Partner Communications Company Ltd (PTNR) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company First Quarter 2009 Results Conference Call. All participants are at present in a listen-only mode. (Operator Instructions).

Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded May 21, 2009. I would like now to turn over the call to Mr. Oded Degany, Vice President of Corporate Development, Strategy, and IRO. Mr. Degany, you may begin.

Thank you, 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 2009 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 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 Margolis], on (972) 544 8159 52 and a 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 US Securities Litigation Reform Act of 1995. Regarding such 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 release dated May 21, 2009, as well as Partner's prior filing with the US Securities and Exchange Commission on forms 20F, F1 and 6K as well as the F-3 shelf registration statement, all of which are readily available.

Please note that information in this conference call related to projections or other problems is subject to 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. David?

Thank you, Oded, and hello to all our listeners. We are pleased with Partner's performance this quarter. Partner's results demonstrate the Company's financial and operational robustness in view of the challenging macroeconomic environment and the implementation of recent regulatory initiatives. We have succeeded in mitigating the recession impact on our cellular business profitability. Since the release of our 2008 financial results in February, the business environment has stabilized and has now better clarity.

Our non-cellular activities are making encouraging progress and aim to address new source of revenue and relatively low incremental costs for a Company the size of Partner. We are receiving positive feedback from our customers with regard to these innovative services. We are investing in a focused manner, carefully balancing between the current economic constraints and tomorrow's needs while not impacting our ability to continue and generate strong cash flow.

One of Partner's main competitive advantages is its ability to still serve as a value company in times of recession while addressing new areas of activity with an estimated market size of approximately ILS5 billion, which together with our large customer interaction and strong brand will yield fruit for the benefit of the stakeholders.

I would also like to share with you our satisfaction on the completion of the implementation of our 33 new contact centers, which came in replacement of the previous third party distribution channels. These new company-owned, high standard contact centers reflect Partner's core values and will strengthen the sales activities of our cellular business and of our new ISP and VOB activities.

We are already beginning to see the positive impact of this new efficient distribution channel. The number of net subscribers has been increasing from March 2009 compared with the first two months of the first quarter.

We have also started this quarter the implementation of the upgraded version of our HSPA network, which will reach downlink speeds of up to 20 to 21 megabits per second. This upgrade is the first in the Israeli market and one of the first in the whole world. This upgrade is expected to improve the mobile broadband user experience and to enhance content and data consumption.

Despite trying times, Partner is financially strong and well positioned to face the challenges to come and I am confident that the actions we are taking today will be key drivers for future growth and will open for us new options to develop the business.

Partner's consistent dividend policy is evidence of our cash flow visibility and of our confidence in our continuing ability to offer a solid cash return on investment and value to our shareholders. The dividend policy also comes together with our constant commitment to provide our subscribers with superb network quality, excellent customer service, and the most advanced data and content services.

I am certain the keeping our high quality customers in the center will continue to yield fruit in the future in a wide variety of communication areas. With that said, I would now like to hand the call over to Emanuel Avner, our CFO. Emanuel, please.

Thank you, David. As you all know by now, the first quarter of 2009 is the first quarter reported according to IFRS, as opposed to US GAAP. We have tried to be as transparent as possible by providing you a comparison of both the quarterly results for Q1 2008 and the annual results for 2008 under both IFRS and US GAAP. I hope this will help you to better understand how IFRS has affected our financial results. We also intend to publish next week a presentation on our website that explains in more detail the implications of the transition to IFRS.

Moving on to the business review for the first quarter, service revenues decreased by 2.9% in Q1 2009, primarily reflecting the recession impact on roaming revenues and the fact that the first quarter of 2009 contained approximately 2% fewer working days than the first quarter of 2008.

The voice revenue tariff in Q1 2009 was weakened by a number of factors, including one, the move from 12 second billing interval to single second billing; two, the interconnect tariff reduction in March 2008; and three, competitive market conditions. Service revenues in the quarter were positively affected by growth in total network minutes, reflecting the approximate 2.8% increase in the subscriber base and in increase in the weight of the postpaid subscribers with higher than average level of usage.

Of course, content and data revenues and revenues from non-cellular services also continued to contribute to revenues growth. Gross profit from service revenues decreased by 10.5%, reflecting the lower service revenues as well as onetime provision in the amount of ILS26 million set aside for a claim against Partner by the Ministry of Communications in Israel.

Turning to equipment sales, due to the capitalization of approximately ILS45 million on handsets -- of handset sales, subsidies under IFRS further enjoyed a gross profit from non-capitalized equipment sales this quarter of ILS18m, compared with a gross loss on equipment sales of ILS34.4m in Q1 2008.

Selling, marketing, general, and administration expenses decreased by 4.2% in Q1 2009, again mainly reflecting the effect of capitalization of sales commissions under IFRS in the amount of approximately ILS9m, offset by additional cost from our fixed line services.

Overall, operating profit increased by 2.4% year on year. EBITDA totaled ILS552m in the first quarter, the equivalent of 42.6% of service revenues and 39.1% of total revenues. This is an increase of 2.6% from Q1 2008. Excluding the impact of capitalization of handset sales in Q1 2009 and of one-off items, EBITDA in Q1 2009 would have decreased by 4.2%. This decrease is mainly related to the impact of the ramp up cost of our new ISP and VOB initiatives in Q1 2009, rather than costs related to our core cellular services.

I am pleased that we have managed to maintain profitability in our core cellular business this quarter, mitigating most of effects of the recession. As David mentioned, we now have greater clarity in the possible effects of the recession on our business going forward. We continue to believe that our dividend policy is still appropriate and therefore we are distributing 80% of net income for the first quarter in dividends, consistent with the existing policy.

We hope this stability provides you, the investors, visibility on the company's future dividend payments and with the confidence we have in the business going forward. With that, I will now hand the conference back to Oded. Oded?

Thank you, Emanuel. Jonathan, please take the lead and open the conference to Q&A.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). The first question is from Scott Malat of Goldman Sachs. Please go ahead.

Good morning, thanks for taking the question. First, I just wanted to ask about net additions, just following the first half of 2008 you had kind of the greatest share of net adds in the industry. You've somewhat lagged Cellcom -- Pelephone had more net add units in this quarter. It sounds like you've done some things in distribution in this quarter that could help. Can you talk about your share of net adds and where you want that to be?

Scott, thank you very much for the question. Well, our approach towards recruiting the new subscriber is mainly based on NPV analysis and profitability. On a standalone basis we don't target to recruit the subscribers without referring to the profitability which is derived and will be derived in the future.

I think that there is a consensus in the market regarding the factors we are dealing with, a fairly saturated market in terms of the number of subscribers. Let me refer you to the write-off of 92 subscribers by Pelephone at the beginning of -- or the end of the fourth quarter.

So from our perspective we are balancing between our, of course, willingness to recruit new subscribers. But on the other hand we are very careful and we are investing a lot of resources in ensuring and making sure that those subscribers are [in] and profitable subscribers.

Okay, thank you. Maybe I can just have another one, on handset subsidies it seems like they have slowed across the industry. I am just thinking the big picture. Smart phones have by and large not taken off in Israel. Other countries' carriers have taken a different path, they have increased the subsidies on smart phones in order to drive ARPU growth as subscriber growth has slowed.

Can you just talk about your subsidizing decisions, obviously again as you balance the profitability with growth? Do you think it's going to be increasingly compelling to subsidize smart phones more than you have in the past as applications and devices improve? Thanks so much.

Scott, it's very difficult to answer such a question because you need to forecast the number of upgrades and the subsidy and the cost of the new handset and so on.

Generally speaking, I can say that from our perspective upgrading subscriber is a profitable process. Again, we also view it from -- by calculating the NPV of such an upgrade. And we said in the past, and we adhere to this statement that we will continue to upgrade subscribers to sell the generation.

Regarding the number of upgrades and the subsidy itself looking forward, I can't answer this question.

Okay, thanks.

Thank you. The next question is from Daniel Meron of RBC Capital Markets. Please go ahead.

Thank you. Hi guys. You said that business had stabilized, what kind of evidence do you see for that in the marketplace right now?

What we can say there are some indications, and again those are not significant indications. Certain for most we can see eventually the MOU neutralizing the lower number of working days, and also neutralizing the free minutes grew by between 3% and 4%.

So it's below, by the way, the average growth, the historical average growth. But I think that in the last few months we saw a health in that deterioration. The business environment is -- looks more, I would say, clear and this is one thing.

We have also noted and stated in the press release that following the opening of our new 33 contact centers the number of net adds in March and April was higher compared to the first two months of the quarter. This might also be an indication for sort of the health in the recession impact.

Regarding the roaming the impact is a significant impact, but we don't see a deterioration or a continued deterioration in the same level compared to the first two months and to the impact in the Q4 '08.

Do you expect that going forward we should expect the churn to normalize seasonally, I don't know if roaming or other weaker segments are complying with that, but do you see it pick up in those segments as well or the business at large heading into the summer months?

Well, it's very difficult to predict. What we can say is that we invest a lot of effort in keeping and maintaining the profit level. And I think that you can see from the report, and I can guide you through the analysis process, that we have managed, and this is a great achievement in my opinion, to keep the level of profitability in our cellular business.

So regarding the impact or maybe future recovery of the business segment in the future, unfortunately I cannot forecast it and give you such an answer.

Okay. And last one just before I yield the floor, can you provide us a little bit more color on what efforts exactly did you do in preserving the customer base versus competition? How did it come to play or any specific segments or actions that you are taking to increase the value of the existing customers that you have right now?

I think that the rule of the game in the industry has not changed, most of the company upgrades the customers in order to immune the customer base. You know that we are the strongest brand in the industry, and we have the best customer service. So it also has an impact on the retention of (inaudible) subscribers.

I think that in the future, and this is one of the strategic rationales behind establishing the ISP and the VOB activity, we might see a positive influence of the activity generally for Partner, because we'll be able to offer them more services, and hopefully improve the retention rate.

Okay thank you.

Thank you.

The next question is from Alex Kuznetsov of ING. Please go ahead, sir.

Good afternoon. I have a couple of questions. First of all, you are currently undertaking some NGN projects, could you comment on the business cases, please? Would you be able to quantify the potential benefits for the company, and what do you expect to achieve having completed those projects?

And also (multiple speakers) comment on.

Sir, this is the operator. Could you please repeat the question in a louder voice?

I am sorry. I know you are currently undertaking some NGN projects, could you comment on the businesses cases, please? And what you expect to achieve having completed those projects?

Well, you know, Alex, let me elaborate on the technology or the investment in the network from -- in two major avenues. On one hand we continue to invest in our cellular network, and we also reported that we are the first cellular operator in the Israeli market that started to implement the 21 megabit per second HSPA network. This is with respect to our cellular network.

So on an ongoing basis we will invest in the network, we'll upgrade the network and enable our customers to receive better bandwidth, and of course, more application and rich content. So this is the cellular revenue.

Regarding the ISP and the VOB activity, we do have and we have already established the platform which enables us to provide those services, meaning the server, so on and so forth. However, those customers use the basic and the cable infrastructure in order to get the access services.

So that -- we provide the voice over broadband services and the ISP services end application, but on top of basic current infrastructure and the cable current infrastructure. And they are about -- or both of them are in the process of upgrading the network to NGN and to DOCSIS 3.0.

Did I answer your question?

Yes, and just one more follow-up question, could you comment on your revenue sharing agreement? I understand that eventually a certain part of revenue goes to Bezeq. Could you let us know what part is retained by you and what part eventually goes to Bezeq?

We don't have revenue sharing agreement with Bezeq or with the cable company. The customer on a standalone basis can say buy the access separately. In the Bezeq case we can serve as a sort of reseller, but it's not a revenue share. We are not partner, we just resell the infrastructure or the customer has the option to buy it independently.

Okay. Can you quantify what portion of your revenue from end users eventually goes to Bezeq?

We can not disclose this number. What we can say is that we signed last year a transmission agreement with Bezeq for five years with a total amount of approximately ILS300m for five years. This was disclosed I think in our report a year ago.

Yes, I recall. And one more follow-up question on competitive environment. Could you comment on the changing scene in the competitive environment, please, and whether Pelephone launch had any material impact so far.

Well, Pelephone launched its GSM network two months ago. So far we have not seen any increase in competition I would say in an unexpected manner. The Israeli market is a competitive market. You can see the result in the consistent decrease in the RPM in the last few years.

But it was competitive before, before Pelephone's implementation of UMTS and it will be competitive after the implementation of UMTS. We didn't -- we don't see anything that we didn't expect to see.

Should we expect effective tariff rates to decline by about the same percentage for the next 12 months as in the past?

I cannot provide you with the guidance regarding the tariff rates. However, I think that it's a really good assumption that to adopt, based on the history, that the RPM/the tariff is reduced by a few percent per year.

Okay, thank you very much.

Thank you.

Thank you. The next question is from Istvan Mate-Toth of Credit Suisse. Please go ahead.

A very good evening, gentlemen. I have first a technical question. Will you keep your dividend payout ratio as a percentage of earnings even though you are changing the accounting convention, or could there be any change?

And secondly, you mentioned HSPA in your press release, I am wondering do you think that this could be become a major mass market product going forward, or you still see it as somewhat of a complementary product?

The HSPA -- can you repeat your second half of your question.

I am sorry. The second question was whether you think mobile broadband could become a mass market product like it has in Portugal, Austria, UK? Or you think it would remain more of a complementary product in Israel?

Okay. You know, the first part of the question the answer is -- regarding dividend policy, we reiterated the 80% payout ratio. I think that you should -- or it is highly recommended to analyze the impact of IFRS on our earnings and to conclude from it what would be the amount of dividend that will be distributed in 2009. So I think that the answer is very clear.

Regarding the second part of the question we are fairly optimistic about the datacom market, and that's mainly based on an analysis that we conducted in some European countries.

At this stage I cannot say that the revenue in this area are flowing, and are very, very high. But I think that this is a very -- this is highly dependent on the number of [electors] in the Israeli market, which is relatively low compared to what you see in Europe, and also the ability of the mobile carrier to provide the customers with high bandwidth. And I think that the implementation of the 21 megabit per second is definitely a supporting stage to this trend.

Okay, that's very clear. If you allow me a follow-up question, what implication would be set on your backhaul costs if there is a major take up of, let's say, mobile broadband? Do you think that your backhaul investments will be able to accommodate the demand for the time being? Or do you think this is something you will have to step up spending.

Well, we have already prepared the platform to support the data or the increase in bandwidth and this is mainly composed of two elements. The first element is, as I mentioned before, the agreement with Bezeq. We are very, very satisfied with the agreement.

And the second element is our own infrastructure. Let me remind you that in 2006 we acquired a company called MED1 with more than 1,000 kilometers of fiber optics. And we use this infrastructure as part of our mobile backhauling network. And, of course, we also use the microwave in order to connect the base stations and the switch.

So generally speaking we are using two avenues, the Bezeq and our own infrastructure. At this stage we don't see any huge increase or unproportional increase in the transmission cost due to high data consumption.

That's very clear and helpful. Thank you very much, Emanuel.

Maybe one more comment, let me remind you to the guys who are technology savvy among us that the networks are improving and the transition to SMS has, I would say, an impact of (inaudible).

Thank you.

Thank you.

Thank you. (Operator Instructions). The next question is from Aram Fuchs of Fertilemind Capital. Please go ahead, sir.

Yes, I was wondering if you could give us a few comments on the potential for MVNOs within the Israeli market, what you see as both the potential opportunity and the potential risk. Thank you.

Okay, regarding MVNO what we can say is that our opinion is that there is no business case for an MVNO in the Israeli market. However, in parallel it's also very important to indicate that it is on the agenda of the regulator.

So I believe that the juries are still out. And I still don't see a very, I would say, serious player that intends to implement MVNO in the Israeli market, but definitely it's a possibility, because as I mentioned it is on the agenda of the regulator.

Can you be a little more specific, because I know the regulator mentioned that if the incumbent cell phone companies cannot come to an understanding on potential MVNOs they will regulate pricing on a wholesale basis. And if that's the case couldn't they just make it -- the pricing so lucrative for the MVNO that the business case becomes a little more tenable.

Well, first of all I don't think that they said the way that you phrase it. However, based on our familiarity with the case studies, worldwide case studies, you rarely find regulators that enforce prices on the cellular operators, it's not -- we are not a monopoly. And Israel is a democratic country. And our shareholders have their rights. And it's not very [civil] to decide one day in the morning to enforce prices on the cellular companies. So everything is possible but it's a very severe act from the regulator.

Great, thanks for your time.

We have follow up questions from Alex Kuznetsov of ING. Please go ahead.

Good afternoon once again. I just wanted to ask you if you can provide us with some update on your [employee] option program, and whether there were any significant changes or we should expect the addition of some options in the near future.

Well you know the General Meeting approved in November allocation of (inaudible) Partner taking approximately 8m options as part of the ESOP, of the employee stock option plan. And that's all the information that I can provide you. Of course, we intend to grant it to employees and senior managers. It is part of the retention and the compensation package of (technical difficulty) Israel, and that's it.

Okay. And one more follow-up question, I thought some time ago that there was some [consent] that HTL may exit your shareholder base. Have there been any actions, any new developments? Have they made any decisions?

Alex, HTL is a public company, they have their investor relations. I think that the best thing is to refer this question to them. They are a shareholder of Partner and they should answer this question.

From our perspective we don't foresee or think that there is any operational impact on the business. We are managing independently. It's a public company with strict corporate governance. So I don't think that there will be an impact if the shareholders will be replaced. But, directly if you want an answer to your question it should be referred to them.

Fair enough. Thank you very much.

Thank you.

Thank you. Our next question is from David Kaplan of Barclays Capital. Please go ahead.

Hi. If you can talk a little bit about the economic environment, one of the things that your management team pointed out in the last conference call was that you were beginning to see signs that you thought were worrisome in Q1 and now on this call you said it turns out that everything was okay. Can you talk a little bit about what those things were? How it is that they turned out okay? And what do you think it is that changed?

And then looking in Q2 and the rest of 2009 what do you think about those impacts and how -- what are they going to have on the company's ability to continue to grow revenues?

Listen, David, first of all, thank you for your question because it will assist us in clarifying our opinion about the current status of the recession.

I think that the recession in 2008 was a very unique one. I don't think that focusing the future based on such a unique event, is a serious forecast. What we can say is that we haven't seen any further deterioration in the business, okay. It's not a sliding line that goes down and we don't see the bottom.

We do see sometimes, and by the way you can even read it in the Israeli newspaper, on one hand there is a decrease of the GDP by 3.6%. And the day after you can read that there are some positive signs for a recovery and some, I would say, stability signs.

So from our perspective as a cellular operator, what we can see is that if you compare, for example, the roaming revenue of the first quarter to the first quarter of 2008 there is significant decrease in the roaming revenues. But we don't see a continuous decline in the roaming. It's like, let's call it, a step function or something which is similar to a step function.

And regarding the MOU, as we mentioned in our previous call we saw and identified some health in the MOU compared to the growth that we were used to in the last few years. I think that at least it is correct for us, not very severe by the way as I mentioned before, to neutralize the working days and also the free minutes, it's an increase of only 4%.

But if you take a look at our competitors' report you can see that it's not a phenomenon. And the indication that we provide you a quarter ago was a correct and a very accurate one. So hopefully I help you to forecast the future, but it's not -- it's a challenge.

All right. Just to follow up a little bit, you mentioned roaming revenues, first of all, can you say if you noticed a greater impact or greater decrease in roaming revenues those outside of Israel or are those coming into Israel? Can you differentiate between the two of those for us?

Well, unfortunately for confidentiality reasons -- commercial confidentiality reasons I prefer not to answer this question, because the out-roaming is a retail business and the in-roaming is a wholesale business. So I'd prefer not to answer it.

Okay. And then just lastly if you can answer this one, on -- in particularly in the business market where there have been some significant layoffs in Israel, have you noticed an impact in the business market do you think coming from that?

I can tell you that no doubt, like in many industries, the impact of recession on the business segment is much more severe compared to the residential segment. That's not a secret.

And I -- in some cases there are some people think that maybe the residential business will be hurt in the future. But I think that it's the common knowledge that the business is more, I would say, sensitive and vulnerable towards the recession.

All right, thanks. Last thing out of curiosity, I know that you have now reported or given the Q1 2008 results in IFRS in order to give us backward comparison. Do you have any intention of telling us or helping us work through with the Q1 numbers what would have been in US GAAP given that most of our models are still in US GAAP?

We provide you the comparison in terms of IFRS. And if you ask such a question let me elaborate on that and share with you the comparison. I think that the greatest achievement this quarter was the ability to maintain the same profit compared to Q1 '08, even though you see the impact of the recession on our revenue and ARPU.

And I think that if you single out from the Q1 '09, the capitalization effect, the ISP cost and the onetime items you see that we have managed to maintain the same level of profit on our core business which is the cellular. And we think that this is a very good achievement.

All right. Thanks 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 statements I'd like to remind participants that a replay of this call is scheduled to begin in two hours. In the US, please call 1-888 326 9310. In Israel, please call 03 925 5936. Internationally, please call 9723 925 5936. Mr. Degany, would you like to make your concluding statement?

Thank you very much, Jonathan. This concludes our 2009 first quarter results conference call of Partner Communications. I invite you all to schedule a conference call with us and to set a meeting.

I think that if you need further information regarding the transition from US GAAP to IFRS, you can find it in the press release. We did a lot of effort in disclose information that will assist you to understand our -- to better understand our report. We will also elaborate on that in the analyst meeting on Sunday, and we will file in our website Emanuel's presentation on IFRS.

So please feel free to call us anytime. And that's it. Access to the call and to other valuable information on Partner is available through our website, so you can hear this conference call again. Thank you very much and have a good day.

Thank you. This concludes the Partner Communications Company's first quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.