GCC telcos embrace tech to diversify revenue streams

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GCC telcos are looking for new ways to expand their businesses and diversify revenue streams, considering moderate growth prospects for core telecom operations in their domestic markets.

The GCC telcos we rate are typically major local players, operate in a relatively favorable and stable regulatory environments, and benefit from their leading market positions and well-invested asset base. Yet, they suffer from a decline in some core telecom services, including fixed voice telephone and messaging services.

Mature markets

The GCC region’s mature telecom markets, with mobile penetration rates of 130-210 per cent, offer limited organic growth prospects for telcos. For our portfolio of rated GCC telcos, we expect core telecom revenues in domestic GCC markets to grow by 1-3 per cent per year over 2024-2025.

The growth rates of GCC telcos’ international subsidiaries in developing countries with large customer bases and fast-growing populations are higher in local currencies than in the  GCC region.

The latter has smaller subscriber bases, except in Saudi Arabia, which is the largest telecom market in the GCC and whose relatively lower mobile penetration rate in the peer group provides stronger upside potential. Geographical diversification risks include currency depreciation, higher cost inflation, competitive pressures, and higher country risks.

Rated GCC telcos – including Beyon, e&, Ooredoo, and stc – aim to enhance their techco services and have already expanded their non-telecom businesses over the past few years. Additional impetus was instigated by recent strategy announcements, for example stc’s DARE strategy, which the company announced in 2018.

Rated GCC telcos reorganised their company structures to expand their offerings beyond traditional telecom services. For instance, e& Group separated its telecom operations from its other tech businesses in 2022. It became e& but retained the Etisalat brand for telecom operations in its domestic UAE market.

Telcos provide a wide range of non-telecom services, with cybersecurity, cloud services, the Internet of Things, artificial intelligence, and data centres primarily targeting business-to-business (B2B) customers.

Mergers and acquisitions

To scale up their non-telecom revenues, GCC telcos announced several small to midsize acquisitions, which exceed $1bn, over the past two years. We believe mergers and acquisitions (M&As) in the region will continue because of GCC telcos’ healthy balance sheets and growth ambitions, as well as the fragmented IT market in the GCC region. This is regardless of relatively high acquisition multiples and some targets’ limited profits.

GCC governments’ digitalisation and economic development agendas will support digital businesses and boost GCC telcos’ consolidated revenues. We estimate non-telecom operations contribute about 15 -16 per cent to rated GCC telcos’ combined revenues.

Digital businesses generate higher revenues in the case of more advanced telcos, including stc and e&, compared with Ooredoo and Beyon. While core telecom services will continue to account for most revenues and remain the overwhelming profit generators in the short term, we expect digital businesses will grow at a significantly faster pace.

Based on our latest forecast, we expect investment-grade-rated global software and services companies to expand by 8-10 per cent over 2024-2025, compared with 1.5-3 per cent for investment-grade-rated global telcos.

The impact of digitisation

Considering the GCC governments’ strong digitalisation push, we think GCC telcos’ growth rates could be higher than elsewhere since the development of a digital economy will spur e-commerce, fintech, streaming, and gaming.

Digitalisation will increase private and public spending in information and communication technology (ICT), which will benefit rated GCC telcos because of their leading market shares and close ties with various governments.

GCC telcos’ increasingly diversified business mix is positive, but competitive challenges and higher margin volatility are key risks. GCC telcos benefit from utility-type characteristics and resilient performance, even during cyclical troughs, as well as high margins, especially in the post-paid segment.

This is because of relatively favourable regulatory environments, with two operator markets in the UAE and Qatar and three operator markets in Saudi Arabia and Bahrain.

By contrast, techcos operate in a highly competitive, significantly more fragmented and volatile environment, which could expose GCC telcos to competition from small to midsize regional players, major global tech groups, and hyperscalers.

That said, we think GCC telcos benefit from a competitive advantage when dealing with government-related customers, given their local presence and well-established relations and reputations. Global techcos and hyperscalers generally collaborate with local partners in the region, which creates opportunities for GCC telcos to act as technology integrators or build data centres to cater to hyperscalers.

Additionally, regional regulations may require that certain data remain in the domestic cloud, which could represent another protective barrier for GCC telcos.

Read: Qatar’s Ooredoo, Zain and TASC to create $2.2bn tower company

The author is an associate director at S&P Global Ratings