Partner Communications Company Ltd.
Q4 2014 Earnings Call Transcript

Published: 11 Mar 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications' Fourth Quarter and Full Year 2014 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. And thank you to all our listeners for joining us again on this conference call to discuss Partner Communications' annual fourth 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 a summary of Partner’s operational and financial performance over 2014 and will also say a few words about the wholesale fixed line market. Ziv Leitman will then provide a more detailed overview of the financial and operational results focusing in on the fourth 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 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 March 11, 2015, 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. We would also like to point out that Partner filed its annual report for 2014 on Form 20F 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 over 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'll now turn the call over to Partner's CEO, Haim Romano. Haim?

[Haim Romano:]

Good day, everyone, and welcome to our earnings conference call. I am pleased to review 2014 with you. Financial highlights for this year includes service revenue of NIS 3.4 billion, down by 10% comparing last year. Equipments revenue of NIS 1 billion, up by 35%. Adjusted EBITDA of NIS 1.1 billion similar to 2013 and the net debt of NIS 2.6 -- net debt of NIS 2.6 billion, down approximately by NIS 400 million. As you know 2014 -- in 2014, the intense competition in the cellular market continued and even escalated. This caused another decline in service revenues, which I already mentioned. We addressed this market's reality by continuing our efforts and efficiency measures. In 2014 we cut operating expenses by approximately NIS 200 million and we cut our workforce by NIS 470 full time employees. We also worked to develop another growth engine to compensate for the decline in service revenue. We established at the end of 2013 our Retail division. This division proved itself. In 2014 equipment sales grew by 35% from NIS 735 million to NIS 1 billion, while gross profit from equipment sales grew from NIS 42 million, up to NIS 228 million, more than five times. This allowed us to record an EBITDA of NIS 1.1 million and to continue to pay down our debt as I already mentioned. We also stayed committed to our investment plan, especially in our 4G network. We were the first to launch the 4G network in Israel and we now have more than 1200 4G sites with coverage of 80% of the population in Israel. We offer the fastest network and the broadest 4G coverage in Israel. Once we receive the approval from the MoC, the Ministry of Communication, to share frequencies with HOT Mobile, our customers will be able to enjoy the full potential of their 4G network. Our investment in technology and customer service also continues to prove itself. Despite of the intense competition and despite of the fact that we're not the most aggressive player on price, our postpaid subscriber base in 2014 declined by only 1,000 subscribers. Most of the decline in our subscriber base came from prepaid customers and subscribers with no meaningful contribution to revenues. Now I would like to say a few words about the wholesale market. Finally, a few weeks ago the wholesale market regulation came into effect. We were the first one to offer Internet One - ISP and broadband infrastructure services through a single provider. We're seeing great interest from customers, but unfortunately, we're also experiencing significant resistance from Bezeq and HOT. We're working with the MoC to overcome those difficulties. I believe that an efficient and effective wholesale market together with the strategy we have in place, our commitment to technology and innovation and our customer-focused approach will enable us to realize our vision of becoming a complete telecom group and continue being a leading player in the Israeli market. And now I would like to turn over the call to Mr. Ziv Leitman for detailed review of our financial results. Ziv please.

[Ziv Leitman:]

Thank you, Haim. Before diving into the financial results of the fourth quarter, I would like to remind everyone the [total] [ph] comparison I discussed in my prepared comment are to the third quarter of 2014 unless otherwise indicated. The cellular market continues to be extremely competitive, characterized by a very high churn rate and continued price erosion of services. Total service revenues in the fourth quarter were NIS 808 million, compared to NIS 862 million in the third quarter. Lower service revenues resulted from the continued price erosion as well as a seasonal decrease in roaming revenues. Our cellular subscriber base decreased by a total of 57,000 subscribers in the fourth quarter of which 13,000 were postpaid subscribers and 44,000 were prepaid subscribers. Over the course of 2014, our postpaid subscriber base remained similar while the prepaid subscriber base declined by 118,000 subscribers. The prepaid market continued to contract mainly due to the prevalence of very competitive postpaid unlimited plans. As expected, cellular ARPU was down by NIS 5 to NIS 71 as a result of the continued price erosion as well as a seasonal decrease in roaming revenues as I just explained. Due to the continued price erosion we're seeing in the market in the past few weeks, a further decline in ARPU can be expected in the first quarter of 2015. Equipment revenues in the fourth quarter totaled NIS 300 million, an increase of NIS 60 million from the previous quarter. Gross profit from equipment sales totaled NIS 61 million compared to NIS 64 million in the third quarter. The decrease in profit margin was mainly a result of a change in product mix. On the expenses side, OpEx totaled NIS 630 million in the fourth quarter, down NIS 27 million compared to the third quarter. The decrease was largely the result of seasonal decrease in direct revenue related expenses, such as interconnect [time into] [ph] other operator in addition to lower selling and marketing expenses. The number of employees on FTE basis at the end of fourth quarter was 3,575. Since we started implementing efficiency measure in the fourth quarter of 2011, the number of employees on FTE basis has been reduced by 5,013 or 58%, mainly by lowering the level of new recruits. EBITDA decreased by 12% or NIS 33 million compared to the previous quarter, largely a result of the lower service revenue, which was partially offset by lower OpEx. Finance cost in the fourth quarter of 2014 totaled NIS 36 million down NIS 14 million from the third quarter, mainly due to lower linkage expenses and lower losses from foreign exchange movement. Profit for the quarter totaled NIS 24 million down NIS 16 million compared to the third quarter, mainly due to the decline in EBITDA, partially offset by the lower finance cost and lower tax expenses. Free cash flow after interest payment was NIS 21 million in the reported quarter, compared to NIS 106 million in the third quarter. Free cash flow was adversely impacted by the semi-annual interest payment as well as an increase in trade receivables due to higher equipment sales with long-term customer financing plan. As we've previously discussed, should the level of equipment revenue with long financing continue, this would likely lead to a further increase in working capital, which will have a negative impact on the cash flow. Net debt at the end of 2014 amounted to approximately NIS 2.6 billion. Before opening the call for your questions, I think it will be helpful if I summarize the steps we've taken over the past few months in connection with our debt. Firstly in November 2014, we entered into four loan agreements, two agreements with immediate loans for eight years, totaling NIS 200 million. The other two were deferred loans for December 2017 totaling NIS 200 million. These two deferred agreements followed the December 2016 deferred loan agreement we executed in May 2014 totaling NIS 250 million. Secondly, in January 2015, we entered into two loan agreements for six years totaling NIS 200 million. Lastly, in January 2015, we made an early repayment of principal of $177 million on a loan with an original maturity date of December 2016. I’ll now be happy to open the call to questions. Moderator, please begin the Q&A.

[Operator:]

Thank you, ladies and gentlemen at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Michael Klahr of Citibank. Please go ahead.

[Michael Klahr:]

Hi. Good afternoon. A few questions from me. Firstly, I see that the fixed line service revenues are falling; you no longer break out the fixed and ISD customers. Firstly what's going on there? And then my second question is about the wholesale launch, at the moment it looks like it's through 012 rather than Partner. Should we expect to see the Partner brand in fixed in 2015 or 2016? And then also on wholesale, you said in your statement on the call that there has been resistance from the infrastructure owners, can you elaborate on what that means? Thank you.

[Ziv Leitman:]

Regarding your first question, regarding the fixed line segment revenues, this quarter the service revenue were NIS 250 million compared to NIS 259 million in the previous quarter. The reduction was due to one-time seasonal revenues in the third quarter, but when you compare the fourth quarter revenue of the NIS 250 million to the second quarter, you see slight increase, since in the second quarter of 2014 it was NIS 248 million, in the first quarter it was NIS 247 million so you don’t see a decline in the revenues of the fixed market.

[Haim Romano:]

Okay, in respect to your second question, we see that the market is expecting and reacting to the wholesale proposal. The difficulties from especially from the side of Bezeq are technical ones and we hope that the Ministry of Communication will help and together we'll overcome those difficulties and then port out from Bezeq will be smooth and easy as it’s in the cellular market. And we know that in the cellular market until they overcome those issues of the portability and moving between companies, you saw that it was the main barrier and we hope that the Ministry of Communication will solve it at the end of the 17 of May. The other issue is HOT, because HOT is around 40% of our customer base infrastructure supplier and we expect the Ministry of Communications to be decisive in respect to HOT as well.

[Operator:]

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

[Nicole Gilliat:]

Hi, Haim, hi Ziv. I have two questions today. First one about CapEx, is it fair to assume that fourth quarter CapEx will be the run rate for 2015? And my second question is about headcount, what figure do you expect for yearend 2015 headcount and what cost do you think will be associated with eliminating those employees? Thank you.

[Haim Romano:]

The CapEx will be less than last year because we managed to restore most of our 4G sites on place. The rollout of the 4G now as I mentioned before, includes more than 1,200 sites and we can slow down a little bit investment for next year. We don’t need those amounts of investments of CapEx in the year to come. And for the second issue is a very sensitive one. I wish I don't have to lay out even one person. We will adjust the cost structure of the company due to situation and the competition and that's why that we won't be needed to do some dramatic action, but we will do everything we have to do to sustain the company and profitability.

[Operator:]

The next question is from Bruce Schoenfeld of BlueStar Global. Please go ahead.

[Bruce Schoenfeld:]

Yes, hi, my question was mostly answered in your response to Michael’s question about resistance from Bezeq to the wholesale market, but I wonder if you could just elaborate on your answer. You said that the issues are mostly coming from the Ministry of Communications, but your original comments implied that Bezeq and maybe HOT are actively kind of pushing back and trying to delay the opening of the wholesale market? So I just want to get your comments on that?

[Haim Romano:]

The recent debate between Bezeq and the Ministry of Communications about certain issues and this debate, part of it now is in the Supreme Court. So I believe that Bezeq is [not that in 2002] [ph] comply with the Ministry of Communications orders. We see that there are technical issues from our perspective that could be solved with the goodwill of Bezeq before, but I don’t want to elaborate on this. I hope that Bezeq will do the necessary steps and we will find a way to cooperate and implement the wholesale market in a very efficient way. The procedure today is a barrier for the customer. It’s not seamless and it should be seamless. Unless it will be seamless, I don’t think that their project will succeed from the side of them [indiscernible] and MoC is doing everything he can under the circumstances to move forward. I hope that they will still stay decisive in this issue.

[Bruce Schoenfeld:]

Okay. Thank you.

[Operator:]

[Operator Instructions] Next is a follow-up question from Michael Klahr of Citibank. Please go ahead.

[Michael Klahr:]

Hi thanks. Ziv, I just wanted to come back for the fixed service revenues question, if I look year-on-year, I see it down 1 billion or down 7% fixed service revenues over last year? What would that change be?

[Ziv Leitman:]

There was -- year-over-year, there was some price erosion in the ISP…

[Haim Romano:]

Mainly on the ILD. The main issue is ILD. The price of the ILD is consistently going down. The ISD is more stable. We manage to stabilize the ISP mainly by increasing the speed offering. The ILD these days is under big pressure.

[Michael Klahr:]

Okay. Thanks and my other question was about the Partner brand, should we expect to see Partner brand in wholesale if the other issues resolve?

[Haim Romano:]

No we work with the two brands. We have 012 brand and we have Orange brand and we intend to work with those two brands.

[Michael Klahr:]

Sorry, I mentioned, we see the Orange, or should we expect to see Orange brand in fixed?

[Haim Romano:]

You will see the Orange brand fixed, we have fixed customers in -- ISP customers in Orange, but we start with the 012 and we will move to Orange brand in the near future.

[Michael Klahr:]

Thank you.

[Operator:]

There are no further questions at this time. 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 two hours. In the U.S. please call 1-888-782-4291. In Israel, please call 03-925-5921 and internationally, please call 972-392-55921. 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 to everyone and have a good day. Thank you.

[Operator:]

Thank you. This concludes the Partner Communications fourth quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.