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KPN aligns financial reporting with new organizational structure
April 13, 2007
THE HAGUE, The Netherlands -- KPN confirmed earlier this year that it was putting the customer at the center of its business, by announcing on 2 January 2007 a new organizational structure in the Netherlands. This organization is now built around customer segments rather than around products, creating a customer centric organization. KPN’s former Fixed division (“Fixed”) and KPN Mobile The Netherlands (“Mobile”) have made way for new Consumer, Business and Wholesale & Operations segments. Consequently, KPN’s financial reporting has changed to reflect the new organizational structure and today’s announcement provides a reminder of the rationale for the transition and provides the consequent comparative financials for the years 2005 and 2006. The change will have no consequences on the headline reported numbers as published in our 2006 Annual Report and Form 20-F, on trends nor on the issued guidance.
The organizational Fixed-Mobile integration is one of the first in Europe and a further evolution of KPN’s strategy for increasing customer focus in a telecommunications world in which distinctions between technologies are fading rapidly and in which customers increasingly are looking for integrated propositions. Fixed-Mobile Integration builds on the customer segmentation in the former Fixed division, strong demand in the Business market and successful pilots in the Consumer market. It is expected to result in financial benefits, with higher revenues from cross- and upselling, and lower operating costs from efficient infrastructure use.
KPN’s new integrated organization in the Netherlands consists of four segments: retail units for Consumer and Business, Wholesale & Operations (W&O) and IT Netherlands (Appendix A). The retail segments operate with a strong market and customer focus, whereas Wholesale & Operations provides network services to both internal KPN segments and external wholesale customers with a strong emphasis on operational excellence.
Outside the Netherlands, the division Mobile International contains the subsidiaries E-Plus in Germany, BASE in Belgium and, given the similar nature of the business, the Dutch mobile wholesale activities.
The new reporting format has no consequences on the overall financial results for 2005 and 2006 nor on the issued guidance (Appendix B). However, as the former Fixed and Mobile divisions no longer exist, the numbers on a divisional level do change. The new reporting format is a reflection of the underlying strategy and operations in each division. Please note that during the transition phase, KPN will also provide additional unaudited pro forma disclosure on the previous reporting structure, in order to allow for comparability with peers.
In the new reporting format the margin from the former Fixed segments is enhanced by wireless services, leading to higher margins. Changed intercompany flows and changed recognition of mobile terminating at Wholesale & Operations result in lower internal revenues and a higher EBITDA margin. Depreciation and amortization in Wholesale & Operations have increased due to centralization of assets.
KPN will be reporting its results for the first quarter of 2007 ending 31 March 2007 on 8 May 2007.
Consumer generated € 4.2 bn in revenues in 2006, 5% higher than in 2005 (Appendix C). This revenue growth was predominantly the result of a step-up in wireless services following the consolidation of the Telfort acquisition in October 2005. Traditional wireline voice revenues are declining due to a proactive migration to VoIP. This VoIP migration is reflected in strong broadband revenue growth, albeit at lower margins. From a cost perspective, investments in the customer base in VoIP and TV are partly offset by subscriber acquisition cost reductions in Mobile.
The Consumer strategy builds on KPN’s strong position in the Dutch market in wireline voice, broadband, mobile and TV, in addition to a multi-brand strategy and extensive distribution capabilities. Going forward, KPN will take full advantage of this position by cross- and upselling, developing multiplay propositions and Fixed-Mobile integrated offers. Recent launches in this area are a homezoning proposition, flat-fee propositions for Telfort and a new consumer loyalty program.
In the Business market, KPN generated € 3.3 bn revenues in 2006, 3% lower than in 2005 (Appendix C). Part of the revenue decline can be attributed to a reduction in traditional wireline voice minutes and the migration of customers with leased lines to lower priced E-VPNs and IP-VPNs. The pressure on the traditional portfolio is partly offset by lower costs to Wholesale & Operations. Revenues from new business are growing, examples being (managed) applications and network outsourcing. In wireless services, KPN has a market leading position resulting in solid revenue growth at lower acquisition and retention costs.
The Business market has clearly demonstrated the need for integrated services. In Business, KPN now has fully integrated its marketing, sales and service approach across wireline and wireless services, and is rapidly expanding its Fixed-Mobile portfolio. In this market, KPN is transforming from a connectivity service provider towards an integrated ICT services provider.
Wholesale & Operations
The Wholesale & Operations business generated € 3.9 bn in revenues in 2006, 3% lower than the previous year (Appendix C). About 70% of these revenues are internal revenues from the retail segments and the remaining 30% originates from third parties. Line loss and lower traditional wireline traffic volumes in Consumer and Business are only partly offset by higher wireless traffic volumes. External revenues are fairly stable, the combined effect of lower revenues from originating and terminating minutes, and higher volumes in transit and international traffic. Overall, there is a shift from services with higher margins to services with lower margins. Moreover, cost savings in the traditional portfolio are partly offset by launch costs for the new IP service portfolio.
KPN is now fully integrating its wireline and wireless networks respectively, which will streamline the services portfolio and will result in additional efficiency gains. In wholesale, KPN is expanding its service portfolio to internal and external customers, e.g. with Wholesale Line Rental (WLR) and Wholesale Broadband Access (WBA). Moreover, KPN is building an All-IP environment which provides an IP service portfolio at structurally lower costs.
Mobile Wholesale NL
In our Mobile International division, Mobile Wholesale NL generated € 0.3 bn in revenues, 50% higher than in 2005, due to strong market growth in the wholesale segment. After a step-up from the Telfort acquisition, this segment has shown strong profitable organic growth, as KPN has attracted the most attractive wholesale partners and the business model has low subscriber acquisition costs. KPN’s mobile wholesale strategy focuses on leveraging wholesale partners, brands and platforms across the footprint.
KPN Telecom NV (NYSE: KPN)
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