Partner Communications Company Ltd (PTNR) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2004 financial and operational results conference call. At this time, participants are in a listen-only mode. Later we will open up the lines for questions and answers. If you should require assistance during this call, please depress star and then a zero. As a reminder, today's conference will be recorded. And at this time I would like to turn the conference over to your host, Dr. Dan Eldar. Please go ahead sir.

Thank you. Good morning or good afternoon and thank you for joining us for this conference call to discuss Partner Communications first quarter results. With me on the call today are Amikam Cohen, CEO of Partner and Alan Gelman, our CFO. At this time if you don't have a copy of today's release, please contact [Miguel Margoninski] 972-544-814-159 here in Israel or [Nehabi Sharon] 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 all the 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 differ 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 April 29, 2004. As well as Partner's prior filings with the U.S. Securities and Exchange Commission on Form 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 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 broadcast simultaneously over the internet and can be accessed through our website at www.investors.partners.co.il. At this time I would like to turn the call over to Amikan. Amikan.

Thank you Dan. The first quarter of 2004 was another record quarter for Partner in terms of revenues. Partner is widely recognized for its excellent network services with the award winning customer service and unique marketing and branding capabilities. Our core strength in this area as well as our dedication to offering our customers an attractive rate plan and innovative data and global roaming services have enabled us to achieve our performance goal.

At the end of the first quarter, we reached 2,165,000 subscribers. We estimate that we now have approximately 32% of the cellular market in Israel. Our market is becoming more competitive and more penetrated. Still, we believe Partner is facing significant growth opportunities.

We are already looking forward with excitement to the opportunities presented to Partner by the Third Generation. In the first quarter of 2004, we have started to roll out our 3G network. We have already covered significant parts of the central [part] of the Israel and the rollout is progressing according to the plan.

We will be offering commercial 3G services later this year. We believe 3G will enable us to maintain our leadership position in the market and to further enhance the technological and the veneu proposition we offer to our customers. We are certain that our close relationship with the Hutchison Group, the knowledge base to which we have access, our cost sharing agreement and our ability to shorten time to market in the development of services enhancement and application gives us an advantage unavailable to our competitors and an opportunity to serve our customers and shareholders in the most efficient way.

Bearing in mind the age of the population in Israel, the technological literacy and the capex level for both license and network rollout, we are confident that the Third Generation operating serve our strategy to lead the market into a new era. And to allow Partner to continue to grew in revenues and profitability alike. In the first quarter we also announced that we are in discussions with Matav, a cable systems media enitiy, to invest $137 million U.S. in Matav, for approximately 40% share of the Matav's equity together with control of the company.

We are currently conducting a due diligence review and are in negotiations regarding the terms of investment. We believe that the market in Israel is going to work convergence and the creation of two major comprehensive telephone groups, one group [Besek] and the other around the cable company. We believe that if we consummate our investment and acquire control of Matav, we will have the opportunity to lead the cable group and to enhance our competitive positioning.

If the deal is done, we will intend subject to regulatory and other procedures to leverage synergies between Partner and cable company in marketing, sales, technology and other areas. And to offer a variety of services to customers including multi-channel cable television, broad band internet transmission, fixed line telephoning and cellular telephoning. With that said, I would like too turn the call over to Alan Gelman.

Thank you Amikam. We are pleased to report another quarter of record revenues. It was a quarter that was in line with the guidance we have provided in the past. Our guidance for 2004 revenue growth profitability margin, minutes of use, ARPU, SACS remains unchanged and we continue to look at 2004 as a better year than 2003.

For the sake of brevity and I know the Israeli participants on this conference call are in the mood to see the Final Four this evening, rather than review the press release which I assume you have in front of you, I would like to go directly to Q&A. And we will try to give you as much color as we can on the quarter's results and on our strategy going forward by responding to your questions.

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

Ladies and gentlemen, we will now conduct a Q&A session. If you wish to ask a question, please press star then one on your touch-tone phone. You may remove yourself from queue at any time by pressing the pound key. Once again if you do have a question, please press star 1 at this time. And our first question comes from the line of Michael [Clarr] from UBS. Pleae go ahead.

Hi good evening gentlemen. Can you give an update on where the acquisition of Matav stands? How you foresee the merger with [Tefo] and Golden Channels to be completed? and in particular how will this be financed? And what will happen with the [desks] of these companies in your view?

We were in the process of negotiating a variety of issues. We have not concluded an agreement with [Devenk] who presently are own [Devel] And obviously it is too soon to provide you any details about the discussions with [Devenk]. With respect to financing, we do intend to raise additional financing and most probably this will be in the form of additional debt.

Thank you. I've got one other question. You mentioned in a call today that the sales and marketing costs were up in Q1 due to increased competition in the marketplace. Do you expect these costs to return to previous levels in Q2? How confident are you of this and at this early stage in the -- is there any concrete evidence that the competitive pressures in Q1 are already subsiding?

I think our confidence that the levels of selling and marketing expenses will be lower in Q2 are quite high. We stated in the press release there are two reasons for the increase in sales and marketing expenses. One is the increase in markon which had to do with competitor issues basically on the timing when we have different types of campaigns and you understand that we don't allocate our markon expenses linearally

We have each quarter the same amount of expenses. If you look at the fourth quarter, for instance, very low marketing expenses and we had more marketing expenses in the first quarter. The reason why we expect marketing expenses to go down in the second quarter is we also spent a substantial amount of money in the first quarter to reorganize our dealership organization and that basically is a expense that will not reoccur in the second quarter and not recur in the third quarter.

So therefore we believe that the second quarter's marketing expenses will be very much in line with the marketing expenses you saw in 2003.

Thank you and enjoy the basketball.

Thank you Michael.

And our next question comes from CSFB from Istvan Mate-Toth .

Good evenin. Alan,I would like to ask you some questions. If I had impression you are running ahead of schedule for launching commercial services this correct? Or do you speak to your end of the year --

We are still on the same schedule. Istvan.

On t he same schedule. And secondly, should we assume any kind of cost implications from the launch of the service? Because we may see the repeat of Q1 in selling and marketing or are you think that will not be significant?

I think if you recall the guidance we gave in the past, we did say that we expect to increase selling and marketing expenses when we launched 3G at the end of the year to get 3G off the ground and we will see additional subscriber acquisition costs. So we are consistent with the guidance we have given in the past and you will additional expenses in that area that will impact on margin when we actually launch the commercial -- when we have the commercial launch of 3G.

And then the last thing, Alan, are you fellin comfortable in terms of I believe the handset course infrastructure of course everything is on track as you would have expected?

We were very satisfied with the progress we made before and we have not changed any of the guidance we have given with respect to 3G.

Thank you very much.

Our next question comes from [Benita Nickilojuitt] from ING. Please go ahead.

Yes good afternoon. I want to talk about the data revenues. It seems that they went down quite significantly on the quarterly basis. I'm just wondering why is that? And my second question is related to traffic patterns. You indicated in your press release that your interconnect costs went up. I'm wondering whether there were other changes in the calling patterns or it is just higher number of minutes in absolute terms.

I will give it to you first question first. Data revenues went up. Data revenues went up in the first quarter. They were higher than they were in the fourth quarter.

If you look at data revenues as a percentage of total revenues vis-a-vis the first quarter of 2003 and that's maybe were the difference in how we look at it is evident. In the first quarter of 2003 data revenues were lower, but total revenues was substantially lower therefore data revenues as a percentage of total revenue was 7.9% where data revenues as a percentage of total revenues of the first quarter of 2004 was 7.6%.

So if you look at the absolute revenues from data and content they were 3 million Shekels higher in the first quarter than they were in the fourth quarter. With respect to traffic patterns, there is no change in the interconnect direct rate and there's really no change in what I call traffic patterns.

The only change in traffic patterns that we have seen and have seen on a consistent basis as we get more and more customers as we have less incoming calls with relationship to out going calls because it's more traffic within our own network. The statement we made as far as increased interconnect costs where our costs of sales has gone up is because we have additional minutes of use.

We have additional customers, additional minutes of use and therefore quite naturally interconnect costs do go up and therefore cost of sales in absolute terms will always go up. And we hope they continue to go up in the future as we continue to have more minutes of use.

One more on data revenues if I may. I meant data revenues going down, I meant on a quarterly basis because so far in your history really quarter on quarter we were seeing growth in your data revenues why in the first quarter this year I can see 17% drop in this revenues on the quarterly basis and I'm just wondering why it is the case.

Again, I'm not sure where your question is coming from. Data revenues in the first quarter of 2004 were 83 million Shekels. Where in the fourth quarter of 2003, they were 80 million Shekels.

All right.

We don't have a reduction there.

Okay. Just on a percentage of revenue. Yeah, okay.

Only percentage of revenue. The percentage of revenue is actually higher in first quarter than the fourth quarter also.

Okay. Thank you.

Thank you.

Our next question comes from Citigroup from the line of Harshad Thanki. Please go ahead.

Thank you it's actually Tom [Crowley] Citigroup. A few more questions on the strategic direction of Partner here regarding Matav and the funding of that. You mentioned it would be funded out of debt. I assume that just means drawing down on your bank facility. Perhaps you can give us an update on where you stand on the timing on how negotiations are going? How you'll account for this acquisition, whether it will be a proportional or fully consolidated or equity. And funding going forward, could you just provide some guidance there. It's not clear to me how-- I assume none of these operators are self-financing and I would assume you would have to provide most of the funding. If you could clarify that.

If you don't mind, Tom, I will take the last two questions first and maybe Amikam will talk about the strategic direction. From the funding of Matav, we are leaning to fund the transaction via debt. I don't rule out -- I don't rule out the use of additional bank debt that would have to be agreed upon with the banks, but we will definitely fund the Matav transaction if it closes, not through the operating cash flows of the company.

We will be in the market to raise what I call external capital to fund Matav. As far as the accounting for the acquisition, the accounting for the acquisition, it appears to be that the highest probability of the way we would account for the acquisition will be on the equity basis and therefore the additional debt which would eventually be taken on via the full transaction would not appear on our balance sheet.

In other words, we would have -- we would just have the one line entry on the balance sheet and the one line entry on the income statement as is common with the equity method of accounting.

Let me add to Alan's comments comment one word, Tom, about strategy. Equity partner identified a trend in the Israeli telecom market which a trend toward convergence of many players and a trend towards the formation of two significant one stop shop telecom groups offering a wide variety of telecom services to both household, private consumers and business customers.

We do see these groups formed around the [Devek] group on one hand and the cable company on the other. We believe that if we have the opportunity to lead the cable company, this will enhance our ability to compete in the market.

It will create higher customer loyalty and higher stickiness of customers and will enable us to bundle services which include several services, six services, the broadband internet services, transmission and data services to customers. That is the reason behind this deal. We believe that there is a significant measure of synergies between the companies and we do intend to leverage these synergies in sales and marketing customer service and in engineering.

Okay. And one follow-up. You mentioned, Alan, the word "capital", raising fairly generic. Any more precision?

No, not at this time. I think we will look at the alternatives available. Like I said, if the transaction closes, we will probably go to the marketplace and raise that additional funding externally.

And what is that additional funding? It's not just the $137 million?

No, it's just the $137 million and to follow-up on your question, the transaction -- one of the conditions precedent to the transaction, is also Matav acquired additional subscribers. To do that they are in negotiations and we are participating to purchase those additional subscribers in all probability from one of the other cable operators and that would include taking on additional debt of that particular cable operator and that's one of the issues that's outstanding as far as the level of debt that we will be taking on by Matav to fulfill the pre-condition of this transaction.

We believe and one of the things we are making sure of that when that agreement is made and we have a consolidated debt of Matav and the other subscribers that they will purchase, that that company is on solid footing and has a bank facility that will allow them to operate the company will not require Partner to inject additional cash into this transaction over and above the $137 million. We also are insisting that any debt that is in Matav or that will be assumed by Matav will be nonrecourse to Partner. So there from a credit risk profile.

We believe the only cash we will need to purchase this 40% is the $137 million. Of course, if we decide that we want to take a bigger position in Matav in the future, we will to raise additional cash or use our operating cash flow to take that position.

Okay. Thank you.

Thanks. We have a question then from [Gal Vinrag] from Eye Blaster. Please go ahead.

Hi. My question is regarding the market in Israel. Isn't the Israeli market a bit saturated with the three big operators? Aren't they worried about recruiting new customers for the upcoming year?

I think we will go about recruiting new customers but doing a good job of doing it in a penetrated market. And I think as we said at the beginning, we are repeating our guidance, or reinforcing the guidance which we have given at the beginning of the year that we expect subscriber growth to be albeit not double digits but slightly below double digits in 2004 and that's quite an achievement in a very penetrated market. And yes it is difficult. And it is a competitive market. But we believe we will continue to do a good job in that particular area.

Thank you --.

And we have a question from [Hyam] Israel's line with [Xanax].

Two questions for me. Yeah hi, two questions for me. Can you please give us the break down on your capex investment, the break down between the 3G and your existing IN network for the quarter and if you have guidance for the capex and the split again for the full year? My second question is regarding SMS tariffs and the interconnect tariffs [inaudible] again on the both of them on the tariffs what your views, how do you project if there will be any cuts in tariffs again?

As far as the capex on 3G is concerned, approximately 80 million Shekels of 144 million Shekels we invested in capex for Third Generation. That's in line with the guidance we have given for the year.

If you recall the guidance we gave was 600 million Shekels in total capex approximately of which approximately half would be for Third Generation in 2004. With regards to SMS we don't believe there will be any further reduction in SMS tariff. What we believe is in any event the -- that's been taken into consideration in the guidance we have seen in the marketplace and we really have nothing more to add on top of that.

Okay. Thanks.

And we have a question from [Yona Weiss] with James please go ahead.

Yes good afternoon. Do you -- does the financing for the cable deal affect other funds to refinance outstanding bonds?

Repeat the questions, please?

Does financing for the cable deal affect any plans to refinance or retire the outstanding bond you have?

It doesn't upset any plans there. I think we were talking about two mutually exclusive transactions. We do intend subject to market conditions to refinance the high yield bonds when we have the call date in August of 2005. And we don't believe this transaction was the requirement by us to raise additional capital for this transaction will impair our ability to raise the additional capital to finance the high yield debt.

You may consider doing one [inaudible]

I think that's too early to tell. And something we will always look at the market conditions when we are ready to raise capital. If we believe that it's better to, as you say, kill two birds with one stone, and that's the best way to go, then we will kill two birds with one stone. If we think we will do it in two branches, we will do it in two branches. What ever is better.

Thanks.

Once again if anyone has any qez, please press the star and one at this time. At this time I'm showing no further questions in queue.

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

Thank you. And ladies and gentlemen. This conference will be available for replay starting today Thursday April 29th at 9 :30 P.M. Israel time and will be available through Wednesday May 5th, at Midnight Israel time. You may access the AT&T executive playback service by dialing 1-800-475-6701 from us in the United States or Canada or from outside of the United States and Canada please dial 230-365-3844 and then enter the access code of 728842. Those numbers once again are 1-800-475-6701 from within the U.S. or Canada. Or 320-365-3844 from outside of the U.S. or Canada and again enter the access code of 728842. That concludes our conference for today. Thank you for your participation and for using AT&T kpfs executive conference -- conference.