Partner Communications Company Ltd (PTNR) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company second-quarter 2010 results conference call. All participants are at present in 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 August 30, 2010.

I would now like to turn over the call to Mr. Oded Degany, Vice President, Corporate Development and Regulations and Investor Relations. Mr. Degany, would you please like to begin?

Thank you, Tessa. 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 Communication's 2010 second-quarter results.

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 for Q&A.

At this time, if you don't have a copy of today's release, please contact our Investor Relations Coordinator in Israel, (inaudible), at 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. Regarding such [also] forward-looking statements, you should be aware that certain 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 August 30, 2010, as well as Partner's prior filings with the US Securities and Exchange Commission on Form 20-F, F-1 and 6-K, as well as F-3 short 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 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 stage, I would like to hand the call to our CEO, David Avner. David.

Thank you, Oded, and hello to our listeners. The second quarter of 2010 was another impressive quarter for Partner, demonstrating the Company's industry leadership and focus on financial and operational excellence, as well as customer satisfaction. I am highly satisfied from the continuous growth in our revenues and EBITDA, which is a direct result of our marketing efforts and our ability to offer attractive bundle offering to our customers.

As planned, the profitability of our fixed line business, which includes service to the residential and the business segments also improved. We also continued to see significant growth in mobile data, which is one of the main growth engines of our service revenue.

Partner, as an industry leader, continues to set a new standard. Recently, we launched new tariff plan called orange free, an innovative tariff program which is a milestone in the Israeli mobile market. For the first time, a cellular operator offers a simple pricing plan, allowing customers to talk freely within network. Orange free plan also offers our customers the freedom from future commitments. The plan bundles cellular voice and data with ISP and fixed-line telephony services and is a clear signal of our strategic transformation into a comprehensive communications service provider with a customer-centric approach.

I hear orange free is an important step for the Israeli mobile market and look forward for its positive impact on our customers' satisfaction.

On the regulatory forefront, the decision regarding the potential MTR reduction has not been taken yet. In parallel to the regulatory pressures, as reflected in the financial arrangement law and proposed mobile termination rate reduction, we see early signs of a change in the regulatory attitude toward the opening of the wireline business to fair competition.

We invest efforts in trying to accelerate this important process, and I believe that some of the potential negative impact of regulation in the mobile business might be mitigated by new revenues that will be generated following the opening of the fixed-line business to fair competition. In addition, establishing a wholesale market in the fixed-line segment is an important factor in our wireline strategy and is expected to pave the way to build our footprint in this market.

Partner's emphasis on its employees' welfare has been recently recognized once again. In a survey made by BDI, a consulting company, orange was the only telecommunications company to make it into the Top 10 Best Companies to Work For in the Israeli market. This is in addition to previous high rankings the Company achieved in other surveys.

I would like to take the opportunity and welcome Mr. Yacov Gelbard on his appointment as the Company's CEO and wish him great success in his new role. I am certain that the combination of Mr. Gelbard's rich, comprehensive managerial experience, mainly in the telecommunications area, together with the assets that have been built at Partner over the years, will bring Partner to new heights.

I would also like to thank Mr. Eli Glickman, my colleague and friend, for his leadership and remarkable achievements as the Customer Service Division's VP and for his significant contribution to the Company as the deputy CEO.

The second quarter of 2010 was a successful quarter for Partner, and I believe that the leadership, assets and the unique culture that we have built over the years will continue to bear fruit in the future for the benefit of our shareholders, customers and employees.

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

Thank you, David. I am very pleased with our financial and operational results this quarter. Service revenues increased by 3.3% from NIS1.36 billion in the second quarter of 2009 to NIS1.41 billion in the second quarter of 2010. The increase mainly reflected an approximate 5.2% growth in the cellular subscriber base, including data modem subscribers, which is the key revenue growth engine, and growth in the use of data and content services.

In addition, the service revenues from our fixed-line segment more than doubled year on year, from NIS12 million in Q2 2009 to NIS25 million in Q2 2010. These increases were partially offset by a reduction in cellular subscriber ARPU of 3.2%, which mainly reflects the ongoing airtime tariff negotiation resulting from the competitive market conditions.

Operating profit reached NIS474 million, increasing by a healthy 9.2% compared with NIS434 million in the second quarter of 2009, mainly reflecting the improved margin on equipment sales, offset by higher amortization expenses of NIS42 million compared with NIS18 million in Q2 2009.

EBITDA totaled NIS646 million in Q2 2010, the equivalent of 38.5% of total revenues. This represents a strong year-on-year increase of 12.5%. As in the first quarter of 2010, the negative contribution from the fixed-line segment significantly narrowed, from NIS16 million in Q2 2009 to only NIS3 million in Q2 2010.

Turning to dividends, the Board has approved a dividend distribution for this quarter of NIS1.87, or $0.49 per share, a total of approximately NIS290 million or $76 million, the equivalent of 99 of net income.

Regarding the imminent decision by the Ministry of Communications on interconnect tariff, while the lower tariff would be expected to reduce profit levels, our annual guidance for 2010 remains unchanged.

Looking further ahead, Partner is in the process of determining the most appropriate courses of action to take to address the impact of these changes, which will, of course, depend on the severity of the reduction. With that, I will now hand the conference back to Oded. Oded?

Thank you very much, Emanuel. You are now invited to open the floor for Q&A.

(Operator Instructions) David Kaplan, Barclays Capital.

If we can talk a little bit about the management changes, can you give us a sense --. I don't know who is actually there in the room with you, but can you give us a sense of what those changes mean as far as culture of the Company or short-term or long-term goals that would be at the Company? I imagine that there won't be any changes to the ISP or voiceover broadband business in the short-term, but if you can talk a little bit about what it might mean and then where those changes are coming from.

Well, you know (inaudible) -- hi, David. First of all, thank you very much for your question. I think that generally speaking, Partner is a company with a very strong corporate governance and the (inaudible) involvement in the Company is very high. The decision regarding the appointment of Mr. Gelbard was taken following a structured process. And you know that this is the Board's privilege to decide about the appointment of the CEO.

Now, regarding the implication of this decision of the appointment, I think that you know, like many other decisions, including the strategies, the Board will decide in the next few months and quarters regarding the future Company's strategy. Based on the current support of the Company -- of the current support of the strategy by the Board, I that we will continue to receive from the Board additional support.

I know that Mr. Gelbard brings with -- has a lot of knowledge. He is savvy with the telecommunications business and technology. And the fact that he has served for more than seven years as the CEO of Bezeq Israeli Telecom will definitely contribute to enrich our strategy and to push it forward.

Okay. And just one more quick operational question. If we look at the mix of business between prepaid and postpaid, we saw that there was a little bit of a pickup in the prepaid business. Can you talk a little bit about where the strategy is behind that, especially given that a potential MVNO competitor would most likely be assumed to be going after that market as well, doesn't that put you head to head with your future competitors?

Regarding MVNO and the connection between MVNO and the prepaid as a target market, I think that the fact that only approximately 25% of the subscribers in the Israeli market are prepaid subscribers is a sort of a hurdle or a barrier to entry to MVNO.

In most cases in Europe, you find out that the number of MVNO subscribers is substantially higher. For example, in UK, it's 60%, in Italy, it's 90%, and so on. So we believe that it is very natural that MVNO will target first and foremost the prepaid markets. However, the fact that the number of prepaid subscribers is relatively low in the Israeli market and the fact that the prepaid revenues account for substantially less than the 25% subscribers, I think that makes the MVNO business not very attractive.

If that is true, if the MVNO business is not particularly attractive, then why is Partner increasing its share on a micro basis? Why is the prepaid subscribers -- are they growing as a percentage of the total subscribers for Partner, if it is not the best business to be in?

Well, you know this market -- the prepaid market is heavily subject to seasonality effects. So historically, you always see high net adds of prepaid subscribers during the summer and during Pesach. From Partner's perspective, it is a valued market, a relevant one. We have a product manager specifically for this market, and we will continue to address it in the future.

And regarding the fluctuation in the number of new prepaid subscribers, it is a result of the seasonality effect.

Okay. Thanks.

[Doug Rosenberg], RBC Capital Markets.

I just wanted to ask, first of all, equipment came in pretty high. Is that a trend? Is that a one-time thing? Is it also seasonality?

We've said in the past -- and we think that this is a very important observation -- that, you know, we are not composed of two separate companies. Partner is one Company that sells equipment and services. And in most cases, the equipment is embedded and is an integral part of any package or (inaudible) plan that we offer our customers.

So the distinction between those two separate revenues, in my opinion, will not yield a better analysis of the Company's results. I think that the fact that there is an increase in the equipment sales and the fact that there is an increase in profitability, which is partially a result of the increase in equipment sales, is very, very natural.

Of course, it is subject to marketing decisions. In the future, the marketing can decide if it changes the allocation between the cost of handsets and the cost of [cell time]. Those are dynamic variables which are subject to marketing considerations.

I see. Thank you. I was going to ask on what part of the service growth, but if -- not separating them, but what part of the growth would you attribute to seasonality? And then do you think it will have a negative effect on the next quarter?

Well, you know, generally speaking, I think that, first and foremost, it is important to emphasize that the observation of the management regarding the potential recovery from recession is valid and there can be -- it has been identified from the numbers.

Regarding historically, the second and the third quarter of Partner are higher and stronger compared to the first and the fourth.

Okay, but --

There is a seasonality effect regarding the entire revenues of the Company.

I see. And do you think that there will be any more of a push towards this quarter versus next quarter because of holiday days?

Because of holidays?

Meaning (multiple speakers).

Not something material. I think, after all, the influence of the holidays is well known to the Company, but you also need to take into consideration other parameters, such as the number of business days, the daylight hours and so on and so forth. So it is not just one parameter. I can tell that, in general, we have a very accurate model regarding the forecast of the next quarter, which is based on many parameters, not just the holiday.

And also in the holidays, there are sometimes two contradicting [factors]. On one hand, there is a lot of tourism outside of Israel. On the other hand -- and of course, in (inaudible), on the other hand, there is less the business activity.

So the bottom line is that in some cases, you will find out not just additional or less revenues, but also changing the allocation of the usage of services.

I see. Okay. Thank you very much.

[Jerome Spangler.]

I've got two real quick questions. If it has been addressed, I apologize. But the MOC reduction of tariffs -- and I understand it is going to have a negative effect on net income -- could you speculate what that really means?

Yes, you know, we disclosed -- I can't recall right now the date, but you can find on our website, the press release -- we disclosed our assessment to the potential negative impact on the Company. We, based on the initial proposal, which means 84% reduction in one time, we disclosed the impact on the EBITDA will be between NIS30 million and NIS40 million on a monthly basis, and the impact on the net income is estimated by between NIS20 million and NIS30 million on a monthly basis (multiple speakers).

What does that mean in US dollars?

You should be valued by approximately 3.8, okay? This is the exchange rate. It is also important to emphasize that the assessment of the impact relies only on the direct impact. It doesn't take into consideration change in the potential in the usage (inaudible) or some mitigation tools or a cost reduction, the change in tariff plans, adjusting the tariff plans to different types of segment and so on and so forth.

Right. One more quick question. I noticed the dividend is about 26% of net income. Is that generally the trend of dividends that the Board will approve, in the neighborhood of 26%?

Generally speaking, you should take into consideration that we distributed a one-time dividend last March. So if you want to calculate the ongoing dividend yield, you should exclude the one-time dividend, which was approximately 1.4 billion.

In a nutshell, I think that you can see, based on last dividend per share in the last four quarters, in the last 12 months, if you divide it by the price per share on June 30, you will -- the result is approximately between 12% and 13% of dividend yield.

It doesn't say anything about the future, because our dividend policy is based on payout ratio out of the net income. So dividend is, by definition, dependent on the net income, but it can give you a clue about the historical dividend yield.

I can also tell you that since the transaction -- or the acquisition of the controlling stake in Partner was conducted in an LBO mode, there is full alignment between the interest of the shareholders and the interest of the controlling shareholders. So it is not a secret and it is fair to conclude that the future dividends (inaudible) the interest of most of the shareholders.

Okay. Thank you very much.

(Operator Instructions) There are no further questions at this time. Therefore, 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 1-888-326-9310. In Israel, please call 03-925-5936. Internationally, please call 9723-925-5936. Mr. Degany, would you like to make your concluding statements?

Thank you very much, Tessa. This concludes the second quarter of 2010 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 questions.

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

Thank you. This concludes the Partner Communications Company second-quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.