Partner Communications Company Ltd.
Q2 2016 Earnings Call Transcript

Published: 17 Aug 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications’ Second Quarter 2016 Results Conference Call. All participants are at present in a listen-only mode. [Operator Instructions] Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please begin.

[Gideon Koch:]

Thank you. Thank you, everyone for joining us today on this conference call to discuss Partner Communications’ second quarter results for 2016. With me on the call today is Issac Benbenisti, Partner’s CEO; and Ziv Leitman, our CFO. Issac Benbenisti will first present the operational highlights of the quarter and add some words about the current regulatory climate. He will then hand over to Ziv Leitman, who will provide a more detailed overview of the financial and operational results for the quarter and finally, as customary we'll move on to the Q&A. 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 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 August 17, 2016, 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 statement as of the date of this call. For your information, this call is being broadcast over the Internet and can be accessed following the call through our website at partner.co.il. I will now turn the call over to Partner's CEO, Issac Benbenisti. Issac?

[Issac Benbenisti:]

Hi, and good day, everyone, and welcome to our earnings conference call. During the second quarter we continued with implementation of the company's vision to become a comprehensive Telco company. We are currently carrying out unification project of the system of the 012 Smile Partner. As part of this process all of our fixed line customers will be gradually transferred to the Partner brand. During the quarter, we also announced that we are examining options to deploy an independent fixed line infrastructure using fiber optics. Around a month ago we started the field test where we successfully connected residential Internet customers to Partner's fiber network. It speeds up to 1 gigabyte per second. Over the last few weeks we have been promoting this issue with the Ministry of Communication. We expect to receive the support of the regulator in this infrastructure project that would both open the market to competition and narrow the gap with the rest of the world in Internet speeds and the available technologies. In parallel, we continue to work towards entry into the television broadcast market. We await the implementation of the Filber Committee recommendation regarding the must sell. There must sell requirements for sport content and linear broadband - broadcast channels over the Internet. The implementation of those recommendations along with other steps will open the television markets to competition and lead to lower prices for customers. Turning to the cellular market, the second quarter marked the fourth consecutive quarter of growth in our Post-Paid cellular subscriber base. We also review this positive trend to some extent to the improvements we are making to our customer support services including the expansion of available platforms for digital support services including the social network. With that I will now turn the call over to Ziv Leitman for a detailed review of our financial results. Ziv please.

[Ziv Leitman:]

Thank you, Isaac. Before I dive into the financial results of second quarter, I would like to note that all comparisons I will make are to the previous quarter unless otherwise indicated. Starting with revenues, cellular service revenue decreased by 3% in the second quarter. The decrease mainly reflected the decline in revenues related to the ROU agreement with Hot Mobile, as well as the continued erosion in air time service revenue as a result of the competition in the market even though to a lesser extent than in previous quarter. These decreases were partially offset by an increase in seasonal revenues, as well one time service revenue items. The cellular churn rate in the second quarter stood at 9.8% compared to 11.2% in the previous quarter reflecting the decline in both Post-Paid and Pre-Paid churn. We continue to see a decrease in Post-Paid subscriber churn, which has reached the lowest level since mid-2013. Revenues and gross profit from equipment sales in the second quarter of 2016 decreased by NIS 62 million and NIS 14 million respectively. The decreases were primarily due to a decline in the amount of sales largely reflecting from tightening the company customer credit policy. Operating expenses decreased by NIS 40 million primarily reflecting a decline in sales and marketing expenses and the impact of the network sharing agreement with Hot Mobile which began in the second quarter of 2016. Starting from the second quarter of 2016, the revenues from ROU agreement with Hot Mobile have been replaced by the mechanism to share operating costs and capital expenditure as part of the network sharing agreement. EBITDA in the second quarter of 2016 increased by NIS 6 million, reflecting the decline in operating income expenses, which was partially offset by the decline in service revenues and the decline in gross profit from equipment sales. Profit totaled NIS 26 million compared with NIS 14 million in the first quarter. The increase largely reflected the increase in operating profit. Free cash flow before interest payment totaled NIS 160 million compared with NIS 114 million in the first quarter. The increase primarily reflected the first installment in an amount of NIS 35 million of the lump-sum of NIS 250 million under the Network Sharing agreement, as well as the decrease in other operating working capital items. The next installments of the lump-sum also in an amount of NIS 35 million was paid last month. And the final installment in the amount of NIS 118 million is expected to be received during the fourth quarter of 2016. Finally, the Company continues to decrease the net debt and as of the end of June, it stood up approximately NIS 2 billion. I will now 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.

[Tavy Rosner:]

Hi, thanks for taking my questions. The first one is with regards to your comments on the fiber. Can you give us a sense of what's the company strategy with regards to fiber and what's the timeline from here and perhaps CapEx implications for the company?

[Issac Benbenisti:]

Okay. What we announced that we are doing some tests regarding the ability to deploy a new network, fiber network the technology of G.fast. We have the knowhow and we have the enough infrastructure already by Partner we have it in the main areas in the country. So what we have in mind is to use the reform that we currently have with basic and other infrastructure companies that we will be able to use the passive - I don't know how to say it in English - yes but, how you say the…

[Ziv Leitman:]

Duct.

[Issac Benbenisti:]

Okay. To use the duct in a passive way. And they enter to the neighborhood that we'd like to go and deploy this network. We are in the phase that we test the ability, we test the technology and if we will decide to expand this fiber project, of course we will announce about it.

[Tavy Rosner:]

Okay. That’s helpful. So assuming that your test go well, and that you are satisfied with the results. What's the next stage, do you need to get any approval from the MOC to proceed?

[Issac Benbenisti:]

Actually this reform was already announced in the wholesale reform in the passive sector. But again we have to sit with them in order to see how to deploy it in a wide range in Israel and still we need the support of the regulator to in force basic and others - like HOT basic and specially basic to open the decks and allow us to go on with this reform. Currently with did the test, we see that we can do it, we have the abilities and we have the knowhow. In order to proceed we have to finalize the negotiations we have with Ministry of the Communication to see how they can support this project and then we’ll decide how to proceed.

[Tavy Rosner:]

Okay. That's very helpful. And the last one is regards to TV. In your prepared remarks you mentioned you're waiting to see the implementation of the field or reform. How that helps you enter the market, because it's my understanding that you would just you know make channels accessible on their Internet and so on and so forth. So how would that help you with your positioning on the market?

[Issac Benbenisti:]

The issue with content or television solutions in Israel it’s a bit complicated then why. It's simple to be able to go on with content to TV solution, where pay TV solution it’s easy. You have to have the STB, you can buy content, and you can play in the market. You know that we have an access to the residential market, we're very well perceived and well known Company in the market and it’s easy to do. What is the constraint? The constraint is that the market is dominated by two very strong and powerful and with very rich content companies like HOT and YES. In order to be able to create a massive competition and to do this television project a significant, we have to have few issues to resolve it with a regulation. One of them is must sale. You know that the main issue with the TV solution is the content, and the content is very expensive HOT and YES both of them or each of them, the expenses of the content yearly it's NIS 500,000 million. And the content is very expensive. You can spend such amount if you have a few hundreds of thousands of customers, but if you enter the market you cannot go and spend from the first year such amount. And -- must sale this is something all over the world that was happened, even in Israel by the way, when YES entered the market, when HOT was monopoly in the market, YES penetrated to this market by having a must sale on few channels and content services. This is something that was supported by Filber Committee and we wait to see how it will be deployed. The other issue is the broadcast channels, the free broadcast channels that we have Channel 2, Channel 1, Channel 10 in Israel that now on we cannot broadcast it over the Internet OPT, it's DDT, it’s something that has to be resolved in order to support companies like Partner and Cellcom be competitive and significant in the market. We don't say that we wait and just if those regulatory issues will be solved, we will enter the market as a television company. This is not what we are saying. But we do say that if the regulatory will not resolve those issues, it will be very difficult for companies like Partner and Cellcom to really penetrate and be significant in this market. And we see what Cellcom may did till now, we do not criticize of course what they have done, but we can see the figure that after two years of very hard work they've done, they have something like 80,000 subscribers, and I don't believe that they make any profit out of it and this is part of it is because of the constraints and the regulatory unresolved issues.

[Tavy Rosner:]

Understood. Thanks for your answer.

[Operator:]

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

[Nicole Gilliat:]

Hello. You've generated substantial cash flow and you’ve taken steps to reduce that. So I’d like to hear management and the board staffs on capital allocation, mainly reinstatement of the dividend?

[Ziv Leitman:]

So as you recall in order to pay dividends, we need to meet two conditions, the deposit criteria and the maturity criteria. So right now we fulfill those two criteria's, but when the Board of directors need to make a decision whether to distribute dividends, they need to see also the strategic picture and to understand what going in the market and to make sure the level of debt is sufficient to the field competences in the market. So the decision to make, to pay dividend it's a decision that should be taken by the Board and not by management but in my opinion it's not imminent. We cannot expect to pay dividend in the next few quarters until the market will be stabilized. So we do want to reduce the debt but right now I don't see the company paying dividend in the next two quarters.

[Nicole Gilliat:]

Okay. Thanks. Regarding handset sales, mobile equipment revenues were down substantially this quarter and you commented on what led to that. So should we expect similar policies going forward leading to similar levels of equipment sales in the coming quarter or should it go back to where it was in recent years.

[Issac Benbenisti:]

As you know we don't provide guidance for the future…

[Operator:]

I see, she has disconnected. [Operator Instructions] 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 two hours. In the U.S., please call 1-877-456-0009. In Israel, please call 03-925-5937. And internationally, please call 972-3-925-5937. The recording is also available on the Company's website www.partner.co.il. Mr. Benbenisti, would you like to make your concluding statement.

[Issac Benbenisti:]

Yes, I would like to thank you very much and looking forward for the next quarter. Thank you very much.

[Operator:]

Thank you. This concludes the Partner Communications' second quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.