Tumbling profits

The reporting of second quarter financials at the end of July offered a poignant and timely insight into the state of the telco industry in the Middle East. Etisalat, Ooredoo, and Zain reported a 40 per cent, 39 per cent, and 38 per cent slump respectively in their second quarter 2015 net profits to end June, prompting Comm. to review the reasons for these drastic declines in profitability and check whether they reflect wider factors currently dogging the regional sector

A number of operators in the Middle East reported declining profitability for the second quarter of 2015

Etisalat Group reported that consolidated net profit after Federal Royalty amounted to AED1.5 billion (US$411 million) in the second quarter to June 30, down 40 per cent year-on-year, attributing the fall to the group’s share of results from associates and forex losses.

The company attributed the decline to higher depreciation and amortisation charges; the impact of Mobily’s additional provision for accounts receivables; higher net finance costs; incurring forex losses during the period against forex gains in the same period last year; and higher Federal Royalty charges.

What is apparent from the reasons given by the UAE telco in explanation of the fall in its profitability during the quarter is that there are a number of factors within its control to change and others that are simply not. Fluctuations in foreign currency rates are an extraneous factor to any business that runs a pan-regional, multi-currency operation, and while little can be done about currency movements that may be negatively impactful on overall financials, network operators are advised to reactively limit their exposure to unstable currencies as much as possible.

However, factors such as its high net finance are within Etisalat’s control, and may require the reorganisation of its debt and payment periods in order to become less burdensome. What happened to Mobily with respect to the publication of inaccurate financial results last year in what appears to have been a bid to maintain impressive growth figures, is a sound lesson for operators across the region on how not to define success. Marginal, incremental growth is more sustainable than chasing headline numbers that appear strong on the surface, but which on closer examination, are unlikely to be a true reflection of the position, or even sustainable.

Having reported a 39 per cent fall in quarterly net profitability year-on-year to QAR501 million (US$138 million) to end-June, Ooredoo said that the business during the period was impacted by adverse currency movements and the security situation in Iraq. Compounding the fall in profitability was the fact that top-line revenue was down five per cent year-on-year, this despite the telco having reported that it ended Q2 with a total 114.2 million subscribers in its global operation, up 21 per cent year-on-year.

Operators need to decide where best to invest resources with respect to customer retention or acquisition strategies

Ooredoo said that the increase in the customer base was chiefly driven by strong performances in Indonesia, Myanmar, and Algeria, though these performances were not enough to mitigate sliding top- and bottom-line performances. Over the recent past Ooredoo has invested significant amounts of cash in the expansion of its international footprint, forking out US$500 million for its operating licence in Myanmar alone, and estimating it will spend up to US$15 billion over the 15-year licence period, including operational and capital expenditure, licence fees and taxes.

The telco is also in the midst of an extensive and expensive re-brand of its operations to the single Ooredoo identity, in the hope of benefiting from a single aspirational vision and culture while also benefiting from synergies driven by the operation of a single-branded entity. While the pursuit of such a strategy is sound in theory, its implementation must always be checked against the actual performance of the business, and whether the customers being added to the network are of sufficient value and quality, or whether the telco would be better placed to utilise a greater portion of its resources on customer retention exercises rather than acquisition.

Positively for Ooredoo, the telco also reported that in its home market of Qatar where margins remain at their strongest, it ended Q2 with 3.4 million mobile subscribers, up 14 per cent year-on-year. The operation in Qatar accounted for 25 per cent of the group’s overall revenue in the first half of the year, underlying the importance of protecting and cultivating this operation as much as possible.

Data represented 34 per cent of the group’s revenue in the first half of the year, up compared to 20 per cent in the first half of 2014, and was one of the bright spots of the telco’s financials.

Dragged down by the conflict in Iraq, and the currency weakness in Sudan, Zain Group has been reporting softened numbers for some quarters now, and the latest was no different. The telco reported that net income for the quarter reached US$130 million, down 38 per cent year-on-year.

Choosing the correct ‘pill’ to quell the growing pains of the operator community is proving challenging  

As it has estimated in the past, Zain formulated that for the first half of the year to end-June, foreign currency translation impact mainly due to the appreciation of the US dollar cost the company US$57 million on revenue, US$26 million on EBITDA and US$13 million on net income. While such an impact may be real, Zain has also been finding it challenging to add net new customers to its overall base for some time now, and likely needs to push harder in its search for viable customer and service growth areas.

The telco reported that data revenues at the end of June accounted for just 20 per cent of overall service revenues, which is on the low side compared to its regional competitors, though the company has been searching for new revenue streams, recently announcing its third foray in the field of venture capital investment through a strategic participation in Luxembourg-based Digital East Fund. 

The investment in the Digital East Fund is the third venture capital announcement from Zain in recent months, building on the establishment of the Zain Digital Frontier and Innovation (ZDFI) business unit in 2014, which is charged with launching Zain into the digital space.