Oman Telecommunications Company SAOG (OTEL) Earnings Call Transcript & Summary

[Foreign Language] Greetings. This is Aisha Al Balushi, and I welcome you all to Omantel's First Quarter of 2024 session. It's my pleasure to host you all on behalf of Omantel's Senior Finance Management today. Joining us today, Ghassan Hashar, Chief Financial Officer; and Amal Al Ojaily, GM, Strategic Finance; and [ Ravi ], who's Senior Strategist to the CFO office. And we have as well Mr. Sudhakar, General Manager of Financial Control. By now, you should have received the company's presentation and the Q1 unaudited financial statements, both of which have been uploaded to Omantel's website and MSX. During this call, we will make forward-looking statements. These are predictions and projections or other statements about future events based on current expectations and assumptions and are subject to risk and uncertainties. [Operator Instructions] Now I will hand over to Mr. Ghassan Hashar, to walk you through the main highlights of the quarter.

Good afternoon, and welcome to our Q1 financial performance update for Omantel. To begin with, then the main highlight is to also confirm that Omantel is continuing on its journey towards the strategy of building an ecosystem around the company where we can see we are transforming the company from being the conventional telco towards as a technology and digital solutions provider. From there, you can see the list of subsidiaries we are having within our ecosystem, starting from Zain. And then, of course, from there, we have our subsidiary, Infoline and the BPO business Oman Data Park and the data center, OmPay; in the fintech side, [ Tedom ] and IoT, Etlaq and space launch infrastructure, Equinix data center and of course, lately, Zain Oman International on the wholesale business. And that comes along also with the partnership with the hyperscalers like AWS and Google and Microsoft. Next, Aisa. Well, for Omantel, the key developments during the first quarter of the year mainly was the successful issuance of $500 million Sukuk for a tenure of 7 years. And of course, the commencement of the operations at ZOI, Zain Omantel International, which is the JV responsible of the wholesale business, which started in Q1 of this year. And to elaborate more in our partnerships with the world's hyperscalers, our partnership with Google Cloud when it comes to cloud edge collaboration and artificial intelligence, along with machine learning. The other partnership as well is with AWS and in Amazon when it comes to providing services and the sovereign cloud capacity and marketplace. The other milestone during the quarter was the launch of the National Cloud in partnership with Huawei. And of course, I'm sure that everyone is aware of the partnership of Omantel Innovation Labs with Oman Investment Authority and the joint future fund. There was a raise of OMR 12 million as a commitment, and this is going to be managed by Omantel Innovation Labs to invest in new start-ups in technology and innovation. It's very important also to highlight that our sustainability report has been published for 2022 and 2023, in line with MSX 30 disclosures and you may visit the Omantel website to download the report. Finally, also a recent development is our acquisition of stake in Etlaq, which is a space launch infrastructure in Oman and the share is about 25%. From here onwards, Aisha will take you through the presentation and cover with the financial highlights, and then the session will be open for Q&A. Aisha, you may proceed.

Thank you very much. Moving to the summary of Omantel highlights of the year. Despite the challenges that we continue to face, we successfully navigated our way towards maintaining Omantel's market share leadership in both mobile business and fixed businesses. Omantel fixed line business has witnessed a growth of 1.2%, supported by growth in the fixed Internet revenue, including broadband, which registered a growth of 800,000. While the domestic mobile market continues to witness heat and competitive pressure during the first quarter. However, we remain and continue to focus on enhancing customer experience, service delivery management and innovative services, packaging and premium network quality. The first quarter witnessed a positive uptake in ARPUs mainly from successful packages upselling, both in postpaid and prepaid. And in sequential slides, we will explore this further. And on the ICT business has posted a 1.4% growth year-on-year including the subsidiary mainly contributed by the cloudification services and communications. Moving to Omantel domestic key financial indicators We can see from the slide, the revenues has decreased by 6.4% year-on-year and the net profit as well by 8.6% year-on-year. However, we want to highlight that stable EBITDA and gross margin on a retail level. And the decrease is mainly coming from the wholesale capacity margins that led to the decrease in EBITDA as well. And we have seen also an increase in CapEx for the first quarter. And as we mentioned, the EBITDA has decreased by 3.1%, mainly coming from the capacity margins decrease, and the net debt has increased by $6.6 million year-on-year and subscribers has decreased also 3.6 million year-on-year, and free cash flow has decreased by 37% year-on-year. On the performance of Zain Group, we can see that the group revenue has decreased by 1% year-on-year; stands at USD 15 billion and group EBITDA has fallen by 11.1% year-on-year, and the group net profit also has decreased by 59% year-on-year. The net profit decrease is -- net profit year-on-year decrease is attributed to the restatement of the first quarter of 2023 for KSA Tower sell and the ongoing conflict network challenges in Sudan. As well, dividend from Zain has received in year 2023 -- that will be received in Q2 of year 2023 to $76 million. Strategic developments at Zain Group. We have ZainTech has completed the acquisition of STC. ZOI has started operation from the -- has already started operations in Q1 2024 and Blue Raman and KSA [indiscernible] will be operational by 2024 and year-end. Also, as we mentioned in Sudan, partial resumption of network and services in Sudan on the 7th of March. Now moving to our Omantel Group performance. Omantel group performance, including Zain Group, the group revenue stands at $728 million, decreased by 0.8% and EBITDA stands at $226.8 million, decreased by $8.7 million, and the net profit is at $40.6 million, decrease of $21 million year-on-year compared to a normalized profit for 2023. On the subscribers, as we mentioned earlier, because of the -- there is, as we have witnessed in the first quarter, a decrease of 19.2% mainly coming from Sudan on the account of the network shutdown and the mass migration crisis. And on the domestic subscribers, we also have seen it reduced by 100,000 on account of reduction in mobile prepaid base by which 260,000, which was offset by increase in postpaid mobile base by 146 and FPB base by 6,000. On the revenue, domestic revenues decreased by $10.4 million, by 6.3%, on account of a decrease in humping revenue by $3.7 million and devices revenue by $6.7 million. However, on Zain Group revenue is increased marginally by [ $1.5 billion] on account of growth in devices revenue and hubbing revenue in KSA and Iraq, which was offset by the fall revenue in Sudan. On EBITDA, the domestic EBITDA decreased by $1.4 million on account of reduction in the gross profit by $3 million, which was partially offset by a decrease in impairment of receivables by $1.5 million. We have seen better management of receivables by enterprise and Zain Group EBITDA decreased by $19.6 million, with a significant impact coming from Sudan, which contributed by almost $29 million, which was partially offset by increase in KSA and Iraq as well. And in the net profit, the net profit before minority interest decreased by $92.6 million since quarter 2022 includes the capital gain on KSA Tower sale of $81.7 million. Excluding the capital gain on the tower sale of $81 million, the net profit for 2023 stands at $51.5 million, which represents a year-on-year decrease of $10.9 million. The decrease is on account of fall in EBITDA, an increase in finance cost and amortization on the group level. Now moving to Omantel domestic performance, excluding Zain. We have the domestic revenue, excluding devices and transit revenue is increased by almost 0.2%, which is supported by growth in fixed broadband by 800,000. The revenue decrease of $10.4 million is on account of the fall of the transit voice revenue, as we mentioned earlier, and the device revenue by $6.7 million. And the mobile revenue, excluding device revenue decreased by 600,000, whereas the fixed broadband revenue has increased. On the EBITDA, the EBITDA decreased by $1.5 million on account of the reduction of wholesale margin on capacity sales and reseller revenues. However, the retail gross margins were in line with last year where OpEx costs, including impairment, has decreased, the same reason because of improved receivables managed by the enterprise team, which is around -- which decreased attributed to reduction in impairment. Moving to the net profit. The net profit had decreased by $3.5 million, the same reason on the lower EBITDA performance because of the wholesale gross margins on capacity sale and increase in depreciation and amortization by $2.2 million. If we go back to slide earlier, we have mentioned that the CapEx has increased to $18 million. This is the reason why also the depreciation and amortization has increased in line with the CapEx increase as well. Moving to the Omantel Group profit domestic to group profit. Looking at the contributing elements to Omantel Group profitability with Omantel domestic number and the Zain dividends and the profits from Zain and Omantel Group profit stands at $12.8 million. Moving to the value generation slide. As we mentioned earlier that the heat and competition to continue, but effective subscriber retention and upselling strategy despite challenging market condition has resulted with a better ARPU management and customer retention as well. As we can see that there is a drop in the prepaid customer base that resulted a drop in overall customer base, and this is mainly coming from the new TRA regulations to stop the [ SIMdamic ] and also because of the ongoing migration from prepaid to postpaid, we can see that some of the decrease was offset by the increase of the postpaid. Cost of sales for Q1 2024 decreased by 9.4%, which is in line with the decrease in revenues and mainly coming from the lower hubbing cost and device costs, which is in line with the decrease as mentioned earlier with the revenue. And operating admin cost has decreased by 0.5% year-on-year, and this is on account of the impairment. And CapEx to revenue ratio stands at 11.8%, and we would expect that this ratio will pick up to be in line with the previous year's and it's expected to be at 15% at the end of the year. Moving to the last slide on the debt profile. Net debt as of the first quarter increased from $678 million to [ $722 million ] on account of increase in borrowings $30 million, a supplier financing by $6.4 million and the reduction in cash -- and sorry, in bank balances by $8 million. Excluding lease liabilities, the net debt as of the first quarter is around $593 million compared to $549 million. Also as Ghassan has mentioned earlier, in the key development during the period, the company was successful to finalize a sukuk issuance of USD 500 million for a 7-year tenure at 5.3% profit rate compared to the budgeted cost. This has resulted in savings of around $400,000 for the quarter and $1.5 million for the full year. And thus bring us to the end of our presentation, and I will open the session for Q&A.

Yes, Neetika?

Yes, please.

This is Neetika Gupta from Ubhar Capital. So I just wanted to have a bit more detailed explanation on the ZOI joint venture, now that it is into operation. So what is the kind of upside we should expect in terms of revenues or maybe eventually net profit for this full year? Because this will start contributing to this year, so some color on that would be much helpful.

Sure. No worries, Neetika. Sudhakar, can you please help us and support with answering Neetika's questions on ZOI?

Yes. Neetika, ZOI, as we have told you, is a joint venture between Omantel and Zain. Omantel holds around 26% stake. Now ZOI is formed with a primary objective to invest in submarine cables and terrestrial expansion, particularly in the territories where Zain, of course, operate. So currently, both the investors, so that is Omantel and Zain, are investing in these capacities in these regions and in the new submarine cables. As we mentioned in these developments, both the Blue Raman and the KSA terrestrial expansion, they are expected to go live early 2025 or probably towards the end of 2024. So first, so in terms of their revenue and profitability for 2024, it's not going to be a significant number because they are currently in that CapEx cycle where they're currently investing. Having said that, ZOI is also managing the wholesale operations of Omantel, they continue to manage the wholesale operations of Omantel and the wholesale operations of Zain opcos also. So as a result of that, they earn a management fee, and they continue to ensure that the wholesale business of Omantel meets its own targets. If you remember last time also in the investor presentation, we told that the existing assets of Omantel will continue to remain with Omantel. And based on that, we will continue to generate the revenues and profitability, which you have seen in the previous years. So yes, in terms of the contribution of ZOI as an investment itself to Omantel profits, that is something -- the effect of that, you would see that in the coming years, starting with 2025. But they continue to manage the wholesale operations of all opcos, which are already generating the revenues and profits which we are seeing in Omantel profits.

Just one follow-up. So on -- regarding the situation in Sudan, so we've seen that the subscriber base has significantly declined. So what is the update there? And how do you see it panning out in the future? And what are your -- maybe what is the kind of resolution that you're looking at there?

So Neetika, I think the situation in Sudan, unfortunately, I think it was beyond the control of the management also. In February, I think that was a complete network shutdown. But then immediately post that, I think Zain management has taken sufficient actions whereby by implementing their disaster recovery plan, they established a new data center in Port of Sudan. With this, they were able to get a partial restoration of our network. Now a big chunk of these sites are on air now. The subscriber base loss, what you have seen up until March, a big chunk of it has been restored in the month of April with the network coming back and the management working to gradually acquire these customers. In fact, I would say that the April month, a significant chunk of that customer base has been restored, although they are not at the same level as they were before the network shutdown. So April, a big chunk of it is restored and management is working to ensure that whatever they could do within their control, they are implementing measures to ensure that there is continuity of the business operations.

Thank you, Neetika. [ Bishan ], you may ask your question.

Firstly, a pleasant sort of thanks to sort of see the Omantel's stand-alone numbers at the end of the presentation. If I look at the last section, you've given it exactly as we wanted, Omantel group, excluding Zain, which sort of gives us some insight as to what the original or the parent [ mastery ] is doing. Now just to clarify, if I look at your balance sheet, these borrowings include Oztel. Correct? Or is it still without Oztel because that's what the group would imply?

Borrowings include Oztel, [ Bishan ].

Right. Okay. And then the only difference here -- Hello?

Yes, we can hear you [ Bishan ].

Sure. So now, just wanted to reconcile. If I look at your December 31 number reported in the presentation versus -- or, at least the stand-alone financials that were sort of released to us. There, we saw a total borrowing of $278 million. I'm talking about 31st December, Omantel Group, excluding Zain that was circulated earlier today. As for that balance sheet, your borrowings, as per note 17, is $278 million. But if I look at your overall Omantel financial, that number should be around $484 million. So why is that [ differences ]? For Q1, '24, it reconciled, that's fine with the new sukuk. But I couldn't reconcile the December number. The December number as per balance sheet was $278 million as per note 17...

I think you're only considering the noncurrent portion of the borrowings. If you see in this slide, $278 million is noncurrent. And then you have $211 million under current borrowings. Right? And if you remember last time, before the sukuk issuance was completed in January, as of December, the previous sukuk repayment was financed through a bridge loan. So the bridge loan, since it was borrowed for a very short period, that was shown under the current portion, which is sitting in that $211 million.

Correct. So that number cumulatively with your long-term borrowing comes to around -- okay. So that's $490 million more or less.

Correct.

Yes. So okay, fine. Sure. That makes sense. Perfect. So effectively, this will be the best way to look at Omantel stand-alone if it did not purchase Zain? I mean just to look at what the core operations are or at least the Oman operations are.

Yes, that's not entirely right. Right? Because most of the borrowings what you are seeing on the balance sheet was intended to fund these acquisitions.

Fair enough. And the asset also shows up over there, but this gives us a good picture of what we discussed in prior sort of interactions where we have a good flavor in terms of what Omantel is doing on its own or at least in its home market. And this finance cost that we see -- that we see of $43 million for 2023 effectively is with the lease cost for the sale and leaseback of the headquarters.

Yes, that's right.

Is that correct?

Yes, that's right.

Right. Right, right. Okay. And then just in terms of some comments in terms of the competition you see from the third operator and sort of we've spoken about how the growth is on the fixed broadband side and on the data side. So some of the challenges that you see over there and what's the path ahead for the home market specifically. I mean, we've seen all the initiatives and it's fantastic to see Omantel trying different things, and we wish you all the success. But if you could just talk about some of the ARPU sort of metrics and fixed broadband because there's some -- there's only a certain level to which we can grow over there, right?

Yes. I think -- see, [ Bishan ], I think if you look at the numbers, I think one positive aspect to take away from this is the improvement in the ARPU itself. I think in the first quarter, and in fact, this is a culmination of whatever we have done last year also, to ensure that not only do we retain customers but to also upgrade them to higher-end plans. We also ensure that at the entry level. Like earlier, we were primarily acquiring customers in postpaid on a OMR 9 plan. Now gradually, we brought in plans where the entry point is now starting at OMR 10 and OMR 11, obviously, with a little bit higher allowance, but we have been able to acquire customers at that entry level. That's one reason why you see an increase in ARPU. Besides that, we have also been able to upgrade customers from the entry-level plans to the higher plans. So this upselling strategy, which was executed last year with a very good focus, helped us in increasing the ARPUs. What is a little bit difficult in the current market is on the prepaid side. On the prepaid side, I think Aisha also mentioned that there are some TRA regulations which came in, which obviously, from Omantel's perspective, we'll also look at it from a positive side that now, henceforth the SIM is charged at a OMR 1 price. Earlier, the plan used to be embedded in the SIM, which meant that most of the operators in the market used to effectively done SIMs into the market. Now, with that regulation, although it has an impact on the subscriber base, our revenues still remained intact. If you see our monthly average revenue of prepaid was close to around 4.6% to 4.7%. And even in case of prepaid, we had an increase in -- a slight increase in ARPU of 100 [indiscernible] across that base. That's primarily because of improvement in our VAS services also. So we see, in this competitive market wherein prepaid, the pricing has been quite aggressive, what Omantel has been doing is not to react completely on the pricing side, but also to look at various other revenue streams to increase the revenue, particularly on the value-added services while trying to maintain our price positioning at similar levels what we have last year. So I hope I answered your question. Prepaid remains to be a difficult market to crack. But I think first quarter shows that we have been able to maintain revenue because of the fact that we are also diversifying our revenue a bit into these value-added revenue streams.

Sure. Sir, I know I'm allowed only one follow-up question, but just one last parting comment because -- to be very sure.

Yes. And we have a couple of analysts [ waiting ] here right now.

No, no, I completely understand it. So one last comment. Up to last year, you would give us sort of the ARPU on also the fixed and Internet side, which I'm not seeing currently. And secondly, if I look at your Q1 '22 presentation, the presentation that Omantel did on this call exactly a year ago, your ARPU for prepaid was OMR 2.6. And now it shows as OMR 3. So you compare -- if I compare last year with this year, it's OMR 3 versus OMR 3.1, but if I look at last year's presentation, it was OMR 2.6. I can't reconcile that difference. What has changed for it to sort of be restated to OMR 3. And if you could sort of give us ARPUs for the fixed and Internet as well going forward. Just these 2 things my side.

Okay. I think your first question on the fixed Internet. The ARPU numbers, what you're seeing over here, were the fixed broadband segment. Now if you look at all our fixed broadband plans, it is bundled with the fixed voice. So effectively, what you're seeing over here is the ARPU for both the broadband segment and voice combined together. We have got very, very small set of customers who are exclusively buying only voice service from us. Because most of the customers now buy both the broadband and voice and voice is bundled with it. So in short, the ARPU numbers, what you're seeing over here is including both home broadband and voice services. So I hope that should answer your question on the fixed service itself.

Yes. Okay. Yes.

Earlier, we were trying to disaggregate that, but I believe that doesn't represent a meaningful picture considering that the fixed voice revenue continues to go down, and we have got a very small set of customers who only exclusively buy voice services. I think your next question is on mobile, right?

Prepaid ARPU for Q1 '23 reported in the presentation last year was OMR 2.6. And now it shows as OMR 3 for last year's period. So why that major change?

I think we will look at it this [ division ], and I'll get back to you on this.

And also going forward, if you could also report blended. You used to give us blended for prepaid, postpaid, if that could come, just be helpful.