Mobile Telecommunications Company K.S.C.P. (ZAIN) Earnings Call Transcript & Summary

Hello, and welcome, everyone. I am Madhvendra Singh. I head the CEMEA & LATAM TMT Research at HSBC. It is my pleasure to host today Zain Group for its first quarter 2025 earnings call. And I want to thank the senior management of Zain Group for their time to do the call today. [Operator Instructions] I will hand over the call now to Mohammad Abdal, Group Chief Corporate Affairs and Communications Officer, who will introduce the panel today.

Thank you, Maddy, and welcome, everyone to Zain Group Q1 2025 Earnings Conference Call. I'm joined today with Ossama Matta, our Group CFO; Kamil Hilali, our Group Strategy Officer; Mohammed Shereef, Group Head of Finance; Khaled Kandari, Group Treasury and Executive Director; Aram Dehyan, Group IR Director. In a moment, we'll take you through the IR presentation, which was posted earlier today on our website. And after that, we're happy to answer any questions you may have. During the call, we'll be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on the current expectations and assumptions that are subject to risks and uncertainties. Please refer to our detailed cautionary statement found on Slide #2. With that, I'll now turn the call over to Ossama Matta.

Thank you, Mohammad. Ladies and gentlemen, good afternoon, and welcome to the Zain Group Q1 2025 Earnings Call. We are proud to report an exceptional start to the year with strong double-digit growth across all key financial KPIs, revenue, EBITDA and net income. Importantly, our excellent performance this quarter was driven by strong telecom growth, further enhanced by the expanding impact of our new growth verticals, namely ZOI, ZainTech and Fintech. This new growth vertical delivered an additional $124 million in revenue for Q1 2025, a remarkable growth of 185% year-on-year, and now accounting for 11% of total group revenue. Notably ZOI achieved a remarkable 371% increase in revenues year-on-year, while ZainTech recorded an impressive 184% growth year-on-year. We are seeing many positive signs of recovery in Sudan as network restoration has reconnected over 5.8 million customers and is leading towards significantly better operational performance. I would also like to highlight the success of our recent AGM, where our shareholders approved a 25 fils dividend for the second half of 2024, bringing the total dividend for the year to 35 fils per share, reflecting a 73% payout ratio. They also approved to renew the minimum annual cash dividend policy of 35 fils per share for another 3 years, extending it till 2028. More specifics on these growth verticals. We start with ZOI, Zain Omantel International. ZOI continues to deliver exceptional growth with revenue for the quarter soaring 371% year-on-year, reaching $116 million. This strong performance was driven by early closure of major capacity deals in data and connectivity, significant growth in voice traffic volumes and a significant expansion in partnerships and international agreements. ZOI is now ranked as the highest performing network in the region and among the top 100 globally out of over 70,000 active networks. As ZOI grows beyond this traditional wholesale role, we are focused on becoming the leading ultra-regional edge data center provider in the Middle East and Africa region. Our goal is to build a seamlessly connected digital ecosystem that supports global connectivity. We aim to offer data center solutions that help businesses, international carriers and hyperscalers to connect easily through one unified platform. ZainTech, the other growth vertical, is the group's digital solutions provider, and it is playing a key role in driving enterprise growth across the group. ZainTech generated $45 million in revenues in Q1 2025, which is an increase of 184% compared to last year. This strong performance contributed to a 16% year-on-year growth in the enterprise revenue group-wide. ZainTech achieved several important milestones this quarter [Audio Gap] and was granted a commercial license in Saudi Arabia, allowing it to expand its presence and operations across key digital areas. Additionally, ZainTech joined the NVIDIA Partner Network becoming the first in Jordan and one of the few in the region to bring advanced AI solutions to businesses across its markets. On the Fintech side, Zain's fintech business continues to scale with healthy growth in revenue, customer base and transaction volumes across all jurisdictions. In Q1 2025, our fintech operations generated $34 million in revenues, up 30% year-on-year and total transaction value of $1.7 billion. In April, we proudly launched Bede in Sudan. With these developments, Zain has completed the launch of its digital services, financial services across all operating markets, reinforcing our position as a leading fintech enabler across the region. As part of our regional brand strategy, our aim is to have all the fintech arms to be under a unified brand, which is the Bede brand. On the Tower business, and as mentioned in our last call, our TowerCo business, [indiscernible] Ooredoo and TASC is currently awaiting final regulatory approvals from Qatar's Communication Regulatory Authority to proceed with the asset and share transfers, and we are well prepared for its operational execution once the approval is granted. On other matters like corporate sustainability, we launched our 14th consecutive sustainability report titled, The New Paradigm Shift, the first in the region to include both reasonable and limited assurance. This milestone further reinforces Zain's leadership and commitment to transparency and responsible business practices across the region. One more thing to highlight is Zain Brand strength. And before we dive into the financials, I am pleased to share that Zain Brand Finance has just valued Zain Brand at $3.5 billion for 2025, which is an increase of 14.5% from last year. This reinforces our AAA brand strength and confirm Zain as the #1 brand in Kuwait and in other markets. We are proud to announce that Zain has been ranked among the top 25 strongest telecom brands and has also secured among the top 40 most valuable telecom brands globally this year. Moving to the financial highlights of the year, a bit positive for the quarter where we ended the period serving approximately 51 million customers, up 20% year-on-year, serving an additional 8.3 million customers. This was due to the network restoration in Sudan and the improved market access in Iraq and strong growth in other markets. Sudan saw its customer base more than double, growing 110% year-on-year, adding over 5 million customers. We anticipate this positive development to continue over the year as Zain's services are restored in more and more areas of Sudan. Q1 2025, Zain Group revenue grew 15% year-on-year to reach KWD 536 million, which is equivalent to $1.75 billion. EBITDA for the quarter also jumped 15% year-on-year to reach KWD 171 million, which is equivalent to $554 million and reflecting an EBITDA margin of 32%. Net income for the quarter soared at 66% year-on-year to reach KWD 48.5 million, which is approximately $157 million, reflecting an earnings per share of 11 fils. This remarkable growth in profitability was driven by the significant recovery in Sudan and the sustained momentum in Iraq and in other markets. Total CapEx for the quarter reached $242 million, representing 14% of revenue strategically allocated to key markets. The group continues to maintain healthy cash flow with a free cash flow of $126 million for the quarter, representing 7% of revenue. Total liquidity available to Zain Group stands at $2.8 billion. Net debt to EBITDA currently stands at 2.2x and total debt to total capital, including debt and equity is around 45%. As for the guidance for 2025, we are looking confident in maintaining this strong momentum as we have seen in Q1. And we expect group revenue to continue with a double-digit growth between 10% to 15%, and on the normalized net income, we expect to have also double-digit growth between 12% to 18%. And when I say normalized, it means relating the impact of the positive impact last year coming from IHS, the acquisition of IHS. Our CapEx to revenue ratio is projected to remain healthy between 15% and 17% across all markets. With that, I will now hand over to Mohammed Shereef to discuss the results in more detail, and thank you.

Thank you, Ossama, and good afternoon, everyone. Moving to -- let's go to Zain Kuwait. Maintaining its market leadership, the operator customer base stood at 2.6 million. Revenue for the quarter reached $303 million. EBITDA increased 2% to reach USD 103 million, representing an EBITDA margin of 34%, while net income grew 2% year-over-year to reach USD 58 million. Data revenue reached USD 108 million, representing 36% of total revenue. Zain KSA. Zain KSA delivered a solid performance in Q1 '25. Revenue is up 6% to reach USD 718 million. EBITDA increased 5% to reach USD 217 million, reflecting an EBITDA margin of 30%. Net income surged 40% year-over-year to reach USD 25 million. The operator data revenue grew by 2% to reach USD 284 million, representing 39% of the total revenue and active customers increased by 3% to reach more than 9 million customers. The OpCo witnessed continued growth in 5G, B2B, Yaqoot and Tamam revenue. Yaqoot [indiscernible] digital arm witnessed continued growth in revenue, while Tamam, the consumer micro finance arm witnessed an increase of 31%, all of which contributed towards an increase in top line. Zain Iraq. Zain Iraq continues to build on its growth momentum, delivering another strong performance in Q1 '25. Customer base grew 11% year-over-year to reach 20.7 million customers, driven by investments in network expansion and monetization of the new B2C and B2B products and services. Zain Iraq revenue increased 13% year-over-year to reach USD 286 million, mainly from growth in data revenue. EBITDA increased 13% to reach USD 105 million with an EBITDA margin of 37%. Net income for the quarter soared 73% to reach USD 26 million. Zain Jordan. Zain Jordan delivered a solid performance for the quarter, achieving steady financial and operational growth. Revenue grew 7% year-over-year to reach USD 141 million with an EBITDA of USD 55 million, reflecting an EBITDA margin of 39%. Net income for the quarter grew 8% to reach USD 18 million. Expansion of 4G services, the rollout of fiber and launch of 5G services in Jordan led to data revenue growth of 10% year-over-year, now representing 53% of total revenue, highlighting the growing demand for high-speed connectivity and digital services in the country. Additionally, Zain Jordan's customer base expanded by 5% to reach 4.1 million customers. Looking to Zain Sudan. Zain Sudan delivered a remarkable recovery in Q1 '25, showing strong signs of growth despite the ongoing challenges in the country. The operation recorded exceptional growth across all KPIs, supported by successful restoration of 1,564 sites, including 219 in [indiscernible]. As a result, revenue grew 112% to reach USD 107 million. EBITDA surged 423% to reach USD 61 million with a robust margin of 57%. And net income soared 138% to reach $53 million. The rapid network recovery has reconnected millions. As a result, our customer base more than doubled, up 110% year-over-year from 5.2 million in Q1 '24 to 11 million in Q1 '25. We remain very optimistic on further progress in the upcoming quarters. Finally, Zain Bahrain. Zain Bahrain generated revenue of USD 56 million, an increase of 8% year-over-year. Data revenue grew 4% to represent 44% of total revenue. EBITDA reached USD 14 million, reflecting an EBITDA margin of 26%. Net income reached USD 3.1 million, up 10% year-over-year. With that, I will hand over to Mohammad Abdal for the Q&A.

Thank you, Mohammed. Operator, we will now move to the Q&A session.

[Operator Instructions] The first question is from [ Tando ].

This is [ Tando ] from UBS. I just have -- I'll start with 2, please. Just in terms of the tower transaction. Could you just remind us what the equalization payment is now? Because if I listen to what your peer Ooredoo is saying, it seems like they've been building some sites and that equalization payment of, I think, $500 million will probably not move much. So any update on that equalization payment will be helpful, please. And then my second question is just on Iraq and whether you have any updates on the fourth operator coming in next year. I was wondering if you've run any scenarios in terms of the impact that the fourth player could have? And then what you guys have in order to mitigate any substantial impact from the fourth operator?

Thank you for the question. I mean in terms of acquisition, I mean, currently the main change that happened is now that we have [ partnerships going out ] of the equation, right? We expect the acquisition that we announced previously to reduce by about $130 million to meet the expectations mainly because now we're going to [indiscernible].

For Iraq, of course, the fourth operator, there are a lot of discussions going on between us and the regulator and [indiscernible] because it is not fair for a fourth operator to come take exclusivity of 5G for the coming 3 years. Even though we are seeing other markets and we have seen 5G, what -- 5G services, what they are doing in other markets. So I can basically tell you that it will not have a major impact, especially in Iraq. You can compare it to Jordan, for example. But we managed to reduce this exclusivity, and this is informal and informal discussions or agreements from 3 years to 1 year. So this is happening. We are still fighting it as we don't want to -- we don't agree that they will have exclusivity for 1 year. All operators should have the same kind of fight. And I would like to also remind you like in Iraq, it's not an easy country to operate in. It's not easy to put towers in [indiscernible] country. It will take some time for any operator, a new operator to provide services in Iraq. I will not see any major risk on 2025 or even 2026. I hope I answered your question.

The next question is from Nishit.

Congrats on a very solid results. I just have a couple of questions. One on the broader financials, there were certain it looks like one-off in 1Q, if you can give some more clarity. One seems to be from investment income, the spike through since inception. So what exactly is this since inception, FVTPL investment income and there was a big jump there. But it was offset by a good jump in the other expenses also this quarter of more than $11 million, which is much higher than your quarterly run rate. So any color on these 2 one-offs would be helpful. At the same time, your operating expenses also went up this quarter to almost $170 million. Is it got to do with equipment handset sales or is there something else because this is one of the highest in recent quarterly run rate. So that just like one question on these line items within your income statement. And second, just on the Sudan, I know you had upstreamed last time I had asked, you said you upstream some cash through wholesale agreements as well. So given the strong performance and all, is there even getting easier to upstream some cash out of Sudan? That's it for now.

Regarding the investments and gain on investments, we have recorded this quarter gain on investment related to SpaceX and it's approximately $52 million booked to the shortage. And as you said, there are also increases in the -- the reason we booked this gain is because the value of the investment has increased. We also have an increase in other expenses, which is related to some provisions taken at the group level related to a lot of matters that we are looking at, whether it's on the tax side, whether it's on Saudi side, better to take provisions when you have unexpected gain. So this is what we did. On the operating expenses, there is a lot of push across all operations on the -- to gain on the revenues. And some of it is coming from trading and trading I'm talking here about the equipment. This will have an impact, of course, on the margins. And there are other areas, for example, like Iraq, there is a major push in the market on sales because of the situation, the third operator is we need to push as much as possible to benefit from the disconnection that happened to them. And this has increased the commission charges. Also in Saudi, for example, we have packaged more products, especially on [indiscernible] with international destinations. And this has increased the cost and reduced also the margin. And finally, if you look at the new growth businesses, which is ZOI and ZainTech, it is big in terms of revenues. But when it comes to EBITDA, it will have a lesser positive impact for the group because of the increase of the cost related to it. For Sudan, we are upstreaming from Sudan, and we expect the upstream to be between $30 million to $40 million this year.

That's very detailed. Ossama, just one follow-up on the Iraq push on the sales. Interestingly, your other competitor also did the similar thing. What's the situation in second quarter? Is this disconnection to [ Kuwait ] continuing for now or things have changed?

Still as they are. But for us, it's an opportunity that we are getting advantage of. But also at the same time, we are changing a lot of things in Iraq. On the product side, we introduced a new product called KAFOO and we are pushing it into the market. We are also doing a lot of changes on the [indiscernible] a lot of packages now are being introduced in the market. And also on the commission side, pushing more on the sales. We also from companies that are sister companies or they owned by Iraq, we became the Samsung, what we call this leader, distributor, main distributor in Iraq. And we are also into this now business, whether it's retail or bulk things. So a lot of things is happening in Iraq and also targeting more into the government projects. We haven't been successful before. Now we are seeing a lot of traction and bringing in a lot of projects. So this is basically -- I hope I answered your question.

[Operator Instructions] We have some questions on Q&A box. So I'll read them up one by one. The first question is from Faisal Hussain around why was the CapEx high? In which country it is coming high from? And how are you financing this CapEx?

It was normal. CapEx was normal. Actually, some of the CapEx that started last year, we have seen it now capitalized in Q1. Also, there are some CapEx related to ZOI that we have pushed into the market. But I don't see any abnormality in the CapEx. It is very normal. And it is within the industry standard.

And then the next question is...

To give you more highlights on this, like, for example, we're going to launch in Kuwait, 5.5G very soon. And this will happen in June. So part of the CapEx that you see also is related to the 5.5G. We expect good revenues to come from it in the second half of the year.

So actually, there is a question on that as well. What is the financial impact of rolling out new spectrum in Kuwait? How many sites were rolled out in Q1? Yes. I mean I think...

It covers all of Kuwait. We will have an amazing service in Kuwait in terms of 5.5G. And as you know, it's very generous and rich and very bold when it comes to technology.

The question is that do you expect that to happen within the CapEx guidance?

Yes, of course.

Then the next question is from [ Lazaad Al Damani ]. When you will expect to launch Bede in Kuwait? I think he's talking about the fintech.

Bede, the Fintech. We already have the book, which will rebrand to Bede share wallet. Still here in Kuwait, it's not easy. We don't have a digital bank license or micro lending license, we don't have it. It's still -- what we call this Buy Now Pay Later thing, it's still there. It's just the wallet. So this is [indiscernible] we see big business on this, but we'll continue to lobby and to ask for such license. It might take some time, but we already have now this wallet with changes to Bede and will support the other business.

The next question is on -- I think Kuwait again, but I will expand that to any other market it is relevant for. What is the impact of Pillar Two tax in Kuwait? And I think net profit declared is KWD 17.9 million, which is before taxes. Is that understanding right? So you can probably also talk about any potential tax time line and impact in the relevant markets.

We looked at the Pillar Two tax across all operations. We have added additional tax related to -- and this is because Sudan is owned through our [indiscernible] company in the Netherlands. So that's why -- and they have started applying Pillar Two tax in 2024. As for the rest of the operations, including Kuwait operations, in total, we have looked at it. And based on the assumptions that we put in place, we applied the safe harbor, whether it's on the employees cost or on the fixed assets. And apparently, we are fine, we don't have to incur any additional tax. But this is the reason because the regulation here in Kuwait isn't out yet. That's why we have taken some provisions, as I mentioned earlier at the...

Then the next question is from [ Ahmad Al Abdi ]. Does your guidance for net income growth this year include the gain on investments and other expenses?

Yes. Based on Q1 results and the guidance that we've given you, it's basically without investment gain because I have taken provisions against in Q1.

So couple of questions from my side as well. How is ZOI and ZainTech, Fintech, these revenues shown in the group earnings? Are they part of the individual market reporting? Or do we have to think about them separately? That's the first one. And then the second question is on Sudan. The revenue growth was very strong. How did the OpEx grow? And in what areas this OpEx growth is coming from? So what I'm trying to get to is, should we expect significant improvement in margins as well in Sudan? It's already at, I think, almost 55%, 57%. So can this get even better?

When you compare it with last quarter, remember last quarter Q1 2024, we had a complete shutdown of the network for 1.5 months. So when you compare it with last quarter, I mean, it's not a fair comparison. We restored now the company is doing great. But from a performance point of view, in terms of revenue, whether it's price increases or restoring network and going into new markets, into new areas, this is helping a lot, but it's putting also, of course, some pressure on the cost. Nevertheless, you have almost like out of -- we have 1,500 sites on air and we approximately have 1,200 [indiscernible]. And this basically reduces the cost of utility, fuel, et cetera to operate these sites. From the total cost, the cost will be basically related to I believe like salaries and what have you and some maintenance. But it's fine. I mean we don't see -- it's run very efficiently. What was your other question?

That was about how do you report...

They are reported as others separately.

They're not part of the, let's say, Kuwait revenues. They include...

No, no, no. They are not.

They're not, okay. There are a few more questions in the Q&A box. So some questions around the revenue and margin trends in Kuwait asking what drove the improvement in margin in Kuwait, I think they're asking year-on-year. And which segment witnessed an increase or perhaps due to cost efficiency? So that's one question.

In Kuwait, we have seen like the postpaid business year-on-year compared to last year. The other businesses like [indiscernible] has dropped because of some parliamentary reelections that happened in Q1 2024. On the MBB, we are fine, but we also see there is an opportunity here. We have seen some fierce competition on the MBB, but we see also there is good traction on the MBB business as we expect to uplift prices in the market. The other businesses, which is basically the trading business is doing very well. And the reason we have good gross margin is because of the rebates we are getting from the suppliers. And what else? On the postpaid, we have increased customer base. But of course, ARPU has dropped because of the competition, and we have increased also the contract commitment from 24 months to 36 months. So we are seeing positive signs in the market. The most important thing is basically proper competition and not irrational competition. So hopefully, Q2, I believe it will be good for Kuwait as well as we have seen some positivity in terms of uplifting prices.

There is a question from Nishit again.

Yes, I just have a follow-up on Maddy's question on the accounting for ZOI, ZainTech and all. I see -- in terms of numbers, I see the delta in your other business to be around $28 million as per the segment reporting. But if you see the press release there from the entire businesses, it says that almost $124 million or KWD 38 million has been the delta from these other ZOI, ZainTech, [indiscernible] and Fintech services. So the delta here is KWD 38 million, but the delta in the segment is KWD 24 million. So are some part of these growth verticals that you have under the countries, maybe around KWD 14 million delta that has created here? If you can just be more clear on that.

This is on the revenue side, right? You're referring to...

Yes.

We put in other revenues as well like small operations like Port Sudan, it is there. Zain Cash, it is there. We have also another entity, Kuwaiti Sudanese Holding Company in Sudan. All of this are under others. But the bulk, as you mentioned, it is ZainTech and ZOI. These are the major ones. But you have also [ Port ] Sudan, ZainTech Sudan is included there.

If I could just follow up on that. I think what probably will be helpful is to say whether there is any intersegment adjustments happening in the other compared to the number you are reporting for ZOI and Fintech and tech, maybe those are the stand-alone numbers. And when you...

Yes, you're right. I mean when we look at the -- when I say the business of ZainTech has increased in terms of revenues, it doesn't include elimination. Any interbusiness, intercompany transactions gets eliminated. So the business on its own, whether it's ZOI or ZainTech is 100%. But when you consolidate, you eliminate any intercompany transaction.

A couple of more on the Q&A box. Is there any write-off in Q1 for the mandatory provision to roll out new 5G spectrum in Kuwait?

No write-off. No.

Great. That was quick. Another question on B2B business in Kuwait. How do you see it evolving? Any sign of pickup? Can you shed some light on it?

On the B2B, we are fine. We are doing fine. But of course, this will be enhanced support once we have license here in Kuwait. And once more of the hyperscalers come into Kuwait, so all of this will be positive. We have seen some positive action in the business in Q1, in general, in Kuwait. But hopefully, things are on the right track and things will be better. From a business point of view, we have a growth in the B2B in Kuwait by 4%, whether it's on the business solutions side or on the mobility side. So we're fine.

Great. I think this should be the final question on Kuwait. So someone is asking the market service revenue increased, but Zain Kuwait service revenue doesn't seem to have grown. So what is the reason?

As I mentioned, we had some challenges in the core business basically, whether it's on prepaid or on the MBB. On the prepaid, there is a lot of movements happening between prepaid and postpaid. Postpaid is flat, but I have a drop in the prepaid, and this is mainly coming from the competition. On the MBB, as I mentioned, we need to uplift prices, and there are some signs that we will be successful in having this in Q2 going forward. We have lost on the SMS -- on the bulk SMS as compared to last year. And we are pushing on the trading. There is good margin in it, as I mentioned before, and we are getting some good rebates on it. So from a service point of view, we are doing fine. There is competition. It is impacting the margin, but it is being compensated by other revenue streams.

And this would be probably the final question for today. Can you talk about your data center strategy, ambitions? If any specific targets you could share for this year, next year?

So [indiscernible] countries I think Kuwait and Iraq. Okay, so this is...

Great. I think that concludes the call today. Any final words, Ossama?

We will have a great year this year looking at Q1 great results, and we expect that this will continue in the coming quarters. All operations are doing great, whether Kuwait, Iraq, Sudan, of course, Sudan and Iraq are exceptionally doing well. Saudi, a lot of challenges, but things are moving into the right direction. In the prepaid, we managed to turn around the business in Saudi, and this is a major plus. On the postpaid, we're doing fine. We have some issues on the B2B, but we are fixing this. So from a total business, it is doing great. The new growth verticals are doing great as well. So we expect to have a great year. Thank you.

Thank you very much, and thank you, everyone, for attending the call today. Thank you, Zain Group management team for taking the time. We can close the call now. Thanks.