Partner Communications Company Ltd.
Q3 2017 Earnings Call Transcript

Published: 21 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications' Third Quarter 2017 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please go ahead.

[Gideon Koch:]

Thank you. And thank you to all our listeners for joining us on this conference call to discuss Partner Communications' third quarter results for 2017. With me on the call today is Isaac Benbenisti, Partner's CEO; and Dudu Mizrahi, our CFO. Isaac Benbenisti will present a number of operational highlights for the quarter in the TV, fixed line and cellular markets. He will then hand over to Dudu, who will provide an overview of the quarterly financial and operational results. And finally, we'll move on to the 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 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 November 21, 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. 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 earnings conference call. Our strong entrance to the TV market, together with our significant presence in the Internet and cellular markets, established Partner as a comprehensive communications group. The customer recruitment figures for the Partner TV are high compared to our preliminary forecasts. In the last month, the sales rate has increased even more and the number of daily installations has accelerated compared to the period from August through October. In less than one month, we have completed installations in 10,000 additional households, and currently the number of households that are already connected to the Partner TV service is approximately 30,000. In addition, thousands of additional households have scheduled installations by the end of the month after they have already completed joining the service. Most of the customers that have joined the TV service have chosen the service as part of our bundle and triple offerings which also includes ISP and Internet infrastructure. As part of our strategic plan as a comprehensive communications group, in August we also announced the commencement of the commercial phase of our independent fiber optic infrastructure project, Partner Fiber which provides, for the first time, a more advanced and cost-effective alternative to the existing fixed infrastructure in Israel. Partner's optic fibers have already reached tens of thousands of households throughout the country, and we are working to deploy further at an accelerated rate in several cities simultaneously. In the cellular segment, we added approximately 33,000 net postpaid subscribers in the last quarter and recorded a net increase in our cellular subscriber base for the second consecutive quarter, despite a decline of approximately 18,000 prepaid subscribers. I will now turn the call over to Dudu Mizrahi for a detailed review of our financial results. Dudu please.

[Dudu Mizrahi:]

Thank you, Isaac. Good day, everyone and welcome to our earning conference call. In the third quarter, many of the activities that the Company has been engaged in during the last year were reflected, among others, in the growth of 33,000 postpaid cellular subscribers, a continued single-digit cellular churn rate, a significant improvement in the equipment sales gross profit margin which stood at 27%, an improvement in the EBITDA margin compared with Q3 of 2016, and an additional quarter with a strong free cash flow. The increase in CapEx in the quarter mainly reflected the acceleration of the Company's fiber project, which enables the Company to offer advanced services based on an independent fixed-line infrastructure, as well as the entrance to the TV market. Regarding our final project, we announced yesterday that we are holding negotiation with Telecom regarding our potential long-term corporation [ph] agreement for the deployment of fiber optic infrastructure by both companies, whereby each party will be entitled to purchase fiber optic infrastructure services from the other party in order to connect residential buildings throughout Israel. The agreement if concluded and executed will allow the companies to avoid duplicative future deployment and will accelerate the deployment of the fiber optic infrastructure while reducing costs. The financial steps which we executed in the past months, including among others, the early repayments of loans in an amount of ILS900 million and the raising of a new traded bond series, are reflected in the significant decline in finance expenses compared to Q3 of 2016. The financial steps, together with the strong free cash flow presented by the Company in the current quarter, resulted in a decline in net debt below ILS1 billion to ILS887 million. And now, I'll be happy to open the call for questions. Moderator, please begin the Q&A.

[Operator:]

[Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.

[Chris Reimer:]

This is Chris on for Tavy. Thank you for taking my questions. I was wondering if you could comment on the 30,000 TV customers, did you say they were mostly taking the triple play, and also are you concerned with the recent launch by [indiscernible] TV?

[Isaac Benbenisti:]

For the first question, yes, the majority of the subscribers that joined the service choose the triple solution and what was the second one? Are we worried about…

[Chris Reimer:]

Are you concerned, yes, with the increase in competition?

[Isaac Benbenisti:]

We knew that the traditional competitors will have to act, and we are happy that they choose the same or like or they try to imitate the solutions that we choose the open books with Android TV. We are more advanced, we have the connection with Netflix, our UI is much, much more advanced, and the product that we provide is chosen by the Israeli customers. So we know that [indiscernible] still ahead of our competition, and we know that they would react and they’re facing a significant decrease in their database, so they will have to react, but we know what we're going to do and we have confidence on it.

[Chris Reimer:]

Also just regarding the potential long term cooperation with Cellcom and the fiber rollout, can you give a sense of what proportion of the population you would be targeting let's say in the next three years and does that involve using any of the Israeli electric infrastructure?

[Isaac Benbenisti:]

We haven't really provided any future detailed plans regarding our deployment, but we can definitely say that a very significant part of population will be covered by the deployment of fiber optics either by Partner or by Cellcom or by the joint operation. So eventually we plan that it will be a very meaningful deployment. Regarding the [indiscernible] currently we’re looking at the venture, but we haven't decided yet regarding what we’re planning to do with that, but we know the venture is out for sale and we’re looking at numbers but haven't yet decided what to do with that.

[Operator:]

The next question is from Roni Biron of Excellence. Please go ahead.

[Roni Biron:]

A few numbers stood out on the positive side, and I would like to get a sense how sustainable they are. First, you added 15,000 subscribers after adding 4,000 in the second quarter. Can you keep this up while stabilizing the underlining ARPU in this environment or this is not really sustainable?

[Isaac Benbenisti:]

I believe that this is sustainable. I mean we work very hard on our database in order to decline the churn rate in order to gain more customers. We believe that our strong entrance to the TV market, which really created a really good vibe for the company in the Israeli market, we can see it in the PR, in the press, and of course in the atmosphere in the company. So we believe it will affect the cellular market and besides that we took and we still have few more activities to take in order to decrease our database in the future.

[Roni Biron:]

And when you look at the pricing side, can you stabilize the underlining ARPU while adding more subscribers, do you think we have reached some kind of a bottom or there is more erosion ahead?

[Isaac Benbenisti:]

I think it’s hard to anticipate what will be the near future but we can see few signs that we’re at a tipping point and maybe we’ll see in the near future stabilization of the ARPU in the market, because the creation of telco groups that we and Cellcom are going after, the core business of Bezeq and HOT, and they suffer from our entrance to their core business, maybe the motivation that they had in the cellular market will decrease. We see in Telephone and in HOT Mobile websites that they increased their cellular prices. It doesn’t reflect always what they do underlying but on the Internet or the website that they have, they increased their price of the cellular. Of course we have the entrance of Xphone as a new comer, we don't know what would be the affect, it can be negative effect. But generally speaking about the market, we can say that we believe that we’re ahead [indiscernible] as a period of standard that the prices will stabilize, maybe we'll see more decrease but I believe we're in a tipping point.

[Roni Biron:]

And two more questions, the first one is on equipment margin, 27% in the quarter is this the right margin for this business, it seems quite high?

[Dudu Mizrahi:]

Well Roni, I think we've discussed the topic before we’re making a lot of efforts to improve margin and the handset sales and one can see the margin went up since Q1 and moving forward. So it’s a trend that you could see over the last few quarters, think that there is still a potential to increasing margins, hopefully we’ll be able to do that, but we think there is still room for improvement.

[Roni Biron:]

And finally regarding Partner TV, a full quarter I guess we'll take its toll on profits. Should we expect a decline in fixed line profits compared to third quarter as we move ahead?

[Dudu Mizrahi:]

Could you repeat the question Roni, you’re asking whether the…?

[Roni Biron:]

Regarding a full quarter of Partner TV given the upfront costs, should we expect a decline in fixed line profit or are there any offsetting factors?

[Dudu Mizrahi:]

If you look only on the TV of course you could have - you can see on Q3 only partial effect of the TV launch, and of course moving forward we could see in Q4 and probably you will see the full effect of the TV launch and initially of course you’ll see more cost than revenue in the beginning of the service as we’ll put more and more customers. So the answer is yes, the Q3 result doesn’t really reflect the full amount of cost on the TV side.

[Operator:]

The next question is from Nicole Gilliat of ION Asset Management. Please go ahead.

[Nicole Gilliat:]

My question is about, if it result so looking back over 2017 as if focus for free cash flow benefited from favorable business and working capital.

[Isaac Benbenisti:]

Nicole we cannot hear you?

[Nicole Gilliat:]

I am very sorry, can you hear me now?

[Isaac Benbenisti:]

Yes.

[Nicole Gilliat:]

Looking back over 2017 a good chunk of your free cash flow was favorably by equipments in working capital. So looking ahead are you content with the current levels of equipment sales in the business?

[Dudu Mizrahi:]

Well I hope I understood the question but as I answered earlier to Roni, we think that there is still room of growth in handset sales and very you know - over the last quarter having to improve margins but we still see room for growth both in revenues and handset. And hopefully we’ll be able to do that in the quarter.

[Nicole Gilliat:]

And given the great strides you've made in refinancing debt over the last several years, the company be considering a resumption of a dividend policy going forward?

[Dudu Mizrahi:]

Currently there isn't [indiscernible] or any change in the dividend policy currently but as you can imagine it’s on the table and it will be discussed in [indiscernible].

[Operator:]

[Operator Instructions] The next question is from [Michael Shannon of Moon Capital]. Please go ahead.

[Unidentified Analyst:]

I was wondering in terms of the CapEx, can you give a little bit of guidance in terms of what CapEx we should be expecting in the coming years given the accounting change, as well as the fiber route? Thank you.

[Isaac Benbenisti:]

We haven't given any guidance regarding CapEx but as you can imagine when we're talking about you know fast and extensive deployment to fiber optics than we expect CapEx to grow in the coming years as we further deploy our fiber optic network. So the answer is yes, we expect higher CapEx levels than what you could see over the last few quarters. Currently we're not giving any guidance regarding those numbers.

[Operator:]

There are no further questions at this time. Before I ask Mr. Benbenisti to go ahead with his closing 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 1877-456-0009, in Israel please call 03-925-5940, and internationally please call 972-3925-5940. The recording is also available on the Company’s website www.partner.co.il. Mr. Benbenisti, would you like to make your concluding statements?

[Isaac Benbenisti:]

Yes, thank you very much for joining the call, and we're looking forward for the further quarter to deploy successfully our strategies to become a comprehensive telco group. Thank you, everybody.

[Operator:]

Thank you. This concludes the Partner Communications' third quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.