Partner Communications Company Ltd.
Q3 2016 Earnings Call Transcript

Published: 23 Nov 2016

[Operator:]

Welcome to the Partner Communications Third Quarter 2016 Results Conference Call. [Operator Instructions]. I would now like to hand 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 today to discuss Partner Communications' third quarter results for 2016. With me on the call today is Isaac Benbenisti, Partner's CEO; and Ziv Leitman, our CFO. Isaac Benbenisti's presentation will focus on the operational highlights of the last few months. 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, we will 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 may vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to [indiscernible] from those in the forward-looking statements are contained in Partner's press release dated November 23, 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 F3 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. 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. Starting with the Cellular segment, in the third quarter the post-paid cellular subscriber base increased by 24,000, while the pre-paid subscriber base decreased by 21,000. This is the fifth consecutive quarter that this trend has continued. The cellular churn rate continued to fall and in the third quarter the rate was 9.7% compared to 9.8% in the previous quarter. We continue to bring innovative services to our subscribers. In this quarter we were the first Israeli operator to introduce a Wi-Fi calling service which enables calls to be placed over the wireless Internet. We also began to upgrade a number of our cellular sites to the 4.5G or LTE, advanced standard. We're also already beginning to see the results of the update operation -- updated operation model that we introduced in the business division. Agreements with strategic customers are being extended and many new business customers are enjoying total and comprehensive service value offers. In the Fixed Line segment, the ongoing projects to unify the operations of 012 Smile under the Partner brand significantly progressed in the third quarter. And already most of our private Internet customers enjoy Partner's advanced services. The completion of the project in the coming months will enable us to offer all of our customers integrated and customized services. The Israeli telecom market is currently at a crossroads. As most of you know, a reform has brought before the Israeli parliament with the aim of decreasing the prices of telecom services for our customers. Informed decisions by the regulator will increase competition in the telecom market. It is the Israeli customer who will benefit most from this reform. Regarding TV services, we believe that the must-sell requirement of sports content will enable significant reform of the TV market which is currently controlled by a duopoly. And as a result, this will lead to lower prices in the Israeli TV market which is considered one of the most expensive in the world. 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 go over financial results for the third quarter, I would like to note that all comparisons I will make are to the previous quarter, unless otherwise indicated. Starting with revenue, cellular service revenues increased by 1% in the third quarter. This mainly reflected the impact of higher seasonal roaming revenues which was stronger than the impact of the continued price erosion in cellular airtime services. As a result of the seasonality, ARPU increased by NIS1 to NIS66. And for the same reason, ARPU is expected to be lower in the fourth quarter. Fixed-line service revenues were relatively unchanged from the previous quarter. Regarding equipment sales, the downward strength that we're experiencing in 2016 continued through this quarter, leading to a further decrease of NIS54 million in revenues from equipment sales and NIS40 million in gross profits. The decreases were primarily due to a further decline in the quantity of sales in both the cellular and fixed-line segment which was mainly related to the tightening of the Company customer credit policy and the change in the product mix. Operating expenses decreased by NIS2 million compared with the previous quarter, to NIS570 million. EBITDA for the first -- for the third quarter of 2016 decreased by NIS8 million, mainly reflecting the decline in gross profit from equipment sales which more than offset the increase in the service revenues and decline in operating expenses. Profit totaled NIS19 million in the third quarter compared with NIS26 million in the second quarter. Free cash flow before interest payments totaled NIS215 million compared with NIS160 million last quarter. The increase in free cash flow primarily reflected lower CapEx payment as well as a decrease in other operating working capital items. Finally, the Company continued to endeavor to decrease its net debt and as of the end of September it stood at approximately NIS1.8 billion, decreasing by approximately NIS200 million in the quarter. 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 Michael Klahr of Citibank. Please go ahead.

[Michael Klahr:]

Two questions, firstly, about your entry into TV which you said you should do in the first half of next year, what's the -- or what can we think about the associated cost or impact on profitability next year, as a result of that? And my second question is about the Arrangements Law which I think you mentioned in your press release. What is the potential benefit to you in terms of current costs or payments you are currently making to Bezeq from being able to having access to their ducts? Thank you.

[Ziv Leitman:]

Regarding the expenses which are associated with the TV operation, so -- as we said last time, we don't disclose the costs associated with this project. But we did say that in the first half of the year, we expect to see negative effect on the EBITDA before we record substantial number of subscribers. I cannot quantify the number.

[Michael Klahr:]

Okay. And on the Arrangements Law, what potential changes or impact that could have on your costs, should that be a passed?

[Ziv Leitman:]

So there are a few clauses there. One of the clauses relates to the passive wholesale regulation; which the regulation already exists, but it's not implemented by Bezeq or by the Minister of Communication. So hopefully when the law will pass, the wholesale market regulation, the passive one, will be implemented. So it will enable us, first of all, to deploy our fiber optics project and to use other services which eventually will reduce some of the cost and will improve our position in front of our customers. This is one clause. The other clause regards relates to the must-sell issue. So of course when we launch our TV operation, if the must-sell will be implemented, it will enable us to provide more content to our customers and will accelerate the number -- the deployment of our TV operations, TV projects and we will be able to recruit more customers.

[Michael Klahr:]

Okay. Could you -- if it's passed in your favor, would you be able to reduce your costs in the mobile business as a result of that?

[Isaac Benbenisti:]

It's not as a result of it. This is something that we work regardless of TV project, to reduce cost, to be more efficient. And we have room to improve in order to be more efficient and to create value as a Company. And this is something we work very hard and we have been working very hard. And you can see the results in the report and we'll continue to do it in the coming quarters.

[Michael Klahr:]

This bill would create additional opportunities for you to reduce cost further, is my question.

[Isaac Benbenisti:]

I didn't understand.

[Michael Klahr:]

If this bill, the passing of this bill, would create additional opportunities for you to cut costs further. Is that correct?

[Ziv Leitman:]

As I said, in the TV -- with the must-sell issue, if it will pass, it will enable us to buy content probably at a reasonable price. So compared to the alternative, it will be cheaper. If we will be able to use the passive infrastructure of Bezeq, it will enable us to reduce costs compared to the current contract that we have with Bezeq. Unfortunately, we cannot quantify the numbers right now.

[Isaac Benbenisti:]

I would like to emphasize that this must-sell issue is very important for entering the market in a reasonable way, not only for us, but for other competitors, newcomers, in the Israeli TV market. But I can say now that our goal is to bring the solution that is not similar or like HOT and YES, the duopoly now in the market, in order to compete with them with the same content and the same way they go to the market. It's more complicated because -- and we have some opportunities because the world TV market is changing, regardless what we do here in Israel -- the movement to the Internet, the cord-cutters and so. And we believe that we can, after investigating deeply the issue with the new solution, that it will allow us to enter the market significantly; not as a result that we invest massively in content, but investing the right content with the right offer with the best platform. And I believe that when we'll be able to talk and to elaborate on it, we will do it with you, of course.

[Operator:]

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

[Nicole Gilliat:]

I have four questions for Isaac, please. Firstly, do you believe that we're past the worst for the cellular market, meaning do you see more downside in terms of ARPU and more significant downside in subscriber numbers? That leads me to my second question, we're sitting on November 23 with only a few weeks left in the year. And besides some seasonal factors, is there any reason to believe that the trends we've witnessed in the second and third quarters, in terms of ARPU subscribers and CapEx, will look any different in the fourth quarter? And the third question is about CapEx. So as we look towards 2017, aside from any possible investments related to TV, are there any major CapEx requirements next year that will mean significant change, higher or lower than 2016? And then lastly, when I look at your cash flow, excluding one-offs, you've generated about NIS350 million of cash flow this year. If the Company continues to generate cash flow -- free cash flow at that pace, should we expect a dividend payment in 2017? Thank you.

[Isaac Benbenisti:]

Okay. So regarding the first question, I think -- and you know I can only assume and I can only analyze the Israeli market, I don't have a crystal ball, but my assumption and it's a strong assumption that we're at an inflection point in the market. I think that when we analyze what is going on with Golan Telecom, what we can see now the HOT mobile loss, the operating loss of almost NIS100 million. We can see the results of telephone and we can see the results of Partner. I think an end compare the prices that we have here in Israel to the world, and of course in the cellular market, we cannot compare it to any other arena in the market because the prices here in Israel are fourth of what is the average price in the U.S. and half of what is the average price in Europe. So of course this must be changed. And I believe and we can see the trends in the Israeli market when we analyze the churn, the ARPU of the churn and ARPU of the newcomers that it's almost similar, that we're at a point that we should expect the market sales, the trends in the market will increase the ARPU. I cannot say by how much; I don't know how to say production. But as analyzing the market, I think that we're in a point that we should expect an increase in the ARPU. Regardless what is going on in the market, we as Partner, as a leading company to take care of our sales. We do not have to sit and lean back and wait for the market to change. We have to do internally many issues. And we have lots of work to do in order to create some value and differentiation from the customers, so the customers will stay with us, will not leave us easily for a few shekels here and there, and we can ask for premium price. And this is something that we have to work very hard in the details in order to create customer journey, in order to create value in terms of services in terms of customer behavior, in terms of quality of service. And this is something we're working on the marketing side, sales side and service side. And I believe we will see the trend. By the way, we already see it when we analyze the net adds and the churn and when we analyze the different segments of the cellular customers that we have. Regarding the second question, I must say that I didn't understand the question. If you can repeat it, please, I will then be able to answer.

[Nicole Gilliat:]

Sure. So the second question is somewhat related to the first. It was looking forward to the fourth quarter, as we're already about two months into the quarter. Aside from any seasonal factors, is there any reason to believe that the trends we've seen thus far in the year, in terms of ARPU and subscribers and CapEx, will look any different in the fourth quarter?

[Isaac Benbenisti:]

I don't know if we can expect significant change. We'll have to wait and see. But I don't see -- I'm not expecting to see significant change in the fourth quarter. Regarding the third -- is that okay?

[Nicole Gilliat:]

Yes, thank you.

[Isaac Benbenisti:]

Regarding CapEx 2017 -- would you like to add something, Ziv, if --?

[Ziv Leitman:]

We didn't finalize the budget for 2017. So we don't know, at this point, whether we will have guidance of the number of CapEx next year.

[Isaac Benbenisti:]

The only issue I can say that we analyze carefully our abilities, we take steps, but we do it in a responsible way. We -- you can see we've decreased our CapEx expenses. But part of it is because we decreased realistic CapEx. But we have lots of savings in the CapEx business. We found many, many places that we can do the same with less, with suppliers and internally. And this is something we will continue to do in 2017 in order to make room for new investments that we must be able to -- we must have in the TV business we would like to enter and in our infrastructure project. Regarding the dividend, you would like to add something, Ziv?

[Ziv Leitman:]

No, there's nothing that--

[Isaac Benbenisti:]

The CapEx?

[Ziv Leitman:]

The dividend.

[Isaac Benbenisti:]

Okay.

[Ziv Leitman:]

So as I said, we didn't finalize the 2017 budget yet. And the amount of cash that will be created in 2017 will be derived from the business results, i.e., EBITDA and from the CapEx requirement. So only after finalize this process, we will see what will be the excess cash that will be available. And only then we will be able to take a reasonable decision regarding dividend. As I said the last time, even now we meet the two dividend criteria, the maturity and the profit criteria which are required by the Israeli law in order to distribute dividend. However, we need to take into account the market situation and the Company stability for the long term. For the long term, we do believe that we need to create a lot of cash and we need to pay dividend as it was in previous years. But in the short term, in the coming quarter, I don't expect paying dividend unless we would see a dramatic, positive change in the market.

[Operator:]

The next question is from Chris Grundberg of UBS. Please go ahead.

[Chris Grundberg:]

I've just got two questions, if I may, both on the fixed-line side. Just wonder if you can comment a little bit on the efficacy of the wholesale market there. You're referencing growing pains again. Just wonder if you can elaborate at all on that -- so if there's been any improvement you've seen versus prior quarters or how the trends there are in terms of getting access to that wholesale market. And then just on the second question, wonder if you can comment on the OpEx reductions that you've seen in that fixed-line business which you referenced in the release this morning. Just in terms of what you've done there; how sustainable it is; and if that is something that you might even take further, going into next year. Thanks.

[Isaac Benbenisti:]

So regarding the wholesale market, we should divide it into the current bit stream access solution that we're working, nothing changed dramatically. We still work very hard to compete with Bezeq. Looking from outside, it seems to be that we have lots of customers. But when we go into the details, Bezeq makes it very hard for us to work in this wholesale reform and we suffered a lot. We work intensively with the telecom minister and the other regulators to fix it. Regarding the wholesale in terms of telephony, nothing happened regarding the wholesale, within the passive wholesale solution. You know that we brought it to the Israeli minister and the Arrangement Law is working on it in order to make it happen. And regarding the wholesale on HOT, nothing really happened yet. This is regarding what is going on in the wholesale market. And the reason that we'll continue to work very hard to implement the wholesale, by all means; but we'd like to go and go further with our fiber project that will take advantage of the passive reform sector. This is for the first question. Ziv, would you like to elaborate on the second one?

[Ziv Leitman:]

The second one was regarding cost savings. So you see some cost saving with that even though there are fluctuations from one quarter to another. Part of it is coming from the ongoing activities that we've done regarding saving and cost. And part of it is coming from the network sharing agreement with HOT which will enable us to save some costs. And as Isaac said before, we're striving to save additional costs next year. But again, we don't have -- unfortunately, we don't have a specific number to disclose.

[Operator:]

[Operator Instructions]. There are no additional questions at this time. Before I ask Mr. Benbenisti to go ahead with this 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 1-888-782-4291. In Israel, please call 03-925-5930. And internationally, please call 972-3-925-5930. The recording is also available on the company's website, www.partner.co.il. Mr. Benbenisti, would you like to make your closing statement?

[Isaac Benbenisti:]

Yes, I would like to thank very much all the participants. And we will continue to work very hard to create a brighter future for this Company. Thank you very much.

[Operator:]

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