Zain Saudi Arabia recently saw its first profitable half year to date, and its fundamentals are strong. What has driven these results?
At the end of 3Q2017 Zain delivered strong results. YoY 11% revenue growth over the same quarter in 2016 while YTD we had 9% growth in revenue. We are delivering some of the best margins in the industry, including 68% gross margin and 34% earnings before interest, tax, depreciation, and amortization (EBITDA). We have had three consecutive quarters of net profit, which has never happened in the company's 10-year history. We started 2017 with about SAR900 million (USD240 million) in liquid assets and ended the third quarter with about SAR1.8 billion (USD480 million), doubling our cash assets despite loan payments and funding our growing business. A transformation program underpins this performance. It begins with Zain offering customers more and smarter choice in products and services with better value. Zain in the past was a simple scratch card business for many years and this was due to a lack of sufficient investments in network CAPEX. We paid the world's highest license fee ever per capita globally at USD6.1 billion a decade ago to acquire the license. Several years ago the shareholders decided to invest and transform Zain into a data-centric company. Zain invested SAR4.5 billion (USD1.2 billion) into upgrading the network with LTE-A. The first part of the transformation was investing in the network and thus giving customers more choices for data packages. Today, about 55% of our revenues come from data whereas a few years ago almost 90% came from voice. Today Zain is perceived by customers as the data company of preference in Saudi. We have shifted away from prepaid and our growth is driven by postpaid, data, and enterprise customers. We are also gaining more Saudi national customers. Zain is now focused on reliability, quality and smart value offers for different customer segments. As our business today is over 95% B2C consumer business, we are also beginning to win over enterprise customers and exploring opportunities with government accounts. The other pillars of the transformation program included a significant investment in retail outlets and brand. We also implemented a cost optimization program and identified savings that could be diverted to sales and marketing activities. Finally, we focused on consistent and caring approach to handling customer enquiries and complaints with more responsive resolution of complaints. The combined impact of all these initiatives have contributed to better performance.
What remains to be done in terms of the quality of your network and the positioning of your products?
We have been issued with a new unified license (Dec 2016) that allows us to deliver and build fixed networks. However, we will not be replicating the incumbent's fixed network. In most areas of the world this is not economically feasible and the market in Saudi is no different. Our approach on the fixed side of the business is to be selective and target predominantly enterprise clients. We have a joint marketing initiative with Saudi Electricity Company and in 2018 we will be delivering FTTH services to residential and business customers. We are also acquired spectrum to enhance the performance of our wireless network. We continue to roll out new infrastructure to improve coverage and capacity and expand our existing LTE-A data network. Our products portfolio will include best of class fast broadband services based on LTE-A and FTTH technologies. In addition to fast and reliable connectivity, we are also exploring solutions for smart home, smart cars and smart cities.
What role does cost management play in your strategy?
We talk about smart efficiencies, and not just cutting cost. If we can save money from something that does not impact the customer or the quality of service, we will do so. We are reviewing all our supply arrangements to ensure cost and terms and conditions reflect current economic environment. We are exploring sharing risks and rewards with some suppliers. Any savings are being redirected to sales, marketing and customer care. Smart cost optimization is an integral part of our business leadership at all times, irrespective of levels of growth. In 2017, at least half of our net profit resulted from a combination of cost efficiencies couple with reduced amortization due to the extension of our license from 25 to 40 years.
How have you dealt with the impact of expatriates leaving the country and having fewer SIM cards?
What keeps us awake at night is not what our competitors are doing, but the economic and regulatory environment. We believe in the Vision 2030; mid to long-term diversification of the economy requires investment and a great deal of digital enablement. However, in the short term some policy initiatives are shrinking the market. Expat levies and increased levies on expats are reducing the total number especially of prepaid customers. In addition VAT of 5% will result in lower disposable income for the great majority of expats. There will be significant impact in the spending patterns of expats in 2018 till readjustment takes place. In 2016/2017 due to a number of sound policy initiatives including biometric verification, approximately 6.5 million SIM cards disappeared from the industry. We expect customer numbers to remain steady in 2018 with reduced revenue per sim from the expat segment of our customer base.
Zain announced a plan to cancel shares and do a rights issue. What is behind this bold move and how did you decide on it?
Zain today has accumulated significant losses from previous years trading and also has a very high debt-to-equity ratio of 82%. As part of its financing arrangements due to such high levels of debt and losses, as the company turns profitable, shareholders have to wait for many years before any dividends can be paid. Diluting some of the shareholders and creating new shares can realize a pathway to dividends realized if the company continues its positive trading performance. Dilution is not an easy decision to discuss with the Board but it is a necessary long-term decision for the company; institutional investors understand such necessities. Subject to approval from shareholders and CMA, we expect to complete this initiative in 1Q2018.
What are your expectations for 2018?
Our strategy is simple: focus on delivering smart value, consistent quality of service and responsive customer care. We also want to diversify and complement our core business, which is predominantly centered around wireless connectivity in the consumer segment, with fast broadband solutions based on fiber and wireless technologies, for home, business and enterprises. We are working towards accelerating the enablement of digital lifestyle in Saudi across not only youth and other lifestyle segments but also across communities through digital health, digital education and other applications. There is tremendous growth potential for digital services and superfast connectivity in the Saudi market in the years ahead driven by Vision 2030. However, we believe the next 12-24 months will be very challenging for the industry and us.