Good day, ladies and gentlemen. Welcome to KPN's third quarter earnings webcast and conference call. Please note that this event is being recorded. At this time, all participants are in listen only mode. We will facilitate a question and answer session towards the end of today's prepared remarks. If you would like to ask a question, you may do so by pressing pound key five on your telephone keypad. I will now turn the call over to your host for today, Matthijs van Leijenhorst, Head of Investor Relations. Please go ahead.
Good afternoon, everyone, and thank you for joining us for KPN's third quarter 2026 results webcast. With me today are our CEO, Joost Farwerck, our CFO, Chris Figee, and also our incoming CFO, Wouter Stammeijer, who will take up the role on the 1st of November. He's listening in. Before we begin, please note the safe harbor statement on page two. Today's remarks may include forward-looking statements, including KPN's expectations regarding its outlook and ambitions, as also set out in the press release published this morning. All such statements are subject to the safe harbor. With that, let me hand over to our CEO, Joost Farwerck.
Thank you, Matthijs, and welcome everyone. Let me start with the highlights of the third quarter. Group service revenues increased by 2.7% with growth across all segments. Within the mix, Consumer showed continued growth, mainly driven by mobile. Business inflected to growth driven by continued strong SME and an improvement in LCE. Wholesale continued to grow driven by mobile while the decline in broadband subscribers moderated. The underlining business continues to perform with healthy EBITDA and free cash flow growth year to date. Together with Glaspoort, we passed the milestone of 6 million fiber homes, and we remain the clear leader in the Dutch fiber market. Finally, we remain confident to deliver on our full year 2026 outlook and midterm ambition. Chris will take you through the financials later, but first let me briefly revisit our strategy and operational performance.
At our strategy update in November last year, we confirmed we are well on track to deliver on our Connect, Activate & Grow strategy, which is built on three pillars. One, we continue to invest in our leading networks. Two, we continue to grow and protect our customer base. Three, we further modernize and simplify our operating model. Together, these priorities support our ambition to grow service revenues and EBITDA by approximately 3%, and free cash flow by approximately 7% on average over the strategic periods. Let's review our operational performance, starting with fiber. Within our fiber footprint, 80% of the homes passed are already connected, so we have a strong platform to further commercial activation. We've made significant progress with almost 75% of our retail broadband base now on fiber. Consumer continued to grow led by mobile, while fixed remained resilient in the competitive markets.
Customer satisfaction improved further, reflecting what differentiates KPN, secure high-quality networks, excellent service, and a seamless digital experience. Our fixed-mobile conversions base continued to grow and now represents 62% of our broadband base and roughly 2/3 of our mobile base, supporting customer loyalty and value growth. Now let's take a deeper look into our third quarter KPIs. Broadband net losses were 7,000 in the third quarter, and the churn was elevated early in the quarter following the updates to our general terms and conditions, which for one month allowed customers to cancel without a penalty. After July, trends improved through the quarter and at the same time, broadband ARPU remained resilient, supporting continued growth in fixed service revenues. In mobile, we added 24,000 postpaid subscribers. Blended postpaid ARPU increased by 3.2%, supported by a more favorable customer mix and an increased uptake of value-added services.
Combined, these factors drove mobile service revenue growth which accelerated to 5.1%. Now let's turn to B2B. Business returned to growth in the third quarter reflecting continued commercial momentum across all the three sub-segments, particularly in mobile. Customer satisfaction remained best in class, supported by our strong position as a trusted and secure provider. Beyond connectivity, we continue to broaden our mobile proposition with the launch of KPN Mobile AI, helping business customers work smarter and create more value from customer interaction. Looking at the underlying business, SME continued to deliver strong growth slightly above 8%, with strong demand across broadband, mobile, and clouds and workspace. Also, LCE returned to growth with service revenues increasing 2.5% year on year driven by mobile, IoT, and security. Security was particularly strong, although part of that was reflected in project revenues.
Tailored Solutions revenues declined by 3.3%, and that's reflecting the carryover effect of the large contract changes in 2025. That headwind gradually eased out through the quarter and had lapsed by the end of Q3, supporting a further improvement in the fourth quarter. Finally, wholesale. While broadband remained under pressure from the declining copper, net losses moderated, supported by strong fiber net adds and a smaller remaining copper base. Mobile continued to perform strongly, especially supported by our international roaming service. Other service revenues were broadly stable as growth in visitor roaming was more than offset by lower revenues from legacy products and low margin interconnect services. Now, before we move to the financials, a personal note. As you all know, Chris will leave KPN and hand over to Wouter on the 1st of November.
So, this is his last chance to take us through every detail behind the numbers. Chris, thank you for the good cooperation and everything you've done for KPN. I wish you lots of success and fun in your future career. Now, Chris, over to you.
Thank you, Joost. Let me summarize some of the key figures for the third quarter for you and year to date. First of all, the adjusted revenues increased by 2.9% year on year in Q3, driven by both higher group service revenues and higher non-service revenues. Second, our adjusted EBITDA after leases was stable compared to last year or increased by 2.4% on a comparable basis, excluding IPR benefits, driven again by higher revenues. Our adjusted EBITDA margin decreased by 140 basis points year on year to 44.8% of total adjusted revenues. Third, year to date, free cash generation was stable compared to last year, despite the prior year tailwinds from IP sales and IPR benefits. I will give you more details on the underlying cash development later in this presentation. As previously guided, group service revenues accelerated to 2.7% year on year, with all segments contributing.
Within the mix, consumer service revenues increased by 1.8% year on year, primarily driven by mobile. Business service revenues came in strong and increased by 3.9% year on year, driven by continued momentum in SME and a rebound in LCE. Wholesale service revenues delivered 2.1% year on year growth in the quarter, driven by international sponsored roaming. Our underlying EBITDA, that is excluding IPR benefits, grew by 2.4% year on year, supported by revenue growth. The underlying EBITDA margin decreased by 80 basis points or 45.5%, mainly reflecting higher direct costs, including handset and hardware sales and third-party access costs. Adjusted indirect OpEx increased by EUR 7 million, mainly driven by higher personnel expenses due to the annual wage indexation and the one-off CLA payment in July, partly offset by a reduction of over 400 FTEs over the past 12 months.
Year to date, our indirect OpEx decreased by EUR 12 million, and underlying progress remains in line with plan, and we reiterate our ambition to deliver around EUR 20 million of structural net indirect OpEx savings in 2026, and a total of EUR 100 million savings by 2030, comparing to a 2025 baseline. Our year to date operational free cash flow increased by 5.5% on a comparable basis, adjusting again for prior IP sales and IPR benefits. This strong cash conversion reflects the continued strength of our underlying business, primarily driven by EBITDA growth. Our reported free cash flow was stable year to date as EBITDA growth was offset by changes in provisions and higher restructuring costs. The delta in provisions reflects mostly pension contributions as well as a few other non-cash movements.
Delta and other free cash flow elements mainly reflect prior year lease-adjusted effects from the Althio transaction. Overall, our cash margin remained broadly stable at around 14% of adjusted revenues. Finally, we ended the quarter with a cash position of EUR 440 million after absorbing the impact of the interim dividend over 2026. With that, we continue to have a strong balance sheet. At the end of September, our leverage ratio was 2.5 times, stable both sequentially and year on year, and in line with our self-imposed ceiling. Interest cover remains strong at 9 times. During the quarter, we successfully refinanced our EUR 500 million hybrid bond, and this transaction further optimized our capital structure and reduced our financing costs. Our liquidity position of more than EUR 1.5 billion remains very strong and covers debt maturities through the end of 2028.
Finally, in July, Fitch Ratings upgraded its outlook on KPN from stable to positive while reaffirming its credit rating reflecting our improving free cash flow profile, stabilizing market structure, and the diminishing impact of legacy revenue decline. Overall, our financing profile remains strong and well-positioned going forward. We reiterate the 2026 outlook that we shared with you in July, and we remain confident in delivering our full year financial objectives. In line with our commitment to shareholder returns, we paid an interim dividend of EUR 0.08 per share on August 3 this year, and we completed our EUR 250 million share buyback program. Finally, we reiterate and reconfirm our midterm ambitions as presented at our Capital Markets Day, including our total cumulative shareholder distribution targets. Let me conclude with a few key takeaways.
We delivered solid financial results in the third quarter with accelerated group service revenue growth supporting underlying EBITDA and free cash flow growth. From here, we expect service revenue growth of around 2.5% as the Tailored Solutions contract efforts have lapsed and prior year comparisons effects from IPR and IP benefits are now behind us. Growth was broad-based, with all segments contributing. Mobile maintained strong commercial momentum while broadband remained competitive. We remain the leader in Dutch fiber with about three quarters of our retail broadband base now on fiber and more than six million fiber homes passed. Overall, we are on track to deliver our 2026 outlook and reiterate our three-three-seven mid-term ambitions, including our cumulative shareholder distribution targets. Thanks for listening. With that, happy to take your questions.
Thank you, Chris. Operator, please open the floor for questions.
Ladies and-
Please limit your questions to two. Thank you.
-ladies and gentlemen, we are ready to take your questions from now. If you would like to ask a question, please press pound key five on your telephone to enter the queue. The first question comes from Keval Khiroya from Deutsche Bank. Please go ahead.
Thank you for taking the questions. I have two, and also best of luck in the next role, Chris, as well. Thank you. The two questions. You highlighted the reasons for the weaker consumer broadband KPIs. Would you expect the broadband base to be at least stable in Q4, or do you see any risk still to the customer momentum in broadband? Second, you introduced the ad hoc more for more mobile increase this year in mobile, and you have changed the contract terms in fixed, which means you could presumably be a bit tactical there as well. I appreciate you cannot tell us your pricing plans, but would you say the focus on value over volume has increased and managed the volume side of the equation? If so, thank you.
Yeah, thank you for the question. Indeed, a weaker quarter on the broadband base with a decline of 7,000. You all know that the Netherlands is a competitive market, but the reason that we go below zero is that we saw a temporary churn pressure early in the quarter related to the contract-free periods. That has to do with the change in the general terms and conditions we introduced. It was a call we made, and we anticipated on that. With this, our terms and conditions are up to date, clear, and aligned with the developments in legislation and case law. It provides us also with greater flexibility to adjust our subscriptions and propositions in there or in the future. On that, as you know, if you look back every year, we have introduced one or more price increases.
It's a bit of a sensitive topic in the Dutch markets. We do not communicate upfront on price increases. Having said that, like I just said, in the way we changed our terms and conditions, we see more flexibility to adjust our propositions. We are pretty confident in the developments in Q4 when it comes to the broadband base. I expect broadband base consumer in Q4 to move back above the zero. I expect slight or decent growth in Q4.
That's clear. Thank you.
The following question comes from Carl Murdock Smith from Citi. Please go ahead.
That's great. Thank you very much. Similarly, Chris, best of luck for the future and congratulations Wouter. Two questions from me, please. Firstly, can you talk a bit about the impact of the price of memory and how that's having an impact on the cost of CapEx equipment and handsets, et cetera. Is this manageable within current CapEx envelopes, or could it potentially put next year's CapEx ambition of less than EUR 1.0 billion at risk? Secondly, obviously lots of focus at the moment on the agentic AI and how this might impact potential consumer purchasing behaviors. I'd just love to hear your thoughts on how this could impact the market and what you're doing to prepare for it. That'd be great. Thank you.
Chris will follow up on this. When it comes to our CapEx envelope, we are pretty much focused on the strategy and the financial framework we introduced a long time ago, and we will keep on doing that. Of course, it is a challenge when it comes to impact of memory and prices related to that. The teams are working on it. We do a lot of hedging in the way we purchase upfront. Of course, we also innovate. We buy against higher prices, but we also buy against lower prices due to innovation we do. It is a challenge to run our CapEx, but currently the teams are very well equipped to run it in the way we plan it.
Sometimes it is tough, a challenge for the new CFO, but I am sure we will manage it in a good way like we did over the last six, seven years.
Maybe on that point, Carl, I have two perspectives. My future perspective will love this thing. My current perspective says, "Gee, this is an attention point." Look, as Joost said, our CapEx envelope is a CapEx envelope. We will solve this in the CapEx envelope. It is solvable within the CapEx envelope. It is not easy, but it means an increased focus on reuse, recycle, and refurb. A revisit on the amount of memory compute that you actually need in your device where you do not have too much compute. I think there is optimization going around the actual spends. Then it becomes a matter of reprioritizing CapEx. Obviously, this equipment is critical for our customer experience. You cannot cut it back.
It just means that you have to make choices in the allocation. I think our view is the envelope is the envelope, and we will solve it inside that.
When it comes to your question on AI, on one hand, you could see there is a threat, although I think we managed it well. Agents such as Meta's Muse may reduce churn and switching costs for customers, making it easier for customers to select another provider and to switch in an easy way. On the other hand, the Netherlands is a super competitive market. We know different sites and apps where customers already are very transparently able to compare all the propositions out in the market. KPN ranks well when it comes to prices, Youfone as well. When it comes to quality, we always pop up first. That is something we closely monitor around these developments. You could see there is a threat. I think it is a no-brainer. It exists, and that we have to play a role in that.
On the other hand, we are introducing a lot of agentic AI in our operating model. We have transformation programs ongoing to run the OpEx down in the years to come. We introduced a program related to net savings of EUR 100 million up to 2030, and I am super enthusiastic about the way AI is supporting us there. It creates a lot of opportunities to improve customer engagement and develop new ways of working and to lower our OpEx.
That is great. Thank you very much.
The following question comes from Joshua Mills from BNP Paribas. Please go ahead.
Hi, everyone. I will echo the sentiments as well, Chris. I thought for the last call, I would give you a geeky niche question on the free cash flow bridge for next year. Hopefully, that keeps you entertained. I guess if I go back to the three-three-seven guidance and take the starting point. The 7% CAGR gets you to about EUR 1.16 billion of free cash flow for 2027. Then, if you add on the EUR 15 million or so from the Althio deal, you get to about EUR 1.175 billion. The first question is that the right way of thinking about the maths? Is there anything else I am missing? I understand it is an around 7% CAGR number, so just trying to get to the midpoint. Then if we do the bridge from the EUR 950 million of free cash flow to next year.
If you use 3% EBITDA growth in line with the guidance, that is about EUR 80 million higher EBITDA. If you drop the CapEx to EUR 1 billion, that is EUR 250 million. Adding this all up, you get to about EUR 1.28 billion of free cash flow, which is obviously about EUR 100 million guidance. Could I ask you for the last time to run us through the moving parts in the free cash flow bridge for next year where that EUR 100 million or so of headwinds come from cash taxes, interest costs, any working cap effects, just to help us with our modeling? Thanks very much.
Joshua, I am still thinking whether this is a question or a job application. I think let me walk you through some of the elements. Obviously, leave it for Joost and Wouter to give you the full number for next year. We traditionally give full year guidance when we present full year numbers. T he exact number will be, I guess, on the agenda on the Q4 numbers somewhere in February. I n general, I could say your approach is right. The way we look at it, we have given you a three-three-seven CAGR, and that is kind of similar frame that we apply by setting our own ambitions and targets for next year. So I think it is the right way to go about it from a mathematical perspective. Then moving parts, the way I think about it, you need to have growth in EBITDA.
There will be step down in CapEx to EUR 1 billion. That is more or less in the books in terms of how we plan to manage this. Against it, we will have a step up in tax. I think as you can see this year, we are doing better on tax than previously. We have been fairly conservative on estimating our tax spend next year. So, it is looking good. But there will be an inevitable tax step-up as we are using our net operating losses. I think there will be restructuring spend, which is a bit higher this year, which will also be a bit higher next year. I think we are accelerating the FTE decline to this year. We are doing about 400.
I would not be surprised if next year we get to about 500 to 600 of FTE decline in terms of overall cost ambition. Interest flat, slightly up possibly.
I think there is a significant working capital opportunity again next year, which we are preparing right now, same thing again. T hat is going to be the equating number that takes you to the number. B asically moving parts, I think you are right. Tax will be up. But again, tax increases have been less than what we anticipated due to various reasons, better and longer use of net operating losses. Again, it is slightly higher reorg spend. Again, but that is positive spend as we are reducing staff, reducing costs. As I said, possibly acceleration of the FTE decline. Today we are doing about 4% of our staff. Next year could be as high as about 6%. Interest flat-ish to maybe slightly up, but that is marginal. T he remainder is working capital.
There are still opportunity to improve working capital, and that is also stuff that we are doing today to be prepared for next year. That is how I would qualify or outline the bridge into next year. Joshua,
Thanks. That just makes sense.
Yes. I think you mentioned all the right buckets. One thing I would like to add to Chris story is that when we lower the run rate of Capex with EUR 250 million in a year, the effect is in cash EUR 250 million in the year after. I N the year itself, it is a bit less because some of that CapEx would have been paid in 2028. So taking it into account, I think it is a healthy financial framework we are running here, especially next year and the year after. T hat effect of EUR - 250 is a bit lower in the year itself than in the year after.
That is very clear. M aybe, if I could squeeze one last one in. On working capital, is the main issue here that delta between the timing of the CapEx on the P&L and the cash flow? If not, when would we expect working capital to normalize in future? Is this something that we should be thinking about as a flat working capital item in our modeling from 2028 onwards, or are there other steps back that you can.
Well, 2027 will probably be still a positive number. As Joost said, there's a bit of a working capital drag, but there's working capital opportunities against it. I think the whole thing normalizes when CapEx normalizes. I think probably 2028 is a more normal number. A t this point, Joost said there's work done to compensate for the working capital timing effect of the CapEx delta that you have next year. I think 2028 is probably the first year when you have really stable CapEx numbers and you have more stable working capital.
Great. Thank you.
The following question comes from Mollie Witcombe from Goldman Sachs. Please go ahead.
Hi, guys. Thank you for taking my questions. I just have two, please. Firstly, on mobile. I understand that the EUR 1 more for more security increase was maybe reversed. Just maybe a little bit of color on how should we be thinking about trends in mobile consumer, given that that's the case. I think you also maybe put through some price increases in October. Just how they've landed more generally, a little bit of color on that would be great. Then my second question, I just wanted to come back to the terms and conditions update. You mentioned some case law. I just want to check this isn't at all connected to the ECJ ruling that we saw with one of your European peers, is it? Also, will this likely affect your competitors as well?
Just a little bit more detail on that would be great. Thank you.
Yeah. Thank you. Mobile consumer. Yeah, we are following a couple of price increases, like you said. We did a more for more adjustment, which worked quite well because it also was related to an improvement of the proposition. W e also introduced security shields on our proposition, which is called Extra Veilig Mobiel, with an additional pricing. We have the usual price increase we did. So that is related to 5% year-on-year revenue growth. Also, we see a strong base growth. Also, we see a good supportive premium mix. Unlimited accounts for 45% of the acquisitions in September, to give you an example. I t is not related to one price action we did.
It is a whole ecosystem we are running here on mobile, and mobile is a good market in the Netherlands, and we are playing our role here, and I think we will continue to do so. Your second question was about?
Mollie, can you repeat your second question, please? We couldn't entirely follow the question.
Yeah, of course. You mentioned earlier that you had updated your terms and conditions on the 6th, and unless I kind of misheard some commentary in the background there, you said something about getting case law up to date or something along those lines of being in line with more recent case law. I just wanted to check that this wasn't at all connected to the recent ECJ ruling. One of your European peers had some ruling on back-book increases. I just wanted to check if that was connected at all and if your competitors will also have to update the terms and conditions, and you might benefit on that side.
Well, I don't think it's really related to EU ruling, to be honest. Every now and then, we have to adjust our terms of conditions to see how we are aligned with developments in legislation and some case law. W e also found out that we could use and benefit from more flexibility to adjust subscriptions or propositions over time. Well, so with this, we can run our base in just a little bit better way than we did in the past. We're a base company. It's super important to focus on the value of the base and to run it in an excellent way. F or that, we did this. We anticipated on one month all customers free of contracts, and we also knew that our competition was aware of that because we had to announce it. I t is really on how we run our base.
It's not related to EU regulation as far as I know.
Okay. Very clear. Thank you very much. B est of luck to Chris as well. Thanks.
The next question comes from Polo Tang from UBS. Please go ahead.
I would like to copy everyone else and just wish Chris the best in his new role. I have got two questions. Firstly, on consumer broadband, I know that you flagged that losses in Q3 were mainly due to one-off terminations because you changed the terms and conditions tracks. Q3 also saw Ziggo offer ESPN to all subscribers for EUR 2.50 per month, and you also had Ziggo expanding into the DELTA Fiber footprint. My question really is, how much of an impact do you think Ziggo had in terms of your broadband declines in Q3? Do you see a risk of this continuing in the coming quarters, given that Ziggo is not incentivized to remain promotional ahead of their spin-off in mid-2027? My second question is really just around fiber build.
Can I clarify if the plan is still to build to 80% to 85% fiber coverage in the Dutch market? Just looking thus far, KPN covers about 70% to 75% of the Netherlands. DELTA Fiber, ODF cover the rest, and there is limited fiber overbuild in the market. I am just asking in terms of if you build to 85%, will this not increase fiber overbuild, and will it not induce more broadband competition into the market? Thanks.
Yeah, Polo, on the first one, if you look at our broadband developments in the year, except for 1.5 months, our churn has been really subdued. We have been investing heavily in churn, loyalty-based programs, ARPU protection measures, et cetera, and churn has been actually lower than previous years consistently. The lower net add growth in a year was because we have a lower share of new sales. I think we also have been very restrained in joining the discount frenzy, and we have more focusing on base optimization, churn reduction. That has actually worked throughout the year, except for 1.5 month where, as Joost alluded to, the terms of condition changed, led to cancellations in Q2, which showed up in net add losses, a churn spike in Q3. After that, the whole thing normalized.
If you look at the current order balance on a weekly, monthly basis that we tracked, it is actually similar to the beginning of the year. Obviously, there is an Odido hack running through it, but it is actually a fairly stable order balance that we see on a weekly, monthly basis. We also had a few activations in October that are pushed for technical reasons to the fourth quarter. All of that means there is a lot of stuff going on. We do recognize that Ziggo is active on DELTA. Ziggo has a new ESPN contract, but except for the 1.5 freaky churn months, the overall order balance has been stable and our churn has been relatively low. It gives us quite some comfort that in Q4 you will see the returns of some sort of positive net adds.
Yeah, Polo, on fiber, you are right. We announced a target of up to 85%, not 85%, up to 85%. We currently are almost on the level of 75%. Having said that, DELTA and ODF, they also build a footprint of one million. The Netherlands is above 90% fiber coverage. Now for us, it is very important to understand how we move further, and maximize the value of our current fiber infrastructure. We will continue to expand the fiber footprint in a more disciplined, value-attractive way. Also within the financial framework, because that is also a target we announced, and some targets are more important than other targets, I would say.
We also have a more flexible toolkit, how we serve our customers outside our footprint, and we evaluate all the options, how to move above 80%, but also through the lens of customer experience, strategic control, long-term value creation, you name it. Perhaps in the next quarter we will come back to the target of 85% and how we are going to run it. The CapEx step-down is something we already planned for next year. It is no way to move back from that, and we will execute on that. I think that is the way we will move further.
Okay, thanks.
The following question comes from Ajay Soni from JP Morgan. Please go ahead.
Hi, guys. Thanks for taking the question. My first is on consumer fixed growth, which has slowed a bit in Q3. I know you have the combi discount headwind throughout this year. If I look at fiber ARPU growth, it has been quite limited in 2026. Do you think this fiber ARPU growth does step up in 2027? The second question was just to follow up on your cash flow bridge, which was around your accelerating FTE reduction next year. What are you seeing that's going to be driving that much bigger FTE cut in 2027? Thank you.
Well, I think it's too early to say where fiber ARPU will be next year. If I look at broadband service revenue growth at around 2.3% per annum. If you look at where we started the year, the consumer service revenue growth at 1.9% is where we expect it to be. It's driven by more mobile and less fixed than what we anticipated in the beginning of the year. Mobile has been doing better in terms of net add growth and also sticky price increases. They're actually stuck in a filter down to bottom line. In fixed, we see ARPU is actually in line what we expected. There's a slight, the headwinds are small base effects, which are negative. I think less growth than what we anticipated. Obviously, the decline in Q3 is part of that.
Also, the market requires a bit more discounts or less revenues from the additional set-top boxes or additional streaming services. I think that drives fixed to be around 2.3%. I would expect that probably in Q4 to be a similar number. At some point in next year, I would hope that accelerates, but that's something for next year. I think compared to where we started, to me, the most important point is group service revenues and consumer service revenues is on plan, and at fixed, ARPU is more or like where we planned it to be and relatively stable. On the FTE reduction, it's come from various initiatives. We've obviously given you guys EUR 100 million net cost savings opportunity and targets. The adoption of more agentic AI service in call centers.
It is the ramp down of our fiber rollouts, which require less fiber-related staff and project management staff. We are obviously scaling down the fiber rollout, so that organization will be right-sized and normalized.
There is other initiatives ongoing, notably in the B2B markets. We have seen a few larger customers leave. We will right-size and adjust our organization from that. So a range of initiatives across the group that will, as we see, accelerate the reduction in labor potential and staff at KPN. All these initiatives are, I would say, underway, have been launched, have been discussed with works councils, and are basically being set in motion.
Great. For this year, you are obviously expecting the EUR 15 million to EUR 20 million OpEx reduction. Do you envision that stepping up in 2027?
Well, we will get back to that next year. More important than that is that we focus on a net OpEx reduction of EUR 100 million in 2030. That means that we have to lower the cost every year. We are confident on that. The run rate is good. We see an FTE reduction in all the areas where we introduce digitalization and AI agents. Probably for next year, we will focus more on the overhead of the company where the opportunities are higher as well, because the labor fees are higher there as well. We will give you more updates on that next quarter.
Great. Thank you. Best of luck, Chris, in your role.
Thanks.
The following question comes from David Wright from Bank of America. Please go ahead.
Thank you, guys. Chris, best of luck, and that kind of guidance granularity on cash flow, et cetera, is always what is being very much appreciated on our side. A couple of questions. Firstly, just on the kind of satellite agentic AI risk. We are all asking these questions, but I do feel like operators are all giving a broadly similar answer, which tends to be that pricing is a bit of a moat for Europe. It has obviously been very painful, but that low pricing does present a less easy opportunity for satellites and/or less potential disruption from AI agents. I just wondered to what extent you really do think there could be any sort of curveballs here that are not quite anticipated by the industry or anything that you think is really sort of a little bit wild out there that could change the game.
The other question is, we have had, I think, VodafoneZiggo openly talking about elevated commercial expenditure this year. It is quite clear they want a big step-up in cash flow growth next year, which probably suggests less commercial expenditure. There is obviously new ownership in one of your other competitors. I am just wondering if you are anticipating or maybe hoping for a slightly less disruptive competitive 2027. Is that a realistic proposition? Thank you.
Okay. David, thanks. There are a lot of reports out in the market on satellites. It could be a risk. I think it is more for us a fallback scenario where we use satellite to serve the Ministry of Defence as an example. Also in these reports, you find back that the Netherlands is a bit of an exception. We are not really a country. We are more a large village, city like Singapore or something. 90% or more of all the households are connected to three fixed networks, copper, cable, and fiber, and all priced against a decent level. One gig for roughly, well, for a naked internet line, something like EUR 20. C ompared to satellite subscriptions, it is not easy to beat that when it comes to satellite services on quality and on pricing.
Having said that, of course, we follow everything because if you make it for free or whatever, it is always a risk. Sa Tellite is on our risk radar screen, but compared to a lot of countries, also confirmed by the reports, the risks in the Netherlands are pretty low. AI, I think there are more opportunities in AI than risks. But also there it is on my radar screen. W e try to push the company to embrace AI and make use in our transformation programs. It is always difficult to predict what VodafoneZiggo will do in the future. I am not sure if they know themselves, but it is true that they push a lot of cash in the market to make the base grow, and that is what they do.
We noticed that they already announced that the broadband base developments of this quarter is the best in years. So, we are waiting. That is working. But against a very high price, taking into account what they promised to market on debt reduction, et cetera, free cash flow. Then, yeah, okay, one could assume that they will slow down a bit somewhere next year. Having said that, hope is not a good way to build your strategy. W e are not hoping on anything, and we are anticipating on a competitive market just like this year, next year, and that is where I expect the teams to act on and to still make our broadband base grow.
Very good. Thank you.
The next question comes from Paul Sidney from Berenberg. Please go ahead.
Thank you very much for taking the questions. Chris and Wouter, all the best for the future in your new roles. First question is, you delivered 3% service revenue growth. You are clearly guiding 3% midterm growth for the same metric. This is well ahead of your European peers, which are struggling for that top-line growth. I was just wondering, just big picture question, what does KPN do better than its peers? Is it product differentiation, digitalization B2B, fiber rollout ahead of your peers, or is it simply just that you are part of a better market structure with regulatory support? Then just secondly, on capital allocation. Very solid balance sheet committed to returning free cash flow to shareholders.
Are there any other initiatives that may be not obvious to us that KPN can explore to create value, whether it is data centers, satellite collaboration, fiber bolted acquisitions, just to name a few examples. G reat to get your thoughts.
Yeah. Paul, I think, of course, it is very interesting to listen to Chris in his farewell call to elaborate on where KPN is doing better than others. I think what we did when we started, Chris and I together almost seven years ago with the new team, is focus. What we said is, "Let us especially focus on where we make the cash." Most of the telcos, they combine ICT with connectivity, international asset-heavy investments. We wanted to be a very healthy, focused company in the Netherlands instead of a company wrestling in different countries in Europe. We said we are clearly making a lot of money in mass markets. So, that was a decision we took. Let us first fix that consumer wholesale SV. Then let us repair the B2B in the second phase.
Let's focus on where we really are good at, and that is infrastructure-heavy investments and high margin and cash-generating profits. That's what we did. We build a lot of fiber, and we focus on where we make the money. Chris, what do you think?
I think similar. Look, we're a relatively simple company. One country operation. I think the market helps, although it doesn't always feel like. I think certainly in broadband, the market is highly competitive. In mobile, you see a more pronounced three-player market structure. That does help us a bit compared to other markets, but I think the strength of KPN has been to be identifying clearly where do we make money, and then we put our capital to those areas where we make money. If we don't make money, and make money means on the fully allocated, fully loaded base, including all the network costs. Areas where you don't make money, you de-emphasize, restructure, reduce. I would be surprised if you see more of that focus in the coming years. I think that's probably, in the end, the story.
Yeah. We also introduced the portfolio review, what we do frequently. We are improving the cash we make on portfolio is scoping. Sometimes on certain items when the strategy is okay, but the way we run the portfolio is not good enough. It's interesting.
Yeah. On your second question. Look, we clearly have a clear capital allocation policy where we return all our free capital to shareholders after spending all our money on CapEx. We're going back to EUR 1 billion in CapEx next year, which is still around 17% of revenues. W e're still investing quite heavily. Is it completely comparable to other telcos? No, because then you have to really dig down into how you capitalize labor. I t's still a significant amount of investing going on at KPN, mostly in our networks. I would say the return of cash to shareholders is not at the expense of future growth. So, we're investing a lot. We deliberately choose to spend about 80% of that cash to dividends, make sure it's well covered, and the remaining 20% in buybacks, where there's obviously always a bit of flexibility around it.
I think the initial focus of KPN is really to return to shareholders. Within the EUR 1 billion, we should be able to fund the future investment growth. Could there be opportunities in other asset-heavy industries like data centers? Yes, but I think always on the back of the stuff that we already have. Like monetize the investments that we've already done in data centers, in decentral metro core locations and what have you. I think our focus on the coming years is continuing on the current path. I think we've been fairly successful with that. New initiatives are on the digital infra base.
If they are, it's more within the existing CapEx envelope and using assets that we have and skills that we have to make sure we continue paying the cash to our shareholders, because I think predictability in that field is also worth a lot.
Great. Appreciate your comments. Thank you very much.
The next question comes from Maurice Patrick from Barclays. Please go ahead.
Yeah. Thanks again for doing the call and good luck again, Chris, for the future. Just a couple of ones from me, please. First one, on fixed wireless access. You have been pretty dismissive of the impact of that on your base. I am curious if you are still seeing no real impact on broadband from competitors pushing FWA? First question. Second question. Slide six, you show the penetration of fiber on your retail base, now 73%. It has been growing pretty steadily at about 1% point per quarter. But curious to understand is how the cohorts, does it slow when you get to a certain level? Is there a certain point at which it stops growing? Th en just a last sub-question. Post the blocking of the Glaspoort deal, wondering if your view on consolidation of fiber networks has changed versus organic. Thanks.
Yeah, Maurice. Thanks. On fixed wireless access first. We introduced it ourselves as well in areas where we can use it, not broadly in the Netherlands. But taking into account that in the Netherlands, we run the best mobile networks in the world. T he best one is KPN, and the second on the world level is Odido. There is already a lot of unlimited subscriptions out in the market, and it works more or less the same as fixed wireless access. T o sell an internet connection on fixed wireless access is, in a country like the Netherlands, not really working. It is a niche market. It works quite well in some areas. I have a small boathouse somewhere out in the rural area. So, there I can use fixed wireless access. T o be honest, I just use unlimited from KPN. It works quite well.
Not really impactful, I would say. Fiber growth. We launched an updated strategy called Connect, Activate & Grow. I f you look at the numbers, we are more focused on connecting households than passing more houses. W e passed now the six million. We passed 59,000 houses more last quarter, but we connected 73,000. T hat is because we want to use more the investments we already did. I think there is a huge potential in what we already built it for. It is not that the customer footprint of 73% is related to the 72% or 73% fiber footprint. We could grow the consumer base in the fiber footprint as we are doing now with all the investments we did, and in homes passed, homes connect ratio of 80%, quite unusual. So, I will push the company to grow further on the install base on fiber.
On ACM, someone mentioned regulatory wind tail or something in the previous question. Well, that's not the case in the Netherlands. ACM, for some reason, did not approve a very small but important fiber deal when it comes to how they look at the market. In short, I think they tried to avoid KPN buying other fiber assets because we already have a super large position in the Dutch market. Looking at what they did put on paper, we do not agree, and I think from a legal standpoint, it doesn't make a case. W e will fight it. T hat will take time. Meanwhile, we're looking at all the options around us. W e're building ourselves in a decent way within the financial framework. W e all are also looking at how to move further within the coming two years in a creative way.
That, of course, we also have to discuss with our regulator. P robably it will take some time. I'm convinced that in the future there will be more room to acquire fiber footprints.
Great. Thank you, guys.
The next question comes from Ulrich Rathe from Bernstein. Please go ahead.
Yeah, thanks very much. I have two questions, please. The first one is still on consumer broadband. We have discussed this in quite detail already, but I was just wondering, you are positioning July as special because of the terms and conditions change. Could you talk about how the net adds actually were then in August and September? Were they at prior levels, i.e. already in positive territory? Was there a bit of a tail of these terminal condition changes that carried through the quarter and your expectation is that it will improve in the fourth quarter but don't really have the evidence in August and September yet for that? My second question, if I may, is on the business top-line trends. You cut the full-year outlook last quarter, I think largely because of low margin revenues in business. So there is a lot of volatility in this.
I was wondering, when we look at the third quarter now, in business, is that a normal quarter? Is that a normal run rate that we can look at? Or would you say no, third quarter really is a particularly strong quarter in business and it is not necessarily representative of what is to come? Thank you.
Well, I would say on business, it is a strong quarter when it comes to SME and LCE developments. I n total service revenues, it will not change because probably LCE will be a bit lower. I mentioned a one-off benefit on the security side with a large customer, but that is always in and out in results. W e expect Tailored Solutions especially to flip up far above the zero just because we got rid of these contracts we didn't want to run anymore. I n total, service revenues in B2B will be good.
I think Q4 will be very similar to Q3 in terms of where business revenues will come in.
What we described on the consumer broadband base in words, we already mentioned that the first month, July of the quarter, was not good, that was related to a 30 days period of that terms and conditions things we described. T he other two months were above zero again. It was really a hit in July that created the - 7, and August and September were above zero.
Thank you very much.
The next question comes from David Vagman from ING. Please go ahead.
Good afternoon, everyone, and thanks for taking my question and of course, all the best, Chris, in your hall. The first question is on the competitive dynamic that you see in fixed broadband for Q4 until now and going forward. G iven, for instance, of course, the Ziggo efforts, but also Odido launching Simpel in fixed. Then, my second question on the COGS evolution in Q3, if you could comment, you have already provided some detail, and also what to expect for Q4 and maybe already 2027. Thank you.
Yeah. So competitive dynamics in the market. Well, on mobile, I think the market, and we continue to perform well. The good news there is it is both an ARPU and a base increase. I expect that to move on like that. Fixed is a competitive market. You mentioned Odido with Simpel. We run Youfone. VodafoneZiggo has a no-frills brand. O n one hand, I would say we anticipate on promotional activities across the market to continue. I mean, our main competitors are preparing for some kind of listing somewhere next year. M oving to that moment, they will probably try to make the base grow next year as well. We will continue to focus on value creation. Having said that, of course, it is not our intention to report negative broadband-based developments every quarter, but it is also important that we do not follow crazy discounter schemes.
We follow our own route. We believe in household steering. To be honest, we report on broadband and on mobile ARPUs, but our main trick is to run households where broadband and mobile are combined as one ARPA instead of two ARPUs. We will do that. So yeah, competitive market. We anticipate, like I already said, that it will not change. That is the best way to build our strategy. We will play our own focus on value creation strategy there.
I think on your question on the cost of goods sold, the COGS that go through our contribution margin. I would expect some similar developments like what you see in the fourth quarter that a few components, the cost of sports, most notably ESPN, that contract has gone on. T hat will be then in a full quarter, be elevated. I would expect similar level of promotional activity as in previous quarters. We have the allocated cost of PlusPort that come easily throughout the year. Against that, also in our COGS in Q3, obviously, you have the roaming charges, meaning the summer season, we pay more roaming fees. We also get more roaming income. Y ou pay more roaming fees, basically there are much more Dutch people going out than others visiting the Netherlands. So typically in the summer, retail side, we are roaming negative. That has been negative.
If you add to all those moving parts, I would say something similar development in the fourth quarter. There will probably also be an increase in COGS next year as you get the full year of ESPN cost kicking in. Obviously, we are taking initiatives to counter that either in terms of revenues or in terms of cutting back on COGS spend. I f you go through these moving parts, I would say, David, the best estimate of some similar development in Q4 as in Q3, even if the moving parts are a bit different.
Thanks very much. Both.
Unfortunately, we only have time for one more question, and the final question comes from Konrad Zomer, from ABN AMRO - ODDO BHF. Please go ahead.
Thanks for allowing me the option to ask a question. First one is, are we likely to get new quantified financial ambitions for the next four years when you are going to report your full year numbers in February? Or is the change in CFO going to delay that process? My second question is, can you share with us what percentage of your consumer grades from copper remains a customer by using your fiber connection instead of moving to competitors?
Well, let me first take the first question, and thank you for that. When we present our annual results, we, of course, will primarily focus on the guidance of 2027. We more or less did that with the guidance we did put out in the market. Not planning to change that. T o give more detail and substance on that is for me, the most important thing to announce beginning of next year. It doesn't have to do anything with the change of CFO. CFO change is not delaying anything. W ith Chris and the team, we would have done the same. I'm also aware of that 2027 will be the final year of the four-year strategy we announced some time ago. Of course, we will give more insights on how to move further somewhere in time, but probably later in the year.
Then your second question was on install base copper. In the fiber footprints, am I correct?
Yeah. People, when they get rid of their copper connection, they need to make a choice. They can either use your fiber connection or they can maybe use the cable connection of an alternative.
Yeah. So all our customers move more or less. In simple words, we move all our customers from copper to fiber. First of all, the customers who want fiber, we move to fiber. Then second, the customers who don't want fiber, we move to fiber with a copycat of the copper service. Then later on, we were convinced that we can sell off. For instance, we say, "We give you for two months, one gig for free, and if you like it, then you have to pay for it." A ll KPN customers are moved to fiber. It's same for wholesale customers. We see an increase of the penetration of roughly 6%, sorry, 6% in the first wave.
When we build fiber in a new area, our consumer base is improving and the wholesale base is improving, and the total adds up to an improvement of 6%. Then in a couple of years, we see in the older fiber areas, our penetration ratio moving up to 60%. I n the areas where we build fiber longer than five years ago, we are already above 60%. That is why we truly believe in fiber. The business case is working. A lot of customers on Ziggo don't want to move to fiber because they just don't want to move the TV interface or the remote control. W hen they move households or when they move out of the country, once in 10 year people move, they go for fiber when there's fiber in the building.
Very clear. Thank you very much.
All right. Thank you, everyone. Before I would like to conclude today's session, I would like to give the word to Chris.
Yes. Thanks, Matthijs. Maybe as Professor Figee might say, a few final words of wisdom. I thought it was cool. When you are full-time visit KPN running payment terms, ARPUs, net adds, order balances. Occasionally, you put yourselves in the shoes of a shareholder or an analyst and you think, valuation is. You guys are figuring out, is paying today worth the future cash flows that are going to come in, right? I guess in our sector, you are looking for companies where the future assumptions required to justify the valuations are not too heroic, where free cash flows and dividends provide some support, and where you are paid to wait for your assessments and your analysis to come true. That is why at KPN, we have always aimed to reduce the cost of capital by being very predictable on the return on capital, right?
You may have accused me from time to time, be very meticulous and precise, but being predictable means safety, security, and predictability, thereby reducing, in my view, the cost of capital to KPN. We have delivered a EUR 0.20 DPS on this year and committed to a EUR 0.25 dividend per share on next year. When I look at my two colleagues in the eyes, I think they will for sure deliver that. That means if you add your share buyback program, KPN's share price yields a cash return of well over 7%. W hen you look at the tangible support valuation, the volatility around future cash flows, and all the uncertainty in the market in a competitive environment at KPN, I think you are being paid to wait for the future to unfold, right?
Our share price provides a clear anchor, and we have always worked against that, and I am very sure that KPN will continue to do so in the sector. I would like to thank Joost. Joost, there is a gray zone when a colleague becomes a friend. You have clearly crossed that line, and I hope to continue to stay in touch and see you on Saturday morning at the Albert Heijn in Den Haag. Wouter, best of luck to you. Six, almost seven years at KPN, getting stuff done here requires blood, sweat, tears, and the occasional shutdown of common sense. KPN will do the right thing. Has done the right thing, and I am pretty sure you will do the right thing.
If anyone would be the next CFO of KPN, it is you, and I could have not wished for a better, more talented successor, and you will be doing fantastic. To my listeners on the call, thank you very much for keeping us sharp. Thank you very much for your optimistic and respectful challenges, and the occasional moment where I thought, "How the hell did you figure that out?" So well done to you. Thanks for almost seven great years, 27 fantastic quarters, and I will see you on the other side. Thank you.
Thank you, Chris. With that, we conclude today's session. Let me know in the case of any questions.
Thank you for participating. You may now disconnect your line. Have a nice day.