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Partner Communications Company Ltd. (NASDAQ:PTNR)

Q4 2011 Earnings Call

February 22, 2012 10:00 am ET

Executives

Gideon Koch – Manager, Revenues-Finance Department

Haim Romano – Chief Executive Officer

Ziv Leitman – Chief Financial Officer

Analysts

David Kaplan – Barclays Capital

Michael Klahr – Citibank

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company Fourth Quarter and Year End 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, February 22, 2012.

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

Gideon Koch

Thank you. And thank you to all our listeners for joining us on this conference call to discuss Partner Communications’ estimated results for the fourth quarter and the year 2011. With me on the call today is Haim Romano, Partner’s CEO; and Ziv Leitman, our CFO.

Haim Romano, our CEO is going to open discussion with an overview of Partner’s strategy, then Ziv will cover our financial and operational results for the 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 call may be forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1932, 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 oral forward-looking statements, you maybe aware that Partner’s actual results may 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 February 22, 2012; 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 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 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 at www.orange.co.il. I will now turn the call over to Partner’s CEO, Haim Romano. Haim?

Haim Romano

Hi. Thank you, Gideon, and good morning everyone in U.S. and good afternoon to everyone else. Partner reports today the main estimates fourth quarter and full year results. The financial results for 2011 reflected changing market conditions, the effect of the regulatory changes, as well as increasing competition in the Israeli telecommunication market.

The tough market conditions required us to adjust our organization and to act accordingly while maintaining our assets and improving operational profit. We are now in a transition period, and we’ll have to take some measures and we do take them to attract the new market conditions. I’d like to take the opportunity and name few of them.

Our main focus is the customer. We have a long tradition of treating our customers as our main assets. We will continue to take all the necessary steps in order to protect (inaudible).

In the fourth quarter we started to implement a number of measures in order to improve our customer experience, which just started (inaudible) the offers to the customers by introduction of new packages named Orange Clear. That are simple and a straight forward packages, and we will now have more than 120,000 subscribers in the Orange Clear package.

During the fourth quarter, we began to reduce our level of workforce, as we mentioned in the last conference call with you. And at the same time, checking our operational efficiency measures to better address the new challenges.

With respect to the fixed-line segment, during the fourth quarter, the structural separations, which means the Orange brand and 012 was terminated. And we started the process of managing the fixed-line business or the businesses of Orange and 012 Smile.

We’re currently in the process of integrating most of the head quarter activities under one management, the management of Partner in a new management structure to maximize operating activities.

We are accelerating our investments, upgrading our network towards the 4G technology and as well as a fixed-line network. We expect that by the end of this year, approximately 1,500 cellular sites will be LTE ready. We continue to closely examine new growth engines.

Our long-term strategy is to provide an excellent customer experience that will differentiate us to a full high quality of network, outstanding customer service and innovative marketing initiative and professional help to channels. Putting all this together, during these coming years, we strengthened Orange’s position as a leading brand.

I’d like now to hand over the call to Mr. Ziv Leitman, our CFO.

Ziv Leitman

Thank you, Haim. The company is currently examining the development in the Internet Service Providers’ market, and the possible impact if any on the company and its results. In addition, the company is still examining the necessity if any of the impairment of intangible assets of the fixed-line segment.

As a result, the company is reporting at this time, the main estimated results and operating indication for the fourth quarter and for the year 2011. The final and complete results for the fourth quarter and for the year 2011 will be published towards the end of March 2012, at the same time the company publishes its audited financial report for 2011. You will appreciate that since we are only releasing the key estimated results and operating indices, so today my remarks will be limited to discussing the released results. I’m also going to focus my remarks on the quarterly results, rather than on the annual results.

Total revenue in the fourth quarter of 2011 were ILS 1.6 billion, a decrease of 10% from the fourth quarter of 2010. Excluding the contribution of 012 Smile, Partner’s revenue decreased by 25%. Service revenues for the Cellular segment totaled ILS 1 billion, decreasing by 29% from the fourth quarter of 2010.

This mainly reflected the impact of the reduction in interconnect tariff, which reduced service revenues by approximately ILS 278 million in the fourth quarter, as well as the ongoing price erosion following the increase in the intensity of competition over the last 12 months. Excluding the impact of the reduction in interconnect tariffs, Cellular segment service revenue decreased by 9%.

Compared with the third quarter of 2011, Cellular service revenue were mainly affected by seasonal factors and the continuing pricing erosion. The intense competition also affected our operational performance in the fourth quarter.

Our Cellular post-paid subscriber base decreased by 27,000, and the Cellular churn rates reached 8.2%. However, it is important to note that most of the churn consisted of the lower customers and the increase in the churn rates reflected an increase in the churn of pre-paid subscribers rather than post-paid subscribers.

ARPU was ILS 106 this quarter. This is a decrease of 12% compared with an adjusted ILS 120 in the fourth quarter of 2010. The decrease in ARPU compared with the third quarter mainly reflects seasonal factors and the ongoing price erosion. We believe that Partner’s ARPU remains the highest in the Israeli cellular industry, which is also reflected in the highest level of minutes of usage subscribers.

Cellular equipment revenues in the fourth quarter totaled ILS 294 million, a decrease of 9% year-on-year and a decrease of 22% from the third quarter of 2011. The decrease from previous quarter mainly reflected the fewer number of working days due to the Jewish holiday in October, as well as the delay in launching of the iPhone 4S to mid-December.

In the Fixed Line segment, sales revenue in the fourth quarter reached ILS 324 million of which 012 Smile contributed ILS 278 million, compared with ILS 341 million in the third quarter, this represented a decrease of 5%. The local fixed-line telephony subscriber base reached approximately 290,000 lines at the end of 2011; and the ISP subscriber base was approximately 580,000.

Turning to profitability, consolidated EBITDA was ILS 478 million in the fourth quarter of 2011, decreasing by 28% year-over-year, and by 10% from the previous quarter. 012 Smile contributed EBITDA of approximately ILS 51 million in the fourth quarter. The decrease in EBITDA compared with the fourth quarter of 2010 largely reflects the direct impact of the reduction in the interconnect tariffs, which reduced EBITDA by approximately ILS 109 million in the quarter, together with the cellular service [price] volumes and the decrease in equipment gross profit of ILS 22 million.

The decrease in EBITDA is also partially explained by the reduction in frequency fees of ILS 50 million that Golan called it in the fourth quarter of 2010 following a Supreme Court decision to accept a petition against the Ministry of Communication. The impact of these factors was partially offset by the contribution of 012 Smile. Compared with the third quarter, that was positively affected by the reduction of ILS 63 million in operating expenses, which included the impact of number of efficiency measures taken by the company.

During the fourth quarter, the company began the process of adjusting the level of workforce to a level appropriate to the company objectives, and the market conditions. These adjustments will impact the company results mostly in the year 2012.

Consolidated net profit in the fourth quarter of 2011 was ILS 132 million, decreasing by 67% compared with the fourth quarter of 2010. As we discussed in the third quarter results, tax expenses for the fourth quarter increased by approximately ILS 12 million as a result of a change in the future corporate tax rate.

And finally regarding dividends, the company’s Board of Directors will discuss the dividend distribution for 2011 at the time of approval of the audited financial reports for 2011.

That conclude my prepared remarks. Can I now ask the moderator to please begin the Q&A. Moderator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Michael Klahr of Citibank. Please go ahead.

Michael Klahr – Citibank

Hi, everyone. I’ve got a few questions. So basically can you give us any color in terms of the examination of the impairment, when you began to examine this more closely, i.e., did they happen after HOT’s entry into ISP or before that? That’s my first question. And some questions on the operational results.

Ziv Leitman

We have discussed the impairment testing totaled to the end of the year, and it will be concluded next month together with the final preparation of the audited financials.

Michael Klahr – Citibank

So can I – so you’re actually looking at towards the end of 2011. On what – given that I mean, EBITDA is perhaps slightly lower from 012 Smile than where it was previously but not materially different, so what caused you to begin to re-examine that valuation?

Haim Romano

According to accounting rules, one thing you must do, impairment testing for your intangibles, specifically goodwill, and we do it every year. So it’s not a surprise.

Michael Klahr – Citibank

But when you came today for this report, did you not know that those examinations are ongoing, and if so why didn’t you wait until March when that examination was completed to report your fourth quarter?

Haim Romano

As far as I know every year Partner release its audited financials by the end of March, as far as I know there were years, the 20-F was filed in April. So it’s not surprising towards the original date, but the audited financials will be finalized on March.

Michael Klahr – Citibank

So why are you doing this to pull now rather than waiting until and if release of the main data today, rather than just waiting to do it altogether in at the end of March, when you’ve got audited financials?

Haim Romano

We wanted to share with the market as soon as we have the financial figure, and the operational figures, we wanted to share with the market this number and not to wait till March.

Michael Klahr – Citibank

But in the past, I know you once said the, you want the company, but in the past when we saw the financials even when they came in February, that was usually the audited financials, so I just don’t understand what?

Ziv Leitman

As far as I know Michael, even last year it was not the audited financials. The difference is that, last year the company didn’t have the goodwill on the balance sheet since 012 was purchased just on March. So that field there was no issue of the impairment tax gains of trust in asset, this is the difference.

Michael Klahr – Citibank

Okay. So just another one sir, operationally can you tell us how many employees are at the company currently, and whether there you expect any change to that over that or what changes you expect to that number in 2012?

Haim Romano

Hi, it’s Haim. We can’t provide you now with the exact number, we will do it in a month from now. But I can tell you it’s 100. We have 100s of employees less than we used to have in the third quarter. And there the process is going and as we said before, you will see the full effect of it in the first quarter of 2012, and after.

Michael Klahr – Citibank

So we have – and even though you, according to my calculations you have your cash cost around ILS 60 million lower this quarter than they were in the third quarter, you’re saying, we are assuming revenues to equal going forward that we can still see further declines in cash costs into 2012?

Ziv Leitman

Michael, first of all this ILS 63 million, as I said, the total operating cost in the fourth quarter were lower by ILS 63 million compared to the third quarter. It’s not necessarily cash, part of it, it’s due to efficiency measure, i.e., employees and other operating expenses, and part of it is due to seasonality and revenue related.

Michael Klahr – Citibank

Okay. So the part which is related to the efficiencies, am I right, those are down and that we would expect to see greater efficiencies in the first quarter in 2012?

Ziv Leitman

This is a fair assumption.

Michael Klahr – Citibank

Okay. And are you able to give us any guidance of [license], example I’m looking at CapEx, which you didn’t disclose, I don’t think you’ve disclosed the CapEx for the year, but based on the first three quarters its been quite low this year, I’m just wondering, is there any reason to expect that to rise in 2012 or…

Ziv Leitman

We already gave guidance that the CapEx in 2012 are expected to be around ILS 650 million, while the CapEx in 2011 will be lower.

Michael Klahr – Citibank

Okay. And that’s mainly coming from the LTE upgrade or is there something else than that?

Haim Romano

Mainly from the LTE upgrade or the 3.5G upgrade, and the fixed-line upgrade, and the IT recovery.

Michael Klahr – Citibank

Okay. So then, can you tell me how much of that ILS 650 million is related to those upgrades and what the normal rate would be beyond 2012?

Ziv Leitman

Most of it will be related to the upgrades and after 2012 you will see a reduction in those numbers because we’re going to implement the previous plan of swapping our network into 3.5 and 4 generation, depends on the investment that we expect which we will have to invest in the license of the…

Michael Klahr – Citibank

Okay.

Ziv Leitman

Of the LTE.

Michael Klahr – Citibank

And then just lastly, and I’m sorry to be taking so many questions, but on the churn rate you mentioned there was a big difference in the churn rates on higher ARPU, I assuming post-paid customers versus pre-paid customers. Can you tell us what the, how much or whether there was a change in the churns for post-paid customers on Q3 and if so what the magnitude of that change was, was it meaningful?

Haim Romano

As I said, there is no change in the churn of the post-paid.

Michael Klahr – Citibank

Okay.

Haim Romano

Which means increasing the churns was in the pre-paid.

Michael Klahr – Citibank

Okay. That’s all from me, thank you very much.

Haim Romano

Thank you very much.

Operator

The next question is from David Kaplan with Barclays Capital. Please go ahead.

David Kaplan – Barclays Capital

Hi, good evening, everyone. I also have a couple of questions. Let’s start with the fixed line impairments, now you guys, you said you should be done with looking at those impairments and you said in the press release, if any of impairments. Do you have any sense at all you had right now, can you give us any guidance on certainty of that in fact being impairments or is it possible that there wouldn’t be one?

Haim Romano

Right now, we have no idea. We have no idea and we’re not sure that there will be impairments. Now it’s under testing and we take external experts to do part of the work and we have no indication whether there will be impairment or not.

David Kaplan – Barclays Capital

Okay. And my second question is actually on the operation side and the mobile side, service revenues were actually pretty much in line with expectations. How are you thinking about 2012 going forward, do you have any guidance or view on one of the new, two new network operators might launch services because it’s possible that could get percepts 2013? And do you think that 2012 from a disruptive pricing perspective could look like 2011 or do you expect it to be less severe?

Haim Romano

I think 2011 is a very strange year, because the competition wasn’t there. What we faced in 2011, and I mentioned it several times it was a direct early reaction – too early reaction from inside of the operations of the operators to a regulatory steps. 2012 is a transmission year. I said it before, and I really, truly believe in it.

I can’t see that, especially Golan will be able to start this action in 2012, but I’m sure that we’re going to see them in the year after. We do all the preparations as we need to go to strengthen our brand and the customer loyalty, tight competition. And actually the spirits, they are so low, but we can’t – where we can spend some time in the market.

So competition is here, and strengthened up between the three operators, and the engine nodes that are coming. And this is the reason that we are trying to find another engines as far. And we believe that the way of returning our customer base, and working hard to make our operations, operation of course more thin, if it is the right way to take a risk. And we feel that, in that respect we are on track.

David Kaplan – Barclays Capital

Okay. I will go on to the second, the next point, obviously that you just mentioned a newer or different growth engines, and if we think about the fixed-line segment and the ISP segment a little bit, obviously there has been a lot of noise this week locally about some of the new triple-play offerings by one of the competitors. I kind of want to know how do you look at the fixed-line network going forward taking into account the State Committee recommendations for either opening up the wholesale market or introducing infrastructure from the electric company, and some kind of initiative there. And how do you see that as helping you build-out your own fixed-line businesses as a third-party operator, that’s the first part of that. And I guess the second part of that is, do you view potential CapEx coming on your end from that, that would be beyond the ILS 650 million that you’ve talked about so far in guidance?

Haim Romano

The Ministry of Communications understands that there is some actions that you must take. They’re now talking about several actions like retail minus until they will implement this full monthly plan of customers and actually hold the higher tier programs.

We don’t wait for them; we try to find another solution with other players in the market like Bezeq, and I can’t obviously elaborate on that, but we have some – from our point of view, we have some good answers to what they’ve done. One of the answers is going to their field and introducing the IPTV, and we look seriously at this field as opportunity and engines of growth. We think that it’s more interesting today than ever. We can’t see how can we increase our CapEx this year, when you don’t see a need for that, mainly OpEx related problems.

David Kaplan – Barclays Capital

Okay. Then if I think, actually the…

Ziv Leitman

David, David.

David Kaplan – Barclays Capital

Yeah, go ahead, sorry.

Ziv Leitman

In order to be more specific to your question, regarding the wholesale market at this point we don’t think that the NLU model will be implemented, we don’t think that the LLU model is practical for the Israeli market. We think it’s more practical, but it will be, as Haim said wholesale market according to cost plus or retail minus. And not LLU, which require some CapEx to model both.

Haim Romano

And regarding to the electricity company we issued there, it’s a very interesting initiative and support the Ministry of Communications trying to implement it, and we hope it will be implemented in the future. But it’s not the only way for us, we have another alternative, walking with Bezeq and others as I said before, contract operators there.

David Kaplan – Barclays Capital

Okay. I guess could you, can you give us some sense of the 012 ISP customers, what percentage of those are on ADSL versus what percentages of those are on cable?

Ziv Leitman

60% of them are on ADSL today, but I’m not sure about it, it’s…

David Kaplan – Barclays Capital

Okay. And then, then just one more last quick question going back to the mobile side, the equipment sales and we know those were impacted by the delay of the iPhone in the fourth quarter, but now that those sales have taken place. Do you have any sense of what kind of the recovery in the first quarter would look like or do you not yet really have any good view on that yet?

Haim Romano

It’s too early to comment.

David Kaplan – Barclays Capital

Okay. Great, thanks.

Operator

(Operator Instructions) The next question is a follow-up question from Michael Klahr of Citibank. Please go ahead.

Michael Klahr – Citibank

Hi, can I ask – what’s the company’s response to HOT, Century and to the ISP market with this ILS 20 offer? How will you be reacting to that?

Ziv Leitman

We have an offer that we actually implemented, like three months free and then 25% discount. We got this offer from Bezeq, and it’s a great answer to the offer of HOT. And every customer that asks for a solution for or another plan, they need this offer, and we see that this offer is very attractive to our customers.

Michael Klahr – Citibank

So what’s the – it’s three months free, and then…

Ziv Leitman

Three months free on the ADSL side, and then 25% reduction on this monthly fee from ILS 80 to ILS 60 per month, yearly. It’s a very attractive offer.

Michael Klahr – Citibank

Okay, that’s from Bezeq side?

Haim Romano

And then if your customer that use a – a customer with a fixed-line of HOT is asking for a Bezeq better offer, so we offer them Bezeq, and we see that this offer is attractive for them, and the many customers that take this suggestion.

Michael Klahr – Citibank

And what about on the ISP side, which that your current price in ISP, which is I think around ILS 30, ILS 35?

Haim Romano

It’s ILS 39 versus ILS 20 that they’re offering. But if I’m able to reduce the cost of the fixed-line or the ADSL, we can offer more going down a great offer that we introduced until now and we can be very competitive to them.

Michael Klahr – Citibank

So actually on your side, your ARPU on the ISP side hasn’t changed at all then from only three weeks ago?

Haim Romano

Not significant, we do some adjustments but you have, all of them are temporary adjustments not a long-term, it’s just a short campaign from our side.

Michael Klahr – Citibank

Okay. And have you seen, have you lost customer, can you give us any idea of a meaningful number of customers left you in the last weeks against HOT?

Haim Romano

It’s not tough, and we don’t want to, and we won’t go to a price more, and we don’t see and it’s drop dramatically. Of course there are some customers that are attracted from the [triple sum] HOT and they might take this offer, but on the other end there are many customers of HOT that we can be attracted from our cooperation with Bezeq.

So we can equalize that in a way. But in long-term, there’s something that we have to adjust, and see what we’re going to do about it. We don’t believe that HOT is going to stay with this ILS 20 offer for long-term, and they’ve said that, but it’s kind of an introduction offer. And as I said before, I believe that the regulator will do something about it, either reducing the cost of interconnects or the fixed-line cost or force them to do something about their offer, we still negotiate with the ministry.

Michael Klahr – Citibank

Okay. But if I’m a Bezeq customer, Bezeq has to offer me that, offer that ADSL offer as well right, even if I am a HOT customer, it’s kind of take ISP from HOT at ILS 20, and then go get their discounted ADSL offer?

Haim Romano

Because you have to pay for the line and for the ISP differently.

Michael Klahr – Citibank

Okay.

Haim Romano

We can subsidize the ISP from the reduction of the ADSL cost.

Michael Klahr – Citibank

Okay. Okay. Thank you.

Haim Romano

Okay. Thank you.

Operator

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 1-888-326-9310; in Israel, please call 03-9255-901; and internationally, please call 972-3-9255-901. Mr. Romano, would you like to make your concluding statement?

Haim Romano

Just to say thank you everybody, and good night from the people in Israel, and have a good day from people in U.S. Thank you very much.

Operator

Thank you. This concludes the Partner Communications Company fourth quarter and year-end 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.

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