Koninklijke KPN NV

F:KPN

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen. And welcome to the KPN's First Quarter 2019 Earnings Webcast and Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to your host for today's conference, Ms. Grubesic, Head of Investor Relations. You may begin.

[Bisera Grubesic, Head of Investor Relations]

Thank you, operator. Good afternoon, ladies and gentlemen and welcome to KPN's First Quarter 2019 Results Conference Call. 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 slide, which 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 and ambitions, which were also included in the press release that we 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, Bisera, and welcome, everyone. Jan Kees and I will take you through a short presentation on the first quarter results of 2019 and the outlook for the full year.Our performance in the first quarter reflects a mix of an ongoing competitive environment and the impact of the execution of our strategic actions. We are all making good progress with the accelerated simplification and digitalization of our company, which delivered significant cost savings in the first quarter. On the other hand, in Business, customer migrations to our future-proof KPN ONE portfolio and value-over-volume approach had an adverse effect on revenues. We achieved adjusted EBITDA after lease in line with last year and free cash flow in the quarter was impacted by intra-year phasing.We're confident to deliver on our full year outlook. Jan Kees will explain this further. We finalized the disposal of iBasis in February, allowing us to fully focus on our Dutch operations.Before turning to Q1 results, let's shortly summarize our strategy and the main pillars driving KPN's performance. Our ambition for the 2019-2021 period is to deliver organic growth in a sustainable way. To achieve this, we are accelerating the execution of our strategy following 3 main strategic pillars. First, the best converged smart infrastructure. We are building the digital highway of the Netherlands to become the undisputed quality leader. Second, focus on profitable growth segments. This means we will leverage our strong market position to further drive our convergent strategy with a clear focus on value over volume. And third, acceleration of simplification and digitalization. We will accelerate our IT simplification, rationalize our core network, and we are moving to a more simplified organization. We'll give an update on these 3 pillars throughout this presentation.We told you already that we have been talking -- taking all the necessary preparations for our accelerated fiber rollout strategy. To realized 1 million extra homes of Fiber to the Home, we started construction in 11 locations and we expect to ramp this up by the end of the year. To provide our customers with a true future-proof connection and the best possible customer experience, we have chosen to deploy Nokia latest G-PON technology.Currently, we are preparing for this network typology and expect the first customer to be connecting in second half of the year. But at the same time, we are making the network ready to take the next steps and use XGS-PON. This will allow symmetrical up and download speeds of up to 10 gigabits per second. Also, our mobile network is of outstanding quality as recognized by the leading P3 mobile network test. KPN scored 961 out of 1,000 points. From all Dutch operators, we have shown the biggest improvement in performance compared to last year. We expect that this -- that with a full modernization of our mobile network in the coming years, we can further expand our progress and become the undisputed quality leader with the best access network.Everything we do is for our customers. We sincerely believe that customer satisfaction will lead to better financial results, and we are intrinsically driven to make our customers happier. In fact, in Q1, we saw record-high Net Promoter Scores in both Consumer and Business. On top of that, we are improving our delivery training business and reducing our time to market and number of products. This makes us confident we can further improve customer experience. Moreover, we recently were ranked #1 among Dutch companies when it comes to reputation. We received this award from the leading reputation institute. This award is a sole recognition of the work of all KPN employees who exceed customer expectations every day.Another core pillar of our strategy is to drive growth in convergence. Taking this into account in combination with the current competitive environment. In January, we made the announcement to fully focus on our strong and powerful KPN brand. The KPN brand is ready to serve all customer groups in the various segments. From budget services to premium services. That is why we will enrich the KPN brand with best signature features of Telfort, XS4ALL and Yes Telecom brands over the course of the next 2 years.This will enable us to offer consumers and businesses and even better user experience with our leading combinations of fixed and mobile services, with a much more efficient operating model. It will improve the quality of our services and time to market, allowing us to bring innovation to the market more quickly. The first milestone in this brand strategy will be the closure of the Telfort shops, which is scheduled for the next week already.Now let's have a look at the performance of our Consumer segment in the first quarter. Our continued focus on value and convergence has further strengthened our position as a leading converged operator in the Netherlands. We added 14,000 converged broadband customers, reflecting a penetration rate of 46%. The new brand strategy will further drive convergence of the brands and convergence takeup. And we were able to again grow our broadband base on what? Correcting for the migrations to our small business proposition. We strongly believe that our accelerated fiber rollout and personalized approach will contribute to further growth on our high-value broadband base going forward.Revenues in consumer fees were up slightly compared to last year. The effect of a higher fixed ARPU was partly offset by a declining base of our Digitenne and legacy PSTN customers. KPN's focus on high-value customers is shown by our fixed ARPU increasing more than 5% in Q1. This was driven by price adjustment last year but also by more people taking value-added services. KPN has a continued premium offering approach and positioning in the market. If we compare ourselves to competition and also look at the current promotions, we see that we have similar or premium pricing across the range of different bundles. But we also offer a premium customer experience as evidenced by our Net Promoter Scores. The Dutch mobile market continues to be characterized by strong competition, and this is reflected by our postpaid ARPU decline 5% year-on-year. As you all know, KPN has a very loyal customer base. The declining ARPU is, therefore, partly related to those customers that are only renewing their subscription once every 3, 4 or 5 years instead of every 24 months. And they were on an old proposition with much higher ARPU levels. A large part of these customers has now switched to new propositions.We want to highlight that the lower ARPU is more driven by these renewals than by inflow. We continue to focus on our high-value customers, and we are confident that we can manage our postpaid ARPU to remain around the current level also driven by our new brand strategy. Again, we see solid performance of our KPN brand with a more or less flat customer base during the quarter. The customer base saw our no-freeze brands, Telfort and Simyo, witness a moderate decline. However, this was much lower than in prior quarters.Furthermore, we continue to see solid takeup of our convergence propositions. We added 61,000 converged postpaid customers during the quarter, reaching 59% of our total postpaid base. For the KPN brand, its performance is much better at 70% of our postpaid base.In Q1 2019, business revenues declined 4.9% year-on-year. Decline in communication services and IT services was only partly offset by growth in Professional Services & Consultancy. However, it is important to realize that a considerable portion of the total revenue decline in business is self-inflicted. This means that it is driven by our strategic actions sort of accelerated migrations in our value-over-volume approach. These actions have a negative impact on the revenue in the short term but as we have explained, they are aimed in improving profitability in the mid to long term.Our strategy in business is based on a converged and simplified product portfolio and the clear value-over-volume approach. For instance, our core IT services, such as security and workspace management, saw a solid growth in the quarter. However, the reported decline in IT services of 3.5% is entirely driven by one of low margin licenses revenues that we recorded in Q1 2018. It is not that we don't sell licenses anymore, but we only do so if we can deliver them as part of the total customer solution, including recurring service revenues for KPN with a good business case for KPN.As you already know, we are accelerating the migration of customers to our future-proof KPN ONE platform. As of Q1, already 1/2 of our SME customer base has migrated from legacy services. In the migration process, we face both line rationalization and an adverse ARPU effect. However, line rationalization is also driven by general market trends. Many companies are moving to mobile only and keep only a very limited number of fixed lines.We aim to have old SME customers migrated by mid-2020 and all large enterprise customers by end-2020. Moreover, once we have migrated customers, we see ample opportunity to up and cross sell additional services. Also, churn for KPN customers is much lower providing a solid base of profitable revenue growth in the future. We strongly believe that the current strategic actions are value accretive for all stakeholders in the long run.In the first quarter of 2018, we introduced the converged proposition for small business customers. We see a very solid takeup in the first 12 months, with already 1/3 of our customers taking both fixed and mobile services. Migrations from the Consumer segment to this proposition creates some cannibalization on our headline rolled-on performance in Consumer. However, we see a significant ARPU uplift between EUR 5 and EUR 10 per month among the migrated customers. This is also driven by an increasing uptake of additional value-added services such as the addition of television package. There is a clear need for these customers to be treated as true business customers, which makes them happy to spend more with us.So while these migrations impact our headline consumer net add, we are actually pleased that we can extract additional value from these customers. The moment we move customers onto the KPN ONE platform, we will immediately see a reduction in terms of costs of 25%. So the costs to serve our customers will be lower. And this is already happening when we migrate our customers. In addition, the number of IT systems will decrease dramatically. We are going to cut off the complexity that we have because we are moving from legacy onto the new platform. And finally, we're simplifying all the internal processes. We are not talking about technology only, but we are talking about the way we are organizing ourselves. The way we manage our business, everything is going to be simpler. So from big complexity to simplicity. And these all should lead to stabilize end-to-end adjusted EBITDA after leases for the business segment by mid-2020. On that note, let me hand over to Jan Kees.

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

Thank you, Maximo, and welcome, everyone. As you all know, we adopted IFRS 16 accounting standards as of the 1st of January 2019. We already shared the restated figures to you in March. Under IFRS 16, the costs related to former operating leases are no longer recognized as OpEx but are transferred below the EBITDA line. They are now recognized as depreciation of the right-of-use assets and interest-only liabilities. At KPN, we treat leases more as operational items rather than a financing instrument. And therefore, we introduced 4 KPIs to reflect this: adjusted EBITDA after leases or, if you will, EBITDAAL; adjusted indirect OpEx after leases; free cash flow, including repayments of leases; and leverage ratio, which is calculated as net debt, excluding leases, divided by adjusted EBITDA.Looking at the main financial metrics for the quarter, we report revenues of slightly below EUR 1.4 billion, 2.9% lower year-on-year. Adjusted EBITDA after leases was in line with last year at EUR 563 million and we generated EUR 69 million of free cash flow. In Q1, free cash flow is seasonally impacted by phasing within the year. I will explain each of these figures later in the presentation.From this table, I would like to point you towards the row for adjusted indirect OpEx after leases as that is where you can track our current cost savings program. We recorded a net profit of EUR 89 million, which is 10% lower year-on-year. That was mainly impacted by higher restructuring costs, partly offset by lower net finance costs and lower income taxes. In our full year outlook, we already indicated that restructuring charges will be higher this year and this is visible in the Q1 results.Now let's look more closely to our revenues. Revenues declined 9% in the first -- 2.9% in the first quarter. In Consumer, the decline was fully driven by lower mobile service revenues and lower handset sales. Mobile service revenues declined 4.6% year-on-year mainly driven by lower postpaid ARPU, as Maximo here just explained. Residential revenues grew slightly. The lower base for our DVB-T and traditional voice services both offset by a higher fixed ARPU.Business revenues are considerably impacted by the migration of our customers and our value-over-volume approach. But also customer needs in B2B are changing, leading to structurally lower revenues from fixed voice and legacy IT services such as PBX and conferencing. However, we are migrating them to a future-proof portfolio with better upsell and cross-sell opportunities and a higher Net Promoter Score. These revenues from Professional Services & Consultancy increased compared to last year, supported by higher revenues from integrated solutions at KPN's largest customers and additional revenues from consultancy services.In Wholesale, revenues grew 3% year-on-year, as a higher number of data users, increasing data usage and more revenues from visitor roaming led to higher mobile service revenues.Looking at adjusted EBITDA after leases. We see that our accelerated simplification and digitalization initiatives are delivering successful cost savings across all buckets. Costs for our IT and technical infrastructure were 18% lower compared to last year. This was partly driven by contract renegotiations with suppliers as well as a reclassification to COGS as per Q2 2018. But costs of goods and services were also lower, mainly as a result of lower handset sales, as I indicated earlier. Personnel expenses decreased year-on-year due to reduction in both own and temporary personnel.We are making good progress with the accelerated simplification and digitalization of our company, which delivered significant cost savings of EUR 27 million in the first quarter, a good start. We are very confident to reach the target of approximately EUR 350 million of net indirect OpEx savings in the coming 3 years. We were able to track our performance in quarterly disclosures. The number to look for as the basis of these savings is the figure for adjusted indirect OpEx after leases, which was just over EUR 2 billion in 2018.Looking at our cash flow in the quarter, here you see the full bridge between adjusted EBITDA after leases and free cash flow. But let's move to the free cash flow development in a bit more intuitive graph. We generated EUR 69 million of free cash flow during the quarter, which is 53 -- 43% lower compared to last year. This is mainly driven by higher restructuring cost and higher CapEx. As you can see in the table on the previous slide, higher CapEx was mainly due to the accelerated fiber rollout. However, free cash flow in the first quarter is impacted by intra-year phasing of interest expenses and working capital movement that normally put more pressure on cash flow in the first 3 months of the year.Looking at our financial position. We redeemed another one of our high-coupon bonds in early February. Taking out EUR 465 million senior bond with a 7.5% coupon, will lead to almost EUR 35 million lower annual cash interest expenses as of next year.As of the end of the first quarter, net debt was EUR 188 million lower compared to the end of Q4. It was mainly driven by the sale of Telefónica Deutschland shares and free cash flow generation during the quarter. As of 31st of March, we owned a stake of 3.5% in TEFD.Furthermore, we signed a credit facility of EUR 300 million with the European Investment Bank on the 1st of April under favorable terms. This facility is dedicated to our planned mobile network modernization. At 2.5x, our leverage ratio remained stable compared to the fourth quarter of 2018. As I already indicated earlier, we prefer to treat leases as operational items rather than as financing instruments. Therefore, our definition of leverage ratio treats leases the same way. We take net debt excluding all leases; and for EBITDA, we take the metric after leases. Take into account the lease-related expenses.Therefore, we remain committed to our target of less than 2.5x in the medium term for leverage. For transparency, we also show you the leverage ratio under the IFRS 16 definition, which is 0.2x higher.Now let's turn to outlook. Our outlook for 2019 reflects the new financial KPIs. But apart from the outlook -- apart from that, the outlook remains unchanged because it remains important to see our outlook for the full year in perspective of our ambitions for the period until 2021, we also reiterate these ambitions.We expect adjusted EBITDA after leases to be aligned with 2018 and organic growth over the full 3-year period. We expect stable CapEx of EUR 1.1 billion in all 3 years but with a substantial change in the mix towards access investments, and we expect incidentally lower free cash flow in 2019 driven by front-end loaded restructuring charges that year. But for the full 3-year period, including 2019, we expect a mid-single-digit CAGR driven by growth in EBITDA after leases. Finally, despite incidentally lower free cash flow, we intend to grow the regular dividend of 2019 to EUR 0.125 per share.The progressive dividend reflects our confidence in the execution of our strategy for the coming years, which will deliver organic sustainable growth. So let me now briefly wrap up with the key takeaways. Our performance in the first quarter reflects a mix of an ongoing competitive environment and the impact of the execution of our strategic actions. We are making good progress with the accelerated simplification and digitalization of our company, which delivered significant cost savings in the first quarter already.In Business, strategic actions are impacting our top line, but strengthen us in the confidence that end-to-end adjusted EBITDA for leases will stabilize mid next year. The KPN brand remains solid in an ongoing competitive environment in the Netherlands. We achieved adjusted EBITDA after leases in line with last year and free cash flow in the quarter was impacted by intra-year phasing. And finally, we are on track to realize our full year outlook and remain confident to reach our medium-term ambitions. Thank you, and now let's move to your questions.

[Bisera Grubesic, Head of Investor Relations]

Thank you, Jan Kees. Before we start, a few remarks. [Operator Instructions] And I would now like to hand over to the operator for the Q&A.

[Operator]

[Operator Instructions] The first question is from Mr. Polo Tang, UBS.

[Polo Tang, MD & Head of Telecom Research]

I just have 2 questions. The first one is since your Q4 results, there's obviously been news flow about potential private equity interest from Brookfield. Is there anything that you would do differently, if you're a private company, that you can't do currently? That's the first question. And the second question is really just on cost savings and restructuring charges, can you give us an idea of the phasing for both cost savings and restructuring charges through this year? So as in Q1, we delivered EUR 27 million of cost savings and taken EUR 36 million of restructuring charges. So can we expect the restructuring charges to be front-end loaded and for cost savings to build through the year or alternatively, is Q1 representative for what we can expect through the course of the year?

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

Yes. Thanks for your questions. Of course, we don't comment on any rumor. Your question is that if we feel that potentially going private, this would change our plans. The answer is we don't have any prejudice on being a public listed or going private.Our main interest is to develop, deploy our strategy. And of course, to do everything we have to do in order to satisfy our different shareholders and stakeholders.

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

Yes. And as to the phasing of both the OpEx savings and the restructuring charges, that is always a fee paid, of course, some savings. For the full year in 2019, we expect a peak in restructuring as already indicated in December at the Capital Markets Day. We do not give specific guidance on a per quarter restructuring charges for this year. We made a very good start in 2019, both in restructuring as well as in OpEx savings. The restructuring charges in Q1 are EUR 36 million. It's not an automatic that you can say, okay, I multiply that by 4 and then you have the full year restructuring charges. However, we also do see and I would say that -- I would highlight it as a kind of a positive, that we also have seen in the first quarter natural attrition, a bit higher than expected, which does save us some personnel costs, but also saves us a little bit on the restructuring charges as well. But for the rest, I reiterate what we have said in December on this, 2019 will be hit somewhat by extra restructuring charges, but it will add to our EUR 350 million for the full fee net OpEx -- indirect OpEx savings.

[Operator]

The next question is from Keval Khiroya, Deutsche Bank.

[Keval Khiroya, Research Analyst]

One question on business and one question on OpEx, please. So you've very clearly talked about the shift in value-over-volume and the impact of Q1 last year having these low margin license revenues. When thinking about the shift and what it means for the rest of 2019 quarters, should we expect a similar impact for the rest of 2019? Or was the back end of these low margin revenues very different in the 2018 quarters. And secondly, just coming back to previous question, I understand you can't give very clear color on the quarterly impacts on OpEx, but just if we think about personnel savings, is it still reasonable to assume that we should see a bigger saving as it progressed through the year and your recent agreement with the Works Council?

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

Yes. On the business revenues, as we mentioned, there are several self-inflicted effects, that are resulting in revenue decline for the B2B. The first one is the accelerated customer migrations to the KPN ONE platform. We have already achieved 50%, which means that 50% of the customer base has already migrated from traditional fixed voice and legacy broadband services. And on the value over volume, we are deliberately not participating in deals, mainly hardware deals, and we also have to consider the large license deal in Q1 2018 that boosted revenues in the first quarter of last year. If we look at the -- all the different buckets, then we see that on Professional Services, we are growing year-on-year, 3.6%. Higher revenues are supported by higher revenues from integrated solutions at KPN's large customers and additional revenues from consultancy services as well.On the mobile service revenues, the decrease is 8.8% year-on-year. We have a lot of pressure on LE & Corporate segments. Traditional fixed voice has declined by 15% year-on-year, and this was mainly due to rationalization and migration to voice services. Revenues on IT have declined 3.5%. However, if we look at the growth on security and workspace, that is really good and is partly offset by declining revenues from licenses and hardware. On the Internet of Things or the IoT proposition, the growth is 5.8%. So all in all, what we've seen this moment is that if we consider or we net the business revenues performance of the self-inflicted, then we will have a better performance. And the more we proceed and accelerate on our programs, which are, I mean, perfectly in line with the strategy we presented last year, then at a certain point, we are going to achieve our main target, which is end-to-end EBITDA stabilization on the B2B segment. And later, we will have revenue stabilization as well.

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

Yes. And as to the question of restructuring and talks to the Works Council and unions, although I cannot directly comment on our ongoing negotiations with the Works Council and union side, I can say they are on track and they are in a positive manner. And not necessarily that they are even front loaded as to our plan but what is helping us at the moment, is actually more the Dutch labor market, which is one of very low unemployment and that's also one of the reasons that natural attrition is somewhat higher than we accounted for. So I would say, helped by the external conditions, we see a positive, also positive development of our FTE cost and our labor-related spend. And at the same time, the negotiations with the unions and the Works Council are also on track as well. So all in all, a positive development on labor-related spend. Also, the discussions with our suppliers, in that regard, are also going into the right direction as well and also there we see savings as well. So a good start of the cost savings program, which gives us tailwinds and even more confidence to deliver at least our promises of the Capital Markets Day in December on cost reductions.

[Operator]

The next question is from Mr. Frederic Boulan of Bank of America.

[Frederic Emile Alfred Boulan, Senior Analyst]

So first of all on the -- just going back to mobile quickly. So rationalization, so if you can discuss a little bit, in particular, how you maintain to -- plan to maintain segmentation on quality and services without having different brands? And more broadly, longer term, if you can shed a bit of light on expectation on the -- on mobile service revenue trends in Consumer and also in the other segments you mentioned is other parts with Wholesale and roaming that really helped offsetting the weakness in Consumer, how sustainable is that piece? So any color on that would be appreciated. Second question, sorry, to come back on the topic in terms of restructuring charges this year. So from a cash perspective, I think, you were at around EUR 30 million if you look at the cash restructuring costs in the first quarter, any -- just wondering whether you could provide any color on full year is something like EUR 150 million was a realistic reflection of your comment that it's going to be materially higher than the EUR 90 million or so you did in 2018. So any color on that would be appreciated.

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

Okay. I will take the first one and Jan Kees will elaborate on the second. The one brand consolidation, so let me go back a bit on what is the main intention and the main strategic goal that we are achieving with that. We decided to create under the KPN brand a new value proposition that, of course, will keep the most important segmentation in the market, which means that the KPN brand proposition will serve different customer segments. As I mentioned earlier, we will take into consideration the most important signature features of the different brands that we currently have, XS4ALL, Telfort, Yes Telecom when it comes to the B2B. So we will have different proposals in the market, different offers, that will be addressing the most important customer needs of the different segments that we are currently serving. The fact that we will do this with one brand, means that we're going to have a more efficient operating model. We're not going to have fragmented investment in the market but just investment in one brand, which is the most important brand that we have. The reason I saw an additional value in what we're doing, which is improving enhancing and strengthening even more our ability to cross sell mobile and fixed, which means that we are going to strengthen our strategy in delivering convergent services, which is the most important strategic goal that we have in the Consumer and the B2B.On top of that, by having all offers and propositions under one brand, which is the premium brand, the most important brand that we have, we'll be able to maintain our premium approach in the market. It's like saying that in this moment now we serve customers with different brands. Telfort is somehow a brand that is like serving customers with a budget mix. By translating these propositions into the KPN lineup, we'll have the possibility to be more premium than what we are today. So that will have a positive impact on our ARPU coming forward -- going forward, sorry.Back to your question on the consumer mobile revenue strength, what I can tell you is that we feel very confident that when it comes to the mobile consumer ARPU, we'll not see further deterioration. So we are confident that we can keep this level stable and even increase it also because of the reason that I already mentioned, which is being able to consolidate on brands under the premium one. But also because by enhancing our convergence strategy, then that also will allow us to be more effective when it comes to the dynamic of the consumer service revenues because most of our consumer mobile revenues will be attached, embedded into the convergence proposition. This is relevant because in this first quarter, we posted a quite significant result in terms of postpaid mobile customers that are already convergent. We're talking about 59%. And we had 61,000 new postpaid customers convergent. And that means, that the more mobile customers we have on our convergence proposition, the more the customer life cycle is going to improve because the churn rate is going to be lower, and because we will have also the ability to improve our proposition by adding new services, the IoT services as an example but security will be also another opportunity. Again, our strategy is to increase our revenues in the convergence domain. This is the most future-proof domain that we have and that's also supported by the way we are now improving the quality of our infrastructure because we are rolling more and more fiber. That is absolutely and definitely the most future-proof technology that we can deploy in the market.

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

Yes, and just on cash and restructuring charges in 2019. The Q1 impact is not necessarily exact reflection for the full year. Let me just reiterate, it will be materially higher in 2019 as a one-off than 2018. But it will support a very positive business case because, typically, the payback period of restructuring is roughly a year or so. So it will help 2020 EBITDA very much already. And we have made a good start, but we are accelerating and front loading our restructuring. So this year will be a very positive in terms of restructuring charges in the fuel -- future EBITDA. But on cash, we will see the impact this year as an incidental one-off as an extra-elevated level of restructuring.

[Operator]

Your next question is from Mr. Luigi Minerva, HSBC.

[Luigi Minerva, Senior Analyst]

The first one is a bit theoretical but I would appreciate your views. And it's about the -- particularly the fixed line network ownerships. So whether you believe for KPN, it is more valuable to keep network and services integrated or whether there are opportunities to exploit, maybe on the regulatory side, that would put you towards a network separation scenario. And then secondly, on the competition evolution during the course of the year, maybe if you can comment on the fixed line dynamics now that the cable regulation has been broadly clarified and also on the mobile dynamics has -- as the T-Mobile entered it to integrate their operations.

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

Yes, thanks for your question. On the first one, there is about the network separation. We are looking at it this moment, we're just analyzing, seeing and observing all the different initiatives on network separation that we have worldwide, in particularly the ones that we have in Europe. There is not a clear evidence in this moment on what would be the advantage if we're moving to a network separation. There are some pros and cons in the moment. What we are doing in this moment is that the most important goal is really to build the right infrastructure in the country. And the right infrastructure in the country is a Fiber to the Home infrastructure. Just in order to have not only a quality but also a technology advantage vis-a-vis any other competitive technology in this moment available. The moment you do that, could also bring an advantage, future advantage and benefit, which is the fact that if you have an infrastructure that is the leading infrastructure, then you can also have the leading platform in order to serve as many customers as possible. But then again is something that has to be seen in the future but definitely in line with our strategy.When it comes to the regulations, yes, we have the new price list of VodafoneZiggo. In this moment, we don't have any concern about that. We see that there will be in the future, in this short, medium term maybe other potential changes but for the moment there is no any matter of concern. Not only because of the pricing but also because in order to migrate from one platform, which is our copper or fiber network, 2 cables, then you have to make investments. If you need to co-invest on our network, you need to change modem. And in this moment, as you also well know, we have long-term contracts with the most important wholesale customers.

[Luigi Minerva, Senior Analyst]

Okay. And then maybe on mobile, has the new third player integrates? How do you see the competitive environment evolving?

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

Yes, I mean the competitive environment on mobile at this moment is particularly intense. There is competitive pressure in the market, continuous promotions, changes in prices. So we have to look at that very carefully. You know that we have a premium approach in the market. At this moment, if you take our offers, bundles and you compare it to competition, then you notice that we are at par. And most of the times, we are more premium. So we are more expensive but again, the strategy is not mobile only but the strategy is just convergence. It's just having a fixed mobile, TD and other service integration. That's exactly what we're doing. Because of the merger, we cannot speculate on that, of course, but we see that in a number of quarters from now maybe there could be more, maybe, or better dynamics when it comes to competition.

[Operator]

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

[Paul Sidney, Research Analyst]

And I just had a couple of questions, please. Just coming back to the Consumer postpaid ARPU trend in the quarter, I was just wondering -- you pulled out customers moving from sort of legacy offers that have been on those legacy offers for 3, 4, 5 years. I'm just wondering is there any particular reason why Q1 '19 should have been a quarter that was affected by that dynamic perhaps more than in previous quarters. Was it an active sort of migration process that you pursued or was it some other trend? And then just secondly, following up on your comments on wireline, and you offered a new fixed network access proposal last February and offering better commercial terms with the service providers. I was just wondering, where are we on that. Is there any update? And how they've been received by the resellers and also the ACM? And what are the next steps in that process?

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

Yes. On your first question about the postpaid mobile ARPU, yes, between the fourth quarter of last year and the first quarter of this year. Yes, I mentioned that a big part of it is depending on renewals of contracts of those customers that have been on 3, 4, 5 years' contract. And the last part of these customers has already now switched into the new propositions. So the answer is the main impact on ARPU is coming from debt. But as a large part of this customer has now switched, then we feel more confident that the trend of the mobile postpaid ARPU in the next quarter is going to be more stable. Can you repeat the second question, please? I'm not sure that I got it right.

[Paul Sidney, Research Analyst]

Yes, sure. Just to reiterate, trying to get an update on how your improved commercial offers for fixed network access have resonated with the service providers also the ACM and just where we are in that whole process. I guess it is linked in part to the cable wholesale proposal as well but just where we are in terms of when these service providers can commit to you on new terms?

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

Okay. So on our side, we did not make materially -- we did not materially change the wholesale offerings. But as part of VodafoneZiggo, they published new wholesale rates. So, we could be -- we're allowed to present the reference offer by the end of 2018 and then tariffs by the 1st of April 2019. So they did this. Still ongoing discussions though, also a lawsuit by VodafoneZiggo. So we have to see the outcome of that but not -- we don't see any at this point in time, any material changes in the wholesale fixed market as a result of that, also not on our side.

[Operator]

The next question is from Mr. Michael Bishop, Goldman Sachs.

[Michael Bishop, Equity Analyst]

It's just really -- 2 questions from me. Firstly, I was just wondering if you had any latest information on how much higher you think the lifetime value of a converged customer is? I think you said just over 10% at the Capital Markets Day. So I'd be interested if you've seen any change in that dynamic. And then secondly, in terms of the upsell in B2B, I was just wondering how you're finding that upsell proposition in B2B because quite often with telcos as they upsell more services, you clearly run into more competitors. But as you flagged, you seem to be seeing much better NPS score. So I'd quite like to get more information on the dynamics.

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

Yes, let me start from the second -- your second question. We are now seeing -- we are witnessing a positive impact, a positive result every time we migrate a customer into the KPN ONE platform. What we see is, of course, a better cost to serve, which is lower. We see an improvement in the churn rate. And at the same time, we see that for approximately 2/3 of customers, we have more chances to upsell and cross sell new services. So these are very preliminary numbers that we have, but we see that everything that we've got would've been a consequence of the migration into the KPN ONE platform and it's already occurring. Again, positive impact on the NPS, positive impact on the churn rate, positive impact on the cost to serve, and we also have positive impact on ARPU because customers are more willing to subscribe new services.

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

Yes. And on a CLV, you asked about customer lifetime value, that's much more than a 10% because 10% is a higher value per month per household but churn rate if I cut in half or even compared to mobile only, cut by 3 quarters. So CLV, if you're talking about customer lifetime value, is really multiple of nonconverged customers.

[Operator]

The next question is from Mr. Steve Malcolm, Redburn.

[Stephen Paul Malcolm, Research Analyst]

I've got a couple of questions. First of all, just on the fixed line ARPU, it seems like you had a sort of recent material step-up in the year-on-year improvement in Q1 to be running at 3.5%, 4%, and went up by 5.5%. Doesn't know what is a big volume impact there. There was no price rise I'm aware of. So can you just maybe shed a bit more light on what exactly drove that? And then secondly, just on the IT cost, I mean it looks like the biggest driver holding EBITDA flat this quarter was your EUR 20 million reduction in IT cost. And I think you mentioned some of them have moved to COGS over the quarter. I'm not quite sure if I caught that correctly. But can you just sort of give us an idea of how we should think about those costs through the rest of the year? And whether any of those costs have been capitalized? So there's a sort of an EBITDA benefit there or whether that's a real sort of 20% reduction we should continue to expect that to the rest of the year and beyond?

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

Okay. Jan Kees, you take the second.

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

Yes. I'll start with the second question. So the 80% lower is in part is moved to cost of goods sold. However, cost of goods sold, in itself, was also lower this quarter. So also there we managed to reduce cost as well and that's something that we see going forward. So we are -- IT, both OpEx as well as CapEx actually, will be lower for the full year also. And in CapEx, it will shift to more excess CapEx, so on a mobile network modernization and increased level of fiber rollout. And in OpEx, it will help the EUR 350 million net indirect OpEx savings as well. So IT OpEx and Capex are planned to be much lower also this year and going forward.

[Stephen Paul Malcolm, Research Analyst]

Can you just give us a sense what the underlying IT cost reduction was when you strip out the migration to COGS? Give us a sense of what prices over the next 2 or 3 years on your overall IT budget?

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

Yes, so we didn't split it up exactly because there's always some parts moving to different buckets as well. So you can directly -- you can track very transparently the indirect OpEx line, as I just indicated in our P&L. As to the CapEx part, it will shift to, as I said, roughly 30% excess will shift to 50% over 3-year period to excess CapEx. So that's another, well, 15% at least or more percent of CapEx that will shift mainly from IT, lower IT bends to -- from the CapEx envelop to excess CapEx. And in the indirect OpEx item, you can track it through the total indirect OpEx item. But we don't split exactly IT buckets in costs.

[Stephen Paul Malcolm, Research Analyst]

Okay. And on the ARPU question?

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

Yes, on your first question about fixed ARPU, yes, we increased price, I think, last year. So the fiber ARPU increased by 5.4% year-on-year is mainly because of the price increases that we had last year, but it's also due to the fact that we have been able to cross sell some value-added services to our fixed...

[Stephen Paul Malcolm, Research Analyst]

But as the price rise has impacted Q3 and Q4 last year. So it should be brought with the same. And yet the ARPU increase is greater in Q1 than it was in the second half of last year. So I'm guessing there's something else going on. I'm just kind of curious what that is.

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

That's exactly what I mentioned, which is the cross sell and upsell of additional services.

[Stephen Paul Malcolm, Research Analyst]

So that is -- that's up in Q1 versus the second half of last year. Maybe could you just help us understand what those services are that have stepped up to have this 100 basis point improvement?

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

Yes. We're talking about TV services, of course. We are talking about some other ancillary services, but it's mainly about TV. So it's related to our convergence strategy.

[Stephen Paul Malcolm, Research Analyst]

Okay. So it's extra, sort of value-added TV services within -- because the TV volumes obviously didn't increase this quarter. So it's just extra products that TV customers are taking, paper view, stuff like that. Okay, versus -- can I just ask one final one on your mobile wholesale. I mean the 20% year-on-year growth, which is obviously kind of spectacular on the wholesale line. So remember in roaming benefits there, I guess, there's some headwinds coming later in the year through intra-EU calling rates and stuff like that. Can you just give us a sense of how sustainable the growth rate is in the mobile wholesale side of things? Hello?

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

Yes, yes. You're talking about -- Yes, I mean, it's of course, we have an increase of data. We have a huge increase on data every single year. But at the same time, yes, is that a usage mainly? Is more visitor -- is more revenues coming from visitor roaming, so these are the main reasons why that has increased.

[Stephen Paul Malcolm, Research Analyst]

And you think that you can continue to do that through the rest of the year? These trends, you don't see that changing?

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

On data usage, I mean, this trend has been particularly steady over the last few years. So we expect it to be the same.

[Operator]

We are now moving to the last question. Mr. Konrad Zomer, ABN.

[Konrad Zomer, Equity Research Analyst]

My first question is on your Business division. The minus 4.9% decline in revenues, you clearly stated that some of that was self-inflicted. Given that the migration to KPN ONE is going to take at least another full year, probably a little bit longer. Can you quantify for us what the proportion of that 4.9% decline in revenues is related to the lower revenues in the first phase after migration, please? And my second question is on the -- quite a few headlines on the news tapes about the -- about KPN not using Huawei as a supplier to its 5G network. Can you explain why that would not lead to higher costs for you, given that they are quite an efficient cost-efficient supplier of your existing needs?

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

Yes, on your first question about the Business market, we cannot provide you a percentage, but I can tell you that this is a considerable impact on the revenues performance. Then you also have to consider that in 2019, we are not going to have inorganic revenues and the moment we will accelerate the migration, then of course this impact will continue but always with the main objective of stabilizing our EBITDA -- end-to-end EBITDA of the segment by mid-2020.

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

Yes, and as to your vendor, multi-vendor, a question that we have announced today. But actually, it's very clear what we announced today was twofold. First of all, we selected Huawei for our radio access network. And as a part of our multi-vendor strategy, where we don't want to be too dependent on one supplier, we said also because of that -- because of multi-vendor strategy but also because of the discussion and debate in Europe about the core networks. We will select for the core networks our supplier from one of the OECD countries. So our suppliers from the OECD countries. So from the Western countries, including Japan, South Korea, et cetera. And then, as to your question does that have any influence on procurement costs. Well, actually, on the radio access network, where we have selected Huawei in our provisional agreement that Huawei is a clear leader both in innovation, technology we had for the competition and also from a price point of view very competitive as well. In core networks, it's a bit different. There you see multiple vendors now coming up, new vendors based on white boxing and software-defined networking and NFV software technologies that you can use hardware -- generic hardware from one vendor and software release from other vendors. So then, not necessarily we will choose one of the big incumbent suppliers. And even there we can select a strategy, which will cost us less money than selecting one of the large telecom suppliers rather than costing more money. So I think this strategy that we have communicated is a perfect blend of a multi-vendor strategy, but taking into account the strength of all companies. We select radio access network, Huawei, which clearly they are the leader, both in quality, innovation and price. But on the core networks, where there is also a lot of security concerns, we see new vendors, which are very price competitive but also very innovative as well. So we have much more choice there, and that's why we communicated this vendor strategy.

[Bisera Grubesic, Head of Investor Relations]

Thanks, Konrad. And this was also the last question of today's conference call. Thank you, everyone, for joining us today. And if you have any further questions, please contact our Investor Relations department. Operator, you can now close the call.

[Operator]

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