While many vendors and operators in the MEA region saw a dip in their fourth quarter results from 2011, Swedish telecoms vendor Ericsson experienced a surge in sales in the Middle East.
While the vendor’s global results for 2012 showed declines, in line with the rest of the industry, its Middle East sales rebounded 12%.
During the three-month period ending 31 December 2011, sales to telecoms operators in the region increased to SEK5.2 billion (US$763 million).
At the height of the so-called ‘Arab Spring’ political unrest during Ericsson’s 1Q11 and 2Q11, the company reported Middle East revenues of SEK3.1 billion (US$454 million) and SEK3.5 billion (US$513 million), respectively. At the time, Ericsson reported that its business was being impacted by the unrest occurring in these markets.
Anders Lindblad, head of Ericsson Region Middle East, describes Q4 as “very strong” and said that the company was pleased with the business it had managed to win from its clients.
He adds that there were two main drivers behind the results. “The first half of the year was slow, so it was partly a catch up. I think some of the operators decided eventually to spend the budget,” he says.
Indeed, in the first half of the year the company’s sales to Middle East operators was relatively flat in terms of full-year 2011, rising by just 2% to SEK15.5 billion (US2.27 billion).
The Q4 growth was also driven partly by a couple of the markets that “lead the pack in the transformation of mobile broadband” according to Lindblad.
One country that invested heavily was Saudi Arabia, which was also less affected by economic uncertainty political unrest in the region. “They [Saudi Arabia] are steaming ahead in the transformation of the whole telecoms industry,” Lindblad says. “We have a couple of other markets that were also very strong. Sudan invested quite a lot in Q4 as well.”
Ericsson also saw its managed services business grow, with operators increasingly turning to strategies that help them to increase efficiency and save money.
“Financial uncertainty and the pressure on the competitiveness for the operators and their own income statements also gave the interest to invest more and look more into managed services. We actually had quite a strong increase that showed in the second half and fourth quarter managed services was very significant,” Lindblad says.
Reasons to outsource
Operators have been turning to managed services for three main reasons according to Lindblad. For some telcos, the main aim of outsourcing is to allow them to increase their focus on climbing the value chain and enter new verticals.
Another reason is to increase the quality of services, perhaps owing to a lack of necessary competency within the operator itself. “In this region there are many markets where it is difficult to find competencies and also have the right processes and tools and everything,” Lindblad says.
The third reason is to increase efficiency and optimise cost, with vendors such as Ericsson typically better equipped to manage networks at a lower cost than single operators.
According to Lindblad, managed services account for almost 50% of Ericsson’s business in the region. While this side of the business has the advantage of bringing recurring revenues, its growth as a percentage of Ericsson’s overall business is also likely to pull gross margins down.
Ericsson signed numerous managed services deals in the region in the second half of 2011, including a $650 million, five-year network outsourcing agreement with Zain Iraq in November 2011.
Lindblad says that the Zain Iraq deal was not reflected in the vendor’s Q4 results. “We will see that in 2012,” he said. “We took a number of other contracts in managed services and we renewed many contracts – 6 o 7 in 2011 – which is significant and that has shown up in the numbers. We were up about 30-40%.
Lindblad thinks that 2012 will see a continuation of the trends seen in 2011, with ongoing political uncertainty. “That is not going to stop. 2012 will see that continue to effect economies,” he said, referring to countries including Egypt, Syria and Iran.
Telcos in the region could also face a greater challenge gaining finance in 2012, with financial institutions possibly demonstrating “less appetite” to lend money, Lindblad says. He believes European banks in particular may be more bearish, while Middle East leders may also prove to be less risk prone than in the past.
“There are Middle Eastern banks that have a lot of available cash but they are not, or have not been, as risk prone in making the capital available and these two things will determine the operator aptitude into investing into or taking big infrastructure investments,” he says.
However, taking a longer-term perspective, Lindblad is more optimistic. “In the end telecommunications is something that people really want. We have a lot of untapped potential in the region because we have a lot of 2G markets still, with very little internet penetration. We don’t have super 3G coverage in the region as well, so of course if we get the economic or political stability there will definitely be a hunger to grow this area,” he says.
“If I look at a 10 year perspective of the region it looks really positive. There is a lot of untapped potential. But short term it is a lot about risk management and available appetite for investment.”