Koninklijke KPN N.V. (KPN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the KPN Second Quarter Earnings Webcast and Conference Call. Please note that this event is being recorded. [Operator Instructions] We will facilitate a question-and-answer session towards the end of today's prepared remarks. [Operator Instructions]. I will now turn the call over to your host for today, Matthijs van Leijenhorst, Head of Investor Relations; Please go ahead.

Yes. Thank you, operator. Good afternoon, ladies and gentlemen, and thank you for joining us for KPN's second quarter and H1 2026 Results Webcast. With me today are our CEO, Joost F. Farwerck and our CFO, Hans Figee. Before we begin, please note the safe harbor statement on Page 2. Today's remarks may include forward-looking statements, including KPN's expectations regarding its outlook and ambition as also set out in the press release published this morning. All such statements are subject to the safe harbor. With that, let me hand over to our CEO, Joost F. Farwerck.

Yes. Thank you, Matthijs and welcome, everyone. Let me start with the highlights of last quarter. Group service revenues increased by 0.8%, and that's driven by consumer, SME and wholesale. In the mix, consumers showed an improving growth trend across both fixed and model. In business, SME continued to perform strongly. Overall, growth was impacted by a decline in low-margin tailored solutions division and LCE and wholesale continued to grow with international sponsored roaming as the key driver. Our EBITDA increased by more than 3% on a comparable basis, supported by revenue growth and lower costs. Free cash flow rebounded in the second quarter as planned and is up to 7% year-to-date. And together with Glaspoort our joint venture, we remain a clear leader in the Dutch fiber market. Of course, we are disappointed by ACM's decision prohibiting the proposed Glaspoort Delta Fiber transaction, but our commitments to disciplined fiber expansion remains unchanged and fully aligned within our financial framework. We partnered with Schwarz Digits to bring European sovereign cloud to the Dutch markets to serve our larger customers and the government. And finally, we expect group service revenue to grow and to accelerate to approximately 2% to 2.5% in the second half of the year. Trends in tailored solutions and LCE led us to moderate our full year 2026 service revenue outlook. But of course, the exit run rate is the most important indicator for the future when it comes to service revenues. Importantly, we remain confident in delivering our full year EBITDA and free cash flow guidance while preserving our midterm ambitions, including shareholder distributions. Chris will take you through the financials later. First, let me briefly revisit our strategy and our operational performance. Last year, in November, we confirmed we are well on track to deliver on our Connect activating growth strategy, which is built on 3 pillars: One, we continue to invest in our leading networks. Two, we continue to grow and protect customer base; and three, we further modernize and simplify our operating model. And together, these priorities support our ambition to grow service revenues and EBITDA by approximately 3% and free cash flow by approximately 7% on average over the full strategic period. Let's review our operational performance, starting with fiber. We continue to lead the Dutch fiber market. As our fiber rollout matures, we are focused on turning coverage into active customers, and this is translating into continued growth in fiber broadband net adds, which now accounts for 72% of the retail broadband base. Consumer service revenue grew 1.9%, the strongest performance in 5 quarters with growth improving across both fixed and mobile. Higher year-on-year customer satisfaction reflects what we differentiate with KPN, secure, high-quality networks, excellent service and a seamless digital experience. Our fixed mobile convergence base continued to grow and now represents 61% of the broadband base and roughly 2/3 of the mobile base, supporting customer loyalty and value growth. Let's take a deeper look into our second quarter KPIs. We delivered another quarter of broadband base growth, supported by a healthy inflow of new fiber customers despite a challenging competitive environment, and combined with the growing ARPU, our fixed service revenues continue to grow. In mobile, we added 18,000 postpaid subscribers. And together with ARPU growth and value-added services, this drove mobile service revenue growth to 3.2%. Now let's go to the B2B segments. Business service revenues declined by 1.1% year-on-year. as continued strong SME growth was more offset by the declines in Tailor Solutions and LCE. At the same time, commercial momentum remains solid across both fixed and mobile. And this quarter, for instance, we onboarded all 7 university hospitals in the Netherlands. Customer satisfaction improved significantly year-on-year, reflecting the quality of our networks and services and reinforcing KPN's position as a trusted and secure partner. And building on this strength, we recently partnered with Schwarz Digits to bring a European sovereign cloud solution to the Dutch market responding to our customers' growing demand for secure and sovereign digital services. Within business, growth continues to be driven by high-margin SME with a growth of almost 7%, with strong demand across broadband, mobile and cloud and workspace. In LCE growth in mobile security and CPaaS was more than offset by declines in legacy services and low-margin cloud and Workspace. We expect LCE to grow next year and to remain under pressure for the remainder of this year. Data Solutions revenues declined, reflecting a tough period year-on-year comparison and our continued focus on the value and the contract quality. And we expect tailored solutions to flip back to growth in the second half of the year, gradual improvements in the second half, that is. And despite lower reported service revenues, the contribution margin increased year-on-year in B2B. Finally, wholesale. While the broadband service revenues remain under pressure from the decline in copper, mobile firm strongly supported by international roaming. Other service revenues also increased. That's driven by [ Vistroni ] And now -- before we move to the financials, as you all know, Chris will be leaving us on the first of November. And while we still have Q3 to work together, I would like to thank him for his dedication and significant contributions to KPN and in the meantime, we are ensuring a smooth transition, and we remain fully focused on executing our strategy. And with that, I'll hand over to Chris.

Thank you, Joost. Let me walk you through our financial performance. and first summarize some key figures for the second quarter and the first half of the year. To start, adjusted revenues decreased by 0.5% year-on-year in the second quarter, as higher group service revenues were more than offset by the decline in non-service revenues and other which reflected the absence of prior year IP sales and IPR settlement benefits. Actually, these one-off effects, adjusted service revenues adjusted revenues increased by 2.5% year-on-year. Second, our adjusted EBITDA after leases decreased by 0.3% compared to last year or an increase of 3.4% on a comparable basis. So again, excluding IP sales and IPR benefits. This underlying growth was driven by higher revenues and lower costs. The reported EBITDA margin improved by 8 basis points to 45.6% of total adjusted revenues -- and as previously highlighted, our full year EBITDA guidance assumes a huge shaped year-on-year growth pattern over the year with continued lower growth year-on-year in Q3 and the planned pickup in Q4. Third, our net profit decreased by 1% year-on-year, driven by lower operating profit, partly offset by the absence of one-off costs related to hedge accounting recorded last year. And finally, as anticipated, our free cash flow rebound in the second quarter and increased to -- about 7% to EUR 21 million compared to the first half of last year, mainly driven by EBITDA growth and change in working capital. We'll provide more detail on the underlying test development today during this presentation. In the second quarter, group service revenues grew by 0.8% year-on-year driven by consumer, SME and wholesale. Excluding the effect of Tailored Solutions in the quarter, -- the underlying group service revenue growth was 2.2% year-on-year. And as previously guided, we expect group service revenue growth to improve in the second half of the year. Within mix, consumer service revenues increased by 1.9% over the year showing improved growth in both mobile and fixed. Looking ahead, mobile is expected to remain our primary growth driver. Business service revenues declined by 1.1% year-on-year mainly driven by tailored solutions and reflecting our focus on margins and contract quality. Excluding the Tailored Solutions business, Q2 growth was 3.1% year-on-year. And for the second half of the year, we expect B2B to return to top line growth, driven by continued strong growth in high-margin SME and tailored Solutions normalizing, partly offset by a soft performance in LCE. Finally, also delivered 1% year-on-year growth in the quarter, driven by international sponsored roaming and uptake in visitor roaming, while copper declines continue to weigh our broadband. Our adjusted EBITDA grew by 3.4% year-on-year on a comparable basis, ahead of our midterm CAGR ambition, whilst the EBITDA margin improved by 40 basis points to 45.6%. Growth was supported by revenue growth and continued cost discipline. Higher direct costs mainly reflect the increased handset and hardware sales as well as higher third-party excess costs. We also continue to make solid progress on efficiency with indirect costs declining by EUR 50 million year-on-year, supported by a lower workforce, lower energy costs and ongoing operational improvements. Compared to last year, our workforce was reduced by more than 330 FTEs. Year-to-date, we've reduced indirect OpEx by EUR 80 million. While the current run rate includes some phasing effects, underlying progress remains in line with plan and we reiterate our ambition to deliver EUR 15 million to EUR 20 million of structural net indirect OpEx savings in '26 and a full EUR 100 million of net savings in 2030 compared to 2025. Looking at we expect temporary EUR 4 million to EUR 5 million headwind in the third quarter related to a one-off CLA payment, but we remain confident in delivering our full year EBITDA guidance. In the first half of the year, our operational free cash flow increased by 3.1% year-on-year or 6.7% on a like-for-like basis, so excluding the IP sales and IPR benefits. The strong cash conversion reflects the continued strength of our underlying business and was primarily driven by EBITDA growth. Now let's look at free cash flow. Free cash flow increased 7% to EUR 329 million in the first half, supported by EBITDA growth and favorable working capital developments. This was partially offset by higher cash taxes interest payments and restructuring costs. Interest payments were temporarily higher in the first half and are expected to normalize in the second half of the year, while the movement in provisions mainly reflects timing effects. Overall, our cash margin remains broadly stable at about 11% of adjusted revenues. Looking ahead, we expect a small free cash flow back in Q3 from EBITDA or capital phasing rate for last year. And for the full year, free cash flow is expected to be a weight towards Q4, supported by the timing of EBITDA generation at our capital effects. We therefore remain fully confident in delivering on our full year 2026 free cash flow outlook. Finally, we ended the first half with a cash position of EUR 365 million, absorbing the final dividend payment over 2025 and the completion of the EUR 250 million share buyback program. Let's focus on return on capital. KPN remains focused on creating long-term value is evidenced by a strong return on capital employed. ROCE was 14.4%, remaining at a strong level. The 20 basis points year-on-year decline reflects higher capital employed from continued network investments and higher spend on real restructurings. Looking ahead, the scope to further and our ROCE reaching a financial ambition of 15%, consistent with continuous creation of shareholder and stakeholder value. We continue to run a strong balance sheet. At the end of June, our leverage ratio was 2.5x. Leverage increased slightly during the quarter, reflecting the usual seasonal effect of dividend payments and share buybacks, partially offset by free cash flow generation. Looking ahead, we expect leverage to end the year at or slightly below our self-imposed seeding of 2.5x, supported by stronger free cash generation in the second half. Our interest coverage ratio remains strong at 9.1x. The average cost of debt declined slightly following the partial unwind of interest rate hedges despite increasing our exposure to short-term floating rates. Even so, floating rate exposure remains limited at 18%. Finally, with a liquidity of EUR 1.4 billion, we remain well positioned to cover debt maturities through the year 2028. We expect group service revenue growth to accelerate to 2% to 2.5% in the second half of the year. Combined with the 0.7% in the first half, which reflects the decline in our Tailored Solutions business. This brings our full expected full year '26 group service revenue growth to approximately 1.5% year-on-year. Importantly, our full year EBITDA free cash flow guidance remains unchanged. This is supported by a favorable mix with consumer and SME performing somewhat better than initially expected, alongside continued cost discipline. We, therefore, remain confident in delivering our full year financial outlook. Our midterm ambition remain unchanged, including cumulative shareholder solutions. Let me conclude with a few key takeaways. We delivered a solid first half with improving consumer trends and continued momentum in SME, driving healthy service revenues and underlying EBITDA growth. In fact, for the second quarter in a row, Underlying EBITDA growth came in above the 3% hurdle. We expect group revenue growth to accelerate 2% to 2.5% in the second half of the year, up from 0.7% in H1. We remain the clear leader in Dutch Fiber with almost 3/4 of our retail broadband base now on fiber. And despite the competitive market, we continue to see healthy consumer inflow across both consumer and business supported by strong customer satisfaction levels. Consistent remains strong and free cash flow is progressing according to plan. We strengthened our digital service portfolio through the partnership with Schwarz Digits. And we successfully completed our EUR 250 million share buyback, underlining our commitment to return all our generated free cash flow to shareholders. Overall, we remain on track to deliver our full year EBITDA, CapEx and free cash flow outlook. All midterm ambitions, including cumulative shareholder solutions remain unchanged. Thank you for listening. With that, happy to take your questions.

Thank you, Chris. Operator, please open the floor for questions. Analysts, please keep or limit your questions to 2, please.

[Operator Instructions] Our first question today is from Mr. Joshua Mills from BNP Paribas. Please go ahead.

So one for me on the B2B side and then a second one on the consumer side. So on the B2B side, it looks like this is the reason why you've downgraded the service revenue guidance for the year. I just wanted to understand within that, was the bigger negative surprise on tailored solutions or LCE because I think tailored solutions, you'd always said would face a tough comp, and this is more about lapping some contracts last year. So it doesn't seem like much has changed. And you highlighted a couple of times during the call that LCE is going to remain soft in cloud and workspace is part of the reason for that. So some more color around whether it's LCE or tailored solutions, which is disappointed would be helpful. And then secondly, on the consumer side. I think in the past you've given some quite granular detail on where you affect service revenues to develop in Q3, Q4. Could you just remind us of where you expect to see consumer service revenues land, whether it accelerates? And then whether there's any other price increases that come through that will help with that.

Yes. Thank you, Joshua, for your questions, and I will start, Chris will follow up. Yes, you're right. The downgrading of the total service revenue this year is related to the B2B effects because in consumer, we consider our growth pretty strong in the competitive environment where we are met very good wholesales in plus. So it's all about Tailored Solutions and LCE. We guided for 2% to 2.5% service revenue on the full year, but already last quarter, we saw that we're moving more to 2% then to 2.5% when it comes to Tailored Solutions of LCE and the effect of Tailored Solutions is slightly more negative than we planned for at the beginning of the year. It's low margin. We're cleaning up there. So I'm not that worried about the margin effect, but the impact on the service revenue is a bit stronger than we expected. And also LCE, we tried to sit around in the coming 6 months, we expect that to happen only next year. And so in all honesty, when it moves below 2%, we think it's prudent to adjust our service revenue guidance. Having said that, in total, we will move up above 2% in this coming quarter and the coming second half of the year. And I think that's the most important message we have in service. We will end the year on a level between 2% and 2.5% and we exit the year on that level. .

Yes, Joshua. Just to add on that, on the B2B side, look, we reported a decline in B2B growth. Tailored Solutions would be around 2.5% to 3% in each quarter. And I think in the second half of the year, you'd expect total B2B growth in the segment also to be north of 3% in each of the coming quarters, driven mostly by SME. I think on the flip side, where LCE, as Joost said and [indiscernible], will be below our plan, it softer. SME is doing better, so you would expect SME to grow around 7% in the second half of the year that continues actually do better than planned. And that -- but the total B2B will be growing about 3% plus in the second half of the year. And then when you look at the consumer side of things, I'd expect consumer service revenues to be around 2%. We did 1.9% in the second quarter. I think Q3 and Q4 will be similar. So 2% plus or minus a bit on each of the quarters. I'd expect mobile to accelerate -- mobile to accelerate because our base is up significantly, about 100,000, mobile ARPU doing better. We have indexed mobile service revenues, we have additional price increase on our security solutions that will add to our we see, I think, it successfully managed renewal delta, frontbook I think we're getting better at that as well. And when you look at the premium side of the market, we obviously increased our front book pricing or -- did the same. So I would say that the upper end, the premium part of the mobile market is in quite a decent place. And in the no-frills segment in a noncommitted part, we've seen stabilization and increasing our roaming revenue. So I'd expect consumer revenues to be around 2%, with mobile up could be above 4% in the second half on fixed. I think the fixed underlying fixed growth is close to 1%. It will moderate a bit in Q3 but has to do with the comps last year. For example, last year, we increased our pricing of our second set-top box. That's not happening this year. So you see a little bit more volatility in the fixed service revenues in the second half of the year. I think underlying 1%, 1.5% is feasible certainly into next year. But to be very precise. In the second half, you see mobile north of 4%, fixed below 1%, for a total service revenue growth in consumer around 2%. And then again, B2B north of 3%.

Just 1 very quick follow-up. On the LCE softness. Is there anything structural here? Is it that you're seeing more competition from AI players on the cloud side or something like that? Or is it just normal course of business? .

Well, I think what we're seeing on the cloud and workspace is going down a bit better at lower-margin business. I think mobile is doing actually quite well in NLC. There's some price pressure, but good volume wins. I think the pressure is more on corporate VPN, corporate connectivity, with a bit of broadband and a bit of voice where we see somewhat more competition and then finally, it's an IoT as well in -- IoT is a business where you have strong volume growth and then the occasional repricing, right? So you grow volumes and then to your large customers reprice -- the price per ticket. So a bit of a saw tooth revenue pattern, and we're now hoping this year the downward part of the saw tooth and then we'll grow again. So I don't see any AI companies coming in.

No.

But Joost, do you want to add to that? .

Well, we have more or less the same strategy as is SME, but we started on SME because that's generated far more cash than LCE, but it's a decline in legacy, like Chris said, and it's making the new business grow, move your customers to future-proof business. It takes more time than we expected it's also more complicated than more mass market steering on SME. But in principle, we have the same strategy there and move our customers to future-proof portfolio, and then it will grow. It takes some time, but I'm pretty convinced we will end up there.

The next question is from Ajay Soni from JPMorgan..

My first 1 is around the KPIs we saw on the net add side, I think some were expecting a bit of a tailwind from the security breach, which didn't really materialize. Is this due to competition stepping up within Q2, which maybe offset this tailwind? And the second 1 is just looking into next year, you mentioned H2 service revenue around 2% to 2.5%. Within this there still feel though that there are headwinds from LCE and wholesale broadband. So looking ahead into 2027 could we actually see service revenue growing higher than this? Or what other headwinds or tailwinds do you see for next year? .

Yes. So on the broadband net, that's your first question. I think Q2 was -- taking into account that we live in a competitive broadband market, still a rough quarter for us. So first of all, we had this Odido breach that provided temporary uplift. But on the other hand, VodafoneZiggo is far more competitive. They do a line in the sand. They don't want to lose customers. So competitiveness intensity has moderated also because Odido is trying to fight back from that breach effect. So recent pricing moves by KPN and Odido early July, were there. Odido implemented some mobile front book price increases that leads to a more rational market. We see compared to Q2, Q3 starting on a much lower level less than -- yes, like I call it rough. So -- but Q2 was according to the last 5 quarters, the most competitive one, and it started with our competitors, 1 impacted by negative incident and the other really trying to fight back and spending a lot of costs on that to make the decline less or turn it around. At the end, we follow our own strategy. We believe in investing in our base and not hunting after all the price seekers. And until now that works quite well. So taking everything into account, I'm not that I'm pretty satisfied with the plus 4 we report to this quarter. It's not as before, but taking into account everything that happened, I'm pretty okay with that. .

And to answer your question, Ajay, on the service revenue growth. I mean we've got fair visibility on the second half of the year. So 2% to 2.5%, we feel pretty comfortable to underwrite that. Obviously, it's June. So -- it's early to say what service revenue growth in 2027 will be. I would say 2% to 2.5% is probably the right ballpark. If I have to look into my crystal ball, I read -- [ tea ] leaves I would say, if anything, consumer should be around 2% to slightly higher, SME is growing at 7%. I don't count on that continue, although SME has been outperforming expectations for a few years now. So -- but I wouldn't count on SME growing by 7% again. And so some moderation is expected, although it will probably be the highest growing business that we have. But I wouldn't count on that staying at 7%. LCE and Tailored Solutions normalizing and improving a bit into next year and wholesale will be similar to this year. I think it depends a bit on how we end the year. So it's hard to say your full guidance on service revenue growth for next year, that it was already in June. But if I look at the moving parts and what we see in the second half of the year, I would say bank on 2% to 2.5%, same range with slightly different compositions.

The next question is from Mr. Polo Tang from UBS.. .

Firstly, congrats to Chris on the new role. Secondly, I've got 2 questions. The first 1 is just about EBITDA growth. So you briefly touched on it in your prepared remarks, but can you talk in a bit more detail through the phasing of EBITDA growth in terms of Q3, Q4 and quantify some of the puts and takes. So looking at Q3, from memory, you've got one-off gains from last year dropping out plus you called out the new wage agreement impact. So therefore, to clarify, should we expect Q3 EBITDA growth to be another quarter in terms of -- well, actually should Q3 EBITDA growth actually be declining as a question. And then will you get any further IP sale benefits this year. Second question is, can you comment on the level of fiber overbuild in the Dutch market currently? Also, can you confirm if you still intend to build to 80% to 85% fiber coverage longer term? Or would you consider wholesaling from the likes of Delta Fiber and ODF. I'm just asking the question as KPN covers roughly 70% of the Netherlands and ODF and Delta Fiber cover at the remainder of the market, therefore, if all your fiber build from here is overbuilt, will this not increase competition in the Dutch broadband market going forward? .

Yes. Polo, let me take the first question. So indeed, on Q3. Last year, in the third quarter, we had EUR 16 million of earnings from the IPR settlements. Obviously, they will not come back this year. So I would expect headline EBITDA in Q3 to show a small decline versus last year simply due to this effect. Underlying small growth, a bit less than this quarter -- because if I look at the distribution of EBITDA during the year, it's more tilted towards Q4. So full year guidance firmly intact. I mean you cannot figure out what Q4 will be like, but it's a little bit more back-end loaded than in Q3 both on the headline, but on -- also on an underlying basis. But that's the most -- there's mostly one-offs and effect as we alluded in our voice over. We have our collective labor agreement as a one-off payment this year, EUR 45 million that hits us in Q3. So those things feature into the Q3 numbers. So Full year EBITDA confirmed, reiterated a little bit more tilted towards Q4 than Q3. And on the headline basis is a small decline. .

Yes. Polo, on the fiber rollout, we guided for a fiber footprint up to 85% in the future that is including small M&A now that deal between us or Glaspoort and Delta is blocked by a negative decision by ACM. Of course, we disagree with that outcome. It's it took them 2 years to get a paper by the bucket. We can't follow the line of reasoning. So we have decided to appeal ACM's decision, but that will take time. So if we can't buy anything, we can't do M&A, small M&A, then we will move up to 80% only. And let's see where we end up after we fight at ACM's decision. It's not all overbuilt by the way. There's still a region where we're building that -- where we are the only ones. It's also related to new build. We expect 70,000 to 80,000 new build houses in the Netherlands every year, so we will connect these. Our strategy is not today that we serve our customers via whole -- by deals with third-party fiber networks. But of course, 1 of the strategic questions for us is, okay, how do we serve our customers outside the fiber footprint. We do that today with a mix of copper bundled copper, fixed wireless access, bundled with copper et cetera. So there are several solutions we use today. And how we move further to 2030 is what we're working on now. It's a relevant question. Besides the whole ACM decision, it's important anyhow. So -- but that's something for us to first decide and then to inform the market. We're not changing our fiber rollout plan. It's all within the financial framework we guided for, and we believe that -- some of overbuilt areas -- overbuild is not a good business case. So we have to decide how to serve our customers there. But that's for the future.

Clear.

The next question is from David Wright from Bank of America.

You've given a great deal of granularity if a more than most will provide, I think, on the next couple of quarters. But I guess it was just a bit more on the '27 service revenue CAGR the midterm. You've obviously brought down the '26. I think it's probably fair to say that some of the LCEs may be just a little bit less visible. I know we had been expecting some improvement that's been pushed out a little. So is there no temptation just to take a little edge off the sort of 2027 service revenue guidance with this particular move? Or are you sort of still confident that the building blocks are there to get you back there? I appreciate that circa 3% could be 2.6%. But just wondering how you thought about that. .

Well, let me start and then Chris can give a few '27 -- yes. No longer it's horizon. We're working on a plan to get on '27. So we have a pretty good view, but this calls about Q2 and not about 2027. But we're not skipping out guidance for the full strategic period. That's the first thing. So if we have anything to change there for the full period and we'll be formally communicated to the market. Like we said, we're uplifting service revenues in the second half of the year. If it's 2%, it's more difficult to get it up to 3%, if it's 2.6%, then we're in a better movement. But I'm pretty convinced that we are well, we're increasing prices every year in consumer, in -- both on broad but and mobile. In between, we increase prices. We do it in SME, we are good in SME by approaching the market ourselves and via partners. Mobile is great. We're building on our fiber -- we're still believed in the plan for the full strategic period. And it's going to be 2.45%, 2.6% that I don't know yet.