Partner Communications Company Ltd (PTNR) 2002 Q4 法說會逐字稿

Ladies and gentlemen, good day and thank you very much for standing by. Welcome to the fourth quarter and annual results 2002 conference call. At this time, all participants are in a listen-only mode. Later there will be a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press zero and then star, an operator will assist you. As a reminder, today's conference call is being recorded. I will now turn the conference call over to your host, Dr. Dan Eldar. Please go ahead, sir.

Thank you very much, operator. Good morning or good afternoon. Thank you for joining us for this conference call to discuss Partner Communications' fourth quarter 2002 results, and year 2002 results. With me on the call today are Amikam Cohen, CEO of Partner, and Alan Gelman, our CFO.

At this time, if you do not have a copy of this morning's release, please contact me [indiscernible] at 972 54 814 159, here in Israel, or Mr. Kevin Manix (ph) in New York at 1-212-807-5063, and a copy of the release will be either emailed or faxed to you immediately.

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 the US Private Securities Litigation Reform Act of 1995. In connection with such forward-looking statements, you should be aware that Partner's actual results might vary materially from those projected in the forward-looking statements. In addition, additional information concerning factors that could cause actual results to continue to differ from those in the forward-looking statements, are contained in Partner's press release dated January 29, 2003, as well as Partner's prior filings with the US Securities and Exchange Commission on forms 20-X, 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 may be relied upon subject to the previous Safe Harbor statement, as of the date of this call.

For your information, this call is being simultaneously broadcasted over the internet, and can be accessed through our web site at www.investor.partners.co.il.

At this time I would like to turn the call over to Amikam.

Thank you, Dan. I would like to review the year 2002, and highlight some of the Partner achievements last year. 2002 was another very good year for Partner.

We continued to add subscribers, significantly growing our subscriber number by 379,000 subs, or 26% in 2002. Our revenue continues to grow to a total of 4,055m shekels, a 25% growth compared to previous year. Thanks to focused strategy and tight control over costs, we managed to translate revenue growth into profit. Approximately 50% of revenue went to EBITDA.

Our fourth year of operations has been the first in which we posted net profit of approximately 84m shekels, compared to a net loss of 303m shekels for the year of 2001. We generated free cash flow for the last three consecutive quarters of approximately 129m shekels.

In total funding, we now have a fully-funded business plan, including our investments needs for the Third Generation. Our funding is also aided by amendments to our bank facility made in late December, making our facility more compatible with our business strategy, and providing more flexibility and availability.

I believe Partner manifested an outstanding performance in 2002, by simultaneously growing its subscribers, its revenues and its market share. And additional ability to maintain low subscriber acquisitions costs, and tight budgetary restraints,all adds to our ability to continue to be profitable. Throughout 2002, we have been preparing ourselves for a tough economic environment in Israel.

Israel is in the midst of economic slowdown, which is affecting the general business community, and the spending power of the consumer segment. The competitive environment in our market continues to be challenging. However, we estimate that in the last quarter we took the largest share of the net sales in the market.

At the end of 2002, we reached 1,837m subscribers, growing our subscriber base by 26% in 2002. We estimate that we now have captured approximately 29% of the cellular market in Israel, up from 27% at the end of the previous year. Competition in Israel is increasing.

In mid-2002 Cellcom began offering services on its newly rolled out GSM/GPRS 1800 network. Meanwhile, Pelephone announced that it had covered some parts of Israel with its [1X] technology, and is continuing to rollout a network in our part of the country as well.

In addition, they have recently announced a new brand deal to the younger segments of the population. Nevertheless, we don't see sign of aggressive type competition, as all three operators in Israel, including Partner, have raised their airtime rates. And in January, Pelephone and Cellcom announced additional price increases.

We believe our assets, including our brand, network quality and customer service, just voted number one in cellular business by Israel's most prestigious [management] center, will also continue to serve us in this competitive market. Looking ahead, we believe that Partner is well positioned for continued success. Our company remains committed to achieving its stated goals through careful planning and execution, while maintaining a firm [fiscal] policy.

With that said, I would like to turn the call over to Alan Gelman for remarks on financial and operations results for the fourth quarter. Alan?

Thank you, Amikam. Good afternoon and good morning, everyone. I'm assuming that you all have our press release, and therefore I will focus the discussion on the fourth quarter, and guidance for 2003, rather than review the comparative information included in our press release.

We posted another solid performance in the fourth quarter. Our financial and operational performance was in line with the guidance we previously provided. Despite seasonal conditions which affected usage, our revenues decreased only slightly from the third quarter, while our subscriber growth remained strong.

Our expenses were affected in the fourth quarter by the expected increase in marketing and selling expenses, responding to the increased competition. And by accelerated amortization of leasehold improvements caused by the consolidation of our customer service facilities into our Rosh Ha'ayin headquarters, which are expected to be completed in the first quarter of 2003.

The additional amortization in the fourth quarter was approximately 7m shekels. An additional 7m shekels will be recorded in the first quarter of 2003.

While we expect to grow our revenues and post improved profitability in 2003, we do expect 2003 to be a challenging year for the industry. We project top line revenues to grow by approximately 7% to 8%, versus approximately 25% in 2002, driven by lower subscriber growth due to a highly penetrated market, reduced interconnect tariffs mandated by the regulator, increased competition and the continuing tough economic environment.

We expect margins to contract at the outset of 2003, predominantly due to the immediate effect of the reduction in the interconnect tariffs. We do, however, expect margins to recover in the course of 2003, as revenues climb, driven first and foremost by subscriber growth, and also by additional data and content revenues for more advanced handsets supporting GPRS, and from the introduction of advanced data applications such as our [indiscernible] applications and MMS.

We expect quarterly EBITDA margins and operating margins to improve to approximately 29% to 30% and approximately 16% respectively during the course of 2003.

We expect to maintain stability in MOU and ARPU, and expect them to decline only slightly year-on-year. We expect 2003 MOU and ARPU to be in the range of approximately 255 to 260 minutes, and approximately 165 to 170 shekels per month. We expect average SAC per subscriber to be stable in 2003.

With regard to our subscriber base, we expect to continue to grow our subscriber base, but at a rate slower than 2002, due to increased penetration and a projected increase in churn. We project that our average subscriber base for 2003 should grow in correlation with our top line revenue growth. We project an increase in our churn rate for 2003, predominantly due to increased levels of churn from the prepaid sector, driven by turnover in the base of foreign workers in Israel. Our quarterly churn rate should increase to 3.5% to 4% in the course of 2003.

As Amikam stated, we made the transition in 2002 into a cash flow generating operation. We believe that this trend is sustainable in 2003, even though there will continue to be quarterly fluctuations.

In summation, in spite of challenging conditions ahead, we expect to build on our outstanding financial and operating results achieved in 2002.

Thank you Alan. You are now invited to ask your questions. Operator, please.

Very good. Ladies and gentlemen, [indiscernible] please depress the one on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are on a speakerphone, please pick up the handset before pressing the numbers. If you pressed one prior to this announcement, we ask you please press the one again.

One moment please for the first question. A question from Jonas White from Lehman Brothers, please go ahead.

Hello, gentlemen. Good afternoon. Do you have some information on the threat that is posed by Cellcom and migration to the GSM? How is the competitive interplay between you two going? And what steps, if any, are you taking to stop them from entering into the exclusive GSM territory that you still hold?

Thank you Jonas. Let me say a word about the competitive environment here in Israel. Cellcom, as you rightly point out has started its GSM operation several months ago.

Cellcom is continuing to migrate customers from its [DDMA] network to its GSM network. Still most of Cellcom's customers, including some of its new customers are DDMA subscribers. Cellcom does not position GSM as a network which is superior to DDMA, but only as an additional service, which is more suitable for those customers who are traveling the globe, or those customers who use more frequently the data and content services provided by Cellcom.

Cellcom is going now through management change, which is assumed to be very material for Cellcom. It has recently appointed a new CEO, a pediatrician formerly headed Israel's largestHMO. Its customer division director, in charge of selling and marketing, has just announced this week its departure from Cellcom, and it is assumed that some additional personnel changes will occur at management level at Cellcom.

Cellcom has also announced recently some lay-offs, several hundred employees, and apparently is looking into its strategic planning, with an attempt to make some changes. With respect to Pelephone, Pelephone continues to rollout it's [1X], as Amikam pointed out.

About two weeks ago it launched a campaign for a new brand, targeting the younger generation. The name of the brand is Escape. It is really too early to judge its success so far. We do not feel it in the market, but it has only been in the market for a very short time.

Both Pelephone and Cellcom have increased their airtime rates, so we do not see market that ends in a price war in the private sector. In the business sector, the business sector continuers to be very competitive, but Partner is doing well in this sector, with some significant new subscribers coming to us in the fourth quarter.

Two other questions. Could you explain or give details to the drop in EBITDA for the fourth quarter?

That's one question, you said two additional things. Is there another thing?

Yes, overall, do you have any sense that any pending war in Iraq would benefit or be detrimental to Partner, both as an individual company and in the context of the general Israel economy?

Alan Gelman Well let's take the second one, which is easier. I don't know how the war in Iraq will affect the company.

I'm sure it will affect the economy here. But I think that's something that is unknown how it will affect us. I prefer to leave that question on the side.

It's our opinion that there are two sides to every equation. In one respect, people will probably use the cellular telephone more, but there's no question about it, that we would rather there not be a war with Iraq. Or, if the war with Iraq affects us, I would assume that it would have an overall effect on the economy, at least in the short term.

It might have a long-term effect on the economy, which is better. But at least in the short term I would assume that there would be some kind of an effect on the economy.

As far as EBITDA is concerned. In the fourth quarter, EBITDA was affected by two things. First of all the seasonality, reduction in revenue fourth quarter versus third quarter, based on seasonality in line with the guidance we have given. Also the additional selling and marketing expenses.

We talked about that on the last conference call, that we will probably go back to at least the levels of sales and marketing expenses which we exhibited in the first and second quarter. Maybe even a little bit more because of the entry of Cellcom into the GSM space. And we did spend about 17m shekels more on total sales and marketing in the fourth quarter than we did in the third quarter. If you take those two items together, that's basically the difference in EBITDA.

Going forward, do you see that as a trend for 2003, or do you believe that this is something which nipped in the bud?

No in 2003, from the point of view of the quarterly expenses on SMM, I think you're going to see them going to where they were before and being pretty consistent.

As far as EBITDA percentages are concerned, we will probably see some contraction in the first quarter, because of the reduction in the interconnect rate. But we should see EBITDA percentages recover, and even be higher than they were in 2002, towards the third quarter of 2003. We should see EBITDA percentages in 2003, on a quarterly basis, getting to the area of 29% to 30%, probably in the third quarter.

Thank you very much.

You're welcome.

The next question is from Neil Wedlake from Morgan Stanley. Please go ahead.

Hello, and good afternoon. I wondered if first of all you might be able to just expand a little bit on that final point, in terms of the EBITDA expansion? Because a couple of points you make in the press release, one is that you really see most of your growth coming from Voice Services rather than from Data, and you see growth slowing down there. I seem to remember the conversation, or the point you made in the conference call for the third quarter numbers, where you saw obviously a challenging outlook for EBITDA margin, and stated then that really it would have to be Data growth for drive of expansion.

Now I'm just really -- since you said that we're going to see a dip in the first quarter anyway, so below the 25% level, I just wonder if you could just expand a little bit on how we get to a 29%, 30% level. Which is [indiscernible] points higher than the peaks that we've seen during the seasonally strong period of 2002, when Data will be taking a smaller part of that overall revenue picture. As you said, we're going to have lower Voice margins due to the lower interconnect rate?

We will do that one by one. First of all, how will EBITDA expansion occur. First of all subscriber growth. Subscriber growth has always been the major driver of our revenue growth. Over the last year we grew out subscriber base by 26%, and our revenues grew by 25%. We believe that there's still room for subscriber growth. We've been taking the lion's share of the market over the past couple of years, and we believe that we will do the same in 2003.

If it was understood by what was said, that we expect Data growth to be slow. We don't expect Data growth to be slow, we expect Data to grow at slower rates than they grew from 2001 to 2002.

I understand that, but you did say the bulk of revenue growth would come from Voice Services rather than from- Alan Gelman: The bulk of our absolute revenue growth will come from Voice Services, but as a percentage of growth, Data revenues will grow faster than Voice Services. So we do see data growth growing substantially in 2003. We do not see Data getting to 2003 to the 10% level we would like to see it get to. But we do see Data becoming a larger percentage of our total revenue stream than it was in 2002.

In addition, cost control. We're very, very diligent on cost control; we think we can become more efficient, even though we've been very efficient over the past couple of years. Since year 2000 we grew our revenues by 93%, and we actually went down in our SG&A by 6%.

During that same period of time we grew our subscriber [gains] by 120%. So we're very diligent in that particular area. We think if you put the three things together, we should be able to drive margins higher, because our costs will be definitely dealt with.

Just to put a number on the Data share of revenues, were at 6% in 2002, what do you see the numbers being -- what's your target number for 2003?

I'm sorry, can you repeat that, Neil?

Data revenues as a share of overall revenues, 6% in 2002, what would be your target for 2003?

I don't think it's going to go much higher than that. It might go to 7.5%, in that range. Data is still going to take a while to develop.

I'm going to be consistent with what we said in the third quarter, we're going to grow our Data revenue substantially, and that's going to be a good area of absolute growth. On the other hand, until we really have the ability to increase handsets and have low-priced handsets that support all these application, the amount of handsets as a percentage of our subscribe base will still be low.

That will take time. So you're not going to see the big push forward probably until 2004, unless we see a tremendous decline in the price of handsets that will make it more affordable for most of our customers to have those handset which support the advanced Data applications. Which will in turn drive revenue growth. So we do see growth there, but in percentage terms we see a little bit of growth, but it's still substantial in terms of absolute shekels.

I really don't want to labor the point, but I still trouble to see how the math stacks up where your blended margin is not going to be aided by Data, because its staying pretty much the same share of overall revenues, 6%, 7% - it makes very little difference.

So on 7%, 8% revenue growth, obviously being at lower margin because of the interconnect issues; I'm still struggling to see how we get to an EBITDA margin above the peak of last year?

Well we talked about 7% to 8% revenue growth, we're talking about after the interconnect issue, Neil.

Okay, right.

So that's after the interconnect issue.

Fair enough. I'm sorry, I know I've probably labored that question, but if I could just perhaps have a quick update on 2003, maybe 2004 projected CAPEX?

Well a lot depends on where we are with 3G. We've given guidance in the past that projected CAPEX, including 3G for 2003 will be in the area of 700m shekels. That's 50/50 3G/2G. Depending on when and if we launch 3G in 2003, we could have CAPEX to revenue ratios of below 10% for 2003. We don't expect to spend more than 350m shekels on our Second Generation operation.

And the latest thinking in terms of timing for 3G?

Well, a lot depends on what we see happening in the world, I think. We want to see that 3G is successful in some other areas.

We're looking towards our sister companies in England and Italy, to learn from their experience, which hopefully they will launch Third Generation in the near future.

We will make that decision, not only based on that, but based on the fact that there are handsets that are reasonably priced, applications that we feel we could market. If everything goes well, we have always said we will be the first ones into 3G here in Israel. The actual timing of that, it could come as early as the end of 2003, it could come into 2004. A lot depends on what we see going on in the world.

Right, thank you very much.

You're welcome.

The next question is from Steven Franck from Morgan Stanley. Please go ahead.

Hi, Steve from Morgan Stanley Credit Research. Could you go through what the covenants are to maintain access to your bank debt? Then I just want to [indiscernible] on the 3G number. Would you say 700m shekels in 2003, is that correct? Thank you.

Okay, the second question was easy. Yes, it is correct, 700m shekels in 2003 will be the CAPEX expenditure.

And just to follow up on that, and Neil's question. 2004, do you have a number there?

No, we're not giving any guidance on 2004. I think again it depends on where we are with Third Generation. Of course if we start launching Third Generation in 2003, and Third Generation is successful, 2004 will be a major build-out year for Third Generation. If the rollout is delayed somewhat, the initial rollout will happen in 2004, and then CAPEX will be less. So I think we should wait on that particular question.

The convents now, thank you?

Steve, with respect to the covenants, you asked another question, do you want that?

No, my second question was; what are the covenants for access to your bank debt? Thanks.

Okay, first of all the covenants -- well I'm not going to go into the actual calculation of the covenants, I'll go more into what the covenants themselves are; if that's okay with you?

Yes, that's good.

Okay, one second. Okay the covenants are, EBITDA to bank debt, EBITDA to total debt, fixed charge coverage ratio, and debtserviceratio.

And are you going to tell us what the numbers are, or are you just going to leave it there?

I think we're just going to leave it there. That's the disclosure we've given in the past. What I can say is that we feel confident that these covenants are doable as far as our business side is concerned.

Part of the reason we amended the bank facility was to make the bank facility more flexible and more appropriate to our Third Generation operation. And we feel confident that we won't have any problems meeting these covenants.

Okay, but the actual numbers of requirements are not disclosed, though. You're telling us what they are in general, but you won't tell us what the numbers are, is that right?

We haven't disclosed those numbers, that's correct?

Okay, but in your view there's no problem in skating close to these numbers if you've got to ramp up CAPEX pretty substantially in 2004, is that right?

No, of course not, and the reason -- again, the reason we went through this whole process with the bank was to make our Third Generations plan doable within the bank facility. So we've pretty much build in a good amount of headroom there, so we won't have problems with our Third Generation build up.

Okay. And then one last thing on this war issue. The insurance -- do you guys self-insure, or do you get insurance from other third parties?

We have insurance from third parties.

Okay, thanks very much.

You're welcome.

The next question is from Pila Bertusi from Salomon Smith Barney, please go ahead.

Yes, good afternoon. Two questions if I may. The first one, the increases in tariffs, could you confirm that these were active as of September? And whether the bulk of these tariffs were felt by the private subscribers?

The second question, could you confirm by how much termination times have come down in January? Could you maybe quantify what you expect the effect of this will be on the first quarter of 2003, please?

Okay, with regard to the first question, everything is confirmed. In other words, the tariffs were increased in September, most of the tariffs increased in the private sector.

With respect to the reduction in the interconnect tariffs. The interconnect tariffs went down by 10% as of January 1st. We have not given guidance as far what the -- that's quantifying that effect on our financials in the first quarter.

The effect will be substantial. It will probably cause our first quarter results to be a little lower as far as revenues are concerned, and as far as margins are concerned in the fourth quarter. But we are not giving specific guidance on the actual reduction in the results because of the reduction in the interconnect tariffs. The reason for that is basically we view as proprietary information, the breakdown between incoming and outgoing minutes, and we don't want to disclose that information.

That's great. Thank you very much.

The next question is from the line of Stephen Pettyfer from Merrill Lynch. Please go ahead.

Thanks, and good afternoon. Three questions if I may? Just to revert to an earlier question, could you give us a little bit more detail on the cost control side, where specifically on the costs you're looking to cut further? Second question, looking at your breakdown between post-paid, prepaid, and the like, it looks like you've had a pretty consistent split there in terms of net adds? I just wanted, given that you're now taking what looks to be more gains from your competitors, do you expect that sort of split to remain going forward? Thirdly, could you give us a split of your subscriber acquisition costs, please? Thanks.

On the third question the answer is, no. We don't give a split on subscriber acquisition costs. But I will answer the first two.

I can always try.

First of all, as cost control goes. We've done a really good job over the -- I think I said at the very beginning, we've done a good job over the past couple of years of maintaining our costs and growing our revenues. I'll repeat it, we went up 93% in revenues over the last two years, and our costs went down 6%. What we typically do is, we look to allocate the resources in our SG&A, and in our costs in various projects which have the highest ROI.

I don't necessarily think you're going to see cost cutting, per se, or you're going to see costs coming down from the levels they were in 2002. but you're going to see maintaining levels of costs that were in 2002, to 2003. Therefore you're going to see more total revenue on the top being driven down into EBITDA percentage and net income.

An effort we are making in 2003, which we started to do towards the end of 2002, which is related to your next question, is substantially trying to reduce the subscriber acquisition costs, because it's a major cost center in the company. What we are trying to do is drive subscriber acquisition costs on prepaid customers down to practically nothing. And on post-paid customers in the private sector, to minimize subscriber acquisition costs.

Where we will probably continue to invest in subscriber acquisition costs, is in the business sector. Although even in that sector we're looking to materially reduce our subscriber acquisition costs. And I think if you're going to focus on one particular area where we're going to try to improve a great deal in 2003, that's the area.

Will the average SAC per customer come down in 2003, materially, the answer is, no. For the simple reason that expect in 2003 to enlist more business customers rather than prepaid customers, and private customers. Typically on the business customer, there's a very, very high SAC in return for a three-year commitment, and in return for ARPU, which is substantially higher than a post-paid in a private customer.

So you will see SACs coming down, average SACs remaining pretty much stable. But as far as the mix of customers are concerned, you're going to see a larger percentage of business customers being added to our roster than post-paid customers and prepaid customers. You could see that already in 2002.

For instance at the end of 2001 we had 16% of our customer base was business customers. At the end of 2002, also 16% of our customer base was business customers, even though we added a lot more prepaid customers than any other customer. So from that point of view, the percentage as far as the weighted average of the business customers that were added in 2002, was higher than the weighted average of the business customers which were added in 2001. We expect that trend to continue even stronger in 2003, because that's an area of focus for the company.

Alan, can I just follow up on that. Am I right in remembering that some of your competitors had long-term contracts specifically at the business customer level, which are still coming off?

Well I think that's a natural evolution. Almost all business customers are on a contract type of basis, because all our competitors also invest in SAC. Basically what we do is we try to tie up the customer for a certain period of time to make sure you have a good return on your SAC.

Wasn't that a three-year contract? Am I right?

Some of them are three-year contracts, some of them are two-year contracts. A lot of the contracts are specifically negotiated with specific customers. Most of the contracts are three-year contracts.

And they're ending now are they, still?

Some of them are ending now, some of them will end next year. Some of them ended last year. Yes. As far as our customers are concerned, the ones with three-year contracts, because we just started in 1999, the first ones were up in 2001. 2002 actually, sorry.

Okay, thanks.

You're welcome.

The next question is from Peter Delinar from Salomon Smith Barney. Please go ahead.

Hi there. Just two quick questions. The first is on any rating agency meetings planned in the near term? And the other is sort of just if you could remind us what are the UMTS build out requirements?

Okay, the first question first. As far as rate increases are concerned, two of our competitors have already raised their rates early in January, and that was in response to the response to the reduction of the interconnect rate.

We are considering increasing our rates.

There has not been any decision taken as of yet, so there's nothing really to report there. What was the second question again - I'm sorry?

UMTS build out requirements?

There are UMTS build out requirements in the license. Basically once we start commercial service with UMTS, we have a requirement to build that network within a period of two years.

I think you misunderstood my first question. I was asking about the rating agencies? Are they going to be doing -- are there any meetings planned?

Oh, hopefully. Let's hope. Moony's have already raised their ratings. Standard and Poors at that point did not raise the ratings, and they're still reviewing our situation. Hopefully we'll get a positive answer from them.

Thanks.

Once again, any additional questions or comments, please press one at this time. We have a question from the line of Haim Israelfrom Zannex,please go ahead.

Hi. First of all I want to apologize I entered the conference call late. Can you please provide us, if you haven't already, provide us with a breakdown of the ARPU between business product and prepaid?

It's in our press release. Do you have your press release in front of you?

Yes. I only just entered the office, I'm really sorry.

It's not a problem. The average ARPU is 178 -- Average business is 343, prepaid is 120, and private is 161.

Okay, thanks.

You're welcome.

the next question is from the line of Istvan Matetoth from CSFB. Please go ahead.

Good afternoon. I have two questions, Alan. One of them is that, if I understand you correctly on data growth this year, it is unlikely that GPRS for Partner one-access telephone will be key differentiating competitive tools. Is this roughly correct, that 2003 is unlikely to be a GPRS versus [1X Beta] in Israel? Secondly, on your outlook, to be honest I have the opposite problem to one of my colleagues previously.

It seems me that you are presenting a very cautious outlook for '03. I do accept that the market is likely to be tough, and the economy is not doing well. But it seems to me that are you are not really looking for any growth, and seeing margin pressure. I mean is this a bad case scenario what you are presenting? Can there be some upside if competition is more favorable, or churn is [indiscernible]? Or is this kind of your base-case scenario?

Well I think there's always upside available here, but I don't really think that our scenario is a very, very conservative scenario. Most analysts looking at these revenue markets have been looking in the cellular space, 0% to 3% total revenue growth for the total market. We're looking at revenue growth that's higher than that.

I think we're aggressive in our assumptions. Yes, we are being careful, but I think it's a very challenging type of forecast for 2003.If we do better than that, I think we will be very, very, very satisfied. If you work through the numbers in models with that type of revenue growth, you'll see 2003 with better results than 2002, and better margins than 2002 on an annual basis.

Therefore I don't really think we are being very conservative there, I think we're trying to be realistic.

With respect to the GPRS, 1X, I think your assessment is correct. I don't think there's going to be any real market differentiation between -- That it's going to be marketing tool for either of the companies. What we do feel is that even though there is GPRS and Pelephone 1X, we don't believe that it will have a major impact on the revenue streams in 2003.

This is very helpful. Thank you Alan. Just one quick follow up.

In today's papers in Israel, there are stories that you are preparing for a major cost-cutting exercise. Is there something new, or are they talking about what you have been talking about in the case of conference call before?

I haven't seen the papers today in Israel, but we're not talking about any cost-cutting exercise. What we typically are doing and looking at are our resources, our expenses, and we're allocating our resources to the project, which has the largest ROI. We typically do this on a regular basis. If there are costs that are cut in the process, the costs are cut in the process, but there's no wholesale cost-cutting exercise that we're going through right now.

Thank you very much.

You're welcome.

Your next question is from Ahmed Gee (ph) from Foresight (ph). Please go ahead.

Hi guys. Can you explain why gross profit margins went down in Q3?

In Q3 or Q4?

Q4?

Okay, gross profit margins went down in Q4 for only one reason. First of all -- well for more than one reason.

First of all, seasonality, we had less revenues, and when you have less revenues and some of your cost of sales are fixed costs of sales, quite naturally your gross margin percentage goes down. In addition, I think I explained that in the press conference and also in the press release, we had a sort of a one-time expense which went into the gross margins.

That was basically the increased amortization of the Customer Service premises, which we moved to our headquarters in Rosh Ha'ayin. Therefore we had an amortization expense in the fourth quarter of approximately 7m shekels, where we have another 7m shekels, which we will be writing off in the first quarter.

Okay, thank you.

You're welcome.

We have a follow-up question from Jonas White from Lehman Brothers. Please go ahead.

Just one follow-up question. Have you being seeing any fruits or any type of cooperation with other companies, your sister companies as you referred to them, in Italy and the UK, in their initial rollout of Third Generation?

Absolutely. We are part of a group that's called The H3G, which is Hutchinson Third Generation. We're active participants in that Group. That Group typically cooperates on applications, network suppliers, handset suppliers. It's a major advantage for us over our competitors. It's also a major advantage for us as far as actual costs in building the network and getting handsets. Because we have the buying power and the knowledge of the whole Hutchinson Group. But I think being part of that Group and building on their experiences - especially since there are going to be a couple of companies that are actually launching 3G in the near future - a tremendous, tremendous differentiating factor between us an our competitors.

Yes, but are you already on topic, on 3G? Meaning, has that subject already been broached in your communications or interactions with these other bodies?

Well that's the purpose of the interaction. This Group is a Group that only deals with Third Generation.

Okay. Thank you.

You're welcome.

I have a follow-up question from Pila Bertusi from Salomon Smith Barney. Please go ahead.

One more question if I may. Could you please remind me, for 2002, what percentage of your total revenues came from interconnect, please?

Well we don't give that information, sorry.

Thanks.

You're welcome.

A follow-up question from Stephen Pettyfer from Merrill Lynch.Please go ahead.

Thanks. Two more quick questions please. Roaming, do you give that number out as a percentage of revenues?

We do. Do you want it?

Yes please.

Okay. In the fourth quarter In-Roaming revenue was about 3% of our ARPU.

Usually anywhere from 2% to 3% of our ARPU, that's the range. And Out-Roaming revenues have been approximately 6% to 7% of our ARPU. I give you a caveat there on both there items. First of all, in 2002 on the In-Roaming revenue side, we at one point had a monopoly on In-Roaming revenue.

Now we don't have a monopoly on In-Roaming revenue. On the other hand, there were very little tourists that came to the country in 2002. On the Out-Roaming side, it's an economic issue also, the more Israelis travel abroad, the more the Roaming would be. But as you look at both sides of the Roaming, approximately 10% of our total ARPU comes from Roaming.

Thanks. The second question was, what were your FX losses in the fourth quarter, please?

Well we'll go back and we'll answer that question with an explanation, if you don't mind.

We hedged a lot of our foreign currency risk. Pretty consistently for the fourth quarter we had hedges in place for about $150m, which was more than our actual current expenditures.

What we've started doing is hedging future capital expenditures in our budget, especially considering the fact that we might go out in Third Generation and have some substantial CAPEX. So, from the point of view of foreign currency, we would have had actually, if we didn't hedge, we would have had a large gain, because the shekel actually strengthened against the dollar. But because of the hedging transactions, we basically cancelled out most of the gain we would have had. Our net expense was approximately 4m shekels.

And do you have the same hedging profile going forward?

Absolutely. We haven't changed it yet, but the hedging profile is not written in stone.

In other words, we might change that going forward. We continually analyze whether or not we have the right profile of hedging.

Would it be fair to assume that you're hedging any anticipated 3G spend, if there's a big burst of that this year?

I don't think that will be changed. I think we've provided for that already. But, Stephen, let me just correct you for a second. I think I might have misled you on the numbers when I said 4m shekels as an expense, it was 4m shekels on the other direction, 4m shekels as revenue,because the shekel actually strengthened against the dollar.

Okay, thank you.

Okay.

Thank you. At this time there are no further questions in queue. Please continue.

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