By Ed Attwood
Vicious competition and a saturated marketplace have made life tough for Saudi Arabia’s third mobile operator, Zain KSA. But the appointment last year of one of the kingdom’s top telecoms figures, Sheikh Farhan Al Faisal Al Jarbaa, has helped the firm turn its fortunes around
You won’t find many people better acquainted with the Saudi telecoms sector than Sheikh Farhan Al Faisal Al Jarbaa. The genial entrepreneur has now spent well over three decades running a set of companies that specialise in hi-tech infrastructure, building partnerships with the likes of Ericsson, Scientific Atlanta (now owned by Cisco) and ViaSat, and serving clients as diverse as the Royal Court, Saudi Telecoms Company (STC) and the Ministry of Defence.
In many ways, Sheikh Farhan has perhaps done more than any other private-sector figure to develop Saudi Arabia’s now highly advanced telecoms infrastructure. The annual iftars at his house in the heart of Riyadh have become a meeting place for the who’s who of the industry, and his Rolodex is full of heavyweight contacts.
“I’m fortunate enough to have a lot of relationships with telecoms decision makers, as a result of my 30 years in the industry,” he beams from behind a desk at the Riyadh headquarters Modern Technology Co (MOTECO), one of his companies. “I have grown up with people who were junior engineers, who became ministers, deputy ministers, CEOs and chairmen.”
All of which explains why the shareholders of Zain KSA, the kingdom’s third mobile licence holder, were keen to appoint Sheikh Farhan as the firm’s chairman just over a year ago. Since starting operations in 2008, the local unit of Kuwait’s Zain Group has been fighting tough competition in the shape of former monopoly holder STC and Mobily, which is owned by the UAE’s Etisalat. It has also been hampered by the original $6.1bn cost of obtaining its licence — a price that many observers felt was far too high given the 200 percent penetration rate in the Saudi market.
While the firm has been allowed by the Saudi government to defer its licence fee payments, it is still to turn a profit. However, recent results seem to indicate that Zain KSA is finally on the right track. At the end of last month, the company reported a 9 percent rise in revenues to $448m year on year, while its net loss narrowed by 19 percent to $68m, beating analysts’ projections.
Earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 16 percent during the same period to $92.8m, while the firm’s EBITDA margin increased to 21 percent, the highest figure since operations were launched seven years ago. In addition, the company reported that its subscriber base had topped 10 million, up by nearly a quarter since the same period a year before — not bad in a country with a population of 28 million.
The stronger results are down to a transformation plan supervised by the chairman and CEO Hassan Kabbani, as well as a friendlier regulatory environment in the country.
“First of all, we tried to cut costs and there was a lot of excess expenditure we got rid of,” the chairman says. “We have also been pushing to get more revenues from data — and when it comes to data, our services are some of the best in Saudi Arabia.”
Zain KSA’s focus on data is certainly paying off. In 2014, the firm grew its mobile broadband customer base by 147 percent, while mobile internet data traffic grew by more than six times against the previous year. It’s all part of the company’s plan to tap into the requirements of a younger population that is consuming mobile data at an astonishing rate. Saudi Arabia currently has the highest per capita YouTube viewership of any country in the world, while social media sites like Facebook and Twitter are also hugely popular.
To meet demand, Zain KSA is investing heavily in its network via the so-called Reload Project. That has involved a $1.2bn agreement with Huawei, Nokia, NEC Corporation, Cisco and Alcatel-Lucent, in a bid to expand network capacity, coverage and speed. In March, it also signed a deal to build a ‘Tech City’ in Riyadh.
“By June this year, we should have 60-70 percent coverage in terms of LTE and 4G for the kingdom, and we hope that by next year we’ll have covered most of the country,” Sheikh Farhan says. “In the meantime, we’re also expanding our 2G and 3G network all over the kingdom.”
In addition, the chairman’s time in the hotseat has also seen a new, more simplified corporate logo, and a bigger retail network, with around 9,000 points of sale now dotted around the country. A capital reduction to write off all the firm’s accumulated losses up until the end of September last year was also approved by the Capital Market Authority in January.
Also playing into the firm’s hands has been a decision by the telecoms regulator, the Communications and Information Technology Commission (CITC), to cut termination fees from 25 halalas to 15 halalas. These fees are charged when a call originating on one network terminates on another, with the caller network charged by the operator of the network on which the call is received. As a result, the fees have benefited the two more established companies, a policy that Zain KSA has long complained against.
“We were targeting a much lower standard than the one they reached, but the CITC has its own reasons and policy and we are grateful to them that they listened,” the chairman says. “We are sure this change will help boost competitiveness in the sector, and consumers will no longer be hostage to on-net calling promotions offered by our competitors.”
But Sheikh Farhan says that he takes no pleasure at all in the chaos that has hit one of his competitors, Mobily, in recent months. Since accounting errors were discovered in the company’s accounts last November, Mobily’s stock has slumped, resulting in a loss of about $8bn in market value. The firm’s CEO, Khalid Al Kaf, and chairman Abdulaziz Al Saghyir have also departed, leaving Mobily to report a $53m loss in the first quarter — a far cry from the $427m profit it had announced a year earlier. In effect, the crisis means that only one of Saudi Arabia’s telecoms operators, STC, is currently profitable.
“It’s a very unhealthy thing that happened there,” he says. “Mobily was one of the leading companies, one of the fastest growing companies. A lot of the people working for Mobily are good people, really capable people, so this came to everybody as a surprise. But we wish them well.”
The chairman also says that he is “confident” about the impending result of an arbitration case between Zain KSA and Mobily, which has arisen from a dispute about the terms of a 2008 contract that stated that the larger company would provide a series of services, including domestic roaming, to Zain KSA. Mobily claims that its rival owes it $586m, although the smaller firm puts the total at $3.5m. The arbitration panel has asked Mobily to submit a detailed statement of claim by 23 May, after which both firms will provide further submissions.
“We’re not really at freedom to talk about it, as the case is under arbitration, but we believe our statement was very honest and clear,” the chairman adds. “We’ve been clear with our record, and with what has been announced in the media and stock exchange, and I don’t think there is any more than that.”
A potential problem area is the entry of two new mobile virtual network operators (MVNOs) — companies that pay to lease other operators’ infrastructure and set their own services and prices. Last year, two companies won the right to operate in the Saudi market, the UK’s Virgin Mobile and Lebara (which use STC’s and Mobily’s network, respectively). A third firm, the UAE’s Axiom, which had been due to use Zain KSA’s network, but had its permit cancelled after it failed to submit documents to the regulator in time. As things stand, Zain KSA is therefore the only operator without an MVNO. Sheikh Farhan says he is relaxed about the new arrivals.
“I think that the Saudi market is open for more competition and that the new MVNOs will only benefit consumers,” he adds. “From our side, we have our own plans for this service. The CITC might give us another chance, but this time we have to be strong and proficient, and carefully choose a partner.”
Further down the line, the chairman remains bullish about the chances of turning a profit in the near future.
“I won’t contradict our CEO — he has said that we can do it in three years’ time, and I think if we keep on that level, given the results in the first quarter, we can close the gap even faster,” he says. “Also with the help of the government on the termination rate and other issues — that could be a major advantage.”
If Zain KSA can continue the good results that its transformation plan has achieved thus far, then the rewards will be considerable. The Saudi telecoms market ranks as the largest in terms of total service revenue in the Middle East and Africa region, with $16bn last year, according to consultancy Pyramid Research. The kingdom beat out South Africa ($13.4bn) and Turkey ($13bn) regionally, although overall revenue did decline by 1 percent last year, largely as a result of Mobily restating its finances.
While the heady days of impressive top-line growth may be over, thanks to saturation in the market, there is still plenty of opportunity for operators to gain revenue from data, and also from the fast-growing ICT market.
As for Sheikh Farhan himself, he says he will stay in his position for as long as he is needed by Zain’s shareholders, despite the pressures on his time from the other companies he oversees. As well as his role at MOTECO, which he founded in 2001, Al Jarbaa also relaunched the Mobile Systems International (MSI) group of companies in 2006, which was originally founded by his old friend, telecoms billionaire Mo Ibrahim. Then there’s Farhan Commercial Company, part of his family business, and High Capabilities Telecom (HICAP), which he launched in 1983. From fibre-optics to satellite communications, Al Jarbaa’s firms have helped various units of Saudi Arabia’s armed forces, as well as a whole range ministries to boot.
“It’s a challenge, it’s good for me,” he says, smiling. “We want to cover all the kingdom, we want to get more customers and we want to serve the economy of the kingdom. We want to be a full partner in the telecoms sector.”