Partner Communications Company Ltd.
Q2 2014 Earnings Call Transcript

Published: 13 Aug 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications’ Second Quarter 2014 Results Conference Call. All participants are at present in the 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. And thank you to all our listeners for joining us on this conference call to discuss Partner Communications' second quarter results for 2014. With me on the call today is Haim Romano, Partner's CEO; and Ziv Leitman, our CFO. Haim Romano will first present an overview of Partner’s strategy and its impact on the quarterly results. Ziv Leitman will then provide a more detailed explanation of the financial and operational results of the second quarter. And finally, 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 1932, 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 August 13, 2014, as well as Partner’s prior 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 simultaneously via the Internet, and can be accessed through our website, at orange.co.il. If you have any further questions following the call, please feel free to contact our Head of Investor Relations in Israel, Elana Holzman on 972-54-781-4383. I will now turn the call over to Partner's CEO, Haim Romano. Haim.

[Haim Romano:]

Good day everyone and welcome to our second quarter earnings call. The results of the second quarter reflect the challenging market environment we operated in and the steps we have taken to deal with this environment. The intense competition and the aggressive pricing offered by our competitors are driving price erosion and keep the churn rate high. As a result we recorded a decline in our service revenues those smaller than we saw in the last two quarters. We continue to take the necessary steps to mitigate the effect on the revenue and profitability. First, we improved our cost structure and operating model the result was a decline of 8% in operating expenses compared to the second quarter of 2013. Second we grew our recruitment sales which were up by 25% compared to the second quarter of 2013. Thus those efforts contributed a 4% increase in adjusted EBITDA compared to the second quarter of 2013. This is the second quarter in the row we recorded an increase of an adjusted EBITDA compared to the prior quarter. In line with our strategy we are investing in our business and improving our competitive advantage by focusing on technology innovation and quality of service. All of this while we are reducing costs. In July, we will launch the first 4G network in Israel, 100s of 1000s of our customers can already enjoy the advantages and services of the LTE technology. We have the widest deployment of the 4G size with 100s of sites in place. And we expect more than 1000s sites by the end of this year. We are also investing in our fixed line network and today we offered one of the fastest fixed line networks in Israel. We are proud of our continued leadership position in quality of service. The recent 4G launch positions us the market leader and technology, innovation and customer experience. And now, I would like to turn the call to over to Ziv Leitman. Thank you.

[Ziv Leitman:]

Thank you, Haim. Before diving into the financial results, I would like to remind everyone the total comparison I discuss in my prepared comments are for the first quarter of 2014, unless otherwise indicated. Our market continues to be highly competitive characterized by unlimited voice and texting plan in our high churn rate. All these resulted in ARPU erosion and further decline in service revenues. In the second quarter, service revenue decreased by 2%, the decrease was mainly explained by the intense competition, which is driving down the cost to customers of the unlimited plans. Our postpaid subscriber base continues to grow in the second quarter by approximately 1000 subscriber, this the fifth consecutive quarter of growth in our post-paid subscriber base. The prepaid subscriber base decreased by 23,000 compared to the previous quarter partly as a result of seasonal changes and partly due to prepaid subscriber moving over to postpaid plan. The cellular churn rate declined slightly compared to the previous quarter from 11.6% to 11.4% this decline follows two consecutive quarters in which the quarterly in churn rate increased. In line with the decrease in service revenues ARPU decreased by NIS1 from NIS77 in the first quarter to NIS76 in the current quarter. The decline in ARPU resulted mainly from continued price erosion of cellular services, which was partially offset by an increasing revenues from wholesale services provided to other operators. Equipment revenues in the first quarter were NIS225 million, a slight decrease compared to the previous quarter. However, gross profit from equipment sales significantly improved this quarter by NIS13 million, primarily due to improvement in the supply chain and change in the product mix. On the expense side, the company continues adjust in its cost structure and executing operational efficiency measures. In the second quarter, these measures, together with other item, led to a decrease in operating expenses of NIS19 million. The number of employees on FTE basis at the end of the second quarter was 3,736. And since we started implementing efficiency measures in the fourth quarter of 2011, the number of employees on FTE basis has been reduced by more than 4,800 or 56%. EBITDA grew by 6% or NIS70 [ph] million compared to the previous quarter, largely as a result of the increase in gross profit from equipment sales and the decrease in operating expenses, partially offset by lower service revenue. Finance costs in the second quarter of 2014 increased from the previous quarter by NIS25 million, mainly due to an increase in CPI linkage expenses and a one-time early repayment fee NIS6 million. Despite the increase in EBITDA, the net profit decreased by NIS6 million this quarter due to high finance expenses. Free cash flow, after interest payment was NIS123 million in the second quarter compared to NIS139 million in the previous quarter. The decrease in free cash flow was mainly due to semi-annual interest payment. Net debt, at the end of the quarter, amounted to NIS2.7 billion and we continue our effort to reduce our net debt. In April, we made an early repayment of bank loans in the amount of NIS100 million. Since January 2013, we have paid down bank debt in a total of NIS717 million. In May, we entered into the differed loan agreement for a principle amount of NIS260 million with certain institutional investors. The lenders will grant partner of the principle amount in December of 2016. I will now be happy to open the call to question. Moderator, please begin the Q&A.

[Operator:]

(Operator Instructions) The first question is from Alex Balakhnin of Goldman Sachs. Please go ahead.

[Alexander Balakhnin:]

Yes, good afternoon. Congratulations on good results. I wanted to ask you a question the competitive environment, it seems that it keeps being challenging and my question in this circumstance is how do you expect like what will change in the market for this relatively irrational competitiveness to subside what will happen, what are the steps must the market participants undertake to send the marketing into the improvement phase. Thank you.

[Ziv Leitman:]

The situation today is that I think the all of the player are in a kind of loose situation, the big ones are paying a lot of money to their distributors to recruit new customers and then at the same time they are loosing better customers with higher ARPU to their competitors and they are paying a lot of money and loosing a lot of money just to stay at the same stage that we were before with the same market share. If you see our market share last year and our market share today its almost the same, we lost from last year 7000 subscribers in terms of net debts. Q2 2013 compared to Q2 2014 but the erosion there was significant I think cell phone and telephone are in the similar satiation although the lost I think 92 telephones and 122 cell phone, but that the result is the same. Well just to keep our customer base we have to invest a lot of money and to loose a lot of money at the same time. The new comers are in the same situation, they are losing a lot of money just to keep their growth and the growth is quite moderate. So at the end of the day I believe that this market will come to kind of fresh analyzation, because nobody is gaining anything from this one, from this behavior, not a market share and of course not profitability and not increasing in revenues. We saw what happened in last 12-months we see what’s going on today. And when Golan is proposing NIS18 for the second handset, and second line telephone and Cellcom are not in a very good situations in such respect. So I believe that at the end of the day the markets will slowdown and we see that the markets becomes a little bit different and what is driving the market is more the distribution channels that the operators themselves.

[Alexander Balakhnin:]

So from your standpoint the biggest changes – well the biggest differentiation factor we should be the distribution network, which you’re building out?

[Ziv Leitman:]

Yes. And the fact that they will get to the – the fact that nobody is winning and everybody is loosing, so this is, you don’t get any market share advantage and you don’t get any increasing service revenue on the contrary so this price don’t lead to any good results for nobody, so I believe that its going to end I think sooner that we expect, but this is my view.

[Alexander Balakhnin:]

Thanks.

[Operator:]

The next question from [Indiscernible] of Citibank. Please go ahead.

[Unidentified Analyst:]

Hi. I have two questions please. One about the 4G and your LTE, is the CapEx is already done and how much of it is still left to do?

[Ziv Leitman:]

Most of the CapEx was invested for the LTE in this stage, but we look forward to the advance LTE and other new technologies. So we can’t say that we’re going to reduce significantly the CapEx for the next quarter.

[Unidentified Analyst:]

But it will be increased significantly or?

[Ziv Leitman:]

No.

[Unidentified Analyst:]

Okay. So same level.

[Ziv Leitman:]

Most of the investments for the LTE is behind us.

[Unidentified Analyst:]

Okay. Sorry.

[Haim Romano:]

But we don’t expect different CapEx number compared to previous year.

[Ziv Leitman:]

Yes.

[Unidentified Analyst:]

Okay. Thank you. My second question is about your cost, OpEx. We see they were reduced this quarter but on lower level. So what can we expect for the second half of the year?

[Haim Romano:]

OpEx was a challenge and it will be a challenge and we have all the intention to meet these challenges in the future.

[Unidentified Analyst:]

Okay.

[Operator:]

The next question is from Tavy Rosner of Barclays. Please go ahead.

[Tavy Rosner:]

Hi, yes. Thank your for taking my questions. I have a question on the 4G, actually on the business plan, we’ve seen for example in France that incumbent player launch premium packages with 4G and then after a few months you had some disruptive arrival of people stringing into 4G at no additional costs to the equivalent of what we have now NIS400, do you think this going to happen in Israel?

[Haim Romano:]

I hope not, but it’s going to happen in Israel, but our strategy is to package it with services, the 4G with services and this will be an advantage, this is something that our the small competitors don’t do, it’s not their strategy and our strategy is different, we want to introduce to the customers not just the speed, not just the quality of the network. We want to introduce to them products and application that they can use and enjoy and not just the network. And we believe that this can improve our service revenue.

[Tavy Rosner:]

Okay. Thank you.

[Operator:]

(Operator Instructions) The next questions are follow-up on Alex Balakhnin. Please go ahead.

[Alexander Balakhnin:]

Yes. Hi, again I just wanted to check with you on the LTE CapEx so far. What was sort of share of your CapEx was devoted to the LTE in the previous quarter and what is your expectations on the CapEx to rollout the LTE network across the country?

[Haim Romano:]

The investment in the LTE started actually three years ago, when we singed the contract with Ericsson for the HSPA+ and in the contract was the investment for the entry included. So, it’s not just the last two or three quarters, it’s something that started three years ago and still continues. So, it’s one of the elements in the package that we signed with Ericsson and in this year.

[Alexander Balakhnin:]

I see, but may I paraphrase it a little bit, to what extent your backbone and back haul are prepared for the like the avalanche type of increase for the network traffic related to the LET rollout or like what share of your base stations are connected via fiber?

[Haim Romano:]

I can’t…

[Ziv Leitman:]

Alex, we didn’t disclose this kind of information, but we said that by the end of the year we will have at least 1000 sites ready for the LTE.

[Haim Romano:]

More than ready operated.

[Ziv Leitman:]

Operated but this is the full LTE network will run only after we will get the frequencies, right now we are running on one band of 5MHz and only after the LTE spectrum tender we will get additional frequencies and we will be able to run the full LTE network.

[Haim Romano:]

At the end of the year most of the population in Israel will be served by the 4G network of Orange, more than the 1000 sites all over the country. The limit will be because – the performance will be because of the frequencies the 5MHz straight, immediately after getting the 15 I hope strip that we need we will be able to introduce to the market full service in LTE and after that LTE advance.

[Alexander Balakhnin:]

Okay. Got you, thanks

[Operator:]

The next question is a follow up [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Hi, sorry I wanted to ask again maybe I just didn’t understand you said that on the cost side you see it will still be challenged, but I was asking about the rate of the decrease of COGS do we can them in the same rate as this quarter or maybe six months.

[Haim Romano:]

As we said in the past, we are not giving any guidance regarding the cost restructure and we are not committing that every quarter we will have saving compared to the previous quarter. It’s possible that some quarter will be higher than the previous quarter and some of them will be lower.

[Ziv Leitman:]

But anyway it’s a growing process.

[Haim Romano:]

Yes it’s an ongoing process, but it’s a long-term process so you cannot expect the third quarter OpEx will be lower by the second compared to the second one by the same number that was the second one compared to the first one.

[Unidentified Analyst:]

Okay. I get now. Thank you.

[Operator:]

There are no further questions at this time. Before I ask Mr. Romano to go – I’m sorry there is another question, would like to take it.

[Haim Romano:]

Yes. Please.

[Operator:]

One second sir and the questioner disconnect, okay. Before I ask Mr. Romano 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 1 888-295-2634. In Israel, please call [phone], and internationally, please call 972-3925-5930. The recording is also available on the Company’s website www. orange.co.il. Mr. Romano, would you like to make your concluding statement?

[Haim Romano:]

Just to say thank you very much. And have a good day.

[Operator:]

Thank you. This concludes the Partner Communications’ Second Quarter 2014 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.