Koninklijke KPN NV

AEX:KPN

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to KPN's Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the call over to your host for today's conference, Bisera Grubesic, Head of Investor Relations. Go ahead, please.

[Bisera Grubesic, Head of Investor Relations]

Thank you. Good afternoon, everyone. Welcome to KPN's third quarter results presentation. Before turning to the core of the presentation, I would like to draw your attention to the safe harbor statement on Page 2 of the slides that also applies to any statements made during this presentation.In particular, today's presentation may include forward-looking statements, including the company's expectations with respect to its outlook, where -- which were also included in the press release published this morning. All such statements are subject to the safe harbor statements.I would now like to hand over to our CEO, Maximo Ibarra.

[Maximo Ibarra, Chairman of the Management Board & CEO]

Thank you very much, Bisera, and welcome everyone. I'm here with Jan Kees, our CFO, to take you through a short presentation covering our third quarter results.Let me start by sharing with you the 3 main takeaways from the past quarter. First of all, we have record high customer satisfaction scores, both in the Consumer and the Business segment.Second, in both segments, we see ongoing strong results from our successful focus on value and convergence. And third, our third quarter EBITDA was flat when correcting for the impact of the collective labor agreement. Jan Kees will come back to this later.Over the third quarter, the Dutch mobile market remained quite competitive like in the past quarters. This was especially visible in the no-frills and prepaid segments of the mobile-only market. The lower mobile termination rates were introduced on the 12th of July last year, so the start of Q3 was still impacted by regulation. If you exclude that affect, mobile service revenues declined 2.5% year-on-year. This is an improvement versus the second quarter.And excluding regulation, our postpaid ARPU was flat compared to last year. This was driven by the increasing share of our KPN brand as part of total service revenues, and it is evidence that our focus on the high-value KPN brand is paying off. We also see continued strong results of our successful focus on convergence. We added 53,000 postpaid customers or fixed-mobile customer base, surpassing the landmark of 2 million converged postpaid customers.Also when we look at our residential customer base, we see solid additions to our fixed-mobile proposition. Generally, converged customers are more satisfied and more loyal. Therefore, they contribute positively to our NPS and have a higher average customer lifetime value.Our strong household proposition led to continued revenue growth in consumer residential. The declining base of Digitenne and legacy services such as traditional voice is offset by an increasing ARPU per household.But now let's move into the B2B business. After a quarter of revenue growth in Q2, revenues in business declined again in the third quarter. We had really flat deals during our second quarter results. Moreover, at 1.7% -- a minus 1.7% for the first 9 months, the trend stills shows the market improvement compared to the same figure year-to-date 2017.Let's take a closer look at some of the revenue factors. While IoT is a segment positioned for growth, our revenues here declined 10% year-on-year. This is mainly due to one-off contract adjustments with some of our larger customers. However, we expect usage of these customers to significantly go up in the future, and therefore we believe it is only a temporary effect.Our proposition for IoT remains successful, evidenced by continued strong end-to-end base growth. We added 1.1 million SIM cards over the past 12 months, and we continue to attract new customers to our fully integrated KPN brand. And we see solid growth in professional services driven by increased order intake in previous quarter.We have recorded a first time positive Net Promotor Score for business, and I am proud that the hard work we have put into turning this segment around is now recognized by our customers. They value our simplified and standardized product portfolio. And having added 37,000 customers, we see continued solid demand for our integrated KPN ONE product for small and medium enterprise.Let me now hand over to Jan Kees to take you through the financials.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Thank you, Maximo, and good afternoon, everyone. As Maximo indicated, the impact from regulation in the third quarter was limited to only the first part of July. The effect on total revenues was approximately EUR 4 million. And when excluding this, adjusted revenues declined 1.3% year-on-year. Adjusted revenues in Consumer declined 0.6% year-on-year, fully driven by the effect of low termination rates and a lower base of mobile-only customers. Business revenues continued to witness some tailwind from last year's acquisitions, and this effect will phase out towards the end of the year. But while business revenue has also benefited from additionally low margin hardware revenues in the second quarter, these were not material in Q3.Also revenues were mostly impacted by lower revenues from international fixed voice and by lower fixed and mobile termination rates. This was partly offset by higher mobile service revenues due to a larger mobile customer base.As the negative affects left in Q3, we are confident the wholesale revenues will stabilize around the current level.At the start of July, we agreed on a new collective labor agreement for our employees. This means we provided the rate increase with retrospect as of 1st of January, 2018, and we recorded the full term -- year's impact for the first 9 months in our Q3 personnel expenses. But please note, roughly EUR 7 million relates to the first half of the year. Excluding this effect of EUR 7 million, third quarter adjusted EBITDA would have been flat year-on-year, and our margin would have increased by 60 basis points compared to last year.Regardless of the collective labor agreement, we saw an increase in personnel expenses during Q3. This is mainly driven by in-sourcing of network software engineers that were located abroad and previously recorded in IT/TI expenses. Now let's turn to free cash flow. Over the first 9 months, free cash flow grew almost EUR 70 million compared to last year. Growth was mainly driven by less cash interest rate, less impact from change in working capital and higher EBITDA.Net debt was somewhat higher than at the end of the second quarter. The main reasons, the redemption of the EUR 1.1 billion hybrid bond in September, the payment of an interim dividend of EUR 0.12 per share, totaling EUR 168 million, and the final coupon payment for a euro hybrid of EUR 67 million.Through the redemption, we will save the coupon payment as of next year resulting in real cash savings of EUR 67 million in 2019.But let me now move to the outlook for 2018 and some concluding remarks.Full-year adjusted EBITDA will be in line with last year. CapEx is expected to be around EUR 1.1 billion, and we update our free cash flow outlook to approximately EUR 800 million. And we also confirm our guidance for the full year regular dividend of EUR 0.12 per share, which represents an increase of 9% year-on-year.So to summarize, our customer-centric approach is delivering results, leading to record high customer satisfaction scores in both Consumer segment and the Business segment.Our focus on value and convergence is delivering growth in our fixed mobile customer base and our KPN ONE base.And our third quarter EBITDA was flat when correcting for the impact of the collective labor agreement.Thank you all. We will now take your questions. And we would like to keep today's call about the current trading update. So please save any questions related to our strategic update for the Capital Markets Day. Thank you.

[Bisera Grubesic, Head of Investor Relations]

Yes, we are ready to start with the Q&A. Please limit your questions to 2 each. And in case, there is still some time at the end, you can always request for more questions later in the call. Operator, you can start with the Q&A.

[Operator]

[Operator Instructions] The first question comes from Mr. Polo Tang.

[Yin Kin Tang, Managing Director and Head of Telecom Research]

I just have 2 questions. The first question is really just about the new cable wholesale regulation. What's your take of the impact on the markets and KPN specifically? And my second question is really just about price rises that you put through in terms of fixed line. Why are you not seeing stronger growth in terms of consumer residential revenues? And can you remind us of the quantum of the price rise that you put through? And can you maybe just talk about what some of the drive factors might be that could be assessing the impact of the price rises?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, thanks very much for your questions. Generally, on the cable, we have already had over the past quite solid contracts -- wholesale contracts to -- with our main customers, Tele2 and T-Mobile. These are long-term contracts, are very convenient for our customers, so we don't see, in general, any short-term, medium-term material impact. Then you know very well that in the next period, Ziggo has to come back to us with a price into the market with a pricing on the wholesale on the cable. But we also know that no one is absolutely, like, agreeing with the decision including VodafoneZiggo. And again, we don't see any impact in the short or medium term, material impact. We will understand better in the next few years. Of course, we are modeling all our -- the different scenarios or the different impacts that we could have. But for the moment, we don't see any material impact.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Yes, and Polo, as to your question about revenue in residential. In -- actually in Q3, we saw fixed revenues increase by 0.4% year-on-year, driven by high ARPU per household, but the price effect in itself was higher, but it's partly offset by somewhat lower growth in base. But also because in residential, still we account for legacy products, and we see also continuing decline of somewhat legacy base, such as the older Digitenne television and traditional voice, PSTN, which is part of the net effect, also somewhat lower nonservice revenue is recorded for. So as a net result still would increase but indeed somewhat higher than the ARPU on broadband, which is, as you suggest.

[Operator]

The next question comes from Mr. Keval Khiroya, Deutsche Bank.

[Keval Khiroya, Research Analyst]

One on personnel expenses. On B2B, obviously, last quarter you had higher hardware revenues and some of the M&A impacts still washing out. Could you give us a sense of how just the underlying trend compared to last quarter? Is it stable or have things gotten better at all? And can you remind us of how we should expect trends develop next quarter given, I guess, some of the larger investment in QSight also start to wash out? And then just when we look at personnel expenses, those are up 2% year-on-year. I think, Jan Kees, you mentioned there has been some impact from the IT in-sourcing. Does it explain the full increase that we have seen in personnel expenses year-to-date?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes. On the B2B, yes, the revenues were 3% lower, and this 3% is mainly coming from rationalization and migration from traditional services to the new technologies and integrated solutions. It's clear there is price pressure in a very competitive mobile-only market that is specific for the LE and -- mainly LE & Corporate segments. Then we also had revenues from Internet of Things platform, KPN's Internet of Thing proposition that is declining 10% year-on-year, and that was, as I already mentioned, coming because of contract adjustment with some larger customers we had. And this has been partly offset by growth in professional services, growth in IT services, particularly security services and cloud solutions. Then you also have to note that in the B2B you -- it is better never to take 1 single quarter in order to determine the real trend because revenues in B2B depends on many factors. These are the factors I already mentioned, but there are also factors that in the Q2, and we flagged that in our previous call, there were some revenues or more revenues coming from hardware sales that we're not having in this Q3. And if we look at the underlying trend and the long-term trajectory, that is still a positive long-term trajectory. But of course, we can, and we have to do better in the B2B, in general. And more details will be, of course, shared with all of you in the next Capital Markets Day.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

And Keval, as to your question about the personnel expenses, actually, there are 3 elements to take into account. First of all, the already mentioned CLA, of course, is there for the full 9 months, recorded in this quarter, EUR 10 million in total, of which EUR 7 million is more related to the first half of the year. Then, of course, M&A does not only have a tailwind on our revenues, but it also, I mean, some -- that you buy people as well, and also that increased somewhat the personnel expenses, of course, because it increases at that point somewhat the headcount. And yes, thirdly, extra, that's also substantial part, is the IT in-sourcing, quite a substantial amount of people on the maintenance of the network and monitoring of the network that we have been in-sourcing. Until now, it was recorded for an IT/TI expenses. So that's just moving an OpEx line from one line to another line. And your other 2 also are explained by this. So underlying, we still see a decrease in trend. So we are confident that we will continue to reduce indirect OpEx, including personnel expenses.

[Operator]

The next question comes from Mr. Sam McHugh, Exane.

[Samuel McHugh, Analyst of Telecom Operators]

Just a couple of quick questions on B2B. So firstly on the migrations of customers away from consumer into B2B. Can you roughly say how long you think that will last? I think, maybe 6,000, 8,000 every quarter move across, and how long that could go on for? And then secondly on the Net Promoter Scores, obviously, it's great to have it in positive territory now. What do you think is really the root cause of the improvement? Is it the KPN ONE plan itself? Is it the extra services? And how could you improve this even more?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, on the first question, we have already migrated quite a good chunk of our customers into the KPN ONE platform. But if I'm not wrong, we're approximately around 13% plus of our customer base that have been migrated. We also have made some progresses in the third quarter. Our plan is to accelerate this migration because we need to get rid of the legacy platforms, and make sure that we can get most of our customer base in the new platforms with better cost -- serve to cost and of course, more efficiency. Of course, on this migration, it will take some more time, but we are in -- in this moment deciding how this can be accelerated in order just to complete the migration in the shortest time period.On the NPS, it depends on many reasons. I think, it's in general the quality of the service that we provide to all segments. But, of course, that is also depending quite a lot in their migration to new platforms where the experience changes completely and is absolutely much better. That is definitely one of the main reasons for this NPS increase. In general, I'm quite happy about this performance of the NPS because it means that all our efforts are getting into the right direction. B2B is a complex environment because it is made by different segments. But, in general, all the trajectories are -- underlying trajectories are getting into the same -- to the right direction. Then again, in a few weeks from now, we will have the chance to share much more on that with all of you, and we can have discussions on the way we are monitoring our operational performance.

[Operator]

The next question comes from Mr. Frederic Boulan, Bank of America.

[Frederic Emile Alfred Boulan, Senior Analyst]

So just to come back on the Business side. So I think the pitch from March 2016 on the business area was trying to stabilize the telco legacy business, but also grow pretty aggressively in the IT side. So you're showing some pretty good growth in your IT services and professional services. Can you tell us a bit more which areas have you tackled successfully? In your view, I mean, how IoT seems to be still a very limited piece of the business? And reverse, in the legacy businesses, we are starting to -- we continue to see some pressures in the broadband and network is down quite a lot again. So which areas you think still have work to do? And where we could see some stabilization of the trends? So any granularity here would be welcome.

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes. I think that when it comes to the IT, we see -- we still see good potential in the security services. We are now in the process of making sure that all the recent acquisitions that we have made can be fully integrated, and that those security services can be fully integrated in our value chain. So sales force for the different segments can start really making sure that in our telco product portfolio also IT security services are well embedded. So I see potential there, of course. And the IoT is again another long-term trajectory. We are quite happy about the performance in terms of volumes. This is a volume-driven business. Then, of course, from time to time, there will be some counter adjustments. But in the medium and long-term we see that, I mean, the end result of the multiplication volumes and the ARPU from contracts will be -- will have a positive development.On professional services, okay, that is just a confirmation. Things are getting underway into the right direction. There are other services like workspace and cloud, these are part of our core IT product portfolio. But the main opportunity that we have is that, as you know, our market share in the B2B segment is very high, so we have the opportunity of leverage all the customers we have in the different segments with the right IT product portfolio, making sure that all the new acquisitions will deliver the right products to our mainstream product portfolio. So that is exactly our ambition. And I think that we are getting there, but we are just only at the beginning.

[Operator]

The next question comes from Mr. Usman Ghazi, Berenberg.

[Usman Ghazi, Analyst of Telecom]

I have got 2 questions, please. The first one was just on the Consumer residential. Again, I mean, I think there was an acquisition that we're annualizing in Q3, right? So could you indicate what the shortfall from that annualization was in Q3, please. And then just on the enterprise market. I think, you mentioned that 30% of customers have been migrated to KPN ONE, and then you wanted to accelerate it. I mean, is it fair to say that the largest part of the repricing risk and those customers with the highest migration costs, those have already been tackled? Or is that not correct?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, let me start with your second question on the B2B. Yes, I mean, I confirm this, more than 30% of the customers of the small and medium enterprise have been migrated. We are addressing the large enterprise base as well. It's of course, as I said, a process where there is a rationalization of your portfolio. I mean, if you have several lines, some of these lines are legacy lines, and then you move into the new platform, then you know very well that the first impact as the result of that rationalization, you have like lower value of the full than total contract.But immediately after, if you get the customer on the platform, you will be able to upsell that customer much easier, and at the same time, the cost to serve is going to be extremely low compared to the current one. So it's just that value tactic deterioration because of this migration. I think that we can accelerate more this migration. My ambition and our ambition is to do that, and we are now analyzing what are the different ways in order to get there as soon as possible. But the more we have customers on the platform, the better it will be for all our results. In particular, when it comes to up selling, because then you know the platform will give customers the opportunity to upsell and cross-sell real time which is the unique opportunity that we have never had.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

And as to the question on acquisition that's Solcon. It's a very special niche player targeting religious segment. We didn't disclose the revenue, it's some tailwind, a small tailwind. I can tell you that in Q3 2017, it was 47,000 broadband customers because that's what we disclosed. But with a smaller TV base, then rating would be expected, given the special character of this group. So that's BBB in this segment, but 47,000 broadband customers we acquired, and it's a -- but it's a small tailwind.

[Operator]

The next question comes from Mr. Luigi Minerva, HSBC.

[Luigi Minerva, Senior Analyst]

Two questions. One on spectrum and the second on B2B again. On spectrum, I was wondering if you have any indication of the approach that the spectrum agency is likely to take on the auction or whether they want to create semantical blocks or ring-fenced portion of the spectrum. Or may be more broadly, whether you believe they will in the trade-off between maximizing proceeds from the auction and leaving actually the operators instead more funds to deploy the network, whether -- which one they will prioritize of the 2? And secondly on B2B, just to clarify, if we adjust for all the M&A and the one-offs in Q2, can we still talk about a sequential improvement of the underlying adjusted revenue trends Q3 over Q2?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, on the spectrum, of course, we don't know any detail of the auction yet, so that is why we cannot speculate on that. We are modeling different scenarios as you can imagine. But we don't know the detail yet. The only information that we currently have that again is not final but is what we can consider as quite reliable information is that we will have an auction for the 700 most probably -- most likely at the beginning of 2020. And we will have the auction for the 3.5 around 2022. So we don't have the final date yet, but we only know that this auction is going to be split.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Yes, and as to B2B, a bit more forward-looking. Of course, we have also included in the update that we gave in the Capital Markets Day. But I already can say is that we still see some volatility from quarter-to-quarter as we already always indicated. But we are very confident that we will be able to deliver sustainable margin improvement. And that certainly also what we see happening, yes. So underlyingly we see NPS, Net Promotor Score is improving as already said today, record high, first time positive in B2B. We saw also new products, our target portfolio doing very well, also compared to competition, but it's too early to indicate too much on revenue stabilization. Of course, we will give somewhat longer outlook on the Capital Markets Day, but we are confident that we are able to deliver sustainable margin improvement in B2B also.

[Operator]

The next question comes from Mr. Josh Mills, Goldman Sachs.

[Joshua Andrew Mills, Equity Analyst]

I have 2, please. And the first is just a follow-up again on that B2B point. But -- if I look back at Q2 when you reported slightly positive revenue growth, you -- I think you indicated at that time that there was a 2 to 3 percentage point boost and therefore, the underlying service revenue growth was more like minus 2%. The report in Q3 of minus 3% will also be including some M&A from QSight. So is it not the case that the B2B revenue declines are kind of mid-single-digit and therefore, slightly worse than Q2? And it may be that the margin, the NPS scores improved, but top line hasn't, just really want to make sure I understand that correctly. And then secondly, just on the mobile service revenue trends, you've seen an improvement quarter-on-quarter, wanted to know whether that was to do with a improving competitive environment and particularly whether you have seen a more rational price approach from MVNO players like Simple?

[Maximo Ibarra, Chairman of the Management Board & CEO]

So I'll take the first question. Again, on B2B, we see different things happening, and the 2% to 3% was we said M&A, which the tailwind is also there in Q3, yes. But we also said about Q2 there was some hardware revenues initially also. And actually in Q3, where we have seen them also last year, in this Q3, they were not. So it is always some seasonality in there. So it's very difficult to compare on a real quarter-to-quarter basis revenues in business. That's why we look at more the longer-term trends. And yes, competition is still there, of course, some tailwinds that will phase out in Q4, especially the 1st of December in Q4, but underlyingly, given the positive Net Promoter Scores, given the positive uptake of the new target portfolio, indirect cost reductions that are ongoing on, we do see gradual margin improvements also. So there is some seasonality fluctuate into that, but enough support to be confident about delivering sustainable margin improvement in B2B also.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Yes, on consumer mobile service revenues, I think that there are 2 key messages. The first message is that, our postpaid ARPU is remaining stable, even though we operate in a very competitive environment. But we see the price pressure is mainly on mobile only and effective on no-frills and prepaid segments. So we are good, and we have been doing well in shifting as much as possible the value to the KPN brand, so that is why the KPN brand now has more share in the service revenue mix. And the second information is that as our main focus remains convergence and retention of high-value KPN customers that is what we have been doing and by the way, we have been achieving to attract the KPN brand postpaid base. We have reached 68% penetration. And in Q3 2017, it was 62%. So moving from 62% to 68% into convergent proposition of the KPN or by postpaid base is something that we are quite proud about.

[Operator]

The next question comes from Mr. Emmanuel Carlier, Kempen.

[Emmanuel Carlier, Analyst]

Two questions from my side. One is on the subscriber additions. So since a couple of quarters, it's somewhat weaker. Could you explain in a bit more detail the drivers for that? So with that unbundling in combination, it's somewhat increased competition. And how do you expect that to evolve? What could result in better KPIs in the coming quarters? And then the second question is on the CapEx. So I think, you benefit from deregulation on the fixed side. I would like to know what the impact could be on your CapEx budget.

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, on the customer base, in the Consumer segment, if we take the broadband, there is still negative net adds, but the underlying trend is improving. You know that in the postpaid, broadband space we have also the plan cyclic, which is the complete offer for the SoHo segment and that is positively jeopardizing part of the customer base of Consumer residential. So there is, I mean, a positive news because we get a better ARPU and a lower churn rate when we move customers from the residential consumer into the SoHo residential customer base. But net of that, the number is better than in the previous quarters, so the underlying trend is quite positive. And we believe that also looking at the numbers of September, that underlying trend will be even better.

[Emmanuel Carlier, Analyst]

Is that a seasonal impact?

[Maximo Ibarra, Chairman of the Management Board & CEO]

It's -- I don't see a seasonal impact in this moment. It's more a structural performance.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

And then as to the CapEx question, relating to deregulation on the fixed, are you referring to the deregulation specifically for business parks?

[Emmanuel Carlier, Analyst]

Yes.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Yes, okay. Then I understand your question. So yes, in business parks we have become deregulated, and as a consequence of that we have indicated to roll out more fiber, but also VDSL upgrades to business parks. And this -- speed increases also allow for a lot of value because they allow migration of changing customers to KPN ONE whereas now they have connections that will not be able to be upgraded to KPN ONE. And it's also an opportunity to strengthening our competitive position, both for delivering fiber or VDSL upgraded speeds to our customers on business parks, but also, of course, to delivering KPN ONE. But all this we do within the CapEx envelope that we have. So it is not an extra on top of the CapEx envelope, it is a reallocation that we have done within our current CapEx envelope, so as a result of that, we do not see an increase of our CapEx.

[Emmanuel Carlier, Analyst]

And on top of that, I think you have to upgrade your network class -- your legacy network? So that should result in some CapEx savings as well, no?

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Okay. So you are -- that's the most recent deregulation that we can migrate faster to -- away from legacy, indeed. That will help us to -- well, actually especially also cost savings, it will help us. Some maintenance CapEx but it will also have CapEx involved to do the modernization, of course. But as a net result, especially bottom line, will be affected by an increase of margin in EBITDA because it is -- our OpEx on those older infrastructures are much higher than our fiber new moderate -- modernized networks that we can now rollout now a bit faster. So it will have, in the next few years, a positive impact on our margin profile. More probably than a CapEx influence.

[Emmanuel Carlier, Analyst]

And is that something you can quantify?

[Jan Cornelis De Jager, CFO & Member of the Management Board]

No. Not at this moment certainly. And it will be also part of a much bigger move towards modernization, SDN, software-defined networking, network functionality virtualization, NFV -- network function virtualization, NFV, and moving towards an OIP infrastructure. Ultimately, that will bring us in very substantial savings, very, very substantial savings, but there certainly is something that we want to touch upon on the Capital Markets Day at 28th of November.

[Operator]

The next question comes from Mr. Mandeep Singh, Redburn.

[Mandeep Singh]

So the question is really around the mobile competitive environment and the pending approval or not of the merger deal. Have you noticed any behavioral change competitively from T-Mobile or Tele2 in the run up to the decision? That's the first part of the question. And the second part of the question is, what do you think the outlook would be if the deal is approved or if the deal is blocked? How do you think it could play out?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, of course, we cannot, I mean, speculate on the final outcome of the merger between T-Mobile and Tele2. On your first question, we don't see any, any change or any, like, a different behavior of these 2 players in the Dutch market, I mean, before any decision coming from the European Commission.

[Mandeep Singh]

Sorry, can I just follow-up, because I think you misunderstood my question. What I was trying to say was if the deal is blocked, how do you think the operators might behave competitively? If the deal is approved, how do you think the market dynamics will play out? Not whether you think it will be approved or blocked.

[Maximo Ibarra, Chairman of the Management Board & CEO]

No, no, it's exactly -- my answer was the right answer because I understood perfectly your question. So we cannot speculate on the end result and the outcome of the European Commission decision.

[Operator]

The next question comes from Mr. Paul Sidney, Crédit Suisse.

[Paul Sidney, Research Analyst]

One follow-up question please, on regulation. In February, KPN extended and expanded the wholesale agreement proposal to your service providers. I was just wondering if we could get an update on where we are, and what has been the feedback from the service providers themselves? And also, what has been the response from the ACM?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Well, there's been no -- I mean, if you ask the most important aspect, if they are fine with this regulation as we already mentioned -- I mentioned earlier, there is not let me say like a general consensus on this regulation of cable, because we don't need cable regulation. We don't need cable regulation because we have been already operating in a kind of open access -- with a kind of open-access approach. We signed in 2015 with T-Mobile and Tele2, 2 very important wholesale contracts. They have 7 years' duration, and they are very well articulated. So this is the first point. Second point is that when you move from one technology to another technology, in this case, from KPN infrastructure to cable infrastructure, then you need to go towards some additional investments because changing technology, changing access that will be also quite demanding. So the combination of these 2 factors are quite important and that is why we believe that in the short and medium term, there is not going to be any material impact on cable regulation.

[Paul Sidney, Research Analyst]

But, in general, have you all -- has the extended proposal been taken well by the service providers?

[Maximo Ibarra, Chairman of the Management Board & CEO]

No, we, of course, cannot give any detail on that.

[Operator]

The last question comes from Mr. Paul Sidney, Crédit Suisse.

[Paul Sidney, Research Analyst]

I have 2 questions, please. The first one would be on cost, the incremental cost savings if I understand the disclosure correctly this quarter was EUR 15 million compared to I think EUR 25 million last quarter and EUR 45 million in the first quarter, I am not entirely sure that's just from memory here. So is the EUR 15 million just sort of the ups and downs as this project has come to fruition? Or is this slowdown really something we should be thinking about? And my second question is the IoT contract adjustment. Could you describe a bit more what exactly this means, like contract adjustment that sort of drives the revenues into decline? In particular, against a background that at some point, I think during your commentary, during the Q&A earlier you said that in IoT you sort of have to accept contract adjustments from time to time, if I understood that correctly. Could you just describe what these contract adjustments are? How they happen, how often they happen? If you can give a bit of background on that.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

So the first question about Simplification savings, as -- you are absolutely right. It is EUR 190 million now run rate savings at the end of Q3. That always has some seasonality in that because we can only account for the Simplification savings when and in so far the audit department recognizes the decommissioning of the derelated IT systems and that comes in waves and in blocks. But we remain on track to deliver on our target of at least EUR 350 million savings by the end of 2019. And well, next few quarters will certainly be -- some of the quarters have to be higher than this quarter in order to deliver that, of course.

[Maximo Ibarra, Chairman of the Management Board & CEO]

On your second question about the IoTs. Let me give you a little bit more of color. It's not just one contract, it's just some contracts. When they come to our renewal, that is -- it's more about the ARPU and those contracts had a quite high ARPU compared to other quarters, so now they're getting to like an average ARPU IoT contract. Again, it's renewals, it's a number of contracts and it's -- the driver is ARPU reduction. But, in general, the most important thing is that we see quite a material, huge increase in the volumes of this 1.1 million additional SIM cards on IoT platform over the last 12 months.

[Paul Sidney, Research Analyst]

All right. So -- sorry, just to be perfectly clear on this. What happened in the first quarter now is not a one-off, it is a step change, it is a reset to a new base? So if everything else is equal, we would see a similar trend also in the fourth quarter in IoT? Of course, I understand there's an underlying volume increase as well, but this is not a one-off that you booked out revenues that you had recognized before, but it is a reset of a running contract. Do I understand this correctly?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, of course, when you have a drop, because we have seen the renewal, a decrease in our ARPU for some contracts, then you will see thanks to the additional volumes that we also have in other contracts that we will get, like, an average general increase. So not like a one step down and we will be on that step down, it will depend also on the number of contracts and the volumes we will generate. And the new volumes that we have generated, of course, will generate revenues. So it is, of course, a correction only for the quarter.

[Bisera Grubesic, Head of Investor Relations]

Thank you everyone for joining us in today's call. If you have any further questions, please contact our Investor Relations department. Have a good day, everybody.

[Operator]

Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect your line. Have a nice day.