Fierce competition within the saturated telecommunications market contributed to a steep decline in earnings from Etisalat yesterday.
The UAE's largest phone company, which has offered to buy a 46 per cent stake in Kuwait's Zain, said third-quarter profit fell 23 per cent from the same period last year as local competition hit revenues and operating expenses rose. Net income declined to Dh1.74 billion (US$473 million) from Dh2.25bn a year earlier.
The figures fell short of analyst expectations of more than Dh2bn for the quarter. Revenues fell by more than 8 per cent to Dh7.31bn compared with Dh7.99bn in the same period last year.
The company added just 10,000 new mobile subscribers in the quarter to 7.81 million. The operator also lost about 40,000 internet users to 1.35 million.
"What we're seeing right now is a very saturated market in the mobile side," said Irfan Ellam, a telecoms analyst with Al Mal Capital. "Net additions will be in the tens of thousands and not in the hundreds of thousands as we've seen before," he said
Operating expenses factored heavily into Etisalat's earnings, rising 12 per cent to Dh4.11bn in the quarter. Several factors including rising salaries, regulatory expenses and depreciation led to the increase in Etisalat's operating costs.
Etisalat's $10.5bn offer to acquire a 46 per cent stake in Zain would make the UAE telecoms operator one of the largest in the world.
Minority shareholders have yet to approve the deal and the Kharafi Group, one of the largest private investors in Zain, is still working to acquire the shares in the company that Etisalat needs to reach 46 per cent.
"Although some of Zain's markets are maturing in terms of being 100 per cent penetrated, they still have growth opportunities," said Mr Ellam said. "But [Etisalat's] balance sheet remains strong even after the Zain acquisition and they'll generate enough money to take care of their debt.
Etisalat generates about 86 per cent of its sales through its international operations, with its Egyptian unit representing the majority of its foreign revenues.
While analysts have cited Etisalat's Egyptian business as a crown jewel in the operator's portfolio, it also needs to begin performing in its African and Indian operations to help offset a decline in its local revenues.
Etisalat has about 30,000 subscribers in India under the Cheers Mobile brand and has been in talks with several of the country's operators including Reliance Communications and Idea Cellular to expand its presence in the world's second-largest wireless market. Under the country's telecoms laws, however, Etisalat cannot acquire another company until January.
"India hasn't been resolved yet and that's not exactly ramping up its revenue," Mr Ellam said. "[Etisalat's] growth should be coming from overseas acquisitions and internet subscribers."
Etisalat's revenues were also affected by the decrease in its internet subscribers. While Etisalat does not break down its internet subscribers into dial-up or broadband categories, Mr Ellam suggested that users from other emirates had moved to Dubai and signed up with du.
He also pointed at the possibility that a significant number of the operator's dial-up customers cancelled the service and opted for mobile broadband packages.
"There's a substantial number of dial-up customers," Mr Ellam said. "This could be the beginning of those people fleeing."
Etisalat's main rival du is expected to report its third-quarter earnings next week. Analysts expect du to report earnings of Dh138m, a 75 per cent rise compared with last year.