Partner Communications Company Ltd (PTNR) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to your host Dr. Eldar. Dr. 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' second quarter 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 Ms. Yael Margoninsky at 972-544814159 in Israel or Ms. (inaudible) in New York at 71-6462849418 and a copy of the release will be either emailed or faxed to you immediately.

To begin, I would like to draw your attention to the fact that oral statements in this conference call maybe forward-looking statements within the meaning the US Private Securities Litigation Reform Act of 1995. In connection with such oral forward-looking statements you should be aware that Partner's actual results may 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 July 28, 2004 as well as Partner's prior filings with the US Securities and Exchange Commission on form-20F, F1 and 6K as well as the S3 shelf registration statements 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 being broadcast simultaneously over the internet and can be accessed through our web site at www.investors.partner.co.il. At this time I would like to turn the call over to Amikam. Amikam.

Thank you Dan. Second quarter of 2004 was another record quarter for Partner. Partner's excellent financial and operational performance this quarter were fueled by the quality of our network, our focus on customer service which is widely recognized for its excellence, our advanced value added services and our unique brand.

This month the daily business paper Blog (ph) declared for the second consecutive year the Orange brand to be the most valuable brand in the telecom sector in Israel and second in the general consumer market following the Coca-Cola brand. Our success in establishing our network as quality network, leading in integration and unique user experience enable us to grow our subscriber base and to continue to drive value to our shareholders.

At the end of the second quarter, we reached 2,200,002 subscribers. We estimate that we have approximately 32% of the cellular market in Israel. Our market is becoming more competitive and more penetrative. Yet, we believe we can meet our goals by increasing our yearly subscriber number by 7 to 8% as compared to 2003 and continuing to accrue quality subscribers.

This quarter we were particularly proud to add a large number of business subscribers. About 40% of our net-adds were new business subscribers. We view these as a vote of confidence and follow recognition of our network quality and customer value. In our continuous drive to introduce the most advanced services and technologies, we are already looking forward with excitement to the opportunities presented by the third generation.

During the second quarter of 2004, we continued to rollout our 3G network. We have already covered significant part of reserve and the rollout is progressing according to the plan. We will be offering commercial 3G services later this year. We are confident, that the third generation offerings serve our strategy to lead the market into a new era and, to allow Partner to continue to grow in revenues and profitability alike. With that said, I would like to turn the call over to Alan Gelman. Alan.

Thank you Amikam. In the second quarter, we continued to achieve strong results helping margins, grow our revenues, generate cash flow and improve our financial position. We recorded record quarterly revenues, EBITDA and income before taxes. Quarterly revenues totaled 1.255 billion new Israeli shekels, EBITDA reached 402 million new Israeli shekels, a 32% margin and income before taxes reached 200 million shekels. Net income was 133 million shekels and operating profit was 266 million shekels, a 22% margin on revenues.

We continued to generate free cash flow for the ninth consecutive quarter and further reduced our bank debt by 147 million shekels. As a result of our strong cash flows and improving credit matrixes, we elected to reduce the credit available to us under the bank facility by $100 million. Maalot, an Israeli credit rating agency, an affiliate of Standard & Poor's in Israel, announced today that they raised our credit rating to AA- from A+.

The rating increase is further evidence of the strengthening of our financial position and credit worthiness and we expected to facilitate achieving more advantage or more advantageous credit terms in the future. We are evaluating a number of alternatives to refinance our $175 million 13% subordinated notes callable on August 2005. Among the alternatives we are discussing with the banks their willingness to refinance the notes with additional bank debt. Consequently, we are currently maintaining $235 million of additional availability in our bank facility.

Our general administrative expenses were higher this quarter, primarily due to two non-recurring items. We expensed deferred charges of approximately 4.5 million shekels comprising primarily of legal and accounting fees incurred in 2001 and preparing and maintaining our shelf registration with the US Securities and Exchange Commission. Although we intend to maintain this shelf registration, these deferred charges were expensed since we believed that the probability of issuing securities utilizing the shelf registration in the near future is low.

We also incurred 3 million shekel of costs in our attempt to purchase a controlling interest in Matav. These costs were expensed since the memorandum of agreement between the parties relating to the transaction expired and we discontinued negotiations.

With respect to 3G, we are continuing according to our plan with the build out of our 3G network towards an expected commercial launch towards year-end. Commencing with the commercial launch, we will incur additional depreciation and amortization charges on the 3G network and license. In addition, there will be incremental operational, selling and marketing costs associated with the launch of these services. The impact on our financial results will depend on the ultimate timing of the commercial launch.

Looking forward, we will continue to drive shareholder value by building upon our core drivers, our robust network, our strong brand and our focus on customer service. In the third quarter of 2004 as compared to the second quarter of 2004, we expect to show further improvement in our operating profit and margins, seasonally higher MoU and ARPU and similar SAC levels.

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

Thank you sir. [OPERATOR INSTRUCTIONS]. We have a question from Neil Wedlake of Morgan Stanley. Your line is open.

Our next question comes from Benita Nosovsky (ph).

Yes. Good afternoon. It is Benita Nicolalowich (ph) here from ING. I have two questions. Firstly, on Matav negotiations, is it - are there any chances for this negotiation really to start over again. How do you see this? And also you have mentioned something was done with regard to subscriber acquisition cost, definitions, maybe you could tell us something more about this as well?

OK. Very good. I think with the Matav transaction, what we have put in the press release is what we have to say about it. The memorandum of agreements expired and the company discontinued negotiations regarding the transaction. With regards to the subscriber acquisition cost, we discovered a technical error we had in computing subscriber acquisition costs in the first quarter. We corrected that error and that is basically - that is basically the situation. What I do have to add about the subscriber acquisition cost is that it does not have any impact on our financial statements and, that of our location of cost elements between various cost items and of course the revenue.

Sure, thank you.

We have a question at this time from Benny Charvet (ph). Your line is open, please go ahead.

Good afternoon. Yes good afternoon. My question is also regarding the Matav deal. Assuming that you did stop your negotiations, are you planning to purchase any other telecom companies in Israel or, are you planning to continue just with cellular companies?

At the moment Benny, we don't have any intention to purchase any other businesses. We are obviously constantly reviewing opportunities in the market and we would decide upon strategies when the time is right.

OK, thank you.

Thank you.

Our next question comes from Steven Pettyfer.

Yes. Thank you. Steven Pettyfer from Merrill Lynch, two questions please. Firstly, your sales and marketing expense looked comfortably low this last quarter. I wonder if there is anything particular there or if there was an element of benefit from the higher charge in the first quarter. And secondly, I wonder if you could just update us on competitively where you stand from a 3G perspective. There seems to be some increased noise from Cellcom about their progress there and I wonder if you had any color you could add on that? Thanks.

Well, first I'll give the technical answer to the selling and marketing expenses. Selling and marketing expenses are at their normal levels. If you recall the last quarter, we said that we expect selling and marketing expenses to return to their normal levels, which we have experienced over the past year.

Given the fact that in the first quarter we had additional selling and, marketing expenses with regard to additional Markham (ph) expenses and changing - making some changes in our distribution system in Jerusalem. So, from the point of view of the second quarter selling and marketing expenses, I think they are at their normal level and there is - the only reason they look like their lowered is because the first quarter expenses were substantially higher.

Alan, if I could just break in there. 6% of sales is - I think it is the last year, you had only one quarter where you are so low. Is this an absolute number that we should be focusing on now?

I am sorry. 6% of sales with respect to what?

Sales and marketing.

You are looking at numbers that are pretty much consistent to what was in the previous year. If you look at - if I go back let us say, start with the third quarter of 2002 or the fourth quarter was 85 million and, then it was 78 million and, then 81 million and, then 83 million. It went down in the fourth quarter because we had less Markham marketing expenses but then it went up to 91 million in the first quarter where we had these substantial expenses and changing our distribution system in Jerusalem and now went down to 76 million. So, I wouldn't pay too much attention to the percentage of total revenues because our guidance has been that we expect selling and marketing expenses after the first quarter which includes this quarter to be similar to where it was in the previous quarter the year before.

Given with respect to 3G, you rightly point out that Cellcom announced that it is launching its 3G services. We believe that we are far ahead of Cellcom both in terms of the ability to provide services in our - rollout, our plan and, we are confident that when we launch commercial service we will be able to offer an experience to the customers that is unavailable on any other network including that of Cellcom.

Thank you.

Our next question comes from Neil Wedlake.

Hello this is Neil Wedlake from Morgan Stanley. I hope that you can hear me this time.

I am able to hear you.

You can hear me this time. Good. Well, actually a couple of the questions I had have been answered in other form. Although perhaps just to go back to the SG&A progression, you did mention previously that you would expect SG&A - well you have mentioned that you would expect it to be low during the first part of the year but then to rise later in the year, presumably in the last quarter or two, ramp up to launch of 3G. Perhaps you can just give us an idea of what you think the incremental sales and marketing costs will be for that product, both in terms of launch and perhaps ongoing in terms of handset subsidy if any. And, also from the revenue side, you have mentioned that you think you will have good quality service, but what do you think this could mean for those subscribers in terms of incremental ARPU?

Well, first of all we are not going to give any long-term guidance here and, with respect to what we talked about the third and fourth quarter in selling and marketing expenses was incremental SAC and incremental marketing expenses in order to launch third generation. We don't believe that the launch of third generation will have a material effect on selling and, marketing expenses in the third quarter or neither on SAC in the third quarter and therefore our guidance in the third quarter, if you looked at our guidance as far as operating margins and profitability is that we expect further improvement in the third quarter from the second quarter. With respect to revenues, we stick with our guidance that we don't expect any material revenues from third generation in 2004. We view 2005 as the year we will be more aggressive in third generation and, generate revenues and additional expenses during 2005.

Well - I accept that. Sorry, I probably wasn't clear enough in stating my question that it relates more to the very end of this year than into 2005, but that is really what I am interested in and, I think, you know, as you say third quarter should be in a relatively predictable in the absence of an aggressive third generation launch. So, my question really relates to what sort of increment in SG&A you think would be in the fourth quarter because you failed to mention or didn't say that and, then what the revenue increment could be from 2005 onwards?

It depends first of all with respect to the fourth quarter and its impact on our financial statements as we said in the press release, it will depend on the outcome and timing of the launch and, you know, how aggressive we are when we actually launch the product. As far as revenue expectations and forecast for 2005, we are not giving revenue forecast for 2005 with respect to third generation.

OK, thank you very much.

Thank you Neil.

Thank you. [OPERATOR INSTRUCTIONS]. There are no further questions at this time. You may continue.

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