Partner Communications Company Ltd.
Q3 2015 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications' Third Quarter 2015 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 to all our listeners for joining us on this conference call to discuss Partner Communications' third quarter results for 2015. With me on the call today is Issac Benbenisti, Partner's CEO, and Ziv Leitman, our CFO. Issac Benbenisti will first give a broad overview of the quarterly results and Partner's strategic direction. He will then hand over to Ziv Leitman, who will provide a more detailed overview of the financial and operational results for the quarter. Finally, we will move over 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 the Partner's press release dated November 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. Please note that the information in this conference call related to projections or other forward-looking statements is subject to 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 orange.co.il. If you have any further questions following the call, please feel free to contact our Head of Investor Relations, Liat Glazer Shaft on 972-54-781-5051. I will now turn the call over to Partner's CEO, Issac Benbenisti. Issac?
  • Issac Benbenisti:
    Good day, everyone, and welcome to our earnings conference call. The third quarter results reflect the Telco market environment in which competition in our cellular market remains intense and is characterized by continued price erosion. The reform of the fixed line wholesale market, which includes internet and fixed telephony services, has still not been implemented as anticipated, and we are experiencing many difficulties as well as prolonged and impossible regulatory processes, which limits the potential to succeed and create a competitive teleco market. We hope that the Ministry of Communications will remove the barriers as soon as possible in order to fully implement the reform and enable customers to experience a quality service at attractive prices in both internet and fixed telephony services. In the Cellular segment, we have seen growth in subscribers' consumption of cellular data in approximately 70% over the last four quarters, a trend we believe will continue in the future. The move to the 4G network is expected to support this trend. We also observe an increase in data speeds and an improved customer service experience since we shifted to the 20 megahertz frequency band. We have significantly scaled down our infrastructure investments which decreased by approximately 50% in the first nine months of 2015 compared with the first nine months of 2014. The erosion in operating profitability unfortunately does not allow us to make the same volume in investments as in the past. We recorded a net loss for the Company for the reported quarter. The losses reflect the intense competition in the cellular market over the last few years, which has led to significant erosion in revenues in a relatively short period of time. We are continuing to focus both on revenues as well as expenses to improve our results in order to provide comprehensive and quality service to our customers and to expand our value proposition and advantage in the Telco sector. Now, with your permission I would like to turn the call over to Ziv Leitman, for detailed review of our financial results. Ziv, please.
  • Ziv Leitman:
    Thank you, Issac. Before diving into the financial results for the third quarter, I would like to note that all comparisons I will make are to the second quarter of 2015 unless otherwise indicated. Financial results for the third quarter were affected by the number of items which negatively influenced EBITDA and both [ph] the Company to record a net loss of NIS 9 million for the quarter. The most significant factors are the continued competition in the Cellular segment, the one-time employee retirement planned expense, a decline in gross profit from equipment sales, and a reduction in the profitability of the fixed-line segment. These factors were partially offset by income resulting from the new framework agreement with Orange in an amount of approximately NIS 22 million, and the positive impact of the seasonal roaming revenues. Competition in the cellular market remains high. It can be seen from the churn rate in the third quarter of 10.8%, and the continued price erosion we are experiencing in our airtime and data packages. That said, in the past two quarters, we have seen a decline in the churn of post-paid subscribers. In the third quarter, we reported an increase of 24,000 post-paid subscribers versus a cumulative decline of 33,000 post-paid subs over the previous three quarters. Equipment gross profit in the third quarter of 2015 decreased by NIS 15 million. This was primarily due to significant handset sales to large corporate customers at prices generating lower than average profitability as well as change in the product mix. In the fixed-line segment, EBITDA was negatively affected by losses arising from the sale of internet services following difficulties of implementing the wholesale broadband market reforms. OpEx in the third quarter increased to NIS 650 million compared with NIS 601 million in the previous quarter. The increase mainly reflects the one-time NIS 35 million expenses from the retirement plan of approximately 350 employees. Our new framework agreement with Orange positively affected our third quarter results by contributing approximately NIS 22 million to the EBITDA and contributing approximately NIS 170 million to the free cash flow. Finally, net debt at the end of the third quarter totaled approximately NIS 2.4 billion, a declined of NIS 271 million in the quarter. I will now be happy to open the call for 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, everyone. My first question, in your statement you talked about your limited ability to cut costs further, and I wanted to understand that in the scenario where ARPU continues to decline year-on-year through this year until 2016 and perhaps beyond, does that mean you have no levels left to reduced costs further?
  • Issac Benbenisti:
    I will take this question. It is Issac, the CEO. We declared regarding the ability to cut losses because we came to the point that we are now after the decline in headcounts, especially in headcount, we are in the phase that -- we are in a position that risks our ability to serve the customers as we want to serve them in the Israeli market. Of course, we have room for more declines even in headcount, but it will put the Company in a position that we do not want the Company to be in that the service that we provide will not be as good as we want. If and I do not think it will come, but if we will be in a state that will understand that in the Israeli market in the coming years there is no place for services and evaluated service, so of course we can adjust more and decline our costs in terms of customer service and the support that we provide. We also would like to believe that in the coming future, the regulatory environment in Israel will enable us to provide significant value-added services and good service, which will differentiate ourselves from the competitors and we will be able to claim for premium prices due to our advantage in the market, technology-wise and service wise.
  • Michael Klahr:
    Okay. Thank you. In addition, also, again in your statement you talked about the implementation of the wholesale market having a further negative effect on your EBITDA. Is that to do with the implementation problems you have had until now that can be resolved soon or is that entering the broadband market, per se, is bad for profitability.
  • Issac Benbenisti:
    No. Entering the broad line is an opportunity, not a threat to the Company. It is a threat and it has a bad impact due to unfair regulatory processes, and the scheme does not support the ability to penetrate this market to gain market share and to gain some profit out of it. We are active very, very rapidly in the regulatory sector to change it, because otherwise there will be no competition in the internet and the telephony landline business in Israel, and basically we will remain practically a monopoly in the market. I believe that the regulatory offices understand it, and I believe, while I want to believe that in the coming future there will be change. We are still active in the market, we are still gaining market share in wholesale, but this is not how we want it to be in terms of being profitable out of this move.
  • Michael Klahr:
    Okay. Thank you.
  • Operator:
    [Operator Instructions] The next question is from Gilad Alper of Excellence. Please go ahead.
  • Gilad Alper:
    Hi. Thanks for taking my question. Just to get a clarification on the issue of the wholesale market, assuming the regulatory environment does not develop as well as you expect and possibly bad luck if they even allow to eliminate this structural separation et cetera. Would you consider simply exiting the fixed-line market and focus only on the satellite side of the business, do you think it is even possible for a company like Partner to be only focused on the satellite side? Thanks.
  • Issac Benbenisti:
    I do not believe that this situation is visible, because I do believe that the regulatory offices in Israel will understand eventually the situation. Nobody in Israel, and I believe that neither that the Minister of Communication or the Minister of Financ would like to preserve the situation of Bezeq dominating this market. If they will not change the situation, they will dominate the market for many, many more years from now. Nobody would like it to be, so I believe that now we compare the time we have to adapt and they have to understand the situation we are facing, the problem that we face, but I do not think that will come to the question as you phrase it that the question will be okay. We understand there is no visible profit or visible landscape in being able to play in the landline market and to gain profits out of it, so we will be only a cellular Company. This is not something I believe that we will have to face in the near-future.
  • Gilad Alper:
    Okay. Thanks.
  • Operator:
    The next question is from Michael Klahr of Citibank. Please go ahead.
  • Michael Klahr:
    Hi. Just a couple of follow-ups, firstly, the decline in fixed EBITDA, which I think is down 35% year-on-year. How much of that do you think is due to these issues that you talk about and how much is due to normal market ongoing trends?
  • Issac Benbenisti:
    Part of it comes from the long distance calls. This is a segment that declined year-over-year by 15%. This is something that we cannot fight. This is something that people move to data based calls like WhatsApp or others, Skype or others, so this is something that we face. The other part of it is due to the wholesale market or due to the difficulties that we face in the wholesale market currently.
  • Michael Klahr:
    If I look year-on-year, your fixed EBITDA number was down NIS 30 million roughly. Is that half because of long distance half, because - if you get what you want to Bezeq, does that mean I can expect maybe a NIS 15 million increase in profitability there or is that a fair way to think about that?
  • Issac Benbenisti:
    I can't really answer your question, because I do not know if I do really know how to divide it from wholesale and for long distance calls, but of course in the long distance calls, we have nothing to do. We have to improve ourselves, but it will still go down. We have in the landline segment or the internet and landline segment to improve in the business segment and we have some cloud computing solutions to improve our results there and mainly to deal with the wholesale market to improve our results.
  • Michael Klahr:
    Okay. Thank you.
  • Operator:
    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 03-925-5930. Internationally, please call 972-392-55930. The recording is also available on the Company's website at www.orange.co.il. Mr. Benbenisti, would you like to make your concluding statement.
  • Issac Benbenisti:
    Yes. I would like to thank you very much for the call and hope for brighter future.
  • Operator:
    Thank you. This concludes the Partner Communications' third quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.