Cellcom Israel Ltd. (NYSE:CEL)
Q4 2009 Earnings Call Transcript
March 2, 2010 10:00 am ET
Porat Saar – IR, CCG
Amos Shapira – CEO
Yaacov Heen – CFO
Anupam Palit – Jefferies & Company
Darren Shaw – UBS
James Chase [ph]
Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom Israel Ltd fourth quarter and year-end 2009 results conference call. All participants are present in 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, March 2, 2010. I would now like to hand over the call to Ms. Porat Saar of CCG Investor Relations. Ms. Saar, would you like to begin.
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 are Mr. Amos Shapira, CEO; and Mr. Yaacov Heen, CFO.
Mr. Shapira will open the call by providing a summary of the main highlights of the fourth quarter and full year 2009, followed by Mr. Heen, 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 that in the 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 Israeli Securities Law 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 31, 2009 20-F filled with the SEC.
In addition, any projections as to the company’s future performance represents management’s estimates as of today, March 2, 2010. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change. You should have, by now, received a copy of the company’s press release. If you have not received so, please call CCG Investor Relations at 1-646-233-2161.
I would now like to hand the call over to Mr. Shapira. Amos?
Thank you, Porat. Good day, everyone. And welcome to our fourth quarter and full year 2009 earnings call. 2009 has been a fantastic year for Cellcom Israel. We achieved record results for the third consecutive year, as we demonstrated continued growth in all financial parameters.
Specifically, we strengthened our leadership position in the Israeli cellular market with the highest revenue and profitability, and we continued our growth momentum, representing the highest revenue operating income, EBITDA, net income and free cash flow in the company’s history.
On the revenue side, our continued focus on growth drivers led us this year to an increase of approximately 31% in revenues from content and value added services, representing 15.4% of service revenues.
Furthermore, our revenues from landline services to business customers also grew this year. Both of these revenue drivers leveraged existing infrastructure, which meets our strategy that complementary activities need to also be synergetic to our core business. These drivers also enabled us to offset the impact of reduced roaming revenues.
We remain committed to delivering appealing content and value-added services, viewing this profitable and fast growing area as a key element of our strategy. Notwithstanding, the average monthly revenue per subscriber decreased in 2009, compared with 2008 by over 3%, while average monthly minutes of use increased by approximately 1% reflecting the ongoing airtime price erosion in 2009.
Indeed, as part of our focus on these services, in 2009 we initiated innovative and incentive interactive reality show programs that were both Internet and cellular based. Widely viewed in Israel, we recently sold these programs to cellular content providers in other countries.
As regards to our focus, we will continue to direct our energies on cellular communication and its opportunities. There has been a profound change in how people are using their mobile devices with increased use of mobile Internet and content transfer.
This change is growing rapidly and we, at Cellcom Israel, remain focused on maintaining and leveraging our connection with the end-user in order to enable this development and increase our growth potential.
In 2009, we also continued to strengthen our position as Israel’s leading and largest cellular operator by enlarging our subscriber base. Indeed, we ended the year with close to 3.3 million subscribers.
Likewise, we increased our 3G subscriber base by 36%, reaching approximately 1 million subscribers and representing over 30% of our total subscriber base. We are constantly introducing new innovative and advanced handsets to support and satisfy the needs of this lucrative and growing 3G subscriber base.
This year we also continued to closely monitor expenses and maintain the deep efficiency measures implemented in recent years. These efficiency measures enabled us to achieve a record EBITDA, the highest in our history.
As always, we believe that a prudent and tight cost management is a necessity in times of global recession and heightened competition, while at the same time, we continued to increase our topline.
At Cellcom Israel, our goal of building a company based upon consistent and stable long-term growth leads us to focus on our core competency that of cellular communications. It also leads us to continue leveraging this competency by developing new businesses while taking advantage of cost synergies.
As we look towards the future, we continue to focus on cellular business by addressing the key trends of the Always-On Everywhere consumer. This dedicated focus on what we do best continues to prove itself quarter-after-quarter helping us to generate stable and consistent growth.
Indeed, we continue to monitor the dynamic changes in the local communications market in order to identify new business and growth areas. Our strategy to focusing on our core business continues to prove itself as we steadily increase revenues and profitability, achieve new records and provide our customers with quality service and the most advanced handset all while prudently managing expenses. We are committed to continue this path for our customers, shareholders and dedicated employees.
I would like to turn the call now over to our CFO, Mr. Yaacov Heen for a detailed review of our financials.
Thank you, Amos, and good day to everyone. Before I begin, I would like to note that we have published our annual report on Form 20-F with the SEC. You can download the file from either Cellcom Israel or the SEC website. Now to the results.
This has been a solid year at Cellcom Israel. Our record results in 2009 are the product of a 31% increase in revenues from content and value-added services, our ongoing efficiency measures and growing landline revenues.
These three positive effects compensate for the decline in roaming revenues attributed, among others to the macroeconomic environment and the decrease in airtime revenues attributed to the ongoing price erosion.
Revenues for 2009 increased 1%, totaling 6,483 million Shekels, compared to 6,417 million Shekels last year. Revenues for the fourth quarter of 2009 increased 4.3%, totaling 1,639 million Shekels, compared to 1,572 million Shekels in the fourth quarter last year.
Operating income for 2009 increased 4.6% reaching a record of 1,768 million Shekels, compared to 1,690 million Shekels last year. Operating income for the fourth quarter of 2009 increased 7.4% to 419 million Shekels, compared to 390 million Shekels in the fourth quarter last year.
EBITDA reached a record of 2,529 million Shekels for the year, increasing by 1.9% compared to 2,482 million Shekels in 2008. EBITDA as a percent of revenues totaled 39%, compared to 38.7% in 2008.
EBITDA for the fourth quarter increased 3.7% to 610 million Shekels, compared to 588 million Shekels in the fourth quarter last year. EBITDA for the fourth quarter of 2009 as a percent of quarterly revenues totaled 37.2%.
Financing expenses for 2009 totaled a net 219 million Shekels, compared to 310 million Shekels in 2008. The decrease was primarily due to gains from the company’s CPI hedging transactions.
For the fourth quarter, the financing expenses totaled net 58 million Shekels, compared to 47 million Shekels, due to higher expenses resulted mainly from the higher debt level which too increased interest expenses, as well as, higher CPI linkage expenses.
Net income for 2009 reaching a record of 1,182 million Shekels, compared to 989 million Shekels in 2008, an increase of 19.5% or 15.4% after elimination of one-time tax income as reported in our third quarter.
Net income for the fourth quarter of 2009 increased 11.5% to 271 million Shekels, compared to 243 million Shekels in the fourth quarter last year. Basic earning per share for 2009 totaled 12.01 Shekels and 2.75 million Shekels for the quarter. This is compared to 10.12 million Shekels in 2008 and 2.48 million Shekels in the fourth quarter last year.
Now to our balance sheet and cash flow. Cellcom Israel continues to show solid results. In 2009, we continued to generate a strong free cash flow, reaching a record of 1,518 million Shekels, an increase approximately 25% from the previous year. Free cash flow for the fourth quarter totaled 271 million Shekels, compared to 366 million Shekels generated in the fourth quarter of 2008.
In addition, during 2009 and the fourth quarter 2009, the company invested 663 million Shekels and 223 million Shekels in fixed and intangible assets respectively. This is compared to 633 million Shekels and 190 million Shekels in 2008 and the fourth quarter of 2008. Shareholder’s equity as of December 31, 2009 amounted to 374 million Shekels.
Now to our KPI, the churn rate in 2009 totaled 19.6%, compared to 18.9% in 2008. The churn rate for the fourth quarter 2009 totaled 12.8%, compared with 12.3% in the fourth quarter last year. Both annual and quarterly churn were primarily impacted by the churn of pre-paid subscribers characterized by lower contribution and subscribers with collection problems.
MOU in 2009 totaled 331 minutes, compared to 329 minutes in 2008, an increase of 0.6%. MOU for the fourth quarter of 2009 totaled 333 minutes, compared to 320 minutes in the fourth quarter of 2008, an increase of 4.1%.
The higher increase from the Q4 ‘09 to Q4 ‘08 is mainly attributed to the occurrence of the Jewish holiday season, which is characterized by reduced usage. In 2009, this holiday season was mainly in Q3.
ARPU for 2009 totaled 144 Shekels, compared to 149 Shekels in 2008, a 3.4% decrease. ARPU for the fourth quarter 2009 totaled 143 Shekels, a 2.7% decrease, compared to 147 Shekels in the fourth quarter last year. Both annual and quarterly decreases resulted among others from the lower roaming revenues and the ongoing airtime price erosion in 2009.
As in the past, we share our success with our shareholders and as such, we will distribute a dividend of approximately 257 million Shekels, representing approximately 95% of the fourth quarter net income.
Our total dividends distributed in 2009 amounted to approximately 1.2 billion Shekels or a 12.4% dividend yield for the year. Please be advised that the dividend declaration is not guaranteed and is subject to the company’s Board of Directors’ sole discretion.
With that, we have completed our business and financial review, and I would like to open the call to your questions. Operator?
Thank you. (Operator Instructions) The first question is from Anupam Palit from Jefferies & Company. Please go ahead.
Anupam Palit – Jefferies & Company
Hi. Thank you very much. You’ve indicated that you’re potentially looking at new business and new growth areas, and of course, you want to be focused on the synergies that you have with them with the core cellular business. But can you give us a little bit more insight into where you’re looking to invest in these new businesses and growth areas? That’s my first question.
And the second question, again you’re having very, very strong cash flow. You’ve got over 900 million Shekels of cash on the balance sheet now. As you look for 2010, how would you plan to deploy that cash, again, you’re probably going to have very strong cash flow, but is there opportunity to potentially increase the dividend, issue a special dividend or are there M&A opportunities for you in 2010? Thanks very much.
Now, I’m sorry that, Amos Shapira speaking, that I don’t have, I can’t be more specific about the area where we look for growth except the fact that it can be in every area that we think that we have an added value synergy or any other advantage, because actually these are the same words in different wording.
So, and because it’s very important to understand, because there are a lot of buzzwords, running, floating in our industry about what is actually our business, group of communication and some other. We are very proud that we made correct decision, as it seems at least now, where to enter, what business to enter and what business also not to enter. Now, as you know, we entered the landline in the business sector because we found there is a synergy. We have added-value because our infrastructure reached the industrial zone in Israel and our sales force reaching the customer, the business customer. It doesn’t happen in the private business and since we thought that we don’t have any added value, any advantage, not in costs nor in the product then we thought that our probability to succeed in entering to the private sector is very slim.
And this is only one example how we make our decision. Just to, we are very keen to reach to look to any possible business because – first of all because we have the energy. We have excitement to do it but as long as we feel that it is a business and not an adventure.
Now, another example is how we refer to the growth of the mobile Internet and with your permission I will broaden my explanation about this area. Now, it seems that, especially in the last – in the recent past, there is no doubt that the mobile Internet is the big story of the telecommunication business. As we learned from GSMA, GSMA was not the first year that it was not after devices, but after content after application because the mobile Internet is the future.
Actually, there is a saying that the mobile Internet will make – will do to the fixed Internet as the cellular made to the fixed telephoning. Now, so there is a big cake or central cake there in the mobile Internet. And when I say mobile Internet, it is not just a video or especially, I'm not sure you know that video will be the main factor. But actually applications that leverage the advantages of the mobile phone, the location based services, information that is needed on the go and other applications that leverage the advantages of the mobile phone.
Now, the question is who will take what share from this growing cake? And no doubt that iPhone or Apple showed that when you improve the user interface, then the customer is keen to use the mobile Internet. Now, of course, where there is a potential, there is also a risk. But what we are doing in Cellcom in these days is that we learn the new arena, the new competitive environment and we see it as an opportunity because we are very focused on the – on this segment, as you see.
We grew in the last year in core data and content more than double than our main competitor. And this is the only benchmark that I can make in this moment because we are focused on this area and we put all our energy on this growing segment. Now, we learn and we see. We learn how we are going to leverage our advantages which are our direct relationship with the end consumer, the mechanism of payment that a cellular provider is providing. Yes. There is a threat because a platform like the iPhone is putting the cellular providers in maybe in a more remote – inferior place. But as you probably heard, there are changes in the industry where mobile operators now unite in order to create their own platform for application and for other, as probably you heard. So there is a big change regarding the mobile Internet. And we are very enthusiastic in exploiting this growth.
We don't know and we are not sure what will be the end result of these changes. But we are putting our energy in order to see because this is exactly an example of an area where we have synergy, we have the know-how and it's exciting because of the magnitude of growth that is there.
Anupam Palit – Jefferies & Company
Okay. Sorry. I will hand over the second half of your question to Yaacov Heen.
About the free cash flow, you know that most of it we distributed, our formal dividend policy, 75% and we distributed about 95% of the net income. We don't see any changes in our strategy because of this year. This is the same strategy as we used the last year.
Anupam Palit – Jefferies & Company
Okay. Great. Thank you very much.
(Operator Instructions) The next question is from Darren Shaw of UBS. Please go ahead.
Darren Shaw – UBS
Hi. Good afternoon, gentlemen. I have three questions if I may. The first one is if you could just update us on the competitive environment amongst the three wireless providers. You talked in the press release about the – I think the pick up in competitive environment in the business segment. If you could give more details, perhaps, on the kind of pressure you're seeing. The second question is in terms of the increased data and the increased usage of data in iPhones, if you could just comment on Cellcom's ability to – in terms of capacity to deal with a huge move into iPhones. Will you need additional CapEx? What kind of arrangements do you have in place to deal with that? And thirdly is if you could just give us an update on the regulatory environment, I think there was something in the Israeli press today about talking about the regulator, the Telecoms Minister trying to maybe even close down his ministry and go independent. Maybe any update on the timing of MVNOs and any other issues. Thank you very much.
Okay. Amos Shapira speaking. Regarding the competitive environment, I'm very happy that there are changes in the competitive environment because otherwise it was rather boring in my job. But yes, one of the changes in the beginning of 2009 was the entry of Pelephone to the UMTS. In one side, you can say what actually happened. What Pelephone has today is something that telecom and partner has for many years. But this is not actually the case because now there is a new competitor that is more relevant to some of the customer that it was before, which is a change. How dramatic? I don't think that this is a dramatic change. And we saw along 2009, more tension of competition, mainly in the business sector because of the change in Pelephone.
As usual, I believe that this shake will consume itself as it always happens. At the moment, Pelephone has had an upside all it wants because of the revenue from roaming, which was – it was very weak until now. But as I say, we are in Cellcom, very alert to keep our market share, mainly market share in revenue and we couldn't detect in 2009 a major change. Yes. It cost us stamp in the service and in sales. But every year you could have detect a phenomenon, whether it was from partner, whether it was from Pelephone or from Cellcom that made an initiative. But this is life. This is not something that is dramatic.
This is an ongoing business that competitors are doing changes. And then we are doing our job in order to be ready for every change and to take the correct action. And as you see, when you look at Cellcom results in comparison to the player number two in the market, so you see that consistently year after year, we grow faster both in revenue and in profitability. So actually we strengthen our position as a market leader. Now, as to – if I understood well the question – I hope that this is the case. You asked about how we address the growing demand for capacity in our network. So yes, there is a dramatic – the growth for demand and for capacity and speed for – in our network. But also, there is a growth in revenue that are coming from this use. So it's from both sides and our challenge is to look all the time. And this is our – we are doing our business – is how much money we put and what customer we are putting on our network, using data. One of our fast growing businesses is the cellular modem. So what we are pricing the cellular modem in a way that will justify investment in broadening the capacity of the network. So this is an ongoing – another example, this is very similar in the methodology that we are working on is our revenue from data and SMS.
When you look at the numbers, you see that Cellcom is – in number of 3G subscribers is the smallest company in the market, where our revenue from data and SMS is equal to the second one – to the number one in the market. So actually, our revenue from every customer of 3G is the highest in the market because we don't have a goal to have the highest number of 3G subscribers.
What our goal is to have the highest profitability and the highest revenue in this priority and we look all the time, how much money we put in migrating a customer from 2G to 3G. And this is the same how we invest in our network in order to meet the growing demand of capacity. It is a challenge as it is in other places in the world. Although in our system, it's – we know what is the direction. Now, as to the regulation, maybe this is a more complicated issue to talk about because this deals with the government and with officers in the government and these are issues very hard to predict. So all what I say is my understanding as it is today – and for example, if you ask me what will be the next and when the next steps in MVNO, I don't know.
Now, basically, as you know, my opinion, I don't see the MVNO as a strategic threat to our business. I don't say that there are no scenarios, according to the decision that will be made by the regulator, that there will be a short-time damage to the industry. But this will be a short time and not a long-time damage. From reason that I can analyze it, there will be more questions about it. Now, other issues is the interconnect sphere, yes, another issue. This is on the table, the work is done. And this will not be the first time that such changes will be made, although the competitive situation is different than it was three, four, five years ago.
But as we say, what we – as a management team, we don't control what the government is doing. We try to affect the decision. But in the end of the day, our role is to see what are the possible scenarios and to be ready for every scenario that is possible for as I said, regarding MVNO. In spite of what I said about my assessment about the potential damage of the MVNO, believe me, that we have plans as to what to do exactly in every possible scenario. So this is – I think that these are the main issues. If I missed something, just ask me again.
Darren Shaw – UBS
Amos, you didn't miss anything. But if I could just go back to the question on the challenge from the growing demand for capacity and speed and network. And if I just look two or three years down the line when we have hundreds of thousands of more iPhone users in Israel and specifically on the Cellcom network, I mean, do you have – are you talking about a huge step up in CapEx or are you talking about not a huge step up in CapEx?
With all the caution that is needed when I – you ask to assess the future, as it seems today, yes, we don't see – we can't foresee a dramatic change in the percentage of our CapEx from the total revenue.
Darren Shaw – UBS
Great. Thank you very much.
I don't believe that this will be the case. But as I said, this is my assessment today.
Darren Shaw – UBS
Great. Thank you, Amos.
There are no further questions at this time. Mr. Shapira, would you like to make your concluding statements?
Yes. Thank you very much. Thank you, everybody, for joining Cellcom Israel's fourth quarter and full year 2009 earnings conference call. We have interesting times ahead and I look forward to hosting you at our next call. Good day. And have good Passover, Easter and so forth.
Thank you. This concludes the Cellcom Israel Ltd fourth quarter and year end 2009 results conference call. Hold on a moment, sir there is another question. Would you like to take it, Mr. Shapira?
Yes. We'll take it.
Thank you. There is a question from James Chase [ph], a private investor. Please go ahead, sir.
Yes. My question is the free cash flow for the fourth quarter of '09 was substantially less than it was in '08. Why is that the case and how does the free cash flow from the fourth quarter of '09 compare to the third quarter? And also, how does the dividend compare?
About the free cash flow for the fourth quarter, that is shifting between quarters generally when you look at the free cash flow and the overall picture, it's an annual increase of 25% year over year. About the fourth quarter, we have to increase the inventory due to the iPhone launch. So this is part of the expenses in this case that we have to pay. And we closed the year of 2006 and 2007 with the tax authority and for those two main reasons, we have a decrease in the free cash flow. But as I told you, it's just a shifting between the quarters and when you look at the overall picture, it's 25% higher.
But also, regarding the inventory that was generated by the launch of iPhone. This is also – seems not a long-term increase in our inventory. Of course, when you launch something new that you don't have history how to deal with it, then you take the safety net and now we are in a process of reducing the inventory. So we don't see it as a long term phenomenon.
Okay. As an individual investor from the United States, am I subject to the 20% withholding tax on my dividend?
Yes. Of course.
Okay. And the dividend is supposed to be $0.68 a share this quarter?
The dividend, approximately.
Okay. All right, thank you.
There are no further questions at this time. Thank you. This concludes the Cellcom Israel Ltd fourth quarter and year end 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.
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