Partner Communications Company Ltd (PTNR) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company third quarter 2008 results conference call. (Operator Instructions). As a reminder this conference is being recorded November 5th, 2008. I would like to now hand over the call to Mr. Oded Degany, Vice President of Corporate Development, Strategy and IRO.

Mr. Oded Degany, would you like to being?

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're 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 the financial and operational results. What we shall then open floor to Q&A.

At this time if you don't have a copy of today's relays, please contact our Investor Relations managers 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 all forward-looking statements you should be aware that Partner's actual results might vary materially from those rejected 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 November 5, 2008, as well as Partner's filing the US Securities and Exchange Commission on the Form 20-F, S-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 statement as 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 over to our CEO, David Avner.

Hello to all our listeners. I am very pleased with the first quarter results in which the Company achieved record revenue and double-digit growth rates in its main profitability parameters. I am proud that we have managed to maintain a competitive cost structure despite the fierce competition and regulatory pressure, and at the same time as implementing our new strategic activities.

In this time of economic uncertainty and turbulence, Partner's resilient financial structure, reflected in our ability to generate steady and strong cash flow, is one of the most remarkable strengths of the Company. It reflects Partner's solid balance sheet and healthy operational position as well as its ability to continually deliver value to our shareholders, while actively implementing new strategic initiatives.

As recently announced, Partner expects to start in the next few weeks the FUT of its portfolio of services, taking a further step toward realizing the Company's strategy to evolve from a pure cellular operator into a diversified multi-service communications and media service provider.

Our new products and services will include ISP services, mail access, WiFi, VoIP technology and Web-based entertainment multimedia services. By developing a presence in the customers' premises, Partner will offer its subscribers the benefits of service synergies with its core activity while strengthening its position as a leading telecommunications company in Israel.

The benefit of our conservative and fundamental business approach are now being appreciated. And I am confident that we are in a firm position to deal with future challenges.

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

The third quarter in 2008 was a very strong quarter for us, both in terms of our financial and operational performance. Service revenues rose by 4% compared with Q3 2007. This reflects continuing growth of the subscriber base, and especially high-quality postpaid subscribers.

Also, demand for our advanced content and data services, including SMS, continues to rise, this quarter increasing by 26% year-on-year. Content service revenues now account for over [50%] of service revenues.

Operating efficiency continues to improve, and operating profit increased by 20% in Q3 2008 to NIS469 million. This is due to both an 80% decrease in gross loss from equipment revenues, and also an 8% increase in gross profits from service revenues.

On the key profit measures, quarterly net income increased by 38% to NIS296 million in Q3, and net income margin of 18%. EBITDA increased by 16% to NIS624 million, the equivalent of 42.8% of service revenues and 38.2% of total revenues.

Free cash flow for the third quarter was also very pleasing, reaching NIS440 million for the quarter. This expands the free cash flow generated in the first nine months of the year to over NIS1 billion.

Dividends to be distributed for the quarter amount to approximately NIS237 million in total, or NIS1.54 per share. This is according to our current dividend policy of 80% of net income.

Partner has always taken a responsible approach to financial planning and management. And we believe this approach has especially proved itself in recent months. As regard to the share buyback plan that was approved in February, the Board of Directors had decided to suspend the plan for 2008 in view of the recent significant financial market turbulence. The issue will be revisited by the Board once market conditions become more stable.

Looking ahead, we are confident that Partner's sound financial structures and impressive operational stability puts us in a strong position to contend with future economic downturns at the same time as growing the business.

With regards to 2008 we reiterate our annual guidance, bearing in mind that the fourth quarter is seasonally slower than the third quarter. With that, I will now hand conference back to Oded.

You are now invited to ask your questions. Sheila, please take the lead.

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

Great execution guys. A few questions on my side. First of all, you mentioned in your press release that you had a rise in the debts that you wrote-off this quarter. Is there anything behind it? And also what do you think about the macroenvironment in Israel?

With regard to the bad debt, actually if you can see in our financials we had a rise in bad debt from the beginning of this year. This is due to the number portability that started last year. We actually -- [when] we initiated the (inaudible) plans the (inaudible) of handsets that are paid through the bank account, and therefore we suffered from an increase in bad debt.

This is nothing with the recent economic, let's say, crash or credit crash. Actually we stopped these offering after the initial period of number portability, and we expect to be more stable in bad debt.

Regarding to the economic condition now in Israel, we base our forecast and we base our business here on the forecast of the Central Bank of Israel and other consultants. And until now we see that the growth that is forecasted for next year is about 2%, which is lower than what was in -- we had in 2007 and 2008. But it's not a big, let's say, downturn.

With regards to unemployment, we see that the forecast for next year is higher unemployment than we see right now. But again, it's not a very high number. We talk only about 7% or 7.5%. Until now we don't see any impact of that on our business.

Oded, I think you mentioned in one of the interviews that you may reconsider the dividend policy in early '09. Could you elaborate on that and provide with us more color to what this statement means?

Well, (inaudible). First of all, one comment regarding the macroeconomic environment. What we're doing here within Partner is a very, I would say, comprehensive analysis of the various scenarios or the various possibilities of the market development.

Where you cannot predict what will be the fate of the Israel in the worldwide economy 12 months from now, so we are doing -- conducting various analysis of scenarios, and prepare ourself for all types of development in the market.

Regarding the dividend policy, first of all, I want to remind all of us at the current payout ratio is 80%. The Board decided to suspend the buyback plan, and that's mainly due to the turmoil in the world financial markets. You know that our conservative approach is proven. And we have managed to conduct our business and manage our business in a very conservative and successful manner, mainly due to the fact that we were very conservative in the past.

So the Board decided to suspend it at the moment. The Board will revisit the dividend and the cash dividend -- sorry, the cash payout ratio for the Company at the beginning of 2009.

But can you provide us with a more clear statement on what it means to reconsider? Does it mean you will reconsider positively to go up or down?

At this stage we cannot say whether it's going to be up or down. I can tell you that the Board and the management highly appreciates the fact that paying dividends to shareholders is very important to the Company. Everything is dependent of course on the development in the financial market and in the business environment. All I can say is it is usual, by the way, the Board will [guide] at the beginning of 2009. And we decide about the dividend [fleshed] by the policy for 2009.

I can assure there is no discussion current now in the management about lowering the dividend payout ratio.

Okay, thank you.

Tsahi Avraham, Clal Finance.

Just one question regarding the number of subscribers. You raised 10,000 of them following the statement after the second quarter. I mentioned it because you also had another recounting or change in method in the beginning of the year when you raised another 60,000, I think, if I remember correctly. Maybe there is simply no more room to grow. Could you elaborate about that subject?

First of all, you need -- one should distinguish or completely distinguish between the change in the recognition method of subscribers at the beginning of the year, okay, and the 10,000 subscribers that we changed -- that we cancelled at the end of the second quarter.

We're managing a huge database of 2.9 million subscribers. In order to provide you with accurate information, and in order to have the most transparent company in the industry, we are conducting on a monthly basis many analysis from various angles in order to find the accurate numbers of the subscribers. The number of subscribers that pay or did not pay in the last six months and saw and so forth.

From time to time we find differences in the results of those rechecks and angles. And at this time we decided -- by the way, also from conservative reasons to count the 10,000 subscribers it is not a material number. It is a number that relates to previous quarters. It is not a number that came out from the second quarter or the third quarter. It belongs to the history in the last 2007 (inaudible) and so on. This is why it should be deducted from the entire number of subscribers of Partner.

Do you feel comfortable to say that we weren't going to see any other recounting in the next quarters?

I just want to mention something. It's not a recount. On the first time, at the beginning of the year, when we changed the method, it was due to a phenomenon that we have noticed in the number portability environment.

We noticed then in the prepaid arena several companies in the market counting, as if they are active subscribers. Also those things didn't produce any revenue to the Company. The methods that consist even today in most companies they count lines, according to the sale of the line, and not according to the production of any revenue of this line to the company. Partner was the only company that noticed this phenomenon, and noticed that in several companies they do all kind of manipulation with this fact. And we have decided, in order to be even more conservative, to start the counting of an existing subscriber only when he starts to use the line.

This is why we have changed the method and reduced 60,000 subscribers. Meaning it was not a correction, it was not a mistake, but a more conservative method due to what we have noticed in the market. It wasn't significant in the past. It became quite significant in the beginning of 2007. In this case of the 10,000 subscribers, we're not correcting again.

We noticed that there are several business customers that have asked us to suspend a line. They are supposed to pay for this situation, however not all of them are paying for it. We have noticed that due to the fact that it is not 100% clear that we will be able to actually charge the customers, we have decided to churn them out. So it is due to conservative method and not a correction, not on the first time, not on the second time as well.

Scott Malat, Goldman Sachs.

I am wondering if you could talk just directionally about the sub adds through the quarter, and how that trended month-to-month?

The net adds in the second quarter -- in the third quarter was 37,000. And you know that it is composed 60% -- sorry, [36,000] it is composed 60% postpaid, the other 40% are prepaid subscribers. Does that answer your question?

No, I was thinking about month-to-month, how things trended. Did you see it drop off towards the end of the quarter, as maybe some of the macro effects may be were a little bit heightened?

We don't provide the data on a monthly basis. I just want to remind you what Emanuel said before, and that we do not see any significant trend regarding potential recession at this stage. Not necessarily that we wouldn't see it in the future, but at this stage we don't see any sign for a significant change from the Company, if this was the reason for your question.

Just from an MOU standpoint, I think very strong, and you have been very strong for a while. I just wondered if you tell the breakdown that MOU, and how you think about that going forward? It does seem in a tougher macroenvironment, subscribers could turn to maybe cheaper landline phones a bit more to cut down on the cost. Do you think MOU is the place where we might see some pressure, if there is pressure?

We don't necessarily think that we will see pressure in the MOU. The MOU result are influenced by several factors. The first one is -- as we mentioned many times in the past, is the demand elasticity, the fact that there is a price erosion. And we see -- and our customers use more minutes.

The second factor is additional minutes at the expense of the (inaudible), the Israeli incumbent. And the third one is change in customer behaviors. In some cases we sell packages -- as we offered in the last month, I'm sure you're familiar with this [normally] in the States.

So the MOU is a factor which is influenced -- is a number which is influenced by several factors. I don't see any specific reason why the pressures will be put on this specific number.

Alex Kuznetsov, ING.

Good afternoon. I would like to ask a couple of questions. My first question is on SG&A. Could you let us know the reason for such a noticeable increase in SG&A year-over-year, given the slowdown in subscribers acquisition please?

Also, could you elaborate on the implications of the recent regulatory changes in Israel. And finally, are there any covenants which may limit cash distribution through either dividends or buybacks going forward?

Let me start with your first question regarding the SG&A. Yes, you will see an increase in SG&A, but you have to bear in mind that while we do the business of the cellular, and we show great results, we do also build at the same time also other businesses internally.

We now have built an ISP company or ISP service internally in the company. Also the voice over broadband for the residential market. And also we develop a web site that will offer a subscriber and us and other subscribers also offering of entertainment, of movies and music, etc.

So everything is digested already in our expenses in the OpEx and CapEx of the Company. And this is also one of the reasons why you see a decrease in the SG&A -- increase -- sorry -- in the SG&A. I am not -- catch your second question. Can you repeat that?

The second question is basically regarding implications for your Company from the regulatory changes in Israel. Specifically, is the adoption of (inaudible)?

Regarding the changes in the regulations, we of course study these changes, like we studied them the past other changes, and we will see how we can cope with that.

Of course it might limit our ability to increase prices along the quarter in terms of the subscribers. But it might be that we will be able to increase prices according to increased sales, for instance, in the CPI, in the Consumer Price Index, or if we put in the contract from the beginning (inaudible) increase in the term of the contract.

This is only for the private sector. It's nothing to do with the business sector. As I said, we learn how to cope with that, and we believe that we can mitigate the impact of that regulation, maybe not in full, but it might be partially.

Regarding your third question, regarding the buyback and the dividend payout ratio, currently the Company has a dividend payout ratio publicly of 80%. This is no change. The Board of Directors decided to suspend now the buyback in light of what is happening now in the market. We are a very conservative Company when it comes to our financial structure, as we used to be. And I believe it is proven now in the recent months in light of what is happening now in the credit crunch. The Board of Directors will revisit the issue of the buyback and the payout ratio in the beginning of next year.

Maybe I was not very clear. My question was primarily about covenants. Are there any specific covenants which might (multiple speakers)?

We don't have any covenants whatsoever. Not from banks, not related to the notes, no. We are free of any covenants.

And just one more clarification regarding the (inaudible) question. So should we assume that the increase in SG&A is primarily due to deployment of new services that just start up -- ISP services?

These services that we now built in the Company, of course we recruited people in order to initiate that, to build that. It does not generate any revenues until now, so it is very, let's say, natural that you will see an increase in the SG&A. Although it's not a huge increase. There is another increase in the G&A which related to the bad debt that we reported on.

Istvan Mate-Toth, Credit Suisse.

I have two quick questions. First, in your press release you mentioned some cost savings and cash savings from better working capital management, and from lower equipment pricing. I wonder if you could elaborate on how sustainable you think these are, and will this be a permanent feature going forward?

And secondly, I was wondering whether you could elaborate a little bit on your strategy. What would be the CapEx implications of as you are executing on your new strategy providing additional services? Do you expect to go into [center] sales?

And what is the opportunity you see for mobile broadband currently? I don't know if you have an [HSTP] offer, but I don't know where you stand on that product currently.

Let's start with the first question about the cost saving. Yes, we have a very great achievement in the cost saving this quarter. Actually these are the fruits of many initiatives we started last year, like lowering the cost of our transmission expenses, lowering the cost of forming the daytime content, maintenance. We also moved from two vendors in the infrastructure to only one vendor. And of course we enjoy the saving of that. And this is of course sustainable for the future also.

Regarding the management of the cash flow, if you notice in the first quarter of 2008 we reported a negative cash flow, although it was not so high number, but it was negative. From that time we look more on our cash flow internally. We did in the second quarter an onetime factoring of credit card receivables, which were [to sell and nonrecord] factoring.

This actually increased our cash flow in the second quarter to NIS600 million. Now we do on a current basis, we sell the credit card receivables for the sale of the handset. And this ought to contribute to increase the working capital -- to decrease the working capital of the Company.

On the other end, we lowered the level of the inventory -- and from the first -- in the second quarter. And again is also contributed to the cash flow. Year-to-date our cash flow -- free cash flow is about NIS1 billion. And of course this is for us very pleasing.

Regarding the CapEx, actually we said in our press release, in the guidance, that -- I mean, if you look at the CapEx until now, it is about 7.5% of the revenues, which is a very low number and includes also the investment in the ISP and (inaudible).

But we say that for the full-year you should expect an increase in that number. And our guidance was that the CapEx should be about 9% of revenues. And that's what we guide for. For next year, I believe that it will stay more or less on the same -- which should be below 10%, even with all (technical difficulty).

Hello? I think I lost you for a second.

So next question please?

Ori Licht, IBI.

Congratulations on a good quarter. I went to ask you two questions. First of all regarding your entering the ISP market, are you trying to cross-subsidize the ISP services with the mobile services? And how do you see the impact on the ARPU? That's one.

And the second one is regarding what David said at the beginning of the conference, regarding the Web-based entertainment [multimedia] center. How do you address the issue the regulations if you rebuild VOB or IPTV new market in Israel?

Regarding your first question, we have not exposed yet our pricing strategy regarding the ISP development -- the Web VOB market, we will I believe expose it in the next few months.

Generally speaking, what I can say is that we intend to be very cautious regarding the usual bundling. But I would prefer not to elaborate on this further.

Regarding the question about the Web VOB regulation, at the stage since we intend to provide services over the Internet to the customer premises and the customer PC, we don't see any need in obtaining a license.

Regarding the future plans of the Company, to be a player in the living room and so on and so forth, at this stage we prefer to be very cautious about saying anything specific about it, because it is highly dependent, as you mentioned, on regulation, but also on technology advancement. Don't forget that in order to provide to the customer a high-quality product, you need to ensure the technology support stands out of Partner and the brand value of Orange.

Darren Shaw, UBS.

I had a few questions. First of all, with Telefon's upgraded network coming on stream I think in the first quarter next year, I just wondered what you thought would happen to the competitive environment? And whether you and the others may have to increase sort of [subsidy] retention costs to keep on to customers? And if you had idea how much would change in terms of that (inaudible) of the industry post Telefon as new network?

The second question is just -- the new -- apologies, if you discussed this earlier, that I may have missed it. But the Ministry of Communications, the new rule that came out in October, which I think is in the course from 2009. I wondered -- I know you said you haven't quite assessed it yet, but surely if you could just discuss it in detail exactly what's happened, and just to clarify that it's definitely just non-business customers? And just sort of the (inaudible) issues that you got to face going forward on that? Is this a price on new contracts or contracts that are already in place? I was away, so I missed that.

Finally, maybe a little bit of a cheeky question and others. But obviously with everything going on in the world and the world being a bit crazy, if you could give us some comfort as to the fourth quarter, and how you see the fourth quarter? As in do you expect it to be the same as the third quarter, or do you expect people to lose jobs and stop using the phone in the same way?

Let me start with the last question, because just to provide you with some confidence. So let me to combine two statements that we provided to the market. One is Emanuel's statement a few moments ago that we don't see -- still don't see any impact of the recession.

And a second statements is an historical one, and this is the Company's guidance, or the annual guidance. And you can of course take those two statements and conclude that we do not expect material changes or new surprises in the fourth quarter.

By the way, let me just remind you that historically, or traditionally, the fourth quarter is a weak quarter compared to Q3. And we also provided you with some, I would say, guidance regarding the CapEx (inaudible).

So you have the CapEx, you have the seasonality of the industry, you have the annual guidance of the Company, and you have Emanuel's statement regarding the impact of the recession. I believe that all those four can provide you at least with a high-level picture about the results of Q4. So hopefully you all now feel more confident about Q4.

So let me start with your first question about Telefon. First of all, we say that we do not indicate any major changes in the market. We mean up until now, meaning even after the end of quarter three. The first quarter of -- the first months of the last quarter behaved according to our projections from the beginning. There's no significant changes in the behavior of (inaudible).

Let me start with question number one regarding Telefon. First of all, and [for most] let me emphasize that we're working on the various potential scenarios with Telefon for a few months. I would -- instead of the typical investor, I would adopt the following assumption.

One, first of all, Partner is a very good company with a very strong brand. And every potential act of a potential competitor can be answered by the a company which is high-quality company, and with a very strong cash flow and a very strong I would say organization that knows how to act and respond -- and also a responsible manner. This is one thing.

The second thing, you should analyze the interest of Telefon as a company, and ask Telefon, or the shareholders of Telefon, what is their major intention -- or what was the reason for upgrading the network into UMTS?

At least what they say is they want to improve the ARPU of the Company, not necessarily take the other companies up or down. I think that the shareholders of Telefon are also financial shareholders, so you can conclude from the type of shareholders of all the potential way of behavior of the company itself.

I cannot elaborate now because after all its Telefon's decision how to act, how to act in this area. Maybe let me remind you one more bullet. And this is regarding the quality of the network and the time that it takes to provide services in the quality of Partner.

Regarding the second question about regulation, I can tell that historically, we knew how to cope with the regulations decisions [and to act]. I am sure that the new contract from the beginning of 2009 will be adjusted to the new situation. And I also think we have some degree of freedom to mitigate potential impact of these regulations.

Tom Chadwick, Merrill Lynch.

The first question regards your own purchasing power in regard to the equipment suppliers. Have you seen any evidence of increased purchasing power? And do you think that has a capacity to reduce your overall CapEx spend over the next twelve months?

And the second question regards your own equipment sales, which are clearly down in the third quarter, and whether you're concerned at all about that, and whether or not that something we should be worried about?

We signed an agreement with Ericsson, something that we already announced, regarding replacing the 3G network of Nortel with the 3G network of Ericsson. And this was done with very, very good terms. And we're very happy for that. And this is one of the thing that contributed to the efficiency that we showed in the third quarter. So we believe that we have very good terms, and by doing that we can lower the maintenance costs and CapEx cost of the Company.

Regarding the equipment sales, yes, we have lowered that number. The number of transactions, meaning upgrading and (inaudible) of subscribers went down after a very active period of the number portability. And this is of course very natural after a very active period of many, many upgrades -- big numbers of upgrades and acquisitions, we believe this is a very good figure for that quarter.

(Operator Instructions). There are no further questions at this time. Before I ask Mr. Degany to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the US, please call 1-888-295-2634. In Israel, please call 03-925-5940. Internationally, please call 972-39-25-5940. Mr. Degany, would you like to concluding statements?

This concludes our third 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 additional questions.

Access to the call and other valuable information on Partner is available through our website at www.orange.co.il. Thank you very much. And have a good day.

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