Partner Communications Company Ltd (PTNR) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company's first-quarter 2011 results conference call. (Operator Instructions). As a reminder, this conference is being recorded May 25, 2011. I'd now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please go ahead.

Thank you, and welcome to all our listeners, and thank you for joining us on this conference call to discuss Partner Communications' results for the first quarter of 2011.

With me on the call today is Jacob Gelbard, our CEO, and Emanuel Avner, Partner's CFO. Our CEO, Jacob Gelbard, is going to make several statements, and then Emanuel will give a summary of our financial and operational results and outlook. We will then, of course, open the floor for Q&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 U.S. Private Securities Litigation Reform Act of 1995. Regarding such oral forward-looking statements, you should be aware that Partner's actual results might vary materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in Partner's press release dated May 25, 2011, as well as Partner's prior filings with the U.S. Securities and Exchange Commission on Forms 20-F, S-1, and 6K, as well as the S-3 shelf registration statement, all of which are readily available. Please note that the information in the 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 at www.Orange.co.il. At this stage, I would like to hand the call over to our CEO, Jacob Gelbard. Jacob, please.

Thank you and hello to our listeners.

The results of this quarter reflect the impact of the reduction in interconnect tariffs and the implementation of the new customer regulation, which led to a further intensification of competition in some of our markets. The level of competition is expected to become even stronger in the future months, following the entry of MVNOs and two additional UMTS operators into the cellular market.

Over the past months, Partner had prepared itself in a number of areas for this new reality. First, we have strengthened our commitment to our customers by increasing the customer-service workforce by 25% and have also began the process of upgrading our CRM billing systems in order to improve internal efficiencies and time to market.

Second, we have launched tariff packages, which include large quantities of minutes and data at highly competitive prices. Third, we have continued to lead the smartphone revolution in the market by offering attractive deals for a wide variety of top range handsets.

As a result of these actions, Partner enjoyed in the -- the highest number of net subscriber additions in the market this quarter, despite an increase in the level of churn. We are already seeing an improvement in the quality of customer service and reduced waiting time. We believe that our strategy is in the right one at this period of growing uncertainty for the long-term benefits of the Company and its shareholders.

In addition this quarter, with the completion of the 012 Smile acquisition, Partner took an important step towards the transformation into a comprehensive communication group. 012 Smile will enable us as a group to offer a wide range of residential and business communications products at the same time as improving operating efficiencies. In addition, the upgrades of our existing networks and the deployment of the fourth-generation LTE network will help us to differentiate ourselves from our competitors and will provide considerable added value to the experience of our customers.

Finally, I am proud to announce that, once again, Partner was recognized in a survey by The Marker magazine and BDI as the best workplace to work in among all communication companies and the second best workplace among all companies in Israel. The survey results reflect the Company's commitment to its quality -- very high-quality human capital, which is the foundation for our long-term success.

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

Thank you, Jacob.

As Jacob described, the results this quarter resulted from the double-whammy impact of the reduction in interconnect tariff, together with the intensified competition in the market.

The reduction in interconnect tariffs reduced revenues by approximately NIS250 million and reduced EBITDA by approximately NIS100 million. The impact was in line with our forecast which we gave last year.

The increasingly strong competition in the market also impacted revenues and expenses this quarter. The discounting that was necessary in order to recruit new customers and to retain our valued customers caused a reduction in ARPU, and operating expenses increased following the recruitment of additional customer service and sales representatives to deal with the increased number of customer requests.

The upside of this story was the proceeds from equipment sales increased by NIS71 million in the quarter, compared with the first quarter of 2010. The majority of these sales were of smartphones and other high-end devices that will support revenue growth from content and data services in the future. In addition, the fixed-line segment with 012 Smile included -- provided a contribution to EBITDA of NIS45 million in the quarter, an increase of NIS48 million compared with the first quarter of 2010.

Looking ahead, the negative impact of the reduction in interconnect tariffs and the increasingly competitive market conditions, I expect it to continue through 2011. However, we plan to mitigate the impact of the reduction through implementing efficiency measures, increasing equipment sales, and the profitability of the fixed-line services including 012 Smile as in this quarter, and through further growth in data and content services resulting from the continued increase in the penetration of smartphones, tablets, and laptops.

The overall impact of the regulatory and market developments on the Company's profitability will therefore depend on the success of these steps and other factors, such as market conditions.

With that, I will now hand the conference back to the moderator to begin the Q&A. (Multiple speakers).

(Operator Instructions). Maura Shaughnessy, MFS Investment Management.

I've got a couple of questions. I guess in February when the termination fee went away and this competitive environment really kicked in, it was a bit surprising to me the level of competition, given the fact that we wouldn't be seeing the MVNOs of the two new competitors until next year. And so, the question really is, when I look at Partner's results versus your two peers, clearly Partner was the most aggressive on the handset sales, and you can see that with the margins on your handsets relative to your peers.

And you know, everyone can pump their chest on market share, but when it destroys the economic value of the subscribers by being so aggressive in the marketplace, it doesn't seem that that makes a whole lot of sense to me and doesn't benefit your shareholders all. So, I just -- I'm really kind of confused as to what Partner is trying to achieve by just trying to get subscribers at any cost. That's the question.

Jacob speaking. First of all, we don't try to get customers at any cost.

Pushing forwards smartphones into the market enable us, A, to increase stickiness of customers to the company and, B, to increase ARPU by adding additional services based on data and video capabilities. All the new recruits, customer recruits, enabled us to improve our ARPU, improve our revenues, and looking forward, the markets will get into a more competitive environment. Increasing stickiness of customers is a tool, in a way, to ensure your customer base.

So, that's the strategy that we implemented, and I believe that in the long run, it's the right strategy in a growing competitive environment.

So when I see that the profitability of your handsets are in the 20s relative to your peers in the 30s, and that we all know what happens when handsets get materially subsidized and how the business model collapses, am I missing something there? I didn't see your (multiple speakers)

I believe that you are missing because the market has changed. We don't subsidize, anymore, customers.

Customers are free to choose which company to get services from. I can purchase a handset from Partner and theoretically move to another company to get its services from one of our competitors. Likely it won't happen because usually we sell our handsets with a guarantee that if he will use it under our umbrella, he will get reduced tariffs. So, it's in the customer's interest to stay with us after he purchases the handset.

But we don't subsidize anymore. We did it in the past when we could get a commitment from the customer to be with us for 36 months. And if not, he will pay us a penalty, a very high penalty. At that stage, we could and did subsidize. Now, in an open market, we don't subsidize anymore and probably will never subsidize again.

So, it shouldn't be surprising to us to see the level of competition post the termination fee when MVNOs and/or the new competitors weren't even in the marketplace, that the market would be so disruptive as it has been the last couple of months (multiple speakers)

I believe that the MVNOs will target the very low segment of the market of the private sector.

Pushing the smartphone as our main tool actually brings out some customers that are advanced in using new services, so the quality of those customers are highly more than customers that will move to the MVNOs environment. So, the market is changing and probably it will be split again between the different operators.

Our aim is to keep the best breed of customers in our customer base. We might lose some customers, but those customers are usually called low tariff or low ARPU customers, and the cost of keeping them don't always justify the effort.

So, the market is changing, and we will have to adjust ourselves to that new market environment, and that's actually what we have been doing through the first quarter of this year.

Yes, I just hope the long-term economics are considered, and it's not just about subscribers. But I'll let other people ask the questions. Thank you.

Dan Shaw, UBS.

I had a couple of questions. The first one is the trends in the first quarter of Partner winning market share and having a handset margin lower than the competitors. Do you see those trends continuing in the second quarter and in the second half? That's the first question.

The second question is on the 012 Smile acquisition. Could you just give a comment on how that was going versus your expectation and guidance of an EBITDA number for full year?

And finally, in terms of scope for cost savings, can you just touch on whether you've had any cost savings which have delivered in Q1 and whether you see more coming through, and when do you think they will come through? Thank you.

Emanuel?

Okay. First of all, about the trend of the market share, Partner was more active in the first quarter of 2011 compared to the other competitors, and this can be seen by the number of net adds that we gained against the market and also the number of port in and port out that was this time, this quarter, first time after many quarters, it was positive for Partner.

And this also pushed the number of smartphones that we sold in the market, and I believe that Partner will be also active in the next quarters in these terms, although I believe that the pace will go down a little bit in the coming quarters.

Regarding the 012 and our expectations, we expected EBITDA level of NIS275 million. Included in our results this time is only one quarter. The EBITDA was NIS23 million, which is in line with one month, so it -- which was in line with our expectations, and that's what we see right now. The other synergies will come only later on in this year.

About cost saving, I think we have to start saying that Partner prepared itself for this competition ahead. Starting from Q4 2010, we included more service and sales personnel because we have seen already that lowering the exit fees in the market will result in higher churn and in high turnover of subscribers among the all three operators, and therefore we prepared ourselves for that. I believe that this pace of churn and turnover of subscribers from one company to another will slightly reduce along the year, and I believe that we are capable to adjust our workforce and cost in the next quarters.

Regarding the cost savings that we had already in Q1, although we had an increase in salaries and in sales force, as I described, you can see that SG&A has not grown in Q1. This is actually the fact that we had some savings in some other expenses in the Company, and I believe that we will have more in the next quarters ahead.

That's great. Thank you very much.

Daniel Meron, RBC Capital.

Just wanted to see what other measures you may need to take in the next several months to adjust Partner's operations to the current market dynamics. It seems like you already addressed the (technical difficulty) center operations. What else do you have to do in the infrastructure side in the ongoing operations or marketing or positioning?

I think that we can speak about maybe two issues. One is efficiency that I already described, and I think that we can do much more in the quarters ahead.

The other, a very nice improvement in our fixed-line segment. You can see that the fixed-line segment contributed this time NIS45 million to our EBITDA, and this was an improvement of NIS48 million. NIS23 million came from 012 Smile, and the rest, the improvement of an additional NIS25 million, came from Partner itself, Partner's fixed-line business. I think that this can be improved further on in the next quarters, and we will show a better profit in our fixed-line business.

We understand that the profitability of our cellular services went down, and we will do our utmost in order to improve that by efficiency and by increasing our data and content revenues. I think that we can do much more also in the side of improving the ARPU of our customers by shifting customers from a different tariff to buckets of tariff, giving a much more quantity of minutes and SMS and data to the customers and increasing the ARPU of the customer by slightly more. I think that a lot can be done there also.

And the third issue is, of course, of the smartphones and other handsets. We've seen that this is a growth engine for the Company for some quarters already, and I believe that this can be also a source of profit for the Company for the next quarters.

And then, on the (technical difficulty) feel comfortable with the amount of leverage you've got on them all right now? I think it's about two times net debt to EBITDA, which is roughly in line with the industry, but how do you feel about that considering the slower free cash generation the next several quarters? Thank you.

Yes, this time we reached almost two times of net debt to EBITDA. This is due to the fact that 012 Smile was included only one month, although the full debt of the 012 Smile transaction is fully integrated in our balance sheet.

But in any case, I think that Partner will take as a target not to be more than two times of net debt to EBITDA, or more or less in that range. And I believe this is a range that many other telco companies believe that this is a range that they can live with, and I believe this is also true for us.

So, must take into account that we will have positive cash flow from 012 Smile. 012 Smile generates a very nice cash flow, so this also will give us the possibility or capability to -- for us to repay our debt.

(Operator Instructions). There are no further questions at this time.

Before I ask Mr. Koch 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 U.S., please call 1-877-456-0005. In Israel, please call 039255921, and internationally, please call 97239255921.

Mr. Koch, would you like to make a concluding statement?

Thank you. This concludes the conference call of Partner's results for the first quarter of 2011. We appreciate your interest, and please feel free to contact us if you have any additional questions.

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

Thank you, sir. Ladies and gentlemen, this concludes the Partner Communications Company first-quarter 2011 results conference call. Thank you all for your participation. You may go ahead and disconnect.