Saudi Arabia's top two telecom operators - Saudi Telecom Company (STC) and Etihad Etisalat (Mobily) - will show the rewards of their efforts to cut costs and lure customers to more costly contracts when they post results later this month.

The STC and Mobily dominate an increasingly saturated home market and are having to get smarter to drive growth, according to industry experts.

Both are trying to move users on to more lucrative contracts and consume more profitable data services, but earnings growth is likely to have been sluggish in the most recent three months.

STC's fourth-quarter profit will rise by a slim 1.4 per cent to SR2.37 billion ($630 million), according to the average forecast of analysts polled by Reuters, while Mobily's will likely increase 5.1 per cent to SR1.78 billion.

"We're seeing more and more customers switching to smart phones and operators are trying to sell them handsets tied to post-paid contracts that will push them to use more data," said Asim Bukhtiar, Riyad Capital's head of research.

"It's not about increasing mobile penetration any more, but getting existing customers to increase their usage."

Figures are expected by the end of the month yet under Saudi rules neither company has to set a date for the release.

STC and Mobily dominate the sector locally, accounting for 48 and 41 per cent of total revenue respectively for the nine months to September 30, NBK Capital estimates. Loss-making Zain Saudi is a distant third with 11 per cent.

STC has won back market share by taking advantage of its near-monopoly on fixed-line to woo customers with discounted packages that include phone, broadband and television services.

This helped turn around its operations, with profit for the nine months to September 30 rising 28 per cent year-on-year to SR6.88 billion. That followed a 40 drop in annual profit between 2006 and 2011 as the sector opened up to competition with the launch of Mobily in 2005 and Zain Saudi in 2008.

"STC's new management team has been focusing more on domestic operations and cutting costs at home, the effect of which will be visible in Q4," said Nishit Lakhotia, telecoms analyst at Securities & Investment Company in Bahrain.

Cash cow

STC remains majority government-owned nearly a decade after being listed on the Saudi bourse and has prioritised cutting its workforce in recent years, largely via early retirement.

This will raise non-operating expenses in the short-term, said Bukhtiar.

STC's operations span the Muslim world from Indonesia to Turkey, but its domestic market remains its cash cow despite a stated aim for foreign units to account for half of revenue.

It has so far fallen well short of that target and its domestic business provided 68 per cent of group income in 2011.

"If the other operators decide to be more aggressive by slashing prices it could put STC under more pressure," said Shrouk Diab, NBK Capital assistant vice president and telecom analyst. "Broadband, both fixed and mobile, is STC's key growth story."

The company's foreign units are also adding to its costs by borrowing on international markets.

"These don't have the same access to cheap funding as STC itself does at home," said Riyad Capital's Bukhtiar.

For Mobily, an affiliate of the United Arab Emirates' Etisalat, the era of double-digit profit gains appears to be ending.

"Data (usage) will continue to drive earnings growth, but as a single-country operator, overall growth is slowing - Mobily is becoming more of a dividend story," said SICO's Lakhotia.

Like STC, Mobily has also focused on cutting costs and benefits from low debts, Bukhtiar said.

Zain Saudi, an affiliate of Kuwait's Zain, continues to struggle against its better-resourced rivals and is forecast to make a fourth-quarter loss of SR387 million.

That would be less than last year's loss of SR461 million, said the expert. But the company is still a long way from turning a quarterly net profit and with an inferior network to Mobily and STC, cannot offer the same comprehensive internet and phone packages. So its best option is to undercut rivals.

"The company is becoming more active in its marketing and does want to get back into the game, but can this translate into a greater revenue share of the Saudi market?" said Bukhtiar.

"Zain Saudi has to focus on the more cost-sensitive consumers, which is the pre-paid market," he added.-Reuters