Partner Communications Company Ltd (PTNR) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2005 financial and operational results. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Yael Margoninsky. Please go ahead, Ms. Margoninsky.

Good morning to our listeners in North America, and good afternoon to those in Europe, the Middle East, and Asia. 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 Partners, and Alan Gelman, our CFO.

At this time, if you do not have a copy of today's release, please contact me here in Israel at +970-54-481-4159, or in New York Ms. Margot Olcay at 1-646-284-9418, 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 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 Partners' 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 April 20, 2005, as well as Partner's prior filing with the U.S. Securities and Exchange Commission on Form 20F, S1, and 6-K, as well as in the S-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 previous Safe Harbor statements as per 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.

Thank you, Yael. We are very pleased with our results for the first quarter of 2005. Partner is continually improving its financial and operational performance, which is driven by the excellent quality of our network, our award-winning customer service, our unique brand, and our passion for advanced voice, content, and data services. These have allowed us to continue growing our subscriber base, which now includes over 20,000 3G subscribers, who are already experiencing the extensive range of 3G services available on our network.

We are also delighted the Partner has made history this quarter by completing a public debt offering of 2 billion share counts, which we believe to be the largest ever (ph) corporate debt offering in Israel. We are also entered into a new, more flexible bank credit facility and as of today repurchasing approximately 33.3 million of our shares from our founding Israeli shareholders, which Alan will say a few more words about shortly.

Partner is now (indiscernible) to be in a stronger position than ever before to capitalize on future growth opportunity and to continue to grow our revenues and profitability alike. I would like now to hand the conference over to Alan. Alan?

Thank you, Amikam. We are extremely happy with our results for the first quarter of 2005. We recorded continued growth in quarterly revenues, EBITDA, and operating profit. Quarterly revenues totaled 1.26 billion shekels. EBITDA reached 401 million shekels and 31.8+ACU- margins. Our operating profit was 237 million shekels. Income before taxes was 186 million shekels, and net income was 124.5 million shekels, which is an increase of over 35+ACU- from Q1 2004.

In the first quarter we incurred additional depreciation and amortization charges on our 3G network and license, following the launch of the 3G network in December, and also had to absorb the impact of the reduction in interconnect tariffs as directed by the Ministry of Communications. Overall we believe the results for the first quarter are in line with the annual guidance that we gave in our press release for the yearly 2004 results, which was published on February 7, 2005.

As Amikam mentioned, since the beginning of the year our debt structure has been significantly improved. First, we completed an offering of 2 billion shekels of unsecured Series A notes which were issued at their par value and registered in Israel. The net proceeds, which were received at the beginning of this month, were approximately 1.9 billion shekels.

Second, we also this month entered into a new bank credit facility which is less expensive and more flexible than our old one. And finally, today we completed the repurchase of approximately 33.3 million of our outstanding shares from our founding Israeli shareholders. The total consideration for the shares was approximately 1.074 billion shekels and was funded by the new debt issuance together with internally generated funds.

The share repurchase, together with our improved debt structure, will offer for real value for both our remaining shareholders and bondholders by optimizing our leverage for future growth opportunities and future dividend payments. We intend to use the balance of the funds available principally to call the 13+ACU- +ACQ-175 million senior subordinated notes on August 15, 2005.

We do not intend to use the proceeds from the bond offering and the new facility to pay an immediate dividend to our shareholders. That said, future dividend payments are a possibility, given our level of profitability and our ability to generate positive cash flow. However, due to covenant restraints, the possibility of a dividend payment in 2005 is remote. Yael?

Thank you, Alan. You are now invited to ask your questions. Moderator, please, q-and-a

(OPERATOR INSTRUCTIONS) Joseph Wolf of UBS.

I had a question about 3G, actually. I was wondering if you could give us a little bit more color on the development of that 20,000 custom subscribers since your launch date, whether there was a big pickup in the first couple weeks of the launch and that has subsided+ADs- or whether you've seen a steady stream of customers interested in 3G services?

Then I was also wondering whether you could go into some of the -- if you've got any data or any preliminary data on the kinds of advanced services that your customers are most likely to be using right now?

This is Amikam speaking+ADs- I will answer the question. First of all I would like to say that we are very, very pleased in what we achieved so far concerning this issue of third generation subscribers. So far we subscribed a little bit more then 20,000 subscribers. I can tell you that what we see is increasing ARPU+ADs- it is expecting (ph) our expectations.

Still what we see and what we forecast at the beginning was, or our main concern is, with the handset issue. But according to the roadmap that we saw from almost all the vendors -- and I am speaking on behalf of Nokia, Samsung, LG, and Ericsson, Sony Ericsson, and all of the other big ones -- we believe that second half of this year we will see various, large variety of handsets. I believe that we will be able to increase the pace of subscribing third-generation subscribers.

Thank you.

Neil Wedlake of Morgan Stanley.

I have a question related to the changes to the interconnect regime. We obviously know what the schedule is of rate reductions over the next two or three years, or at least the proposals. In order to get an idea of the true impact of that, can you maybe give us an idea of the split between incoming and outgoing minutes? And maybe some commentary on the elasticity that you see to those reductions.

I know that the mobile operators have raised their retail tariff, so it is kind of hidden from the subscriber. Could you tell us whether that is the same, the fixed to mobile? And if not, i.e., if the subscribers, if they are actually picking up the benefit of the lower interconnect, are you starting to see an increase in interconnect minutes from that source?

I hate to disappoint you, Neil, after such a long question. It is too early to tell. I think since the interconnect regime just went into place on the first of March, the results of the price increase in the interconnect regime as far as elasticity on minutes -- I think we'll have to wait a couple of months to see what the real effect is. Especially it's impossible to draw conclusions on March's numbers anyway, because the customers don't get their bills and really realize what the effect of the interconnect rate and the price increases are until they actually receive their bills in April.

So I think we'll have to wait probably until the next call to get a little bit more guidance and a little bit more flavor on what is happening with respect to the interconnect regime and the price increase, with respect to the elasticity effect of the tariffs to the customer. So I think we should wait on that.

With respect to the breakdown between incoming and ongoing calls, we don't give that information to the public.

I suspected you might say that. Could you maybe just clarify exactly how the response has varied between the mobile and the fixed line operators? (multiple speakers) Go ahead.

Sorry+ADs- keep going.

Just in terms of you've tried to balance that effect on your offerings?

We did a couple of things when we -- to counteract the interconnect. Again, we think the results show that we've been reasonably successful. We always said that the major tool to counter the effect of the interconnect was cost reduction. We were successful in doing that in the first quarter+ADs- and therefore our results show the effect of the cost reduction.

The price increase? We always said the price increase will only offset a small portion of the increase in the interconnect. We basically raised our prices+ADs- our competitors also raised their prices. In that respect I think we are in a rational market. I am not saying there is not competition in the market. There is competition in the market. We see price competition in the marketplace. But everybody basically realized that one of the ways to offset the regulation was also to raise their prices.

Our feeling was always that raising the prices is not enough, and that we would have to make certain cost-cutting measures in the Company. We implemented those quite successfully in the first quarter, which gives us a lot of confidence going to the second quarter, when we will have three months of interconnect effect, that we will be able to stand by the guidance we gave the market as far as replicating our EBITDA for 2004 and 2005.

Thank you very much.

Alex Wright of UBS.

I had a couple of questions. The first one is just looking at the ARPU trends over the last couple of quarters. As is clear, the (indiscernible) suffered a little bit because of the interconnection rate changes. I just wondered if you look into the second quarter, given that the interconnect rates came down at the beginning of March, do you expect the ARPU to fall further? Or do you think that the price increases that were implemented during the course of the first quarter will help to stabilize that ARPU?

The second question is regarding the covenants and gearing level that may be targeting beyond 2005. First of all, once you've paid down the high yield bonds, are there any covenants outstanding in '06 and beyond which will limit the dividend-paying potential that you have going forward? Can you give any kind of indication on what level of gearing you will be targeting, whether it's net debt to EBITDA or are any other kind of measure you may have mentioned? Thanks.

Let me just take the first question first, which was probably the easiest question. We gave guidance that we expect ARPU levels in 2005 to be about 10+ACU- lower than ARPU levels in 2004. There is no question about it that the impacts of the interconnect regime in the second quarter will be more substantial than the impact we saw in the first quarter.

That will be offset somewhat because the second quarter is a more seasonal quarter. There's higher minutes of use. There is more roaming revenue in the second quarter. But essentially the impact from the interconnect regime will definitely have a larger impact in the second quarter. And that's what we guided on when we talked about how we are going to counteract the new regulatory regime.

Understand, the first-quarter results include only one month of the reduction of the interconnect rates. We are talking about the next quarter+ADs- we are going to have three months of a reduction of the interconnect rates. Like I said all the time, the price increases only offset a small portion of the interconnect regime. Most of our remedy for the interconnect regime is cost-cutting, which doesn't come into play as far as ARPU numbers are concerned.

With respect to the covenants or the gearing level, first let's talk about covenants. The only relevant covenant that we have that will control dividends or basically limit dividends is a very, very liberal covenant. It is a covenant that says dividends have to be limited to -- post dividend, by the way -- equity levels have to be 20+ACU- of total assets.

Just to give you a -- to help you out with the numbers, our equity at the end of March was a little bit more than 1.7 billion shekels. After the transaction with the shareholders will have about 650 million shekels in equity on assets of 4.5 billion shekels. So we are talking about an equity to asset ratio at the end of the first quarter of about 14+ACU-. I made it (ph) very, very clear that that equity to asset ratio will increase during the course of the year.

If there is a possibility to pay dividends at the end of the year, I would say that possibility is remote. If there are dividends it will be a small dividend, because I don't expect the Company will outperform the 20+ACU- equity to asset ratio substantially enough to pay a substantial dividend.

Thank you. Then looking into '06 and beyond, Alan, in terms of (multiple speakers) ratio improvements?

The '06 and beyond I think, given the fact that we have visibility -- and again we don't give guidance on '06 and beyond -- but the Company is generating consistent profits and cash flow. So the issue of the covenants in '06 and beyond should not be problematical.

As far as the gearing level is concerned, we made it very, very clear when went into the transaction with the shareholders, one of the things, one of the drivers behind the transaction was we felt we were undergeared+ADs- that we were not making efficient enough use of our balance sheet. Interest rates are very low.

The return on capital to investors, whether we talk about net profit or cash flows, was substantially higher. And we believe that the gearing level should be higher than the 1.15 debt to EBITDA ratio we achieved at the end of the first quarter, and therefore post-transaction we are in the area of 1.8. We intend to keep the gearing level in, I would say, numbers that are closer to 2 than 1.

Great, thanks very much.

Yoav Burgan of Poalim Sahar.

Alan, you mentioned before the cost-cutting measures that you implemented during the first quarter. Could you elaborate a bit? Because if I look at the headcount at the end of the quarter, it's more or less flat compared to the end of the last two quarters. Do you intend some kind of significant downsizing in your workforce?

A couple of things. First of all, nobody ever said that all the cost-cutting was headcount. Headcount is one of the areas of cost-cutting. We gave disclosure in the press release that one of the major areas where we spent less in the first quarter was advertising and distribution.

The reason why the headcount numbers are the same in the KBIs (ph) that you receive is because we give advance notice to the employees, so the employees are still on the payroll. Therefore they are counted as part of the headcount. But the overall financial cost of the employees is lower because we always provide for the advance notice. But you will see the headcount, we have released a certain amount of employees, approximately 5+ACU- of our workforce.

But the cost-cutting is by no means only an issue of headcount. It's an issue of promotional expenses+ADs- it's an issue of subscriber acquisition costs+ADs- how much we spend on retention+ADs- how much we spend on administrative expenses throughout the organization. Overall we reduced our SG+ACY-A expenses. If look at the first quarter of 2005 vis-a-vis let's say the four or five preceding quarters, we reduced those expenses by approximately 25 million shekels.

Now most of that is sustainable going forward. Yes, we had less promotional activity in the first quarter, so there will probably be more promotional activity in the second quarter. But the level of expenses throughout 2005 is expected to be at a lower level than they were in 2004.

Great. My second question, a few months ago there were headlines regarding your intentions entering the fixed-line market in Israel, facilitating the future Ministry of Communications regulations on VoB, video on broadband. Has there been any developments in this area?

No real developments there. Yes, it's interesting to us. Because if we could add a fixed-line perspective or a fixed-line product to our product offering -- again, as an ancillary product and not as a major line product. We are not here to compete with basic (ph) or the cable companies. but to give an advantage to specific customers who need that particular product, and we could do it over the Internet without substantial cost, without investing in infrastructure, without making any substantial acquisition, it is interesting to us. But nothing that really developed in the last couple of months.

My last question relates to the PTP market or niche. I saw that Araphone (ph) started to market -- started penetrating the PTP business market. Cellcom has been doing this for almost a year. What are your intentions regarding this niche?

As I believe that you know, we started with the PTP with trials for the PTP approximately a year ago. There were some regulation obstacles from our (indiscernible). But I have to tell you that we find out that doing the PTP over the GPLS is not good enough. So we decided to drop them and to wait until we have something much more mature in technology like the third generation. In the third generation, most of the handset that will be available, I would say, during the second half of this year, will deal with the ability to give the service built into the system. So then of course we will be able to introduce a proper service to the market. So far, we believe that doing this over the GPRS, over the 2.5 generation is not good enough.

Great, thank you.

Ellie Shohed (ph) of Vega Consultants BDO.

Most of my questions have already been asked and answered. I have another question about the gross profit of the Company as I can see that since Q3 of 2003 it keeps on falling, continued falling. I wondered if you know the reason for this, and a particular reason+ADs- and to what level are you targeting? Thank you.

Very simply I'll talk about -- there are two different things we're talking about. If we talk about Q3 2003 through maybe Q4 2004, the gross profit percentage, if you divide services and equipment -- and we report on services and equipment -- you will see our gross profit percentage in services has been pretty stable. It was 37.6+ACU- in the fourth quarter of 2003, and 37.2+ACU- in the fourth quarter of 2004.

There is a drop the first quarter of 2005+ADs- and that has to do mainly with the additional depreciation and amortization on third-generation network which we launched on the first of December. And therefore we have the additional depreciation and amortization in the first quarter of 2005, along with other expenses that in the past we capitalized.

In addition you also have the effect of the interconnect regime in March. So we will see that, if you are asking where that number will go, that number will go a little lower in the second quarter. It will go lower because we will have maybe a little bit more -- we will have a little bit more depreciation and amortization, because we have more network buildup on third generation. And we will have three months of the specs (ph) on the Internet level, which basically affects us more on the gross profit level, where the cost-cutting we get back on the operating profit side.

Now the other issue as far as margin, or gross profit margin dilution, I think is less consistent. That's the issue of how much we subsidize handsets, and how much we sell on the equipment side. We are still in the policy of overall subsidies on handsets+ADs- and depending on the level of activity that affects the overall gross profit percentage for that particular quarter.

But I think the number you should focus on as a more steady number with trend is the gross profit from services+ADs- and that has been pretty consistent from the middle of 2003 to the fourth quarter of 2004, even though there is some slight dilution because there is some overall price dilution. But the major drop has to do with the depreciation and amortization of the third generation and the implementation of the new regulatory regime.

Thank you very much.

Benita Mikolajewicz, ING.

I have a question about the competitive environment+ADs- maybe you can elaborate a little bit more on what is happening and why your churn has increased quite substantially+ADs- and maybe whether you have any estimate on your share on net additions during the quarter. Also I will have one more question later.

First all, Benita, I think the net adds are in lines with the guidance we gave the market. We gave market guidance of 4 to 5+ACU- subscriber growth for 2005. There is no question about it+ADs- the 32,000 gross adds, even though they are lower than they were in the previous quarter, is in tune with what we guided the market.

With respect to the increase in churn, the increase in churn is primarily -- almost exclusively -- if we compare the first quarter of 2005 to the first quarter 2004 from the prepaid sector, it's very, very difficult to pinpoint exactly where the increase in churn is coming from in the prepaid sector. Because we don't have as extensive information on our prepaid clients as we have on our postpaid clients.

But there are two definite trends that we could identify that definitely contribute. One is that in 2003, in the summer months of 2003 the security situation in Israel was not the best. Therefore there were very very few tourists. In 2004 there was a lot of tourism during the summer here in Israel+ADs- and a lot of the European tourists by SIM cards, prepaid SIM cards. They are registered as prepaid subscribers. Then after they complete their vacation here in Israel, where they go back to France or wherever else they go, they basically don't use that SIM card anymore.

Because our policy is that if a SIM card isn't used and doesn't generate revenue in a period of six months, they become churn+ADs- so there is some increase in churn that has to relate with that sector of our business.

And the other thing that we can identify -- again, it's hard to quantify it -- is that Israel is making a very big effort to cut down the amount of foreign workers in Israel. There's been a big push this year to reduce the number of foreign workers. A lot of those foreign workers were our customers on the prepaid side. A lot of it came from countries that had GSM technology, and we were the first GSM operator, so I think our market share in foreign workers was pretty large. We see a reduction in that sector. No question about it.

Sure, thank you. Also in terms of your selling and marketing expenses, which went down, you have mentioned that they are going to pick up in the following quarters. Shall we expect around 6+ACU- of revenues, as last year? Or do you think you would be able to keep them lower?

I think we are going to be able to keep them lower. But we're not necessarily guiding to the same level of selling and marketing expenses which we had in the first quarter. The first quarter we did not have a lot of sales promotion, after we were very, very aggressive in the fourth quarter of 2004. You could expect sales and marketing expenses to be higher in the second quarter, but still at lower levels than they were in the past.

Sure. Thank you very much.

Istvan Mate-Toth, of Credit Suisse First Boston.

Alan, I am terribly sorry if I misunderstood something+ADs- but did you say that you have started to expense certain items which were capitalized before? If this is correct, could you just elaborate on what exactly these expenses are which were formerly capitalized?

And I have a related question to Alex's covenant question. So your dividend I believe it will depend upon you maintaining the 20+ACU- equity to asset ratio, if I understand it correctly. Could you give us the exact number of your shareholders equity on a pro forma basis, post the transaction, as of the day when you bought back the shares and translated them? And what exactly your distributable reserves under Israeli regulation would be, ignoring the 20+ACU- covenant?

Let me go to the easy question first. What were the expenses that were capitalized? According to U.S. GAAP before you -- as long as you didn't launch the 3G network, expenses that were directly and exclusively related to the establishment of the network -- and they could be IT expenses, they could be payroll expenses, consultants that are specifically engaged to establish the network -- those expenses are capitalized. Once the network is put into service they are amortized over the life of the network.

So in before (ph) pre-December 1, those expenses -- employees, consultants, like, and that is most of the expenses -- were capitalized. Once the network was launched commercially, those expenses are starting to be expensed on a regular basis.

Okay, I understand.

With respect to the equity to asset pro forma ratio, I think I went through that, but I'll go through it again. If you look at the end of the first quarter, our total shareholders equity is 1.735 billion shekels. The transaction with the shareholders is 1.074 billion shekels. That means we are left with about 650 million shekels in equity at the end of the quarter, where our total assets are about 4.5 billion shekels.

Thank you very much.

(indiscernible) one other question, Istvan?

Yes, the 650+ADs- how much I think the (multiple speakers).

Distributable earnings of the 650, approximately all of it is distributable earnings.

Thank you very much.

Absalom Schimih (ph) from HSBC.

Congratulations for the numbers. Just a few questions regarding the 3G. Can you provide the actual number that you had in 3G subscribers for the quarter?

Absolutely. We had 8,000 at the end of the year. We added another 12,000 in the quarter.

Do you think this rate is something that could be indicative for the future of the next quarter? Or this number should go higher as we go along?

As I said before, third generation is exactly according to our expectation. Due to the fact -- the main obstacle is due to the fact that we still have some, I would say, problems with handsets. But as we see and as we know the roadmap of the main vendors for the third generation, we see this gap is opening by the second half of this year. So we believe that the pace of the second half of the year will be much higher.

All right. Would you say that the increase in data revenues is mostly from the new 3G net adds, or it is from some other reasons?

We are very, very satisfied and we are very encouraged by the increase in data revenues on third generation. We are not going to give any information on that right now, because like I said it's 20,000 original customers and we don't want to -- even though we are very, very, very happy with it, we don't want to make any conclusions based on the first 20,000 customers, which might not be indicative of a larger market.

That said, the main driver for additional data in content revenues in the numbers that you see is not necessarily third generation, because third generation is still a very small base of our customers. It is mostly second-generation data and content revenue. But what is encouraging is that the main driver for the increased data and content revenue is coming from the technological advances and the handsets.

As handsets become more technologically advanced and our supportive of the content -- for instance, they have colored screens, streaming (ph) clients, better memory, better battery life, and GPRS-enabled -- it becomes easier for customers to use data and content. Therefore the data and content becomes more accessible.

Quite frankly we are seeing now for a couple of quarters straight a big boost in data and content revenues, which is extremely encouraging going forward to third generation, where the third-generation experience in the user interfaces is far better than the second generation user experience.

If I'm sensing you right, that means that the majority of the increase from data and content revenues hasn't actually even started taking off what is the potential of, let's say, a substantial (indiscernible) base of 3G subscribers.

You are taking me 100+ACU- right. What we're saying is it's very indicative of what can be when you have a handset that is very, very, very compatible with content. What we see right now is just the first, what I call, the grassroots of what we believe to be a big opportunity.

All right. In regard to the network coverage, can you elaborate what is the current status of the 3G (indiscernible)?

Today it's is 80+ACU- or a little bit more than 80+ACU-, 85+ACU- from the population. I believe that we are going to end up rolling out to the network coverage-wise by the end of the next quarter.

All right. Excellent. In regard to be prepaid issue you discussed before, the trend -- do you think that the trend we saw in the quarter, you mentioned the two factors behind it, do you think that basically sums it up? Or should we expect a similar trend in the next one or two quarters for the prepaid churn rate?

I think you are going to see different things in the next couple of quarters, because the issue of the tourists is usually a first-quarter issue. If you look at last year we had a bump up in churn also in the first quarter. That was also predominantly from prepaid customers. Because the issue of the tourist is an issue of summer usage, and then six months later the customer becomes dormant.

So you're going to see second-quarter numbers different than the first-quarter numbers. But there is no question about it, and I think it's very consistent with the performance of companies worldwide+ADs- when the market is more and more mature and more penetrated, the churn rates naturally go up. So you will see churn rates not the same as they were in the first quarter, but you will see churn rates that are essentially higher than they were in 2004.

My last question is just in regard to your latest announcement regarding the Blackberry service. Do you think we can expect some kind of meaningful revenues this year from this service? Or that's kind of more of a must-have strategic add-on for business clients?

I think it's a very strategic add-on for business clients, and it is something we are very excited about. It's another service. We generally pride ourselves on giving our customers the leading edge of the technology and the best service possible. It is definitely a niche product that is not a product for everybody.

It's a product that is relatively expensive. It's a product that provides a solution to people that need mobile e-mail, and it is a very, very good solution, and we are very happy to have that product for our business customers. It's more of an added service to our customers. We don't expect any material revenue streams from it.

All right. Thank you, guys.

Sergei Arsenyev of Goldman Sachs.

Could I just ask you one follow-up question on subscriber acquisition costs? Can you tell us what the 3G subsidy is, relative to your average subsidy, or in absolute terms, if you can disclose this?

First of all, we don't disclose numbers third generation and second generation. What we did tell the market is at the beginning and the initial launch of third generation we will adopt a slightly more aggressive policy for subscriber acquisition of the third generation. But over the long haul, we believe that our policy for subscriber acquisition on third generation and second generation should be relatively the same.

Thank you.

Neil Wedlake of Morgan Stanley.

You have mentioned a few areas of guidance which you have reiterated. I just wondered if for completeness we can just round off on any other areas, particularly in the CapEx area, where it seems the run rate in the first quarter was relatively high. Could you just recap on your expectations for this year's CapEx? Or if you want to phrase it in (indiscernible) 3G budget, both (technical difficulty) and for 2G, that would be useful.

Great. That is it? One question? Okay.

(multiple speakers) I wanted to clarify the EBITDA point you made as well, between that equal (ph) EBITDA margin to 2004 (multiple speakers).

No, no. I will clarify both of them, Neil. First of all, in the CapEx area we feel that we have a tremendous competitive advantage on third generation, because we're the only operator that really has a valid all-inclusive third-generation product. Our position was that we want to roll out the network as fast as possible. Therefore we accelerated the buildout of the third-generation network, and therefore you see CapEx in the first quarter at levels higher than we had in previous quarters.

That is part of our strategy to establish ourselves as the leader of third generation here in Israel. You will see CapEx for all of 2005 being in line with CapEx for 2004, which means that you will see lower levels of CapEx in the coming quarters.

With respect to EBITDA, our guidance on EBITDA was on absolute levels of EBITDA, not on EBITDA margin. That fact that EBITDA margin was higher in the first quarter is not -- we are not guiding to higher EBITDA margins+ADs- we're guiding to the same absolute level of EBITDA in 2005 which we had in 2004.

Could you just clarify again on your calculation of the dividend covenants? Just to clarify, you mentioned 670 (ph) of adjusted equity, which looks clear. But the 405 (ph) assets, I presume you are not adjusting that for the cash outflow for the repurchase, because although the debt offering (multiple speakers)?

I am not adjusting it because we don't -- because the numbers don't include the actual debt, the debt that was raised. Because the actual cash received on the debt offering was in April.

Okay, that is clear. Thanks.

There are no further questions+ADs- please continue.

Thank you. 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+ADs- good evening in Europe, the Middle East, and in Asia.

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