Partner Communications Company Ltd (PTNR) 2008 Q1 法說會逐字稿

Welcome to the Partner Communications Company first quarter 2008 results conference earnings call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the Question and Answer Session. As a reminder this conference is being recorded May 5, 2008. I would now like to turn the call over to Mr. Oded Degany, Vice President of Corporate Development Strategy and IRO. Mr. Degany, you may begin.

Thank you, Julie. Good afternoon to those of you in New York, 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 results.

Today, we are joining the conference call from Tel Aviv where we have just recently concluded our Board meeting. With me on the call today are David Avner, our CEO, and Emanuel Avner, our CFO. Our CEO David Avner is going to make several statements, followed by a summary of our financial operation 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, [David Margolis] on 972-54-815952 and the copy of the release will be either emailed 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 forward-looking statements, you should be aware that Partner 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 release dated May 5, 2008, as well as Partner's filings with the U.S. Securities & Exchange Commission on the Form 20th F1 and 6-K as well as the F3 [self-registration] statements 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.orange.co.il.

At this time I would like to hand the call to our CEO David Avner.

Thank you, Oded, and hello to our listeners. We are pleased with our results of the first quarter of 2008 in which Partner again delivered a strong performance in spite of the new challenges we faced this year. As expected, following two quarters of intense activity in the second half of 2007, we have seen the market stabilizing while net adds and expenses returned to normal level.

Number portability has quickly become an integral part of the Israel cellular market and definitely benefits the Israeli customers. In this quarter, we have again realized our successful strategy to focus on the post paid business and residential segments, and manages to report 40,000 high quality post paid subscribers, 60% of whom are business customers. The number of our third generation subscribers has continued to grow, reaching about 750,000 a quarter and 36% or 36% of our post paid subscriber base.

Our content business has continued to serve a major gross driver and become a central part of our business reaching revenues of approximately NIS 200 million. Maintaining our leadership in content and media is an important strategic goal for Partner.

In the first quarter of 2008, Partner has managed to improve its profitability indicators in spite of the intense competition and regulatory pressure. The improvement is the result of the company's determination to carry ongoing efficiency plans in order to increase value to our shareholders. In [Powerland], we have continued to invest and enhance our superb Customer Service organization. I am very proud of those achievements mainly vis-a-vis the strong competition we face and reduction of average (inaudible ). In March, the [Groenhouer] committee published its recommendation regarding the regulatory landscape of the Israeli telecom markets. We are encouraged by the main recommendation of the committee to promote full [localloop] bundling in the Israeli market. We believe that the regulator and determination to implement [localloop] bundling will enable the Israeli customer to enjoy a wide variety of broadband services, rich content as well as new standards of Customer Service.

Partner has several alternatives to become a player in the broadband residential market. Technology and regulatory trends worldwide enable new -- to offer high quality multi-media and content services by using various access methods. We are currently actively working on establishing our noncellular platform which will be introduced at the beginning of next year.

Needless to say that Partner intends to maintain its position as a value company with a strong cash flow, high profitability and an attractive dividend deal for our shareholders. Finally, I would like to take this opportunity to say how proud I am that Partner was once again, this morning, chosen as the most favorite workplace in the telecommunications sector. I have no doubt that employee satisfaction plays a tremendous part in Partner's success, and I would like to thank all of our employees for their commitment, dedication, and optimism to to Partner.

With that said, I would now like to hand the call over to Emanuel Avner our CFO. Emanuel, please. Thank you, David, and hello to our listeners. The results of the first quarter are pleasing with improvements continuing to be made in our operational and financial performance. Service revenues increased by 6.7% to NIS 1.3 billion in the first quarter due to further rises in the subscriber base (inaudible ) and in content and data revenues.

The increase was despite the lower average revenue per minute, which resulted from competitive market pressures that approximate for 14% of decrease in the interconnector from the beginning of March. The strength of our content and data revenues is encouraging with quarter data revenues excluding SMS increasing by 40.8% compared with the first quarter of 2007.

Improvement can also be seen in all of the key profit measures. Gross profit increased by 13.6% to NIS 507 million in the first quarter of 2008. Operating profit increased by 15.8%, NIS 349 million. Total EBITDA NIS 533 million, an increase of 17.1% from the first third quarter of 2007. This is equivalent to 39.7% of service revenues and 33.5% of total revenues. And finally, net income increased by 24.2% to a level of NIS 243 million.

Free cash flow was negative in the first quarter. This reflects activities and payments related to the introduction ability in December 2007. And therefore, we expect free cash flow to return to a normal level on the next quarter. On the basis of our quarterly results, we confirmed annual guidance for 2008 which we gave at the beginning of February in the NOL 2007 press release. Partner's strategy has always been to maximize shareholder value. We continue to offer our shareholders an attractive dividend deal, and the share buyback plan for 2008 will contribute in earnings per share. With that, I will now hand the conference back to Oded.

Okay, Emanuel, you are now invited to ask your questions.

(OPERATOR INSTRUCTIONS) The question is from David Kaplan of Lehman Brothers. Please go ahead.

Hi. Good afternoon. I have one question about the CapEx, and just tell me if I'm wrong, but for the quarter -- CapEx for the quarter was only around 7.5% of revenues, and I was curious if the impact of that was from the agreement with Erickson?

It is Emanuel here. The CapEx in the first quarter was comparatively low, but this guidance for 2008. In 2008 we should be something below 10% of revenues, and I don't think that we should conclude anything from the results of the first quarter. We have started already to implement the contract with Erickson, but the impact of that is still now not material.

So that was not the impact in the first quarter of 2001?

No. As you see, the CapEx to revenues was low compared to the last material figures, and I said that the guidance for 2008 that it should be a level of approximately less than 10% of the revenues.

Right, but it's also low in absolute terms compared to Q1 '07.

It is. It is.

Was there a particular impact? What happened that was different that led to lower CapEx? Nothing in particular?

I cannot give you any conclusions from the CapEx of the first quarter because we work according to an annual budget, and our annual budget reflects a CapEx on an amount of approximately less than 10% of the total revenues of the company, so you cannot conclude anything from the first quarter.

Okay. Thanks, Emanuel. Just, David, if I can ask one question. How do you view what seems to be the acquisition of Hot Buy, another party? How do you see that changing the over all market in Israel from one that was expected or thought to have four major telecom parties to one that in the end might only have three? I know that you mentioned that you view the implementation of local loop on bundling as positive for the market, but overall with only three major parties or players in the market, how do you view that as having significant changes or changing partner strategy going forward?

Still don't see acquisition of what I know about is an acquisition of 10 to 15% of Hot shares by net region IDB, so it's still quite early to discuss this idea. However, we don't see (inaudible) material - if it has a material impact on our business, and the net vision we hold does not give the net vision the IDB group to any first refusal on Hot shares. The fact that we didn't give any counteroffer was a conscious decision. It is not that we forgot or was not -- we didn't notice, so I don't see a major change in the market. So, David, I would like to add something regarding your question. First and foremost, it's very important for us to emphasize that we are monitoring on even a daily basis all of the M&A and the other alternatives that we have in order to realize our strategy. We believe, and I think that our belief is also substantiated by the worldwide trend, that we have few alternatives in order to become a player in the broadband residential market and Hot is not the only alternative. At this stage what we can say is that we don't exclude any of the options that's available for us, and we are still working very intensively on developing and promoting our non-seller platform which will be launched at the beginning of 2009.

At this stage what we can say is that we don't exclude any of the options that's available for us, and we are still working very intensively on developing and promoting our non-seller platform which will be launched at the beginning of 2009. All right. Great. Thanks very much.

Thank you very much.

The next question is from William Kirby of Nevsky Investor. Please go ahead.

Thank you. A few questions, firstly, is the increase this post paid subscribers sustainable, and specifically, are you saying post paid subscribers from your competitors or is the share of postpaid in the over all market rising, and my second question is just on equipment subsidies. Do you have any plans to say introduce handset subsidies or reintroduce them to a higher level in the future or is the level of equipment margin we saw in Q1 '08 likely to persist? Thank you.

Regarding the post paid market, as part of our strategy, we decided a year-and-a-half ago to concentrate in the post paid market. We believe post paid subscribers are the most lucrative subscribers. We believe that we will be able to leverage the relationship with those subscribers toward other communication areas, and consistently since then we have managed to recruit mainly post paid subscribers. What you see --by the way-- for example, in Q4, '07, the net add was 65,000 subscribers, most of them or the vast majority were post paid subscribers. In Q1 '08 we managed to recruit 40,000 post paid subscribers, about 60% of them are a-- business subscribers, and we think that this is proof to the success and the reorganization of our very strategy to concentrate in this market. As you know, we are the only company that provides the market with a breakdown between the number of subscribers based on business private and previous subscribers, and we do it because we think that it is very important to emphasize the fact that the number of subscribers is important only if you understand as an investor what is the Company's position post paid subscribers. Regarding the second half of your question, I will let Emanuel to answer it. Regarding the equipment subsidy, actually we see in our results in the fourth quarter of 2007 and Q1 2008 that the level of the gross loss of equipment was lower compared to the other quarters in 2007, and this is actually a decision of the company. I mean, how to set the level of the SAC and SLC. This is a subsidy for the handsets, and it relayed or accept according to many-many (inaudible) including marketing and competitive medicine in the market, and this time in Q4 2007 and Q1 2008 we used an offering that offered a higher price as to the handsets and lower subsidy, but we give also the customers higher rebates along the contract term. Again, this is a decision of the company, and we might keep using that offering or we might change that in the future. I cannot go.

Okay. Thank you.

Thank you.

The next question is from Alexander Balakhin of Goldman Sachs. Please go ahead.

Good evening. I have a question on your guidance. Your performance in the first quarter was pretty strong, and at the same time you reiterated your guidance which is -- which looks I would say conservative compared to performance in the first quarter. Do you expect some market changes going forward later this year so you keep your guidance unchanged? Can you elaborate on this?

You are right, that the results of the first quarter are very encouraging, but even taking that into account we prefer to be conservative and not to change the guidance of the full year, and we might change that relaying on the second quarter results if there will be a need for that. Right now we don't see any need to change our guidance. No, we do not project any major changes in the market regarding MVNO, right now or so will happen in -- 2009. 2009 or late 2008.

And can you please update us on mobile portability, how the company feels, if it is positive as it used to be or do you see some sort of competition increase for M and P introduction?

The M&P actually started the beginning of December 2007, but I can tell you that the offering to subscribers started to initiate even before then, meaning even in the third quarter of 2007, and what we see right now that is in the first quarter of 2008, we start to see a decline in the number of transactions and the number of import, out, and transaction, and our feeling is the number portability is more or less decline, and I don't foresee that we will see higher rates of changes in the future.

Thank you.

The next question is [Neerial Anek] from B 1. Please go ahead.

Hi, guys, congratulations on the quarter. Want to hear your opinion regarding your broadband strategy and basically --you did mention the (inaudible). You didn't mention are you going to compete with recent ISP companies in Israel or do you see this market in a different view as a cellular company?

Thank you for your question. Oded speaking. Generally, we didn't elaborate on our future noncellular activity that's mainly due to a commercial (inaudible) which we prefer not to disclose our marketing plans. What we can say is that we have the privilege as of this stage, as a pure cellular player to choose the lucrative market or the most interesting market in terms of growth and in terms of the advantage of the connection between the mobile and the fixed line, and we are very optimistic about this market. In total, we said that we don't think that in the first years it will have a material impact on our revenues and profits. However, it is very important from the angle of customer stickiness and customer's perception, and you need to be very patient and wait until the beginning of 2009 in order to see our product and service offering.

Thanks, guys.

Thank you. (OPERATOR INSTRUCTIONS) The next question is from Darren Shaw of UBS. Please go ahead.

Good afternoon, gentlemen. I had a few questions. The first one is if you can quantify actual shekels terms please, Emanuel, the impact of number portability. You talked about free cash flow being negative in the quarter, so I just wonder if you can give us an idea of actual cash impact? The second question is on pricing. I saw in the press that --the local press in Israel --that pricing I think has gone up from the first of March. If you can talk about actual numbers in terms of percentage increase, and then a couple of questions the telecom's regulating industry over here. I'm not sure if you can answer them. Maybe you're in a better position to speculate than I am. Do you think from where you are, do you think the regulator may approve or not approve the Hot IDB deal if it were to happen, and then finally, do you think the [Grenhouer] committee recommendations will actually become law and if hypothetically IDB did get ahold of Hot, how do you think that's in the works? Thank you.

Darren, hi. First of all, please repeat your first and second questions. Maybe I will start by answering your third and fourth question. Okay? Regarding the approval of the (inaudible) I think you should refer this question to the regulators and the regulators decision whether to approve or not approve the transaction between net vision and Hot? Can you repeat your first and second questions?

The question was in the press release, Oded, you talked about negative free cash flow in the first quarter and coming back to normalized levels going forward, so I just wondered if you could actually quantify the impact of number portability like 200 million shekels or something, and the second question was on pricing, I believe pricing may have gone up from the 1st of March to the 1st of April. Wonder if you can quantify pricing, what happened in the market for Partner?

Okay. This is Emanuel. I will answer on this questions. First of all, the free cash flow, in any case it is recommended to look cash flow on an annual basis whether than on a quarterly basis because there are many fluctuations in cash flow statement not like profit and loss statement, but to your question, yes, we suffered from a negative free cash flow in the first quarter because of mainly the number portability that started in the fourth quarter of 2007 and the main reasons for that are higher inventory. Actually we started to accumulate inventory end of 2007. because of the increasing time, and we started to order the inventory to be ready to the number portability field. I can tell you that right now the level of our inventory at the end of April is already 50 million shekels less than the level that we presented at the end of the first quarter of 2008, so inventory level is okay right now. We also accumulated account with (inaudible) in the first quarter in total amount of 100 million shekels, and this a result of many activations that we had in the fourth quarter and also in the first quarter. We will handle that-- we will handle this issue to factors of the some of the receivables, or I believe the accounts receivables will be more positive in the second quarter. The third part is payment to suppliers that was down in the first quarter on the account of the expenses of the fourth quarter of 2007, and this is usual thing, I don't think that we should elaborate on that more.

This is regarding the free cash flow, as you can understand, I believe that we will return to normal level of cash flow in the second quarter, and again you should look at that on the annual basis rather than on a quarterly basis. Regarding the erosion in [towreeve], you can see from our reported that the rate per minute was a decrease in the first quarter of 2008 by approximately 4% or 5%. This is due to a competitive measure that they had taken into the market, and also all the [towreeve] plans that we introduced in the number portability period, and there was also a decrease in data connect [towreeve] by 14% from beginning of March, 2008, and the Company partner already announced that we will increase the prices to our customers in April, so this move was already done. We increased the prices in April for part, not all, but part of our customers, and this of course will be reflected in the second quarter results.

That's very helpful. Thank you very much.

Thank you.

Thank you.

There are no further questions at this time. Before I ask Mr. Degany to go ahead with his closing statement, I would like to remind participants, that a replay of this call is scheduled to begin in two hours. In the U.S. please call 1-888-254-7270. In Israel please call 03-925-5936. Internationally please call 9723-9255-936. Mr. Degany, would you like to make a concluding statement?

Thank you, Julia. This concludes our first quarter results conference call of Partner Communications. We appreciate your interest and feel free to contact us at Investor Relations if you have any additional questions. Access to the call and other valuable information on Partner is available to our website www www.orange.co.il. Thanks again and have a good day.

Thank you. This concludes the Partner Company first quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.