Partner Communications Company Ltd (PTNR) 2003 Q3 法說會逐字稿

Welcome to the third quarter financial and operation results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Dr. Dan Eldar. Sir, please go ahead.

Good morning, or good afternoon, and thank you for joining us for this conference call to discuss Partner Communications' third quarter 2003 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 today's release, please contact (indiscernible) at 97254-814159 here in Israel, or (indiscernible) in New York at 1-646-284-9430, and a copy of the release will be either e-mailed or faxed to you immediately.

Before we begin, I would like to draw your attention to the fact that oral statements in this conference call may be forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. In connection with such oral forward-looking statements, you should be aware that Partner's actual results might vary materially from those projected (indiscernible) -- I'm sorry -- in connection with such oral 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 October 29, 2003, as well as Partner's prior filings with the U.S. Securities and Exchange Commission on form 20 S, F1 and 6K, as well as the (indiscernible) statements, 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 broadcasted simultaneously over the Internet and can be accessed through our website at www.investors.Partner.(indiscernible). At this time, I would like to turn the call over to Amikam.

The third quarter of 2003 was another record quarter for Partner. Our financial and operating performance is the result of our strong market position, our strength in marketing, customer service and (indiscernible) quality and our (indiscernible). At the end of the third quarter, we reached 2,032,000 subscribers, approximately 30 percent of the cellular market in Israel -- another milestone for us. We are already looking forward with excitement to the opportunities presented to Partner by the Third Generation. We believe 3G will enable us to maintain our leadership position in the market, and to further enhance the technological and development proposition we offer to our customers. Bearing in mind the age of the population in Israel, the technological literacy and CAPEX levels for those licenses and network rollout, we are confident that the Third Generation offerings serves our strategy to lead the market into a new era, and to allow Partner to continue to grow in revenues and profitability alike. We expect to start rolling out the Third Generation network in the beginning of 2004 and to start providing commercial services towards the end of the year. We are certain that our close relationship with the Hutchison Group, the knowledge base to which we have (indiscernible) our cost sharing agreement and our ability to shorten time to the markets in the development of services (indiscernible) and application, give us an advantage unavailable to our competitors and an opportunity to serve our customers and shareholders in the most efficient way.

With that said, I would like to turn the call over to Alan Gelman to summarize the financial and operational results for the third quarter.

Thank you. Good afternoon, good morning everyone. First and foremost, we are extremely pleased with our financial results for the third quarter. We successfully demonstrated our ability to sustain our healthy margins, grow our revenues, generate cash flow and reduce our overall debt level. Our quarterly results are driven primarily by strong topline revenue growth, driven by increased usage, seasonally higher roaming revenues and our continuing emphasis on reducing (indiscernible), controlling costs and improving processes. The result -- improved profitability and better margins in Q3 as compared to Q2. We expect to be able to maintain these levels of margins and profitability with seasonal fluctuations throughout 2004. We also expect to close 2003 with another strong quarter, with results substantially better than those recorded in Q4 2002.

We continued to strengthen our balance sheet and generate substantial free cash flow. The result -- lower bank debt, lower cash interest payments, better leverage ratios, no funding requirements and an investment-grade corporate rating of A from (indiscernible), Israel's credit rating agency. Our high levels of profitability and lower levels than anticipated of capital expenditures for 3G equipment will allow us to continue to generate free cash flow in the coming year during the build-out of our 3G network and further strengthen our financial position. With regard to our key business indicators, subscriber growth remained healthy, at levels higher than Q2 as the Company passed the 2 million subscriber level. We expect continued healthy growth at levels slightly lower for the balance of 2003. MOU and ARPU increased and our SAC was much lower, in part due to a larger proportion of prepaid subscribers activated (indiscernible). Looking forward to 2004 as compared to 2003, we anticipate slightly lower average MOU and ARPU, lower SAC and a slight decline in net activations. Our CAPEX levels continued to be low. For the third straight quarter, we invested less than six percent of our revenues in additional CAPEX. We expect to continue to invest substantially less in capital expenditures for the remainder of 2003 than we did in 2002. In anticipation of the upcoming build-out of our 3G network, we intend to start rolling out our 3G network in the beginning of 2004, with commercial service offered later in that year.

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

(OPERATOR INSTRUCTIONS). Stephen Levey, UBS.

I'm just wondering if you could tell us how close you are to finalizing your 3G contract, and when you will be able to formally tell us exactly what you are spending on that?

We're not finished formalizing it yet. When we finish we will make an announcement, but I think we're close. We are in the final stages.

One other question from me. There have obviously been some early signs of some stabilization in the Israeli economy without necessarily seeing any spectacular growth. I am just wondering if there were any trends this quarter which lead you to believe that this (technical difficulty) the cellular market, (indiscernible) maybe some signs of stabilization or improving trends, in terms of what's happening in the wider (technical difficulty)?

No, we don't really see any. I think we see the same performance as we have (technical difficulty)

Martin Masar, CAIB.

I have two questions for you. Firstly, I was wondering -- EBITDA margins once again picked up. I was thinking, is there a number that you are looking for, kind of a target number where you would like to see them in the fourth quarter, and maybe in overall 2004? Or could you give us guidance for that?

Fourth quarter, as usual, is a seasonal quarter. It's the winter months. There are less daylight hours, less roaming revenues, and quite naturally, there's more than probable that there will be a contraction of EBITDA margins in the fourth quarter. With respect to a comparison of annual margins versus 2003 versus 2004, the guidance we've given in the past is that we expect to be able to maintain this same level of margins in the near-term. And the next bump up in the margin rate will have to be when we get more data and content revenue growth, which will be consistent with our third generation network. It won't happen immediately with the third generation network, but once we get third generation network -- or third generation subscribers in large enough quantities to drive data and content revenue, we will see (indiscernible) material margin growth. But in the near-term, margins should remain pretty stable and sustain their current levels.

(indiscernible) you already started talking about my second question, and it was the data and content revenues. I think they are at minimum levels, but it's decent levels if I compare it to other carriers in our research coverage. So I was thinking even without 3G, do you believe there is still upside -- I don't know -- in these revenues? Maybe in first half 2004?

We believe there is substantial upside in the data and content revenues, we just believe that the process is going to be a slower process. We believe that handset prices have to come down. We believe that once handset prices come down and subscribers have handsets enabled to support advanced data and content applications, there will be decent growth in that particular area. Currently, the handsets are still priced a little higher than for it to be a mass-market product. We are not really interested in going overboard on subscriber acquisition costs to enhance data and revenue growth, so therefore, the evolution is going to be a slower evolution. It's going to be a natural evolution. It will take time. We believe as time goes on, prices of handsets will come down further. And they will find their ways into the hands of our subscribers. And from experience, subscribers that have data and content enabled handsets use more data and content services. So it's going to be a process; it's going to be a process that's slow. Slow for the balance of 2003, and probably for the balance of 2004. But we believe towards the end of 2004 that it will start to become a mass-market item.

Stephen Pettyfer, Merrill Lynch.

Three questions if I may. To start off with, I wonder if you could comment a little bit more on your comments about SAC? If you could give us some color as to how you drove down so drastically the subscriber acquisition costs in the quarter?

I don't know if we did anything really unique in the third quarter. Our policy has been not to subsidize handsets and we have not been subsidizing handsets. We've been trying very hard to cut down the subsidies in the business sector, and by charging our customers more for their handsets and reducing the SAC in the business sector -- which is basically, we're the only sector where we've been subsidizing handsets to a great deal. And also, the mix of the customers was different in the third quarter. The mix of the customers -- there were more prepaid ads proportionally than other ads in the third quarter, and the SAC on the prepaid customers is lower than it is on postpaid customers and business customers. However, we do believe that lower levels of SAC are sustainable, not necessarily the levels we achieved in the third quarter, but we believe that we will see lower levels of SAC in 2004 than we saw in 2003.

Is that a result of increasing mix of prepaid?

No, not at all. It's a result of policy, not subsidizing the customers, cutting dealer activation commissions and being a little bit more, I would say, aggressive on what we collect in the business sector and subsidize a little less in the business sector. And totally -- average we will have lower SAC.

I suppose that also implies a fairly gentle rollout on the 3G side, as well?

On the 3G side, even taking into consideration the guidance we have given as far as SAC being lower in 2004, we expect to be more aggressive on SAC on 3G, but moderately aggressive. The question about when we start rolling out 3G at the end of 2004, when the handsets will be pricier than the second generation handsets. In other words, to promote the product we will subsidize those handsets to some extent, which is larger than what we are doing on the second generation handsets. But I would say that in a moderate way, and therefore, we feel comfortable with giving guidance that SAC levels in 2004 will be lower than 2003.

The second question is just on the -- I believe in the third quarter there should be something like 23 million retrospectively you have gained from Bezec (ph) and handset royalties?

I don't know if you looked at the press release yet, Stephen. The fact of the matter is that after the subsequent event which we reported in the second quarter, there was another subsequent event. Bezec petitioned the District Court in Jerusalem to overturn the decision of the Ministry of Communications. That case is yet to be heard and there is yet to be any hearing on the case. Therefore, we've disclosed in note number 6 of our financial statements right now that due to the appeal that Bezec has petitioned the Jerusalem District Court, we have not recognized that 19.5 million -- to be exact -- in the third quarter financial statements.

Finally, on the CAPEX side of things again. Why is there such a significant difference between the reported CAPEX and the CAPEX in the cash flow statement?

Because there's a time delay. Most of our CAPEX we have payment terms that are what I call not long-term payment terms, but we have good credit terms on our CAPEX. And the 305 -- approximately 305 million shekels which we paid over the nine months in CAPEX, versus the 190 million shekels which we have recorded on our balance sheet, is basically a timing difference. We are paying for CAPEX -- some of the CAPEX we are paying in that 305 million shekels from 2002. What you're going to see there is continuing strong cash flow in the fourth quarter and the first quarter, because the low CAPEX levels, along with strong performance on the operating side, will keep cash-flow generation high for the next couple of quarters.

Istvan Matetoth, Credit Suisse First Boston.

(indiscernible). I have 2 questions. One of them is, when you gave your '04 guidance for the margins and revenue growth, what kind of 3G assumptions do we have behind that -- substantial, meaningful, or nonmaterial (indiscernible)?

As far as 3G in 2004, we haven't really given any guidance as far as the subscriber growth of 3G for 2004. What we are saying is that the commercial launch of 3G will be towards the end of 2004; therefore, the impact on 2004 from the point of view of revenue and subscriber numbers is insignificant. The only real impact in 2004, and one of the reasons why we're giving guidance as far as margin and percentage margin growth remaining the same, is the fact that we will incur additional expenses in 2004 in getting the third generation network up and running. And therefore, even though we project revenue growth, and we have -- we should have some additional expenses which will offset -- I'm losing my English -- which will offset the additional margin growth on the revenue side. And therefore, we expect a percentage to maintain (indiscernible) percentages, and then profitability percentages at the same levels as what we did -- or what we have in 2003 for 2004.

My second question is, you had a number of 3G additions in Q3. Could you give us a bit more color on the economics of the prepaid product? What kind of ARPU can subscribers (indiscernible) acquisition cost we have there. And what is the subscriber (indiscernible) currently that's in contract (indiscernible)?

We don't give information as far as the breakdown of ARPU between the different sectors and subscriber acquisition costs. But I think it's clear that ARPU and prepaid is the -- on a segmental basis is lower than the other segments. In fact, likewise it's pretty much negligent on the prepaid customers. As far as the breakdown of customers at the end of the third quarter, we had 332,000 business customers, 606 prepaid customers and 1,094,000 private customers.

(OPERATOR INSTRUCTIONS). Anna Bostaun (ph), CAIB.

I just had a question about the general competitive situation, because you are doing very well and you're SACs, as you say, are keeping very low. Can you just give us a few words on what your competitors are doing, and whether (indiscernible) in a moment (indiscernible) going more for margins or what's happening that you are doing so very well?

It's a market right now, which is very very focused on improving results. We don't see aggressive SAC policies on any of our competitors. We don't really see aggressive price competition on the mass market. We're not talking about the private sector and the prepaid sector. We do see a lot of competition on the business sector. We see competition more on positioning, positioning in different segments, the youth segment; positioning as far as technology is concerned; packaging, and really you see an emphasis -- all the operators right now (indiscernible) improving their financial results. So I think it's kind of a responsible type of competition. I am not saying there is no competition in the market; I think the competition is pretty fierce, but the competition is at a high level of what I would call -- or a more sophisticated level, and it's not in any way near where people are aggressively subsidizing handsets and cutting prices.

Do see that position staying the same over the next year? It's very good, obviously. But is there any trigger that could -- for example, an improving financial situation in Israel, or whatever -- that could make it more fierce. Or do you think really that it's going to stay pretty friendly?

(multiple speakers)

I like your optimism about the improving financial position in Israel, and I hope you're correct. Let's hope it happens. I think the situation which we have now will probably continue, even more so in 2004. I think their 2004 is -- at least the way it looks and the statements that are made, that were made by our competitors about what their focus is and how they expect to market their products -- I believe that we're going to see similar types of competition in 2004.

(indiscernible). My follow up question is on number portability. It's obviously a big issue at the moment in Europe. Is it something that's going to happen anytime soon in Israel?

Soon, no. But I think it's on the agenda of the regulators. It might take a couple of years, but it's definitely not on the agenda in 2004 and I would be very surprised if it's on the agenda in 2005. But it's something that (indiscernible) talk about.

I guess you would be a winner from that, wouldn't you?

Excuse me?

You would be more of a winner from that, because --?

I don't know. I think it's hard to tell. Honestly, I don't know.

Amit Sagi (ph), (indiscernible).

Can you give us the figures of roaming revenue for the quarter?

No.

(OPERATOR INSTRUCTIONS). Stephen Pettyfer, Merrill Lynch.

Since you're giving short answers, I thought I would just ask you what you're FX loss was in the quarter?

You know we don't do that either, but what I will tell you -- I will give you enough information that you could figure it out. There was a huge swing because there was a devaluation of the shekel in the third quarter of three percent, and there was the shekel as stronger against the dollar in the second quarter. If you see the final numbers, if you look at the financial expenses -- and the financial expenses in the third quarter were 98.4 million and the financial expenses in the second quarter were 62.9 million -- if you look at the difference there, the difference there is 36 million. And that's after we had improvements in the cash interest expenses, which we're paying the banks because of reducing our leverage in Lower Central Bank of Israel. So therefore, the swing -- what I call the swing between the second quarter and the third quarter, is quite substantial.

There are no further questions in queue at this time. Please continue.

Thank you. This concludes, then, this conference call of Partner Communications. I would like to thank you for your participation. Access to this call and to other valuable information on Partner is available through our Internet site, at www.investors.partner.co.(indiscernible). Thank you, and good morning in North America. Good evening in Europe and the Middle East.

This conference will be available for replay after 8.45 PM today through midnight on November 4. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701, and entering the access code -- 703297. International participants, dial 1-320-365-3844. (OPERATOR INSTRUCTIONS). That does conclude the conference for today.