EUR 850.00 For Business Accounts Only

Morningstar | Koninklijke KPN Reported 3Q Results Generally in Line With Our Expectations; Shares Undervalued

Koninklijke reported third-quarter results generally in line with our expectations, and we maintain our EUR 3 per local share fair value estimate and narrow moat rating. We believe the shares are undervalued. The firm’s reported revenue decline of 0.9% looks very good versus our full-year projection of an 11.8% drop. However, the difference is because of the way we account for the pending sale of its iBasis unit. The firm reports results on a proforma basis as if the business was sold at the end of 2016, while we include it in revenue through the first quarter of 2018, as the deal wasn’t announced until the second quarter.

The consumer segment’s revenue declined 0.6%, primarily from the loss of wireless subscribers. While it gained 52,000 mobile postpaid customers that also subscribed to a fixed-line plan, it lost 102,000 customers that were postpaid wireless only or prepaid subscribers. This along with some regulatory cuts pushed revenue down despite a 4.1% increase in average revenue per converged household. We are pleased with the nice job the firm is doing in cross-selling subscribers to converged offerings of fixed-line and wireless services. It now has 68% of its postpaid wireless base on converged plans, and we anticipate this focus will lead to a return to revenue growth in 2020.

The business segment’s revenue fell 3% but is also making progress in adding converged customers, with an additional 37,000 in the quarter. While overall revenue in the division was down, the firm had some bright spots with IT services up 6.2% and professional services & consultancy growing 6.1%. However, we expect it will take time for growth in these newer areas to increase revenue for the entire unit.

The firm continues to work on reducing costs. Its reported adjusted EBITDA margin was 41.8% versus our full-year projection of 39.4%. However, the majority of this difference is again due to our inclusion of one quarter of iBasis’ results, which has very low margins.