Partner Communications Company Ltd (PTNR) 2003 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Partner Communication First Quarter Financial and Operational Results Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question and answer session with instructions to be given at that time. If anyone should require assistance during the conference, please press zero then star.

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Dr. Dan Eldar. Please go ahead.

Thank you. Good morning or good afternoon and thank you for joining us for this conference call to discuss Partner Communication First Quarter 2003 Results. With me on the call today are, Amikam Cohen, CEO of Partner and Alan Geiman, our CFO. At this time, if you do not have a copy of today's release, please contact Ms. Anatath Loney (ph) at 975-481-4159 --- in Israel or Mr. Dan Lowe (ph.) in New York at 1-212-280-5063 and a copy of the release will be either e-mail 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 maybe forward-looking statement with the meaning of the US Private Securities Litigation Reform Act of 1995. In connection with such all forward-looking statements, you should be aware that Partner's actual results might vary materially from those projected in the forward-looking statement.

Additionally information concerning factors which could cause actual results to differ materially from those in the forward-looking statements are contain in Partner's press release dated April 30, 2003 as well as Partner's prior filings with the US Securities and Exchange Commission on form 28-F1 and F-6 and 6-K as well as the F-3 Shell [Inaudible] statement all of which are readily available.

Please note that the information in this conference call related to projections or other forward-looking statements maybe relied upon subject to the previous Safe Harbor Statement as of the date of this call. For your information, this call is been broadcast simultaneously over the Internet and can be accessed through our website at www.investors.partners.co.in. At this time, I would like to turn the call over to Amikam. Amikam.

Thank you Dan. I would like to review the first quarter of 2003 and highlight the some of Partner's achievements this quarter. At the end of the first quarter we reached almost 1.9m subscribers. We start operating in a competitive environment in our market that continues to be challenging. We estimate that we now have captured approximately 29% of the cellular market Israel up from 22% at the end of the first quarter of 2002. One major issue that affected our financial result with global was the 10% reduction effective January 5, 2003 in the rate charge of incoming calls was worth mandating by the regulator. This reduction had significant effect on our revenues. Another development that has affected our revenue was the significant reduction in roaming revenues.

First, the war in Iraq caused a decrease in number of visitors coming in and out of Israel, however, thanks to our focused strategy and tight control over costs we managed to improve our financial performance and to continue to translate revenue into profit. We continue to generate [Inaudible] not for the first consecutive quarter. Based on the rate of increase, a reduction in our bank debt and an improvement in our financial performance. (technical difficulty). Our ability to generate free cash flow, coupled with the availability from our credit facilities allows us to execute our business trend including our [inaudible] generation operation without additional funding. We are still facing a tough economic environment in Israel.

The country is in the midst of an economic slow down which is affecting the general business community and the spending power of the consumer segment, however I am confident that Partner will continue to manage debt and out spend performance by seriously growing a subscriber base. If the slower pace than last year growing revenues in the second quarter and third quarter of this year and expanding market share. In addition, the company's ability to maintain more subscriber acquisition cost and a tight budgetary restraint only serves to enhance its ability to make general growth regarding levels of profitability.

We believe that our assets including our brand, [Inaudible] quality and customer service work as number one in the [Inaudible] business by [Inaudible] most prestigious management center will all continue to serve us in the competitive market. Looking to head we believe that Partner is well positioned for continued success. Our company ha remained committed to achieving its state goal, through careful planning and execution while maintaining a sound straightforward policy. With that said, I would like to turn the call to Alan Gelman for a mark of the financial and operational of results for the first quarter. Alan.

Thank you Amikam. Good afternoon and good morning everyone. We are very pleased with our financial results for the first quarter. We grew our net income to approximately 35m shekels for approximately 31m shekels in Q4 of 2002. This despite the fact that our revenues was substantially affected by a 10% reduction of incoming call termination tariff from January 1, 2003 as was mandated by the regulator and lower roaming revenue due to the war in Iraq and other regional tension. The reduction in the interconnect rate and a lower roaming traffic both of which where beyond our control reduced our revenues by over 15m shekels from Q4 2002 levels. Nevertheless, we continue to grow to our subscriber base and succeeded in growing other elements of network revenue including data and content revenues which now account for approximately 8% of our (inaudible). Limiting the revenue decline versus Q4 2002 is only 31m shekels.

We experienced revenue growth of 11% as compared to the first quarter of 2002 demonstrating our ability to continue to grow our revenues at a healthy rate in a highly penetrated market and in a tough economic environment. We expect total revenue growth in 2003 to be approximately 7-8% from the levels we experienced in 2002. Despite the reduction in our revenues versus Q4 2002, we succeeded in maintaining the same levels of gross profit and operating profit. We did so by diligently controlling our costs, making the necessary adjustments to protect our margin. Lower interconnect and roaming charges cellular to cellular operators an 11% reduction of the royalty rate paid to government and efficiencies implemented in our network and logistical operation were primary factors in reducing our costs to sale by 28m shekels versus Q4. The result was only a slight decline in gross profit and a slightly higher gross margin that we achieved in Q4.

Our SG&A expenses were also marginally lower than in Q4 resulting in an operating profit that was a million shekels higher than Q4. Financial expenses were slightly lower in Q1 versus Q4. We continue to hedge most of our foreign currency exposure consequently for the second straight quarters of fluctuations in foreign currency have not materially affected our financial results. We are continuing with the same hedging policy and program in Q2.

Looking forward to Q2, we expect higher revenues and improving margins across the board. As Amikam stated, we register a fourth straight quarter of positive cash flow. This achievement enabled us to reduce our bank debt during that period by $145m shekels. We expect 2003-second generation CapEx to be materially lower than our CapEx expenditures in 2002. If we start our 3G build out by the end of 2003, our total CapEx including 3G will be in line with our total 2002 CapEx expenditures. The timing of our build out is depending on the progress made 3G's networks and worldwide and the competitive landscape in Israel.

As of the end of the first quarter we had an additional credit availability of $169m on a long-term bank facility. Our consisting cash flow generation, which we believe will be sustainable throughout 2003 and the remaining availability from our bank facility should allow us to execute our business strategy without any additional injection of capital or the need for any additional credit facility or debt instruments.

During February, Standard & Poor's revised its outlook on the company to positive from stable. The main reason for the revised outlook by S&P was the recognition of our strong operational and financial performance since our initial rating approximately two and a half years ago. The revision represents the continuing growing confidence of the credit community in our financial position and operating performance.

Our subscriber base grew during the quarter by 57,000 active subscribers or by 3.1%. Since the market is almost fully penetrated, we expect subscriber growth for the balance of 2003 to be slower. As expected, our churn rate during Q1 increased to 4% from 2.9% in Q4. The increase in churn was primarily in the prepaid sector from rotational churns. Rotational churn occurs when an existing customer purchased a new handset and SIM card and then ceases to use either the new or old SIM card.

We expect the current churn credits to be consistent through 2003 and expect to register annual churn of approximately 16%. Average ML use 267 minutes decreased marginally in Q1 by less than 2% in Q4 while [Inaudible] 164 shekels per month decreased by approximately 8%. 75% of the [Inaudible] decline was attributable to the reduction in the interconnect rate and lower roaming traffic both of which were effectively beyond our control.

Despite the competitive pressures, we continue to control our stock and our reducing [inaudible] subsidies. Our stock in Q1 was 426 sheckles per activation, approximately 11.6% less than Q4.

Looking forward to the rest of 2003, we anticipate relatively stable MOU [Inaudible] and SAC.

To summarize, looking forward we expect revenues to increase and margins to improve in the second quarter of 2003. We expect these results to be driven first and foremost by subscriber growth, increased seasonally usage and additional data and content revenue. During the year, we expect quarterly EBITDA margins to approach 29 to 30% and most important we will continue to be a profitable company, generating positive cash flow.

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

Thank you ladies and gentlemen if you do wish to ask a question please do press one on your touch-tone phone. You will hear a tone indicating you've been placed in queue and you may remove yourself from queue at anytime by pressing the pound key. If you have pressed one prior to this announcement we ask that you please do so again at this time. If you are using a speakerphone please pick up a handset before pressing any numbers. Again ladies and gentlemen if you do have a question please press one at this time. We do have a question from the line of Steven Levy with UBS Warburg please go ahead.

Hi good afternoon just a couple of questions for me if I may. Alan you said that and you wrote in the press release that you were talking about relatively stable ARPU for the rest of 2003 we would have seen I suspect just looking at the numbers that you've given I've had the 2% decline in ARPU haven't been for the changes in the termination rate then in roaming full in roaming revenues. Is the 2% decline per quarter for the rest of the year the kind of number that you're been expecting? Is that what you have defined as relatively stable or do you think you can maintain our ARPU at current level.

Well first of all we think ARPUs will rise in the second quarter and in the third quarter. They will rise marginally. Traditionally the fourth quarter and the first quarter seasonally have left them all used and therefore consequently less ARPUs. So we believe that ARPUs will actually increase marginally in the second quarter and the third quarter sequentially. We will probably have a reduction in ARPUs again in the fourth quarter again seasonal [Inaudible]

Okay. Do have any discussions or any conclusions in terms of what's going to happen it with termination rate in 2004 should we expect them to stay where they are at the moment?

In the meantime there has been --- the only decision is related with regard to 2003 and there is nothing in the meantime on the surface regarding 2004. The only issue being discussed now with the Ministry of Communications currently with respect to interconnect fees and the interconnect fees on the SMS charges.

Okay the last question from me is with respect to churn. Are you able to provide it under the breaks down the churn from customers that just bought a new handset against those customers are about to left the network?

That's very, very difficult because as you know a customer doesn't identify himself as a rotational churn customers. What we've done is we've done some independent and internal surveys, we've called customers, we've analyzed a lot of data and we believe that the rotational churn issue with us is probably no different than being experienced by some of the mature companies in Europe. It’s a substantial number to say is 50% of the churn or 40% of the churn that we cannot put out an accurate handle on it but we do and we have identified it you know through empirical sampling methods that is pretty substantial.

Thanks very much.

You're welcome.

We do have a question from the line of Estavan Madatos (ph) with Credit Suisse First Boston. Please go ahead.

Good evening gentlemen I have two technical questions. Alan did I understand you correctly that you said that you are going for a 7 to 8% revenue growth for the full year compare to 2002?

Correct.

And when you say stable ARPU stable compared to Q1 or quarter 2002?

Stable compared to Q1 as I explained to Steven a minute ago we expect ARPU to remain relatively stable it means we expect increases in ARPU in the second and third quarter and probably a decrease in the fourth quarter because of seasonal issues.

Okay and then decline in Q4. The second technical question I have is that if I look at it correctly your CapEx guidance is [Inaudible] to 100m reduction for this year and could you just elaborate on this a little bit more? How did you find this additional 100m?

How do we find it --- well last year CapEx approach 600m shekels. We expect second generation CapEx in 2003 to be less at or to be substantially less. The question is where final CapEx numbers will fall in 2003 depends on the timing of our builds out the 3G network. We are going to be in third generation and we do it at the main driver of potential revenue growth and profitability of the company. On the other hand the timing of the exact launch of third generation hasn't been decided upon yet we're basically waiting to see what's happening in the world with respect to handsets, how the launches in the third generation network in Europe, will progress and the competitive issues here in Israel. So from that point of view, to give a more definite fix of where we'll end up CapEx in 2003, really depends on the timing of the build-out of our third generation network.

Okay and my last question is that, is it fair to say that you are much more optimistic, over the outlook, than you were in the previous conference call? Is it fair?

Well we're optimistic because, you know we did our best in the first quarter, the first quarter we had a lot of handicaps going in with the first quarter, because of the interconnect rate and because of the regional tension. We believe that from the regional tension point of view, things will hopefully will improve, we've unfortunately resolved ourselves to the division of the regulator that he would reduce the interconnect rate by 10% and we are able to generate additional revenue. From the perspective the real story of the first quarter, is that we're able to, despite, the reduction in top line revenues we were able to maintain and increase our operating income by 1m sheckles and increase our net income. But from that point of view, we're very pleased with (technical difficulties) the results over the first quarter.

We do believe that the second quarter and third quarter will be better and we do believe that our overall results for 2003, will be a materially improvement overall our results of 2002. So in that respect, we're optimistic, we know we have challenges ahead, we're still working in a tough economy there are certain challenges, that present it because we're in a tough economy. But I think we've proven that we could meet those challenges.

Thank you a lot Alan congratulations for the result.

You're welcome.

You do have a question from the line of Martin Lazar (ph.) with CAIB please go ahead.

Good afternoon gentleman and congratulations on a good performance in a tough environment. And actually I also do a have a couple questions. Firstly I was wondering, I noticed that there're a number of shares was I think up from a 179 at the end of first quarter 2002, to 183m at the end of first quarter 2003, was there any particular reason or?

There's only one particular reason, there're options that were issued to employees under the original 1998 option plan, that were exercised in that period of time.

I see and do you expect that what do you expect the number to be at around second quarter or third quarter?

The only changes is in capital, the only changes in capital, that can occur from the exercise of options and since the 1998 plan, a good deal of those options have already been exercised. And if you look at the last quarter they were very, very few options exercised specifically in the last quarter. I don't think you'll see any real change in that pattern that most of the exercising of the options has been done already.

I see, okay and then I saw that your complete head count in the company is operating to 2,233 employees, from a year ago level of 2,469 and I was wondering for the full 2003, do you expect that number to move, do you expect to hire any more employees or to reduce that?

No, we expect employee position to remain stable, where we are now plus or minus, it should be the same numbers throughout the year.

Yes, okay thank you. And my last question is, with regard to the market share [Inaudible] market share is up from 27 % to 29% and were there a need for a specific corporate customers that you were able to acquire in the first quarter or in the last couple of months that helped you through the increase in market share?

Well we don't give out names of our customers, but what we did do in the first quarter and I think if you look at our balance, for business customers are 16% of our total customer base in the first quarter. The actual growth in our subscriber based 23% of them were, what I call business corporate customers, so there're definitely that we're definitely doing a better job in that area and improving our position in that area. But as far as specific names of customers, we're not at liberty to discuss that.

Okay, thank you very much and good luck going forward.

Thank you very much.

We do have a question from the lines from Steven Pettefer (ph.) with Merrill Lynch please go ahead

Good afternoon. Three questions please on your cost side of things, firstly on the you mentioned one of the rare instances where your cost actually went up was on the provisions for doubtful accounts. I wonder if you could give us what that figure was as a percentage of sales? And also, given the economy seems to be general improving, whether you see that as coming down going forward?

Okay, first of all doubtful accounts - - doubtful accounts accumulated provision, we have doubtful accounts as approximately 78 million shekels, which if you look at as a percentage of our accumulative billings from day one, is less than 1.5 % of our accumulative billing. The reason why the provision for doubtful accounts actually increased is that because of the worsening economy here in Israel, we saw more customers coming into the collection process. Interestingly enough we're actually doing a better job in the collection process that our experience has been that where we manage to collect most of the invoices that come into the collection process.

But still we have a formula where our provisions for doubtful accounts is based on our specific formula, depending on how many customers come into collection and the age of those customers within the collection process. And because the economy was going through a tough time and still is going through a tough time, I don't think we've turned the corner as far as improvement is concerned yet. We see more customers coming into collection, that doesn't necessarily mean that we won't collect those customers but the customers are coming into the collection process, and because they're coming into the collection process from a formula point of view of how we compute the allowance for doubtful accounts, the allowance for doubtful accounts increased in the first quarter. And that increase in the first quarter accounted for the full increase in our G&A.

Okay, thanks. On the marketing side you mentioned there that Q4 was perhaps a high comparable is there any reason to think that marketing expenses should rise as you push forward fro the rest of the year?

No, I don't think so, we're pretty controlled on the marketing side as far as expenses are concerned, if you look historically over the last 8 quarters, the marketing expenses have been pretty consistently in the area of what we spent in the first quarter. The issue of the fourth quarter 2002, is more of a timing difference we had less expenses in the third quarter of 2002, and we basically delayed some of the marketing programs because it [Inaudible] entry into the GSM space and therefore Q4 2002 proportionally had more expenses. But you can expect marketing expenses to be plus or minus to sustain levels we had in the first quarter.

Okay, thanks. And finally on the depreciation side of things, a little bit down on Q4, is that a general trend going forward now or is that one off?

Or we're investing less and there's some assets that are being completely depreciated so (technical difficulties) the trend in the meantime will be, you know, for better performance on the depreciation side, pretty stable I would say.

Okay Thanks Alan.

You welcome.

Again ladies and gentlemen if you do have a question please press 1 at this time. We do have a question from the line of Tular Patousy (ph) with City Group. Please go ahead.

Yes, good afternoon. I have a couple of questions if I may, the first one is can you indicate the roaming of a percentage of total revenue or output, if possible? In your press release you mentioned you were able to decrease your facilities by 150 - 45 million over the past 12 months, and then during the call you mentioned that that was over the quarter, can you specify that please?

I'm sorry could you repeat the second question again, I'm sorry I didn't catch that.

In your press release there's a sentence, "you were able to reduce your bank debt by 145 million over the past 12 months.

Yeah.

Can you specify what the percentage was in the first quarter of 2003 if any reduction occurred in the quarter?

Okay, first question first. As far as roaming revenues, total in roaming and out-roaming revenues is approximately 8% of our ARPU in the first quarter for roaming revenues, that's number one. Now with respectively to the reduction in debt in the first quarter, we basically generated cash flow of about 24 million shekel in the first quarter, the full amount of that cash flow went to retired debt.

That's great, and in - - last question can you remind me of what your CapEx forecast for this year was, was it in the area of 400 million.

No, our CapEx - - the guidance we've previously given as far as CapEx is concerned was slightly higher than the CapEx that we had in 2002. We now believe that CapEx, especially second generation CapEx will be substantially less than what we had in 2002. It could come in the area between 450 and 500 million shekels. What total CapEx will be for 2003 will be really dependent on where we sit with our third generation plan.

That's great thank you very much.

We do have a question from the line of Amit Saggy (ph) with Forsythe (ph) please go ahead.

Hi, good afternoon. Can you please explain or give some details about the price increase and what impact it had on ARPU and MOU?

In the meantime it’s too early to tell, Amit, because the price increase is only effective from the 15th of March. So the effect in the first quarter is immaterial.

I'm talking about the price increase it during August last year and during 2002?

I don't think we are --- I think they are probably reflected in the financial segment. I'm trying to follow the question, what do you mean the effect of the price increase?

On one hand interconnect charges went down this year, this of course reflected the ARPU, but on the other hand you had a price increase for some programs and for some clients, and this was ---

The price increase that we did in 2002 was in September was in third quarter of 2002 we had a price increase. But not related at all to the decrease in [Inaudible] right now. What we did is --- we did increase prices again on the 15th of March but that is basically had very, very little impact on ARPU in the first quarter.

Okay, thank you.

We do have a question from the line of Jonah Weiss with Lehman Brothers. Please go ahead.

Good afternoon gentlemen. What exactly are the revenues that [Inaudible] for interconnect, give a little more detail on the types of revenues that supplemented your loss of interconnect charges?

Firstly, we have more subscribers. More subscribers generate more and MOU's. The additional revenues come from additional subscribers, it also comes from the sale of handsets, etc. But we generally don't give the break down of those numbers. Otherwise we also had an increase in data revenue.

That's what I mean, look at different types of revenues, services or modularities

I'm sorry, what different types of revenues were just to what?

That used to --- that took the place of the interconnect for you

There aren't any real different types of revenues. We have the same revenue streams, which we've had always. It is content revenues and voice revenue. What we did do is we grew our revenues, we grew our subscriber base and we grew our other sources of revenues. Basically on the MOUs and in the data and contents where we were hurt by the roaming revenues and the reduction in the interconnect area.

Okay, with regards to roaming and this just might be a typical, a more typical question. The fact that Stockholm now offers GSM service, do you too split roaming --- split roaming fees? Do you offer --- how does that ---how do you account for that?

The in-roaming fees basically depends on where the customer roams. It's a - --you could assume that those in-roaming fees are now split 50-50 between the two companies.

I see so it's just the luck of the job where the individual happens to be placed and which antenna he connects to and which [Inaudible] station he connects to.

Assuming that the number of contracts that both companies have is the same and assuming that the type of coverage is the similar. You could expect roaming revenues form incoming visitors to be split equally between the two providers.

Okay and is it possible to compare that to previous time, previous periods in which Stockholm was not offering roaming services? Has your percentage of roaming income decreased dramatically?

I think it's a mute point in the first quarter because there weren't any roamers in Israel, very, very little. So you could divide almost zero by two you'd still get zero.

Okay very good. Finally if you could just explain in more specifics what rotational churn is? You mentioned the fact that people who changed their phones and cease using another one, does that include upgrades? Or you mean changing the phone number completely or exactly what?

It's basically an upgrade process, which the customer takes the initiative, instead of us taking the initiative in offering an upgrade. What happens is the customer will come into a dealer or an Orange store and say 'okay he wants to buy a new hand set, he wants to buy an old [Inaudible], he wants to buy a new and more advance hand set, he has a hand set for a couple of years. Well basically what he does is he buys new handset and with the new handset hasn't been [Inaudible]

Alright.

And now this customer, lets call him Alan for the example has, two handset, but he is only one Alan. He goes to sleep with one of the handset. So what he does is either depending on whether he wants to keep his old number he takes the SIM out and puts it in the new handset. And basically the new SIM he just puts in a draw and it becomes dormant or visa versa if there is a sales promotion, which give the rebate on the new SIM. He would put the new film into his handset and make the old SIM dormant. So what we have at this -this is called rotational churn in the industry. We basically have a customer who on his own initiative becomes a new customer and at the same time he makes - he also becomes a dormant customer.

So the net effect of the two transactions is, with the exception of timing difference is that your subscriber base is relatively unaffected. But what - the concern of ours with rotational churn, is not the actual increase in churn. The concern of ours is rotational churn means that the customer is benefiting from the subscriber acquisition process. That mean that we are paying a dealer commission and we are subsidizing some of the handsets and basically that's a cost that we would like to minimize. So the goal for us is basically to find the right formula to minimize the actual expenditure on that particular upgrade. And that's the challenge here.

Thank you.

You’re welcome

There are no further questions, please continue.

Thank you very much operator this concludes this conference call of Partners Communications I would like to thank you for your participation. Access to this call and to other valuable information on Partner is available at our Internet site www.investors.partner.co.il Thank you and good morning in North America, good evening in Europe and the Middle East.

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