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B Communications Ltd. (NASDAQ:BCOM)

Q2 2014 Earnings Conference Call

August 7, 2014 10:00 AM ET

Executives

Shaul Elovitch - Chairman

David Mizrahi - CFO & Deputy CEO

Analysts

Roni Biron - UBS

Katie Simon - Citibank

Tavy Rosner - Barclays Capital

Liat Glazer - Excellence

Unidentified Company Representative

Thank you, Lauren. Welcome everyone and thank you for joining us on the call today. With us from Bezeq Group’s senior management team, we have Mr. Shaul Elovitch, Bezeq’s Chairman and Mr. David Mizrahi, Chief Financial Officer and Deputy CEO of Bezeq. Before we begin today’s discussion, I would like to start with a brief Safe Harbor statement and then provide highlights of the second quarter results. Afterwards and Shaul and Dudu will answer caller questions.

Today's conference call and webcast contain general data and information as well as forward looking statements about the Bezeq Group. Such statements along with explanations and clarifications presented by Bezeq's representatives include expressions of management's expectation about new and existing programs, opportunities, technology and market conditions.

Although Bezeq believes these expectations are based on reasonable assumptions, these statements are subject to numerous risks and uncertainties. These statements should not be regarded as a representation that anticipated events will occur or that expected objectives will be achieved.

In addition, the realization and/or otherwise of the forward-looking information will be affected by factors that cannot be assessed in advance and which are not within the control of the Corporation, including the risk factors that are characteristic of its operations and developments in the general environment and external factors in the regulation that affects the Corporation's operation.

More detailed discussions of Risk Factors are included in the Company's periodic regulatory filings available for viewing on Investor Relations section of the Bezeq corporate Web site. Today's conference call and webcast contain partial information from the public reports of Bezeq under the Israeli Securities Laws for which the Hebrew reports can be accessed at the Israeli Security Authorities Web site at www.magna.isa.gov.il.

The call and webcast are not a substitute for a review of the detailed reports of Bezeq under the securities law and are not meant to replace or qualify them. Rather they are merely for convenience purposes with the understanding that the detailed reports are being reviewed simultaneously. No representation is made as to the accuracy or completeness of the information in today's call and webcast. This does not constitute an offer or invitation to purchase or subscribe for any securities and nothing contained herein shall form the basis of or will be relied upon in connection with any contract or commitment whatsoever.

Let me now provide some highlights of the group-wide second quarter 2014 financial results. As second quarter performance demonstrates that our financial strength, diversity of operations, advanced communication services and substantial investments in infrastructure continued to position us well in successfully addressing ongoing changes in the market. Our strong cash flow allows us to sustain a high level of investment in our infrastructure and maximize returns to our shareholders.

Group-wide revenues totaled NIS 2.25 billion, a decrease of 4.3% compared to the year ago quarter, primarily related to the decrease in revenues from cellular services due to the challenging competitive environment in the cellular market as well as lower revenues in Bezeq’s Fixed Line which were influenced by a decrease in fixed call termination rates. Fixed Line broadband continues to drive results with revenue from broadband Internet services up 7.5% to NIS 345 million.

Internet subscribers were 19,000 in the second quarter and totaled 1.31 million at the end of June. Group-wide EBITDA totaled NIS 1.55 billion, an increase of 45.1% compared to the year ago quarter. EBITDA margin for the Group was 69%.

Profitability metrics this quarter were positively influenced by the gains on the sale of Yes line and the amount of NIS 582 million. This gain was partially offset by the provision for the early retirement of Bezeq’s fixed line employees of NIS 117 million. As part of our commitment to return value to our shareholders, Bezeq’s Board of Directors recommended a NIS 1.267 billion cash dividend to shareholders, reflecting the distribution of 100% of the profits for the first half of 2014.

The semi-annual dividend which is subject to shareholder approval, would be payable on October 2, 2014. Moving now to some forward-looking financial perspective. We are reiterating our full year 2014 guidance and project, net profit attributable to shareholders of approximately NIS 2 billion, EBITDA of approximately NIS 4.5 billion and free cash flow of approximately NIS 2.5 billion.

Looking at on our financial calendar, I would like to point out that we plan a meeting with members of the financial community starting with an investor and analyst presentation this Sunday morning at Bezeq’s headquarters in Tel Aviv. Bezeq will also be presenting at the Barclays European Media and Telecom Forum in London on September 2nd and UBS Best of Israel Conference in London on September 3rd. We look forward to catching up with many of you in person. Please contact to me if you need any further information.

That concludes our prepared remarks. I would now like to open the call for questions and turn the call over to our Chairman, Mr. Shaul Elovitch and our CFO Mr. Dudu Mizrahi. Operator let’s take our first question.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions).

The first question is from Roni Biron of UBS. Please go ahead.

Roni Biron - UBS

Hi guys. Two questions from me. First, can you give us some update on the regulatory process around the wholesale market with everything that has been going on recently. I know it’s up to the MOC but from your perspective, when do you expect the second hearing and is it still reasonable to assume binding tariffs by year end?

David Mizrahi

Hi, Roni. And as far as we know, the MOC is expected to issue the second hearing within few weeks from now, that’s what we are hearing from them. We are awaiting feedback. There is some big changes in the model where they have to publish in second hearing. So, we expect it to be published within the next few weeks. And if that’s the case, we can expect the issue to be concluded by the end of this year.

Roni Biron - UBS

Okay. My second question is regarding the Fixed Line segment. It seems like the same trends continued into the second quarter. Broadband subscriber growth has been decelerating to some extent in recent quarters. Can you talk a bit about the competitive pressures that you are seeing and whether we should expect a further deceleration in coming quarters?

David Mizrahi

We will tell you, you are talking about the fixed line business, the broadband?

Roni Biron - UBS

Fixed line business and in particular broadband momentum going forward?

David Mizrahi

You could see in our numbers, we are currently still having a very positive momentum, recruiting most of the, almost all of the growth in the market as far as we know from first glance on the HOT report. It seems like they were on the zero recruit on this quarter. So, basically it is actually gaining market share for the last few quarters in a row. Our ARPU is still growing and we are expecting to continue this momentum.

Operator

The next question Katie Simon of Citibank. Please go ahead.

Katie Simon - Citibank

Hi, question please I wanted to ask. Can you give us an update on the Yes deal from the perspective of timing of course, if you still expect it to be closed by the end of the year and if you have any update on the discussion with the tax authorities regarding the deal?

David Mizrahi

As you know we are in the middle of the process, doing special board committee which have all the external directors and we are in the middle of the process. We expect to continue the process by the end of this year. I cannot provide any update currently on the negotiation with the tax authorities.

Katie Simon - Citibank

Thank you and a follow-up please. How are you going to pay for the deal? And given lower cash in 2015 due to this deal or any other things like higher CapEx for upgrading your network or the potential for spectrum cost, do you foresee any risk to the 100% payment, dividend payment of course?

David Mizrahi

Well, I cannot provide currently any information on how we are going to pay for the transaction. But the way we see it, there isn’t any reason to change the 100% of net earnings, dividend distribution and we are going to maintain this policy going forward.

Operator

(Operator Instructions). The next question from Tavy Rosner of Barclays. Please go ahead.

Tavy Rosner - Barclays

Hi everyone, I was wondering if you could provide some color on the mobile side perhaps on the competitive side that would be helpful.

David Mizrahi

Well there isn’t any significant change since last quarter. There is still very, very aggressive competition as you all know. We are seeing some relaxation this quarter, so ARPU declined slightly but still there is a very aggressive competition, market price is still very low. We’ve managed to reduce the churn rate and we’ve seen only NIS 1 erosion in ARPU but going forward we still expect to see very aggressive competition for the foreseeable future.

Tavy Rosner - Barclays

Do you expect ARPU to be impacted in the foreseeable future?

David Mizrahi

I think we can still expect further ARPU erosion. I hope it will be moderate, more or less of the same rate you have seen on the last quarter.

Operator

The next question from Liat Glazer of Excellence. Please go ahead.

Liat Glazer - Excellence

Hi. First question is regarding the mobile. When do you anticipate network sharing benefits to start? When we will see the cost cuts prior to that?

David Mizrahi

As you know, our agreement with Cellcom wasn’t approved by the regulator. So, currently we cannot share the network with Cellcom, the 4G network that we’ve planned to do. We can do some fast development network sharing but it will take few years to fully utilize that. So, we don’t expect to see big numbers coming from that in the near future.

Liat Glazer - Excellence

And the second question regarding the wholesale market, what market share would you estimate that the new players in the market will get, let’s say two years into the wholesale market and at what stage do you believe that government will allow structural separation with Bezeq International?

David Mizrahi

I cannot give you information regarding our expectations to competitor’s market share but what I can tell you is that as far as we know and I think that was also being said by the head of the Ministry of Communications, the rule of such integration is not really dependent on market share. It rely only on the ability to have or to connect customers on a wholesome basis and we expect to be very soon after the setting of the prices which currently is hearing. So, our expectation is that the overall structural separation will come few months after the setting of the prices.

Liat Glazer - Excellence

And this is only with Bezeq International, right?

David Mizrahi

No, no, I am talking on full group.

Liat Glazer - Excellence

On a full group basis.

David Mizrahi

Yes.

Liat Glazer - Excellence

Okay. And do you see any initial steps by Cellcom to enter the TV content market?

David Mizrahi

No, we don’t think, there was another PR few weeks ago other than that we haven’t seen anything on the market.

Operator

There are no further questions at this time. Before I ask Mr. Dudu Mizrahi to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In Israel please call 03-925-5900. Internationally, call 972-3925-5900. An additional replay is schedule to begin in the period of three hour on the Company’s Web site at www.bezeq.co.il. Mr. Mizrahi, would you like to make a closing statement.

David Mizrahi

Yeah, I would like to thank you all for taking the time to join us today. Should you have any follow-up questions, please feel free to contact our Investor Relations department. We look forward to speaking to you again on our third quarter 2013 earnings call. Thank you all.

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