Partner Communications Company Ltd (PTNR) 2006 Q2 法說會逐字稿

Welcome to the Partner Communications Quarter Two 2006 Financial and Operational Results conference call. At this time, all participants have been placed on listen-only mode.

[OPERATOR INSTRUCTIONS].

Question-and-answer session will be held after the presentation. And as a reminder, this conference call is being recorded, Thursday, July 27, 2006. At this time, I would like to turn the conference over to Mr. Dan Eldar, Vice President of Investor Relations. Please go ahead, sir.

Thank you. 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 this conference call to discuss Partner Communications' 2006 second-quarter results. With me on the call today are Amikam Cohen, our CEO; Alan Gelman, our CFO. We are also delighted to welcome Emanuel Avner, our CFO designate, who will be replacing Alan in the coming week.

At this time, if you do not have a copy of today's release, please contact Ms. Debra Margalit, here in Israel, at 972-54-4815952, 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 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 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 July 27th 2006, as well as Partner's prior filings with the US Securities and Exchange Commission on Forms 20-F, S-1 and 6-K, as well as 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 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.

Our second quarter results were very encouraging showing evidence of further improvements in our key financial and operational results. Our core business services, in particular, continued to show robust growth, despite the reduction in the interconnect charges in March. And we continued to make good progress in promoting our 3G network, which will help us support future growth.

On July 6, '06, we also completed the acquisition of the transmission activity of Med-1, including approximately 900 kilometers of transmission fibers for approximately EUR15 million. This strategic acquisition will enable us to reduce future costs and introduce additional products and services.

Our brand continues to lead the telecom market in Israel. Last week, it was named the second strongest brand in the entire consumer market. Not only have we maintained our position as the leader in our market for the future consecutive years, we have significantly narrowed the gap between our sales and the strongest brand in Israel, Coca Cola.

Regarding the impact of the current regional hostilities based on current information and fuming hostilities seen in the near term, we do not believe the impact of results will be significant. However, service revenues may rise as a result of increased usage, while new subscriber activations may be down.

Partner's strategy has always focused on creation of value for our shareholders. So we are proud that we were recently chosen to be traded on the new NASDAQ Global Select Market, a mark of our commitment to maintain the highest financial and liquidity requirements as well as world-class corporate governance standards. With that said, I would like to hand this conference over to Alan Gelman.

Thank you, Amikam. Following on from last quarter, the results this quarter continued to be strong, with strong service revenues and usage patterns and further increases in all key margins. Going through the quarterly results in more detail, total revenues in the second quarter were 1.373 billion shekels, up 9.8% from 1.251 billion shekels in the second quarter of 2005, and up 3.5% from approximately 1.3 billion shekels in the first quarter of 2006.

Within the total, service revenue growth was strong, up 8.6% in Q2 2006, compared with Q2 2005, and up 5.1% compared with Q1 2006. Both increases were fueled primarily by subscriber base growth and higher average minutes of use but were partially offset by the full quarterly effect of the approximate 7% reduction in interconnect charges in March 2006.

The cost of revenues related to services in Q2 2006 totaled approximately 772 million shekels, an increase of 5.9% compared with Q2 2005 and an increase of 3.7% compared with Q1 2006. Both increases being principally due to higher variable airtime costs resulting from total minutes' growth. Overall, the gross profit on services increased by 13.4% in the second quarter of 2006, compared with Q2 2005, and by 7.4% compared with Q1 2006.

Equipment revenues increased by 22.1% in the second quarter of 2006, driven by an increase in higher average revenue per handset sale, which resulted primarily from the higher proportion of 3G handsets sold compared with 2G handsets.

This also raised the higher average cost of handsets sold, leading to an increase of 7.3% in the cost of revenues related to equipment in the second quarter of 2006 compared with the second quarter of 2005, and from 157.9 million shekels in the second quarter of 2005 to 169.4 million in the second quarter of 2006. Overall, the gross loss on equipment was 41 million shekels in the second quarter of 2006, a decrease of 22.2% from the second quarter of 2005, and a decrease of 36.9% from the first quarter of 2006.

Selling and marketing expenses in Q2 2006 were 75.6 million shekels, an increase of 15.5% from the second quarter of 2005, and an increase of 32% from the first quarter of 2006. Compared with the second quarter of 2005, the increase was primarily due to higher distribution costs and advertising activities. Compared with the first quarter of 2006, the increase was due to the timing of advertising campaigns.

General and administrative expenses in the second quarter of 2006 decreased by 4.8% compared with the second quarter of 2005 and were approximately equivalent to the first quarter of 2006.

Overall, operating profit was 311.5 million shekels in the second quarter of 2006, representing an increase of 23.7% from the second quarter of 2005, and an increase of 13.9% from the first quarter of 2006.

Quarterly EBITDA increased by 12.4%, from 420.8 million shekels in the second quarter of 2005 to 473.2 million shekels in the second quarter of 2006, and increased by 7.9% from 438.6 million shekels in the first quarter of 2006. In revenue terms, EBITDA was 34.5% of revenues in the second quarter of 2006, up from 33.6% in the second quarter of 2005 and 33.1% in the first quarter of 2006.

Our financial expenses in the second quarter of 2006 were 61.2 million shekels, decreasing 26.1% from 82.8 million shekels in the second quarter of 2005, primarily reflecting lower interest expenses resulting from the refinancing, as the company's long-term debt was lower-cost, CPI-linked, shekel-denominated debt.

Compared with Q1 2006, our financial expenses increased by 58.4% from 38.6 million shekels, principally explained by 24.6-million-shekel expense as a result of an increase in the CPI level from 0.1% in the first quarter of 2006 to 1.2% in the second quarter of 2006.

Our bottomline net income in the second quarter 2006 was at 174.2 million shekels, representing an increase of 50.4% from the second quarter of 2005 and an increase of 8.6% from the first quarter of 2006. This represents a net-margin-over-revenues of 12.7% with 9.3% of total revenues in the second quarter of 2005 and 12.1% in the first quarter of 2006.

Reflecting the increase in net income as well as the lower average shares outstanding following our share repurchase in 2005, basic earnings per share, or ADS, increased by 56.2%, from 73 agorot in the second quarter 2005 to 1.14 shekels in the second quarter of 2006. Compared with the first quarter of 2006, basic earnings per share, or ADS, increased by 8.6% this quarter from 1.05 shekels last quarter.

For this quarter, the board of directors has approved the distribution of a further interim quarterly cash dividend of 45 agorot per share, or approximately 70 million shekels, to shareholders on record as of August 17, 2006.

In view of the company's performance over the past two quarters, we have decided to update our guidance for the second half of the year and now expect improved trends to continue through the second half of the year. However, total equipment subsidies may be higher depending on 3G handset availability and prices. With that, I will now hand the conference back to Dan.

Thank you, Alan. You are now invited to ask your questions. Moderator, please?

Thank you, sir. Ladies and gentlemen, we will begin the question-and-answer session at this time.

[OPERATOR INSTRUCTIONS].

Alex Wright with UBS. Please go ahead, sir.

Yes, good afternoon. My first question relates to the guidance where you're talking about the total equipment subsidies, that potentially being higher in the second half of the year. Could you clarify if that is because of potentially greater volumes or because you think there may be some upward pressure on handset subsidies per gross [AB]? And I wondered if you could just talk about whether you're seeing any signs of [key] growth values trends so far in the third quarter?

My second question relates to the transmission business acquisition. Could you give us any feeling for the financial impacts of that transaction on your OpEx and CapEx, both in the short term and in the longer term, once the business integrated? Thank you.

Okay. We'll do one at a time. Excuse me. With respect to the guidance, what we're trying to pass on is that the trends which we saw in the first half of the year will continue in the second half of the year as far as the total business. The core business of service revenues is quite likely to continue the same trends with the same seasonality which we've had in the past years but with a strong increase in what we've seen in minutes-of-use over the first and second quarter.

When we're talking about equipment revenues and equipment subsides, that's basically an area where we're in control. We decide when to step on the gas. We decide when to step on the break. It will depend on handset availability, whether we think we have good quality handsets at low prices, interesting -- and an interesting offer to our customers.

Quite frankly in the third quarter, we probably will not see any more volume increases, and, therefore, subsides will probably be lower. And that's, in part, due to the hostilities which have cut down on the amount of activations which we've seen over the past couple of weeks. If the hostilities continue longer, we'll probably see a lower level of activations in the third quarter. Hopefully, they won't continue that much longer, and then we won't see any major impacts over the year. But if we decide to, towards the end of the year, increase or be more aggressive as far as third generation migration from second generation subscribers, we will incur more handsets subsides.

In any event, you won't see handset subsidies at levels higher than we saw last year. And in all probability, in the third quarter, you won't see any major difference in handset subsidies. If anything, you might see more handset subsides in the fourth quarter after the hostilities have finished and we become more aggressive on third generation, again, assuming that the price of the handsets will come down. I don't think we intend to be very aggressive in third generation if we still see very expensive handsets, and that's been our policy all along.

With respect to the transmission business, of course, the transaction was closed in July, so you'll see the effect of the CapEx in July. You'll probably see double the amount of CapEx we saw in the second quarter, in the third quarter. But the trend of CapEx to revenues, which we've seen over the last couple of quarters, excluding any extraordinary investments like the transmission business, should stay pretty stable. So you will see CapEx pretty much going up double the rate in the third quarter then coming down in the fourth quarter, again, for the levels we saw before the third quarter.

With respect to cost savings, we will see cost savings, but that's not immediate. We still have contracts with Bezeq and some other companies as far as transmission. The cost savings, which we'll see from the platform of transmission -- we'll probably see most of them starting to develop towards the middle to the end of 2007.

Okay. Thanks, Alan. Are you able to quantify what you think the cost savings may be as we get into second half of '07?

We are able to quantify it, but we don't want to. What I can give you in indication for the public record is that Cellcom in their perspective basically said that they spend about 100 million shekels a year in transmission. And hopefully, we'll be able to save some of that by having our own infrastructure.

Okay, great. Thanks very much.

Thank you, sir. And our next question comes from Avshalom Shimei. Please go ahead with your question.

Avshalom Shimei. Congratulations for the results. And first of all, in regard to handsets prices, as I recall, you said in the past that you expect the second half prices for 3G handsets to drop. Can you talk about what you see right now in terms of pricing and maybe compared to your previous expectations?

Well, the prices are dropping. I think they are pretty much in line with expectations, although they are not in line with what the handset manufacturers' roadmap, which basically said the handset prices would drop faster then that. But handset prices are coming down. no question about it. And we're quite optimistic that we'll see low levels of handset prices or low enough levels of handset prices towards maybe the end of 2006 -- hopefully, definitely, by the beginning of 2007, to make a real impact on our results.

We're very excited about that because, as you see, with the data and content revenue, we have an increase of 40% year-on-year in data and content revenue, and almost all of that is coming from third generation. And that's a very small percentage of our subscriber population, right now -- 165,000 in over 2.6 million that are third generation. And that has created such a driver in additional ARPU that our ARPU actually went up this quarter compared to the same quarter last year when we expected it to go down because of the interconnects.

So yes, third generation is very important to us. We're going to be very careful about the subsidies. But we're optimistic that handset prices will come down, hopefully, by the end of the year, if not by the beginning of 2007, and then we can become aggressive as far as moving our subscriber population second generation to third generation.

Alan, can you talk about, maybe roughly, what prices are you looking at when you're saying an aggressive reduction?

Well, I prefer not to talk about that. Avshalom, I would prefer not to talk about what prices exactly. I think it's all relative. The price of the third-generation handsets cannot be substantially higher than the second-generation handset. It's a relative price.

When the customer comes to upgrade, that's what he's comparing. He's comparing the second-generation handset to the third-generation. If that [delta] in price is too large, then the customer is more likely to make the decision to stay with second generation than go with third generation.

When that delta becomes smaller -- and of course, it's harder to get that delta smaller, because second-generation handset prices will come down also -- you have to have third-generation handset prices come down as well. What we're trying to do is narrow the gap between those two handsets, and, unfortunately, we're not in control of that. The people who are in control of that are the Nokias and the Erikssons and the Motorolas of the world.

All right, great. And just my last question, again, with regard to the guidance, you say you expect a similar trend. Do you expect just to focus on that? Do you expect similar margin expansion trend as we've seen in the first half of '06 compared to '05? For example, we saw a 3% point increase in EBITDA margin in the first half of '06 vs. '05. Do you expect something like that or to a lesser magnitude?

Well, I could be very, very blunt and say if you look at our third quarter last year, which was the weak quarter because of the substantial subsidies we have on our equipment, that you're going to see a lot more margin expansion third quarter vs. third quarter.

But what we're deriving in the market is the same trends and the same usage patters or the same services revenues and the gross margins on services -- we should see in the third and fourth quarter. Given the fact that we have hostilities in the region and activations in the third quarter should be relatively low. You'll probably see low equipment subsidies growth in the third quarter. You'll probably see good EBITDA results in the third quarter, especially compared to the last year. And in the fourth quarter, we should see the same service revenue trends. And possibly, if the handset prices come down, you'll see maybe a higher level of equipment subsidies to make the push for migration from second generation to third generation.

All right, thank you.

You're welcome.

Thank you, sir. Follow-up question from Alex Wright. Please go ahead.

Yes, hello. Sorry. I wasn't expecting just to be back so soon. But I just had a couple of follow-up questions. First of all, do you have an absolute figure for the non-SMS and data and content revenues that you'd share with us?

Secondly, on the sales and marketing costs, could you give us an idea of the trends over the next couple of quarters? Do you think that we're going to see similar levels to the second quarter or because of the slowdown in new activations that you're pulling back on those costs in the third quarter?

And finally, just on the pattern of dividend payments, you've already articulated your dividend policy of distributing 60% of earnings. I just wondered if you could highlight how over the course of the year you expect that to progress. Do you think that you would like to, for example, pay a flat dividend over the first three quarters and go up to the 60% for the final quarter of the year or otherwise [how are you looking at that]?

Okay. I'll start with the SMSs. We don't give the information what is SMS and what isn't SMS. What I can tell you is that at one point the split was about 50-50, and that split is becoming more skewed to data and content revenue, because for every 3G customer that joins our 3G network, we get 15 shekels a month, a flat fee for 3G Internet and 3G services. So that is becoming more pronounced on the data and content side and less pronounced on the SMS side.

As far as sales and marketing expenses, probably in the third quarter, if the hostilities continue, you'll see probably lower sales and marketing expenses because we've cut down on a lot of marketing campaign because of the hostilities. You would probably see a pickup again, assuming the hostilities ceased in the fourth quarter. But you shouldn't see any difference in the guidance which we've given, which was pretty much sales and marketing expenses at similar levels which we saw in 2005.

The increase in sales and marketing expenses in the second quarter vs. the first quarter, if you take those two quarters together and you look at the previous quarters, it's basically timing differences with campaign. And the average of the two quarters is pretty similar to what we've experienced in the past.

With respect to the dividend policy, our dividend policy, as you stated, that's what we've been communicating to the market that it's is going to be a flat dividend for the first, second, and the third quarter. When we have -- we will distribute 60% of the net income. If 60% of the net income is higher than 280 million shekels, which at this point we expect it to be, we will give a larger dividend in the fourth quarter.

Okay. That's very helpful. Thanks a lot.

You're welcome.

Thank you, sir.

[OPERATOR INSTRUCTIONS].

Gentlemen, there appear to be no questions at this time. Please continue with any additional comments.

Thank you very much. This concludes this Second Quarter Results conference call of Partner Communications. I would like to thank you all for your participation. Access to this call and to other variable 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 Asia.

Thank you, sir. Ladies and gentlemen, this conference will be available for replay after 9:30pm Israel time today through 12am Israel time on August 3rd. Again, if you'd like to listen to a replay of today's teleconference, it will be available between 9:30pm today Israel time and 12am August 3rd Israeli time.

You may access the teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 837091. For international participants, you may dial 320-365-3844 and enter the same access code 837091. Again, the dial-in numbers for the replay for today's conference are 1-800-475-6701, and for international participants 320-365-3844 with access code 837091. That concludes our conference for today. Thank you all for participating and using AT&T Executive Teleconference. You may now disconnect.