Partner Communications Company Ltd (PTNR) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2006 financial and operation results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder your conference is being recorded. I would now like to turn the conference over to your host Dr. Dan Eldar. Please go ahead.

Thank you, operator. Good afternoon to those of you in Europe, the Middle East and Asia, and good morning to our listeners in North America. Thank you for joining us for the conference call to discuss Partner Communications 2006 third-quarter results. With me on the call today are Amikam Cohen, our CEO, David Avner our COO, and Alan Gelman our CFO. At this time if you do not have a copy of today's release please contact Yael Margoninsky here in Israel at plus 972-544-814159 and a copy of the release will be either e-mailed or faxed to you immediately.

Before we begin I would like to dry 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 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 May 15, 2006 as well as Partner's prior filings with the U.S. Securities and Exchange Commission on forms 20-F, S-1 and 6-K as well as the S-3 (indiscernible) registration statement, all of which are readily available. Please note that 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 the website at www.investors.partner.co.il. At this time I would like to turn the call over to Amikam.

Thank you, Dan. In the first quarter of '06 we built on the progress made in '05 and once again delivered an excellent performance. Service revenues in particular have grown slowly this quarter increasing by 4.6% compared with the first quarter of '05, and we also continued to grow the company's (technical difficulty). As with '05 this year we faced a number of challenges. This concludes reduction in interconnect, continuation of our 3G market penetration and other marketing and operating challenges associated with our 3G operations. In March the rate of growth and better net interconnection went down according to the schedule set by the Ministry of Communication. We believe the strategy we adopted of cost capping measures, price increases and repackaging for our rate plans grew once again helped us to mitigate the effect of this interconnect reduction. We are very pleased with the success of our 3G network and affected subscribers today and we are sure that our efforts to continue pushing 3G will serve as an investment in growth and future profitability.

Israeli customers have (technical difficulty) network connected (indiscernible) in the country are already having the first opportunity to try out the most advanced 3G technology in Israel made attainable to them by our soft launch of HSDPA. Reports in Israeli press indicates that for those customers downloading (indiscernible) has been (indiscernible) to around 1.2 Mb per second on average, which in turn hosts (indiscernible)time and doubled network capacity. We believe that the future Partner will continue to lead the market with its network quality, advanced technology, superb customer service and delivering data and in more focused position. With that said I would like to hand the conference over to Alan Gelman.

Thank you, Amikam. As Amikam said we delivered a very strong performance this quarter with good service revenue growth and unambiguous improvements in all the key earnings margins. We believe the results clearly support the 2006 annual guidance we provided in the press release issued on February 1, 2006. In view of the prospects for further positive cash flow generation we have today recommended the Board adopt a dividend policy targeting a payout ratio of 60% of net income over 2006. We believe this policy demonstrates our full confidence that the company can continue to return cash to shareholders while at the same time keep on growing our business.

For this quarter the Board of Directors has approved the distribution of an interim quarterly cash dividend of 0.45 Shekel per share, approximately NIS 70 million in aggregate to shareholders on record as of June 6, 2006.

To return to our quarterly results, in the first quarter our total revenue were NIS 1.326 billion or $284.4 million, an increase of 5.3% from NIS 1.260 billion in the first quarter of 2005 and also up 5.3% from NIS 1.259 billion in the fourth quarter of 2005. The increase compared with both Q1, 2005 and 2Q, 2005 were fueled primarily by growth in service revenues of 4.6% resulting from a larger subscriber base, increased minutes of use, restructured tariffs and rate plans. In absolute terms compared with the first quarter of 2005 service revenues grew this quarter by NIS 51.8 million which translated into an increase of gross profit on services of NIS 50.4 million. Since we saw the higher proportion of 3G handsets than 2G handsets in the first quarter of 2006 compared with the same quarter last year, our gross loss on equipment also increased by NIS 11.5 million. Therefore, overall gross profit in the first quarter of 2006 was NIS 374.5 million or $80.3 million US, an increase of NIS 38.8 million or 11.6% from the first quarter of 2005.

Selling and marketing expenses in the first quarter of 2006 were NIS 20.7 million lower than the previous quarter, largely reflecting fluctuations in scheduling from quarter to quarter. Compared with the first quarter of 2005 selling and marketing expenses were roughly equal. General and administrative expenses were NIS 2.2 million higher in the first quarter of 2006 than in the first quarter of 2005, but NIS 4.2 million lower than the fourth quarter of 2005. Overall operating profit was NIS 273.5 million or $58.6 million in the first quarter of 2006, representing an increase of 15.5% from NIS 236.8 million in the first quarter of 2005 and an increase of 34.6% from NIS 203.2 million in the fourth quarter of 2005.

Quarterly EBITDA increased by 9.5% from NIS 446.6 million in the first quarter of 2005 to NIS 438.6 million or $94 million US in the first quarter of 2006. An increase by 20.3% from NIS 364.5 million in the fourth quarter of 2005. In revenue terms EBITDA was 33.1% of revenues in the first quarter of 2006, up from 31.8% in the first quarter of 2005 and from 28.9% in the fourth quarter of 2005. As a percentage of service revenues EBITDA was 37%, up from 35.4% in the first quarter of 2005 and up from 32.2% in the fourth quarter of 2005.

During this quarter we began to benefit from the refinancing of the Company's long-term debt into lower-cost CPI linked NIS denominated debt. Primarily as a result of lower interest charges from the new CPI linked NIS denominated debt financial expenses decreased in this quarter by 24% from 50.9 million NIS in the first quarter of 2005 to 38.6 million NIS. Our net income in the first quarter 2006 was 160.4 million NIH or $34.4 million representing an increase of 28.9% from 124.5 million NIS net income in the first quarter of 2005 and an increase of 92.6% from net income of 83.3 million NIS in the fourth quarter of 2005. This represents a net margin over revenue 12.1% compared with 9.9% of total revenues in the first quarter of 2005 and 6.6% of revenues in the fourth quarter of 2005.

As a result of the increase in net income as well as the lower average shares outstanding following our share repurchase in 2005, basic earnings per share or APS increased by 54.4% from 0.68 NIS in the first quarter of 2005 to NIS 1.05 equivalent of $0.22 U.S. in the first quarter of 2006. Compared with the fourth quarter of 2005 basic earnings per share or APS increased by 90.9% this quarter from NIS 0.55 last quarter. With that I will now hand the conference back to Dan.

Thank you, Alan. You're now invited to ask your questions. Moderator, please.

(OPERATOR INSTRUCTIONS)Ben Joseph, Thames River Capital.

Thanks for the call. My first question is just with regard to the service margin, obviously very strong. I was wondering if there's any sort of one-offs in there, whether (indiscernible) is part of cost control and excellent profitability to continue. My second question is with regard to the sales and marketing costs you mentioned scheduling. Can you maybe give us some more color on when we might expect to step up in sales in marketing costs assuming that we can expect that perhaps with reference to the prior year, maybe the costs in terms of sales trends.

I will take the first one first. As far as one-off, there is no one-off there. This is the results were driven basically from our core business, service revenues, if you look at the service revenues that went up 52 million from year to year, and the gross profit basically derived from the service revenues of 51 million, it represents how we dealt with the market. It represents the fact that we were able to restructure our tariff plans; we were able to generate more usage; we were able to get subscribers. We were able to raise our prices when necessary, and basically increase our margins on the core business. If you look at the actual numbers as far as subsidies on handsets, subsidies on handset actually increased quarter on quarter by NIS 12 million, so therefore the results are even that more impressive when we look at the service revenue.

So to your question as far as one offs, as far as the margins are concerned the answer is no. With the question about scheduling, 100%. If you look at last year marketing expenses were low in the first quarter and then varied in the second quarter, third quarter and fourth quarter. It is not necessarily a season-opening. Marketing expenses are timed depending on when the promotions hit the market, and in the first quarter there were less promotions; the second there could be more promotions and the third quarter there could be less. It doesn't go according to seasons. It just in fact, it's just a matter of happenstance that the first quarter this year is similar to the first quarter last year. But yes marketing expenses are variable and have been variable in the past and will be variable this year. And yes there will be quarters with higher marketing expenses than the first quarter and there will be the peaks and the valleys as usual.

In terms of your experience in the market at the moment and how the business is running perhaps you know more recently in this quarter, do you see competition holding up in particular and the requirement for additional cost in sales and marketing maybe ahead of your expectations? Or is it, does the market seem under control and [irrational] at the moment, do you think?

I think we are in line with the guidance we've given on an annual basis. I think the first quarter results clearly support that. I don't think we are going to have any on an annual basis any real deviations from where our projections are. If anything I think the first quarter was stronger than most analysts expected. We were very very satisfied with the first quarter and we don't see any deviations as far as expenses are concerned that would change our guidance that we've given to the market at the beginning of the year.

Thanks very much.

Alex Wright, UBS.

Thank you very much. I wonder first of all if you could update us on the status of the two-for-one handset promotion that you are running or began running I believe in the first quarter as regards to 3G handsets. Is that still going? And have you got to a stage where you are offering a new range of handsets in 3G at this point? And the second question I had regards tariffs. My understanding is that you raised tariffs across your subscriber base pretty much over the course of February. And I wonder if you could give us any feedback on what kind of reaction you've seen in the markets from your customers and from competitors in the months since those tariff changes. Thank you.

Okay, take the first one first, the two-for-one promotion that we ran in the first quarter on the 3G handsets, there are still two-for-one promotions. There are less two-for-one promotions. There are two-for-one promotions on different handsets. I think you're going to see similar activity throughout 2006 with respect to 3G handsets because of the price in the 3G handsets. We said all along that the subsidies in 3G handsets will be greater than the subsidies on second generation handsets and as part of our marketing program to encourage 3G activations. We see the 3G activations even though it is still not a critical mass of subscribers, generate a larger amount of data and content revenue are more profitable than second generation subscribers. And therefore we will continue with that policy. Yes we will be more aggressive from time to time and less aggressive depending on the types of handsets we have in the market but those policies will continue. With respect to new handsets in the market yes, we do have a new range of handsets which we've launched recently. The new Motorola (indiscernible) that we launched, the new Nokia handsets and we have high hopes that those handsets given the fact that the handset quality is improving overnight and constantly improving that that will attract more of our scribers to third generation.

With respect to tariffs, yes, we did raise tariffs in the first quarter in response to the reduction in the interconnect tariffs, so did our competitors. The market pretty much we don't see any real effect in the marketplace, and I don't think there is any bad ricochets or elasticity that we see from the increase in prices. Overall the customer isn't necessarily paying more for the minutes of usage. It is just a question of distribution where that cash is going.

Thanks. I just had one other quick question I had actually was in the release. I didn't see the subscriber acquisition cost figure. Have you stopped releasing that?

Yes, we stopped releasing that because it could eventually be misleading, and we wanted to make that change at the beginning of the year. The reason for that is that more of our subsidies are now for subscriber retention rather than subscriber acquisitions. And the way we've defined subscriber acquisition cost and the way it has been defined in most operators in the market is the amounts of money -- was the amount of subsidies plus other expenses that are incurred for new activations. We felt that we weren't beginning enough of a -- we could possibly get into a situation where there is not enough weight given to the fact that there are subsidies and costs involved in subscriber upgrades. Therefore we felt that the best index for our investors and analysts are basically the subsidies for the total of the growth loss we have on our equipment sales from quarter to quarter. So if you look at the first quarter of 2006 you see we have a NIS $65 million gross loss on equipment; that includes the gross loss also on activations, also on upgrades versus the $53 million in subsidies that we had in the first quarter. The reason for the additional subsidies quite frankly, it cost us more to subsidize third generation. It's not necessarily because we had more sales during that period. Sales were pretty much the same in the first quarter; last year and the first quarter this year but the subsidies were deeper because of third generation. The only thing you don't see in the gross loss on the handsets is the commissions which we pay to dealers which still fits under selling and marketing expense.

Great. Thanks very much.

Stephen Pettyfer, Merrill Lynch.

Three questions if I may; firstly in the cash-flow statement I see that you had a notable pickup in the trade accounts payable. I was wondering if you could give us some color on what was happening there. Secondly, on the interest cost line 39 million, is that a reasonable level going forward given that you were pretty well hedged I understand on the CPI linked bonds? And thirdly on your dividend policy, thank you very much for that; I was wondering if you would like to give us any comments about making that more of a longer-term dividend policy. Thanks.

Stephen, first of all you're a difficult, you ask difficult questions. The first question on the cash-flow first of all trade payables went down, not up. The reason why cash flow was lower in the first quarter if you look at the two lines for trade payables and other payables and current liabilities as a reduction in trade payables, which is basically the result of timing differences because the 31st of December came out on a Saturday and we usually pay our suppliers on the last day of the month. And therefore those payments were actually thrown off into the first of January so you had additional payments in the first quarter. So if you look at trade payables, trade payables yes, went down, effectively that reduces cash flow and that is the major reason why cash flow is lower in the first quarter and was unusually high in the fourth quarter. It is not an indication of where cash flow will be in 2006.

With respect to interest expenses, interest expenses we are hedged, we are hedged about 75% of our CPI linked is hedged. There is still debt that is influenced by the CPI index. I would say that our cost of data still linked to the index, you could expect that the index was higher in the second quarter, that the financial expenses will be higher. Because we don't hedge 100%. As far as the dividend policy is concerned, we specifically said we are setting the dividend policy for 2006. As we promised beforehand when we said we didn't have a dividend policy, that we will review that decision on an annual basis. That we will review this policy on an annual basis and establish a new dividend policy for 2007 when the time comes.

Thanks, Alan, can I just push you on that one? Is that an annual policy, does that mean this time next year we should get another one?

Usually an annual policy is set one per year, so I can't guarantee you it will be exactly 365 days from today but we will do it once a year.

Okay. Thanks.

In any case, Stephen, we find it particularly charming that you thanked us for setting the dividend policy.

I'll try not to do it again.

I trust you.

Joseph Wolf, UBS.

Just a quick follow-up in terms of details in the second quarter. I did notice a lot of advertising and some trip guides during the Passover holiday. Wondering if this is one of the seasons where you will see some marketing costs go up on a seasonal basis.

No. Again, you might see it last week -- you might see it next week -- but yes there is a seasonal issue of advertising. You see it during the Jewish holidays in September October; you see it in Passover. It's quite natural that we have additional advertising campaigns before the holidays. But yes, I say again advertising is a scheduled expense. The fact that advertising was NIS 57 million in the first quarter doesn't mean it's going to be NIS 57 million in the second quarter. And there is no indication of what it will be in the third quarter. Our guidance for the year was that basically given that we are controlling costs and we expect revenues to increase, we're going to increase margins. So on a year-to-year basis you will see those costs coming down.

Thank you.

Istvan Mate-Toth, Credit Suisse First Boston.

Ladies and gentlemen, Istvan Mate-Toth, Credit Suisse. Alan you had mentioned you're expecting an acceleration in 3G subscriber growth for the rest of the year. So circling back to the question of marketing and acquisition costs, do you feel you have any reserves in terms of lower acquisition costs or cut-in costs for 3G upgrade either on the commission side or the handset side, or do you think that on a per subscriber basis this should remain pretty constant what we have seen so far in the last few quarters?

Let me correct that impression. We would hope we would have an acceleration of 3G growth in the last quarters of the year, and we hope that acceleration is driven by lower handset pricing. There is no question that the 3G growth will go hand-in-hand with availability of handset prices and the price of the handsets. The lower the handset price the faster we will grow third generations. Consequently the lower the handset prices the lower our subsidies will be in turn.

So the other way around you expect that some reduction in handset prices going forward?

We expect reduction in handset prices; we are already seeing some reduction in handset prices but we haven't reached the level of handset prices where third generation handsets are the same price or similar prices to second generation handset prices today where we could -- we are at the level of subsidies in third generation handsets will be the same as second generation handsets. So to answer your you're question, if everything goes according to the manufacture roadmap we will see handset prices coming down. Hopefully we will see them coming down faster than we expect, and if that's the case you will see lower subscriber acquisition costs.

Okay. Thanks so much.

(OPERATOR INSTRUCTIONS) Alex Wright, UBS.

Thank you again; just looking at the breakdown of your subscriber's, there has been a fairly gradual but consistent trend of corporate subscriber base growing as a percentage of the overall subscribers versus private contract base has actually declined marginally in the last quarter. I wonder if you could comment on the dynamics that are driving back, specifically is it relative to a reclassification of your existing subscribers, or do you believe that you are gaining market share in the business markets and losing some market share in the private contract market?

We are not losing market share in any market -- I think and it is not a reclassification of subscribers from the postpaid market to the business market. We are gaining market share. We were the last people on the block. There was a time when we lagged behind the business market because when we came into the market everybody was tied up in long-term contracts and as a result of that we started off behind everybody. And we are coming up very, very strong. We have the best brand in the market. We are the most technologically advanced operator in the market and there is a traction -- our product is attractive attractive to business customers. That said, we're not getting swept away in the price war on the business side. We walked away from a couple of a large tenders where the price dilution as we call it on the business side just something we don't want to get involved with, so we are trying to be as competitive as we can be. We are trying to leverage our what we call qualitative advantage over our competitors into increasing market share in the business sector and we have been quite successful in doing that.

So looking forward I mean if we were to look at the growth in the overall subscriber base going forward do you think it is reasonable to expect that the corporate segment should continue to increase its share of your overall subscribers?

I think that has been the trend the last year and a half and I think there is no reason to believe that that trend will cease in the near future.

Great. Thank you, and then the only other question I had was whether you can give us any update on the Med-1 potential acquisition?

It is in the final stages, Alex, and we believe it will be concluded in the coming weeks.

Thank you.

Igor Semenov, ING.

I just have a question on your guidance as far as I missed it. (indiscernible) on strong results can you maybe raise your guidance for the full year?

No. We don't do that, but I think the result of the first quarter clearly support that guidance, and I think experience has shown we like to see the performance on a yearly basis, and we're very, very comfortable with giving guidance on a yearly basis unless we are convinced that we're way off on our guidance, there is no reason for us to come back to the market and update that guidance on a quarterly basis.

Thanks.

(OPERATOR INSTRUCTIONS) At this time we have no further questions in queue. Please continue.

Thank you very much. This concludes this (technical difficulty) results conference call of Partner Communications. I would like to thank you all 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.il. Thank you and good morning in North America. Good evening in Europe, the Middle East and in Asia. Goodbye.

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