Partner Communications Company Ltd (PTNR) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Partner Communications third quarter 2007 financial and operational results. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to our first speaker, Mr. Oded Degany. Please go ahead, sir.

Thank you very much. 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 third quarter results. Today, we are joining the conference call from Hong Kong, where we have just recently concluded our board meetings. With me on the call today are David Avner, our CEO, Emanuel Avner, our CFO and (inaudible), we also have[ Dr. Daniel Dar]. Our CEO, David Avner, is going to make several statements followed by a summary of our financial and operational results by Emanuel Avner, our CFO. We shall then open the floor to Q&A. At this time, if you don't have a copy of today's release, please contact our Investor Relations Manager in Israel, [Deborah Margolis], on 972-54-481-5952. I repeat, 972-54-481-5952. And the 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 U.S. Private Securities Litigation Reform Act of 1995. In connection with such all forward-looking statements, you should be aware that Partner's actual results may 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 releases dated October 31, 2007, as well as Partner [bio] filing with the U.S. Securities and Exchange Commission on the form 20 FF 1 and 6-K as well as the F3 Shelf Registration Statement, all of which are readily available. Please note that the information in this conference call will lead to projection or other forward-looking statements may be relied upon [starting] with the previous safe harbor statement and 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 hand the call to our CEO, David Avner. David.

Thank you, Oded. The third quarter of 2007 was very strong quarter for Partner. We are reporting today that by the end of the third quarter, we have, approximately, 488 third generation subscribers, more than [70%] of our 2.8 million customer base. I can report that as of today, we have increased our third-generation subscriber base further to over half in [e-mail] third-generation subscribers. During the third-generation quarter, we also added 62,000 Net subscribers of which 80% are high-quality post-paid subscribers. Our leadership in 3.5 generation services is reflected in the superb customer experience for both voice and data content services. This experience is being translated into increasing demand for our wide range of data and content services. The results are [substantial--our confidence] in the content services as one of Partner's future growth drivers. I am also very pleased with the financial and operational results we achieved this quarter. As you can see, the results of our [effort manifest] (inaudible) both in the top (inaudible) revenues as well as in our margin [expansion]. The assets built by the company in recent years provide us with the platform to continue and improve our business. Our excellent customer service contributed to additional decrease in (inaudible) rate, despite the increase in [competition] we see in the eve of the introduction of the number portability. With that said, I would like to hand the call over to Emanuel Avner, our CFO. Emanuel, please. Thank you, David. We are extremely pleased with the results this quarter. Total revenues increased by 9.5% with service revenues increasing by 6.4% reflecting our subscriber-based calls to increase in the proportion of high-quality post-paid subscribers and the higher average minute of use per subscriber. As David mentioned, the month for our advanced content and data services continues to rise. (inaudible) this quarter in a 33% increase in content and data revenues from Q3, 2006, accounting for 30% of total service revenues. We also posted very encouraging increases in key profit margins demonstrating our commitment to improving our operating efficiency. Operating profits rose by 22% [year-on-year, EBITDA] increased by 13.2% and net income increased by 16.9% compared with Q3, 2006. Net income decreased by 6% when we compared these figures to the previous quarter, Q2, 2007. This is due both to the additional 34 million [shakers] in financial expenses, which largely reflects the high CPI level of 2.5% in Q3, 2007, and the additional tax provisions related to the [FASB] ruling which I will discuss shortly. In view of our very strong results, the board has agreed to increase the amount of dividends distributed for this quarter to 200 million shekels, and we believe that we now offer a very strong dividend yield for the company shareholders. Following the ruling of the Supreme Court on November 20, 2006, on the matter of (inaudible) which overturned the rules regarding the recognition of financing expenses, the company has accumulated the provision for taxes in an amount of approximately 55 million shekels as of September 30th, 2007, including the provision for approximately 12 million shekels for Q3, 2007. We made this provision due to the possibility that part of the financing expenses are [caught] in the year 2005 to 2007, in respect of the financial debt, would not be recognized as an expense for tax services. On October 28 and 29, 2007, the Israeli Supreme Court issued two new rulings readdressing the same issue. We are currently reexamining the requirements for this provision in the light of this new ruling. Looking ahead, we continue to have confidence in our annual guidance for 2007, bearing in mind that the fourth quarter is seasonally slower than the third quarter, and that we expect the introduction of number portability to increase marketing [expenses] over the quarter. With that, i will now hand the conference back to Oded. Oded.

Thank you very much, Emanuel. And before I hand the call to the moderator, I would like to ask you to please ask your questions in a loud and clear manner. The quality of the line here is not very good. So, moderator, please, you are now able to start to conduct the conference call.

Very good. (OPERATOR INTSRUCTIONS) Our first question comes from the line of David Levinson with Bank Hapoalim. Please, go ahead.

Yes, good evening, Oded and David. And congratulations for the excellent results. I have a few questions. First of all, this quarter you recorded 62,000 Net new subscribers. It is more than twice than the regular recruitment that you have in each quarter than the last year. Can you explain it?

Well, actually, first of all, we believe that this is a nice achievement of the company. We work very hard for this, and all we can say that the quality of those new subscribers is a very good quality. 80%, above 80% of those subscribers are post-paid subscribers, and we continue to focus in this segment, and we think that this is something which is a very nice achievement for the company. There is no special way of doing it but to work very hard to increase the focus in the customer service and to make sure that the company meets its objective.

Do you think you that will be able to maintain those numbers?

Well, actually we do not provide guidance regarding this number, but I can assure that we do a lot of (inaudible) and focusing on the customer service and providing our customers with excellent network applications. And we cannot guarantee any future [in number] with this regard.

Is it a result of one-time marketing operations?

No, it's not a result. It is a result of the continuous effort of the entire organization to recruit new lucrative quality customers. And, as you can see, around the previous quarter, we also recorded high percentage of business customers. I also would like to draw your attention to the fact that the churn rate of the company is very low. It's 3.3% lower compared to the last quarter. So, you can see that the net rate is (inaudible) and influence by low churn rate and high pace of recruitment.

Okay. And another question. The growth profit margins from services was 42.4%. Can we expect that the GP margin will stay above the 41% from now on?

It's Emanuel here. We do not give any guidance regarding these margins. So, I think we can relate only to the guidance that we gave regarding the 2007 results and the fourth quarter.

Okay, thank you.

Thank you, David.

And our next question comes from the line of Avshalom Shimei with HSBC. Please go ahead.

Hi, guys. And congratulations on a nice performance. My first question is regarding the gross loss on equipment. It seems like it reached, 33% lower than in Q2, and now, giving you a high subscriber growth, can you explain how you managed to do this? Was it kind of lower handset prices or some kind of minutes credit that is not seen on the cost of equipment? Please elaborate on that.

Hi, Avshalom. Yes, we do have 33% [loss] margin on equipment this quarter, which is lower than the previous quarter and the [parlay] quarter, but if can you see in Q1, 2007, we had also [loss] margin of 33.8%. It depends on the variety of the handsets that we sell each quarter. This quarter, we had higher transactions compared with the previous quarter and compared also with the following quarter last year. We had very, very nice recruitment and also upgrades of subscribers, but the total loss is 66 million shekels, which is similar to the loss that we had in the [parlay] quarter last year. Avshalom, maybe one more comment regarding subsidizing the handset. This is a [conscious] decision that was taken by the company. It's a [manageable] process, and we see the economic benefit of subsidizing those handsets directly by an increase of the minutes of use and additional consumption of data services. So, I think that you can see from the number of this quarter and the previous quarter that it's fairly manageable.

Yes. On top of that, I'm saying this is a nice achievement. What I was actually puzzled with is how did you guys were able to reach such results. And I was thinking, maybe, it's prices of handsets which were coming down or something else that we cannot see. I'm not saying it's bad. It's actually better than what we expected.

Yes, it is very good achievement. Bear in mind that the cost of our procurement of handsets is tied to the dollar rate. This is another contribution that you have to take into account.

Okay. So, you're saying foreign exchange helped you in achieving this number in shekels?

Yes. Also, this is not the main reason, but also one of the reasons.

So, final question. Can you just elaborate on the main reason why it was that, because I'm just trying to figure out.

Avshalom, it's a variety of reasons. I really cannot tell you anything more than that. It's the variety of the handsets that we sell. It's the dollar rate that was lower. It's the high volume of transactions that we've had this quarter. I cannot give you anymore details. This is the result.

Fair enough. My next question is regarding the inventory. It went up. You gave some explanation. Can you just give some perspective looking forward. Should we expect that to come down in the next few quarters to more normal levels, or this is kind of a new inventory level given the [MMT] pending that we should expect the next two-three quarters.

The inventory level is something that was calculated and forecasted from the beginning. It was not a surprise for us, and I can explain why. First of all, the volume of sales is much higher than what we had previously. You can see that revenues from handsets went up to 200 million shekels from the previous quarter, and therefore, we have to carry more inventory in order to cope with this level of sales. This is one thing. Another issue is that the end of this quarter was in the middle of the Jewish holiday, the middle of Sukkot, and we accumulated some inventory to be sold immediately after the holiday. And this is another factor. And, of course, we would tend now to have a larger variety and volume of headsets for the number portability.

Okay. And last thing.

If you calculate, Avshalom, the turnover of the inventory in days, you'll find out there is no change in inventory days this quarter compared to the other quarters, the previous quarters.

Do you think that's the level that you should see now going forward in the next few quarters, or do you think it would slightly come down?

I would say the level of inventory is tied to the volume of sales that we do, and if the volume of sales would be higher, the inventory level would be higher also.

Okay.

And also placing the number portability next month, and since most of our suppliers go to their vacation during Christmas, we have to prepare some inventory in order to be ready for the number portability. So, this has also an impact on the level of today.

That's helpful. Thanks. And the last one, regarding the ruling, I understand you're looking into it right now. But just to understand the meaning, if in the case, kind of a best-case scenario, you'll be able to, again, account for the provisions that you made, would the impact be just straight stream of this 55 million shekel into the bottom line or is there some kind of a different treatment that we should be aware of?

If we come to conclusion that this provision is not needed anymore in light of the new Supreme Court ruling, so this provision will be cancelled and in part or in all. And all the cancellation of the provision will go down, as the whole figure to the bottom line of the results. So if in the optimistic scenario, we could cancel the 55 million-shekel provision and contribute 55 million shekels to the net income of the company.

Is there any time frame for you to take that decision to reach the conclusion what to do with it?

I can not really guarantee anything because we are, right now, in discussions with the local Israeli income tax authorities regarding this issue, and I believe that, maybe, we can finalize that in one quarter or two.

Great. Great. Thank you very much for your answers, guys.

Thank you, Avshalom.

And our next question comes from the line of Alexander [Blackman] with Goldman Sachs. Please go ahead. One moment. Alexander, you're open. Please go ahead.

Thank you. Hi, this is [Alexander Blackman] from Goldman Sachs. I have a question on your handset revenues. You've posted pretty impressive handset revenue growth. Do you expect that, going forward, you will repeat this trend or it was just [one off]? And are your handset revenues will return back to, more or less, normal levels? Thanks.

We think that we heard--the line is not so good, so we don't hear everything, but I think, I guess that you asked about level of recruitment of new subscribers and [Net ads], is that right?

I am asking about equipment readiness.

Equipment sales?

Yes.

Goes together with the new recruitment, new subscribers. Well, i think that the increase in the competition in the market works for us and number portability will contribute to the company. We believe that we have the best blend in the market and the best service in the market. We will gain out of the new situation in the market with more subscribers. We cannot guarantee, of course, that the pace will be the same, bigger or smaller, but generally speaking, we believe that this is the direction.

Okay, thanks.

And our next question comes from the line of Stephen Pettyfer with Merrill Lynch. Please go ahead.

Thank you. Good afternoon. Two questions, please, for me.

Good afternoon.

Hi. Firstly, perhaps relevant to where you are right now, I just wanted to ask you about your dividend payout. Clearly above the new dividend policy of 80% payout, and I just wondered if given your meetings in the last 24 hours, whether or not we should look towards that dividend policy being edged upwards as demonstrated today. That is my first question.

Hi, Stephen. We don't hear very well, but I guess what you're asking, regarding the dividend policy of the company, and we are now, we finished now a board meeting. This issue was not discussed in the meeting. I think that it will be discussed in the beginning of the next [year]. Right now, the payout ratio is 80%, and this gives a very nice dividend yield to our shareholders.

Just as a follow-on to that, though, you exceeded your dividend policy this quarter. Were you just feeling generous?

The 80% sales ratio is the same, but we increased the amount of the dividend to 200 million shekels. And this means that we would [top up] the dividend at the end of this year, according to the final results of the year.

Understood. Okay. Thank you. And the second question relates to your opening comments about number portability. You mentioned that you were seeing increased competition ahead of that. I wonder if you could give us a little more color on what is going on in the market?

Of course, all the companies are prepared to the number portability. We tend to believe that we are in the best position to benefit from the number portability, and we see that now, also our competitors, Cellcom and Pelephone, use a lot of advertisement around this issue, but we are happy that we don't see any signs of competition over prices. And the competition now is more on image of the company, about commercial activities, etcetera. So, right now, there are no signs yet of price [war] that we believe that they will not be also at the end because the prices in Israel are relatively low, and this was proven also at the end by a consulting firm that was hired by the Ministry of Communication, (inaudible) company. They came to conclusion that the level of competition in Israel is relatively high. And, therefore, we think to conclude that we're in a very good position and right now, we don't see any price [war].

Do you see, or do you anticipate any increase in handset subsidies?

Increase in? Sorry.

Handset subsidies.

No, I don't.

Okay. Thank you.

As we've said in the past, generally speaking, we believe that potentially there will be an increase in the marketing expenses, learning from the lessons in other countries. You can see a country that the impact was zero. You can see country that the impact was substantial impact. So, the company is well-positioned and prepared for all types of scenarios. And we said that our working assumption is that there will be an increase in the churn and also in the SOC and SAC, the subscriber's retention cost and the acquisition cost.

Understood. Thank you very much.

You're most welcome. Thank you.

And our next question comes from -- one moment -- the line of Chen Lindman with Excellence Nessuah. Please go ahead.

Good evening. Two questions. You're saying there is no price war, but are you sensing in contract renewals that there is price pressures when contract customers are budging you to renew or you're budging them to renew a contract. Are you feeling any price pressures?

Can you repeat your question because the line is breaking.

Okay.

And we don't hear you well.

Are you feeling any price pressures when there are contract renewals.? If there is a contract renewal by yourself or by a client, do you feel any price pressure?

All we can say is that we see a consistent decrease in the RPM, in the rate per minute. It's a fairly competitive market, the Israeli market, but we are able to compensate on that by an increase in the MOU which is a result of the demand and also as a result of focusing in the business segment. Additional compensation comes from the increase in data revenue. There is a consistent price pressure. It's not very, very high, but you can see based on the number and the calculation that there is a sort of a pressure.

Second question. In the past, Partner has considered -- .

Say it again, please. At past times when there were changes in the market,, Partner was doing layoffs and cutting in personnel. Are you considering such an act right now? I assume that you asked a question regarding the (inaudible).

No, no, no.

Is that correct?

No, no. The question is, is Partner considering cutting down on personnel?

I'm not--We don't hear you. Can you pick up the phone and repeat the question, please?

No, no. I'm using the phone.

I'm sorry. We don't hear you.

Will you allow me to answer? I think I heard the question. The question was about planned layoffs. If Partner--any other company in our business, we always examine the number of employees and look at the challenges the company is facing. We don't expect to see any major wave of layoffs at Partner.

Okay. Thank you.

Thank you.

Our next question comes from the line of Darren Shaw, UBS. And please speak up, Mr. Shaw.

Hi. Can you hear me clearly?

Can you repeat the question because we didn't hear you well?

Okay, hi, guys. I have a few questions for you. The first one is, just looking back over my notes over the second quarter conference call on July 31st. There was a few questions about the appropriate leverage of the balance sheets at Partner and your answer, if I remember correctly, David and Emanuel, was about that you were waiting to look at some legal and some taxation issues to solve the issue. I'm just wondering if the Supreme Court ruling of the last couple of days is what you're referring to or are you waiting on some other issues as well?

I assume that you ask about the Supreme Court ruling. Is that right?

I asked about the appropriate leverage of the balance sheet, and you said in the last conference call that you were waiting on some legal and taxation issues. Was the ruling from the Supreme Court what you were waiting for or are we still waiting for some other issues?

This supreme court ruling addressed one of the issues that we deal with. As you can see, we have not come to conclusion yet after dealing with this issue. But on top of that, we have some other issues that we have still to solve. I would not anticipate any one-time dividend or a buyback in the near future for the company. Regarding the dividend policy of the company, this will be discussed, I believe, in the beginning of next year, and we will have to announce on that in that future point. That's it.

Okay, I have a couple more questions, please. Just on number portability and market share, you mentioned about five minutes ago that you thought you were potentially in the best position to benefit. I just wondered if you can guess, say 12 or 15 months down the line, do you expect Partner to have a higher or lower or similar market share than the 32% you mentioned today?

Actually we don't provide guidance regarding our expectations from the number portability results. All we can say is that we are fairly optimistic about this process. We [support this process. We think that the fact that our brand is the strongest brand in the Israeli market, and the fact that we came, the last of the market will benefit with us, and we're looking forward to December 1st.

Okay. Thank you. And then in the guidance, you mentioned about the fourth quarter is seasonally slower than the third quarter. Obviously you had a very strong third quarter. Is it fair to say that October has continued like the third quarter or October is a seasonally slower month?

I can't give you anymore details regarding that. All we said is that seasonality has an impact over our results and level of revenues, and you can look on the third and fourth quarter of last year to conclude the level of seasonality.

Okay. And my final question, please, is in terms of the--do you have an estimate of how many of your subscribers or the industry is on a 36-month contract. And is there any update on whether, Ariel Atias, the Communications Minister is putting through a legislation to change the contracts to 12 months?

We don't disclose this number. All we can say is that we support the Minister of Communication's process of canceling the penalties because we believe that the customer should have a free choice and the customer should be able to elect the company without paying penalties to the previous carrier.

That's great. Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) And speakers, no one else has queued up. Please go ahead with any closing remarks.

Hello? Can you repeat the question, please?

There are no further questions, please go ahead with any closing remarks. There are no more questions, sir.

Let me conclude the call then. I believe there is a problem with the line to Hong Kong. I just want to thank everyone who participated on this call. We appreciate your interest. Please feel free to contact us at Investor Relations if you have any additional questions. Access to this call and to other valuable information on Partner is available through our website at www.investors.partner.co.il. Thank you and have a very good day. Bye-bye.

Ladies and gentlemen, that does concludes your conference for today. Thank you for your participation and thank you for using AT&T Executive Teleconference Service. You may now disconnect.