Executives
Porat Saar – IR
Amos Shapira – President and CEO
Yaacov Heen – CFO
Analysts
David Kaplan – Barclays Capital
Daniel Meron – RBC Capital Markets
Michael Clark – Citibank
Cellcom Israel Ltd. (CEL) Q4 2010 Earnings Call March 15, 2011 9:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom Israel Fourth Quarter and Year-End 2010 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) As a reminder this conference is being recorded March 15, 2011.
I would now like to hand the call over to Ms. Porat Saar of CCG Investor Relations. Ms. Saar, would you like to begin?
Porat Saar
Thank you. I would like to welcome all of you to the conference call, and thank Cellcom Israel’s management for hosting this call today. With us here are Mr. Amos Shapira, our CEO; and Mr. Yaacov Heen, CFO.
Mr. Shapira will open by providing a summary of the main highlights of the fourth quarter and full-year 2010 results, 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 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 Israeli Securities Law of 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, 2010 20-F filed today with the SEC.
In addition, any projections as for the company’s future performance represent management’s estimates as of today, March 15, 2011. Cellcom Israel assumes no obligation to update these projections in the future as market conditions may change. You should have, by now, received a copy of the company’s press release. If you have not yet 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?
Amos Shapira
Thank you, Porat. Good day everyone, and welcome to our fourth quarter and full-year 2010 earnings conference call. 2010 was a strong year for us at Cellcom Israel. We attained record results for the fourth consecutive year, demonstrating sustained growth in all of our key financial parameters, including revenues from services, operating income, EBITDA, net income and free cash flow. This positive momentum continued in the fourth quarter of 2010, in which we presented our strongest fourth quarter results yet.
During this past year, we maintained our position as market leader and continued to increase our subscriber base. We ended the year with 3.394 million subscribers, an annual increase of approximately 3%, all of who were post-paid subscribers. Our 3G subscribers base, also increased about 14% reaching 1.14 million subscribers representing 33.6% of our total subscribers base.
In terms of company’s activity for 2010, in first year was – we executed several moves in order to help further strengthen our position. We successfully acquired Dynamica’s operations. Dynamica was our biggest distributor previously which have already contributed to our bottom line and had helped us retain and develop our distribution channels.
We continue to expand our landline services to business customers, for example by winning a tender from the Accountant General’s Office. Furthermore, we developed content programs which were successfully sold to international television operators across the globe, emphasizing our marketing innovation. In 2010, we continued to make efforts to improve our customer service such as increasing our customer service workforce and improving service processes. The results of these efforts were reflected in the fact the Cellcom Israel received the lowest number of complaints among Israeli cellular operators as reported in Israel Consumer Council and the Public Trust Organization.
This is a particularly impressive accomplishment given that we are the largest cellular operator in Israel. Finally, during the fourth quarter, we dealt with a network malfunction, for which we granted our subscribers with a refund in gratitude for their loyalty, and this is reflected in our fourth quarter and full-year 2010 financial statements. Cellcom Israel received and still receives favorable responses from our customers regarding our handling of the network malfunction, the transparency in interfacing with our customers and the refund we chose to distribute.
Turning to more recent events, yesterday we announced that we approached Netvision, an Israeli operator for providing internet services and landline, domestic and international voice services to negotiate a merger with them. This merger is now possible following a recent regulatory change which prevented such a transaction previously. We will make further enhancements about this proposed merger should we have any major news to report. In the meantime, you can refer to our press release issued on March 14 for more information.
In closing, I would – I want to thank our employees and management for the impressive achievements in 2010. I’ve always been a – I have always been and I continue to remain confident in their capabilities and determination in leading the company to success. As always, we are committed to continuing our efforts for the benefit of our customers, shareholders and dedicated employees.
With that I would like to turn the call over to our CFO, Mr. Yaacov Heen, for a review of our financials.
Yaacov Heen
Thank you, Amos, and good day to all of you. 2010 was a record year for Cellcom Israel, even when factoring the one-time effect for the full quarter, we saw a same growth across our peoples ability [ph] parameters for both, the quarter and the year.
Revenues for 2010 totaled NIS 6.6 billion, increasing by 2.8%. Within these, service revenue increased by 2.2% reaching NIS 5.86 billion and revenue from content and value-added services increased by 26%, making up about 19% of our service revenues. Revenues for the fourth quarter included by 1.4% reaching NIS 1.66 billion. Operating income for the year increased by 9.6% totaling about NIS 1.94 billion.
For the fourth quarter, operating income increased by about 6.9% totaling NIS 428 million. In 2010, EBITA increased by 5.5% totaling NIS 2.66 billion, and for the fourth quarter, it increased by 3.4% totaling NIS 631 million. And finally, net income for 2010 increased by about 9.2% reaching NIS 1.3 billion and for the fourth quarter, it increased by 17.7% totaling NIS 319 million.
When eliminating the one-off provisions, our 2010 highlights include 3.8% increase in revenues and 11.6% increase in operating income and the 14.6% increase in net income.
Turning to our KPIs. MOU for 2010 totaled 335 minutes compared with 331 minutes in 2009, an increase of 1.2%. For the fourth quarter, MOU totaled 342 minutes compared with 333 minutes in 2009, an increase of 2.7%. ARPU for 2010 totaled NIS 144 in line with 2009 results. In the fourth quarter ARPU totaled NIS 144, 0.7% increase compared with the fourth quarter in the previous year.
We continued to present a strong free cash flow. In 2010, our free cash flow increased by 8.4%, totaling a record of NIS 1.65 billion. Free cash flow for the fourth quarter increased by 55.7% and totaled NIS 422 million. This strong cash flow enabled us to distribute a dividend of approximately NIS 303 million representing approximately 95% of net income for the fourth quarter to shareholder.
Our total dividend declared for 2010 amounted to approximately NIS 1.4 billion or about 12% dividend yield for the year. Please be advised that the dividend declaration is not a guarantee and is subject to Company’s Board of Directors sole discretion. Looking ahead to 2011, although Cellcom does not give guidance, I would like to address the effect of the latest regulatory changes.
Last September, Cellcom Israel issued a press release regarding the estimated direct impact of the Interconnect Tariff Reduction, which went into effect as of January 2011. As of yet, our estimation has not changed. At the end of 2010, we executed several moves to mitigate the Interconnect Tariff Reduction including, improving our cost efficiencies and revenue enhancements. Simultaneously, other regulatory changes were implemented in our market in January and February of this year.
Among them, the reduction of the early termination fee. These changes produced a significant increase in customer to our call and sales centers as well in the market to best of our knowledge. We have already observed that the reduction of the early termination fee has resulted in both, increased acquisition and retention costs steaming from a materially increased recruitment and churn rates, although we don’t think this is unique to Cellcom.
As a result, we expect the net addition of subscriber for the first quarter of 2011 to be low, but we don’t expect these to have an adverse material effects on our results. And while it is too early to estimate the actual impact of this regulatory changes, on our market, we will continue to take steps in order to address these effects.
With that, I would like to open the call to questions. Operator?
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 David Kaplan of Barclays Capital. Please go ahead.
David Kaplan – Barclays Capital
Hi good afternoon everyone. Couple of questions, if you can talk a little bit about CapEx, post the network failure in the fourth quarter, where there any additional CapEx steps are going to be taken in 2011 as far as upgrade in the network, that we can think about, do you want me to ask one at time or all in once, up to you?
Yaacov Heen
About the CapEx, we don’t see any change between the yields. We are talking about close to 10% of our revenues. And we believe that we can continue with this guidance for the next coming year. As you know last year we invested more than – even more than our competitors, so we believe that there is no any material change between the years.
David Kaplan – Barclays Capital
Okay. You just mentioned now in your – in the last part of your remarks, you talked a little bit about the first quarter and net adds are going to be lower than expected, I guess is the best way to phrase it. If we think about the competition that’s been going on in the first quarter that we’ve seen in the market here and we look at the handset sales that Cellcom had in the fourth quarter relative to its peers in the market, can you tell us a little bit about what’s going on, I mean you touched on it when you talked about net adds being lower, but can you talk a little bit more tangibly on what’s going on in terms of pricing. And what’s going on with ARPU for those new customers?
Amos Shapira
I would answer this question, with the limitation of me to refer to the future. Now first of all what we said about the net adds is not lower than expected, because we didn’t give any guidance about our future. What we said is that the phenomenon which is we believe not exclusive to Cellcom but just because this makes sense because the change in the regulatory create – changed customers behavior. The customer that before the change have had an incentive to remain silence customers. Now they don’t have these incentives. So and these customers will part of the extra customers or the double or duplication of customers in the market.
This is one of the reasons why in the market there were more subscribers – significantly more subscribers than we had subscribers. So what we said that it will take some time until the market will cleanup these duplicated customer which doesn’t have any financial impact or not any significant impact on our financial impact on our results. This is just a change in behavior of the customer which have after [ph] change, the reason of subscribers.
Now about our total net adds, again there might be changes from quarter-to-quarter what – so in the total year, our net adds were quite in the average of the total net adds in the market, and just also full potential of what we said is that our net adds is total 100% all of them were post-paid, which is also something that you have to take. So I wouldn’t come to any conclusion about to the connection between what we said about the cleaning the markets from double phone [ph] double numbers of the customers to the number of net adds in the fourth quarter, which I would put excess emphasis.
David Kaplan – Barclays Capital
Okay. I also just add for the handset sales specifically, specific to Cellcom’s numbers for handheld sales [ph] what the rest of the market was showing. Is there any particular reason for that after subsidies or sell out of iPhones or anything like that?
Amos Shapira
I want to say – yes, we are aware to this change although finally our goal is not to sell handset. Our goal is to create profit. And as you see, we are the most profitable company in the market. And this is kept also this year which is a little bit different from the market expectation about 2010. So we kept our edge in profit. Now to the handset sales, the sales of the handset, most of them are actually the handset that you sell to new base – new customer base by upgrading the customer base.
What we are doing all the time is the calculation. How much additional revenue we get and how much we want to push in our handset. And when you for example in the fourth quarter, although with the growth of our handset, handset sales is lower than the growth of number two in the market, still our profit growth is significantly higher than we added more profit than number two by telephone by the way number three is a different story because telephone is still leading with upgrading and migrated customer from the older network to the new network.
So finally, we examine all the time our policy with our handset but finally we had to remember our goal is not to – our business is not to sell the handset, our business is to sell the – is to create revenue from our services. And this is what is important for us.
David Kaplan – Barclays Capital
Okay, thanks very much.
Operator
The next question is from Daniel Meron of RBC Capital. Please go ahead.
Daniel Meron – RBC Capital Markets
(Inaudible) start of net interest, just technical question. On the Netvision acquisition, can you provide us with some sense, if the deal does happen, when might it impact your numbers? And what is the expense of synergies that you’re extract on the top line or bottom line, can you just give us a sense on how this acquisition contributes to your business? Thank you.
Amos Shapira
I can’t give you any indication about how much time it will take, but we are – when we – so generally speaking, I might say that when we start and move, we are eager to conclude it as fast as possible. So I can’t add anything more than that, that I don’t see any impediments on the road because the regulation is there. So we can conclude the transaction quite fast in taking in consideration that it’s a process subject to due diligence and then negotiation between the shareholders and among the shareholders. So but I don’t see it as many months process. So this is the best that I can tell you right now.
Daniel Meron – RBC Capital Markets
And the synergies?
Amos Shapira
No. This is again I can’t give you any indication about the future. Few, of course that if we want to acquire Netvision, we see synergies otherwise we wouldn’t have bothered to waste energy in order to acquire the company. So how much? You’ll see in the future. We’ll do our best to exploit any synergy that might come from the transaction. I can’t – just with the limitation I can’t give you more than that.
Daniel Meron – RBC Capital Markets
Okay, understood. And then last part of the…
Amos Shapira
One thing more.
Daniel Meron – RBC Capital Markets
Sure.
Amos Shapira
Since at least we have a good reputation, how we are executing moves, take one as an example that we made last year, that we acquired Dynamica and which went well without wasting energy. And restarting the function of the company and our superior profitability along the years which actually even – our superiority increased along the years. So you might think it’s when we are doing something, we do our best in to exploit any synergy that we can take from the business.
Daniel Meron – RBC Capital Markets
Okay, thank you Amos. And then the next question for me, on the MVNO side, we’ve already seen some licenses, we still we think agreements made. So what’s your current take on MVNOs, has it changed in any way you were, I guess (inaudible) amount of impact that you’ll have on the markets and do you still think this is a benign impact on the business?
Amos Shapira
No, if you remember what they said in previous conferences. I said that I don’t believe in from the long-term sustainability and profitability of MVNOs in Israel, and as it happens in the world. Now on the short run, because MVNO is a business without reason, although I would say differentiate which it will be have more intelligence, (inaudible) business case or because if someone buys minutes or a product from someone else is selling to another one, this doesn’t create any added value or any advantage in the market. And this is the basic issue with MVNO. I don’t say that may be it doesn’t say that on the short-term, I don’t see that there will be a negative impact and that shake, but as a long-term phenomenon, I don’t believe that MVNO will be a major issue in the market.
As I said in different with a short-term because a new element which nobody know what was it exactly come into the market. So there will be a little bit nervousness maybe, but as I said, strategically this is not the major threat to the MVNO [ph] in the market.
Daniel Meron – RBC Capital Markets
Okay, thank you Amos. Good luck.
Amos Shapira
Thank you.
Operator
The next question is from Michael Clark [ph] of Citibank. Please go ahead.
Michael Clark – Citibank
Hi couple of questions for me. Firstly, Amos, in the past you’ve spoken about Cellcom being a mobile company. I know I just want to still ask you in terms of this Netvision deal, what the rationale for the deal is?
Amos Shapira
Yes, and I still you know, can say the same. Because this is a general idea, there is a saying about communication group or which implies mainly among the landline businesses, among the landline telephony, ISP, cable TV, because all of these businesses sit, operate on the same infrastructure. While, when you take mobile or the rest landline businesses, the synergy is more limited to the – when you compare it to the synergy among the landline businesses if I was clear what I meant.
Now it doesn’t say that there is no synergy at all between the mobile and the landline. Yes, between mobile operator and a company like Netvision. Whether or I said once that if such deals doesn’t are clear, does it put Cellcom in a strategic threat to our long-term survival? No, I don’t thinks so. Yes, it doesn’t say that if we can make the deal and if there is a synergies, whatever is the synergy that we can say in this competitive [ph] market environment that when we say, we are indifferent. Let’s say that there are synergies of I don’t know a couple of NIS 10 million just as an example.
Now I don’t say that this is a number. Yes, what I actually if I can make it. Why not to make it and to save this cost, although it doesn’t say strategically that the situation of Netvision or Cellcom, but if you combine and save these costs. So this improve your profitability and this is what we are up to. So yes, we are keen to make it, although as I say, if it doesn’t okay, if we put, it will not put us in a strategic threat.
Michael Clark – Citibank
Okay. That’s very interesting, so it’s not about the – some analysts, some journalists were talking – there is a lot of fresh talk about the consolidation of the groups and the opportunity in the fixed line etcetera but you’re looking at – you’re not looking about far ahead at this stage?
Amos Shapira
There are lot of slogans, yes about (inaudible) and all these. I am not very impressed from slogans. Finally, I am up to make business more and up to our competitive edge. If you remember, two years ago, when in a way we were criticized by not answering to the landline business in the private sector. Yes, and we were in a way criticized by analysts that said, you can’t because you have to be there. And I said no, I don’t have to be anywhere if I don’t see any reasonable chance to make money out of it. And I am not – and I also said that I am not – I don’t have to be in the private home, if I don’t have any advantage to be there. I want to be only in places where its profitable to be there and I can make money there. And after two years, at least the market sees that I made a correct decision. And on the same side, we did enter other business sector, why? Because there is synergy. And that synergy because I have infrastructure to serve the customers in the business sector, and this is again what I said about Netvision.
Yes, I want to make the deal because I can save some money, and there is synergies in the day to day operation. So in the competitive arena, I cannot be indifferent to these savings, yet as I said, if not put us in a strategic fact [ph].
Michael Clark – Citibank
If is in the timing, I mean there is a lot of changes going on in Netvision’s market than perhaps by the way you’ve seen maybe six months you’d have a better understanding of what’s going on the fixed market. If the timing – what makes you do this deal today?
Amos Shapira
Now, as I said, first of all there is no reason or not any reasonable why to wait. Because what can be changing the market is as I see it, is to the favor of this acquisition. Because at the moment we shall be – we shall have to keep separation between the ILD business and Cellcom. So we take it in consideration. Secondly, in the future, what might happen that even deceleration will be removed. Another thing is that it might affect to the positive.
Yes, the wholesale market of landline infrastructure that will be in post and basic [ph]. So and there is also other businesses, that maybe will be open to us like IPTV or other businesses which I don’t know today. But yes, it might some also negatives, but I don’t see any reason but this is in the nature of doing business, I don’t see any reason why to wait if I can save cost rather in a short-term.
Michael Clark – Citibank
Okay, thank you for that. My other question is on – you spoke a bit about the impacts of the MTR cuts on SACs [ph] and on net adds, but just we’ve seen from all the operators a big increase in minutes and a big declines in average prices per minute. And I was just wondering if you look how you’re in the market today in a three month since 2011, how much of less stability do you think is there in the market for these increases in minutes and these price declines?
Amos Shapira
Can you say again, repeat the question, I mean.
Michael Clark – Citibank
How much – we’ve seen big move to the bundles of minutes we’ve seen higher minutes of use and big declines in average price per minutes both year-on-year both that yourself and partner, I about 6% year-on-year declines. I am just wondering how much elasticity is there still in the market for increase in minutes for these bundles for increase in minutes of use?
Amos Shapira
I have difficulty to answer this question because, first of all it refers to the future, but of, course we can say that the elasticity decrease from year-to-year because especially when you are talking about minutes of use. But in many cases, we are surprised how much more customer can consumer minutes of use. So I can’t give you more indication that – as far as what you have is – what you have to look at is that our major goal is to increase ARPU and to get more money from the customer, I mean and this is our manual and the flexibility between the price and the minutes. I can’t give you better indication than what you see in our report.
Michael Clark – Citibank
Okay, thank you very much.
Amos Shapira
Thank you.
Operator
(Operator Instructions) 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 Fourth Quarter and Full-Year 2010 Earnings Conference call. I look forward to hosting you again at our next call. Good day.
Operator
Thank you. This concludes the Cellcom Israel’s Fourth Quarter 2010 Results Conference call. Thank you for your participation. You may go ahead and disconnect.
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