KPN’s Q2: Mixed Bag

KPN Q2 2015Privatization did beautiful things for a few people. Overnight some became CEO of a large incumbent giving them much prestige and ample salary. For consumers the benefits of privatization, a much more market driven and henceforth efficient company, never emerged. A parliamentary investigation committee into the privatization of telephone and postal services, railways, coaching of the unemployed and energy concluded in 2012 that “ …the national government initially pursued a simpler and smaller national government but that instead the organizational and managerial complexity have increased…” and “ that by focusing on the roles of citizens as client and tax payer, a too narrow perspective on public interests was used. Consequently, citizens were locked in a limited conception, which is one of the determinants for the public’s dissatisfaction with privatization and agencification of government services”.

The exception to the mixed bag of privatization results was telephone services. It is undeniable that privatizing the Dutch telecom market has brought us healthy competition and subsequently lower price-points, more options and better services. From a citizen’s perspective a job well done.

But where there are winners there are losers. After its independence the incumbent KPN quickly went for international expansion. Only to find out that they were just too small to compete with the big guns. In the mean time things have changed in their home market where competition is flexing its muscles. While KPN is still a giant in the Dutch telephony and datacenter business it has not been able to strengthen its position. The UPC/Ziggo combination is warming up to target KPN’s internet business. The mobile market is highly competitive with numerous price-fighters eating into the ever thinner margins. Amazon and Microsoft are rolling out their cloud platform to attract local business with a cloud strategy directly competing with KPN’s IaaS CloudNL.

KPN’s results for the 2nd quarter were also a mixed bag. Consumer revenue stabilized (-0.4% yoy)) while the business sector continued to slide (-7% yoy). Overall KPN’s EBITDA grew 1% yoy. CEO Elco Blok and CFO Jan Kees de Jager did make it clear this was all due to a weak business sector. They bet on growth in the business sector and prepare KPN for growth once the business market gets in the mood.

There definitely is something wrong with KPN business . In 2013 and 2014 KPN got rid of some business activities (IS&P and Installation & Maintenance) in order to further focus on what the former director of KPN business markets called delivering total business solutions with selected partners based on consultancy and service management. Cost cutting was probably another reason. KPN clearly wants to increasingly make its money in the business market and Blok expects the business division to return to growth in 2016.

KPN’s annual revenue has dropped from €14.6 billion in 2008 to €8.1 billion in 2014. For 2015 KPN expects a turnover of €7.1 billion. All in all less than half they made seven years ago. Blok and CFO Kees Jan de Jager did stress the fact that KPN’s financial position had become much better. It’s net debt position has stabilized as is its credit rating with Moody’s and Standards and Poor.

Pumping up the volume and taking the cost for the planned personnel cuts of 2500 people seems to be the objective for this and next year. After that KPN is a healthy company in an increasingly crowded and competitive market as well as an interesting party for a foreign party that seeks a stronghold in the Netherlands or Europe.

In the mean time it may be a good idea for KPN to turn around its business market results and get more traction by emphasizing that their cloud services checkout is in good old Euro. Both Amazon and Microsoft have increased their prices in a reaction to the 30% Euro depreciation since October 2014 (or made it mandatory to purchase in US dollar). Dutch business may not be excited by KPN playing the Orange card but they certainly are price sensitive. Other options for KPN? Sure, check our blog on what the hosting sector should do to remain relevant.

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About Marcel Warmerdam