Saudi Arabian ICT services provider Arabian Internet and Communications Services Co. (Solutions) reported a modest 2% rise in second-quarter net profit to 453 million riyals ($120.8 million), as double-digit revenue growth was partly offset by higher finance costs and currency-related expenses. The results were broadly in line with analyst expectations, prompting Riyad Capital to maintain its existing view on the stock.
Revenue growth beats forecasts
Revenue for the three months ended June 30 climbed 12% year-on-year to 3.24 billion riyals, exceeding Riyad Capital's estimate of 3.12 billion riyals. The top-line performance points to sustained demand for Solutions' ICT services, which include cloud computing, cybersecurity, and digital transformation solutions for government and corporate clients in Saudi Arabia.
The company's net profit of 453 million riyals came in close to Riyad Capital's forecast of 445 million riyals and above the broader analyst consensus of 418 million riyals. However, the profit growth was constrained by a rise in financing costs and unfavorable currency movements, which ate into the revenue gains.
What's behind the cost pressure?
Solutions, like many Saudi companies, has been navigating higher interest rates in the kingdom, which are tied to the U.S. Federal Reserve's rate hikes due to the riyal's peg to the dollar. Higher borrowing costs increase the expense of servicing debt and funding working capital. Additionally, currency fluctuations—particularly the strengthening of the U.S. dollar against other currencies—can impact the company's costs on imported technology and services.
The company did not provide a detailed breakdown of the cost increases in its earnings release, but analysts noted that the margin compression is a trend worth watching. For context, ICT firms often face pressure from rising input costs, including hardware, software licensing, and talent acquisition, which can squeeze profitability even when revenue is growing.
What it means for investors
For everyday investors, the key takeaway is that Solutions continues to generate solid revenue growth, which suggests its services remain in demand as Saudi Arabia pushes its Vision 2030 digital transformation agenda. However, the rising cost environment means that profit growth may not keep pace with revenue expansion in the near term.
Riyad Capital's decision to keep its view unchanged indicates that the results were within expectations and do not warrant a change in valuation. Investors should monitor whether the company can manage its cost structure effectively in coming quarters, especially if interest rates remain elevated.
It's also worth noting that Solutions operates in a competitive sector where other players like stc and Mobily also offer ICT services. The company's ability to maintain its market share and pricing power will be crucial for long-term profitability.
For those holding Solutions shares, the earnings report is a mixed bag: strong revenue growth is encouraging, but the cost pressures highlight the importance of operational efficiency. As always, investors should consider their own financial goals and risk tolerance before making any decisions.
Broader market context
The results come amid a busy earnings season in Saudi Arabia, where companies across sectors are reporting their second-quarter numbers. The Saudi stock market (Tadawul) has been relatively stable, supported by high oil prices and government spending on infrastructure and technology projects.
In a similar vein, other regional firms have also shown revenue growth but faced margin challenges. For example, Americana Restaurants Q2 profit surged 40.5%, driven by strong sales, though cost management remains a focus. Meanwhile, Shell beat Q2 profit estimates on strong trading, highlighting how different industries are navigating the same macroeconomic headwinds.
Investors will be watching for any guidance from Solutions on its outlook for the second half of the year, particularly regarding cost trends and new contract wins. The company's ability to convert revenue growth into higher profits will be a key metric to track.
