The Netherlands'

Royal KPN


announced last week that net income fell in 1998, it expects lower revenues this year and its international strategy involves a plan to compete in the United Kingdom. This looks suspiciously like a former telecommunications monopoly struggling with the deregulated reality.

On Wednesday, KPN said revenues grew 12.3% to 17.7 billion guilders in 1998 and net income rose 5.1% to 2 billion guilders. But after a restructuring charge, net income actually fell 22% in the year. The company's outlook for 1999 isn't much better. It predicts net income from ordinary operations will fall by 20%, and only return to 1998's levels in "two to three years."

According to


, the consensus estimate service, KPN's earnings per share will be 1.89 euros this year and 2.07 euros in 2000, compared with 1.95 euros in 1998.

Yet some analysts are still sticking by KPN. Guy Peddy, an analyst at

Bear Stearns

, said he is maintaining his attractive rating on KPN because it was widely anticipated that KPN would forecast a fall in revenues this year, and the bashing the shares received after the earnings release presents a buying opportunity.

KPN's shares fell 7.4% to 37.50 euros following the release of the earnings on Wednesday. But by the close on Friday the stock had recovered to 38.90 euros.

Outside of

Tele Danmark


, KPN represents "far and away" the cheapest of the Northern European telcos, trading around 19 times 1999 earnings, Peddy says.

Most of this lower share price can be attributed to the regulatory uncertainty surrounding KPN. The Dutch regulator plans to complete a price cap scheme by July, where KPN will be required to adjust its tariffs based on inflation less an efficiency factor. KPN has stated that its earnings estimates are based on the regulator pegging the efficiency factor at the more aggressive end of the range.

Goldman Sachs

, which is maintaining its market outperform rating on KPN, believes that a less severe efficiency factor than expected by KPN could allow the company to deliver better earnings in 1999 than its conservative estimates.

Goldman Sachs has an investment relationship with KPN, but


was unable to ascertain whether this is also true for Bear Stearns.

Even if the regulators go easy on KPN, is there really much upside for the Dutch telco?

Not according to Vincent Fioramonti, international portfolio manager at


. "There's really no catalyst for increasing revenues, neither through a restructuring nor acquisition. I took a look at it this week but there's no growth-valuation trade-off here," he said.

With the introduction of the euro, expansion outside of home markets is becoming increasingly important in the sector. KPN stated this week that its international operations would be a major contributor to bringing the company's net income back to 1998 levels within two to three years. In 1998, 17% of KPN's growth in revenues came from its international operations.

However, there remain serious questions about KPN's strategy abroad.

Merrill Lynch

singled out KPN's "less than focused" international strategy as a reason for it labeling KPN as its least favorite telecom stock.

The chairman of KPN, Wim Dik, specifically addressed this issue at a press conference on Wednesday, saying the focus of its international expansion would be Eastern Europe and the U.K. He said the reason KPN would target the U.K. was because it is less competitive than the Netherlands.

Granted, the Netherlands may be the most competitive telecom market in Europe, but with so many other European countries to choose from, you might be forgiven for wondering why KPN has chosen to compete in a market that runs, at the very least, a close second to the Netherlands.

David Cooley, director of international equities at

National City Investment Management Company

, points to EBITDA margins to sales as a good indicator of how competitive a market is. He says

British Telecom's


margins are low at 37.1% compared with

Deutsche Telekom's

(DT) - Get Report

at 51%, and so he wonders why "KPN would choose to duke it out with BT."

Could KPN's decision be influenced by the fact that BT is successfully challenging KPN in Holland through its


venture with the national railway

Nederlandse Spoorwegen


Telfort was launched in 1996 to provide national and international services and has since snagged key corporate clients such as








. In September of last year, Telfort launched its mobile service to compete directly with KPN's service.

A spokesman for KPN cheerfully admitted that a sense of indignation might explain KPN's decision to compete with BT. "Yes, we'd like to do to BT in its market what it is doing to us in our market."

Fighting words indeed. But asked to elaborate on KPN's plans for the U.K., the spokesman was unable to be more specific. "Oh, there's no definite plan. It's an intention to do something there in the near future, but it's too soon to say."

Other than the simple revenge factor, the spokesman said KPN is well placed to move into London through its stake in

Telecom Eireann

, the former incumbent in the Republic of Ireland. KPN currently holds a 20% stake together with the Swedish telco


, and KPN has said it wants to increase this stake, with or without Telia, when Telecom Eirann is privatized later this year.

However, other than Dublin's proximity to London, there appears to be no discernible advantage that this stake in Telecom Eirann will offer KPN in its move to compete in the British market.

The former telecommunication monopolies have often been criticized for their lack of vision. Some clarity on KPN's part might do it a world of good.