Partner Communications Company Ltd (PTNR) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company third quarter 2010 results conference call. (Operation instructions). As a reminder, this conference is being recorded November 9, 2010. I would now like to turn over the call to Mr. Emanuel Avner, CFO. Mr. Avner, please begin.

Thank you. Good day to our listeners. Thank you for joining us for this special conference call to discuss Partner Communications' results for the third quarter of 2010.

With me on the call today is Yacov Gelbard, our CEO. Our CEO, Yacov Gelbard, is going to make several statements and then I will give a summary of the financial and operational results. We shall then open the floor to q and a.

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 all 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 statement are contained in Partner's press release dated November 9, 2010, as well as Partner's prior filings with the US Securities and Exchange Commission on Forms 20A-F, F-1 and 6-K as well as the F-3 share 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 the previous Safe Harbor statement 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 www.orange.co.il. At this stage I would like to hand the call over to our CEO, Yacov Gelbard. Yacov, please.

Thank you Emanuel, and hello to you all. Partner continues to achieve excellent financial results. However, we are not taking our achievements for granted. That is why we have taken two steps in this quarter to ensure that our profitability continues to grow in the coming years.

Firstly, we've signed an agreement with Ericsson for the upgrade of our network to 4G network.

Secondly, we entered into an agreement for the purchase of 012 Smile, a leading Israeli operator of international IOD services, Internet services and local fixed line telecom services.

Since Partner was founded, it has led the communications market in Israel. We were the first to establish a GSM network in Israel. We were the first to establish a third generation network in Israel. And now we are the first to announce the upgrade of our network to the fourth generation. The new network will meet Partner's needs for both cellular and fixed line services and will significantly improve the network performance and the range of services that we will provide in the future.

Regarding the purchase of 012 Smile, this will allow Partner to continue to focus on its core cellular businesses while 012 Smile will continue to focus on its core businesses allowing both companies to encourage and to increase their potential sales and profitability.

I am convinced that the combined of Partner and 012 Smile will enhance efficiency in a larger product portfolio while increasing our potential customer base. As a result, we will see an improvement in marketing and operating efficiencies and, of course, profitability.

In our core cellular business we are currently putting in place a strategic plan to migrate -- mitigate the impact of the reduction in the interconnect tariffs. The measures Partner may take include, among others, cost cutting, operational efficiencies, improvements and repackaging of our products.

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

Thank you, Yacov. As Yacov said, we are very pleased with the result of the third quarter of 2010. Service revenues continued to present healthy growth, increasing by 4.2% from NIS1.4m in the first quarter of 2009 to NIS1.45m in the third quarter of 2010. The increase mainly reflected an approximate 4.2% growth in the cellular subscriber base, further growth in the use of data and content services, as well as an increase in roaming activities.

In addition, the service revenues from our fixed line segment increased by 80% year on year from NIS15m in Q3 2009 to NIS27m in Q3 2010. These increases were partially offset by a reduction in cellular subscriber ARPU of 1.3%, which mainly reflects the ongoing airtime tariff erosion resulting from the competitive market conditions, as well as the shifting of part of the Jewish holiday season from the fourth quarter in 2009 to the third quarter in 2010.

Operating profit reached NIS476m increasing by a strong 18.7% compared with NIS401m in the third quarter of 2009, reflecting both an improved margin on equipment sales, as well as increased in-service revenues margins.

EBITDA totaled NIS641m in Q3 2010, the equivalent of 38.8% of total revenues. This represents a strong year on year increase of 12.5% as with the previous quarter.

The fixed line segment continues to make good progress achieving positive EBITDA for the first time this quarter of NIS5m, compared with a loss before financial interest sectors, depreciation and amortization of NIS32m in the parallel quarter last year.

Turning to dividends, the Board has approved a dividend distribution for this quarter of NIS1.93 per share, a total of approximately NIS300m or $82m; the equivalent of 97% of net income.

Looking ahead, we reiterate our annual guidance for 2010.

With that, I will now hand the conference back to the moderator to begin the q and a. Moderator.

Thank you. (OPERATOR INSTRUCTIONS). The first question is from David Kaplan of Barclays Capital. Please go ahead.

Hi, good evening. About the upgrade of the network, can you give us a little bit more color exactly what kind of upgrade it is, what technology you're going to be using, is it going to be an LTE network, is it going to be an LTE ready network, what are the expected speeds that you expect to be able to have on mobile broadband?

I'll try to continue with some information about that issue. What we have agreed with Ericsson is to upgrade fully upgrade all our main systems, fixed and wireless systems, based on new technologies that combine those two services on the French switches.

We are targeting towards the LTE technology which we believe we'll be able to implement beginning of '12, maybe end of '11. We've had already some trials ongoing. The agreement will enable us to fully complete the LTE services by '14. The target is on the one hand to improve the efficiencies of the network.

We are going to multiply our data capability by over 100, multiplied by 100, between what we can guarantee today to what we will guarantee versus capacity in '14 and to increase the up-speed to 40 by '11 and going up to 80 [kilobytes] per second by '14. So, this is a plan that will cover three years.

Our total CapEx, on a yearly basis, won't increase because what we managed to get is an agreement that will combine services and CapEx at a level that we were used to have in the past and we won't need any additions in the CapEx level in the future.

Okay, thanks very much.

The next question is from Rami Rosen of Harel Finance. Please go ahead.

Thank you. Good evening, guys. Some housekeeping questions from my end. Number one, I may have missed that from the press release, but what is the percentage of prepaid subscribers of the overall total customers that you have for the end of this quarter?

It's hard to calculate. We have the number. It's--

You asked about the percentage for the prepaid out of the total base?

Sorry?

Rami, this is the question?

Yes, what is the percentage yes of the total customer base?

Okay, the total prepaid subscribers out of the total base is 27.3%.

Sorry, can you repeat that?

Sorry?

Can you repeat that please, I couldn't hear.

27.3%.

Alright, thanks. Now, regarding current headcount, how many employees do you have currently and how much has it changed over the quarter?

I think the total prepaid base is rather high.

No, I'm talking about headcount now, not prepaid.

How many headcounts we have in prepaid? What is the question?

No, no, no, no. I'm asking, forget the prepaid. Now I'm asking about the headcount, number of employees, of Partner by the end of the quarter, and by how much has it changed?

We don't publish our headcount at the end of the quarter. We do the headcount of Partner at the end of 2009 and if you would like the details we can send it to you after the conference. It is in our 20-F of 2009. For your information, at the end of 2009, the total headcount of the Company was 5,670. But, you have also a breakdown according to the segments in the Company so you should look in our 20-F in page number 97.

I see. Okay, guys, thank you very much.

The next question is from [Josef Asif] of [IAM]. Please go ahead.

Good evening. My question is about service revenues of data. You publish that it grew by 25%, I think, and of that of the NIS160m, NIS130m was text messages which has grown close to 40%. That is a bit different from what the trend is showing globally in which SMS is growing much slower than non-SMS. Can you give some color on that?

Yes, we said in the past and I think also in this press release that the breakdown of our packages that includes minutes plus SMS plus Internet package is a breakdown in our accounting, in our financials, according to the quantity of each of these services in the package.

In that way, let me for an example, if you have in a package that you buy 200 minutes, 200 SMS and also a data package, the breakdown of the payments for this package is divided by these three segments according to the quantity in the package rather than the usage of the package. And therefore, in some of our packages, it might be that we give a certain level of SMS, a certain level of minutes. It doesn't say that the subscriber used exactly that quantity, but the breakdown in our financials is according to the quantity in the package not according to the usage of this quantity.

Yes, but you're recognizing revenues according to what the customer is paying for right?

The total, of course, is what the customer is paying, but the breakdown in the financials is according to the quantity.

I'm not sure I understand. Let's say I buy a package that has X amount of minutes, Y number of text messages and then Z the traffic I can use on non-SMS. That means I already paid for the data package but I don't understand how exactly do you -- how do you separate the amount I paid on the data package on text and data which is non-SMS?

Let me try to describe, okay. If it was a package of let's say 200 minutes, 200 SMS, and data package, included altogether let's say it cost NIS150. Now, as to breakdown this NIS150 to the three, let's say, segments of revenues of minutes, SMS, and data, this breakdown is done by the fair value of each of these components in the package.

The fair value is based on the tariff that we used to sell each of these, let's say, services like one minute multiplied by the number of minutes in the package, plus number of SMS multiplied by the tariff, the usual tariff of SMS, and plus the data package. The NIS150 is divided according to the fair value of each of these components in the package and according to that, we allocate the revenues of each of these segments. Is it clear?

Yes. Is it fair to say that the fraction of the non-SMS is actually very small and actually declining? Because the total rate of--

I think that this allocation that we use, let's say, that's a low, the knowledge that you have as analysts about what is exactly the data and content usage, it is more accounting allocation that we have to do. But, I think you rather should look on the total of the data and voice together rather than looking on the breakdown of each part of this allocation.

Okay, thanks.

The next question is from Doug Rosenberg of RBC Capital Markets. Please go ahead.

Hi, thanks for taking my question. I noticed you mentioned that the Jewish holidays had some weight on the MOUs and on service revenues. I was wondering if that means that the fourth quarter should be a little bit better?

It is not exactly. I would like to add some more information. This quarter in 2010 only Jewish holidays were in September while last year it was divided between September and October.

What is the impact of that? On the one hand, we had high roaming activity because of Jewish holiday. We have more tourists coming into Israel, more people going abroad. On the other hand, the business segment, actually in September used lower activity of telecom minutes and data and I think therefore there was the impact of the minutes of use in the quarter.

Let's say next quarter, I don't know to say it will be material or not. I think last year it was something like 10 days in October. That Sukkot I think was ended at October 10. I don't think it will be much -- it would be material for the fourth quarter results.

Okay, thanks. And just one more, you mentioned cost cutting. Is that something that you already started? Is that something that we should expect in Q4 2011?

No. We plan to implement this end of the year in December, part of the process, and the major part of the process will probably go '11.

I'm sorry, just so I understand, in other words we won't actually see a material impact until 2011 right?

Of course.

Okay, thank you very much.

There are no further questions at this time. Before I ask Mr. Avner 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 1-888-295-2634. In Israel please call 03-925-5928 and internationally please call 9723-925-5928.

We have another question. It's from Darren Shaw of UBS. Please go ahead, sir.

Hi, I hope you're still on the line. I'm sorry about that. Are you still there?

We are still here.

Hi, thank you. A couple of questions from me. I see CapEx fell in the quarter. Where do you see it going in 2011 and 2012?

And in terms of the MVNOs, what is the deadline for the incumbents to reach an agreement with the MVNOs, and do you expect any of the incumbents to reach a permanent tariff agreement, or what happens after that? What's the timing on the Ministry of Communication setting a price? Thank you.

Darren, regarding the CapEx for in the third quarter, as we were preparing to sign a new agreement based on new technology we actually almost stopped any purchases of components on the current technology. So, it showed a decline that will come back to the right level of CapEx in the fourth quarter and going into '11 and '12 based on the agreement that we have signed with Ericsson.

Regarding the next question, the MVNO, we expect that MVNOs will start to operate only in the second half of '11. We don't expect any MVNOs to start earlier or to have an earlier impact before the second half of '11.

Okay. I didn't actually ask that. What I asked was on the agreement that needs to be signed between the MVNOs and the incumbents or set by the Ministry of Communications in terms of the preferred minute tariffs.

That will be probably finalized during the first quarter, the first half of '11. We are now negotiating, but there is no tariffs that are enforced on us at that stage. We believe that the Group, the first half of '11 agreements will be settled this way or another.

Thank you very much.

Thank you. Mr. Avner, would you like to make your concluding statement.

Yes, okay. Thank you, everybody. This concludes the conference call of Partner Communications 2010 third quarter results. We appreciate your interest and please feel free to contact us if you have any additional questions. Our Investor Relations Coordinator in Israel is Ms. Gershuni is 972-54481-5952. Access to this call and to other valuable information on Partner is available through our website at www.orange.co.il. Thanks and have a good day.

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