Partner Communications Company Ltd.
Q1 2017 Earnings Call Transcript

Published: 22 May 2017

[Operator:]

Welcome to the Partner Communications First Quarter 2017 Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please go ahead.

[Gideon Koch:]

And thank you to all our listeners for joining us on this conference call to discuss Partner Communications' first quarter results for 2017. With me on the call today is Isaac Benbenisti, Partner's CEO; and Dudu Mizrahi, our CFO. Isaac Benbenisti will discuss a number of operational highlights of the first quarter. He will then hand over to Dudu Mizrahi, who will provide a more detailed overview of the first quarter financial and operational results. And finally, we'll move on to Q&As. Before we begin, I would like to draw your attention to the fact that all statements in this conference call may be forward-looking statements within the meaning of 27 -- Section 27A of the U.S. Securities Act of 1933 as amended, Section 21E of the U.S. Securities and Exchange Act of 1934 as amended and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Regarding such forward-looking statements, you should be aware that Partner's actual results might vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in Partner's press release dated May 22, 2017; as well as Partner's filings with the U.S. Securities and Exchange Commission on Forms 20-F, F-1 and 6-K as well as the F-3 shelf registration statement, all of which are readily available. Please note that the information in this conference call related to projections or other forward-looking statements is subject to the previous safe harbor statements as of the date of this call. For your information, this call is being broadcast simultaneously over the Internet and can be accessed through our website at partner.co.il. If you have any further questions following the call, please feel free to contact our Head of Investor Relations and Corporate Projects, Liat Glazer Shaft on 972-54-781-5051. I will now turn the call over to Partner's CEO, Isaac Benbenisti. Isaac?

[Isaac Benbenisti:]

Good day, everyone and welcome to our Earning Day Conference Call. We began 2017 at a continued momentum, with the significant measures we took over the last few quarters to streamline and improve processes and unify the company's operations beginning to bear fruit. In the cellular segment, we're continuing to expand our Post-Paid subscriber base with net recruitment of approximately 18,000 subscribers in the first quarter, alongside the continued decline in the Pre-Paid subscribers. This rising trend in Post-Paid subscribers on the seventh consecutive quarter results in the continued development of quality service and network. We continue to invest in our cellular network as well as develop capabilities available only on Partner's network. In the first quarter, we began the deployment of the LTE-Advanced network and expanded the Wi-Fi Calling technology. We also launched the IoT Pro network, the first Internet of Things network in Israel that can recognize IoT devices and manage them in a unique and efficient manner. In the fixed-line segment, we proceeded with the deployment of the fiber optic network that will enable us to supply private customers with Internet speeds up to 1 gigabyte using the most advanced technologies. Those abilities support the growing demand amongst our private customers for a quality and fast network, mainly in light of the enormous increase we see from each quarter in in-content consumption. Partner's TV project that will be launched in -- as planned in the coming weeks will be based on an Android TV operating system with an advanced interface. Our TV subscribers will be able to enjoy linear channels and VOD content and, as part of the same interface, will be -- also be able to benefit from Internet content through external applications. In addition, we announced today that we had entered into a long term agreement with R.G.E. Group for broadcasting rights of broad variety of content which includes, among others sports, rights. I will now turn the call over to Dudu Mizrahi for detailed review of our financial results. Dudu, please.

[David Mizrahi:]

Thank you, Isaac. Good day, everyone and welcome to our earning conference call. One of the main highlights we see in the first quarter of 2017 is that the significant efficiency measures that the company undertook were realized, leading to a sharp decrease in operating expenses of the company. Total operating expenses totaled ILS 496 million, a decrease of ILS 74 million compared to the fourth quarter of 2016 and a decrease of ILS 116 million compared to the first quarter of 2016. The extent of the decrease more than compensated for the erosion in revenues and contributed to growth in operating profit and profit. In addition, during the quarter, the company took several steps to improve the profitability of equipment sales. And the results of the quarter reflect an improvement in the profit margin compared to the fourth quarter of 2016. Gross profit from equipment sales totaled ILS 26 million compared to ILS 18 million in the previous quarter. We expect that this trend will continue in the coming quarters. Overall EBITDA and profit for the first quarter of 2017 totaled ILS 233 million and ILS 51 million, respectively, compared to ILS 164 million and a loss of ILS 7 million in the fourth quarter of last year. Finally, free cash flow before interest payment in the first quarter totaled ILS 126 million, an increase of 11% compared to the first quarter of 2016 and an increase of 42% compared to the fourth quarter of 2016, excluding the HOT Mobile payment in the amount of ILS 180 million that was received in the fourth quarter. And now I will be happy to open the call for questions. Moderator, please begin the Q&A. Thank you.

[Operator:]

[Operator Instructions]. The first question, from Tavy Rosner of Barclays.

[Tavy Rosner:]

First one, for Dudu. You mentioned the improvement in gross margin for equipment sales. I was wondering if you can give some color on that. And related to that, in terms of revenues from equipment sales on the mobile side, it seems to be lagging a little bit, your main competitor. I was wondering why is that so. And can you do anything to kind of close the gap on that side?

[David Mizrahi:]

Yes. Thank you, Tavy. I think we've said that before, that we have -- we had problems with our handset sales during last year. And sometime after the middle of last year, we've -- we've decided to actually restructure our old sales array, handset sale array, in the company. We had issues with bad debt, as you could see in our 2016 results. So basically what we've done over the last few months, we've actually made significant changes in the way we operate the sales, the retail stores and the way we deal with credit rating of our customers. And we believe that the steps we took - we already took and the steps we're taking now will improve both the revenues from handset sales and the profitability. We saw some improvements in the coming quarter and we hope that we'll see further improvement in the next few quarters. And we hope to close the gap during the next few quarters.

[Tavy Rosner:]

Okay. Understood. And then you talked about your upcoming launch of the TV service and also your agreement on the content side. So can you give any color of what your expected related CapEx regarding the TV for the coming quarter? Then in more general speaking, in terms of offering, I'm not sure if you want to touch on that before the actual launch, but how are you planning on competing with the Cellcom type of offering which on the big picture sounds somehow similar, although I have no idea what kind of content you will come up with?

[David Mizrahi:]

I think we cannot really elaborate more than what we've said already on that. Only on the -- on your first question, regarding the CapEx, we already said that most of the CapEx related to the TV launch were already done at the last quarter of last year. Basically, moving forward, we have the -- only the installation CapEx, meaning the technicians installing the service MV and the set-top box. That's the only CapEx moving forward. I think that's the maximum we can say at this point. Once we've launched the service, I think -- I hope, we can say much more than that.

[Operator:]

The next question from Michael Klahr, Citibank.

[Michael Klahr:]

The costs, the sales and marketing and the G&A which you've mentioned, were significantly lower than last year. Can you give us a bit of color into how much of those costs are related to the rebranding? And how much is seasonal? How much is the real -- how much of that decline is actually sustainable through the rest of the year? And how we should think about that.

[David Mizrahi:]

Michael, I think we've disclosed the part of the -- those onetime effects on our OpEx. Other than that, part of the reduced -- the reduction in costs is related in seasonality issues. But most of it, I think, is a real efficiency measure that we've taken and we continue to take which reduced our cost base, both in the network and in the SG&A. It's across the board, so it's not only one issue. It's many, many things that the company was dealing with and those efforts are bearing fruits. And because this is the real one thing that we have full control of, really, there's a very high management focus on that. And we continue to be focused on that. So hopefully, we'll -- we can see moving forward that we can further reduce our cost base. And we're doing a lot of effort to achieve that.

[Isaac Benbenisti:]

I can add to it. As I said before, we managed to accomplish and conclude the merge between 012 and Partner. It was not concluded till now. We had different databases. We had different call centers. When we concluded the merge. We have one call center for cellular and the fixed-line. And we're much more efficient now and we have still things to do in order to be more efficient in the future.

[Michael Klahr:]

Okay. And then my second question is around revenue trends, if you could just give us a few words on what you're seeing in -- or the competition you're seeing in mobile, firstly; also what you're seeing with regard to your sub-brand 012, as opposed to Partner. Obviously, you had growth in subscribers. How much of that was at your sub-brand versus the -- versus Partner? And then just on fixed-line revenues which are under pressure, what's -- or continuing to decline. How much of that is ILD, as opposed to ISP? And is that prices or volume or both? If you could give us a bit of color on that.

[David Mizrahi:]

Well, regarding the fixed-line business, I think we've seen -- we still see the same trends that we saw over the last few quarters, meaning that the ILD business and ISP is declining. And we have those new data centers businesses that the company is very much focused in that we hope will more than compensates all this decline. We still don't see that in the numbers. But we're making a lot of effort in order to grow in our fixed-line business. We're investing in infrastructure. Everything,zlz everywhere, we see a good ROI on our investments. And hopefully the trends we're seeing so far will change during the coming quarters. Regarding the mobile environment, so where we're still, as you know, in a very competitive environment, we feel that ARPU is stabilizing. Market prices are still low and competition is still very high. But we think that there's -- we're seeing signs for stabilizations in ARPU, in turn our revenues. And with the efforts we're making on the cost side, we're seeing improved margin on our sale on services. So hopefully those trends will continue and we'll see a further stabilization in the sale of services in the next few quarters. But that's the most we can say at this point.

[Michael Klahr:]

Can you say anything on the movement of subscribers, whether it's to the sub-brand 012, as opposed to Partner? Or is one gaining on what -- versus the -- can you give us a bit of color around that [indiscernible]?

[David Mizrahi:]

No, no. We were not -- we haven't disclosed those details. So I cannot elaborate on that more than that.

[Operator:]

The next question is from Roni Biron of Excellence.

[Roni Biron:]

Isaac and Dudu, could you elaborate on your fiber rollout? What is your end plan on this front? What kind of progress you are seeing? And should we expect an additional increase in CapEx as a result?

[David Mizrahi:]

Well, our fiber deployment currently is mainly on business areas in Israel. We're widening our offering to business customers. And we're deploying fiber to support that, whenever it's needed and whenever there's a good ROI for that. We're very much focused on that. We see that as one of the biggest growth engine for the company. We expanded the network -- the existing network rollout for residential area, currently on a cherry-picked basis; namely, centers, city centers and multitenant buildings, again, on an ROI basis. And we'll continue to do that in the next future. That's our current plan. I cannot elaborate more than that, but that's what we're doing currently.

[Roni Biron:]

But with regards to the CapEx levels, I mean, what we saw in Q1 is indicative going forward. Or -- I mean TV aside. Or should we expect additional...

[David Mizrahi:]

No. We haven't give guidance on our CapEx level. But as I said, we'll invest as much as CapEx needed whenever we see a good ROI for those investments. And that's what we're doing on a weekly basis. So we're looking at our plans, carefully ensuring that we have good ROI on those investments and continue to invest. So I cannot really get into the amount of CapEx that will be invested, but I can assure you that it's all ROI based.

[Operator:]

[Operator Instructions]. There are no further questions at this time. Before I ask Mr. Benbenisti to go ahead with his concluding statement, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the U.S., please call 1 888-326-9310. In Israel, please call 03-925-5939. And internationally, please call 972-3-925-5939. The recording is also available on the company's website, www.partner.co.il. Mr. Benbenisti, would you like to make concluding statement?

[Isaac Benbenisti:]

Yes. Thank you very much for joining the call, everyone. We're pleased with the results. And we're looking forward, especially for the launch of our TV solution. We believe it will be a statement in the market and we're excited about it. So thank you very much and we look forward. Thank you.

[Operator:]

Thank you. This includes the Partner Communications First Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.