Strategic Appraisal: Saudi Telecom - Essay Example

? Strategic Appraisal: Saudi Telecom BY YOU YOUR SCHOOL INFO HERE HERE Saudi Telecom is the largest telecommunications provider in Saudi Arabia. The company operates in an oligopolistic market structure, characterised by intensive competitive rivalry in order to gain a differentiated market positioning in an environment where products and services are largely homogenized. Research identified strategic considerations that impede business growth and enhanced revenues to include recurrent threats of substitutes on the market, considerable buying power with consumer markets, and risks of competitive rivalry especially as it pertains to the sales and marketing function in operations. STC also maintains significant strengths, including an established brand personality in the Saudi market and the company’s recent strategic imperatives to include more acquisitions and joint ventures to ensure new cost controls and also gain synergies that translate into human capital advantages. Coupled with recent organisational restructuring supported by governmental involvement in business development, Saudi Telecom maintains a dominant market position that leads to competitive advantages. Products and services in this market are easily replicated by competitive entities with considerable knowledge in technology, thus competitive marketing is the most viable strategic opportunity to differentiate. Research identified that Saudi Telecom, however, does require more emphasis on brand-building to gain market prominence and it is recommended, based on research findings, that STC diversify its portfolio of products and services to gain a better market position and achieve revenue increases in a market where growth is recurrently difficult to achieve. TABLE OF CONTENTS 1.0 Introduction............................................................................................................ 1.1 Company Description................................................................................. 2.0 SWOT Analysis of STC......................................................................................... 3.0 PESTLE Analysis of STC....................................................................................... 3.1 Political Forces............................................................................................ 3.2 Economic Considerations............................................................................ 3.3 Social Factors............................................................................................... 3.4 Technological and legal considerations....................................................... 3.5 Environmental concerns............................................................................... 4.0 Porter’s Five Forces Analysis................................................................................... 4.1 Threat of Substitutes..................................................................................... 4.2 Threat of New Entrants................................................................................. 4.3 Buyer and Supplier Power............................................................................. 4.4 Competitive Rivalry....................................................................................... 5.0 Finance Analysis........................................................................................................ 5.1 Current Ratio.................................................................................................. 5.2 Profitability Analysis...................................................................................... 5.3 Trading Position Analysis............................................................................... 5.4 Addressing Competency to Deal with Poor Financial and Operational Performance.......................................................................................................... 5.5 Comparison to Competition in this Market..................................................... 6.0 Forecasting................................................................................................................... 7.0 Recommendations........................................................................................................ References Strategic Appraisal: Saudi Telecom 1.0 Introduction The Saudi Telecom Company (STC) is a telecommunications company headquartered in Riyadh, Saudi Arabia. STC is currently the largest telecommunications organisation measured by market capitalisation, firm size, and volume of workers employed. Currently, Saudi Telecom offers landline services over fixed networks, mobile and Internet services to over 160 million customers in diverse international markets. The Saudi government currently maintains 70 percent ownership in STC (Yahoo! Finance 2012), thus giving government considerable control over operational and strategic direction. 1.1 Company Description STC was founded in 1998 and has undergone radical changes to the firm’s business model and management structure, attempting to transform the business from a government system to one that operates under corporate standards of operations (Chamber.com 2011). This involves more emphasis on training and human capital development, providing effective customer service models, and working to provide flexibility to meet changing consumer and business market demands effectively. Saudi Telecom has been able to introduce a variety of innovations to maintain favourable market share since its inception in 1998, including establishment of mobile telephony loyalty programs as well as points- and minutes-sharing for mobile services, thus introducing new customer-centric conceptions to gain favourable market attention and loyalty to the STC brand. In 2000, STC maintained 1.4 million subscribers to various fixed and mobile services. With addition of pre-paid mobile services, by the end of 2001, the subscribership increased to 2.5 million (MEE 2012). Under the current business model, Saudi Telecom now provides consumers with prepaid calling plans, a variety of monthly subscription opportunities, WAP, Broadband services, and VSAT (satellite services) for business customers, thus diversifying its products and services portfolio to avoid being outperformed by major competition. 2.0 SWOT Analysis of STC There are many strengths and weaknesses of the current business model at STC related to adaptability to changing market demands and the ability to differentiate among growing and influential competitors. This section highlights the most critical dimensions of internal and external business impacting profit success for Saudi Telecom. Strengths Strong, established brand presence as first mover. Enhanced 4G capabilities for business and commercial buyers Diversified portfolio- Including major share ownership of largest submarine cable company. Development of subsidiaries produces synergies to reduce capital expenditures in marketing, technology and procurement. Weaknesses Deteriorating efficiencies in operations. Inefficient utilisation of public relations to emphasise corporate social responsibility in the business model. Concentrated revenues Opportunities Create entry barriers to new competition Increase consumer demand for smartphones More emphasis on branding as differentiation and positioning tool in market. Threats Significant increase in competitive forces Shrinking product life cycle sparked by release of technological innovations in the sales market. Brand defection by price sensitive consumers Saudi Telecom, as a first mover in this market environment, has relied too intensely on its historical brand position and has thus lost considerable market share to major competitors (Heynen 2010). Thus, there has not been sufficient emphasis on the marketing function to establish a differentiated brand from existing competitors and accurately position the business in the competitive market. This is a significant concern for STC in an environment where the sustainability of product life cycle is offset by competitive innovation launches and where intangibles of service and product must be translated effectively to gain market interest and create long-standing consumer connections with desired target consumers. 3.0 PESTLE Analysis of STC 3.1 Political Forces Political forces are significant considerations for Saudi Telecom. Saudi Arabia is governed by a monarchy who serves as the head of state where decision-making occurs upon consultation with senior officials in the government. The ruling monarchy has received considerable negative criticisms in recent years for allegations of corruption (Bowen 2007; Reed and Lang 2006). However, with STC having a significant controlling ownership by the government, the business cannot segregate its operations and strategic developments without direct influence or consultation with important political figures in a regime with, allegedly, questionable ethics and moral reasoning. There are, however, recent developments in the Saudi government system that is liberalising support for business and direct investment. The Saudi government is attempting to privatise many large industries, including telecommunications, to promote growth and improve GDP. Government’s new, active role in creating better relationships with corporate actors provides more effective support for diminished government influence in business development and strategy. This has long-term opportunities for improving corporate/government relationships in an environment where, culturally, there is significant power distance between those in authority and citizen followership (Hofstede Center 2012). Government taking an active role in reducing these barriers illustrate evolution toward a more democratic, socially-minded government system that provides adequate support for improving business competitiveness and market presence. 3.2 Economic Considerations The current national GDP in Saudi Arabia is $576.8 billion USD (World Bank 2012). The favourable economic environment is being bolstered by significant price increases in the oil industry, which translates to significant growth in government revenues to support business development. Additionally, foreign asset build-up in the country has improved the distribution infrastructure in the country and provided a more skilled, local labour pool by which to recruit and train human capital for competitive advantages. There are many new opportunities bolstered by both government revenue increases and foreign investment that allow for new joint ventures and alliances to be developed to improve brand position and achieve synergies in key operational areas of business. Mean wages are also significant for those employed in the industry, averaging $14.74 per individual manhour in 2009 (Princeton University 2011). Though this provides ample opportunities to target and gain attention from new markets with higher disposable incomes, it does have the ability to strain the labour budget of business to recruit and retain well-trained and well-educated workers from the local labour pool. Job training and education, as well as national infrastructure, have been improved through government-sponsored programs supported by tremendous petroleum industry revenues provided to government. Furthermore, national inflation rates have remained relatively stable since 2010, well below the international inflationary averages of other nations struggling with lingering concerns and problems stemming from the start of the recession in 2008. A diminishing inflation rate provides much more disposable income in key profit-building markets; an advantage for STC. Figure 1: Consumer Price Inflation 2009-2011 Source: Samba Financial Group. (2011). http://samba.com.sa/GblDocs/saudi_midyear_economic_review_2011_13_en.pdf 3.3 Social Factors The Qu’ran is currently utilised as the foundational constitution of the country, adhering to very long-standing values of Islam both in government and in social culture. Most in society are bound to these foundational rules of kinship borne of religious-based ideologies and conceptions (Denis et al. 2012). Thus, factors of marketing and advertising (as two relevant examples) must adhere to these religiously-inspired values and conceptions of social morality in order to gain market attention. The Saudi culture is highly collectivist (Hofstede et al. 2010; Hofstede 2001), one that values group affiliation and sustainment of group member needs. Under sociological and marketing theories, collectivist cultures tend to make consumption decisions based on opinion and sentiment of peer reference groups (Henslin 2005; Boone and Kurtz 2007). Therefore, in order to establish a respected brand identity, the methodology by which consumption occurs must be incorporated into advertising materials and the variety of integrated marketing communications utilised by Saudi Telecom. There must, then, be cultural sensitivity when communicating with the collectivist buyer groups vital to revenue production in order to provide relevancy in brand perception and personality. 3.4 Technological and legal considerations Research did not uncover any technologically-based hindrances to gaining market share or improving business’ competitive position. The Saudi commercial infrastructure along with the flood of direct foreign investment into the country has created opportunities for procurement of important and sophisticated technologies that support business, such as ERP software and the tangible network required for telecom services that continue to grow yearly with added investment from government. The only notable legal concern is the lack of current regulations that prohibit SPAM. There are no such laws in the country, thus creating potential privacy concerns for a variety of business and commercial consumers (CITC 2007). With no regulatory framework in place to even identify what constitutes SPAM, this places risk on the telecom industry to ensure customer privacy and establish internalised SPAM policies for the services provided by STC. 3.5 Environmental concerns Saudi Telecom must report its environmental impact and sustainability plans to the Meteorology and Environmental Protection Administration (MEPA) to ensure compliance to anti-pollution regulations. This impacts areas of waste disposal, operations, and recycling of toxic materials utilised in a variety of mobile devices. Government has also approved the recent General Environmental Regulation (GER), a regulatory environment that establishes the consequences for non-compliance or failure to act to known environmental risks. With the government taking a more active role in establishing environmental regulations, this places more pressure on the telecom industry to ensure that environmental sustainability is incorporated into the business model. 4.0 Porter’s Five Forces Analysis To fully understand what drives strategic development, it is necessary to examine the forces stemming from the external environment that either hinder or support business growth. Only factors significantly relevant for STC will be examined. 4.1 Threat of Substitutes Threat of substitute products is a significant concern and competitive risk for Saudi Telecom. In this market, consumers that rely on Internet technologies can select from mobile devices, smartphones, or laptops (as three relevant examples) when accessing the World Wide Web. Therefore, there are much lower switching costs for consumers due to the flood of products produced domestically and those imported that sustain similar networking capabilities. Substitutes, according to macro-economic models of analysis, change the price elasticity of demand (Boyes and Melvin 2005). What this creates is a higher emphasis on price competition in order to outperform competitors with very diverse portfolios of products, brands and services to fill market needs. 4.2 Threat of New Entrants The government, in the case of the telecom industry, provides ample support for creating some entry barriers that prevent new competitors from entering this market. The government preserves competition by denying establishment of monopolies through a variety of anti-trust regulation establishment whilst at the same time regulates the telecom industry. By establishing policies that prevent competitive price gouging, it makes the environment more risky to businesses that would require dynamic or penetration pricing models to enter the market. There are also significant capital expenditures required to enter this mature market, ranging from establishment of manufacturing facilities and distribution networks, to the costs associated with patenting and licensing for intellectual property protections. Proprietary innovations and products must be protected to avoid replication by competitors that can erode revenue successes, thus asset protection demands further establish new market entry barriers for new market movers. There is little competitive risk of new market entrants due to the culmination of established barriers that make entry costly and the operational demands for establishing a new brand amid strong branded competition. 4.3 Buyer and Supplier Power In this industry, consumers have a great deal of leveraging power as it pertains to pricing due to the many different substitutes available and the volume of competition in this industry. Two major competitors, Mobily and Zain, offer similar products to the same target markets as Saudi Telecom all priced competitively in what is actually an oligopolistic market structure dominated by only a handful of large competitors. In the oligopoly, competitive responses usually in the form of marketing and promotion are the foundational tools by which companies differentiate one another when offering rather homogenous product and service options (Boyes and Melvin 2005). Consumers are able to force transparency in pricing and in establishment of relevant customer service models, thus they produce a legitimate backward integration threat to STC (Porter 2011). Research did not uncover the specific dynamics of the supply chain utilised by Saudi Telecom, which could be the product of maintaining competitive obscurity to avoid replication of existing procurement models and distribution strategies. However, there is a wide variety of suppliers ranging from tangible products to providing material for laying the infrastructure for broadband services. Because of the diversity of available suppliers, it does not provide for leveraging in pricing along the supply chain as the switching costs for STC are significantly low. 4.4 Competitive Rivalry Surely the most critical element to maintain positive market reputation and gain market share is the ability to compete against existing competitors. Unfortunately for STC, the government involvement in regulating the telecommunications industry imposes new risks related to competition as the business is unable to utilise short-term dynamic pricing models to gain rapid market interest. Most businesses operating in other industries under the oligopolistic structure are able to change prices periodically during periods where the product life is declining or where brand defection is occurring in key markets due to the prowess of competitive marketers. To establish a relevant business model, differentiation through marketing is a foundational competitive tool rather than relying on price-related methodology that is forbidden by the ruling government. Unfortunately, the Saudi sales environment is one with limited opportunities for growth domestically due to the volume of competition in the market. It is a very mature market with very homogenous products available from STC and its main competition. Thus, in this culture with very high power distance, it is predicted that consumers will defer to the opinion or values of those they believe credible or influential (Al-Gahtani, Hubona and Wang 2007). In order to produce effective and relevant services and products that will be adopted and embraced by consumers, there must be more emphasis on social influence variables in marketing function to promote specific behavioural intentions that influence consumption decisions in key target market groups. 5.0 Finance Analysis This section describes the findings of a financial analysis to determine the firm’s liquidity position, profitability and trading position. Data for the analysis was derived from Saudi Telecom’s 2011 Annual Report and executive statements describing business success and challenges during the 2011 fiscal year. 5.1 Current Ratio Current Assets / Current Liabilities 21,967, 035 / 25,263,095 = .870 Current Ratio Companies that have ratios below one must have inventories that can be easily converted into cash in order to minimise concerns about potential business liquidity (Kennon 2012). Unfortunately for STC, the majority of inventories are products that have limited life cycle and are therefore subject to depreciation and are not easily divested to improve cash position. A current ratio of .870 is largely below industry norms, suggesting concern over liquidity issues at Saudi Telecom. According to the company’s annual report, the majority of inventories with substantial liquid value are unrelated to the consumer segment, consisting of cables and spare parts for utilisation in building the telecommunications infrastructure (STC 2012). 5.2 Profitability Analysis EBIT / Equity 8,488,353 / 20,000,000 + 10,000,000 = .283 Returns to Owners Long-term Capital Employed = Total Assets – Current Liabilities 21,967,035 – 25,263,095 = (3,296,060) EBIT / LTCE 8,488,353 / (3,296,060) Both profitability ratios provided indicate a problem with cost controls at Saudi Telecom. Total liabilities significantly outweigh total asset value. Loan repayments, accrued expenses, and accounts payable represent the most significant liabilities to the business. Depreciation is one of the most significant losses to the business, which is actually higher than EBIT, at a total of 8,853,844 (STC 2012). This was mentioned in earlier analyses describing the lack of available inventories that can be quickly converted to cash through divestiture. 5.3 Trading Position Analysis Sales / Capital Employed 31,328,252 / Total Assets – Current Liabilities 31,328,252 / 111,401,780 – 25,263,095 31,328,252 / 86,138,685 = .364 Productivity of net current assets This financial analysis clearly indicates below-average productivity related to the firm’s trading position. This low ratio is supported by aforementioned acknowledgements of limited asset value related to inventories not able to be liquidated for immediate cash needs. The majority of assets for the business include plant, property and equipment and significant intangible assets related to service, not easily translated into liquidity position. This impacts the productivity of net current assets as intangibles, though valuable from a market and profit (revenue) perspective, do not contribute effectively to the liquidity position of the business. Coupled with a much lower-than-average current ratio, it clearly illustrates problems with inventory methodology and asset procurement that continues to lead to poor financial performance. 5.4 Addressing Competency to Deal with Poor Financial and Operational Performance Komninos (2002) reminds the business world that it is often quite difficult for a business operating in a highly competitive environment to recognise the signs of diminished demand until revenues begin to illustrate drops in sales volumes. Products and services in this industry reach decline rather quickly, due to upgrades to existing technological products available on the market, thus taking them through maturity much faster than in other industries. Clearly, STC does not maintain adequate inventories convertible to cash through divestiture, however this is due to the nature of the product life cycle for this technological market. Research did not uncover the specific competitive strategies being utilised by Saudi Telecom to combat liquidity issues or improve its sales revenues as a means of ensuring better asset availability. This is likely due to the highly competitive nature in the oligopolistic market structure whereby competitive actions are often replicated and similar innovations offered by homogenous product manufacturers and marketers. STC relies on goodwill which is accumulated through various joint ventures and ownership stakes in subsidiaries (STC 2012). These are the foundation of intangible assets that provide competitive advantage and cost savings throughout many different dimensions along the value chain network. Qualitative assessment of research findings would seem to indicate a firm that is seeking more opportunities for alliances and acquisitions as a means of improving its current ratio and operating on a more acceptable margin that is aligned with industry norms. Since tangible value of assets is a significant concern for the liquidity position in a market where there is little opportunity to rely on long-term inventory asset value, the company is taking the right competitive strategy to build intangible asset value that can be translated to cost savings in key operational areas or improve human capital advantages that ultimately translate into profitability. 5.5 Comparison to Competition in this Market The following current ratio is performed for Zain, a major competitor in this industry, taken from the company’s 2011 Annual Report. Current Assets / Current Liabilities 1,137,508 – 718,154 Current Ratio = 1.58 As compared to Saudi Telecom, Zain is much more aligned with industry norms, indicating an acceptable liquidity position. Current liabilities at Zain include only payment on loans to banking facilities and trade-related payables (Zain 2011). For STC, accounts payable and current credit balances payments represent additional liabilities not found in other competitor business models. According to the company’s annual report, much of the performance that contributes to a better current ratio has been the ability of Zain to structure the business to achieve greater efficiency and productivity in operations (Zain 2011), supported by a 7 percent increase in cash revenues due to marketing prowess and international market expansion. Cash revenues contribute highly to better current asset availability, thus giving this business much better overall performance than its competitor Saudi Telecom. 6.0 Forecasting Saudi Telecom currently maintains 160 million customers, both domestic and international. Monthly, this represents a total customer volume of 13.33 million customers being serviced by STC. This market is estimated to provide 9 percent average growth (Ameinfo 2012), thus providing opportunities for market growth of 1,200,000 customers monthly. Period 1 Jan 13.33 Feb 14.53 Mar 15.73 Total 43.59 million Period 2 Jan 16.93 Feb 18.13 Mar 19.33 Total 54.39 Cumulative Total 97.98 million Increase from period 1 to 2 = 54.39 Forecast = 10.8 / 43.59 x 100 = 24.78% Under the assumption that nine percent growth is the standard, expected growth rate as supported by revenue growth and new market availability, the exponential trend indicates favourable market growth. Such increases will translate into a need for additional or innovated support services to sustain this growth, however the analysis lays the foundation for understanding the depth of customer volume increases and what potential changes will be required to sustain a nine percent increase in total customer volume. Unfortunately, production-based analyses to determine operational capacity are not achievable with the market and financial data available on Saudi Telecom. This is an industry that requires multiple support services, such as call centre agents providing customer service, as well as the information technology support required to facilitate effective and reliable networking and mobile services. 7.0 Recommendations Based on all of the research findings and analyses of financial position and liquidity for Saudi Telecom, a series of quality recommendations can be provided to improve its competitive and financial positioning. The most prominent recommendation, to capitalise on brand equity earned through years of competitive branding and service quality, maintains opportunities to remove other externally-driven market threats that serve to impede business success in the long-term. Threat of substitutes is one of the most significant, externally-driven pressures placed on Saudi Telecom in a market environment where many products maintain like services and features. Research did not uncover any notable recognition from executive leadership at STC that the business was seeking opportunities to capitalise on brand equity established through years of brand building in the Saudi marketplace. It is recommended that STC pursue expanding its brand presence through diversification, allowing the company to become actively involved in other, unrelated technology sectors to improve its cash revenue performance. The only notable performance indicator along the current strategy being utilised by Saudi Telecom is the ability to expand its brand presence and gain new market interest through joint ventures and acquisitions; a relatively recent strategy that was once isolated to market presence in the local host culture. Saudi Telecom should be investing more capital into innovation development, utilising the synergies achieved through various joint ventures and acquisitions. Homogenous product offerings by competitors, creating a wide variety of product and service substitutes, demands that Saudi Telecom pursue methods to diversify its product or service lines. Why is this, though, necessarily? Despite poor performance financially in the last year and ineffectively operating under a very low current ratio, Saudi Telecom is in an acceptable cash position according to the company’s cash flow statement (STC 2012), achieved through previous years of higher revenues prior to growth in competitive brand influence. The business should be allocating these resources to identify new market opportunities that will reduce threats of substitutes and also give the business a first mover advantage as a pioneer in new market sectors. By utilising more investment in research and development and contemporary marketing practices, the business can diversify its portfolio of brands and services thus removing over-reliance on a single product or market segment to sustain assets. According to marketing theory, first movers in a new product category maintain long-term advantages as risk averse consumers will often compare later market entrants to the pioneering company with very unfavourable evaluations (Kalyanaram and Gurumurthy 2008). By placing more capital investment into the research and development process, the organisation can achieve market advantages that build on brand equity that is currently being under-utilised as a competitive strategy in an environment where competitive rivalry is intensive in trying to differentiate from competition. Saudi Telecom should also, based on all research findings, conduct more research into what drives consumer sentiment and consumption behaviour in key profitable markets or those that are under-performing. Qualitative or quantitative market research provides firms with valuable real-time data about consumer perceptions of brand personality, functionality and relevance of product and service offerings, or the relationship they find with the technology brand as a value-added product to benefit lifestyle both social and professional. Research uncovered many competitive strategies being utilised by major competition such as Zain and Mobily usually surrounding the marketing and advertising function. There is very little emphasis placed on the brand-building aspects to gain market attention and also establish a differentiated brand identity in this market in any corporate-issued literature describing the competitive strategies of Saudi Telecom. It was established that Saudi Telecom relies on historical brand connotations residing in key target markets in order to maintain its competitive market share, which is clearly insufficient in an environment where there is rapid growth of competitive influence and where homogenous products and services are difficult to distinguish from other competitive offerings. By devoting more investment into identifying key social and psychological values and principles of important markets that influence consumption behaviours, it will give Saudi Telecom an edge in creating a more streamlined and consumer-centric model of customer service and satisfaction that will translate into long-term brand equity. This is important as even Zain, a smaller competitor, indicated that its projected, current brand equity is worth over $2 billion USD (Zain 2011). STC should be more focused on brand equity as a strategic tool in order to gain new market attention, diversify the business, and achieve a market reputation as an innovator in an environment where product and service life cycles continue to shorten. Focusing on branding and marketing also maintains many duplicitous advantages, as it can serve to remove some of the buyer leveraging power on the market by establishing innovations that are not easily replicated. Though there is understanding that the business will adopt short-term capital expenditures for changing operations in manufacturing and establishment of new support services for innovations, the gains achieved will offset such expenditures by changing the dynamics of customer relationships with STC. By establishing a pioneering reputation, it will position the business with first mover advantages whereby consumer markets will view Saudi Telecom as completely differentiated from other competitors in this industry. 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Appendix A: Financial Statements for STC Saudi Telecom Company (a Saudi Joint Stock Company) Consolidated Statement of Cash Flows for the Year Ended December 31, 2011 (Saudi Riyals in thousands) These statements were originally prepared in Arabic and the Arabic version should prevail. 5 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES Net Income before zakat, tax and non-controlling interests 8,488,353 10,977,062 Adjustments to reconcile net income before zakat, tax and non-controlling interests to net cash provided by operating activities: Depreciation and amortization 8,853,844 8,642,204 Doubtful debts expense 2,346,222 1,586,519 Earnings from investments accounted for under the equity method ( )272,273 (82,538) Commissions and interest (449,904) (308,727) Finance costs 2,237,858 1,780,670 Losses / (Gains) on foreign currency exchange fluctuations 2,225,323 (359,318) Provision for end of service benefits 382,676 401,147 (Gains) on sale/disposal of property, plant and equipment ( )97,968 (941,096) Changes in: Accounts receivable (1,394,343) (1,596,159) Short-term Investments )2,262,622( 86,444 Prepayments and other current assets (623,945) (580,716) Other non-current assets 222,337 (138,936) Accounts payable (1,846,411) 2,035,459 Other credit balances (1,096,097) (57,543) Accrued expenses 2,528,454 (39,354) Deferred revenues 178,406 237,888 Zakat paid )62,754( (110,433) Taxes paid by subsidiaries )726,825( (97,980) Provision for end of service benefits paid )324,952( (249,645) Net cash provided by operating activities 26,488,422 21,184,948 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures )7,837,438( (11,353,074) Intangible assets, net )2,329,523( (3,836,016) Investments in equity and other )29,326( (74,970) Proceeds from commissions and interest 457,645 348,680 Proceeds from sale of property, plant and equipment 474,239 1,739,965 Net cash used in investing activities )8,264,423( (13,175,415) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ( )4,432,234 (6,108,787) Murabahas and loans, net ( )256,625 (1,844,154) Finance costs paid ( )2,722,957 (1,386,289) Non-controlling interests )2,294,426( (329,704) Net cash used in financing activities )7,686,222( (9,668,934) NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 537,877 (1,659,401) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 6,050,677 7,710,078 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 6,588,554 6,050,677 Non-cash items Financial statements? translation adjustments (1,452,352) 794,194 Other reserves 136,079 (1,269,415) Saudi Telecom Company (a Saudi Joint Stock Company) Consolidated Statement of Income for the Year Ended December 31, 2011 (Saudi Riyals in thousands) These statements were originally prepared in Arabic and the Arabic version should prevail. 4 Notes 2011 2010 Revenue from services 19 55,662,079 51,786,828 Cost of services 20 (24,333,827) (21,464,230) Gross Profit 31,328,252 30,322,598 Operating Expenses Selling and marketing expenses 21 (7,424,448) (7,083,100) General and administrative expenses 22 (3,878,940) (3,618,983) Depreciation and amortization 23 (8,853,844) (8,642,204) Total Operating Expenses (20,157,232) (19,344,287) Operating Income 11,171,020 10,978,311 Other Income and Expenses Cost of early retirement program (413,529) (605,559) Finance costs 24 (2,237,858) (1,780,670) Commissions and interest 449,904 308,727 Other, net 25 (481,184) 2,076,253 Other income and expenses, net (2,682,667) (1,249) Net Income before Zakat, Tax and Non-controlling interests 8,488,353 10,977,062 Provision for Zakat 26 (118,002) (118,208) Provision for Tax 27 (478,845) (820,171) Net Income before Non-controlling interests 7,891,506 10,038,683 Non-controlling interests (162,854) (602,361) Net Income 7,728,652 9,436,322 Basic earnings per share on Operating Income (in Saudi Riyals) 5.59 5.49 Losses per share on Other Operations (Other income and expenses) (in Saudi Riyals) (1.34) - Basic earnings per share on Net Income (in Saudi Riyals) 3.86 4.72 Source: STC. (2012). Consolidated financial statements for year ending December 31, 2011. [online] Available at: http://www.stc.com.sa/cws/content/en//stc/files/Financial-Statements/FS2011EN.pdf (accessed 17 December 2012). Read More