KPN Profit Drops as Price Competition in Germany Increases

Royal KPN NV, the Dutch phone company partly owned by Carlos Slim’s America Movil SAB, said third-quarter profit fell 32 percent amid increasing German price competition and declining mobile subscription revenue.

Net income dropped to 250 million euros ($326 million) from 368 million euros a year earlier, the Hague-based company said in a statement today. Profit missed the 326 million-euro average estimate of 13 analysts compiled by Bloomberg. Revenue and other income declined 6.5 percent to 3.05 billion euros.

“The outlook for KPN in Germany looks increasingly bleak,” Robin Bienenstock, an analyst at Bernstein, said in a note to clients. “With no face-saving deal with the soon-to-be-listed Telefonica Deutschland on the cards, they are likely to face a harder go-it-alone strategy that may end up being more capital intensive for diminishing returns.”

KPN is struggling with changing consumer behavior as smartphone customers communicate more via messaging technology such as WhatsApp or with calling software such as Skype. The company may also face new entrants to the Dutch mobile market after the government starts a spectrum auction on Oct. 31.

German customers of the E-Plus unit are increasingly looking at opportunities to reduce costs and improve prices for subscription bundles, Chief Executive Officer Eelco Blok said in a conference call for investors today. It’s difficult to predict how long that effect will restrain growth, he said.

Stable Share

KPN had a “relatively stable” market share of 15.9 percent in Germany, Blok said. Earnings before interest, taxes, depreciation and amortization excluding restructuring costs dropped to 323 million euros in the country, on an underlying basis, from 354 million euros.

KPN declined as much as 4 percent in Amsterdam trading and was down 3.7 percent at 5.59 euros at 12:58 p.m. The slump extended the loss this year to almost 40 percent and valued the company at 8 billion euros.

“Against an uncertain and challenging macro environment we have seen mixed performance across the group,” Blok said. KPN is on track to reach its 2012 market-share targets in the Netherlands, he said. Dutch consumer mobile revenue declined 8.3 from a year earlier, on an underlying basis, as lower traffic volumes were partly offset by higher recurring subscription fees.

No Turnaround

“KPN said they are taking several initiatives to turn around the company, and we’re not seeing any turnaround for the time being,” said Javier Borrachero, an analyst at Kepler Capital Markets who has a reduce recommendation on KPN shares. “The traditional growth assets Belgium and Germany are starting to feel the pinch of increasing competition.”

KPN confirmed its 2012 outlook for earnings before interest, depreciation and amortization excluding restructuring costs of 4.7 billion euros to 4.9 billion euros, with free cash flow of 1.6 billion euros to 1.8 billion euros. It also repeated its outlook for a 2012 dividend of 35 cents a share. Ebitda excluding restructuring in the third quarter declined to 1.17 billion euros from 1.33 billion euros a year earlier.

Declining earnings caused KPN to breach its target range on its net debt-to-Ebitda ratio in the quarter, which rose to 2.7.

“We recognize we are outside our self-imposed financial framework in this quarter, and we expect that this situation could continue for the coming quarters,” Blok said.

Contrary Results

“The numbers today indicate another direction than the company has been guiding for,” Kepler’s Borrachero said in an interview.

To strengthen its balance sheet, KPN has tried to sell Belgian mobile-phone unit Base after it ended discussions on a potential merger involving the E-Plus wireless unit in Germany. The non-binding offers it received for Base were unsatisfactory, KPN said in August.

Blok has accelerated job cuts and plans to eliminate as many as 5,000 positions in the Netherlands by the end of 2013, as KPN has a “tough but achievable” goal of cutting costs at headquarters by 30 percent to 40 percent, it said in April.

KPN said in January that 2012 will be a transition period after two years of declining net income, as it accelerates Dutch investments. The company predicted lower profit and cash flow this year and said it won’t buy back shares in 2012 after last year’s 1-billion euro program.

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