Partner Communications Company Ltd (PTNR) 2004 Q3 法說會逐字稿

Welcome to the Q3 2004 financial and operational results teleconference. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions given at that time. (OPERATOR INSTRUCTIONS). As a reminder this teleconference is being recorded. I would now like to turn the conference over to 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' 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 relays please contact Yael Margoninsky at 972-54-48-14-159 here in Israel, or Ms. Margaret O'Cleary (ph) in New York at 646-284-9418 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 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 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 November 29, 2004, as well as Partner's prior filings with the U.S. Securities +ACY- Exchange Commission on Forms 20F, F1 and 6K, as well as the F3 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 statements, 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.partner.co.il. At this time I would like to turn the call over to Amikam.

The third quarter of 2004 was another record quarter for Partner. Partner's excellent financial and operational performance this quarter was fueled by the quality of our network, our focal point customer service, which is widely recognized for its excellence, our advanced value added services and our unique brand. (indiscernible) the daily business paper, Globes, declared for the second consecutive year, the orange brand to be the most valuable brand in the telecom sector in Israel and the second in general consumer market following the Coco-Cola brand. We have won for the third consecutive year the prestigious Institute of Management award for the best service in our field. Our success in establishing our network, our (indiscernible) network, leading in innovation and unique user experience, enable us to grow our subscriber base and to continue to drive revenue for our shareholders. At the end of the third-quarter we reached close to 2.3 million subscribers. We estimated we have approximately 32 percent of the cellular market in Israel. The quarter we ended 67,000 subscribers net, more than telephone and cell phone combined. Another major development in recent weeks was the decision by the Ministry of Communication not to implement significant regulatory changes. Partner is (indiscernible) the most appropriate course of action to take to address the impact of these changes.

Measures Partner is considering might include, among others, cost-cutting and repackaging of our product offering. Depending on the success of this test and other factors such as general market condition, these regulatory changes may have a negative material impact on our possibility. In our continuous drive to introduce the most advanced (ph) services and technologies, we are already looking forward with excitement to the opportunities presented by the third generation. Tomorrow we will launch the most advanced cellular network in Israel with initial coverage in the central area of the country and with user (indiscernible) available profile in this country. We are confident that a third generation offering services (technical difficulty) our strategy to lead the market into a new era and to allow Partner to continue grow in revenues and profitability alike. With that said, I would like to turn the call over to Alan Gelman.

Thank you, Amikam. We are very pleased with our results for the third quarter of 2004. We recorded continued strong growth in quarterly revenues, EBITDA and operating profit. Quarterly revenues totaled 1.348 billion shekels. EBITDA reached 414 million shekels, a 30.8 percent margin, and operating profit was 276 million shekels, over 20 percent of our total revenues, more than both our main competitors. Income before taxes was 232 million shekels, while net income was approximately 115 million shekels. We continued to generate cash flow for the 10th consecutive quarter. During the last 2 1/2 years we reduced our bank debt by over 1.3 billion shekels. Our bank debt as of September 30, 2004, was the NIS equivalent of +ACQ-274 million. With regard to our +ACQ-175 million 13 percent subordinated notes that are callable in August 2005, we are currently evaluating a number of alternatives to refinance these funds. We believe that the funds from operations, together with funds available under our bank facilities, will provide us with enough liquidity and resources to fund our expected capital expenditure needs including our plans to increase the capacity of our existing network and capital expenditures associated with our 3G network buildout as well as obligations under our financing agreements and other material commitments.

However, the actual amount and timing of our future requirements may differ materially from our estimates. We are proceeding according to plan with the rollout of our 3G network and as Amikam said, we expect to launch commercial services tomorrow. As a result of the commercial launch, we will incur additional depreciation and amortization charges on our 3G network and license. In addition, there will be incremental operational, selling and marketing costs associated with the launch of these services. We are committed to continue to build shareholder value by focusing on our core drivers, our robust network, our strong brand and our focus on customer service. Going forward we expect a stronger fourth-quarter than Q4 2003, although it will be seasonally slower than the third quarter of 2004.

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

(OPERATOR INSTRUCTIONS). (indiscernible) Bergon (ph) with (indiscernible).

My first question relates to the turn rates. Obviously you had a pretty significant decrease, if I compare it to the previous quarter and if I compare it as well to Q3 '03. Actually I don't think I totally understood the explanation you provided in your press release. Could you address it?

No problem. The churn rate went down by 7/10 of 1 percent and it was primarily related to what we called rotational churn. If you recall, I don't know if you were on previous conference calls when we explained the phenomenon of rotational churn. Rotational churn is basically a situation where a customer goes into -- wants to upgrade his handset because he wants a newer or a later model handset, and he goes into one of our dealers or our customer service centers and instead of upgrading to a handset he buys a new handset because it's a better deal. He gets a better deal on that handset. So he buys another handset with another SIM card and what eventually happens is because he can only talk on -- well he only talks on 1 of the SIM cards, 1 of those phone churns off the network, it's a dormant subscriber, it doesn't talk or generate revenue for a period of 6 months and then it's considered a churn subscriber. The problem with that type of situation is that we end up paying a double commission. We end up paying a commission for a new activation which ends up costing the Company more money. What we have done over the past year, basically almost a year ago, we started instituting a procedure within the Company where we now allow upgrades also through our dealer system. That has substantially cut down on the phenomenon of people buying a new phone and activating a new phone and only using 1 phone. What happens now is the customer, at least the postpaid customer, which goes into 1 of our dealer locations and he wants a newer handset, he'll upgrade that handset where he is just basically buying a new handset without a new SIM card, and therefore we don't have that churn affect, and effectively we are also paying a lower commission.

So the Company also saves money, the churn rate goes down, and most of the improvement in the churn rate from the 3.3 percent to the 2.6 percent is related to the reduction in that phenomenon of rotational churn and what we call postpaid private customer. Still most of the rotational churn we have in the network is on prepaid customers, and the issue there is that there isn't a reasonable response, as yet, to upgrade for prepaid customers. So if a prepaid customer wants to get a new phone, goes into 1 of our dealers and buys a new phone, and therefore the rotational churn is still the major issue with prepaid subscribers, although we were very successful with the postpaid subscribers.

Okay, great, excellent. My second question refers to the MOU, the increase. Could this be attributed just to -- or mainly to seasonality?

The MOU increase from the second quarter to the third quarter, part of it is seasonality, not all of it is seasonality. We've noticed over the, if you look over the last couple of quarters, if you look at the MOU's in 2004 versus the same quarter the year before, we have an increase in minutes of use. But there is no question about it that if we look at Q2 to Q3 most of the increase is seasonality.

My last question refers to operating cost. The sales and marketing and general and administrative -- G+ACY-A, are the current levels representative let's say for the upcoming quarters?

The current levels are representative but as I said in the guidance I gave in the press release and also in the opening remarks, is that we do expect some increase in selling and marketing expenses, general and administrative expenses and operating expenses, as a result of the third generation launch, at least the beginning of the third generation launch, because there will be some duplication of expenses over the 2 networks, and not necessarily also related to network expenses. They are also related to marketing expenses and some G+ACY-A expenses.

Okay. And this will be like the system beginning of 2005?

From when we launch our third generation network which we are planning to announce the commercial launch tomorrow.

Thanks a lot.

Joseph Wolf with UBS.

Thanks. I wanted to ask a question related to the G+ACY-A, as well, and connect it to the 3G. Alan, in some of the -- in the press release you talked about some specific issues with some handsets where there are a lot more offerings and some doubtful accounts or allowances for doubtful accounts. Can you relate how that impacts, if there are specific issues there that are solvable, or whether that is something which is going to persist and how that would relate to additional handsets that come about because of the 3G launch?

Of course there is a dilemma there. We want to provide our customers with the latest and greatest handsets and that is, I think, the goal of any operator especially if you are competing for each and every customer. And considering that handsets are a major driver of customer growth or a major factor in the customer decision in which network they go to, we make sure that our customers have the latest models of handsets. What's happening lately is that we see operators or vendors or manufacturers, I would call them manufacturers, that are coming out with 1 model, then a couple of months later coming out with another model, then another model, then another model. Basically when the new models come out the older models start moving a little slower and there is an inherent difficulty in getting the right levels of inventory in order to satisfy the customer base.

It is something, that, yes, we are working on. It is something that I don't think is what you call an episode, that it's a 1 time issue. I think it is something we have to be very, very careful with going forward in 3G. 3G is another challenge there because 3G represents a real upgrade in the technology. It is something that the customers are going to be looking for. If 3G is very successful you can probably expect that every customer will want a 3G handset, or most customers will want a 3G handset assuming that the price is right. That said, we have to be careful on the levels of inventory we are carrying on the second generation handsets, but not to cut off our nose to spite our face, because still most of the customers, those second generation customers. So it's an inventory management challenge. I think we are up to it. But it is something, it's a new phenomenon that we are getting used to and hopefully we'll do a better job.

Second question, if I could, is on the level of competition in the gross margins as we exit or move into dealing with the ramifications of the interconnect fee and the changes that have to go out, that have to happen throughout the industry, how much more competition -- or do you see increased competition in that level that will impact gross margins next year or do you think things have leveled off there?

Will it impact gross margins? The interconnect itself will impact gross margins because the fact of the matter that the interconnector rate is going down in itself will impact gross margins. It will reduce the ARPU of course. That's a problem in itself. But we do expect, we do expect -- 1 of the things we might consider doing is repackaging our products, possibly raising prices. Hopefully we will recover a good portion of the damage that would have been expected from the regulatory decisions. But there is no question about it that we are not going to sit around and take it on the chin. We are going to take certain actions. We haven't decided what they might be and of course it could be also a combination of all the 3 things that were mentioned by Amikam in the preliminary statement.

Thank you.

(OPERATOR INSTRUCTIONS). We have nobody else queuing up at this time. Please continue with your presentation.

This concludes 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.investor.partner.co.il. Thank you and good morning in North America, good evening in Europe and the Middle East. Operator.

Ladies and gentlemen, this teleconference will be available for replay beginning today at 9:30 PM Eastern and running December 6th. You may access the AT+ACY-T executive playback service at any time by dialing 800-475-6701. International participants may dial 320-365-3844, and your access code is 756655. Again the toll-free number is 800-475-6701. International is 320-365-3844, and your access code is 756655. That does conclude your teleconference for today. Thank you for your participation and for using the AT+ACY-T executive teleconference. You may now disconnect.