Partner Communications Company Ltd (PTNR) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Third Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please go ahead.

Thank you, and thank you to all our listeners for joining us on this conference call to discuss Partner Communications' third quarter results for 2017. With me on the call today are Isaac Benbenisti, Partner's CEO; and Dudu Mizrahi, our CFO. Isaac Benbenisti will present a number of operational highlights for the quarter in the TV, fixed-line and cellular markets. He will then hand over to Dudu who will provide an overview of the quarterly financial and operational results. And finally, we'll move on to the 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 Section 27A of the U.S. Securities Act of 1933 as amended, Section 21E of the U.S. Securities Exchange Act of 1934 as amended and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Regarding such 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 November 21, 2017, as well as Partner's filings with the U.S. Securities and Exchange Commission on Forms 20-F, F-1 and 6-K as well as the S-3 shelf registration statement, all of which are readily available. Please note that the information on this conference call related to our 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. If you have any further questions following the call, please feel free to contact our Head of Investor Relations and Corporate Projects, Liat Glazer Shaft, on (972) 54-781-5051.

I will now turn the call over to Partner's CEO, Isaac Benbenisti. Isaac?

Good day, everyone, and welcome to our earnings conference call. Our strong entrance to the TV market, together with our significant presence in the Internet and cellular markets, establish Partner as a comprehensive communication group. The customer recruitment figures for the Partner TV are high compared to our preliminary forecast. In the last month, the sales rate has increased even more and the number of daily installations has accelerated compared to the period from August through October.

In less than 1 month, we have completed installations in 10,000 additional households and the current -- and currently, the number of households that are already connected to the Partner TV service is approximately 30,000. In addition, thousands of additional households have scheduled installations by the end of the month after they have already completed joining the service.

Most of the customers that have joined the TV service have chosen the service as part of our bundle and triple offering, which also includes ISP and Internet infrastructure.

As part of our strategic plan as a comprehensive communication group, in August, we also announced the commencement of the commercial phase of our independent fiber optic infrastructure project, Partner Fiber, which provides, for the first time, a more advanced and cost-effective alternative to the existing fixed infrastructure in Israel.

Partner's optic fiber -- fibers have already reached tens of thousands of households throughout the country, and we are working to deploy further at an accelerated rate in several cities simultaneously.

In the cellular segment, we added approximately 33,000 net Post-Paid subscribers in the last quarter and recorded a net increase in our cellular subscriber base for the second consecutive quarter despite a decline in -- of approximately 18,000 Pre-Paid subscribers.

I will now turn the call over to Dudu Mizrahi for a detailed review of our financial results. Dudu, please.

Thank you, Isaac. Good day, everyone, and welcome to our earnings conference call.

In the third quarter, many of the activities that the company has been engaged in during the last year were reflected, among others, in the growth of 33,000 Post-Paid cellular subscribers, a continued single-digit cellular churn rate, a significant improvement in the equipment sales gross profit margin, which stood at 27%, an improvement in the EBITDA margin compared with Q3 of 2016, and an additional quarter with a strong free cash flow.

The increase in CapEx in the quarter mainly reflects the acceleration of the company's fiber project, which enabled the company to offer advanced services based on our independent fixed-line infrastructure as well as the entrance to the TV market.

Regarding our fiber project, we announced today that we are holding negotiation with Cellcom regarding a potential long-term cooperation agreement for the deployment of fiber optic infrastructure by both companies whereby each party will be entitled to purchase fiber optic infrastructure services from the other party in order to connect residential buildings throughout Israel. The agreement is concluded (inaudible) future deployment and will accelerate the deployment of the fiber optic infrastructure while reducing costs.

The financial steps we executed in the past month, including, among others, the early repayment of loans in the amount of ILS 900 million and the raising of new traded bond series, are reflected in the significant decline in finance expenses compared to Q3 of 2016. The financial steps, together with the strong free cash flow presented by the company in the third quarter, resulted in a decline in net debt below ILS 1 billion to ILS 887 million.

And now I'll be happy to open the call for questions. Moderator, please begin the Q&A.

(Operator Instructions) The first question is from Tavy Rosner of Barclays.

This is Chris on for Tavy. I was wondering if you could comment on the 30,000 TV customers. Did you say they were mostly taking the triple play? And also, are you concerned with the recent launch by [SNT] TV?

For the first question, yes. The majority of the subscribers that joined the service chose the triple solution. And what was the second one? Are we worried about things?

If you're concerned, yes, with the increasing competition.

No. I mean, it's -- we knew that the tradition -- competitors will have to act and we are happy that they choose the same or like the -- or they try to imitate the solution that we choose, the open book with Android TV. We are more advanced. We have the connection with Netflix. Our UI is much, much more advanced, and the product that we provide is chosen by the Israeli customers. So we know that there's still ahead of us competition, and we know that they will react and they are facing a significant decrease in their database, so they'll have to react. But we know our -- what we are going to do and we are confident on it.

That's very helpful. Also, just regarding the potential long-term cooperation with Cellcom and the fiber rollout, can you give a sense of what proportion of the population you'd be targeting, let's say, in the next 3 years? And does that involve using any of the Israeli electric infrastructure?

We haven't really provided any future detailed plans regarding our deployment, but we can definitely say that a very significant part of the population will be covered by the deployment of fiber optics, either by Partner or by Cellcom or by the joint corporation. So eventually, we plan that will be a very meaningful deployment. There is -- regarding the ITC, currently, we are looking at the venture, but we haven't decided yet regarding what we are planning to do with that. But we know the venture is up for sale and we are looking at the numbers, but haven't yet decided what to do.

The next question is from Roni Biron of Excellence.

A few numbers stood out on the positive side, and I would like to get a sense how sustainable they are. First, you added 15,000 subscribers after adding 4,000 in the second quarter. Can you keep this up while stabilizing the underlying ARPU in this environment? Or this is not really sustainable?

I believe that this is sustainable. I mean, we work very hard on our database in order to decline the churn rate, in order to gain more customers. We believe that our strong entrance to the TV market, which really created a very good vibe for the company in the Israeli market, we can see it in the PR, in the press and of course, in the atmosphere in the company. So we believe it will affect the cellular market and the -- beside it, we too -- can we still have a few more activities to take in order to decrease our database in the future.

And when you look at the pricing side, can you hold -- can you stabilize the underlying ARPU while adding more subscribers? You think we have reached some kind of a bottom? Or there is more erosion ahead?

I think it's hard to anticipate what will be the new future, but we can see a few signs that we're in a tipping point, and maybe we'll see, in the new future, stabilization of the ARPU in the market because the creation of telco groups that we and Cellcom are going up -- the core business of Bezeq and HOT and they suffer from our entrance to the telco business, maybe the motivation that they had in the cellular market will decrease. We see in telephone and in the HOT Mobile website that they increased the cellular prices. It doesn't reflect always what they do underlying, but on the Internet or their website, they have increased the price of the cellular. Of course, we have the entrance of Xphone as a newcomer. We don't know what will be the effect. It can be a negative effect. But generally speaking, about the market, we can say that we believe that we are ahead of -- it appears the standard -- the prices will stabilize. Maybe we'll see more decrease, but I believe we are in a tipping point.

Okay. And 2 more questions. The other one -- the first one is on equipment margin, 27% in the quarter. Is this the right margin for this business? It seems quite high.

Well, Roni, we -- I think we've discussed the topic before. We've been making a lot of effort to improve margin on the handset sales, and you can see the margin went up since Q1 and moving forward. So it's a trend that you could see over the last few quarters. We're seeing that there is still a potential increase in margin. Hopefully, we'll be able to do that, but we're seeing there is still a room for improvement.

Okay. And finally, regarding Partner TV, a full quarter, I guess, will take its toll on profits. Should we expect the decline in fixed-line profits from -- compared to third quarter as we move ahead?

Could you repeat the question, Roni? You're asking whether the...

Regarding a full quarter of Partner TV, given the upfront costs, should we expect a decline in fixed-line profit? Or are there any offsetting factors?

If you look only on the TV, of course, you could have -- you can see on Q3 only partial effect of the TV launch. And of course, moving forward, you could see the -- in Q4, you would see the full effects of the TV launch. Initially, of course, you will see more cost than revenue at the beginning as the service will have or recruit more and more customers. So the answer is yes, the Q3 result doesn't really reflect the full amount of cost on the TV side.

The next question is from Nicole Gilliat of ION Asset Management.

My question is about equipment sales. So looking back over 2017, as the focus for free cash flow benefited from favorable business and working capital ...

Nicole, we cannot hear you.

We cannot hear you.

All right. I'm very sorry. Can you hear me now?

Yes.

Yes.

Okay. Looking back over 2017, a good chunk of your free cash flow was influenced favorably by business and working capital. So looking ahead, are you content with the current levels of equipment sales in the business?

Right. I hope I understood the question. But as I answered earlier to Roni, we've seen that there's still room to -- of growth in handset sales. And very -- some of the last quarters have had improved margins, but we still see room for growth, both in revenues and [profit] and hopefully, we'll be able to (inaudible) that quarter.

Okay. Great. And given the great strides you've made in refinancing debt over the last several years, might the company be considering a resumption of a dividend policy going forward?

Currently, there isn't a dividend policy -- or any change in the dividend policy currently. But as you can imagine, it's only stable and it will be discussed in the (inaudible) currently (inaudible).

(Operator Instructions) The next question is from [Michael Chen] of [Moon] Capital.

I was wondering in terms of the CapEx, can we -- can you give a little bit of guidance in terms of what CapEx we should be expecting in the coming years given the accounting change as well as the fiber rollout?

So we haven't gave any guidance regarding CapEx, but you can -- as you can imagine, when we're talking about fast and extensive deployment of fiber optics, then we expect CapEx to grow in the coming years as we further deploy our fiber optic network. So the answer is yes, we expect higher capital levels than what you could see over the last few quarters. Currently, we are not giving any guidance regarding those numbers.

There are no further questions at this time. Before I ask Mr. Benbenisti to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the U.S., please call 1 (877) 456-0009. In Israel, please call (03) 925-5940. And internationally, please call (972) 03-925-5940. The recording is also available on the company's website, www.partner.co.il. Mr. Benbenisti, would you like to make your concluding statement?

Yes. Thank you very much for joining the call, and we are looking forward for the further quarters to deploy successfully our strategies to become a comprehensive telco group. Thank you, everybody.

Thank you. This concludes the Partner Communications third quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.