Morningstar | KPN Reports 2Q Results Showing Better EBITDA Margins; Shares Slightly Undervalued
KPN reported second-quarter results with better EBITDA margins than we expected, but we are maintaining our EUR 3 per local share fair value estimate and narrow moat rating. We believe the shares are slightly undervalued. The firm continues to reduce costs, which pushed its adjusted EBITDA margin to 41.1%, nicely ahead of our full-year projection of 39.4%. KPN reported adjusted revenue declined 1.5% year over year versus our estimate of a drop of 11.2%. However, KPN excludes its iBasis unit, whose sell is pending, from both years' revenue, while we include it in 2017's revenue and count one quarter of its revenue in 2018.The business segment generated revenue growth of 0.3%, its first increase in about a decade. However, this is partially due to the transfer of some small businesses from consumer to business, which inflated business revenue, and hurt consumer. Mobile services within business fell 6.2% due to the effects of regulation and lower average revenue per user, or ARPU, as the subscriber base actually grew slightly. Fixed voice revenue also dropped 15%. However, newer services are growing nicely, with the Internet of Things up 8.3%, professional services and consultancy gaining 9.1%, and IT services jumping 28%. Despite the inflated total revenue, we are pleased to see solid growth in new services, which we expect will eventually lead to real revenue growth.
The consumer side saw revenue fall 2.5%, partially due to the inverse of customer transfers, but also due to increased competition. The firm is growing nicely its converged subscriber base, with fixed-mobile households adding 19,000 customers to 1.3 million. Of its broadband subscribers, 44% are now on converged products, as are 54% of its postpaid wireless customers. ARPU for converged customers increased 4.3% to EUR 43. However, ARPU for postpaid wireless subscribers not in converged packages fell 7.3% to EUR 18. We believe KPN's focus is correct, but nonconverged price pressure will continue.
Koninklijke KPN is an integrated information and communications technology service provider. Co. provides its consumer customers data broadband services, IPTV services, mobile (voice, data and SMS) and fixed line telephony. Co. provides its business customers broadband services, mobile, fixed line and data services. Co. operates in the following segments: Consumer Mobile, which provides mobile services and products; Consumer Residential, which provides services in and around the house; Business, which provides fixed and mobile telephony services; NetCo, which includes fixed wholesale services; Belgium, which provides mobile telephony; and iBasis, which provides wholesale network services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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