* Q1 net loss 318 mln riyals vs net loss of 398 mln riyals a yr ago
* Smaller loss comes despite 13 pct drop in Q1 revenue
* Margins improve as it cut costs, changes tack -CEO
* Firm to lease capacity to launch fixed line services -CEO (Recasts with CEO interview)
By Matt Smith
DUBAI, April 16 Zain Saudi, Saudi Arabia's third biggest telecoms operator, will buy fixed line capacity from its competitors to expand its service offering in the kingdom and aims to break even in less than five years, it said on Wednesday.
The firm, which began operations in 2008, claimed 15 percent of Saudi's mobile subscribers at 2013-end and has struggled to break the dominance of better-resourced rivals Saudi Telecom Co (STC) and Etihad Etisalat (Mobily).
But Chief Executive Hassan Kabbani, an industry veteran appointed in September, believes a new approach can help his company woo customers and improve its financial performance.
"Instead of competing against the other two operators, we are focusing on improving our own capabilities, investing in our network for coverage and capacity," Kabbani told Reuters in a telephone interview on Wednesday.
"We have a transformation plan whereby we are improving our commercial reach by rolling out more stores, enhancing the distribution network and the quality level of customer service. This effort is starting to pay off."
He said Zain Saudi's smaller first-quarter loss, which comfortably beat analysts' forecasts, showed its plan to break even in less than five years was on track.
Mobile services provide the majority of income in Saudi's telecom sector, so Kabbani believes there is little sense in his company, 37-percent owned by Kuwait's Zain, building out a fixed line network.
It will instead lease wholesale fixed line capacity from other operators to offer combined packages including mobile, fixed line voice and Internet services. Such packages usually boost customer loyalty, with people more reluctant to switch providers if they get multiple services from a single company.
"The fixed operators have built capacity that is not fully utilised," said Kabbani."We won't invest in activities that will not generate a positive return for us."
He was keen to emphasise parent Zain's close involvement. That marks a turnaround for the Kuwaiti firm after it previously tried to sell out of Zain Saudi before raising its stake in 2012 in the process of a capital restructuring to fund the unit's accumulated losses.
Zain Saudi made a loss of 318 million riyals ($85 million) in the three months to March 31, down from a loss of 398 million a year ago. Analysts polled by Reuters had on average forecast a loss of 400 million riyals.
Zain Saudi attributed its improved performance, despite a 13 percent drop in quarterly revenue to 1.55 billion riyals, to cutting sales, distribution and marketing costs as well some changes to the depreciation of property and equipment.
First-quarter mobile data revenue rose 68 percent.
"We are very satisfied to see our revenue giving a much better margin," said Kabbani. "We could double revenue if we want at low margin or loss (but) we want only revenue growth (that will) be reflected on margins."
Zain Saudi's 23 billion-riyal licence fee is amortised over 25 years, or about 230 million riyals per quarter.
"The more we can grow in a healthy way, the less that burden will become proportionately," added Kabbani. "Our financial ratios are improving."
Zain Saudi's capital expenditure this year will equate to around 15 percent of annual revenue, the same ratio as in 2013.
Its shares ended 1.5 percent higher on Saudi's bourse on Wednesday, outperforming the main index which was near-flat. ($1=3.7503 riyals) (Reporting by Matt Smith,; Editing by Jason Neely, Greg Mahlich)