Partner Communications' (PTNR) CEO Haim Romano on Q1 2014 Results - Earnings Call Transcript

May.14.14 | About: Partner Communications (PTNR)

Partner Communications (NASDAQ:PTNR)

Q1 2014 Earnings Call

May 14, 2014 10:00 am ET

Executives

Gideon Koch -

Haim Romano - Chief Executive Officer

Ziv Leitman - Chief Financial Officer

Analysts

Tavy Rosner - Barclays Capital, Research Division

Alexander Balakhnin - Goldman Sachs Group Inc., Research Division

Michael Klahr - Citigroup Inc, Research Division

Liat Glazer - Excellence Nessuah Brokerage Services Ltd., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company First Quarter 2014 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, May 14, 2014.

I would now turn over the call to Mr. Gideon Koch. Mr. Koch, would you like to begin?

Gideon Koch

Thank you. Yes, thank you to all our listeners for joining us on this conference call to discuss Partner Communications' first quarter results for 2014.

With me on the call today is Haim Romano, Partner's CEO; and Ziv Leitman, our CFO. Haim Romano will first present the operational and financial highlights of the quarter together with an overview of Partner's strategic direction. Ziv Leitman will then provide a more detailed explanation of the financial and operational results of the first quarter. And finally, we'll move on to the Q&A.

Before we begin, I would like to draw your attention to the fact that all statements in this conference call may be forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended; Section 21E of the U.S. Securities and Exchange Act of 1934, as amended; and the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Regarding such forward-looking statements, you should be aware that Partner's actual results might vary materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in Partner’s press release dated May 14, 2014, as well as Partner’s prior filings with the U.S. Securities and Exchange Commission on Forms 20-F, F-1 and 6-K, as well as the F-3 shelf registration statement, all of which are readily available.

Please note that the information in this conference call related to projections or other forward-looking statements is subject to the previous Safe Harbor Statement as of the date of this call.

For your information, this call is being broadcast simultaneously over the Internet, and can be accessed through our website, orange.co.il. If you have any further questions following the call, please feel free to contact our Head of Investor Relations in Israel, Yaffa Cohen-Ifrahon on 972-54-781-4383.

I will now turn the call over to Partner's CEO, Haim Romano. Haim?

Haim Romano

Hello, everyone, and welcome to our first quarter earnings conference call. This quarter, market condition, mainly intense competition and price erosion did not change. This, again, impacted our service revenues. However, despite this market condition, we recorded this quarter an increase in our adjusted EBITDA compared to the first quarter last year. This improvement came from 2 factors. First, continuous effort to adjust our operating model and cut costs to meet our market reality. Second, commercial efforts by our retail division to grow our recruitment sales.

During the quarter, we continued to execute the strategic plan of the current management team -- that the current management team put in place. The strategical plan focused on 3 core values: An advanced and innovative network, quality of service and unique corporate culture. In light of the strong competition, we remain committed to invest in our innovative technology, our network, as well as our supporting systems. We are currently the only cellular operator in Israel ready to launch the 4G network, subject to the approval of the Ministry of Communications. We can immediately provide the most advanced 4G technology using the 5 megahertz frequency previously allocated to the company. This will allow us to be the first operator in Israel to launch a wide range of innovative services.

Our second core value, as already mentioned -- I mentioned, is quality of service. We have made a significant improvement in this area in the past years. Recent reports issued by the Ministry of Communications and the Israeli Consumer [ph] Council among others demonstrated partner leadership position in respect to the quality of service among the cellular operators. As such, recorded for the fourth quarter in the role -- increase of our Post-Paid subscriber base.

The third core value is the human capital. A report issued just last week ranked Partner as the best company to work for in the cellular market, with a significant margin from our competitors. This reflects our employees' trust to the company and the management team. We highly value the trust that we get from our employees and we look at it as a key success factor in our long-term growth.

We also are waiting for the regulatory decisions on 2 other matters. First, the approval for our network sharing agreement with Hot Mobile, and the second is decision of the regulator regarding the wholesale market. This decision, the wholesale market, will likely have material impact in our ability to expand our services and include television in our offerings.

As I mentioned in the beginning of my statement, our market realities continue to be challenging. We've remained committed to our core values and believe that the focus in investments in our customers, employees and innovative technology is the key factor for long-term success.

And now, I would like to turn the call over to Ziv Leitman, our CFO, for more details about the statements -- the financial statements. Thank you.

Ziv Leitman

Thank you, Haim. Before diving into the financial results, I would like to remind everyone that all the comparison I discussed in my prepared comments are to the fourth quarter of 2013, unless otherwise indicated. The intensified competition and price erosion, which Haim discussed, continue to drive the decline in sales revenue, partially compensated for by the growth in equipment sales. In the first quarter, service revenue decreased by 5%. The decrease was mainly explained by the intensified competition, which is driving down the cost to customer of the monthly unlimited plans.

Our Post-Paid subscriber base continued to grow in the first quarter by approximately 4,000 subscriber. This is the fourth consecutive quarter of growth in our Post-Paid subscriber base. The Pre-Paid subscriber base decreased by 24,000 compared to the previous quarter, mainly due to seasonal trend and the conduction of the Pre-paid subsegment of the market. The cellular churn rate grew, again, this quarter to 11.6% compared to 10.7% as a result of the intensified competition already mentioned. This is the second consecutive quarterly increase in the churn rate following 3 quarters of decline.

In line with the decrease in service revenues, ARPU decreased by NIS 4 from the previous quarter as a result of the intensified competition, as well as fewer workdays in the quarter and seasonal effect. Equipment revenues in the first quarter were NIS 227 million, an increase of 11% from the previous quarter. The growth was mainly explained by an increase in sales of tablets and the commercial efforts of the retail division which oversees this activity. Gross profit from equipment sales also improved this quarter by NIS 26 million, primarily reflecting improved margin on equipment sales.

On the expense side, the company continued to adjust its cost structure and to implement operational efficiency measures. In the first quarter, these measures, together with other item, including a decline in interconnect expenses, led to a decrease in operating expenses of NIS 14 million. As in previous quarters, operating expenses were also impacted by various one-time items, which, this quarter, increased the expenses. The number of employees on the FTE basis at the end of the first quarter was 3,826 compared with 4,045 employees at the end of the fourth quarter. Since we started implementing efficiency measures in the fourth quarter of 2011, the number of employees on FTE basis has been reduced by 55%. EBITDA decreased by NIS 8 million compared to the previous quarter, largely as a result of fewer cellular service revenues, which was partially offset by the increase in gross profit from equipment sales and the decrease in operating expenses. Finance cost in the first quarter of 2014 decreased from the previous quarter by NIS 14 million, mainly due to lower CPI linkage expenses and the one-time bank loan early repayment fee of NIS 8 million, which was recorded in the previous quarter.

Lower finance cost this quarter led to an increase in profit by NIS 6 million compared to the previous quarter to a total of NIS 52 million. Free cash flow, after interest payment, was NIS 139 million for the first quarter compared to NIS 209 million in the previous quarter. The decrease in cash flow mainly reflected changes in operating working capital, which decreased by only NIS 43 million in the first quarter compared to NIS 105 million in the previous quarter. We do not expect significant working capital reduction in the coming quarters.

Net debt, at the end of the quarter, amounted to NIS 2.85 billion. We continued our effort to reduce our debt level. And in April, we made another early repayment of bank loans in the amount of NIS 100 million. In the last 4 quarters, we have paid down debt in total of NIS 717 million.

I will now be happy to open the call to questions. Moderator, please begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Tavy Rosner of Barclays.

Tavy Rosner - Barclays Capital, Research Division

First question is on equipment sales and margins. We've seen a nice pick up there. Do you see this as a trend going forward or more as a one-time?

Haim Romano

No, it's definitely not a one-time. We started when we launched the new strategical plan that we call, Genesis, regarding the new division. And we saw at the last quarter of 2013, the results of it, and we see it as a sustainable growth. I'm not sure in this trend, but it will be a sustainable growth and we have intentions to develop this area, laboratories, fixing phones, and we see that customers are coming back. The trend that used to have -- used to be very popular in the last 2 years to go to buy in small shops. The trend now is changing and people are coming back to our shops to buy the new equipment and to get the support. So we think it's a sustainable one. So we have to work and do some more initiatives and see that the retail division will be something that we can rely on it for the long-term. But it's not one-time. Definitely not. We see it's reflected in this quarter as well.

Tavy Rosner - Barclays Capital, Research Division

That's helpful. And just the last one for me. Can you help us understand the finance cost. I understand the linkage [ph] to CPI. But, let's say, if we were to look at net-net effect, what would be a normalized level of finance cost on a quarterly basis?

Ziv Leitman

The total debt -- the net debt that we have is NIS 2.85 billion. So roughly on NIS 3 billion, you should assume between 4% to 5%.

Operator

The next question is from Alex Balakhnin of Goldman Sachs.

Alexander Balakhnin - Goldman Sachs Group Inc., Research Division

I had a question on the competitive environment. You mentioned that it accelerated in the first quarter. What do you think is behind this acceleration? And do you think there is a clear road map reducing the competitive intensity in the market? And -- I mean the small competitors reached their targets to some extent, the fight has been costly. Do you think this will be a temporary thing, which will be discontinued shortly? Or is that might be last for a little bit longer?

Haim Romano

What we see that every time that the market is coming down, Golan and Hot are losing customers, and they're losing the momentum. So they're -- then they try to stimulate the competition. So I'm not sure about their agenda, but what we feel that when the market is stabilized, Golan and HOT, they're losing more than they are gaining, and it's not the best time for them. So every time that the market is slowing down, you'll see Golan running out with a new initiative and throwing NIS 25 -- NIS 35 for unlimited package and such crazy initiatives like that. So we don't expect them to change their strategy in the short term. I think, my assumption, my private assumption, that they have a hidden agenda somewhere, but I don't want to speculate about it. I don't trust any rational -- I don't see any rational behavior from the side of some of the competitors, but I don't want to elaborate on that. I'm not an optimistic about the competition. And we have to take into consideration that they will do such an initiative, but in the other hand, we see that the core of our subscriber is quite stable. I think the price war is on the third or fourth level of the subscribers. You see the switchers, we call them the switchers. And unfortunately, in trying to maintain the market share, the price is going down for others as well. So we will have to consider, again, the strategy -- the pricing strategy of all our brands and see what will be the effective one. So there is market share versus ARPU as a classical denominator.

Alexander Balakhnin - Goldman Sachs Group Inc., Research Division

And I just may ask a quick follow-up question. So it doesn't seem the situation has a clear road map to the stabilization and improvement of the returns of small operators. But in the same time [ph], they don't seem to be ready to pull back. But do you think the situation in the market may change with the change of the customer proposition, in particular, if the markets transit to the LTE or 4G, do you think this may change the competitive environment, i.e., would you expand that in LTE proposition the market may be less fragmented than it is now?

Haim Romano

I think that's -- it might. There are 2 factors that can change the market. One is the LTE, and we believe that the LTE is a big issue. This is the reason that we invest in that, and we're trying to launch as fast as we can. And we are ready to launch as fast as we believe that the Ministry of Communications will give us the permits. And the second one is the quad offering. If we will be able to offer TV and while offering the fixed line and cellular and TV and ISP together, it can stop this dramatic turnover between the customers. So I believe that quad play and LTE together, with more, I think, attention to customer base, will stop this turnover. But I don't see it in the next 2 or 3 quarters. It will take time, but it will be there.

Operator

The next question is from Michael Klahr of Citibank.

Michael Klahr - Citigroup Inc, Research Division

A couple of questions. Firstly, on the equipment side where you obviously put a lot of effort in. Where -- in the quarters just gone, it was 17% of gross profit came from the equipment side. I'm just wanting to understand if you see that increasing as the year goes on? And if so, to where? Like what's your -- in your budget and in your plans, how much of the business or how much of profitability do you see coming from this business? That's my first question.

Ziv Leitman

Okay. You know that I can't provide you a forecast, but I can promise you that we will still do more efforts to increase our revenues in that area.

Michael Klahr - Citigroup Inc, Research Division

Okay. So it's going higher then?

Ziv Leitman

I will do everything to make it higher.

Michael Klahr - Citigroup Inc, Research Division

Higher. I don't mean in terms of absolute numbers, I mean as a share of your overall business.

Ziv Leitman

No, no, I can't comment on that.

Michael Klahr - Citigroup Inc, Research Division

Okay. And then my other question is, firstly, can you talk us through the cost impact of the network sharing agreement with HOT? Can you give us some rough numbers in terms of savings? And then also, I just wanted to ask about the -- you mentioned the entry into fixed and perhaps TV. I just wanted to ask, how ready are you to go there with products? So if you -- if everything is signed off tomorrow, how long does it take you to come to the market with the quarter [ph] and the TV product?

Ziv Leitman

Okay. Michael, in every quarter, I guess you ask me the same question and unfortunately, we didn't disclose the forecast of the benefit from the network sharing agreement with HOT and this is the common practice among the other companies that they have similar contracts. And we didn't see any example of companies that disclose in advance the forecast. But we did disclose the mechanism of sharing the cost. And the OpEx, as you recall, is divided, 1/2 of the OpEx will be 50-50. And the other half will be according to traffic. So let's assume the traffic is in correlation to the number of subscribers, so you can see it's roughly 25%, 75%. So altogether, the OpEx might be around 63%, 37%, the OpEx. The CapEx is 50-50. So you can make your calculation and have a rough idea of the potential saving.

Michael Klahr - Citigroup Inc, Research Division

Okay. And how much more CapEx have you got left for LTE in terms of the total cost that would cost you to upgrade?

Ziv Leitman

Most of the CapEx for the LTE was invested already. It's part of the numbers of 2012, 2013 and the first quarter of 2014. So it's part of our CapEx budget. We don't see any increase in the CapEx going forward.

Haim Romano

Okay. In respect to the TV, any other questions about that?

Michael Klahr - Citigroup Inc, Research Division

No, no, no. That's it. That's great.

Haim Romano

In respect to the TV, we understand that the offering should be a lean one and relying on disruptive technology. And this is the way that we are looking for. It's in the matter of months, not years. But the decision is go to a lean model, a good offering and using disruptive technology and the technology today in LTE and IPTV is running fast. And we're trying to catch the latest technology for that. And this is the stage that we are in, in terms of technology and the system. But, again, we're waiting for the Ministry of Communications to solve this wholesale market issue, because otherwise, it will be hard to find a good business model to broadcast linear movies or channels. So in one hand, it's on the hands of the Ministry of Communications. On the other end, we are now checking the latest technology, and there are some new technologies to come that will make the broadcasting much more efficient with a great quality, HD, of course, and others. So it's a combination of the two.

Michael Klahr - Citigroup Inc, Research Division

Okay.

Haim Romano

But no doubt, it will be very, very disruptive.

Operator

The next question is from Liat Glazer of Excellence.

Liat Glazer - Excellence Nessuah Brokerage Services Ltd., Research Division

If you could shed a bit of light about the wholesale market? When is the Ministry of Communications supposed to publish its final prices? Why is it being delayed? What issues are still being talked about?

Haim Romano

Okay. I want to ask you why is it being delayed and when it's going to be solved and then I wish I could give you an answer for that. I'm not to be addressed for those questions.

Liat Glazer - Excellence Nessuah Brokerage Services Ltd., Research Division

No, but do you feel as if there are issues that are still on the table regarding the wholesale market or is it because they have additional stuff such as the network sharing, the LTE and stuff like that?

Haim Romano

No. MOC is doing everything they can to slow the procedure and to avoid this also market proposal for being a reality here in Israel, as the stuff on [ph] other initiatives. So everything I would say, it will be a guess. It can be next quarter, it could be the end of the year, we don't know. But more than when, for us, it's more important what will be their decision because they can do it tomorrow with a bad decision. We prefer to wait for a good decision than to press and get a bad decision that will kill the business. But we don't have any idea when this situation will be solved.

Liat Glazer - Excellence Nessuah Brokerage Services Ltd., Research Division

Okay. And can you talk a bit about Smile, the length of the business landscape as far as competition, the erosion that we're continuing to see as far as prices, as well as profitability?

Haim Romano

In our fixed line business, we feel comfortable in the trends because we understand that in the private market, we are doing quite well. We have some challenges in the business market, but we sure -- we are sure that we will overcome them.

Operator

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Romano to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the U.S., please call 1 (888) 782-4291. In Israel, please call (03) 925-5904, and internationally, please call 972-3925-5904. Mr. Romano, would you like to make your concluding statement?

Haim Romano

Just thank you very much for your participation, and have a good day.

Operator

Thank you. This concludes the Partner Communications Company First Quarter 2014 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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Partner Comm. (PTNR): Q1 EPS of $0.10 Revenue of $316M (+3.6% Y/Y)