The Company

Telecom Egypt (TE) is Egypt’s sole fixed-line operator and wholesale telecommunications services provider, with indirect access to the mobile market via its 45% stake in Vodafone Egypt (VFE), the country’s largest mobile operator with a 41.7% market share. TE-Data, its fully owned internet service provider (ISP), has 63.4% of the ADSL market. TE has two main business lines: retail and wholesale. The retail segment includes home services with traditional voice and ADSL services and enterprise solutions with ADSL and enterprise-integrated application solutions, and contributes 42.7% of revenue, 62.8% of which is home services.

The wholesale segment comprises domestic infrastructure leasing and data transfer for mobile operators and ISPs; international carriers affairs (ICA) from international voice operations, thanks to TE’s sole international call gateway (IGW) termination licence, which serves more than 78m mobile subscribers; and international customers and networks (IC&N), which capitalises on Egypt’s location by connecting telecoms cables to the Euro-Asia region. The segment contributes 57.3% to TE’s topline, 49.2% of which is from ICA and 35.6% from domestic wholesale.

Retail voice revenue continues to suffer from continued mobile substitution along with weak elasticity as voice tariffs are already down to LE0.03 ($0.004) per minute. However, demand for fixed broadband remains a significant revenue driver with the ADSL subscriber base increasing 22.5% y-o-y in 2013, offsetting the weakness in voice usage and continuous fixed-line subscriber base clean-up (total base declined 7.4% y-o-y in 2013). The IC&N business has become a significant revenue contributor, accounting for 8.7% of total revenue, and after four years of operations, it now services most of the Euro-Asia region’s IP traffic.

TE’s revenue reached LE11.14bn ($1.58bn) in 2013, up 11% y-o-y, mainly supported by ICA’s 26% y-o-y growth and IC&N’s 44.7% y-o-y growth. However, a 38.5% y-o-y increase in interconnection costs due to the three-year commercial agreement with VFE and Mobinil for international voice and infrastructure services, in addition to rising salaries (an 8% annual increase and the structured incentive rewards programme), resulted in a 1.4% y-o-y decline in EBITDA to LE3.7bn ($525.4m) and a 4.1 pp y-o-y decline in margins. Nevertheless, the company’s bottom line was aided by a 10.6% y-o-y increase in income from VFE to LE969m ($137.6m), accounting for 33% of TE’s net profit, in addition to LE350m ($49.7m) in financing income, to record a 12.9% y-o-y growth to LE2.96bn ($420.3m). TE maintains its strong balance sheet, recording a net cash position of LE5.08bn ($721.36m) in 2013.

Development Strategy

TE has been seeking to gain direct access to the mobile market since 2009. The unified licence (announced in April 2014 but not yet launched) should grant TE a mobile licence (without spectrum) for LE2.5bn ($355m), while 4G spectrum will be introduced in two years. In return, existing operators will gain the right to provide fixed-line services via TE’s network for LE100m ($14.2m) and amended IGWs prices for VFE and Mobinil at LE1.8bn ($255.6m) and LE1.5bn ($213m), respectively, with 6% revenue share. Additionally, Etisalat Misr will be allowed to terminate other operators using its own IGW for LE184m ($26.1m) This should provide Mobinil and VFE with an alternative to TE’s sole IGW. The unified licence will also kick off the formulation of a national body for the roll-out of fibre-optic cables. Egyptian operators have requested regulatory authorities liberalise the entire sector by activating the amended IGWs and the infrastructure entity in parallel with opening the mobile market for TE, rather than in June 2016 as was initially planned.

There are concerns that the nascent mobile revenue could be insufficient to offset the net impact that will result from competitive IGWs squeezing international wholesale revenue, which currently stands at 28.2% of total revenue; infrastructure companies pressuring domestic wholesale revenue, which accounts for 20% of revenue; as well as TE’s mobile entry impacting VFE operations, resulting in a reduction of VFE income.