KPN Meets Street Expectations in Third Quarter



KPN reported third-quarter results that were generally in line with our expectations, and we are maintaining our fair value estimate and moat rating for now. While the firm has chosen to classify E-Plus, the German operation it agreed to sell to Telefonica, as a discontinued operation, we are including the division as we think there is still a significant chance that European regulators will not approve the deal. Fortunately, KPN is still providing full details on E-Plus. On this basis, KPN’s revenue declined 6.5% year over year versus our projection of a 7.1% drop. The main culprit remains the Netherlands, though Belgium also showed weakness in the quarter.

The firm’s Dutch consumer residential business continues to add subscribers, with its broadband base increasing 7.1% from the year-ago period to 2.73 million and pay television customers jumping 24.7% to 1.96 million. This subscriber growth allowed the division to increase revenue by 2.6%. However, all other divisions saw substantial revenue declines, causing all of the Dutch business to fall 6.4%.

Belgium, which had shown solid growth until this year, declined 4.7% year over year. While we think KPN will continue to develop its broadband and especially its pay television base, we don’t think this will be sufficient to offset price declines in the wireless business until 2015.

The lower revenue is also pressuring margins. KPN’s EBITDA margin, including E-Plus, was 34% versus our full-year projection of 34.6%. We think margin pressure will remain until pricing stabilizes, despite significant cost cutting. We are disappointed with management’s inability to come to an agreement with America Movil regarding its offer to acquire KPN. With America Movil subsequently walking away and KPN’s continued poor results, we think there is further risk to the stock price, which could pull back to our fair value estimate.

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