Partner Communications Company Ltd (PTNR) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Fourth Quarter 2021 Results Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Amir Adar, Head of Investor Relations and Corporate Project, Mr. Adar. Please go ahead.

Thank you, and thank you to all our listeners for joining us on this conference call to discuss Partner Communications fourth quarter and annual results for the year 2021. With me on the call today is Avi Zvi, Partner's CEO; and Tamir Amar, our Deputy CEO and CFO. Avi will provide an update on Partner's business development. He will then handover to Tamir, who will provide a detailed discussion of our quarterly and annual financial and operational results. And finally, we will 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 provision 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 February 28, 2022, 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 F-3 self-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 also being broadcast over the Internet and can be accessed through our website. If you have any further questions following the call, please feel free to contact me at 972-54-781-5051.

I will now turn the call over to Partner's CEO, Avi Zvi. Avi?

Thank you, Amir. Good morning, everyone, and welcome to our earnings conference call. Partner ended 2021 with improvements in its key financial measures despite the ongoing COVID-19 impacts of the continued high -- and the continued highly competitive landscape in the Israeli telecom market. The results reflect the importance of the company places on the customer who is at the epicenter of the company's activities. We believe in transparency, fairness and attentiveness towards our customers.

It is not without a reason that the cellular segment consistently continues to expand its subscriber base, having exceeded the 3 million subscriber mark last quarter. As we enter a new chapter in implementing our strategy, I am happy to provide some color on the progress that we have made as well as our ambitious targets ahead.

In the cellular mobile market, after reaching 30% population coverage in 2021, Partner intends to continue the accelerated deployment of the 5G sites with the aim of achieving above 40% coverage by the end of 2022. In the fiber-optics market, we are expanding the value chain as we become a dominant fiber-optics infrastructure player. This major shift is based on 4 pillars: one, we are on track to reach about 1 million homes connected by the end of 2022. We are currently at 740,000; two, we're increasing the fiber value potential through wholesale agreements for use of Partners' infrastructure; three, we are strengthening our position as a leading fiber-optics infrastructure provider to enterprises; and last, but definitely not least, we are seeing new opportunities in the Middle East by introducing sustainable fiber-optic connection solution for international communication operators. Tamir will provide more details on this shortly.

In the TV services, Partner is prepared -- is well prepared for the expected entrance of additional international streaming services with its unique Super Aggregator model. As part of our business strategy, we are investing in work environment and in workforce compensation. We are proud on the renewal of the collective employment agreement for further 3 years. I would like to thank Partner's Board of Directors headed by Chairperson, Osnat Ronen, for the complete backing for the measures we have taken in the past year.

I would now like to turn the call over to Tamir Amar for a detailed review of our financial results.

Thank you, Avi. 2021 ended with another quarter of subscribers growth, accompanied by growth in profit and profitability. The cellular segment achieved service revenue growth for a third consecutive quarter with higher profitability than was achieved in the fourth quarter of 2019, prior to the COVID-19.

Early signs of the strategic shift of continued focus towards fiber-optics and measures taken to improve the TV results can be seen in the fixed-line segment profitability, which continued to improve and presented an increase of 35% in adjusted EBITDA compared to the corresponding quarter last year. Our cellular subscriber base increased this year by 187,000. On a quarterly basis, the subscriber base increased by 4,000 in the fourth quarter or by 23,000, excluding the fixed 12-month packages by the Ministry of Education. The churn rate in the fourth quarter of 2021 totaled 7.9% or 7.3%, excluding Ministry of Education subscribers compared to 7.2% in the corresponding quarter last year. The annual churn rate decreased from 30% in 2020 to 28% in 2021, bringing to a total of 7 consecutive years of declining churn rate. ARPU in the fourth quarter totaled ILS 48, compared to ILS 49 in the corresponding quarter last year. Despite the volatile impact of COVID-19 on interconnect revenues and roaming services revenue in the course of 2021, the company succeeded in maintaining a level of ARPU of ILS 48 in every quarter of 2021.

Turning to the fixed-line segment. The number of homes connected within -- buildings connected to our fiber-optic infrastructure reached 700,000 at the end of the year, an increase of 76,000 homes connected in the fourth quarter and 235,000 in 2021. Partner's fiber-optic subscriber base totaled 212,000 at the end of the year, an increase of 20,000 in Q4 and 63,000 over 2021. The penetration rate from potential customers in connected buildings totaled 30%, unchanged since the end of last year.

As we stated in our press release today, we intend to provide international telecommunications operators with a substantial fiber-optic connection between Europe and Far East by deploying additional fiber-optic infrastructure within Israel. The Abraham Accords offers opportunities for new fiber-optic infrastructure solutions, and we bring to the table an innovative and practical solution for the problem of potential cable damage from passing ships in the Suez Canal as well as mitigating geographical dependencies. Our strong position and execution track record led, in January 2022, to the signing of the first substantial agreements for such services, and we intend to further extend this line of business in the future.

Regarding our television services, the subsidiary base remained unchanged from the previous quarter and totaled 226,000. Excluding the proactive removal of certain subscribers from our subscriber base in the second quarter, the overall increase in 2021 was 15,000, mainly due to the impact of the strategic business change in TV services. Adjusted EBITDA in the fourth quarter totaled ILS 250 million, an increase of 23% compared to the ILS 203 million in the corresponding quarter last year.

Now let us review briefly funding and investing. The acceleration of the fiber-optic deployment in 2021 impacted upon CapEx payments. On an annual basis, CapEx payments totaled ILS 672 million in 2021 compared to ILS 573 million in 2020. The company currently expect that CapEx payments will increase in further 2022 by approximately the same amount as the increase recorded in 2021, to be succeeded by a significant CapEx payments decrease in 2023, following the completion of the major phase of deployment of fiber-optic infrastructure by the end of 2022. As in 2021, the company's continuing investment in the 5G cellular network is not expected to have a significant impact on CapEx payment in 2022.

The adjusted free cash flow, before interest and including lease payments, for the fourth quarter totaled negative ILS 79 million, mainly reflecting the increase in CapEx payments, an advanced payment for frequency fees in the amount of ILS 55 million and the annual payments for government-mandated fiber incentive fund. For 2022, the impact of the expected increase in capital expenditure payments on adjusted free cash flow is expected to be offset by other factors, including the impact of the advance payment of frequency fees to the Ministry of Communications that was made in 2021.

Net debt of the company was ILS 744 million at the end of 2021, compared with ILS 657 million at the end of 2022, an increase of ILS 87 million. The company's net debt to adjusted EBITDA ratio remained at 0.8 at year-end 2021.

I will now 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.

I wanted first to touch on the fiber, please. I mean we've seen good traction. I'm wondering what you -- how do you guys attribute this performance? Is it because you guys penetrated buildings that were not yet connected by your competitors, so you kind of occupy the space first, or is it your go-to-market because you're branding it more than the new competitors? I'm curious to have your thoughts on that.

Thank you for the question. When you look at the 2021, in '17, maybe 75% of the new buildings we're connecting, we are already seeing competition there. So this has been a full year of true competition, mainly between us and the IBC group. It should be said that we reached -- we connected this year -- or we reached the point of 740,000 and Bezeq, which is the incumbent in Israel, just announced that they have connected 1 million. If someone would have said a couple of years ago, 3 years ago, that Partner and the government are going to be almost the same size in the deployment of the future infrastructure, eyebrows would go up. We're feeling we're in fierce competition, but we're achieving our goals.

Right. That's helpful. And then touching on 5G, we've seen carriers around the world kind of struggling to find a business model where they can introduce more for more. Is that something that you guys are thinking of? Because I mean, on the one hand, you are talking about kind of further investments, although not material. But I'm just trying to understand how you can monetize in the country so competitive and we're seeing carriers kind of (inaudible) unlimited everything? So just curious to have your thoughts on that.

I think we're 3, maybe 4 years behind the Western world. We're still using -- or we're at the end of using triple bundling as a tool to recruit new customers and raise the ARPU. If you ask me, bundling always hurts the average revenue. And what we hope we'll see in the coming months and the next couple of years will be the unbundling of communication services in Israel. If we sell the mobile communication and the fiber communication and our TV services separately, the ARPA will be higher than it is today.

Our main engines, again, leaning on what I said at the beginning, that we had 3 or 4 years behind. When you look at the mobile, they move to 5G because we are in very early, early steps. Only 10% to 12% of our current customer base have a communication device, a mobile phone with 5G capabilities. So our main driver in the mobile will be the move of the 3G and 4G towards the 5G and that should create additional value through revenues. In the fiber, we're going to push on forward to reach the 1 million households by the end of the year while keeping our share in what we paved of around 30%, which is significantly above the numbers we expected in our initial plan.

When you look at TV, I think TV is going to be the exciting or the interesting arena in the next coming 2 years. We've said in the past, although it's not a separate business unit in Partner, it's part of the fixed-line business. Our business -- our TV business is losing money. We've entered last, we were aggressive. And while we introduced the Super Aggregator as a business model, when we came to implementation, we found ourselves hungry. And we moved to a more conventional packaging type of a TV provider. What we did this year or what we're doing currently is we're going back to our basic strategy, meaning we want to offer a very basic TV service at a very low price.

And to offer you through our open TV, we're using -- as you know, we're using Android as our system, offer you the applications, which are growing very fast in this world. You know Amazon is now in Israel, Netflix is already in Israel. Disney announced that they are launching in May and HBO is supposed to launch by the end of the year. So with more and more content, international content is becoming available on a direct-to-consumer business model, we feel that the platform that we're offering is becoming more and more suitable to the new way of consuming content.

I think that the current models are going to change. The big players, which are still selling TV in the old models of MCTVs are going to move, like Partner, to a more open TV, Super Aggregator model. And once they do it, our advantage will be significant because the choosing of the next TV provider will be based on other relationships rather than the content, which is the main driver right now.

Did I answer your question?

Yes, definitely. I mean I wanted to touch on content, but you just asked on it. Like historically, when you listen to Yes and HOT, they always argue that the Israeli client base is very much into Israeli content that you can't necessarily find on Netflix or the platforms. Do you think it's still relevant these days or at least to some of the population?

No, I don't know if you know, but in my previous role, I was the CEO of Reshet for 10 years, which is one of the two big broadcasters in Israel. So I know the content market relatively well. I think the reason importance for Hebrew speaking content, but it's not a driver to choose the provider anymore. I think that the original content created by (inaudible), eventually will be available on Partner and Cellcom. We're already seeing Keshet 12, which is the biggest broadcaster in Israel, announcing a couple of months ago that they're launching their own application, similar to the broadcasters in North America and offering their own content in a separate application.

I think that as this develops will be the content -- we'll see the content creators, not the content financers or packagers, but the creators finding -- creating their own content and providing them to every platform. I think looking forward 12 months, not 2 years, 12 months, the same content will be available throughout the TV providers in Israel.

(Operator Instructions)

There are no further questions at this time. Before I ask Mr. Zvi to go ahead with his closing statement, 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 1-888 254-7270. In Israel, please call 03-925-5921. And internationally, please call 972-3-9255-921. The recording is also available on the company's website, www.partner.co.il.

Mr. Zvi, would you like to make your concluding statement?

Yes, thank you. I think Partner excels in the human capital of the first degree, which is equipped, in particular, with the flexibility and adaptability necessary for the new era and the changing conditions in both its human and technological aspects. The commitment of all our employees has played a significant role in the impressive financial results we just presented.

Thank you all again for joining, and we are, of course, at your service if you have any additional questions. Have a great day.

Thank you. This concludes the Partner Communications Fourth Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.