Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Partner Communications Company Ltd. (NASDAQ:PTNR)

Q1 2011 Earnings Call

May 25, 2011 10:30 am ET

Management

Gideon Koch – Manager, Revenues Analysis

Yacov Gelbard – Chief Executive Officer

Emanuel Avner – Chief Financial Officer

Analyst

Maura Shaughnessy – MFS Investment Management

Darren Shaw – UBS

Daniel Meron – RBC Capital Markets

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Partner Communications Company’s first quarter 2011 results conference call. All participants are at present in a listen-only mode (Operator instructions)

Following management’s formal presentation, instructions will be given for the question- and-answer session. As a reminder, this conference is being recorded, May 25th, 2011.

I’d now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please go ahead.

Gideon Koch

Thank you, and welcome to all our listeners, and thank you for joining us on this conference call to discuss Partner Communications results for the first quarter 2011. With me on the call today, is Yacov Gelbard our CEO, and Emanuel Avner, Partner’s CFO.

Our CEO, Yacov Gelbard is going to make a several statements, and then Emanuel will give a summary of our financial and operational results and outlook. We will then, of course, open the floor for 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 U.S. Private Securities Litigation Reform Act of 1995. Regarding such all forward-looking statements, you should be aware that Partners’ 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 25, 2011 as well as Partner’s prior filings with the U.S. Securities and Exchange Commission on Forms 20-F, F1 and 6-K, as well as the S-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 Statements 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 at www.orange.co.il.

At this stage, I would like to hand the call over to our CEO, Yacov Gelbard, Yacov please?

Yacov Gelbard

Thank you, and hello to our listeners. The results of this quarter reflect the impact of the reduction in interconnect tariffs, and the implementation of the new customer regulation which led to a further intensification of competition in the cellular market. The level of competition is expected to become even stronger in the future months, following the entry of MVNOs and two additional UMTS operators into the cellular market.

Over the past months, Partner had prepared itself in a number of areas for this new reality. First, we have strengthened our commitment to our customers by increasing the customer service workforce by 25% and we have also begun the process of upgrading our CRM and billing systems in order to improve internal efficiency and time to market.

Second, we have launched tariff packages, which include large quantities of minutes and data at highly competitive prices. Third, we have continued to lead the smartphone revolution in the market, by offering attractive deals for a wide variety of top-range handsets.

As a result of these actions, Partner enjoyed the highest number of net subscriber additions in the market this quarter, despite an increase in the level of churn. We are already seeing an improvement in the quality of customer service and reduced waiting time. We believe that our strategy is the right one at this period of growing uncertainty, for the long-term benefit of the Company and its shareholders.

In addition, this quarter, with the completion of the 012 Smile acquisition was in taken an important step towards the transformation into a comprehensive communication group. 012 Smile will enable us, as a group, to offer a wide range of residential and business communications products at the same time as improving operating efficiencies.

In addition, the upgrades of our existing networks and the deployment of the fourth generation LTE network will help us to differentiate ourselves from our competitors and will provide considerable added value to the experience of our customers.

Finally, I am proud to announce that, once again, Partner was recognized in a survey by The Marker magazine and BDI as the best workplace to work in among all communications companies and the second best workplace among all companies in Israel. The survey results reflect the company's commitment to its quality, very high quality human capital, which is the foundation for our long-term success.

With that said, I would like to hand the call over to Emanuel Avner, our CFO.

Emanuel Avner

Thank you, Yacov. As Yacov described, the results this quarter resulted from the double-whammy impact of the reduction in interconnect tariff, together with the intensified competition in the market. The reduction in interconnect tariffs reduced revenues by approximately NIS 250 million and reduced EBITDA by approximately NIS 100 million. The impact was inline with our forecast which we gave last year.

The increasingly strong competition in the market also impacted on revenues and expenses this quarter. The discounting that was necessary in order to recruit new customers and to retain our valid customers caused a reduction in ARPU, and operating expenses increased following the recruitment of additional customer service and sales representatives to deal with the increased number of customer requests.

The upside of this story was the proceeds from equipment sales increased by NIS 71 million in the quarter, compared with the first quarter of 2010. The majority of these sales were of smartphones and other high-end devices that will support revenue growth from content and data services in the future.

In addition, the fixed-line segment with 012 Smile included, provided the contribution to EBITDA of NIS 45 million in the quarter an increase of NIS 48 million compared with the first quarter of 2010.

Looking ahead, the negative impact of the reduction in interconnect tariffs and the increasingly competitive market conditions, I expect it to continue through 2011. However, we plan to mitigate the impact of the reduction through implementing efficiency measures, increasing equipment sales, and the profitability of the fixed-line services including 012 Smile as in this quarter, and through further growth in data and content services resulting from the continued increase in the penetration of smartphones, tablets and laptops.

The overall impact of the regulatory and market developments on the Company's profitability will therefore depend on the success of these steps and other factors, such as market conditions.

With that, I will now hand the conference back to the moderator to begin the Q&A. Please.

Question-and-Answer Session

Operator

Thank you, sir. Thank you (Operator Instructions) The first question is Maura Shaughnessy of MFS. Please go ahead, ma’am.

Maura Shaughnessy – MFS Investment Management

Good morning or good afternoon. Yeah, I’ve got a couple of questions, I guess in February when the termination fee went away and this competitive environment really kicked in, it was a bit surprising to me the level of competition, given the fact that we wouldn’t be seeing the MVNOs of the two new competitors until next year. And so, the question really is, when I look at your Partner’s results versus your two peers, clearly Partner was the most aggressive on the handset sales, and you can see that with the margins on your handsets relative to your peers.

And everyone can pump their chest on market share, but when it destroys the economic value of the subscribers by being so aggressive in the marketplace. And it doesn’t seem that that makes a whole lot of sense to me and it doesn’t benefit your shareholders at all. So I just, I'm really kind of confused as to what Partner is trying to achieve by just trying to get subscribers at any cost? That’s the question.

Yacov Gelbard

Okay, Yacov speaking. First of all, we don’t try to get customers at any cost. Pushing forward smartphones into the market enable us to increase stickiness of customers to the company and B, to increase ARPU by adding additional services based on data and video capabilities.

All the new recruits, customer recruits enabled us to improve our ARPU, improve our revenues, and looking forward the markets will get into a more competitive environment, increasing stickiness of customers is a tool, in a way to ensure your customer base. So that’s the strategy that we implemented and I believe that in the long run, it’s the right strategy in a growing competitive environment.

Maura Shaughnessy – MFS Investment Management

So when I see that the profitability of your handsets are in the 20s relative to your peers in the 30s, and that we all know what happens when handsets get materially subsidized and how the business model collapses. What, am I missing something there, I didn't see your…

Yacov Gelbard

I believe that you're missing because the market has changed. We don’t subsidize anymore customers. Customers are free to choose, which company to get services from. I can purchase a handset from Partner and theoretically move to another company to get its services from one of our competitors.

Likely it won't happen because usually we sell our handsets with a guarantee that if he will use it under our umbrella, he will get reduced tariffs. So it’s in the customer’s interest to stay with us after he purchase handset. But we don’t subsidize anymore, we did it in the past when we could get a commitment from the customer that to be with us for 36 months, and if not, he will pay us a penalty, a very high penalty. At that stage, we could and did subsidize. Now, in an open market, we don’t subsidize anymore and probably will never subsidize again.

Maura Shaughnessy – MFS Investment Management

And so it shouldn’t be surprising to us to see the level of competition post the termination fee when MVNOs and/or the new competitors weren’t even in the market place that that the market would be so disruptive as it has been in the last couple of months…

Yacov Gelbard

I believe that the MVNOs will target the very low segment of the market of the private sector. Pushing the smartphone as our main tool actually brings out some customers that are advanced in using new services, so the quality of those customers are highly more than customers that will move to the to the MVNOs environment. So the market is changing and probably it will be split again between the different operators. Our aim is to keep the best breed of customers in our customer base. We might lose some customers but those customers are usually called low tariff or low ARPU customers. And the cost of keeping them don’t always justify the effort. So the market is changing and we will have to adjust ourselves to that new market environment, and that’s actually what we have been doing towards the first quarter of this year.

Maura Shaughnessy - MFS Investment Management

Yeah, I just hope the long-term economics are considered and it’s not just about subscribers. But I’ll let other people ask the question. Thank you.

Jacob Gelbard

Gotcha, thank you.

Operator

The next question is from Darren Shaw of UBS. Please go ahead, sir.

Darren Shaw – UBS

Hi, good afternoon Yacov and Emanuel. I had a couple of questions. The first one is the trends in the first quarter of Partner winning market share and having a handset margin lower than the competitors. Do you see those trends continuing in the second quarter and in the second half? That's the first question. The second question is on the 012 Smile acquisition. Could you just give a comment on how that was going versus your expectation and guidance of an EBITDA number for full year? And finally, in terms of scope for cost savings, can you just touch on whether you've had any cost savings which have delivered in Q1 and whether you see more coming through, and when do you think they will come through? Thank you.

Yacov Gelbard

Emanuel

Emanuel Avner

Okay. First of all, about the trend of the market share, Partner was more active in the first quarter of 2011 compared to the other competitors and this can be seen by the number of net ads that we gained against the market and also the number of port in and port out that was this time, this quarter first time after many quarters it was probably for Partner. And this also a pushed the number of smartphone that we sold in the market and I believe that Partner will be also active in the next quarters in these terms although I believe that the pace will go down a little bit in the coming quarters.

Regarding 012 and our expectations, we expected EBITDA level of NIS 275 million included in our result this time is only one quarter, the EBITDA was NIS 23 million which is inline with one month, so it, which was inline with our expectations and that’s what we see right now. The other synergies will come only later on in this year.

About cost saving, I think we have to start saying that Partner prepared itself for this competition ahead. Starting from Q4 2010 we included more service and sales personnel because we have seen already that lowering the exit fees in the market will result in higher churn and in high turn over of subscribers among the all three operators.

And therefore we prepared ourselves for that. I believe that this pace of churn and turnover of subscribers from one company to another will slightly reduce along the year and I believe that we are capable to adjust our work flows and cost in the next quarters.

Regarding the cost saving that we had already in Q1 although we had an increase in salaries and in sales force as I described you can see the SG&A has not grown in Q1. And this is actually the fact that we had some saving in some other expenses in the company and I believe that we will have more in the next quarter ahead of us.

Darren Shaw – UBS

That’s great. Thank you very much.

Operator

Your next question is from Daniel Meron of RBC Capital. Please go ahead sir.

Daniel Meron – RBC Capital Markets

Hello, Yacov and Emanuel. Just wanted to see what other measures you may need to take in the next several months to adjust Partner's operations to the current market dynamics. It seems like you already addressed the contact center operations. What else do you have to do in the infrastructure side in the ongoing operations or marketing or positioning?

Emanuel Avner

Okay. I think that we can speak about maybe three issues. One is efficiency that I already described and I think that we can do much more in the quarters ahead. The other very large improvement in our Fixed Line segment, you can see that the Fixed Line segment contributed this time NIS 45 million to our EBITDA and this was an improvement of NIS 48 million. A NIS 23 million came from 012 and the rest, the improvement of the additional operating NIS 5 million came from Partner itself Partner’s Fixed Line business.

I think that this can be improved further on in the next quarters, and we will show a better profit in our fixed-line business. We understand that the profitability of our cellular services went down, and we will do our utmost in order to improve that by efficiency and by increasing our data and content revenues.

I think that we can do much more also in the side of improving the ARPU of our customers by shifting customers from (inaudible) giving much more quantity of minutes and estimates and data to the customers and increasing the ARPU of the customer by slightly more. I think that a lot can be done there also. And the third issue is, of course, of the smartphones and other handsets. We've seen that this is a growth engine for some quarters already. And I believe that this can be also a source of profit for the company for the next quarters.

Daniel Meron – RBC Capital Markets

Okay. Thank you, Emanuel. And then, the (Audio Gap) comfortable with the amount of leverage you've got on them all right now? I think it's about two times net debt to EBITDA, which is roughly in line with the industry, but how do you feel about that considering the slower free cash generation the next several quarters? Thank you.

Emanuel Avner

Yes, this time we reached almost two times of net debt to EBITDA. This is due to the fact that 012 was included only one month although the full debt of the 012 transaction is fully integrated in our balance sheet, and but in any case, I think the Partner will take as a target not to be more than two times of net debt to EBITDA or more or less in that range. And I believe this is a range that many other telecom companies believe that this is a range that they can live with, and I believe this is also true for us. So we must take into account that we will have positive cash flow from 012. 012 generates a very nice cash flow, so this also will give us the capability to, of course, to repay our debt.

Daniel Meron – RBC Capital Markets

Okay. Thank you.

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Koch to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S., please call 1-877-456-0005. In Israel, please call 03-9255-921 and internationally, please call 972-3-9255-921. Mr. Koch, would you like to make your concluding statement?

Gideon Koch

Thank you. This concludes the conference call of Partner’s results for the first quarter, 2011. We appreciate your interest and please feel free to contact us if you have any additional questions. Access to this call and to other valuable information on Partner is available through our website at www.orange.co.il. Thank you, and have a good day.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the Partner Communications Company first quarter 2011 results conference call. Thank you all for your participation. You may go ahead and disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Partner Communications Company Ltd CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts