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Crisis? What Crisis?

On Tuesday, KPN Telecom NV (NYSE: KPN) was the first of the big European telcos to release its second-quarter results, and there was remarkably little for doom-mongers to chew on. The company beat most of its targets for the quarter, with improvements across almost every metric, with the exception of net profits. (See KPN Reports Q2.)

On Thursday, Telia Company followed with an equally benign set of figures, which saw net sales and margins both rising. (See TeliaSonera Reports Q2.)

It's all a bit puzzling for those who expect incumbents to fall off a cliff at any time, victims of both the credit crunch and their own inability to adapt to the transition to an all-IP, Web-centric service universe.

Part of the reason is that telecommunications spending is becoming more resistant to changes in the wider economy. More and more services are provided on a flat-rate basis, meaning it's an all-or-nothing decision for consumers – and most see the Internet and mobile telephony, in particular, as essential services. Only a serious recession would have any impact on that.

But the results also reflect the fact that telcos such as KPN are proving that the transition from last-generation to next-generation is not beyond them. KPN is operating in one of the toughest and most progressive markets in Europe, but its battle to adapt may be starting to pay off.

For instance, KPN's net line loss was down from 110,000 in 2Q07 to 40,000 in 2Q08, and its number of VOIP customers has climbed to almost 1 million, or about 15 percent of all Dutch households. The number of TV subscribers also rose to more than 650,000. And that fall in profits was both a result of higher capex (up by 38 percent to €451 million), which is funding KPN's pioneering construction of an all-IP NGN, as well as the conversion of the E-Plus mobile network to HSPA, and a reflection of the lower headcount needed in this new environment (generating restructuring charges).

None of this means that KPN and other incumbents are a no-brainer for investors. There are plenty of stumbling blocks ahead. Will big investments in new wireline and wireless access networks really generate new revenues from new services? Can they achieve the big reductions in operating costs that they are promising investors? And can they persuade regulators that they are not frustrating, but actually enabling the ongoing ICT revolution? These are formidable challenges, but KPN's results demonstrate that the incumbent telcos have not run out of answers just yet.

— Graham Finnie, Chief Analyst, Heavy Reading

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