Partner Communications Company Ltd (PTNR) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company second-quarter 2008 results conference call. (Operator Instructions). As a reminder, this conference is being recorded July 31, 2008.

I would now like to turn the call over to Mr. Oded Degany, Vice President, Corporate Development and Strategy and IRO. Mr. Degany, you may begin.

Thank you very much, Jonathan. 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' second-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, and then Emanuel Avner, our CFO, will give a summary of our financial and operational results. 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 Margalit, on 972-54-4815952 (sic -- see website), 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 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 31, 2008, as well as Partner's filings with the US Securities and Exchange Commission on Forms 20-F, S-1 and 6-K, as well as the [S-3 shareholder special] 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 statement as of the date of this call.

For your information, this call is being broadcast in totality over the Internet and can be accessed through our website, www.orange.co.il.

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

Thank you, Oded, and hello to our listeners. I am pleased with Partner's achievement this quarter, in which the Company met its operational and financial goals. We have managed to recruit approximately 36,000 high-quality subscribers, over 80% of whom are postpaid subscribers, with high ARPU levels. Our churn rate decreased from the first quarter to a level consistent with our previous assessment regarding the long-term impact of the number portability. This strong operational performance reflects the high level of loyalty of our customers and our ongoing efforts to improve Partner's customer service and product offering.

From a financial standpoint, I am pleased that we have managed yet again to raise EBITDA to a new record level, coupled this quarter with an impressive cash flow. Maintaining our ability to return cash to our shareholders is one of Partner's imperatives. The strength of Partner's success story was also reflected in the reelection of orange as the leading telecom brand in the Israel market for the sixth consecutive year by Globes. We also won the EFFIE award in the communication category for a groundbreaking customer retention marketing campaign.

Our mobile business will remain Partner's core activity in the foreseeable future. In parallel, we intend to address the residential market and maximize the synergy potential between mobile and fixed applications.

In this quarter, we have made several steps toward the launch of our ISP, which will take place at the beginning of 2009. This will position us in the three most growing areas in the telecom arena -- mobile, ISP and voice over broadband.

Of course, we intend to ensure the coexisting between the cash returned to our shareholders and the development of new areas of activity. We have many opportunities as well as many challenges ahead of us. I am certain that Partner's impressive track record in setting new industry standards will shine through the new services advertised in the mobile.

With that said, I would now like to hand the call over to Emanuel Avner, our CFO. Emanuel, please.

Thank you, David. The underlying improvement in all key parameters in the second quarter are encouraging, and in particular the increase in the net income margin, which increased to 16% this quarter. Service revenues continue to post healthy increases, rising by 5.2% as compared with Q2 2007 to NIS1.4 billion in Q2 2008. This is due to the 4.5% growth in the subscriber base, growth in minutes of use and in content and data revenues.

Content revenues increased this quarter by 28% compared with Q2 2007, with the majority of the increase coming from non-Internet content revenues. While there was a marginal decrease in non-Internet content revenues compared with the previous quarter, this does not represent our expectation for annual growth over 2008 as a whole.

Turning to the headline profit measures, EBITDA reached NIS541 million in Q2 2008, the equivalent of 39.3% of service revenues and an increase of 4.2% for the same quarter last year. EBITDA less CapEx was NIS520 million in Q2.

NIS420 million.

NIS420 million in Q2 2008, increasing by 2.8% from Q2 2007. And finally, net income increased by 8.4% to NIS2047 million, providing a net income margin of 16%.

Looking at trends over the first half of this year, we believe that the first-half results and future prospects remain in line with the annual guidance for 2008 we provided at the time of our annual 2007 results.

Regarding our cash flow [disposal], we are of course very pleased that we achieved a record level of free cash flow of NIS601 million this quarter. This is a direct consequence of our continuous work to further improve the cash flow of the Company, including by lowering working capital.

Our efforts to increase shareholder value have already enabled us to return approximately NIS713 million to our shareholders this year, through cash dividends and the current share buyback program. Furthermore, we have achieved this without raising our debt level. Our net debt to EBITDA ratio remains at the level of [1 to 1], a level that is comparatively low today and which demonstrate the solid financial structure and low risk of Partner.

That completes the business review. So I will now hand the conference back to David. So, David?

Thank you, Emanuel. You are now invited to ask your questions. Jonathan, please open the Q&A session.

(Operator Instructions). Daniel Meron, RBC Capital Markets.

Can you give us a sense on what is the contribution from the ISP business that you are looking for? And also, what is the impact on profitability in '09?

We can hardly hear you, but I understand that your question was regarding the impact or the potential revenues from the ISP business. So the answer to this question is that we said in the past that in 2009 we do not expect that those revenues will be material to our business. And I think that you can take your own assumption regarding the market share that we will take over time, subject to our exposure to the Israeli market and Partner's strength with respect to the call center and the number of interactions that we have with the Israeli customer.

We also intend to maximize the synergy potential between our mobile activity and the voice over broadband or landline effort, and the same with the mobile media and the landline media.

Okay. And then what do you think will be -- I mean, can you give us a sense on what is the reason for the drop in the handset business this quarter? And how should we think about it for the balance of the year?

It's Emanuel here. The reason for the decrease in loss for handset equipment is first of all the lower number of transactions we've quoted compared to the previous quarter and compared to the fourth quarter in 2007. Also, what hurt us was the lower dollar rate and the lower subsidy that we provided to our customers after a very high activity in the number portability period.

Okay. That's fair. Thank you. Good luck.

William Kirby, Nevsky Capital.

Two questions. Firstly, what do you expect the impact on your gross margin to be of the deal you describe in your press release with Bezeq? And secondly, on the ISP launch, how much CapEx do you plan to spend on your ISP? Thank you.

Regarding your first question, the impact of the agreement with Bezeq, we do not disclose the impact on margin. However, what I can say is that there were two major drivers for the agreement with Bezeq. The first one was to meet the future demand, or the future, the forecasted increase in the bandwidth due to the growth of data services. And the second one was cost reduction. We believe that we obtained a good agreement and that we have good prices. But we cannot disclose what was the impact on our margins.

And can you repeat your second question, the ISP CapEx?

My second question was on ISP CapEx. Do you intend to go above the 9% of revenues that you have been spending recently in order to fund your ISP rollout?

By definition, almost by definition, the ISP business is not characterized by heavy CapEx. You can see that the average ongoing CapEx in this market is a single-digit CapEx compared to the cellular, or for example, the cable TV area. We think that we will be able to build the ISP and to establish this activity while maintaining less than 10% of revenue, CapEx to revenue ratio.

[Neil Yulenick], IBI.

Congratulations on the good quarter. I would like to ask you, regarding the ILD activities, are you planning to enter the international long distance call?

At this stage, we do not have any intention to enter this market in the short term. Addressing this market is highly dependent on regulations, on the regulatory decision. So I wouldn't adopt the working assumption that in 2009 we will be active in this market in a material manner.

Darren Shaw, UBS.

I had four questions, if I may. The first one was, in the press release, it talked about competitive pressures. And I just wondered if you can give us an example of how competitive the market is at the moment.

The second question was on the free cash flow paragraph on page 6 of the press release. It talked about, I think, factoring of handset revenues of NIS194 million. From my history of accounting, it is normally companies who are, like, struggling with cash coming in that do factoring. It is highly unusual that a company with such high quality and strong cash flows need to do it. So if you could just try and explain what is behind that.

Thirdly, if you could just try and explain -- I would've thought the accounts payable on the trade side would have been a bit lower. So if you could just maybe explain why that number was as it is.

And then finally, on the SG&A, there was quite an increase year on year. I just wondered if the current number for Q2 was a better guide for the future. Thank you.

I will start with the free cash flow and the factoring issue. Why doing factoring? You have to take in mind that, actually, when we sell handsets, usually we sell the handsets for 36 installments and we pay to our suppliers actually immediately or after one month. This actually increased our working capital, and before doing the factoring we had about NIS1 billion of accounts receivable for 36 months, which is a big burden on our balance sheet.

We made a decision to factor part of this amount, about NIS190 million, since there was a very low interest rate in the market. Actually, we achieved to do this factoring in an interest rate of between 4% to 4.5% for 36 installments, which is a very low interest rate. And we elected to do that in order to better improve the working capital of the Company.

The question about the SG&A, you have to take into account that in the second quarter 2007 we have a very low activity, especially in media and marketing. This quarter, we had also a very big musical concert in the park for celebration of the 60 years of the independence of the country of Israel. So we spent an amount for this musical concert. We had also some expenses, [immaterial] expenses for the erection of the ISP business.

But if you look on the comparison of the SG&A, of the second quarter, the previous quarter you will not see any substantial change. We had another issue, which was something that we quoted already also, is the increase in the provision for doubtful debts. This is also as a result of a number portability period where we had a higher number of transactions, of activations and also upgrades.

Your other question about accounts receivables is -- or accounts payable. Accounts payable, I don't see any change, actually. The level that you see right now is more or less the level that you will see also in the future. I don't see any change in that.

About competitive pressure, you do see a decrease in the rate per minute in this quarter compared to the previous quarter and also compared with the parallel quarter. This is due to competition in the market. This is due to decrease in the interconnect [salaries] that we had in the beginning of March 2008 and also last period, in the same period. We do have very high competition in the business segment. We have also competition in the private segment. This is the usual, let's say, trend that we see for some years. It is not something new.

That is very helpful. Thank you very much.

(Operator Instructions). 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 US, please call 1-877-332-1104. In Israel, please call 03-925-5937. Internationally, please call 9723-925-5937. Mr. Degany, would you like to make your closing statement?

Thank you, Jonathan. This concludes our second-quarter results conference call of Partner Communications. We appreciate your interest, and please feel free to contact us at Investor Relations if you have any further additional questions. Access to this call and to other valuable information on Partner is available through our website at www.orange.co.il.

Thank you very much again, and have a good day.

Thank you. This concludes the Partner Communication Company second-quarter 2008 results conference call. Thank you for your participation, and you may go ahead and disconnect.