Cellcom's Q4 Beats Expectations

Mar. 3.10 | About: Cellcom Israel, (CEL)

Telecom operator Cellcom Israel Ltd.’s (NYSE:CEL) fourth-quarter net income grew 11.5% year over year, primarily driven by strong demand for content and value-added services.

The company reported earnings of NIS271 million ($72 million), or NIS2.75 (73 cents) per share, compared to NIS243 million ($64 million), or NIS2.48 (66 cents) per share in the year-ago quarter. The result also came in ahead of the Zacks Consensus Estimate of 69 cents derived from 5 covering analysts.

Total revenue logged a growth of 4.3% to NIS1.64 billion ($434 million) from NIS1.57 billion in the year-ago period. The increase was mainly the result of 1.5% increase in revenue from services to NIS1.45 billion ($383 million) coupled with a 30.4% growth in handset and accessories revenue to NIS193 million ($51 million).

The expansion in Cellcom’s service revenue was primarily the result of a 26.0% growth in content and value added services, including SMS, revenues partially offset by airtime price erosion as well as lower roaming revenues caused by a slump in tourism.

Cellcom added 33,000 net new subscribers during the quarter with total subscriber base reaching 3.292 million, while subscriber churn rate (turnover rate) improved 50 basis points ((bps)) to 4.8%. Average revenue per user (ARPU) for the quarter recorded a decline of 2.7% year-over-year to NIS143 ($37.9) mainly due to low roaming revenues and airtime price erosion.

Cellcom’s gross margin expanded 220 bps year-over-year to 48.3% as cost of revenues during the quarter remained essentially flat at NIS847 million ($224 million), compared to 848 million in the year-ago quarter as a drop in roaming expense and royalties to the Israeli ministry of communications was offset by higher equipment costs and interconnect fees.

Selling, marketing, general and administrative (SG&A) expenses increased 6.6% to NIS371 million ($98 million) primarily due to a higher sales commission, employee recruitment costs as well as increased bad and doubtful debts related expense. However, growth in revenue and gross margin more than offset the increase in SG&A. Consequently, operating income grew by 7.4% to NIS419 million ($111 million) from NIS390 million in the year-ago period.

In the reported quarter, Cellcom generated free cash flow of NIS271 million ($72 million), compared to NIS366 million ($97 million) in the year-ago period. During the quarter, the company utilized NIS223 million ($59 million) towards capital expenditure and NIS257 million ($68 million) towards dividends.

Meanwhile, the Zacks Consensus Estimate on Cellcom’s earnings for 2010 reduced by a penny over the past month to $3.04 per share as 1 of 7 covering analysts lowered expectation. At $2.94 per share, the most accurate estimate is even bearish and indicates a downside potential of 3.3%, compared to the Zacks Consensus Estimate.

Cellcom is a leading cellular provider in Israel in terms of subscribers, and offers a broad range of value-added services including cellular and landline telephony, roaming services for tourists and additional services such as, music, video and mobile office.