Kaan yaa maa kaan – or, Once upon a time, a story about Etisalat and Du

Big telcos, including and perhaps particularly those in the Middle East, are generally not as forthcoming with information about themselves as market-watchers would like.

So I was intrigued when, in mid-July, with Etisalat’s 2Q12 results looming, the UAE operator’s new PR chaps were suddenly awfully keen that we should meet up.

Over Starbucks coffees, they explained that, sadly, some people don’t seem to understand the Etisalat story. I got the distinct impression that what they really meant is that I didn’t understand the Etisalat story.

This was disappointing, because I have been following Etisalat closely for the past five and a half years. But it got me thinking – what is the Etisalat story?

There are at least two competing narratives. One is that Etisalat has sound financial metrics and has expanded beyond its home base in the UAE over the past decade to build an extensive portfolio of operations in high-growth emerging markets in the Middle East, Africa and Asia. Part of this narrative is Etisalat’s focus on deploying advanced network technology – in the UAE it has rolled out a near-nationwide FTTH network and it launched LTE in late 2011. The high-tech approach is followed overseas too, though adapted to the local market – for example, Etisalat Afghanistan recently launched 3G services, the first operator in the Afghan market to do so.

The need to sustain this narrative might have become even more acute lately because the ownership of Etisalat shares might soon be opened up to foreign investors for the first time, according to reports in the UAE media in late July, quoting Etisalat Group CEO Ahmad Abdulkarim Julfar.

But an alternative narrative would have to take into account the facts that Etisalat’s business in its home market of the UAE is flat, or even declining, while the overall performance of the group’s international businesses – if we focus on those that are controlled by Etisalat and consequently are consolidated within its results – has been modest.

When Etisalat’s 2Q12 results came out they showed that its revenues in the UAE had declined by 0.4% year-on-year and by 3% quarter-on-quarter. The UAE’s seasonal slowdown in summer is likely to have been a factor in the quarter-on-quarter fall, but Etisalat’s revenues in the UAE have declined on a year-by-year basis in five out of the six most recent quarters, according to reports published by the operator. Etisalat’s revenues in the UAE of AED5.64 billion (US$1.54 billion) in 2Q12 represent a decline of about 8% on its UAE revenues of AED6.16 billion in 2Q10. Although the pace of decline in Etisalat’s UAE business has slowed, it is too early to say that it has been turned around.

Meanwhile, Etisalat’s international operations accounted for 28% of the Group’s revenues in 2Q12, up from 26% in 2Q11 but a relatively modest figure given the extent of Etisalat’s foreign footprint. At Qtel, international operations account for more than 80% of group revenues. (Though Etisalat UAE is about 3.6 times the size of Qtel Qatar in terms of revenues, while the Etisalat and Qtel groups are of about the same size in terms of revenues.)

Etisalat has also had made some major missteps in its foreign strategy. A decision to get into the Indian mobile market proved to be a costly misadventure (though not for Etisalat alone). And a potentially transformative deal to take over Zain disintegrated.

At a group level, Etisalat’s 2Q12 results looked better, with revenues up 4% year-on-year and net profit up 17% year-on-year. But the comparison is a little flattering because 2Q11 was quite a bad quarter for Etisalat, with net profit in that quarter falling 15% year-on-year. Etisalat’s group net profit of AED1.87 billion in 2Q12 is about the same (in fact, fractionally lower) than the equivalent for 2Q10. Going back a bit further, to 2009, Etisalat recorded a net profit of more than AED2 billion in three out of four quarters – and in the fourth quarter of that year the figure was only slightly below the AED2 billion mark, at AED1.98 billion.

Etisalat is clearly acutely aware of the difficulties that it faces, and there have been major organizational and management changes over the past year or so as the company seeks to deal with the situation. New products and services have been launched too.

The take-up of Etisalat UAE’s new fixed-line services based on its FTTH network is growing, as is that of mobile-data services, but not as quickly as the operator had hoped or quite fast enough to make up for the effect of competition from cross-town rival Du, as well as factors such as the growing use of OTT VoIP services for international calls. (Despite the restrictions in the UAE on alternative VoIP services, usage is believed to be growing rapidly and is having a substantial effect on local operators that are accustomed to deriving a large part of their revenues from the international calls made by the UAE’s multinational population.)

Coming quarters will show whether Etisalat can indeed return to growth in the UAE. Beyond the UAE, Julfar appears to have ruled out further foreign acquisitions in the near future – but that does seem to leave open the possibility that Etisalat might seek to increase its holdings in some of its affiliates, the non-UAE operations in which it currently has a stake but does not control. Etisalat would look very different if it was able to consolidate Mobily, the Saudi operator in which Etisalat owns 27% and which is reporting consistently strong financial results.

And what is the Du story? For 2Q12, Du reported a 12.9% year-on-year rise in revenues and a 57.1% rise in net profit before royalty. The mobile sector accounts for 77.3% of Du’s revenues and Du had a 45.1% share of the UAE mobile market by subscriptions at end-June, based on the most recent subscription figures reported by the two operators. Du, which launched services in 2007, has regularly been more effective than Etisalat at winning new subscribers – for example, in 2Q12 Du recorded 196,300 net new mobile subscriptions compared to about 50,000 for Etisalat UAE.

Du’s rise is impressive but there is a sense that it might be approaching the limits of easier progress in the mobile sector in which it has recorded most of its growth. Du’s mobile revenues and net new subscriptions for 2Q12 were below those recorded in 1Q, though this is partly due to seasonal factors. And Du’s chances of achieving substantial growth in the fixed market are constrained because the plan to introduce bitstream-based competition between Du and Etisalat has been delayed indefinitely. The plan to introduce MNP in the UAE is also apparently delayed indefinitely. A decision seems to have been taken that Etisalat should not face any additional competition in the UAE in the near future.

So Du’s options are limited, though it will no doubt continue its strategy in the mobile market of developing segment-based offers; increasingly targeting higher-value and postpaid customers; and trying to raise the take-up of mobile data. Additionally, Du’s CEO Osman Sultan has said the company is considering whether to apply for MVNO licences that are expected to become available in Saudi Arabia and Egypt, though no decision has been made as to whether to go ahead.

Of course, Etisalat and Du are not alone among Middle East operators in finding that growth is harder to come by as competition increases and markets mature. At Wataniya Kuwait revenues for 1H12 were down 8.1% year-on-year, while Nawras in Oman has posted declines in revenues and net profit. Batelco Group’s revenues for 1H12 were down 5% year-on-year and its net profit declined by 11%.

But others find themselves in happier circumstances – in Saudi Arabia the incumbent STC and Mobily are doing well out of the continued strong local demand for data services. STC reported an 8.4% year-on-year rise in 1H12 revenues while net profit for the period was up 29%. And proving perhaps that fortune favours the brave, Iraqi operator Asiacell – part of the Qtel group – posted an 18% year-on-year rise in 1H12 revenues and a rise in net profit of almost 36%.