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Cellcom Israel Ltd. (NYSE:CEL)

Q4 2008 Earnings Call Transcript

March 2, 2009 9:00 am ET

Executives

Fiona Darmon – IR, CCGK Investor Relations

Amos Shapira – President and CEO

Tal Raz – CFO

Analysts

Daniel Meron -- RBC Capital Markets

Scott Malat -- Goldman Sachs

Alex Kuznetsov -- ING

Todd Chadrick [ph] -- Banc of America Securities

Anil Doradla -- William Blair & Company

Rami Myerson -- UBS

Marsh Honesty [ph] -- Merry Frank Sam Investment Management [ph]

Richard Gussow -- Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom Israel Ltd fourth quarter and full year 2008 results conference call. All participants are at present in a listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded, Mar 2nd, 2008.

I would like to now hand over the call to Ms. Fiona Darmon of CCGK Investor Relations. Ms. Darmon, would you like to begin?

Fiona Darmon

Yes, thank you, operator. I would like to welcome you all to the conference call and thank Cellcom Israel’s management for hosting this call today. With us on the call today are Mr. Amos Shapira, CEO, and Mr. Tal Raz, CFO. Amos will open the call by providing a summary of the main highlights of the fourth quarter and full year 2008, followed by Mr. Raz, who will review Cellcom Israel’s financial performance in further detail.

Before I turn the call over to Mr. Shapira, I would like to remind our listeners during this call, management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995 and the Israel Securities Law of 1968.

Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company’s filings with the Securities and Exchange Commission, including under Risk Factors in the Company’s Annual Report for the year ended December 31st, 2008 20-F, which will be filed shortly.

In addition, any projections as to the Company’s future performance represent management’s estimates as of today, Mar 2nd, 2008. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change.

You should have received by now the Company’s press release. If you have not received so, please call CCGK Investor Relations at 1-646-797-2868.

I would now like to hand over the call to Mr. Shapira. Amos?

Amos Shapira

Thank you, Fiona. Good day everyone and welcome to our fourth quarter and full year 2008 earnings call. 2008 has been an amazing year for Cellcom Israel. This year, which kicked of with the adoption of number portability, we generated the highest growth in the Israeli cellular market in terms of revenues and profitability. Throughout 2008, we grew faster than the Israeli cellular market, increased our revenue and subscriber market share, further strengthening our leading market position.

Throughout the year we placed we placed (inaudible) emphasis on driving revenues while keeping expenses very much at bay. As a result, we presented the 6% increase in revenue for the year with EBITDA increasing 14% and operating income growing 26%, the higher growth in EBITDA and operating income further emphasized the ongoing efficiencies implemented throughout the year. As a result, we ended the year with close to NIS billion net income, a new Company record. I believe our growth is even more noteworthy when taking into account the regulatory environment, fierce competition, ongoing price erosion, and, of course, the adopted number portability and market turbulence.

In the fourth quarter of 2008, seasonally our weakest quarter of the year, we achieved the highest profit generated in a fourth quarter. Due to a lower handset revenues, total revenues were slightly down from Q4 last year while revenues from content grew 42%. EBITDA increased 18% with operating income up 39%, all key achievements. Net income increased 32%, reaching the fourth quarterly record of NIS 243 million.

Now about cash. This year we continued to generate a very healthy free cash flow, especially noteworthy with a higher expenditure in the first quarter following the introduction of number portability. We generated over NIS 1.2 billion in free cash flow for the year, NIS 366 million in the fourth quarter. As always, this quarter, we continued to give back to our shareholders and declared a NIS 270 million dividend for the quarter, bringing total dividends for the year to NIS 1.1 billion.

Now, we broadly [ph] cover KPIs. In terms of key operating metrics, our subscriber base grew an additional 114,000 this year, 30,000 in the fourth quarter roughly out of which post paid. This brought our total subscriber base to approximately 3,187 million at the end of the year, a new record, and once again the highest in Israel.

We almost doubled our 3G customer base this year, upgrading and adding approximately 312,000 3G users, 52,000 in the fourth quarter, ending the year with 731,000 3G customers. This very rapid growth directly contributed to our top line as content and value-added service revenues increased by 37% in the whole 2008 and over – and by 42% in the quarter over Q4 last year.

In terms of landline services, we continue to expand, and though not yet a segment on its own, revenues from our landline services increased significantly over last year.

Taking a moment to reflect on the macroeconomic, as visible in the results, this quarter, we have not seen an impact on the demand for our services other than impact on our roaming services as inbound and outbound tourism dropped. Now, to put this in perspective, roaming revenues contributed less than 7% of revenues in 2008. We are very closely monitoring expenses and are maintaining a flexible budget in order to be able to react swiftly to any event should it be required.

Now to a few words on the trends we are witnessing and our focus going ahead. We believe that in the coming years we will see a breakthrough in the Mobile Media. We believe that the mobile phone serving as a media device currently has many advantages over other media sources. It serves as a key source of information and entertainment, known as infotainment, as well as other mobility exploiting applications while being our side – by our side every hour of the day, every day of the week.

Our technological progress through our most advanced HSPA network enables us to leverage these trends to our advantage, meeting the growing demands of this new ‘Everywhere Consume.’ We can already supply today mobile broadband at both speed and rate faster than what a large number of landline Internet subscribers have today. As we look ahead, we believe that the next stage in the telecom market’s growth will be driven by telecom users’ increasing demand to always be connected anywhere and everywhere. This new type of user will exploit the advantages of our mobile network always on with high speed and quality media.

As the cell phone evolves into a primary source of communications and media, we at Cellcom will continue to focus management’s attention and investment resources in developing and growing and core business and expertise, cellular communications, launching new services, leveraging our advanced network. As an example, we recently expanded our mobile broadband services. This service is both a similar speed and quality as the available landline services.

In parallel, we continue to review additional areas of activity. We will analyze each opportunity according to our relative advantage vis-à-vis the existing competitors in those areas for which true expected added value (inaudible) strengthening our competitive advantage in the mobile space as well as the potential synergies with core business.

We will also examine potential cooperation in areas where we don’t have an expertise or a relative advantage. We believe that while there are synergies within the cellular space though generally speaking the synergies between mobile and landline are relatively low. Here, the example of our landline services offering to the business sectors spans out as it was a shift to an additional area of activity. Here, we leverage our cellular network’s fiber optic infrastructure to offer landline communication services to the main business centers in Israel.

This infrastructure doesn’t reach private homes. Both this service and the Mobile Broadband mentioned a moment ago will continue to serve as future growth drivers. In summary, this has been a very strong year for Cellcom Israel and I wish to once again thank our dedicated employees and managers for actively contributing to strengthening our position as Israel’s leading cellular company.

With that said, I would like to turn this call to Tal Raz, our CFO, for a detailed review of our financial. Mr. Tal, please go ahead.

Tal Raz

Thank you, Amos and good day everybody. Before I begin, I would like to note that we will furnish shortly our Annual Report on Form 20-F with the SEC. You will be to download the file from either Cellcom or the SEC website, shortly.

Now, to the results. Revenues for 2008 totaled NIS 6.4 billion, up 6% from the NIS 6.1 billion in 2007, mainly driven by a 5% increase in service revenues and a 17% increase in handset and accessories revenues. This 5% service revenues, growth from – a significant increase in landline services, and a 37% increase in content and value-added service revenues.

Revenues for the quarter totaled NIS 1.67 billion, slightly down from NIS 1.68 billion in Q4 last year. The slight decline in revenue resulted mainly from a 26% reduced sales of subsidized handsets compared with the fourth quarter last year when we sold more handsets during the number portability launch.

Lower roaming revenues resulting from slower inbound and outbound tourism, reduction of interconnect tariffs and ongoing product erosion. This was partially offset by a 2.9% increase in revenues of service mainly following the 42.2% in revenues from content and value-added service including SMS. As Amos mentioned, revenues in the fourth quarter were also adversely affected by the shift in the Jewish Holiday season from the third and fourth quarter in 2007 to only the fourth quarter in the 2008.

Gross profit for the year increased 13% to NIS 3 billion, up from NIS 2.7 billion in 2007. Gross margin for the year was 47% from 44.2% last year. Fourth quarter gross margin rose to 46.1% from 39.4% with quarterly gross profit rising 16% to NIS 724 million from NIS 624 million in Q4 last year. (inaudible) in both periods follow a significant drop in handset subsidizing.

Annual SG&A expense totaled NIS 1.36 billion compared to NIS 1.34 billion last year. The annual SG&A expenses as a percent of revenues dropped to 21.2%, down from 22.2% in 2007. The slight drop in expenses is a result of expanding workforce [ph] and recession cost at the beginning of the year following number portability implementation and an increasing allowance for doubtful accounts mainly following number portability, which allow subscribers to switch to another cellular operator without (inaudible). We cannot rule out that the increase in budget [ph] may also influenced by the global economic slowdown.

SG&A expenses for the fourth quarter totaled NIS 348 million compared to the NIS 344 million last year. The slight 1% increase in SG&A expenses this quarter resulted from higher allowance for doubtful accounts and an increase in salaries and related expenses due to the recruitment of workers previously retained through subcontractors. This substantially offset by lower depreciation expenses.

Operating profit for the year reached NIS 1.7 billion, up 26% from the NIS 1.3 billion last year. Furthermore, operating profit for the quarter rose 39% to NIS 389 million from the NIS 279 million in Q4 last year.

EBITDA for the year rose 14% to NIS 2.4 billion from NIS 2.1 billion last year. EBITDA for the quarter rose a further 18% over last year, reaching NIS 566 million. EBITDA margin for the year reached a new annual record of 37.5% with EBITDA margin for the quarter reaching 36% compared to 30% in Q4 last year.

Finance expenses for the year totaled a net of NIS 310 million, NIS 47 million of which in the fourth quarter compared to NIS 147 million last year or NIS 16 million in the fourth quarter last year. This increase was mainly the result of interest and CPI linkage expenses resulting from higher debt level and higher inflation, partially offset by the absence of a former credit facility fully returned [ph] last March.

Net income for the year increased 13% to NIS 985 million compared to the NIS 875 million last year. Net income for 2007 included NIS 56 million net result of a tax provision. Excluding this one-time tax provision reversal in 2007, net income of 2008 rose 20.2% year-over-year.

Net income for the fourth quarter rose 32% to NIS 243 million compared to NIS 184 million in Q4 last year.

Basic earnings per share for the year totaled NIS 10.08 or NIS 2.48 for the quarter compared to NIS 8.97 in 2007 or NIS 1.89 in the fourth quarter last year.

Now, to our balance sheet and cash flow. Cellcom continues to have a very strong balance sheet and free cash flow. This year we generated NIS 1.22 billion in free cash flow, down slight 3% from last year, resulting from higher expenditures we charged in the fourth quarter following the implementation of number portability.

Free cash flow for the quarter was a healthy NIS 366 million, up 55% from the NIS 236 million in fourth quarter last year. During 2008, we invested NIS 556 million in fixed assets and intangible assets representing 8.7% of our total revenues.

Shareholders’ equity at the end of December, 2008, totaled NIS 342 million.

Now, to our KPIs. I would like first to remind you that Q4 is seasonal the weakest quarter given the Jewish Holidays. This year, all the Jewish holidays, characterized by lower usage, fell in the fourth quarter and mid-week. By comparison, the Jewish Holidays were spread between the third and fourth quarter. this was the primary reason for the weaker ARPU and MOU this quarter versus Q4 last year.

ARPU for the year totaled NIS 140 compared to NIS 150 in 2007. ARPU for the fourth quarter was slightly down to NIS 140 from NIS 148 in Q4 last year.

Average MOU for the year increased to 350 minutes from 348 last year. Average MOU for the quarter totaled 338, down from the 352 minutes in Q4 last year.

Moving now to our dividend, our Board of Directors declared a dividend of NIS 2.75 per share for a total of approximately NIS 217 million, 111% of our net income for the fourth quarter. Furthermore, on January 27th, 2008, we paid a total of NIS 1.3 billion out in dividend, including a one-time special dividend in March, 2008, representing a yield of 15% throughout 2008. As mentioned in the past, our dividend payments are note guarantees and our Board of Directors shall decide in its absolute discretion if and when to declare them.

With that, we have completed our business and financial review and I would like now to open the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator instructions) The first question is from Daniel Meron of RBC Capital Markets. Please go ahead.

Daniel Meron -- RBC Capital Markets

Hi Amos and Tal, congrats on a solid execution. Couple of questions. First of all if you can provide a little bit more color on what you see as far the macro impact on your performance and how should we think about as we move forward into 2009?

Tal Raz

Well, I mean I will start to – I will try to answer this question very, very shortly. I mean other than one I mentioned about the inbound-outbound roaming effect on our operation, at this stage we don’t see anything else.

Daniel Meron -- RBC Capital Markets

Should we be looking for a mild growth in 2009, a flattish outlook and how should we think about it when your competitor Partner just last week was talking about a pretty negative trend in 2009, declining minutes of use, and just overall looking for a down earnings year? If you can just give us some more perspective on that, that will be useful.

Tal Raz

Okay, I mean this will be also a short answer because, as you know, we don’t give any guidance. I can also say that we are not similar Partner at the end of the day. I mean there are some benchmarks, which characterize us together, but at the end of the day I mean you should look at each and every company differently.

Amos Shapira

Now, I would add, in my words, we can understand your desire to get more reflection about the future especially in this environment. And I would say especially in this environment we are very hesitant to give nay reflection about the future. And the only thing that we are – we can is what we see now and what we saw until today and this is the most exact thing that we can say that until now what we saw is effect on the roaming and this is it.

Daniel Meron -- RBC Capital Markets

Okay, got it. And then on Pelephone, can any – why is your reach so far from their launch about a month ago on your business if at all and on the overall market dynamics that you see right now?

Amos Shapira

At the moment, until now, from the launch of Pelephone, we haven’t seen anything that is unexpected. They invested a significant amount of money, so they are doing marketing initiative and which is very, very – which is very expected. Now, we – in a way, if I would like to say (inaudible) way if anything in the market -- didn’t have any change, when we didn’t have competitors that are doing from now and then initiatives then probably we didn’t have manager and management. Now, we took our initiatives in the day of – during the last year and also we are taking steps in many areas starting from the top line until the bottom line, which brought the result of 2008, and I can guarantee you that in 2009 we shall not slow down anything that we plan to do. So, of course, this is green color to the industry, but – and I can't say more than that.

Daniel Meron -- RBC Capital Markets

Okay, great, thank you. Good luck going forward.

Operator

The next question is from Scott Malat of Goldman Sachs. Please go ahead.

Scott Malat -- Goldman Sachs

Hi, thanks for the question. The data growth actually was very strong in the quarter. I was wondering maybe because could you talk about smart phones a little bit more in network, so not just 3G and smart phones, things that you’ve done fairly well with BlackBerrys for one. I think you said in the past that 3G phones have 25% to 30% higher ARPUs. Can you talk about the ARPU levels for smart phones, and then as we go forward, might it make sense for you to start increase the amount of subsidies on the smart phones to drive increased data adoption? Thanks.

Amos Shapira

Now, I can't tell you very specific about the ARPU growth per each grade of telephone or generally speaking of course now the smarter is the phone, the higher usually is the generated ARPU. The only thing that I can say is that what we are doing all the time is that we look further. We don’t have a goal, how many 3G phones we should have? The only thing that we have is a goal how much money we are going to make from this. So, we are looking all the time on how much additional revenue – how much additional or how much investment we are putting in migrating customer from one handset to another handset and then what is the expected ARPU. We also monitor all the time what actually we achieve in order to correct and to adjust our models accordingly. So, generally speaking, what you said about the higher ARPU is -- generally the trend is correct. I cannot give you specific number about every grade.

Scott Malat -- Goldman Sachs

Thanks. Let me ask more just on bucket minutes, I know it’s not a big driver right now and I just wanted to get updated as to what percentage of the business and consumer subscribers bucket minutes make up and how you think this might change? Are focusing more on that? Do you look at these as more defensive in a tough macro as you go forward?

Tal Raz

This is Tal speaking. Basically I mean we are not giving the numbers of how many (inaudible) we have buckets of minutes or whatever any other plan. But as I mentioned before, since the beginning of 2008 and even Q4 2007 we started to push as much as we can two plans. One of them was the second plan because we in 2009 we move to the second plan. We changed the basic charging interval from 12 – it was changed from 12 seconds to one second. So we moved as much as we can in order to mitigate the (inaudible) and of course the second plans are with a higher tariff, and the second plan that we pushed as much as we can whereas the bucket of minutes plan in which we are – at the end of day, we actually in deference [ph] to the change in basic charging interval, and that we did more cherry-picking session rather than going to the mass market. But other than that I mean we are not giving any other details on these plans.

Amos Shapira

Now, in order to clarify at this point, because you touched a very important point, which actually is on the driver of our growth and also to our profitability. When Tal talked about cherry-picking, I would rephrase it that we are using very analytical, deep analytical models in order—you know because bucket of minutes can be a generator of additional ARPU, which is the main goal. This is the major – the at most – the end of our operation. But also, if you – if the Company is not dealing with this in a very analytical way, then it can be also a method of losing revenue. So, we are doing it in a very selective manner after a deep analytical models what bucket to what customer we are offering. So, this is a very – this is what I call mainly – a hidden strength of our system, which you don’t see above the line. But this is a very strong methodology that we are taking and this is – I believe that this is one of the key driver of our improvement in our bottom line.

Scott Malat -- Goldman Sachs

Okay. Thank you.

Operator

The next question is from Alex Kuznetsov of ING. Please go ahead.

Alex Kuznetsov – ING

Good afternoon. Thank you very much for your detailed presentation. I have a couple of questions. First of all could you comment on the expenses – the bad debt expense this year so far? And secondly, what trend in MOU and what have you seen this year so far? (inaudible) though one of your competitors highlighted that (inaudible) variations have resulted in a lack of MOU expansion over last year (inaudible). Do you see similar trends?

Tal Raz

Okay. First of all, as to the bad debt, I can say – I can definitely say and we mentioned it in several other conferences and presentation that in the beginning of 2008 we started to see some weakness in collection. It was mainly the result of the fact that since number portability launched customers can switch from one company to another with that – with the same numbers and at the day the operators are not allowed to exchange any information about that. So, here we are losing one very, very strong area of collection and this is why we started to see the coming – coming up in 2008. The numbers are the – that’s expensive, increased in about NIS 25 million, which is, as you know, these over the years, which are numbers, which are not material to the Company, overall. And basically, as I mentioned before, we cannot rule out that it was not – that it is not maybe some detail that we see from the world’s crisis or something like this, but definitely this is a trend that we started to the see in the beginning of 2008. And we are very much related to the number portability and the number, just to correct myself, is an increase of NIS 35 million. Of course that is an information that you can find on the financial info.

The second question is the MOU and ARPU. So, as I mentioned before, the only effect that we see at stage, coming from the world’s global crisis is the fact that we see some decrease in roaming revenues coming from low incoming and outgoing tourists. Other than that, as Amos mentioned, we don’t see any other effect.

And just to put it into perspective, all-in-all roaming revenues are less than 7% of our total revenues. You can imagine that we are not losing all of our roaming revenues at the end of the day. So I think that this is something that we can cope with.

Alex Kuznetsov -- ING

I see. Thank you very much. Could you also share with us if you have any broad guidance for 2009? Do you have any probably a range for revenue and EBITDA (inaudible) mobile phones do you expect this year?

Tal Raz

Alex, we don’t give any guidance as we are long forward that’s all I can say at this point.

Alex Kuznetsov -- ING

Thank you very much.

Operator

The question is from Todd Chadrick [ph] of Banc of America Securities. Please go ahead.

Todd Chadrick -- Banc of America Securities

Thank you. Several of my questions have been very well answered, so thank you. My question was on the comment to – that you made on the low synergies that you see between mobile and landline. I just wonder whether you can elaborate on that, because obviously quite a lot of operators are looking at potential synergies and then an opportunity that arise after that. Just connecting pp thinking why you came to that conclusion?

Amos Shapira

Can you repeat please the second half of your answer because there was noise on the line please?

Todd Chadrick -- Banc of America Securities

Yes, you talked about not seeing synergies between mobile and landline and why you’ve come to that conclusion. What you are thinking is behind that and interested to know what makes you think that there potentially very few synergies there?

Amos Shapira

Yes, you know when you examine the situation or the physical infrastructure of the systems, synergies can be derived from the infrastructure and services and this – and sales and staff positions. When you examine the two -- the landline service infrastructure and the wireline – wireless infrastructure, there is no common infrastructure. All the Company’s infrastructure is negligible. When you – for example -- as an example – the cable Company, I can understand the cable company that enters the fixed line telephony, I can understand there is some synergy because you use the same cable infrastructure for the telephony. When Cellcom entered the fixed line to the business sector, there is a synergy because we leverage our infrastructure that reach the business centers. So we offer data transmission land line data transmission as well as fixed line telephony on the same infrastructure where this infrastructure is not reaching home – private homes, so we don’t have any synergy there on the infrastructure. This is the same, by the way, with ISP and infrastructure provider of the ISP. A customer cannot use an Internet service without infrastructure because in Israel the regulation divides these two services, which is not common in all the countries where you are coming from.

So, you –you can’t consume infrastructure of Internet without – and that service of the Internet provider. Now, where – when you examine the wireless and the fixed line services, there is no synergy. Now, there must be some (inaudible) synergies when you are dealing with management staff even with service. When you examine ISP service and mobile service, it’s not the same. They are completely different. So, you can't – even in the – on the most of the service. And then I am not mentioning that we as a wireless company are not reaching with our people to their homes. We have towers and we have headset and we have call centers and this is it.

Now, I don’t say that our business is simpler that (inaudible) is different. Now – and yes, there is a notion, by the way, a notion about the bundle effect, which I don’t believe in this when you deal with wireless and wireline. And when you bundle two things and I have a very long experience with bundle. By the way, I was also in my past in 2000 completely other industries and bundle was not created in the telecommunication. There is bundle in consumer, in fast consumer goods, when you buy – the (inaudible) buy one, get one free or whatsoever in the consumer goods.

On the aviation, I was the CEO of a (inaudible) you know you buy a room in the hotel and you get tickets, flying ticket. And from all my experience, when you bundle two services, where you have a synergy and you save cost, then this is one thing. So, there is a logic to make the bundle. When you bundle two things, and you create a better product, either because (inaudible) action between these product, then you get a better – you give a better product. But if you don’t have either as a cost saving or a better product then what benefit you give to the consumer. So if you just combine two things, where you are – is that are, two products that are in a competitive market, then just by combining them you don’t have – but by combining them you don’t have a stronger product. This is – I think that this is in a way hallucination. This is my belief.

And by the way, I don’t say that there is no at all zero benefit, but I believe that the management distraction that you get by entering to a business, which is by the way not in a fast-growing, and without any synergy it’s better to focus the management attention to your core business where – especially when that every – all the experts are predicting that the growth of the telecom will come from the mobile services. So, we prefer to focus on this.

Todd Chadrick -- Banc of America Securities

Good. Okay. (inaudible). Thank you.

Operator

The next question is from Anil Doradla, William Blair & Company. Please go ahead.

Anil Doradla -- William Blair & Company

Yes, thanks a lot. I have a couple of questions. The first one on the roaming. You definitely said the global impact on roaming is a decline and it was about 7%. You believe that it’s not going to be zero. But in you models, internal forecasts, can you walk us through a worst case scenario where you come out? And the second question I had was on 3.5 you are going to 4G. There has been a lot of talk about HSPA floods [ph] and LTE. Can you share with us in 2009-2010 what your plans for 4G and potential impacts on CapEx? Thank you.

Tal Raz

I will take the first question and the second I will give to Amos. As to the roaming, just to clarify maybe I said that the total roaming revenues of our total revenues is less than 7% and in the same token I said that we see some reduction in roaming revenues, but again this is – I think that this is something that we can cope with at that stage. We are not giving any guidance, as I mentioned about 2009 or going forward, overall, so I cannot say more than that at this stage. Amos, second question?

Amos Shapira

I will elaborate to the second question about fourth generation and what we are going to do in a very general manner in – and not specifically to Cellcom because of our limitation to deal with forecast and so – first of all, as – the best of our knowledge is that the bid for LTE, you know, the fourth generation in Israel will not take place before 2011. This the best of our – our best knowledge. Then what we are doing in the Company all the time is – especially in this uncertain environment in the telecommunication is that we try to learn what are our options. Even when we are not sure at the moment and when we examine is what is the best option because the industry is still learning.

Some – there were a lot of talking about WiMAX. In Israel and MIRS, which is a subsidiary of Motorola,-- entering – I just today read an article in the Israeli financial newspaper that probably MIRS is going – announced they are neglecting their intention to enter more WiMAX because I don’t know what are the reason but probably they learnt since that they – maybe we are not understand before. But this is the nature of our industry that we learn and then we come to conclusion. Now, what – according to what we learn that at the moment our HSPA system has a future to reach even to 40 megabits per second. At the moment, we reach – we deploy the seven megabits per second, which – even this faster than the speed elsewhere landline Internet that is provided to – that is at the moment most of the – in the majority of homes at Israel.

So, when you – and at the moment there is even not handset – (inaudible) mobile broadband devices that can reach through a mix [ph] with speed above seven. So, there is still a long way to develop with – to have development with our HSPA system. So, in a way you got the timeframe that we are talking about.

Anil Doradla -- William Blair & Company

So, would it be fair to say that given that the spectrum options are some ways away, can we expect Cellcom moving from HSPA to HSPA PLUS maybe?

Amos Shapira

When you say HSAP PLUS, what you are – can you explain a little bit what is it? This is the fourth generation?

Anil Doradla -- William Blair & Company

Yes, I mean there has been some debate within the industry whether they should go towards LTE, Long Term Evolution or just improve on the HSPA technology to a new technology called HPSA PLUS, and basically what it is, is just improve the modulation on the existing technology. So there has been some debate on that. But I just wanted to know whether you had any thoughts and if not that’s fine too.

Amos Shapira

I don’t know. We are assessing the situation all the time. At the moment, it will – our decision will be – we don’t know a lot of factors regarding the fourth generation. It seems but – without any guarantee – just it seems to me now that it will be more logic to exploit and to upgrade our current system rather than to go to something new. But if there will be something new which will be a big jump of abilities, in a very attractive cost then maybe we shall change our decision, but at the moment this the best as I can tell you.

Anil Doradla -- William Blair & Company

Thank you.

Operator

The next question is a follow-up question from Alex Kuznetsov of ING. Please go ahead.

Alex Kuznetsov – ING

Good afternoon. I have a couple of follow-up questions. First of all, do you see any implications from the change in the Israeli government on telecom regulations? And second, what regulatory developments should we expect this year and how they are going to impact your business? Thank you.

Amos Shapira

Can you repeat please the second question?

Alex Kuznetsov – ING

What regulatory development should we expect this year and how they are going to impact your business?

Amos Shapira

Regarding the government, I have difficulty to answer even question about my business. That is I don’t have all the information about the future. So I will not even try to say anything about the government so -- and what will be the impact, whatever will be the government. This is politics and so this is the best as I can say about the regulation. The government at the moment work is on the table is the process of MVNO and what else--?

Tal Raz

WiMAX

Amos Shapira

WiMAX policy and I think that this is the best that we know at the moment which was declared.

Tal Raz

Well I can just add, Alex, in 2008 that we successfully challenged some of the big tackles [ph] in regulation, one of them was interconnect then the next one was number portability in which at the end of the day we increased our market share, but we are not profit – I mean we can now go forward with it.

Alex Kuznetsov – ING

I see. And just one more follow-up question. Your data revenues are also rather impressive than your last year. Could you provide us with a breakdown of your data revenues by service and if possible if you have growth rates for each (inaudible) exact rate would also be helpful.

Tal Raz

Well, data revenues and I am not going to give you the split within the items because we have not published that but it – I mean there are two main items. The first item is the content, which the content is there from telephone two section. One is content providers and the second is the fees that we are charging each and every 3G on our 3G network. And the second large item of course is SMS. And as I reported before, we are very, very proud on what we achieved on the content. Just the last quarter we are showing a 42% increase in data and SMS and definitely this is the main revenue engine for us going forward.

Alex Kuznetsov – ING

I see. Our interpretation to provide the rough breakdown, not exact, but round – rough breakdown, what approximately part of your data revenue comes from content, what part comes from 3G, 3G and so on?

Tal Raz

No, we are not providing this information, Alex.

Alex Kuznetsov – ING

Thank you very much.

Tal Raz

Thank you.

Operator

The next question is from Rami Myerson of UBS. Please go ahead.

Rami Myerson – UBS

Hi, good afternoon, just looking at the numbers in the quarter, the MOU had dropped sharply even compared to previous quarter and would like to -- any information on that?

Tal Raz

Yes, Rami, this Tal. I am glad that you came up with this question. And it’s actually – there are three answer at once. First of all, as I mentioned before, in 2007 this Jewish Holidays was spread through Q3 and Q4, while in 2008 they are in Q4 and not only in Q4, but also in mid-week, which definitely took MOU down. The second point that I want to highlight is that at Cellcom we always take a calculated MOU based on minutes billed as opposed to actual minutes used by our main peer. And in this quarter, with the migration of users from minutes and 12 second plan to per second bill plan, we saw that the average billed MOU decline because of this shift. And it is important to know as opposed to this ARPU only marginally dropped as the second billings plans are in higher tariff and this very important to understand because this is how we are actually compensating on the gap and that – and in that case we are really so increased the revenue from data and landline, which almost totally compensated for the shortfall.

And finally, we have over the past year, we didn’t write off any customers in Cellcom whereas our peers have. Therefore the MOU is calculated based on a comparable basis for both periods and not the way that we are experiencing with our peers.

So these are the three points that it was very important to me to mention because I got a few questions over the day about this point and after we released the financials.

Rami Myerson – UBS

Thank you.

Operator

The next question is from Marsh Honesty [ph] of Merry Frank Sam Investment Management [ph]. Please go ahead.

Marsh Honesty -- Merry Frank Sam Investment Management

That’s an interesting name for a company. Yes, good morning or good afternoon. Let me just follow up on that MOU question – I have a couple of questions – but does that mean that the MOU because of the 12 second to one second change will mean all else equal that the MOU will be lower going forward.

Tal Raz

It means – yes, it means that the MOU will be lower from a technical point of view, but as you know, and as I mentioned before, we pushed the second plan over the two years, we pushed, as I mentioned, buckets of minutes. I will also, of course, say that in December, we took a proactive tariff up in order to compensate for this gap, and at the end of the day, yes we will see MOU going down, but it will have no effect on top line. And by the way we will take steps also when we are publishing 2009 number. We will compare April to April when we will show MOUs. So, at one end we will show MOU 2009 comparing to 2008 as is and on the other hand we will present actual to actual. So you will be able to see the real increase in MOU.

Marsh Honesty -- Merry Frank Sam Investment Management

Okay. Second question is what was CPI in the fourth quarter and what is it expected to be for ‘009

Tal Raz

CPI in the fourth quarter as much as I remember was about 2.5% -- in the third quarter was 2.5%; in the fourth quarter it was almost zero. And the estimation for 2009 at that stage and this is what the Bank of Israel released, is that inflation will be somewhere between minus 0.5 to 0.5, I mean this is the zone – this is the area.

Marsh Honesty -- Merry Frank Sam Investment Management

Okay, so we should – based on that complete estimates [ph] by the Bank of Israel the interest cost will benefit in ’09 versus ’08 pretty materially especially relative to the second and third quarter.

Tal Raz

Well, definitely. I mean 2009 overall we experienced inflation of about 3.8%. And we have a debt of NIS 3.7 billion. All this debt is debentures that are linked to the Israeli CPI and it definitely took a very active part in our financial experience in 2008. And definitely if inflation will be as predicted we will see a great reduction in financial expenses.

Marsh Honesty -- Merry Frank Sam Investment Management

The last question is what – there was a comment in the press release about potentially doing a debt issue. What would be the rationale behind that and use of those funds?

Tal Raz

Well, basically, as you know, we went down in net debt to EBITDA ratio. When we went to IPO in 2007 net debt to EBITDA was about 2.2. We went down today to 1.4. We believe that the company should be at the leverage somewhere between 1.5 to 2.0 net debt to EBITDA. As you know, the debentures are being spread on a very attractive yield. And basically we will – I mean if and any, we will go for this venue, we will use this fund for a general corporate purpose, refinancing of short debt, maybe continued dividend, and real working capital of the company.

Marsh Honesty -- Merry Frank Sam Investment Management

Okay, great. Thanks very much.

Tal Raz

Thank you very much.

Operator

The next question is from Richard Gussow of Deutsche Bank. Please go ahead.

Richard Gussow -- Deutsche Bank

Hi guys. In the past and I think you mentioned it before that you’ve been able to combat the regulatory measures with tariff hikes. Now given the slowdown and the fact that you are no longer allowed to raise tariffs during a contract and also increased competition, et cetera, do you thing that tool of raising tariffs will be limited in 2009?

Amos Shapira

Basically yes, because we are following the law. If I understood well your question, now the new contract that we are doing with our customers in the private sectors -- this is not valid the business sector – are limited, and we can't – during the contract period, which is 18 months, we can't raise prices. Now, there are other benefits that we – of course, we are not forced to sign contract with our customers for 18 months. We could have – if we thought that the benefit from -- and the reason that we are taking – by taking an obligation not to raise prices is higher than the benefit that we are getting from having a lower customer to 18 months then probably we would have done it. Now, there is another thing that is that probably after this regulation, the change the thing that triggered us to raise prices have probably -- also the regulator will not – we will be more hesitant in doing changes in regulation that might affect the contract between operators and customers during the period of what is called the retroactive change. So, this is long term [ph] considerations that I can give you at this point.

Richard Gussow -- Deutsche Bank

Okay, and also – and a different question, what you see as the impact of the depreciation of he shekel against the dollar in 2009 for equipment purchases, et cetera?

Tal Raz

Well, as I mentioned several times in the past, I mean on the equipment sales, and overall we are hedging about 70% of that against the dollar. We are a shekel Company. We are not taking any risk, and we are not going to any adventures. So, basically either depreciation or appreciation of the shekel against the dollar will do us just an insignificant. We are not coming from there. I mean it’s not something – at least I am trying to keep on the point that it’s not something that will have any effect on the business.

Richard Gussow -- Deutsche Bank

Okay. Thank you.

Tal Raz

Thanks.

Operator

(Operator instructions) There are no further questions at this time. Mr. Shapira, would you like to make a concluding statement?

Amos Shapira

Yes, and thank you very much. Thank you everybody for joining Cellcom Israel’s fourth quarter and full year 2008 earnings conference call. We are entering interesting times ahead and I look forward to hosting you again at our next call. Good day.

Operator

Thank you. This concludes the Cellcom Israel Ltd. fourth quarter and full year 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.

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