million, 12.4%, total reported service revenues were down 50.3% year on year. Base has grown its customer base further through good performance of the renewed and simplified base proposition and focused execution. Commercial high speed data is now launched in 16 larger cities and 17 smaller cities. The speed that is offered after they’re all out is 21.6 megabytes which is the highest available speed in Belgium.

Let’s now move on to the operating review of our basis. In Q1 our basis continued to focus on balancing revenue growth and profitability. Revenues were up 17% year on year to 226 million including a positive currency effect of 2%. Revenues have been at the higher levels starting Q2 2010 as a result of the sustained business focus following the full takeover by KPN at the end of 2009. Consequently we expect the lower year on year growth rates as of Q2 compared to what we have seen in the last quarters. We however expect to see some underlying growth excluding currency effects for full year 2011. EBITDA margin was relatively stable Q on Q at 3.1%. Our basis was able to maintain its top five position in the competitive international voice traffic market.

Let me now go into the Q1 2011 performance of Dutch Telco. Revenues were down 3.1% including a negative impact from regulation of 44 million and the net positives impact from incidentals of 22 million. Revenues were impacted by the continued decline in traditional businesses and lower service revenues due to the changing customer behavior. EBITDA was down by 2.2% year on year including a negative regulatory impact of 9 million and a net positive impact from incidentals of 13 million. Continued cost reductions which were put in place to mitigate regulation were not sufficient to also mitigate lower than expected revenues in consumer wireless following the accelerated changing customer usage trends and increasing pricing pressure and customer rationalization in business. I will discuss these trends in more detail when we get to the specific segments at the next slides.

I will skip a slide and continue with consumer wireless at slide 21. Service revenues were down 8.1% year on year. This was a result of regulatory impact of more than 4%. Our continued focus on high failure customer leads to a declining pre-paid base and this had an impact on service revenues in Q1 2011 of around 2%. Furthermore we have seen an impact on service revenues of 2% from accelerated changing customer behavior which I will further explain on the next slide. This (inaudible) also impacted postdate ARPU. Blended ARPU was relatively stable however this was the result of two effects. Both data ARPU was down due to the changing post data customer usage trends partly offset by a mix of that due to a lower prepaid customer base. The percentage of ARPU that was no voice increased further to 37% in Q1.

Let me further explain the trends we see in consumer wireless and the measures we are taking to mitigate the impact of service revenues. More than 40% of our customers have a smart phone and an increasing number of our customers have a data package. The penetration of smart phones goes hand in hand with an increasing penetration of new apps such as more apps for instant messaging. These apps allow new ways of communication besides SMS and voice and consequently impact SMS and voice service revenues. We are actively addressing these trends and are implementing measures to make our portfolio future proof. Short term actions have been put in place such as proactively calling up customers to lock them into higher flat fees and reduced discounts on data.

Medium term actions consist of significant verbal adjustments such as high quality mobile phone bundles and integrated SMS and instant messaging bundles. We have already introduced key pricing but are planning to take this a step further and lead the market by significantly expanding full year base data pricing. In the longer term we will move our portfolio to a quality base model with quality of service and speed as well. With all of this we are confident that we have developed a set of measures to actively reverse market trends and that we can monetize on future data growth. Moving on to consumer wireline on slide 14. The left side of the slide shows continued growth in TV where we have added 58,000 IPTV ads in Q1 with an average of 5,000 ads per week resulting in an increased in our TV market share to 16%. Approximately 50% of new ads are new broadband customers.

On the right side of the slide a graph is shown where we see continued pressure on our broadband market share but a stable growth in customer base amongst others supported by IPTV growth and the free DSL upgrade. We have continued to roll out fixed line as of Q1 the number of homes passed was 693,000 with now 50,000 KPN clients on fiber. I will continue with Business Wireless. Service revenues have decreased by 7.3% year on year and as a result of a strong regulatory impact, lower voice revenues as a result of pricing pressure, offset by higher market revenues supported by an increase in the number of data customers in our customer base.

We are carefully managing stock but see increasing pressure to invest in the market to maintain our market share. ARPU in Q1 is lower due to pricing pressure, regulation and a mixed effect due to an increasing number of lower ARPU data customers. The next slide shows the performance of Business Wireless. On Q1 2011, Q1 2011 showed a negative year on year revenue comparison impacted by a release of the Firth [ph] connection fees in Q1 2010 which was partly mitigated by the positive contribution from Atlantic Telecom that was acquired in Q4 2010.

We see increased pricing pressure on the wireline business segment and on our traditional services due to customer rationalization. Customers are increasingly migrating from traditional services to new services impacting the business ITN base. Business DSL showed a solid performance in Q1 and the number of BPN connections was relatively stable. As a result of our strong market leading position in the business market we are retaining our market share in a competitive environment. Finally, we will look at Getronics. Revenues at Getronics were broadly stable year on year with revenues in the Netherlands down by .5% and revenues at international by 1.7% including a positive 5.1% currency effect. EBITDA margin was flat year on year supported by net positive incidentals of 9 million.

Electronics market share remained stable while market conditions remained challenging. We have seen encouraging results from off shoring projects which delivered improved quality of service at lower costs. Further off shoring opportunities are being studied to lower the cost base and support the margins. Let me finalize with the concluding remarks. Q1 has seen lower than expected revenues in the Netherlands mainly in the consumer and business segments. The road to a new strategy has made us realize that we need to accelerate on investments plans to strengthen the Dutch Telco business.

I am pleased to see that Germany and Belgium are firmly on track and we will keep investing in possible growth in both Germany and Belgium. The trends in the Dutch Telco business and related necessary investments require us to adjust the 2011 EBITDA outlook downwards. We confirm our free cash flow outlook, our dividend proposal of more than 0.85 per share and continue our 1 billion share repurchase program for 2011. Now I would like to hand over to you for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions.) Okay first question is from Paul Sidney, Credit Suisse. Go on please, sir.

Paul Sidney – Credit Suisse

Thank you. I’ve just got two questions for you. Firstly, the trend of increased substitution of voice and SMS from data, is this indicative, do you think, of what we’re seeing in the whole Dutch market or do you think it’s your bundles are perhaps less well positioned than the competition? Just secondly, just in the business market, could you just understand where the increased competition is coming from, which of your competitors are perhaps pushing a bit harder, just to understand that a bit better. Thank you.

Eelco Blok

On the accelerated customer behavior change is driven on the one hand by the increased penetration of smart phones and the increased penetration of the new applications, especially in the young segment, and as you know we have a dedicated brand focusing on this part of the market, the hybrid, and there we have seen already for a certain time this trend but this trend is expanding to our other brands and the expansion is increasing. That’s what we see happening with our customer base. One of the remedies I already presented to you is the change of our bundles from the current voice/SMS data bundles to more integrated bundles. In the business market in general there is an increased pressure from the full competition so it’s not a specific competitor that is increasing the pressure on KPN it’s a general trend.

Paul Sidney – Credit Suisse

Okay, thank you.

Operator

The next question is from Joseph Demofete [ph], it’s Ann. Go ahead please, ma’am.

Ann – Joseph Demofete

Thank you very much. Good morning, two questions if I may. The first one is related to cash flow. Considering that free cash flow would be down 3 million this year if it wasn’t for the tax benefit and that this tax benefit is going to go down to about 100 million if I understand correctly beyond 2011 can you give us any directional trend for the expected free cash flow beyond 2011 and any indication about showing the reiteration going beyond 2011. Then my second question is related to your market share in the broadband segment, consumer broadband. You are saying you expected it to be flat but if I look at the numbers published by Siegel earlier this week they have reported significant (inaudible). Can you help me reconcile this please? Thank you.

Carla Smits-Nusteling

Okay, let me start with the follow up question. The measures we take this year in totaling 300 million for 100 million are related to the trend, the adjustment in EBITDA but the other 200 million are we going to spend to invest in a market position. By doing that, and that’s not only in consumer wireless it’s also in our broadband market and in our business market and in the networks in distribution and IT, we do this because we expect that we benefit in the coming years and that we better now start doing it than wait until next year. So that in itself should have a positive trend going forward. Related to the shareholder remuneration we don’t expect changes because of what we see today and so we’re confident that we can get the shareholders industry leading pay out as you’ve seen us doing over the years.

Eelco Blok

Then the question on the broadband market share; we see continued pressure on our broadband market share but a stable broadband customer base. A part of the additional investments will be related to this part of our business. We will accelerate upgrade of our DSL network and we will increase the investments in our portfolio and on customer service. We believe that we, with these additional investments, can change the trend on broadband.

Ann – Joseph Demofete

Thank you very much.

Operator

The next question is from Matthew Bloxham, go ahead please sir.

Matthew Bloxham – Deutsche Bank

Good morning, a couple of questions. One just on the mobile for Germany because obviously you’re pushing quite heavily on the Smartphone strategy in Germany. I’m just wondering what lessons you need or will kind of need to apply to that market as Smartphone penetration increases, and then secondly, on the domestic business I see that you’re stepping up Vedia Cell [ph] again. We’ve seen a few twists and turns in the Viggis Whole [ph] strategy. Could you just kind of give us a little bit more color on exactly what you’re going to be doing with Vedia Cell going forward? Thanks.

Eelco Blok

The impact on Germany will be limited in our view and driven by the fact that we have already introduced in Germany the integrated flat fee bundles on the one hand and yes, the penetration of smart phones is increasing but still not on the same level as in the Netherlands and the lessons learned in the Netherlands will be of course used in Germany and Belgium. Then on DSL in the Netherlands we have decided as part of the acceleration of our strategy plan to increase the investments in DSL making use of the latest technologies that are coming commercially available such as bonding, factoring and later – probably next year – phantoming and that will give us the opportunity to increase the speed of our corporate network and be able to offer better services to our end users to be able to close the gap between corporate and fiber.

Matthew Bloxham – Deutsche Bank

So on the DSL does that – is it more about kind of improving the capability of DSL where you’ve already got it or would you be looking to maybe extend the footprint of DSL?

Eelco Blok

We have already more than 95% coverage of DSL. It’s about implementing, vectoring and phantoming and using bondings are double tested to air and it’s increasing the number of street cabinets connected to fiber so we decrease the loop links and can offer higher speeds to the end users.

Matthew Bloxham – Deutsche Bank

Okay, great. Thank you.

Operator

The next question is from Mrs. Lowder Yumsun [ph] UBS, go ahead please.

Lowder Yumsun – UBS

Good morning everyone. I just had a couple of questions on wireless and then one more follow-up. Wireless, I wondered if you could separate out the consumer wireless SMS revenue trends from the overall data numbers for us, and then secondly on wireless I wondered in light of today’s comments whether there was anything you could say on the comparison of a customer lifetime value of a Smartphone in the Netherlands versus a normal, traditional phone customer. And then lastly, on 2012 is it fair to expect that you might introduce guidance to 2012 at the upcoming investor day or do you think at this stage there’s enough uncertainty that you might delay that for the time being. Thanks very much.

Eelco Blok

Sorry, can you repeat the last question?

Lowder Yumsun – UBS

Yes, I was just wondering whether traditionally KPN has given more medium term guidance, should we expect that to be introduced at the upcoming investor day or given uncertainty levels increasing will we have to wait for 2012 guidance a little bit later in the year? Thank you.

Carla Smits-Nusteling

Okay, let me start with your question about the value of the Smartphone, the customer life value, if you said in the market a group integrated bundle we think it’s a very profitable model. What we see today is that we have introduced bundles for the past few years because we all expected that if people have a phone to call and use it somewhere around their ear. As much if they want to send a text message and when data was introduced on top of these propositions we put a bundle of around ten Euros to include also mobile internet.

What we now see especially in the youngster segment where it started is that calling and using voice to experience your Smartphone is no longer in fashion, as they say, and that the youngsters communicate explicitly with the mobile data. So they use IM’s and Facebook and those sort of apps as well as free apps for SMS like watch app and there what we see is that our business model doesn’t fit to that. This what we call when we want to change, data-centric bundles that we put this behavior which the customer wants to experience in the center and on top of that you have voice and SMS but not the other way around. Your other question, can we expect 2012 or midterm outlook, we are in the process of finalizing the plans and we will come back on the 10th of May with all the strategic details and our ambitions for the future.

Eelco Blok

And the question on SMS, let’s give you where we are. As I said we will introduce integrated bundles in the mobile business but that will mean significant bundle adjustments and then it doesn’t matter anymore what the percentage of SMS data or voice is. What do we see happening currently in the market? Last year, March, we have seen a 10% growth on SMS year on year and currently we see a 10% decline year on year in March on SMS and a percentage is increasing. That’s the trend we are seeing currently in the Netherlands and accelerating over the last couple of months.

Lowder Yumsun – UBS

That’s very useful, thank you.

Operator

The next question is from Hugh McCaffrey, Goldman Sachs. Go ahead please.

Hugh McCaffrey – Goldman Sachs

Good morning, guys. I’ve got two questions please. Firstly, how do you expect that (inaudible) to be phased through and how many years, including this year, and secondly if the miss in this quarter was near 20 million versus your expectations and you clearly expect that to accelerate, what is causing you to expect that acceleration through the rest of the year? Thank you.

Eelco Blok

The question on the account phasing, it will be in line with our head count reduction of the last couple of years, that’s the best forecast we can give right now. So the 4-5,000 will be reduced in the period 2011-2015.

Carla Smits-Nusteling

For your second question, I didn’t understand it very well but I think I’ve got it closely and otherwise elaborate more on it. The minus 20 how does it extrapolate for the year. Because we see an acceleration and we think it’s good to take into account a minus of 100 for the full year. The other 100 has nothing to do with this trend. It is investing in our market position to make our business in the Netherlands stronger. So the minus 200 in EBITDA a minus of 100 related to the trend we see in the Q1 and a minus 100 to make our business stronger.

Hugh McCaffrey – Goldman Sachs

Okay, that’s very clear, thank you.

Operator

The next question is from Mr. Mondin Singh [ph], Universe, go on please, sir.

Mondin Singh

Hi, thank you. The question really is around this rapid change in behavior you’re referring to. You’ve been told that selling bundles for some time, this is not a new trend, smart phones are not new. Why have things suddenly changed so rapidly that you need to change your guidance so quickly after issuing it and why is your visibility so low, I’m just trying to understand the speed at which things seem to have changed.

Eelco Blok

We have seen during the Q1 this year an acceleration of the penetration of the new apps and the users of that application. Of course we have taken into account the trend of increased penetration of smart phones and user applications but we were surprised in the Q1 with the acceleration of the penetration of the apps replacing voice and SMS and when we analyzed that trend and we concluded that the cost reductions we have put in place were not large enough to mitigate these additional negative trends we had to make the decision to invest additionally in the Netherlands to improve our position in the Netherlands and reduce the EBITDA guidance.

Mondin Singh

Okay, a quick follow up if you don’t mind. Do you see this as a generalized industry trend because what you’re saying seems to be slightly at odds with what we’re seeing in other markets so far, or do you think it will just happen at different places at different times? And in relation to that, or do you think it’s more closely related to the way you’ve structured your bundles and pricing in Netherlands and it’s impacting you more than its impacting other people?

Eelco Blok

It’s a combination of both. What we see happening in the Netherlands in our customer base I’m convinced that will happen around the globe. Of course we are one of the mitigating actions is making changes to our bundles and that’s also one of the drivers of this negative trend. So it’s a combination.

Mondin Singh

Thank you.

Operator

The next question is from Steve Malcolm, Evolution Securities. Go ahead please.

Steve Malcolm – Evolution Securities

Yeah, hi there, I’ll go for a couple. Well the first is in two parts and the second is a single question. First of all, on leverage, I mean obviously you’re either (inaudible) your leverage is going to go up. Can you just sort of remind us of your overall thoughts on leveraging, and related to that can you maybe give us an idea of how much it would cost you in total if you were to take out the remainder of Reg E-fiver, how much you would have to spend, what debt you’d take on and how that might impact your overall debt thinking all around those leverage targets? Thank you. And then just to come back to a previous question on BDSL, I think what you’re saying is the speed-price equation doesn’t really work at the moment and that’s backed up with the fact that only another 1,000 FTTC customers in the quarter. Can you give us an idea where you need to get to with the new investments on speed and price to make that a more compelling proposition to your customers? Thank you very much.

Carla Smits-Nusteling

Okay let me start with commenting on your leverage question about the EBITDA. Given this adjustment our leverage, the EBITDA will we expect be impacted by .1 for the year at the highest and the fiber if we would consolidate it at that point in time also by .1.

Steve Malcolm – Evolution Securities

It would only add, if you consolidated, would that include the cost of buying out the Reg-E-bar[ph] estate, the debt taken on and everything else.

Carla Smits-Nusteling

It includes as if we would consolidate it completely end of the year but as you know we will not consolidate it end of the year and we don’t expect consolidation to take place before 2014.

Steve Malcolm – Evolution Securities

No, I understand that Carla, thank you, but it doesn’t by implication include what it might cost you to take a Reg-E-bar, is that right, it’s based on 100% consolidation?

Carla Smits-Nusteling

Yes, exactly.

Steve Malcolm – Evolution Securities

Okay, thank you.

Eelco Blok

On the BDSL the bonding technology gives us the opportunity with limited investment to double the curve to speed then factoring will be the next technology that we will implement already this year we’ll again gives us the opportunity to on average double the capacity and hopefully around mid-next year phantoming will be available and that will give us an additional opportunity to increase the speed with 30-40% but it all depends on the look length but in our network you can take these increases as a ballpark figure.

Steve Malcolm – Evolution Securities

So given your average BDSL speeds of 25-30 meg at the moment are you saying the same price point you need to get to 60-70? How do we interpret that?

Eelco Blok

Of course we need some additional investment but those are limited and included in the 100 million Carla mentioned. And on price points to be able to offer multi-room HDTV and be competitive with the cable operators on the current price level we need to make these additional investments to our BDSL network so we can really change the game in broadband the next two years.

Steve Malcolm – Evolution Securities

Okay, that’s great, but just to clarify you’re saying the price points remain broadly the same but the speed needs to go up by 2-times-plus to get you to where you want to be versus the cable operators?

Eelco Blok

Yes.

Steve Malcolm – Evolution Securities

Okay, thank you very much.

Operator

Our next question is from Jab Thorne, RBS, go ahead please sir.

Jab Thorne – RBS

I actually had my questions answered already, thank you, so none from here.

Operator

Then the next question is from John Keefe, Edgar Bernstein, go ahead please, sir.

John Keefe – Edgar Bernstein

Thank you, I have two questions please. Firstly can you give us some more color on the number of Smartphone sales that you’ve seen in Germany please, and then of those what percentage went to current E-Plus customers and what percentage were new customers to E-Plus? And then secondly can you just let us know what percentage of the margin decline in Germany would you attribute to the increase in SAC’s please.

Eelco Blok

35% of the new ads are buying a smart phone in Germany, currently and the market decline in Germany is driven by the increased marketing spending in the areas where we have opened up the mobile data services.

John Keefe – Edgar Bernstein

Thank you and of the new customers taking smart phones in E-Plus, what percentage of those are new customers to E-Plus?

Carla Smits-Nusteling

We will look that up for you and come back to that.

John Keefe – Edgar Bernstein

Thank you.

Operator

The next question is from Maurice Patrick, Barclays, go ahead please sir.

Maurice Patrick – Barclays

Hi guys, I’ve got a question about the application side, are there critical mass of smart phones driving this acceleration of the apps to allow all of this stuff, is there any particular catalyst that’s driven the reason for the acceleration and am I right in understanding you are limiting it to the usage of the moment or do you see it expanding beyond that? Thanks.

Eelco Blok

Currently we see expansion beyond the youth segment and that is exactly what is happening in the Netherlands. It started in the early adult group, especially in the high customers but now it’s expanding rapidly to the customers in KPN brand and other age groups so I can give my own – I can use my own example. My kids are using the Bing application on the Blackberry and the What’s Up application on the iPhone and they push me to also start Binging and downloading the What’s Up application because it’s not cool any more to do SMS, you need to use a messenger functionality and that’s currently happening in the Netherlands. It’s expanding very fast outside the youth group. In the Netherlands we have the highest penetration world-wide of the What’s Up application.

Maurice Patrick – Barclays

Great, thank you.

Operator

Our next question is from Luigi Minerva from HSBC, go ahead.

Luigi Minerva – HSBC

Yes good morning, just to follow up on this, on the wireless trend in the Netherlands. I guess on the cannibalization of the traditional services is hardly new. We experience that in every market but still we see very healthy service revenue numbers in the Scandinavian market or in the US, likewise if we look at the Netherlands it looks like BotiPhone [ph] is not experiencing the same trends as you are despite having a higher penetration of market phones. So can you maybe give us a bit more color on exactly what applications your customer base is really using and what makes KPN Netherland’s Wireless business so different from the others, and more details on that would be also on the timing of tier data plans introduction. Can you maybe clarify when KPN introduced tier data plans in the Netherlands when BotiPhone did it and if you think you were late in your introduction. Thank you.

Eelco Blok

So I will start with the last question. We already introduced the tier pricing last year and it will be fully implemented for all our brands in the Q2 of this year and the bundle adjustments will be introduced in the second half of this year. On the SMS trend it may be driven by the What’s Up application, as I said earlier in the call, last year March year on year we saw a 10% increase of the SMS traffic and revenue and this year, March, year on year is minus 10. The minus is increasing so that’s what happening in our customer base and I’m convinced that others will see the same in their customer base sooner or later.

Luigi Minerva – HSBC

So to clarify, just really down to this instant messaging application which has an unusually high penetration in your customer base in the Netherlands?

Carla Smits-Nusteling

Can I comment on this? If you look to an average arpshoot [ph] of the post-paid customer in the group we’re talking about bundles consist of about 20 Euros for voice bundle, 10 Euros on top of that for SMS and 10 Euros on data. Then what happens if you go out of bundles, if you have more voice minutes or more SMS minutes are two increases. From what we see if we compare to bills, because that’s what we did – we took a bill from March this year and we took a bill for instance from September last year, we see the following: that increase in usage isn’t going out of the tiers so that data still stays around the €10. Of course the flat fee for voice and (inaudible) stays more or less the same but then you miss the out of bundle revenues. And when we say that we want to change our bundle propositions towards the data, we want to set data at center of this ARPU and on top of that at far as SMS, and now today it’s the other way around.

And I believe that’s why you will see going forward that some operators have more impact on this trend than others, because I think that well, this trend will be seen in many countries because it’s in terms of people like to use their mobile internet.

Luigi Minerva – HSBC

Okay, thank you.

Operator

(Operator instructions). The next question is from Guy Petty, Macquarie. Go ahead please, sir.

Guy Petty – Macquarie

Yeah, good morning, all. Just a couple of follow-ups. When you were reviewing your sort of reinvestment plans and the extra €200 million that you’re going to spend, was there anything else that you looked at that you decided not to do because of either speed or timing? And secondly on the VDSL strategy, are you signaling that actually there’s no enthusiasm for pure fiber and you need to get a more immediate product out there? And sort of building on what Steve said, is it the fact that you just need to increase speeds almost regardless at the same price points that you’re currently selling that is the key message you’ve got to articulate to consumers? Thank you.

Eelco Blok

The €200 million we presented this morning is part of our new strategy plan. We believe the plan that we will present on May 10th is a complete plan, and as we (inaudible) make decisions during the year, we’ve gone through building the plans to do things, not that we believe we need to do. And as we said, given where we are we have accelerated the implementation of a part of that plan because we want to strengthen as fast as possible our business in the Netherlands.

On fiber, one of the changes we will make the coming quarters is a well, the change in our fiber portfolio because our current portfolio is not very competitive to the cable. So that will be changed in the second half of this part, and I’m convinced that when we have changed this portfolio, the fiber portfolio, that the enthusiasm will be there for fiber products.

Guy Petty – Macquarie

Thank you.

Operator

The next question is from Mr. Dmitri Canneloni [ph], Citi. Go ahead please, sir.

Dmitri Canneloni [ph] – Citi

Good morning, thank you for taking the questions. My first question is on the, when you talk about re-centering the bundles in mobile towards more mobile data, how confident are you that you can increase the price for mobile data? My second question is just coming back to fiber, I just wanted to know if it’s still this minimum target of 250,000 active (inaudible) customers by 2012? Is it still valued at that or do you want to push more in the DSL? Thank you. And just actually on the last thing you mentioned, when you say you want to create more enthusiasm, should we just expect that just means you want to drop prices a bit on your fiber triple-play offers? Thank you.

Eelco Blok

On fiber there’s no change in the objectives we have set, and the changes in the fiber product will not only be about prices but also about functionality, blended with HD quality and things like that. We believe that it is possible when we introduce integrated bundles to increase the revenue of the data part in a bundle. So that’s part of our plan and I’m convinced that we will be able to introduce the bundles without seeing a decrease in our market share in the Netherlands.

Operator

The next question is from Frederic can Daele with Kempen. Go ahead please, sir.

Frederic van Daele – Kempen

Yes, good morning, all. Two questions. First I had a question on the fixed line competitive environment in Holland. Also there is a bit of a deterioration in Q1 – to what exsecond has cable sharpened their offering at the moment and to what exsecond have their price points come down? That’s the first question, and the second question, I was wondering what type of OPEX investments are you actually going to make with this €100 million. Are you going to beef up your marketing budget or is it purely that you’re going to hire more engineers to support the PDSL plans and the roll-outs?

Eelco Blok

On the OPEX it will be a mixed bag of measures we will start introducing, and I’m not going to give you any details because that’s part of our strategy and we have made the decision to start really investing in a broad way in the Netherlands in quality, in marketing, in improving our customer centers. We will increase the number of shops, a whole broad range of actions will be executed the next couple of months.

On the fixed line competition, it’s always with ups and downs. Sometimes the cable companies have a special offer, then tele too comes up with an offer, so there are ups and downs but no major changes in the price points. A little step down but it’s a minimal step down.

Frederic van Daele – Kempen

Okay, thanks.

Operator

The next question is from James Britton, Numera. Go ahead please.

James Britton – Numera

Yeah, thank you very much. Can I start off, have you clarified what level out of bundle revenues constitute in your customer base, perhaps in pre-paying contract as well if you’ve got that breakdown. And then secondly, of the €100 million that you’re going to be investing to improve your Dutch market positions this year, how is that broken down? What element is for the subsidies, what element is for marketing and so on? Thanks.

Carla Smits-Nusteling

Your first question, what we miss in revenues in the Q1 is around €8 million to €10 million and that immediately goes into the bottom line. Your second question, “Can you give me more details on the €100 million?” as Eelco just described it’s a broad range of measures so it includes, and I will give you some more examples and then you will understand that it’s many pieces together. It is increasing our distribution footprint; it’s improving our market share in mobile; it is putting some more sales force in the business market we’re at to protect business market challenges, so our investments in the IP will be able also to very quickly adapt propositions from mobile on the IP side and more and more and more. But we will come back on the 10th of May with all the details you’re looking for.

James Britton – Numera

Okay, thanks very much. Can I just ask a follow-up to the first question? Can you tell me what the total out of bundle revenues is for your Dutch business so that we can obviously get a feeling for what is really at risk here? And perhaps also, (inaudible) the youth segment as really bringing down their spend. What percentage of revenue do you generate from that youth segment?

Carla Smits-Nusteling

The first one I’m sorry but we don’t disclose that one. And the second one, even more sorry because we don’t disclose information on that as well. But I think it’s… What I can say is that we indicate youth segment because it started there and it’s not isolated to the youth segment. So Eelco described the example of what he experienced himself with his children and so it’s not isolated to the youth segment.

James Britton – Numera

Okay, thank you.

Eelco Blok

I would like to come back on one open question and that’s the smartphone question on Germany – 35% of the new adds take a smartphone, and the majority of the new customers at the base rent take a smartphone. That’s it.

Thank you all for your time. For any further questions please contact investor relations.

Operator

Thank you for attending and you may disconnect your line now.

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: Koninklijke KPN's CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts