Partner Communications Company Ltd (PTNR) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Partner Communications Q1 2007 financial and operational results conference call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.

At this time, then, I would like to turn the call over to Dr. Dan Eldar. Please go ahead, sir.

Thank you very much, moderator. 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' first-quarter 2007 results.

With me on the call today are David Avner, our CEO, and Emanuel Avner, our CFO. We have with us also Oded Degany, who will be replacing me at the end of this year. Oded, welcome.

At this time, if you do not have a copy of today's release, please contact our investor relations manager here in Israel, Deborah Margalit, on 972-54-481-5952 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 May 7, 2007, as well as Partner's prior filings with the US Securities and Exchange Commission on Forms 20-S, 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 up subject to the previous Safe Harbor statement 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 David Avner. David?

Thank you, Dan. The first quarter of 2007 was yet another good quarter for Partner. We are reporting today 333,000 third-generation subscribers, more than 12% of our 2.7 million customer base. These customers enjoy a wide and continuously expanding range of third-generation services and great handsets.

Our subscribers can also benefit from our introduction in most populated areas around the country of HSDPA capabilities, enabling a unique high-speed wireless Internet access experience. We view our expanding third-generation services as an important growth engine for Partner.

The assets built by the Company in recent years, making it a leading cellular company in Israel, continue to strengthen. We expect that the core strengths as a provider of superb network quality, excellent customer service, and strongest telecom brand, and the most advanced data and content service will enable us to continue to grow our subscriber growth base and drive value for our shareholders.

These assets will also be instrumental while we broaden the portfolio of services we offer to our customers. With the transmission and fixed line telephony licenses now awarded to us, we are well on our way to offering customers a wide range of superb telecom services. With that said, I would like now to hand the conference over to Emanuel Avner, our CFO. Emanuel, please?

Thank you, David. We are pleased overall with the Company's performance this quarter. Service revenues grew strongly by 6.3%, compared with the first quarter last year, mainly due to the larger subscriber base and increased minutes of use. The increase in revenue was despite the introduction of two significant revenue-negative regulatory measures, including the mandated reduction in interconnection tariffs from March 2007 and a new voicemail regulation that we expect to reduce annual 2007 revenues by approximately ILS60 million.

The percentage contribution of content and data revenue also continues to rise quarter-on-quarter. Underlying earnings fundamentals also continued to slow the growth curve.

Gross profit increased by 19% from the first-quarter 2006, and operating profit increased by 10%. Overall, we saw an increase of 22% in net income, which is encouraging.

On the basis of these results, we reconfirm the annual guidance for 2007, which we gave at the end of January in the annual 2006 press releases. As we said in that guidance, we will decide whether to increase our dividend policy within the first half of this year. In the meantime, the Board of Directors has approved a distribution of a quarterly cash dividend for Q1 for ILS0.51 per share, which is in total approximately ILS80 million shekels or $19 million. With that, I will now hand the conference back to Dan. Dan?

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

(OPERATOR INSTRUCTIONS) Istvan Mate-Toth with Credit Suisse.

Good evening, gentlemen. I have three [related] questions, one to the income statement, two to your cash flows.

The first one is that we have seen a spike in selling and marketing expenses which you [always] have faced due to timing of some campaigns. Could you please tell us whether we should expect this item to go back and normalize to a level of what we have seen in 2006 as a percentage of revenues? Or should we expect them to remain structurally higher '07 versus '06?

The other two questions are, I think we have seen a huge working capital swing in the first quarter relating to payables. Again, you mentioned this in the press release. Could you just give us a bit of a heads-up what we should expect for the full year?

The last question is that I think your CapEx in the first quarter, if you annualize it, is substantially above your guidance. Again, if you could provide a bit more color on this.

Yes, thank you very much. With respect to the SG&A, as you rightly pointed out, we attribute the significant part of the change to the timing of campaign. As you know, we are a significant advertiser in the Israeli market. However, the campaigns are not evenly distributed among the various quarters. Therefore, the timing of specific campaigns do affect the specific results of the quarter.

You should also bear in mind that in Q1 2006 we had significantly lower selling and marketing revenues reported. Therefore, the gap may be slightly misleading.

We have not provided any guidance as to the expectation of change in the level of SG&A. We do not expect to see any major change there.

I will ask Emanuel to respond to your question about working capital.

Okay, as you have seen, we have an increase in the Accounts Payable at the end of the quarter. This is due to payment dates. Usually, we pay at the end of the month. This time, the end of the month, 31st of March, was a Saturday; and therefore, we postponed or we moved the payments to April 1, which was Sunday. Sunday is a working day in Israel. Most of the payments were paid on Sunday, which is in the second quarter. Therefore, you see increase in Accounts Payable, and increase in cash flow from operating activities.

Okay, so these are normalized back? Okay.

And you also asked about --?

On the CapEx.

Yes, you should expect CapEx to be in line with 2006 CapEx.

Okay, thank you very much (inaudible).

Pedro Gill with Fortress Investment.

Good afternoon. Just to pick again on the question on the SG&A line, should we expect to see for the rest of the year the run rate that we have seen this quarter? Or should we expect that to come down a little bit for the rest of the year?

SG&A, we expect to be more or less at the same level as it was last year.

Okay, thank you.

Stephen Pettyfer with Merrill Lynch.

Good evening. Just to continue with that theme, just specifically with regard to G&A, was there any reason either in Q1 '06 or to do with Q1 '07 why that line rose by almost 18% year-on-year? Thanks.

Hi, Stephen. G&A is a very small item in our P&L, and from time to time, from quarter-to-quarter, there are some fluctuations in the spending. I would not draw too much attention to that. We don't have anything to report on that item.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Darren Shaw with UBS.

Good afternoon, gentlemen. I just had a couple of questions if I may. The first one was if you could tell us the impact in the first quarter for voicemail recognition? The revenue impact even at the EBITDA level?

The second question is, could you update us on number portability in the Israeli market? Thank you very much.

Darren, with respect to the voicemail, we gave (technical difficulty) effect of the voicemail and we (technical difficulty) that for the entire year, we would see a loss of revenue (inaudible) at a level of approximately [60] million. In the first quarter, it was somewhere around the level of 13, which we believe is a good indication where it will be in the coming quarters.

With respect to number portability, there is no set date as of now for the introduction of number portability. We believe that all players will be ready to introduce number portability towards year's end. We have seen the Minister of Communication targeting the end of the year for the introduction of number portability.

In terms of our thinking of number portability, we have said before that we believe that as a result of the introduction of number portability we will see a rise in the cost of retaining existing customers in the period prior to the introduction of number portability. And we will see higher churn levels in the aftermath of that introduction.

Judging by the experience accumulated elsewhere, the level of churn tends to go back to where it was before the introduction of number portability, or slightly higher than that.

In terms of being a net beneficiary of number portability, we have seen from experience here and elsewhere that there are usually two types of players which can benefit from number portability. One is the player with the best brand, and the other is the player which entered last into the market. That player has found a large number of customers who were basically captive and who never replaced their phone number because that phone number is their basic business card. They have for the first time an opportunity to choose a supplier of their choice and take the number with them.

In the case of Israel, Partner is both the player with the best brand and the player which entered last into the market. Therefore, we believe that we will not be negatively impacted by the introduction of number portability. As far is the entire market goes, we do not believe it will have a material effect on market shares of the major players.

Great. Finally if I may, in the first quarter do you have any indication in terms of any changes in market shares which have happened in terms of your subscriber growth? Has it been in line with your market share?

We haven't seen the reports from (technical difficulty) and Pelephone, our two main competitors, but we do not have any reason to expect a change in market share.

Great. Thanks very much. Good evening.

Sergei Arsenyev with Goldman Sachs.

Good afternoon. Can I just ask you a question on the MVNO or potential MVNO regulation and whether there has been any update on that? Especially as regards to the rate, the wholesale rate, that the regulator is thinking about.

The second question is with regards to your 3G customers. Could you give the estimate of the data ARPU that is being contributed by the 3G customers?

Well, let me start with your first question about MVNO. Basically, the Ministry of Communication has announced that it is considering the opportunity, if there is one, to introduce MVNOs in Israel. The way they tackled the issue is to hire the services of an international consulting firm to look at the opportunity, whether there is one in Israel.

Cellular operators in Israel are now in the process of submitting their positions to that international consulting firm. We have made our position known, that we believe there is no room for MVNO introduction in Israel. We believe that the market has high penetration. We believe that prices in Israel, both for outgoing minutes and for incoming minutes, are low.

We believe that the competitive level here in Israel is significant, as seen by reductions over the years in the per-minute price of minutes of call; as seen by the levels of handset subsidies; and as seen by marketing expenses made by all players in this market.

This is a market where you have players with very well-developed brands, with very good customer services, and with no segments which have significant underpenetration in this market. Hence, we have concluded that this is not a market which is suitable for MVNOs.

The Minister of Communication has recently said that the mind of the regulator is not set on introducing MVNOs in Israel, and that it will review the possibility, stating that there is no intention to ignore the positions of the cellular players.

The Minister of Communication also indicated that it does not believe that an introduction of MVNO and number portability simultaneously is the right thing for the market. Therefore, we are under the impression that we will see a fair review of our position. We cannot guarantee to you, obviously, that our position will be received by the Minister of Communication.

With respect to third-generation customers, yes, we are encouraged by the data and content revenue. We do see that third-generation customers have typically a higher ARPU than our second-generation customers.

We can see very satisfactory growth in data and content revenue. If you look at data and content revenue, there is a percentage of service revenues. These have reached a level of 12% in this quarter, compared to only 10% in the same quarter the previous year.

Just to give you a sense of the size of the contribution, the vast majority of our third-generation customers choose a package which gives them the opportunity to surf the Net and to access information. The basic package is ILS14.99 a [group], so you can expect significant contribution to ARPU from almost all our third-generation customers.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Istvan Mate-Toth with Credit Suisse.

Thank you very much. Could you elaborate a little bit on your thought process when setting the dividend policy? I think you're going to decide in the second quarter. Again, could you just go through the factors, the pros and cons when you maybe talk about (inaudible) [remuneration]?

Secondly, related to that, do you think we should be worried about the potential underinvestment in your infrastructure? I think your cash CapEx is running significantly lower than your depreciation rates. What (inaudible) looking at this?

With respect to the dividend policy, you rightly pointed out that we have given indication that we intend to review our payout ratio during the first half of 2007. Therefore, you can expect us to come with information about the decision made by the Board when we publish the results of the second quarter, the latest.

With respect to CapEx, we do not believe that we have underinvestment in CapEx. We have an excellent network, judged by comparison to our competitors as well as to comparison with other leading networks worldwide. We believe we have an excellent network judging by the voice quality; judging by the coverage; judging by the rate of dropped calls; the rate of [no-pick-up] calls; and the speed of downloads which we enable our third-generation and second-generation customers to enjoy. We, therefore, believe that we are not underestimating the need to invest.

I think it is important to bear in mind that Israel is a small country with a very favorable topography. We benefit from a very convenient distribution of population density. All these factors tend to lower the CapEx needs.

I assume that we must be doing something efficiently judging by the past experience. These are all explanations for the relatively low CapEx guidance. As I have indicated to a previous question is to expect the same level of CapEx as in '06.

Thank you very much. (inaudible) Thank you.

Thanks, and at this time I'm showing no further questions in queue.

Let me just make one comment about SG&A. I just wanted to make sure that it is understood that we were making reference in terms of the same level of SG&A percentagewise, rather than in absolute shekel terms. We believe that this gives you a good indication of what is to be expected.

Thank you very much. Sir, would you like me to then go ahead with the closing of the call today?

Please.

Okay, very good. Ladies and gentlemen, this conference will be available for replay starting today, Monday, May 7, at 8.30 PM Israel time; and it will be available through Thursday, May 17, at midnight, Israel time. You may access the AT&T executive playback service by dialing 1-800-475-6701 from within the United States or Canada; or from outside the United States or Canada, please dial 320-365-3844 and then enter the access code of 871197. (OPERATOR INSTRUCTIONS)

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