KPN Q3 2021 Results (Call transcript)

Event transcript

KPN Q3 2021 Results

Tuesday, 26 October 2021

DISCLAIMER

The information contained in this event transcript is a textual representation of the applicable webcast 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 webcast. In no way does Koninklijke KPN N.V. ("KPN") assume any responsibility for any investment or other decisions made based upon the information provided in this event transcript, and KPN advises to use all available information about the company, the stock and the market in any investment or other decision. In particular, the transcript should be regarded in its entire context, including the setting of the webcast in which it was brought and the presentation or any other documents used or published in relation thereto.

KPN reserves the right to make changes to this document and its content without obligation to notify any person of such changes

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KPN Q3 2021 Results	1	26 October 2021

Operator: Good day, ladies and gentlemen. Welcome to KPN's third quarter 2021 earnings webcast and conference call. Please note that this event is being recorded. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's prepared remarks. If you would like to ask a question, you may do so by pressing *1 on your telephone.

I will now turn the call over to your host for today, Reinout van Ierschot, Head of Investor Relations. You may begin.

Reinout van Ierschot (Head of IR, KPN): Thank you and good afternoon, ladies and gentlemen. Thanks for joining us. Welcome to KPN's third 2021 results webcast. With me today are Joost Farwerck, our CEO, and Chris Figee, our CFO.

As usual, before turning to our presentation, I would like to remind you of the Safe Harbor on page 2 of the slides, which also applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements including KPN's expectations with respect to its outlook and ambitions, which were also included in the press release published this morning. All such statements are subjects to the Safe Harbor.

Let me now hand over to our CEO, Joost Farwerck.

Joost Farwerck (CEO, KPN): Thank you, Reinout, 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 SME segment.

We delivered service revenue growth in SME ahead of our commitment to stabilize before year- end 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 have 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 continued to grow, supported by strong performance of our Unlimited propositions. With solid adjusted EBITDA growth in the third quarter and a strong year-

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KPN Q3 2021 Results	2	26 October 2021

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 a € 200m share buyback, reflecting our confidence in the successful execution of our strategy. We have nearly completed this leg of our share buyback program, which we see as the first step to structurally return additional capital to our shareholders in the coming years.

We continued 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 have rolled out to 313,000 homes and over the last twelve 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 Glaspoort is now fully up and running and has recently started its wholesale broadband access services for wholesale providers. Together with Glaspoort, we are going to jointly reach 80% of Dutch households by the end of 2026. After reaching that point, Capex will come down to a lower, more sustainable level.

After returning to growth in the second quarter, we have been able to show continued growth in Mobile service revenues this quarter. This was mainly driven by an acceleration of the commercial performance over the last quarter and a higher ARPU level.

Fixed mobile revenues increased 3.5% and total Consumer service revenues grew slightly by € 2m.

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 has been pleasing to see our efforts in this area are paying off.

Consumer NPS recovered strongly to +15 and this is a reflection of the success of our attractive KPN and Simyo line-up, the quality of our products and services, the customer journey improvement 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.

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KPN Q3 2021 Results	3	26 October 2021

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.

Our fiber ARPA remains significantly higher compared to copper due to the take-up of higher speeds, more Value Added Services and more SIMs per household. Importantly, for the first time, our fiber service revenue growth was higher than the copper decline. We delivered 27,000 postpaid net adds in the third quarter in the consumer market 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 segment. This year we started to run the Business segment by focussing 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. We have 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 our 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 in line with our expectations. And, as we highlighted earlier, it will us some more time than in SME to deliver the turnaround there.

Business NPS remained at the positive level of +3, as customers continued to value KPN for the stability, reliability and quality of our network 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 EEN is paying off with a solid based fence. 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, the strong inflow of new Mobile customers, among others driven by Unlimited, is now offsetting that effect. This led to stabilization of mobile service revenues in SME in the third quarter, an improving trend compared to -11% in Q1 and -4% in Q2.

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KPN Q3 2021 Results	4	26 October 2021

And finally, in Fixed Voice the pace of the decline here moderated from around -20% to approximately -10%. This is partly due to the annualization of the phase out of ISDN-2 last year, which reduced the year-on-year headwind.

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 is making a total postpaid growth for the Group, including Consumer and B2B, of 100,000 this quarter. Wholesale providers continued 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. With our open Wholesale access model, we guarantee sufficient room for wholesale providers to grow and to compete. 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.

Chris Figee (CFO, KPN): Thank you, Joost. The financial performance of KPN. Well, overall I am pleased with the development of our key financial metrics this quarter. Let me start by summarizing some of these. Our adjusted revenues increased 1% year-on-year, supported by growth in mass- market service revenues. Our adjusted EBITDA after leases increased 1.4%, at a margin of 46.3% for the quarter, despite a tough comparison base in terms of opex. Free Cash Flow was more or less flat versus last year in Q3, year-to-date however, our Free Cash Flow increased 7.1% despite higher Capex and taxes paid.

Our indirect cost savings run rate this quarter was impacted by several factors. First, the comparable base for the third quarter last year was a tough benchmark to beat this quarter, so this quarter year- on-year is not a good proxy for a normalized run-rate. Second, we continue to see some less tailwind from COVID-related savings. Finally, some other elements affected our staff cost performance this quarter, certainly when compared to last year. These include our recent CLA- increase, dotations to employee related provisions, lower Capex charging, and importantly, large

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KPN Q3 2021 Results	5	26 October 2021