KPN's Q3 profit hit by surprise German downturn

KPN failed to meet analysts' third-quarter profits expectations due in large part to savage competition in Germany. The operator said its German E-Plus subsidiary was forced to cut pricing as customers searched for better deals.

E-Plus, normally a key profit centre for KPN, signed up 210,000 new subscribers on monthly contracts during the quarter, but lower pricing resulted in a 9 per cent drop in quarterly EBITDA according to Reuters.

KPN said its overall core profit, adjusted for one-off restructuring costs, fell 12 per cent in the third quarter to €1.177 billion, just below the €1.185 billion expected in a Reuters' poll of 10 analysts.

To reassure the stock market, albeit that the company's share price fell to a nine-year low on the news, KPN said its guidance for 2012 of €4.7 billion to €4.9 billion in EBITDA and a dividend of €0.35 would be maintained, according to the Financial Times. However, the company acknowledged it was not currently meeting some of its financial targets as its net debt to EBITDA ratio rose from 2.5 to 2.7.

"We recognise that we are outside our self-imposed financial framework this quarter, and we expect that this situation could continue for the coming quarters," KPN CEO Eelco Blok said in a statement.

Blok also complained that competition in Germany was not just coming from Telefónica adopting a more aggressive pricing policy in the lead up to its forthcoming IPO. "There is increased competition in Germany across the spectrum, not just Telefónica, and we expect this to remain like this," Blok told Reuters in a conference call.

The company is also experiencing problems in its domestic business, with mobile revenues down 11 per cent, albeit that core profit rose in the third quarter by 3.6 per cent after KPN introduced new tariffs and a handset-lease model that cuts the subsidies on high-end smartphones.

Commenting on KPN's results, a note from analysts at Espirito Santo said that KPN could be forced to cut its dividend because of its need to pay down debt, while investing in fibre and LTE networks. "Capex will be difficult to reduce given KPN's need to build fibre and LTE, which leaves cutting the dividend as the most obvious source of cash," the analysts said, according to Reuters.

Separately, Blok the company is in talks with América Móvil to find areas where they can work together. "Our relationship is fine,"  Blok said on a conference call, according  to Bloomberg. "We are in talks to explore synergies. Initially this is just between us and América Móvill, but it is obvious Telekom Austria could be involved in the talks in a later stage."

 

For more:
- see this KPN release
- see this Reuters article
- see this Financial Times article (reg. req.)
- see this Bloomberg article

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