AMSTERDAM (AP) â€" Royal KPN NV, the largest telecommunications company in the Netherlands, warned Thursday that profits this year will be below expectations as the rapid adoption of "smart phones" is hurting some of its most lucrative businesses, such as SMS text messaging.
The shock warning wiped over a billion euros off the company's market value and spooked investors in other large European telecom providers such as Vodafone PLC and Deutsche Telecom AG, even though analysts said KPN's problems may be company-specific.
KPN said it plans to respond by cutting 5,000 jobs by 2015, around one in six of its work force, change its product offerings, and invest in infrastructure to increase speeds on its mobile Internet service.
The heart of KPN's problems lies in the fact that the number of its customers that access the Internet via mobile phones has rapidly increased in recent months and is now approaching 50 percent.
That means consumers are limiting their text messages, communicating instead via social media websites such as Facebook or Twitter. They are also substituting voice calls for cheaper Internet-based calls, using services such as Skype.
In March of 2010, SMS use had been rising by 10 percent a year, but that trend reversed at the start of 2011 and "now it's falling by 10 percent," said chief executive Eelco Blok said on a conference call. "That's how fast it's going."
KPN lowered its primary financial target of operating earnings before depreciation and amortization of goodwill, or EBITDA, from €5.48 billion ($7.95 billion) to less than €5.3 billion this year.
Shares dropped 7.6 percent to €10.855 in Amsterdam, valuing the company at around €16.5 billion.
"This is a very serious profit warning," said analyst Victor Bareno of SNS Securities in a note Thursday. "It is caused by structural changes in the market â€" which may be more difficult to address â€" and it affects the mobile Dutch business, which is the key free cash flow generator for the group." He cut his rating for KPN shares to "hold" from "buy."
Industry analysts have long warned the rise of smart phones pose a threat to telecom margins, but major mobile telephony providers have until now said they see more opportunities than costs. They argue they will benefit as customers exchange more data â€" for instance by using their phones for streaming video â€" and consume more bandwidth.
Analysts said KPN's woes may not necessarily be experienced elsewhere.
"The Netherlands has always been an extremely competitive market," said Charles Stanley analyst Tom Gidley-Kitchin.
Gidley-Kitchin said Britain's Vodafone PLC, which operates in a number of countries in Europe, has found that pricing by all around data use has been quite well received â€" its customers are prepared to pay more the more data they use.
Nevertheless, KPN's warning has impacted the sector in a day most European stocks are trading higher.
Vodafone's share price in London was down over 2 percent, while Deutsche Telekom's in Frankfurt fell 1.5 percent.
KPN released a condensed form of its first quarter earnings ahead of schedule, saying sales were down 1.3 percent to €3.23 billion from the same period a year ago, while operating profits were down 10 percent to €712 million.
Net profit actually rose 32 percent to €591 million due to a much lower tax bill in Germany: €61 million versus €327 million in the first quarter of 2010.
Blok said that KPN is planning to introduce new mobile internet subscription packages, including data bundles and new services, but would not give details or explain how these will restore lost revenues. He did say the company would not attempt to block any third-party internet applications.
KPN said its business in Germany, where its E-Plus arm is the third-largest mobile services provider behind Deutsche Telekom's T-Mobile and Vodafone, has not been affected, in part because smart phones are not as popular there yet.
"Of course the penetration is increasing, but due to the fact that we have already introduced integrated bundles, we believe the impact in Germany and Belgium will not be as large as in the Netherlands," Blok said.
Blok said the company would aim to reduce staff by "outsourcing and offshoring" many of its functions. The company has been cutting jobs steadily since it was privatized in the early 1990s, including 10,000 jobs in the period between 2005 and 2010.
Thursday's profit warning was the first for KPN since the early 2000s, when it overpaid for a German mobile telephony license and took on too much debt, eventually issuing new shares with support from the Dutch government to stave off bankruptcy.
The company said Thursday it does not think its investment grade debt rating is in jeopardy.
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