Royal KPN N : KPN Q4 2020 Results (Reports)

Press release

27 January 2021

KPN reports robust Q4 results, delivers on FY 2020 outlook, and sees encouraging trend in mass-market service revenues

• Delivered on FY 2020 outlook: adjusted EBITDA AL of € 2,320m (+1.4% y-on-y), FCF of € 765m (+6.6% y-on-y)1
• Consumer seeing continued growth postpaid base, further stabilizing broadband base driven by fiber
• Awards for fastest 5G network in NL, 5G Innovation, and best in mobile data2
• Accelerated fiber rollout provides solid foundation for coming years
• ROCE improved substantially to 10.1% (+80bps y-on-y)
• Continued progress on cost savings program in Q4 (€ 22m), € 278m since start of the program
• COVID-19impact on revenues largely offset by cost opportunities; net effect on FY 2020 adj. EBITDA AL ~€ 6-10m negative
• Strong balance sheet and liquidity position (€ 2.1bn)
• More specific 2021 outlook: adj. EBITDA AL of ~€ 2,345m, Capex of € 1,200m, FCF of ~€ 765m, DPS of € 13.6 cents over 2021; 2023 ambitions reiterated

Message from the CEO, Joost Farwerck

"During 2020 we were able to make a valuable contribution to people, households, businesses, and government by keeping the Netherlands connected. At the same time we delivered on our financial ambitions in these dynamic times. The global pandemic has changed the way we live and work in ways nobody could imagine. This new reality has underlined the vital importance of a resilient digital infrastructure in which telcos play a crucial role. Our networks have proven to be able to successfully accommodate the significant increase in traffic. We adjusted the way we work to serve our customers and I am grateful to all our employees for making this possible.

During the year we saw encouraging base developments in our Consumer segment with growth in our postpaid base and a stabilizing broadband base driven by fiber. Encouragingly, this quarter fiber service revenue growth outweighed the loss on copper service revenues for the first time. Although we face COVID-19 related headwinds in the Business segment, we are on track to migrate our SME and LCE customers to a future-proof proposition and we see growth on our core products broadband and mobile. Supported by our open access policy, the Wholesale segment continues to show solid growth. Due to several factors, we have seen adverse customer satisfaction trends in both the Consumer and Business segment. This has our undivided attention and we have taken additional measures to ensure the service levels customers expect from the quality leader in the Netherlands.

To leverage and expand our superior network, we are accelerating the rollout of fiber, which is at the heart of our strategy to return to growth. In 2020, we added 319k households to our fiber footprint and we now cover more than one third of the country. We now modernized more than 2,800 mobile sites and I am excited our 5G network was recognized as the fastest and most innovative in the Netherlands. We were once again recognized as one of the global leaders on our sustainability efforts by several leading benchmarks.

At our Strategy Update last November we raised the bar and announced our plan to accelerate the expansion of our fiber network to half a million additional households per year, meaning we will cover half of the country with fiber in 2023. We aim to grow and strengthen our customer base by providing an outstanding digital experience and differentiated services for families and businesses. In order to streamline our organization we will further simplify and digitalize our company. Together, these strategic priorities support our ambition to connect the Netherlands to a sustainable future, to grow mass-market service revenues and EBITDA, and to provide attractive shareholder returns. With these strategic ambitions we capture the momentum of digitalization in the Netherlands."

Key figures

	Group financials (unaudited)	Q4 2019	Q4 2020	y-on-y	y-on-y	FY 2019	FY 2020	y-on-y	y-on-y
	(in € m, unless stated otherwise)				excl. divestments				excl. divestments
	Adjusted revenues	1,393	1,354	-2.8%	-1.0%	5,486	5,275	-3.9%	-2.4%
	Adjusted EBITDA AL	561	561	0.0%	+1.2%	2,317	2,320	+0.1%	+1.4%
	As % of adjusted revenues	40.3%	41.4%			42.2%	44.0%
	Operating profit (EBIT)	202	223	+11%		1,041	912	-12%
	Net profit	84	174	>100%		614	561	-8.7%
	Capex	322	289	-10%		1,115	1,147	+2.9%
	Capex as % of adjusted revenues	23.1%	21.3%			20.3%	21.8%
	Operational Free Cash Flow	239	272	+14%	+17%	1,202	1,172	-2.5%	-0.6%
	As % of adjusted revenues	17.2%	20.1%			21.9%	22.2%
	Free Cash Flow (excluding TEFD dividend)	284	268	-5.6%	-3.6%	726	765	+5.4%	+6.6%
	As % of adjusted revenues	20.4%	19.8%			13.2%	14.5%
	Net debt					5,148	5,332
	ROCE					9.3%	10.1%

1. Year-on-yeartrend corrected for impact of divestments
2. Source: Ookla Speedtest December 2020, Umlaut Connect test 2020

KPN Q4 & FY 2020 results 1

Press release

27 January 2021

Improving operational performance

• Consumer net adds trend encouraging
• • Fixed: +20k fiber net adds (Q3 2020: +27k), -3k total broadband net adds (Q3 2020: -4k)3; ARPU at € 50 (+4.0% y-on-y)
  • Mobile: +1k postpaid net adds (Q3 2020: +9k); postpaid ARPU stable for 8th consecutive quarter at € 17 (-1.1%y-on-y)
  • Convergence: +22k fixed-mobile households (Q3 2020: -4k), 50% of broadband base;
    +81k fixed-mobile postpaid customers (Q3 2020: +2k), 65% of postpaid base
  • NPS declined to +11 (Q4 2019: +19), driven by increased customer usage and expectations, IPTV interface changes, and pressure on customer support capacity during lockdown
• Business customer migrations on track
• • 87% of SME and 76% of LCE customers migrated4
  • +7k broadband customers (Q3 2020: +8k); +26k postpaid customers (Q3 2020: +8k)
  • NPS improved to -2 (Q4 2019: -4); the sequential decline (Q3 2020: -1) was driven by increased customer expectations, and pressure on customer support capacity during lockdown
• Wholesale added +30k broadband lines (Q3 2020: +22k) and +8k postpaid SIMs (Q3 2020: +23k)
• Network delivered further acceleration of fiber rollout
• • Added 112k FttH households, +319k in 2020; upgraded 593 mobile network sites in the quarter, 2,803 since 2019
  • 5G network reaches ~70% of the country on 700MHz; recognized as fastest 5G network in NL, most innovative 5G network, leading mobile data category5
• Continued disciplined cost control
• • Net indirect opex savings of € 22m in the quarter, € 278m since the start of the program in 2019

Robust financial performance

• Q4 2020 adjusted revenues declined 1.0% y-on-y corrected for impact of divestments (-2.8%y-on-y without correction). Growth in Wholesale and Consumer Fixed was offset by lower revenues in Business and Consumer Mobile. FY 2020 adjusted revenues declined 2.4% y-on-y corrected for impact of divestments (-3.9%y-on-y without correction)
• Q4 2020 adjusted EBITDA AL increased 1.2% y-on-y corrected for impact of divestments (flat y-on-y without correction). The effect of lower revenues was offset by continued disciplined cost control. Adj. EBITDA AL margin increased to 41.4% (Q4 2019: 40.3%). FY 2020 adjusted EBITDA AL increased 1.4% y-on-y corrected for impact of divestments (+0.1% y-on-y without correction). The estimated net effect of COVID-19 on FY 2020 adj. EBITDA AL was ~€ 6-10m negative
• Q4 2020 net profit of € 174m, € 90m higher y-on-y, supported by a one-off € 67m positive revaluation of KPN's deferred tax asset and € 17m release of revenue related provisions in Wholesale, while Q4 2019 was impacted by € 48m positive DTA revaluation, € 95m finance expenses related to a bond tender, and € 29m book gain from the sale of International Network Services and Argeweb. Excluding such incidentals, net profit would have increased ~€ 12m net of tax. Excluding incidentals, FY 2020 net profit of € 466m would have been ~€ 42m higher y-on-y net of tax
• Capex of € 289m in Q4 2020. FY 2020 Capex increased € 33m y-on-y to € 1,147m driven by accelerated FttH rollout and mobile network modernization. Fiber rollout Capex increased € 167m, while other Capex was € 135m lower y-on-y
• Q4 2020 Operational Free Cash Flow of € 272m increased 17% y-on-y corrected for impact of divestments (14% y-on-y without correction), and FY 2020 Operational Free Cash Flow declined 0.6% y-on-y corrected for impact of divestments (-2.5%y-on-y without correction), due to higher Capex
• Q4 2020 Free Cash Flow decreased to € 268m (-3.6%y-on-y corrected for impact of divestments, -5.6%y-on-y without correction). FY 2020 FCF increased 6.6% y-on-y corrected for impact of divestments to € 765m (+5.4% y-on-y without correction). Higher Capex and increased investments in working capital were fully offset by lower cash interest paid and lower cash restructuring
• Strong liquidity of € 2,114m; € 864m cash & short-term investments and € 1.25bn undrawn revolving credit facility

Outlook 2021 and ambitions 2023

KPN specifies its FY 2021 adjusted EBITDA AL outlook to approximately € 2,345m with Capex of € 1,200m. The 2021 Free Cash Flow outlook is raised to approximately € 765m, in line with the FY 2020 realization. In addition, KPN expects to pay a dividend of € 13.6 cents per share over 2021, representing 4.6% growth y-on-y. KPN reiterates its 2023 ambitions as provided at the Strategy Update on 24 November 2020.

KPN intends to pay a regular dividend per share of € 13.0 cents in respect of 2020. The final regular dividend of € 8.7 cents per share is subject to shareholder approval at the Annual General Meeting of Shareholders on 14 April 2021. The provisional ex- dividend date is 16 April 2021 and the provisional payment date is 21 April 2021.

	Achievements FY 2020	Outlook FY 2021	Ambitions 2023
Adjusted EBITDA AL		€ 2,320m	~€ 2,345m	>€ 2,450m
Capex		€ 1,147m	€ 1,200m	€ 1.1-1.2bn
Free Cash Flow		€ 765m	~€ 765m	>€ 870m
Regular DPS		€ 13ct	€ 13.6ct,	Progressive dividend,
	+4.6% y-on-y	+3-5% annual growth

1. Corrected for migrations to, and new customers of, small business proposition (8k in Q4 2020, 5k in Q3 2020, 7k in Q2 2020, 6k in Q1 2020)
2. Eligible customers migrated from traditional fixed voice and legacy broadband services
3. Population coverage; source: Ookla Speedtest December 2020, Umlaut Connect test 2020

KPN Q4 & FY 2020 results 2

Press release

27 January 2021

Financial review KPN Group Q4 and FY 2020

Market environment

Competitive activity continued in the Consumer fixed broadband market, with three nationwide operators focusing on converged customers and competition from local fiber operators in rural areas. The Consumer mobile market for entry-level propositions remains competitive, while in the premium segment all operators are now offering unlimited data. The fourth quarter saw seasonal promotional activity, driven by Black Friday and year-end promotions. The Business market remained competitive, especially in the mobile market and the LCE segment.

Key financial metrics

Group financials (unaudited)	Q4 2019	Q4 2020	y-on-y	y-on-y	FY 2019	FY 2020	y-on-y	y-on-y
(in € m, unless stated otherwise)				excl. divestments*				excl. divestments*
Service revenues	1,271	1,224	-3.7%	-1.7%	5,090	4,874	-4.2%	-2.7%
Non-service revenues & other	122	130	+6.5%		397	401	+0.9%
Adjusted revenues	1,393	1,354	-2.8%	-1.0%	5,486	5,275	-3.9%	-2.4%
Cost of goods & services	362	355	-1.9%	-0.3%	1,301	1,284	-1.3%	-2.1%
Personnel expenses	254	229	-10%	-6.5.%	1,027	892	-13%	-10%
IT/TI	84	89	+5.5%	+7.2%	353	328	-7.3%	-4.6%
Other operating expenses	93	84	-9.1%	-8.8%	323	300	-7.1%	-4.5%
Total adjusted opex	793	757	-4.6%	-2.5%	3,004	2,803	-6.7%	-5.3%
Depreciation right-of-use asset	33	31	-5.6%	-2.4%	138	130	-5.6%	-1.2%
Interest lease liabilities	6	5	-9.9%	-9.4%	28	22	-21%	-12%
Total adjusted indirect opex after leases	470	438	-6.8%	-4.3%	1,868	1,671	-11%	-7.5%
Adjusted EBITDA AL	561	561	flat	+1.2%	2,317	2,320	+0.1%	+1.4%
As % of adjusted revenues	40.3%	41.4%			42.2%	44.0%
Operating profit (EBIT)	202	223	+11%		1,041	912	-12%
Net profit	84	174	>100%		614	561	-8.7%
ROCE**					9.3%	10.1%
FTE own personnel (#)					11,248	10,102	-10%

• Q4 and FY 2019 corrected for impact of divestments to be found on page 12
• ROCE is calculated on a 4-quarter average rolling basis. The ROCE in KPN IAR 2019 was based on the Capital Employed as at 1 Jan 2019, thus using a different calculation method. The difference between these two methods amounts to 0.1%pt positive (ROCE FY 2019: 9.3%, instead of reported 9.2%)

Q4 2020

Adjusted revenues declined 1.0% y-on-y corrected for impact of divestments (-2.8%y-on-y without correction). Growth in Wholesale and Consumer Fixed was offset by lower revenues in Business and Consumer Mobile. In the fourth quarter, service revenues declined 1.7% y-on-y corrected for impact of divestments (-3.7%y-on-y without correction). Non-service revenues increased 6.5% y-on-y, driven by higher hardware-related revenues. Due to COVID-19, KPN saw lower roaming revenues and the Business segment saw additional revenue challenges due to delayed IT projects in the fourth quarter. Mass-market6 service revenues declined 0.1% y-on-y and showed an improving trend compared to prior quarters.

Cost of goods and services were 0.3% lower y-on-y corrected for impact of divestments (-1.9% lower y-on-y without correction). Personnel expenses declined 6.5% y-on-y corrected for impact of divestments (-10%y-on-y without correction), mainly driven by the ongoing digital transformation of KPN and lower costs due to COVID-19. IT/TI expenses increased 7.2% y-on-y corrected for impact of divestments (+5.5% y-on-y without correction). During Q4 KPN further supported its employees in working from home and increased capacity at its call centers to improve customer support, leading to additional costs. Further simplification and digitalization resulted in structural savings, while COVID-19 created additional cost opportunities, leading to total net indirect opex savings of € 22m in Q4 2020.

Adjusted EBITDA AL increased 1.2% y-on-y corrected for impact of divestments (flat y-on-y without correction). The effect of lower revenues was fully offset by continued disciplined cost control. Adjusted EBITDA AL margin increased to 41.4% from 40.3% in Q4 2019.

Operating profit (EBIT) of € 223m increased € 21m y-on-y, partly supported by a € 17m release of revenue related provisions in Q4 2020, while Q4 2019 was also impacted by incidentals (€ 29m book gain on the sale of International Network Services and

6 Mass market consists of Consumer, SME and Wholesale segments

KPN Q4 & FY 2020 results 3

Press release

27 January 2021

Argeweb, and an incidental € 6m negative change in provisions). Excluding these incidentals, operating profit would have been

• 27m higher y-on-y mainly driven by lower depreciation and amortization and lower P&L restructuring costs.

Net profit of € 174m was € 90m higher y-on-y, supported by € 67m positive revaluation of KPN's deferred tax asset and € 17m release of revenue related provisions in Wholesale in Q4 2020, while Q4 2019 was impacted by € 95m finance expenses related to a bond tender, € 29m book gain from the sale of International Network Services and Argeweb, and € 6m additional provisions. Excluding such incidentals, net profit would have increased with ~€ 12m net of tax, mainly driven by higher operating profit.

FY 2020

Adjusted revenues decreased 2.4% y-on-y corrected for impact of divestments (-3.9%y-on-y without correction). Ongoing competition, customer migrations, lower roaming revenues and lower IT project revenues due to COVID-19 further impacted performance. During 2020, service revenues declined 2.7% y-on-y corrected for impact of divestments (-4.2%y-on-y without correction) and non-service revenues increased 0.9% y-on-y.

Corrected for impact of divestments, cost of goods and services were 2.1% lower y-on-y(-1.3%y-on-y without correction). Personnel expenses declined 10% y-on-y(-13%y-on-y without correction), and IT/TI expenses declined 4.6% y-on-y(-7.3% without correction). Total net indirect opex savings FY 2020 were € 137m and € 278m since the start of the program in 2019. KPN expects to deliver € 375-400m savings in net indirect opex7 over the period 2019 - 2021.

The effect of lower revenues was fully offset by lower direct and indirect opex, resulting in adjusted EBITDA AL growth of 1.4% y-on-y corrected for impact of divestments (+0.1% y-on-y without correction). FY adjusted EBITDA AL margin increased from 42.2% to 44.0% y-on-y.

Operating profit (EBIT) of € 912m was € 129m lower y-on-y, impacted by incidentals in 2019 (€ 171m book gain on the sale of NLDC, € 29m book gain on the sale of International Network Services and Argeweb, € 6m negative change in provisions and

• 20m release of a revenue related provision) and in 2020 (€ 11m book gain of KPN Consulting in Q2 2020 and € 17m release of revenue related provisions in Q4 2020). Excluding such incidentals, EBIT would have been € 57m higher y-on-y mainly driven by
• 79m lower restructuring cost partly offset by € 15m higher depreciation and amortization.

Net profit of € 561m was € 54m lower compared to FY 2019. In addition to the incidentals that impacted operating profit, net profit was further impacted by a € 67m positive revaluation of KPN's deferred tax asset (€ 48m in 2019) and € 95m additional finance expenses related to a bond tender in Q4 2019. Excluding such incidentals, net profit would have increased by ~€ 42m net of tax, mainly driven by lower finance cost due to debt redemptions and refinancing.

ROCE was 10.1% in FY 2020, which compares to 9.3% in FY 2019. This improvement was driven by increased operational efficiency as a result of disciplined cost control and lower restructuring charges. Capital efficiency decreased due to lower revenues and higher capital employed, which was in turn mainly driven by acquired spectrum licenses.

7 Indirect opex after leases, adjusted for the impact of restructuring costs and incidentals and corrected for divestments

KPN Q4 & FY 2020 results 4