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Cellcom Israel Ltd. (NYSE:CEL)

Q1 2009 Earnings Call

May 26, 2009 10:00 am ET

Executives

Amos Shapira - Chief Executive Officer

Tal Raz - Chief Financial Officer

Fiona Darmon - CCGK, Investor Relations

Analysts

Daniel Meron - RBC Capital Markets

Anupam Palit - Jefferies

Alex Kuznetsov - ING

Richard Gussow - Deutsche Bank

Madu Kadali - Fertile Mind

David Kaplan - Barclays Capital

Scott Malat - Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom Israel Ltd. first quarter 2009 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)

I’d now like to 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’d like to welcome you all to the conference call and thank Cellcom Israel’s management for hosting the call today. With us on the call is Mr. Amos Shapira, CEO; and Mr. Tal Raz, Chief Financial Officer. Mr. Amos Shapira will open the call by providing a summary of the main highlights of the first quarter, followed by Mr. Tal Raz, who’ll 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 that in 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 in 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 risk 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 31, 2008, 20-F filed with the SEC.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, May 26, 2009. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change.

You should by now have received a copy of the company’s press release. If you have not received so, please call CCGK Investor Relations on 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 first quarter 2009 earnings call. Before opening the call, I would like to highlight the recent exciting achievement. Last week a non-profit organization that focuses on implementing fairness and integrity in business as well as promoting its users well-being, found Cellcom Israel to be the best cellular company in terms of service sales.

Cellcom Israel, Israel’s largest cellular provider, was noted as the cellular company with the lowest ratio of customer complaints and the best quality of customer care in the Israeli cellular market.

We at Cellcom Israel believe that there is a direct correlation between customer care, financial performance and our leading position in the Israeli market. I would like to start this call by thanking our managers and employees for helping us to earn this recognition through their ongoing dedication to Cellcom Israel and to our customers.

The third quarter of 2009 was another very strong quarter for Cellcom Israel, further cementing our position as Israel’s leading cellular provider in all aspects of revenue, profitability and subscribers.

This quarter, we continue to show improvement that caused all our key performance indicators, including operating profit, EBITDA and net income. This is in addition to continuing to grow our subscriber market share, while achieving the highest estimates in content revenue growth into local markets. Our very tight control of expenses further enabled us to expand profit margins to newer levels, while generating once again very healthy free cash flow.

Our ability to deliver sales growth performance in the current challenging climate is all mainly due to our strategic focus on our core business, cellular communications, delivering premium content in advanced, highly quality mobile internet. This is in addition to our decision to only enter new activities that show clear synergies with our core business, leveraging existing infrastructure such as landline communications to the business sector.

This clear strategic focus implemented by our experienced management team and that makes us to offer our subscribers a high quality of service, while keeping a very tight right on expenses. I believe these results are especially noteworthy, when taking into account the global economic recession, price erosions, growing local competition and increasing regulatory pressures.

Turning now to a word on the macro impact in the quarter; the environment only grew a limited impact on results this quarter, visible mainly through lower roaming revenues, following the slower inbound and outbound tourism, as well as the higher net debt provisions, which could be attributed to either the climate or to another probability.

Just to keep you a graph of the market, roaming revenues constituted roughly 7% of last year’s revenue. I am however pleased to note, that this weakness was totally offset by the increase in SMS content and value-added services revenues, which were the fastest growing in our industry. Our revenues for landline communications offered to the business community grew nicely this quarter and are one of our key growth drivers for years to come.

Despite the said impact in the quarter, we are very much monitoring [Marcon] situation. As visibility continues to clear, we continue to keep a very tight control on expenses, keeping our abilities to react immediately to any advanced development if necessary.

We at Cellcom Israel remain focused on our core areas of business, voice and data communications, as well as value-added services over our first HSPA cellular network. Cellcom Israel’s cellular network is characterized by both high speed and capacity, and we constantly invest in upgrading our network, steadily increasing the quality and speed of service we provide, in keeping with the developments in the handset markets.

Our strategic focus on our core business is supported by continued expansion into adjacent areas, where we have clearly identified, both synergies of the cost side in addition to a direct contribution to our business.

One such as example is the landline communications for the business sector launched in 2006, as well as the cellular router launched in 2008 targeting business distributors and as of 2009, private users as well. Both these exciting revenues that drive these services meet both targets defined. The leverage of our existing fiber-optic in microwave network is enabling cost synergies while immediately and directly contributing to all our world revenues.

As I noted in the past, we are already witnessing a break-through in the world of mobile media, with mobile phone as the focus device for being both, informed and entertained, being by our side 24 hours, seven days a week. We at Cellcom Israel, remaining true to our core expertise, believe we are in the best position to turn these strengths to our advantage, meeting the growing demands of this new ‘Everywhere Consumer.’ This is by supplying mobile broadband at the speed and rate, faster than the majority of landline internet subscribers today.

Looking ahead, we believe that the next stage in the markets growth will be driven by increasing demand for bandwidth, as this new type of user exploits the advantages of Cellcom Israel’s mobile network, always on with high speed and quality media. We at Cellcom Israel will continue to focus our attention and resources in developing and growing our core business and expertise, and launching new services that leverage our advanced network.

In addition, we continue to identify both complementary, various activity bearing true added-value in strengthening our competitive spending in the cellular space, while leveraging both our advanced infrastructure and broad customer base.

Our strategy continued to proves itself this quarter, as we once again increased our customer base, costing the $3.2 million customer mark. Further, we continue to focus on increasing our 3G customer base, reaching now to 26% of our total subscriber base. An exciting achievement, given that we only launched our 3G services less that three years ago, well after our nearest competitor.

This higher ARPU generating customer contributed to the rate code 36.5% increase in SMS content and value added services, highlighting the true benefit of these customers. This unprecedented increase mainly followed our ongoing investment in enhancing our cellular network, growing both speed and capacity, meeting the increasing demand for capacity and speed.

In summary, this has been another strong quarter for Cellcom Israel, mainly due to our continued focus on our core business, while constantly monitoring expenses. We continue to navigate in a turbulent climate, however remain dedicated to our core areas on expertise, further strengthening our spending as Israel’s largest and leading cellular provider.

With that said, I would like to now turn the call over to Tal Raz, our CFO, for a detailed review of our financial. Tal, are you ready?

Tal Raz

Thank you Amos and good day everybody. Revenues for the first quarter 2009 totaled NIS 1.66 billion, slightly down from the NIS 1.6 billion in the third quarter last year. As Amos noted, this is due to a 21% growth in low market handset revenues due to number portability in the first quarter of last year.

We are very pleased that despite the economic slowdown, ongoing price erosion and product competition, our revenues for service increased by 1.1%, reaching NIS 1.4 billion. Of this we are proud to highlight, that 36.5% increase in revenue is from SMS data and content.

SG&A expenses for the quarter totaled NIS 311 billion similar to last year. SG&A expenses this quarter were fully expected by an increase in bad debt, mainly as a souring for number portability. This increase could also be attributed to a slowdown of the Israel economy due to the global economic recession. This increase was entirely offset by a decline in the marketing and salaries and related expense.

Operating profit for the quarter was 4% to NIS 442 million, from NIS 424 million in Q1 last year. EBITDA for the quarter was 3% to NIS 611 million, from NIS 593 million last year. EBITDA margin for the quarter represented 39.1% compared to 37.2% in Q1 last year.

Finance income for the quarter totaled a net NIS 28 million, compared to a NIS 45 million expense last year. This finance income mainly resulted from the interest of 0.7% deflation as on company’s traded debenture, driving our financial income as opposed to an expand in the comparable quarter. Furthermore, we also recorded a hedging income partially offset by the lower interest income on our short term deposits.

Net income for the quarter increased 27.5% to NIS 348 million, compared to NIS 273 million last year. Basic earning per share for the year totaled NIS 3.54 compared to NIS 2.8 last year.

Now, to our balance sheet and cash flow; Cellcom Israel continues to have a very strong balance sheet and generates a healthy free cash flow. This quarter we generated NIS 393 million in free cash flow, compared to the NIS 71 million last year, which was below, mainly because of the substantial outflow associated with the implementation the number portability. During the first quarter we invested NIS 78 million in fixed assets and intangible assets, representing 6.3% of our revenues as of March 2009 totaled NIS 439 million.

Now to our API; this quarter we continued to grow our subscriber base with 21,000 net new subscribers, joining the Cellcom Israel family, most of which are post paid subscribers. This drove our total subscriber base to 3.208 million at the end of the quarter, a new record and once again, the higher [Inaudible].

In terms of growing 3G customers to benefit from our advanced HSPA network, this quarter a net of 102,000 subscriber signed-up for 3G services, bringing total 3G subscribers to 833,000 at the end of the quarter, most of which are post-paid subscribers characterized by high ARPU.

Average MOU for the quarter totaled 323 minute compared to 327 last year. Commencing January 1, 2009, the regulations require them to change the basic airtime charging unit from 12 seconds to 1 second. As a result of this, we have adjusted the comparable period average MOU in order to enable comparable analysis. MOU in this quarter was also affected by fewer working days, compared to the first quarter of 2008.

ARPU the first quarter totaled NIS 140, compared to NIS 144.5 for the third quarter last year. [Inaudible] lower roaming revenues, reduction in interconnect tariffs, fewer working days in the first quarter of 2009 as compared to the first quarter of 2008.

Moving to our dividend, our Board of Directors declared a dividend of NIS 3.33 a share, a total of approximately NIS 330 million; approximately 95% of our net income for the first quarter. As mentioned in the past, our dividend payments are not guaranteed and our Board of Directors shall decide and it’s up to its discretion, if and when to declare dividend.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Daniel Meron - RBC Capital Markets.

Daniel Meron - RBC Capital Markets

My first question is regarding the competitive landscape that you see right now, given the macro headwind. Have you seen more pricing pressure from your competitors, your packages and how do you deal with these right now?

Amos Shapira

Can you please repeat the question?

Daniel Meron - RBC Capital Markets

So, I wanted to get a feel for what is the competitive landscape looking right now, given the economic weakness? Are you seeing more aggressive moves from your competitors including Partner and Cellcom?

Amos Shapira

I don’t know, it’s really fair to the impact over the economic situation and we said that we haven’t seen anything else, but the drop in roaming revenues. Still there is growth in the total Minutes of Use roughly as we experienced before.

Now as to the competition, there is some movement in the market, which is very obvious after the launch of telephone. Telephone obviously came with a launch campaign which had predicted and we monitor all these activities very closely, but I wouldn’t see it change in the market; nothing that we couldn’t expect when we prepared ourselves in 2008.

Daniel Meron - RBC Capital Markets

Okay. As we look the roaming traffic, have you seen improved trends in the last few months since the end of the first quarter?

Amos Shapira

Not something that we can be very definite, no, not to any direction, because this is a very short time to analyze. So if you have, let’s say a good world activity in [pass-over], this is only a week, so you can’t make this operation any focused for the future, so no direction that we can make it.

Daniel Meron - RBC Capital Markets

Last one, you did have a good increase in data revenue and also in 3G upgrade. Is this a good sign that the underlying demand for your institutions from the subscribers remains pretty healthy? How would you characterize half of the additions? Out of the 20,000 that you added, how much was post-paid versus pre-paid and just a little bit on the query of the new additions?

Amos Shapira

As I understand, we didn’t disclose this distribution between postpaid and prepaid. I just can’t refer to this question, especially when our legal counsel is in the room.

Tal Raz

We said that most of these net of 21,000 were postpaid customers. We cannot relate to the fact of how much of them were 3G and how much of them were 2G, but definitely the focus of the company is still investing the main engine which is 3G and content and we are trying to push as much as we can; our customers from 2G to 3G, because these are the customers that are characterized by say, higher ARPU.

Amos Shapira

Excuse me; I would like a little bit to rephrase what Tal said. Our focus is not mainly on 3G customers. Let’s say it differently; our focus is to make money or to focus on customer that can generate higher ARPU. Yes, I can agree that the main concern is that there is an overlap between 3G customers and higher ARPU, but this is our focus, to make more money and when we plan to invest in upgrading customer, we examine all the time, what is the addition of ARPU and whether the investment is justified.

I want to say that we are not the market leader and the number of subscriber as you know, but we are the third in the number of subscribers, the 3G customers we are the third. We are behind the second one still. We were higher than day time SMS revenue than the second one and very close this quarter to be the first one in the market. So, this is due to our policy not to look at this on the financial side and not on the slogan side.

Operator

Your next question comes from Anupam Palit - Jefferies.

Anupam Palit - Jefferies

I just have a couple; first of all on the debt proceeds, do you have adequate cash flow to manage the financial operations. Were you taking off some incremental debt after the end of the quarter? I was wondering if you had anything in specific planned to the proceeds of that debt, bet it just to find your regular operations or potential for special dividend or an acquisition or for any new investments; I was just wondering how the management team was thinking about that?

Tal Raz

As we announced in the past, the debt was aimed first in the flow to secure the same dividend distribution as we distributed. It seems the company is a positive company since the beginning of 2007.

As we mentioned several times is the past, the company doesn’t not have any intention to grow the adventure out of Israel, to go and acquire companies around the world. We are going to use these new funds, again to secure the dividend and second to make sure that we can support the working capital of the company.

Anupam Palit - Jefferies

Just a quick follow-up, I know you’re not giving the specific numbers on the 3G, but can you talk generally about the differences in churn and ARPU between your 3G subscribers and your non-3G subscribers?

Tal Raz

We didn’t come up with this number. I can tell you that there was some generally in the market in total, not just in Cellcom. We are seeing an addition of several times of a percentage coming from 3G user comparing to 2G user, but of course as Amos mentioned, before the end of the day we want to gain these customers in order to get better ARPU from them, but other than that we are not providing any further details on that issue.

Operator

Your next question comes from Alex Kuznetsov - ING.

Alex Kuznetsov - ING

I have a couple of questions; first of all I see a very vast expansion in your rating from value-added services. Could you provide us the value-added services demand and its drives please? Could you also highlight what is your daily value-added services strategy that gives a strong growth of your major competitors in any material terms please?

The second question is on your EBITDA margin. You reported a [Inaudible] 59.5% EBITDA margin this quarter, do you think it maybe sustainable for your OEM? Thank you.

Amos Shapira

Now as to data, I’ll give you a general idea, because unfortunately we still haven’t found a killer application. So it comes from many areas, from music that still as you know where Cellcom is very much connected, at the structural and also reception wise and also in real terms to the music as we identified this area some three years ago and this was the correct move, because at that time technology didn’t enable, even with 3G, very high quality of video.

As the network improved through HSPA, today we can supply a good quality of a video. So, we now expand our HTPT more towards more sophisticated and more demanding areas like video and other applications.

One example that gives an idea about the quality of our video services, is the successful trial that we make, the [Teleshomae] Hospital in Israel where after some courses of trial we got the approval; of course not we directly, but the [Teleshomae] Hospital got the approval from the Helsinki committee to approve what is called Distant Medical Services.

We said that in the hospital, even when the expert doctor is not in the hospital, they use their mobile phone to make pictures and video and send it to the doctors that is somewhere else and the expert doctor is doing his diagnosis and helps the hospital make the treatment better. So this is one example of how we are moving ahead with our additional services.

Also the mobile modem that is growing very fast. The laptop, as we see today and I understand, also in other places in the world more laptops are sold than fixed PC’s. So we focus on these sales and now also another example is the router that we sell, we started with the sector and now we also supply it to the private sector.

Now, we always are focused on the advantage of the mobility. Now, when we talk about router, we decided not to enter the private sector with the fixed line phone, the communication, because we don’t have any advantage, any synergy in entering to the fixed line. So what we are doing is exploiting our network to supply router that can give connection to both the telephone and internet, while exploiting our cellular system, so this gives you a general idea.

Of course, another factor is the energetic atmosphere of our service system. We see service as once our utmost priority, but actually in fact, our service system is also our sales force. So what we are working on all the time is that our service system will see as part of its role, to increase sales and to increase share for it, and this is something that works both on sales and on service. It is our utmost success and so this is an ongoing task. The result as we see it has some trajectory.

As to your next question whether the EBITDA margin is sustainable, I can’t give you any indication for the future. The only thing that I can tell you is that as long as we are here, we shall not stop to make our utmost effort to maintain and maybe even to improve our result.

Alex Kuznetsov - ING

Can you address and provide any guidance on the EBITDA margin? Also asking a slightly different question, as far as I know, the transition to the top second is being to roll; could you estimate the impact on your financials?

Tal Raz

This is Tal. As we mentioned in the past, we took some step in light of the new regulation. About two year before we started to sell second plans in 2007, in order to mitigate this exposure. Then we started to push as much as we can back to minutes trend in which we are different to the charging into our unit.

Then in December we raised prices and that was in order to fully compensate for what we would have lost in this changing of interval. At the end of the day, other than some technical MOU calculation, there is not any financial impact on the financial result out of that new regulation.

Operator

Your next question comes from Richard Gussow - Deutsche Bank.

Richard Gussow - Deutsche Bank

My question is in relation to your market share. You seemed to have gained market share compared to your competition and if I’m looking for example at Partner’s results, your data revenues for example drove your service revenue. You had about triple the rate of data revenue growth compared to Partner.

I’m wondering if you could tell me how did you achieve that; is that just simply a catch up because you are a late entrance into the 3G market or is there something else behind it? Also I was wondering, in terms of also service revenues was this also a greater impact or lesser impact versus your competition in terms of roaming revenues?

Tal Raz

I would refrain to refer to our competitors. The fact is that, yes, we increased our revenue market share and so our total growth in revenue was higher and also our data revenue was higher, but I don’t know exactly what they are doing. So the only sad thing that I can refer to is what we are doing is as I tried to answer to the previous question.

In mobile operation, after all no operator has a tangible advantage. As you we are not producing the handset and we are not producing also the network. So what we are doing as management of the company is actually we work on many small things that altogether are creating the end results. So I cannot put my finger exactly on what we are doing the best, because as I said there are so many activities that we are working on. So, there is not one thing that I can put my finger on.

As I said, my utmost priority starts from service and also creditability to our customers. Now creditability to our customer is not actually a business goal; it’s actually from our management team and from our employees and I think that this is not something that we only lecture or preach to our system, but also take any measure that it will be implanted and executed with all our employees.

I feel that also it’s the best way and also the best possible way to make business and I think that our employees appreciate and also motivate them to do better in sales, because after all what we are aimed to, the end result is to increase sales and this is also referred to data sales and our other services sales.

Also what we try all the time is not to be hostage to any slogan or to anything, like to sell 3G handset. This is not our goal, but to examine all the time how we can generate more profit to the bottom line. I’m sorry, I apologize if this is a general question, but this is the best that I can say.

Richard Gussow - Deutsche Bank

In terms of handset subject going forward, it seems that the competitor environment is increasing, the telephones launch of the HSPA network. Would we expect to see maybe an increase in handset subsidies going forward?

Amos Shapira

I can’t give you any answer to this question, you can understand. Sorry, I don’t know. This is the real answer because I know that profits, both can be, I don’t know.

Operator

Your next question comes from Madu Kadali – Fertile Mind.

Madu Kadali – Fertile Mind

I’ve got a couple of questions. One, you had discussed about the lack of [Inaudible]. From this point I think iPhone, at least in the U.S. has became sort of a killer device and the application rolled out to some degree. Though it is still debatable whether it’s profitable for the carrier or not, I was wondering if you have view on that and if you have approached Apple for iPhone in this drop?

The second question is, I was wondering if you can comment on, if MVNO were to be with you, what would be the pros and cons for Cellcom? Thank you.

Amos Shapira

In anyway, I wouldn’t refer to any connection with Apple. So of course you can imagine that we learn carefully. On the iPhone, what’s happened with the iPhone in many countries? As we learned any significant phenomenon that happened in other places in the world, since everything can be as threat as an opportunity, so we try to prepare what we are aiming at. Our goal is to learn and to prepare ourselves as much as possible.

As to the MVNO, the MVNO is on the table in the regulation, in the Ministry of Communication for a long time. I don’t see a high probability for the success of MVNO in Israel. Still, this doesn’t say that we’re indifferent and we don’t prepare ourselves to the possibility of the entry of MVNO.

One can learn, what’s going on in other places in the world. In most of the cases, MVNO failed, and I can tell you that we prepare ourselves even to this possibility. I don’t see any room or any reason why MVNO in Israel will be successful. Since any new player in the market in order to succeed should have a reason why an added-value and I hardly can see any added-value of an MVNO in Israel, unless to talk a little bit about the possible added-value, starting from brand strength of another player. I hardly can see any potential player that can have a stronger brand than Cellcom or Partners or any other.

Second, distribution; the distribution system of the mobile operator which gives also the service to the handset and is well spread all over Israel as Israel relatively is a small place and highly populated all over the country. So I can’t see any advantage.

Niche or MVNO like let’s say there is in Germany; MVNO for the Turkish community. We are playing in every niche and see it’s a small market, so I cannot see any niche for an MVNO and now technology of course there is no chance for any advantaging technology and also added-value in cost.

I’m the producer, so I don’t see any chance for advantage in cost. Mainly, that if I will have to compete with MVNO so I have a fixed cost that still exists. So, why should I sell to an MVNO if I can sell, let’s say, if there would have been room for an MVNO then I would have established my own MVNO and sell to myself or under a different name and the reason that I didn’t make it I’ll give you an example.

When I was in the fast moving consumer goods, as you probably know I was a Director in Kimberly-Clark. So we had three new brands like clinics and RV’s and then we had a value brand like a local brand and we had also a basic brand for different segments, because we thought the day is a room for multi-tier strategy.

So believe me, I’m well trained and well experienced with this strategy. I just don’t think that in the mobile operation, there is room. So if there will be room for this, I will establish my own low-tier brand and play with it. At the moment, I don’t see it.

Madu Kadali – Fertile Mind

One more question on FOREX would be what’s the view of you guys in terms of foreign exchange? How do you plan for this? Based on the last call it looks like you are pretty neutral, is that still the case? Thank you.

Tal Raz

Cellcom is a shekel nominated company. All of our debts of shekel debentures that probably that are traded on the Tel Aviv Stock Exchange. On the other hand, we have some exposure to foreign currency, mainly US dollar that relates to handset and some CapEx acquisitions. Basically, we are doing some hedges against the CPI on their debenture and on the dollar spending; we are hedging around 70% of our exposure. In any event this is not an issue which is material to the company operation.

Operator

Your next question comes from David Kaplan - Barclays Capital.

David Kaplan - Barclays Capital

Just if we can talk for a second about the fixed line business in the business market, do you see any opportunities right now, especially given your recent bond issue where you raised some cash of potentially upgrading or spending your fixed line network and looking to gain some more market share in the business market there?

Tal Raz

As I mentioned before, there is not any correlation between the last debenture that we issued to CapEx spending. We generally stick to the guidance that the company is giving; that the CapEx will be less than 10% of total revenues.

As to the fixed line business, we actually have a unique advantage here due to the fact that this fiber-optic network was established years ago, and that time it was in order to say when transmission costs were between the cellular sides. Two years ago we have rented a fixed line and we are actually riding on top of this fiber-optic network. The last CapEx usually will be imposed on the end customer. So, what I’m trying to say is that we are not projecting any CapEx spending in relation to the fiber-optic network.

David Kaplan - Barclays Capital

You don’t currently report the revenue line for the fixed line business separately. So, if you can give us just a sense of what that business is doing; is it growing; is it sitting on the sidelines given the economic headwinds right now? What’s going on in that business?

Tal Raz

As we mentioned before, we see a great increase in this operation definitely year-over-year, but also quarter-over-quarter. We are not releasing the number because they are not material yet to the total operation of the company, but definitely I can say that it’s becoming one of the engines for growth in the company. Definitely if you will isolate the non-voice, the content data and fixed line, definitely it’s one of the most growing segment in Cellcom operation to-date.

Operator

Your next question comes from Scott Malat - Goldman Sachs.

Scott Malat - Goldman Sachs

I wanted to just ask about SG&A, it was up only I guess to 1.3% year-over-year and it’s not despite the higher bad debt expense, so obviously following what you’re saying in terms of tight expense control, I’m wondering if you can help size the increase in bad debt in anyway or maybe understand some of the underlying drivers of the rest of the costs cut that more than offset this pressure?

Tal Raz

Well first of all, as you know expenses were actually similar to the numbers that we have seen in Q1 2008. We didn’t show any growth on this numbers. Yes, in that number we have an increase in bad debt expense that we reported, but it was totally offset by some efficiency measure that we took during 2008. We are keeping on this efficiency measures all the time in order to keep the SG&A expenses low.

We cannot relate to the number of the increasing bad debt expense, but I can definitely say that out of the total expenditures of the company, this is not a material number and as you are seeing for the numbers in the first quarter, this is an issue that we can challenge and I hope that we will keep on challenging it in the future. In any event, it’s not numbers which are in the magnetite that can materially fix the financials of the company.

Scott Malat - Goldman Sachs

Can you remind us of your network upgrade plans, your timing and technology?

Tal Raz

As to the network, as I mentioned several times in the past, most of our CapEx today are just in only maintenance CapEx. We are still not seeing any 4G over the horizons. We stay with the same guidance and the same estimates.

Scott Malat - Goldman Sachs

The timing of LTE and when you guys think you would launch that?

Tal Raz

Actually nobody knows what is LTE exactly at that stage. In any event thereafter, the focus that we have seen on this, the newer technology is somewhere in 2011, 2010 towards. We still started work on that from this point and this is why I think that we are sticking to the guidance of less than 10% of total revenues.

Scott Malat - Goldman Sachs

Then just one more question. Just on handset subsidies, I had asked this before and other people are trying to get it in different ways, maybe this would help. I mean you obviously talk about the data opportunity in your remarks, which we would agree that that’s a big opportunity for your company and then as you look across Israel, the subsidies have stayed low and Smartphone penetration really hasn’t picked up in Israel as much it has in another countries.

So aside from the iPhone or anything, are you starting to see as you move forward on video and higher speeds and the devices are there, are you starting to see more regions financially to subsidize the Smartphone’s more than you have in the past, because the economics are now there? Thanks so much.

Tal Raz

So as for the subsidy level, we can see that in 2008 comparing to our 2007 subsidy level. It actually will cut in half, from about NIS 180 million to NIS 90 million. As long as the market behaves in the way that it’s actually working right now, I don’t see any reason to expand on subsidies. Of course I cannot say anymore than that.

Definitely within Israel, a trend that we are seeing more and more of a Smartphone getting into the market, like BlackBerry’s, Nokia E-71 etc, and definitely we are trying to push our customers to take this kind of handset, because they are generating higher ARPU for us and in some cases we are also subsidizing this Smartphone handsets; not in all cases, but in some of the cases, definitely yes.

Operator

(Operator Instructions) Your next question comes from Alex Kuznetsov - ING.

Alex Kuznetsov - ING

I just wanted to ask a follow-up question on the MVNO entry in Beijing. Do you think that one of the components acquired for specific MVNO implementation is active there in the network? Are you in a position to comment on the additional capacity in the network or first of all in the networks of your competitor that’s filed during peak hours?

Amos Shapira

Can you restate the question again Alex?

Alex Kuznetsov - ING

Sure. I just wanted to ask whether there is a significant space in your network and if you have the information in the networks of your competitors in Israel. I’m especially interested in knowing spare capacity during peak hours?

Amos Shapira

Well if I understand you correctly, you are asking if in peak hours we have enough capacity on the network to host MVNO.

Alex Kuznetsov - ING

Yes.

Amos Shapira

Okay, so in our 2G and 3G network, definitely they are state of the art network. We have enough capacity, I can say definitely, to horsepower customers and we have a very, very low rate of rough cost, but in any event related MVNO, this is something that we didn’t investigate yet and I must say, I think asked about the MVNO status from the availability point of view and the company point of view and I don’t think that the technical issue is if we have enough capacity on the network for MVNO yes or no is the most push out question in that case.

Alex Kuznetsov - ING

Can you touch on the EBITDA issues; could you let us know if you’re expecting major regulatory changes over the next 12 months?

Tal Raz

Well, we have a new Minister in place. Definitely he is learning the business. It will take him some times to learn the business, but we don’t know really what we did in the next step of the equilaterals. I can definitely say that after that stage that we usefully challenged the regulation issues from 2005, but again this is a question mark for us as well as is a question mark for you guys.

In any case, let me hit something. As probably you could understand from my last answer to this subject of the MVNO; that I don’t see MVNO strategic at the moment. As I see it today, I don’t see it as a strategic threat to Cellcom. Even if there is a threat, but as I said this is according to the analysis that I made before, but this in any case if it happens it will be a significant phenomena; yet we prepare ourselves to any scenario.

Alex Kuznetsov - ING

Is there any outlook on the license terms for MVNO providers within guidance from the ministry on how much operators have to pay for in MVNO licenses and will there be a revenue shrink in the payments?

Tal Raz

It looks like we are not on that stage yet.

Operator

Thank you. There are no further questions at this time. Mr. Shapira, would you like to make your concluding statement?

Amos Shapira

Thank you everybody for joining Cellcom Israel’s first quarter 2009 earnings conference call. We have 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 Limited first quarter 2009 results conference call. Thank you for participation. You may go ahead and disconnect.

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Source: Cellcom Israel Ltd. Q1 2009 Earnings Call Transcript
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