Partner Communications Company Ltd (PTNR) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2006 financial and operational results call. 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 call is being recorded today, Tuesday, October 31, 2006. I would now like to turn the conference over to Mr. Dan Eldar. Please go ahead, sir.

Thank you. Good afternoon to those of you in Europe, the Middle East and in Asia; good morning to our listeners in North America. Thank you for joining us for this conference call to discuss Partner Communications' 2006 third quarter results.

With me on the call today are Amikam Cohen, our CEO, and Emanuel Avner, our CFO. At this time, if you do not have a copy of today's release, please contact our investor relations manager here in Israel (indiscernible) on 972-54-658-5123 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 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 Partners' press release dated October 31, 2006, as well as Partners' prior filings with the U.S. Securities and Exchange Commission, Forms 20-F, F-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 Web site at www.investor.partner.co.il. At this time, I would like to turn the call over to Amikam.

We are pleased with our third quarter results which showed good financial and operational results driven by our award-winning customer service, our leading brands, the excellent (indiscernible) and our unique advanced voice content and data (indiscernible). On (indiscernible) orange has been named the leading telecommunications brand in Israel and we have been voted the mobile operator with the best customer service by [Globes], Israel's business daily newspaper. These core strengths will enable us to continue to grow our subscriber base (indiscernible) for our shareholders. During the third quarter, we succeeded in adding 54,000 more subscribers to our 3G network. Our 3G customers can enjoy a wide and growing variety of the data and content services in Israel as well as in dozens of destinations and (indiscernible). HSDPA is also available to our customers in the most populated area of Israel, offering the unique high-speed wireless Internet experience. In the near future, we also intend to broaden the portfolio of our services to include in addition to (indiscernible) fixed line telephone (indiscernible) and other additional [services].

With that said, I would like to hand over the phone (indiscernible) over to Emanuel Avner, our CFO.

Thank you, Amikam. In the third quarter, total revenue was approximately NIS1.5 billion, up 8.1% from approximately NIS1.4 billion in Q3 2005 and up 6.5% from approximately NIS1.4 billion in Q2, 2006. Both increases are primarily explained by strong service revenue growth. This increased by NIS108 million, so 8.9% compared with Q3, 2005 as a result of the larger subscriber base and increased minutes of use, offset primarily by the impact of the mandated reduction in interconnection tariff which went into effect in March 2006.

Compared with Q2, 2006, service revenues increased by NIS72 million, or 5.8%, driven by seasonal growth in service revenues, increased minutes of use and the larger subscriber base. The cost of revenues related to services in Q3 2006 was approximately NIS794 million, an increased of 0.2% compared with Q3, 2005, and an increase of 2.8% compared with Q2, 2006. Both increases [is] principally due to higher variable air time costs relating from total minutes -- resulting from total minutes growth. Overall, the gross profit on services increased in Q3, 2006 by 25.5% compared with Q3, 2005 to NIS522 million, which is also an increase of 5.6% compared with Q2, 2006.

Turning to handsets and equipment, revenues related to equipment increased by 1.5% in Q3, 2006, from Q3, 2005, driven by the higher proportion of 3G handsets sold to new and upgrading customers compared with 2G handsets. However, the cost of revenues relating to equipment decreased in Q3, 2006 by 8.9% compared with Q3, 2005. Compared with Q2, 2006, equipment revenues increased by 17.3% and equipment costs increased by 24.2%, primarily resulting from an increase in the total number of sales, as well as the higher proportion of 3G sales to new and upgrading subscribers compared with 2G sales. Overall, the gross loss on equipment was NIS64.9 million in Q3, 2006, a decrease of 26% from Q3, 2005, and an increase of 58.3% from Q2, 2006. Spending and marketing expenses in Q3, 2006 were NIS84.1 million, up 16.7% from Q3, 2005, and up 11.3% from Q2, 2006. Compared with Q3, 2005, the increase was primarily due to higher distribution cost, commission expenses and advertising activities. Compared with Q2, 2006, the increase was principally due to distribution costs related to growth of our 3G customer base.

Q3, 2006 general and administrative expenses increased by 18.8% compared with Q3, 2005, and increased by 22.2% from Q2, 2006. Both the increases mainly reflect larger provisions for doubtful accounts from receivables. In view of the impact of the [original] facilities on businesses in the north of the country, lower collection activities and the impact of the implementation from July 1, 2006 of the new banking directive which raised the requirements for credit arrangements in bank current accounts.

Overall, operating profit in Q3, 2006 was NIS319.5 million, an increase of 51.3% from Q3, 2005, and an increase of 2.6% from Q2, 2006. Total EBITDA was NIS476.7 million, representing an increase of 24.6% from Q3, 2005 and an increase of 0.7% from Q2, 2006. In revenue terms, EBITDA was 32.6% of revenue in Q3, 2006 compared with 28.3% in Q3, 2005, and with 34.5% in Q2, 2006. Our financial expenses in Q3, 2006 were NIS44.7 million, down 70% from Q3, 2005, primarily reflecting the one-off charge of NIS63 million in Q3, 2005 related to the redemption of the US $175 million 13% senior subordinated notes in August 2005, as well as the interest charges in Q3, 2005 related to both the redeemed notes and the new CPI-linked shekel-denominated Notes. Compared with Q2, 2006, our financial expenses decreased by 26.9%, principally expensed by the lower expenses in this quarter from the smaller increase in the CPI level.

Bottom-line net income in Q3, 2006, was NIS184.7 million, representing an increase of five times more from the Q3, 2005 and an increase of 6% from Q2, 2006. Reflecting the increase in the net income, basic earnings per share, or ADS, increased by 500% from (indiscernible) in Q3, 2006, to NIS1.2 in Q3, 2006. Compared with Q2, 2006, basic earnings per share, or ADS, increased by 5.3% this quarter to NIS1.14 last quarter.

The Board of Directors has again approved the distribution of an interim quarterly cash dividend of NIS0.45 per share, approximately NIS70 million to shareholders on record as of November 22, 2006.

Looking ahead, we confirm our annual guidance for 2006 and continue to expect the improved trends of the first half to flow through the second half of the year, bearing in mind that Q4 is seasonally slower than Q3.

With that, I will now hand the conference back to Dan.

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

(OPERATOR INSTRUCTIONS). Stephen Pettyfer, Merrill Lynch.

A couple of questions please. For starters, could you please give us a sense of the magnitude of the extra provisions on the bad debts this quarter? And secondly, looking at your gross service margins, there seems to be a significant drop again in your cash service cost this quarter. I wondered if you could comment on that and whether you think it's something that is sustainable in the near-term. And finally just on the CapEx front, I wonder if you could just sort of refresh may memory as to where you're seeing the full-year CapEx, given where you are year-to-date? Thank you.

I would like to comment on the bad debt. Actually, we have not published the impact of the bad debt. What I can tell you is that, since we slowed down our collection of debt in the (indiscernible) period, especially for businesses in the north, this had an impact to our provision and we [say] that this higher provision will be decreased (indiscernible), and maybe the impact will be even minimum.

Regarding the CapEx, we had -- this quarter, we had an increase in the CapEx after the acquisition of the MED1 operation, in an amount of $50 million. I assume that in the next quarter, you see a lower level of CapEx to revenue. I have not have -- I think I have not [understood] your question about the service revenue, can you repeat that?

Yes, certainly. If I look at your -- maybe another way of asking -- if I look at your gross service margin, it rose from 37.9% Q2 to 39.7% this past quarter. I wonder if you could comment on whether or not that sort of level is sustainable in the near-term?

I think it is sustainable.

Can I just circle back again to the question on the bad debt. Historically, I seem to recall that your bad debts are running at about 1.5% of sales. Is that a normal number you would expect in the normal course of business?

It sounds reasonable.

Okay, thank you.

Istvan Mate-Toth, Credit Suisse.

I have a follow-up question on Stephen's relating to CapEx. I think if I look at your investments in gross BP&E, it has been around NIS220 million during the first nine months, (indiscernible) low-single-digit percentage of revenues. And I may be mistaken, but I think your guidance has been that CapEx this year is unlikely to be material from last. Could you give us an update on what the outlook for this year’s CapEx guidance? Maybe you can save a little bit more, or is this just a timing issue and we should expect a pickup in the last quarter? And also, if you have at this stage a little bit about the outlook for 2007?

With respect to CapEx, you should bear in mind that this quarter is a unique quarter, and that is because we have a one-off, and that's the purchase price of the MED1 operation. The general guidance we've given is to expect a decline in CapEx for this year for our normal operations, and that is the result of the completion of the coverage rollout of the network that we've built, which we've more or less done in 2004 and 2005. With the additional cost of the purchase of MED1, you should expect CapEx to be more or less at the same level as before (multiple speakers) last year.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Istvan Mate-Toth.

I'm sorry, I don't want to hog the phone, but it seems like there (indiscernible) questions. Could you -- do you have a view on where these net additions have come from versus your competitors? And could you give us a feel of what you see in terms of competing offering on 3G services? And also maybe at this stage, could you share with us what you see kind of the more successful kind of product line is for you, among the 3G subscribers? You already have 10% of your subscriber base. Is there any material difference in terms of usage patterns or product take-up versus 2G subscribers?

With respect to the additions, we assume that we benefit significantly from the fact that we have [built] some assets which have been with us for quite some time now. Namely, we do have a superb network here in Israel, we have an excellent brand, we have an award-winning customer service and the widest variety of value-added services and of handsets in the market. We believe that these are attractive to both our existing customers and new customers. As you are fully aware, we have high penetration in Israel, and therefore, we invest significantly in retention efforts and this is even a higher investment than it is in the acquisition of additional subscribers. We assume that our subscribers, and we not always know where they are coming from, that our subscribers are significantly coming from those who are churned off the network of telephone and cell phones, and we can't tell you which of these two networks lose more customers to us, because as I was saying, we not always know where the customer comes from.

With respect to 3G, we are very pleased with the usage patterns that we see, some of the more attractive services that we see heavily being used in entertainment and music and news and person-to-person video telephony. All these are new streams of revenue and we basically charge our third-generation customers a fee, which is a monthly fee basically covering network access and Internet access. And on top of that, we charge customers per event. We have not given the specific ARPU data for our third-generation service, but as you can see from the fact that the data [and constant] revenues are growing rapidly, we have less than 10% of our customers with third-generation services activated. Yet, if you compare our data and content revenues quarter-on-quarter throughout the last year, you can see increases in the real data and content revenues that (indiscernible) revenues growing by 30% or 50%. So this gives you a sense of the encouraging results that we see with third-generation (inaudible).

Thank you very much then. If I may (indiscernible) this up again, you don't really see any major competitive threats or [declarations] the competitive dynamics out in the market either by telephone or by cellphone. This is how I understand the keys, is that you manage to maintain your leadership in product offering. And the reason I'm asking this is because you can't but notice that kind of -- the gaping difference between your performance and some of the (indiscernible) in Europe. It seems to me that the competitive dynamics is a bit more benign in Israel. Is this is how I (indiscernible) would you agree with that?

It depends what you mean by benign competition. We do feel the competition. We believe that there is a very significant competition in the market. We feel it day by day. It is more (indiscernible) in the business segment, yet you can see our success in growing our business customers which are growing rapidly, both in numbers and in terms of their share within our total market. The results are very significant competition in other areas of the business. I think that the performance that the Company is able to show testifies to our success to compete with that competition, rather than for the lack of competition in the market. If by benign competition, you mean that we are blessed with rational competitors and directional regulators, I think that the results speak for themselves. (Inaudible - background noise) very recently, [CellCom] chose to increase their air time rates. All operators have increased their rates in 2006 at least once, and at least twice in 2005. It gives you a sense of the rationality in the market, of the elasticity which probably exists in the market. But, obviously, it's not an indication of what is to be expected in the future.

Okay, so things have not gotten worse and -- okay, thank you very much.

Are there any more questions moderator?

Stephen Pettyfer.

Thank you. Just two follow-ups please. Just further to the previous comments, are you able to tell us what percentage of your content data revenue is from SMS? And separately on an unrelated question, on working capital, this time last year, we saw a fairly significant increase in working capital demand going into the fourth quarter, somewhat driven by the 3G push. Is that something we should look for again going into the fourth quarter this year? Thanks.

Regarding the SMS revenues, we usually don't publish this information, so I'm sorry about that. Regarding the working capital, I assume that you refer to the level of inventory last year. If this was the case, from time to time, we have a [policy] in the level of the inventory. It is driven by the offering of -- the (indiscernible) that we have in the market by our suppliers and what we keep in the inventory for our customers. It is also driven by our marketing efforts and it is changing from time to time. It's a snapshot of one day in the quarter and it is not always good to (indiscernible) conclude from this point.

Okay, but just on that issue, I think two or three quarters ago, your predecessor was suggesting, that was perhaps an unfair snapshot and we should look for generally working capital levels to be at a lower point going forward. Is that something you share the view of?

Working capital, if you look on the overall account receivables, this has also a correlation with the level of the revenues, and also with the number of transactions that we do each quarter. Of course when the revenue is higher, the accounts receivable will be also with the same positive correlation. And as much as we do more transactions with upgrades and new customers with selling of equipment with up to 36 installments, you will see also a higher account receivables in the current assets, and also in the long-term receivables.

Okay, thank you very much.

Let me make just one comment with reference to Istvan's question, which was previously with respect to bad debt. Istvan, you mentioned a percentage, and that percentage does not represent our actual bad debt percentage, and as we do not make reference to this in our disclosure. I would leave it at that.

Tsahi Avraham.

Well done (indiscernible). One question about the war period. Could you give us a breakdown on the war period and to separate it from the other two months?

I don't think that you'll find any significant effect of the war, Tsahi, except for two areas. One is, as Emanuel mentioned, that provisions for bad debt. The other is obviously a reduction in the number of tourists coming into Israel, which results in lower incoming revenues for us from roaming. In terms of the number of minutes of use and in terms of the other operational parameters, we have not seen any significant effect of the war.

Okay. Second question, maybe following a comment about CellCom, they read (technical difficulty) this month. Is it something we should expect from Partner this year?

I'm not sure that I understood what you have asked. Tsahi, can you repeat the question?

Are you planning or (technical difficulty) possible for Partner to raise the [millage] rate that you take for one minute of (technical difficulty).

We do not share this intention with the public. However, if one looks at prices over time, I think that you do see that prices are going down on a permanent basis and the customers are getting more for the same price or for a lower price. Occasionally, operators find it necessary to raise their air time rates, and if we do find it necessary, we will make the proper announcement.

Okay, thank you.

Sergei Arsenyev, Goldman, Sachs & Co.

I just have a question on whether you have any incremental insight on the Israeli government's position regarding (indiscernible) Telecom's incremental indirect ownership in Partner, whether there has been any change in stance, or whether there has been any pronouncement on that nature, especially in regard of [Arathmac] [citing] the option in HTIL shares, which would take its ownership in Partner above 10%. I'm just wondering whether you have any comments on that?

Actually, (indiscernible), we do not.

Okay, and no color?

As a company, we're not involved in the process, and other than what we read in the press, there is nothing else to add.

Okay, thank you very much.

I'm showing that we have no further questions at this time. Sir, please continue.

Thank you very much. This concludes this third quarter results conference call of Partner Communication. 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 then Middle East, and in Asia. Moderator, please.

Thank you. Ladies and gentlemen, this conference will be available for replay after 9:30 Israel time today through November 7, 2006 at midnight Israel time. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 845-283. International participants please dial 1-320-365-3844, with the access code of 845283. (OPERATOR INSTRUCTIONS).

That does conclude our conference for today. Thank you for your participation and using AT&T executive teleconferencing. You may now disconnect.