Partner Communications Company Ltd.
Q4 2016 Earnings Call Transcript

Published: 30 Mar 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Fourth Quarter and Full Year 2016 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call over to Mr. Gideon 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 annual and fourth quarter results for 2016. With me on the call today is Isaac Benbenisti, Partner’s CEO and Ziv Leitman, our CFO. Isaac Benbenisti will first present our operational highlights from 2016 and say a few words about our plans for the coming months. He will then hand over to Ziv Leitman, who will provide a more detailed overview of the financial and operational results for the fourth quarter. And finally, we’ll move on to Q&A. Before we begin, I would like to draw your attention to the fact that all statements in this conference call maybe 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 March 30, 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. I would also draw your attention to the fact that Partner filed its annual report for 2016 on Form 20-F with the SEC earlier today. 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 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 earnings conference call. In 2016, we marked on a new path as a comprehensive telecom group with the launch of the company’s new brand. We improved the working relationship with our employees, with the signing of a collective employment agreement. We expanded our service platforms and added digital solutions to improve transparency and information availability for our customers. In the Cellular segment, Partner continues to lead the Israeli market with an advanced network and the widest 4G coverage. In 2016, the postpaid cellular subscriber base increased by 85,000 subscribers compared with an increase of 24,000 subscribers in 2015 and the churn rate continued to decline. We continue to implement advanced technologies in our call network, which offers differentiation and in February 2017, we launched the first IoT network in Israel, called IoT Pro, which provides real value to the Israeli consumer. In addition, in the past year, we created a technological and operational base for two strategic company projects for the coming years. Partner’s TV project and the deployment of an independent fiber-optic based fixed line infrastructure. Those projects are expected to create new growth engines for the company, diversify our revenue streams and enable us to offer full communication offerings over our own independent and advanced infrastructure. The TV project, which will be launched in the coming months, will be based on an Android TV operating system. Partner’s operating system will allow our TV customers to enjoy the benefits of a wide range of content with an advanced interface adapted for the Israeli viewer. Creating an alternative to the monopoly and duopolies that currently dominate the fixed line and multi-channel TV markets in Israel will benefit customers, of course. It is indeed the rest of the regulator, the consumer and the entire communication market to support and enable the entry of new players to those areas through the deployment of advanced infrastructures, thereby creating real, improved and more advanced alternatives. I will now turn the call over to Ziv Leitman for a detailed review on our financial results. Ziv, please?

[Ziv Leitman:]

Thank you, Isaac. Before I go over the financial results for the fourth quarter, I would like to note that all comparisons I will make are to the previous quarter, unless otherwise indicated. In 2016, the ongoing strong competition in the cellular and fixed line market continued to affect our results and the negative effect was partially mitigated by efficiency measures. Service revenues in the fourth quarter of 2016 were NIS652 million compared to NIS698 million in the previous quarter, reflecting the seasonality of forming the revenues and the continued price erosion of cellular service revenues as well as a decline in the fixed line service revenues. Operating expenses were stable at NIS570 million. However, they included the one-time expense of the employee retirement plan in an amount of approximately NIS12 million as well as a one-time expense of approximately NIS7 million relating to the early termination of an operating lease. The decline in OpEx, excluding those one-time items mainly reflected a decrease in network-related operating expenses, international telephony and interconnect expenses. Regarding equipment sales, revenue in the fourth quarter were NIS169 million compared with NIS151 million, while gross profit decreased by NIS10 million. The decrease in profitability was mainly related to the tightening of the company customer credit policy and the change in the product mix. EBITDA in the fourth quarter was NIS164 million, a decrease of NIS56 million, reflecting the decrease in service revenues and in gross profit from equipment sales. Free cash flow before interest payments in the reported quarter totaled NIS269 million compared with NIS250 million. This increase reflected the final payment of the lump sum from HOT Mobile in the amount of NIS180 million compared to the payment of NIS35 million in the previous quarter. The impact of this payment was partially offset primarily by the increase in other operating working capital items and by the decrease in profits. In summary, a number of positive trends, which we noticed during this year, continue into the fourth quarter, such as the decline in the pace of ARPU erosion, a decline in the cellular churn rate, continued growth of the Post-Paid subscriber base, continued decline in OpEx, a decrease of net debt which currently stand at NIS1.5 billion and higher free cash flow. And now, I will be happy to open the call for questions. Moderator, please begin the Q&A.

[Operator:]

Thank you. [Operator Instructions] The first question is by Chris Reimer of Barclays. Please go ahead.

[Chris Reimer:]

Hi, thank you for taking my question. I would like to know if you could give some more color on the launch of the TV, if there is any timing around that and maybe a projection of CapEx, how much it might increase?

[Isaac Benbenisti:]

Hi, Chris. I will say something and then I will let Ziv say something. This is Isaac. All we can say now is that we launch it by the end of H1 okay, in the coming months. And that we said it will be on Android TV platform. It will be on the android platform. This is the only thing we can say. I don’t think that we disclose CapEx or any other investment that we put to this project. Ziv?

[Ziv Leitman:]

I can just elaborate that most of the CapEx investment are already included in our 2016 results. And when I talk about CapEx expenses – expenditures, I am relating to the back end. The other part of the CapEx, which relates to the TV operations is the set-top boxes and those set-top boxes are not included in the 2016 results and the spending and the level of expense is spending on the level of subscriber. And you can figure out, what this amount might be if the cost of the set-top boxes is relatively, probably it’s well known, the range.

[Chris Reimer:]

Okay, that’s very helpful. Also, could you give a little color on any plans to invest in infrastructure, you had mentioned also?

[Isaac Benbenisti:]

When you say infrastructure, what do you mean, what kind of infrastructure, every year we invest in the cellular infrastructure. We have the most advanced network. And we keep investing in the network infrastructure.

[Chris Reimer:]

Okay. Well, thank you.

[Operator:]

The next question is by Michael Klahr of Citibank. Please go ahead.

[Michael Klahr:]

Hi there. Ziv, wishing you good luck in the future and...

[Ziv Leitman:]

Thank you, my friend.

[Michael Klahr:]

Yes. Just one, you mentioned some kind of positive comments on the outlook in mobile, more positive than you have been in the past, you mentioned churn and also a reduction in ARPU decline, just wanting to ask you, given the current level of competition in the market, assuming it doesn’t work markedly remains at current levels, when do you think is the inflection point or when does the current lower prices, which are lower than your back book, how long until those work that wait through the base, when we can expect a low point for the ARPU, sorry service revenue based on current prices and competition levels? Thank you.

[Isaac Benbenisti:]

So I think – this is Isaac. I think that we spoke about it before, I think even in Q2 last year. We think now that we are in a point that the market is changing. And the market is changing, we see that Golan moved out and was purchased by Electra. And the reason it moved out is the – understood that the game is over. So there is nothing more to do in Israel in terms of recruiting new customers in a lower price. And the market currently is in a situation that the prices are very, very low compared to the – what we see in the U.S. and in Europe. I don’t think that there is any other economic environment in Israel, any other, let’s say, business in Israel or service in Israel that the prices are still low compared to the U.S. or compared to Europe, it’s a 70% less than the prices in the U.S. and it’s something like 60% to 50% less to Europe. This is of course something that cannot continue forever, because we speak about companies that have to invest in technology and so. So now we are facing the situation. The market will be changing. When and how, what will be the curve, I can’t say. And there are still the market movements and there are some companies that like to recruit more subscribers, so they are still processing the market to keep the prices low. But I think that 2017 will be the year of a change. But after 2017, we will see the change. I don’t know to say how much it will increase, NIS5, NIS10, I really can’t say. But I know that for us, it’s crucial, because if we would like, I say for us, it’s about the Israeli market, okay. It’s even the regulator. Because if we look to the future and we know that we will have the 5G around the corner and we will have to invest, not only Partner, but Cellcom and all the other companies. And the regulator is well received. We won’t be able – the regulator won’t allow Israel to be far behind the world in terms of implementing 5G and so. So I don’t know to say what will be the projection, what will be the angle of the curve, but for sure I believe or I can analyze that we are now in a point that the market will change.

[Michael Klahr:]

Okay. Thank you. And then just on CapEx, your CapEx was quite low that I am just wanting to understand, going forward and taking TV out of the picture, can mobile, is this a new level for mobile CapEx, can it remain at these levels, do you expect a little up-tick, you mentioned 5G, which is in 2017, but aside from that, can mobile CapEx remain where it is currently?

[Isaac Benbenisti:]

I can say about it. We do not give specific…

[Ziv Leitman:]

Guidance.

[Isaac Benbenisti:]

Guidance about the future. But I can say two things. One, that the lower CapEx that you see, it’s not only because we physically invest less. It’s – part of it is because we do a lot of savings. We opened lot of contracts with the third-parties and we did lot of savings. So we do the same for this is part of it. But again, if we look to the past, I can assure that we will not go back to the level that the company have been in. And otherwise, unless, in years from now, we will have to invest in the 5G and the market will change dramatically. I don’t know what – how much we will have to invest in 5G, but this is 2020, 2021. So for us, it’s a far future from now. So yes, we can stay with these levels. We can maintain the company. Part of it is savings. And I don’t think that we will go back to the levels of $500 million per year.

[Michael Klahr:]

Thank you.

[Operator:]

[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 the replay of this call is schedule 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 9-723-925-5930. 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:]

Just want to thank you for joining the call and looking forward for a brighter future. Thank you very much.

[Operator:]

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