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

Partner Communications Company Ltd. (NASDAQ:PTNR)

Q1 2012 Earnings Results Conference

May 23, 2012 10:00 am ET

Executives

Haim Romano - CEO

Ziv Leitman - CFO

Gideon Koch - Manager, Revenues-Finance Department

Analysts

Gilad Alper - Excellence Nessuah Investment House

Michael Klahr - Citigroup

David Kaplan – Barclays Capital

Operator

Welcome to the Partner Communications Company First Quarter 2012 Results Conference Call. All participants are at present in 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 23, 2012.

I would now like to turn over the call 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 results for the first quarter of 2012.

With me on the call today is Haim Romano, Partners’ CEO; and Ziv Leitman, our CFO. Haim Romano will open the call by giving some thoughts about the recent developments in the market here in Israel. Ziv, will then discuss our financial and operational results for the quarter. And finally, we will 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 oral 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 23, 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. Following the call, if you have any further questions, please feel free to contact our Head of Investor Relations in Israel, Yaffa Cohen-Ifrah on 972-54-9099039.

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

Haim Romano

Thank you, Gideon. Good morning, everyone and welcome to our first quarter of 2012 conference call. The financial results of the first quarter reflect the competition in the markets and the challenging times of the cellular industry in Israel over the last past few years.

We continue as planned in some addition of the efficiency measures with a contribution of the decrease of NIS 80 million in operating expenses during the last six months. The full effect of the efficiency plan will be reflected in the upcoming months as we progress with the plan that will be limited.

As part of the overall process, we have reduced the number of positions by 1,440 positions from October 2011 until the end of April 2012. We also allocated a process of full operating merger between partner Orange and 012 Smile and that is expected to be completed in the last – third quarter of this year.

The full merger we enhance our focus on the customer and will enable us to provide a diverse range of services at home and mobile. Last week we saw a significant change in the cellular market in Israel.

With two new operators launching the operations with an unlimited plan, offering prices that were far beyond the relevant prices in the market (indiscernible). We are prepared to the competition and we have updated our marketing offers to the new market price levels.

At the same time, as – and especially in light of the recent events, we are required to examine and to adjust our business plans to the new realities. We will continue with our efficiency plan and even enhances. We will continue with our investments as planned. We will invest a large amount of money in resources to upgrade our network and in August this year we will complete and upgrade the most parts of the Israeli population geography with our sites, and we will have covered the major population centers.

At the same time our IT system recovery plan is progressing as planned. We are also looking ahead focusing on the future potential growth [Technical difficulty] over the internet. We intend to launch during the next six months a television and content services over the internet, OTT, subject to removal of regulatory barriers by the MOC. This services will be added to a wide range of services offered by the Company and at significantly lower price.

In closing, I’m convinced that our unique spirit and continued investments of – continuous investments on our assets, our value customers, employees in the Orange brands, we will continue to serve as a platform to promote our business and cope with the future challenges.

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

Ziv Leitman

Thank you, Haim. Given the 12-month is equivalent to a life time in our industry; I will limit my comments to the results of the first quarter compared with the previous quarter.

Cellular service revenues decreased by NIS 42 million in the first quarter of 2012 compared with the first quarter of 2011. This largely reflects the ongoing trend of increasing ARPU levels due to pricing pressure from business corporate renewing their contracts and some private customers transferring to new more attractive offers.

On the other end, ARPU level was supported by recruitment of new customers with above-average level of ARPU and by existing customers moving to bundle packages with higher ARPU.

The ongoing price erosion has affected both airtime and content and data service revenues. However, we know that Partners continues to succeed in maintaining the higher level – higher ARPU levels than our key competitors. Whilst the cellular subscriber base decreased by approximately 29,000 over the quarter, the churn rate of post-paid cellular subscribers is in the first quarter remained at the level similar to that of the previous two quarters.

Relatively high level of churn partly reflects the Company approach over the past few months named ‘Clear’. The approach emphasizes the values of transparency, fairness, and clarity in all customer interfaces. As a result, existing customers were not given preferred treatment over new customers and also the same standard plans to new customers.

Cellular equipment revenues increased slightly this quarter mainly reflecting the impact of the iPhone 4S launch in December 2011. Operating profit from sale of cellular equipments increased by NIS 10 million mainly reflecting a decrease of unit profit.

Total consolidated EBITDA for the first quarter of 2012 was NIS 438 million, an 8% decrease compared to NIS 478 million in the first quarter of 2011. Net profit was NIS 126 million in the first quarter compared with NIS 123 million in the first quarter before the impact of the impairment charge.

Financial expenses were positively affected in the first quarter by the unchanged CPI levels. For April and May 2012, the reference CPI level increased by approximately 1.3%. Together with the anticipated increase in the reference CPI level for June, this increase is expected to lead to a significant increase in our linkage expenses from the Company’s approximate NIS 2.2 billion of linked debt. As a result, financial expenses in the second quarter of 2012 are expected to be substantially higher than those in the first quarter.

Returning to the results of the first quarter, free cash flow after interest payments totaled NIS 199 million for the first quarter. This high level of free cash flow is evidence of the Company’s robust ability to generate cash flow from net profit.

Net debt decreasing by approximately NIS 200 million in the first quarter continue – for a total decrease of approximately NIS 400 million over the last year. Capital expenditures for the first quarter totaled NIS 133 million, similar to the level of previous two quarters. However, total capital expenditures for the year 2012 is still expected to be approximately NIS 650 million.

Turning to dividends, in light of the recent developments in the telecommunication markets in Israel, the Company is currently updating its business plan and therefore the Board of Directors decided not to discuss the issue of dividend distribution at this time, but rather to discuss it later on.

Now we will be happy to open the call for questions. Moderator, please begin the Q&A.

Question-and-Answer Session

Thank you. (Operator Instructions) The first question is from Gilad Alper of Excellence. Please go ahead.

Gilad Alper - Excellence Nessuah Investment House

Thanks. Hi. The question is on the business model of the Company, you mentioned maybe adjusting it, which is, I guess, the reason you haven’t paid dividend this quarter. So, my question is what exactly you’re talking about? Are you – is it for the sample move-in cross with the business model of Golan Telecom, maybe less customer service and more no simplified internet based business model, or you talking about something completely different? Thanks.

Haim Romano

First I would like to note that last quarter it’s the business model of Golan Telecom – because we didn’t – we tried to explore it, but we didn’t find it yet. So, I’m not sure that Golan Telecom knows its business model, no. The idea is to – and we started already in the last six months to adjust our platform to the new situation in the market reduce cost and taking care of the customer in a different way, most of service and less labor intensive Company. And this is one issue.

We – as I mentioned before, we managed to reduce 1,440 positions we can do much better than that. You can look at the Company at the year 2006, 2005, you can see that the Company was there and staffed by something like 3,900 employees and providing great service. And this is our vision. Our vision is to be a leaner Company with great service; personal in one hand and self service on the other hand, very efficient and very precise Company and still a premium Company. But you have to prioritize your missions and your objectives. And this is exactly what we’re doing, we have to enhance some of our activities and the adjustment, but the business model in this is started – has been started already – the new business model has started already six months ago, when you see the results in the reduction of the OpEx for example.

Gilad Alper - Excellence Nessuah Investment House

Okay. If I can ask just a quick follow-up, …

Haim Romano

Yeah.

Gilad Alper - Excellence Nessuah Investment House

… are you continuing for example as part of adjustments maybe not selling handsets anymore especially because the gross margin on that part of the business is declining anyway, are there any – is there any specific elements to considering simply giving, rather than just becoming more efficient, any part of the business that you think we might won’t – not to do anymore in the future?

Haim Romano

What we started in the last two quarters is not subsidizing the handsets by reducing our ARPU. And it was in the difference between our ARPU and our competitors. So, for example, telecom went down to NIS 90 ARPU because they subsidized handsets with reduction of the ARPU. We stopped that with the Clear.

So, we intend to sell handsets and it’s a quite possible business when you don’t look into the packaging. So we can, since now – even today we just launch a new program for handsets, but we just cut the link with – the linkage between handsets and programs, and we intend to do the same in the business markets.

Gilad Alper - Excellence Nessuah Investment House

Okay. Okay, thank you very much.

Haim Romano

Okay.

Operator

The next question is from Michael Klahr of Citibank. Please go ahead.

Michael Klahr - Citigroup

Hi. I’ve got two questions. Firstly on the new offer that you came out with on, I think it was Thursday last week, the NIS 125 unlimited, up to I think half a Giga and NIS 135 for 1.5 Giga, that wasn’t followed by telecom and telephone whose prices for similar packages are still close to NIS 160, NIS 170. So I wanted to just check what kind – what was driving your constant prices and whether it’s having the desired effect for you so far?

Haim Romano

First, I’ve to correct you, and – sorry for that, but telephone is introducing NIS 119 …

Michael Klahr - Citigroup

You know that’s …

Haim Romano

… Yeah, we’ve the shortage in the markets …

Michael Klahr - Citigroup

Sorry, the NIS 119 is ending with the 100 megabytes of data so to get to with regard to 2011?

Haim Romano

They’re selling even lower than that and telephone introduced with NIS 99 offers in the door-to-door and we’ll see it.

Michael Klahr - Citigroup

No, but for a similar data package of 1.5 gigabytes, it’s …

Haim Romano

In the end of the day, the question is what will be the – the price of the customer will be paying and not – if he is in difference about the data, it doesn’t matter, he’ll pay NIS 99 or even it was difference about the data, he’ll pay NIS 119.

We started that as a retention plan. We said that this is a pilot. We sell – half of our sales are in NIS 135 to 1 Giga and we follow the market and we see – we didn’t promise that this will – this price will be forever. It’s the kind of a retention plans and we look at the market and we see what’s going on. And I’m sure that in the end of the day, this won’t be the price – the common price in the market, but for today, we think that this is the right answer for what’s going on in the market.

Ziv Leitman

If you look, and we’re -- I don’t know where you’re getting your information. The market is there and we will see the retention offers by all the three companies and we’re very, very similar to each other because we understand that for the time being we’ve to do something to face this NIS 99 or NIS 89 not to match this, but offer reasonable offer for the time being to those sensitive price leery customers.

Michael Klahr - Citigroup

Okay, thanks. So, my second question is on what’s happening in prepaid ARPU? If you could give us any color of the impact of the MVNOs on that, if you can tell us anything about difference from what we see on the financial segment?

Haim Romano

Just to complete our – my answer for the first question that you asked, we in parallel to that we decreased our stock. We decreased – we’re working hard to decrease our customer acquisition cost. And if you pay a commission of NIS 480 that’s in the common – less than the common commission in the market, it’s roughly NIS 20 a month to the customers. So we prefer to grow into direct sales and to save those commissions and to get more customers, return to more customers, then to go on with this trend in the market, and you lose thousands and you gain thousands every day. So we’ve to support this rollercoaster, and I’d love to enhance about it later if you want to.

About the prepaid, we don’t see the competition in prepaid today, but we’re sure that it will be there, and we take any measures that we’ve to take to face this threat and we know that it’s there. It’s on our door.

Ziv Leitman

And Michael, if you recall, according to our yearly financials, the average – the ARPU of the prepaid on a yearly average is around NIS 50. We disclose these numbers on the yearly basis.

Michael Klahr - Citigroup

Okay. Can you just tell me in the week since the launches of the two new operator launches, where are you seeing the most churn or the most movement? Is that on the prepaid or the postpaid side?

Haim Romano

The bulk of it now is on the postpaid. And the offer of NIS 89, you and I, we know exactly what the meaning of this offer is for HOT, and we understand why they’re doing that. We understand that it’s not a sustainable offer, but what we’re trying to do now is to minimize the effects of this comparing. But we understand very well that when someone is offering NIS 89, because if we don’t trust that, this offer is good enough and it’s a valuable company that can turn any customer to – turn to HOT or Golan unless he’s reducing price to a ridiculous one, NIS 89. And it was comfort in the papers. I don’t think that I’ve to add on that.

Michael Klahr - Citigroup

Okay. And just – if you breakdown the customer base between residential and business customers, part of the attraction I think of the Golan offer is the long distance telephony where you get 29 countries, close to 29 countries and you also get follow roaming prices and I want to just understand if you’re seeing any impact on the business side or – I know business customers are tied in by longer contracts …

Haim Romano

It was just the declaration. They don’t have the license for that. Actually they ask us to be their – the 012 to be their operator. And we know how to deal with it, we can match it and we don’t think that this is our effect.

We don’t look at Golan as the big story in the market today. Maybe we’ll be surprised, but we don’t look at it as a big story. They’re having many, many problems in service and operational problems. They’re not prepared to the situations. And you can read it in the papers and decide, I think that Mirs as I said to you, when we met, Mirs is a different story. They’ve a company, they’ve a customer base. Mirs and HOT, and we take them more seriously than we take Golan. But we’ve the answers as you’ve seen because you could read yesterday in – we lost exactly the numbers of each and every company.

The problem is because of this earning and losing of customers. This is – it was the main problem today, not just losing customers because we don’t lose customers as written in the papers, but the retention costs and the acquisition costs is something that we look at very carefully.

Michael Klahr - Citigroup

Okay. Thank you.

Haim Romano

Thank you, Mike.

Operator

(Operator Instructions) The next question is from David Kaplan of Barclays Capital. Please go ahead.

David Kaplan – Barclays Capital

Hi. Haim, if you can talk a little bit, you talk a lot about subscriber acquisition, subscriber retention, can you talk a little bit more about, can you split that up for us and tell us where we’re seeing subscriber losses and with all the new competition in the market, the new pricing, and Partner’s new pricing, are you seeing the number of calls, or I should say that the percentage of calls that are coming in and asking about new pricing, are they or in theory looking to leave, how many of those are actually staying and coming out onto new plans at Partner? How many of those at the end of the day, you guys estimate are leaving? And, I guess, that’s the first half of the question.

The second half of the question is, is there a point price or is there a point at which Partner has said we’re not willing to chase you any farther, if you want to go, you’re free to go?

Haim Romano

The number of calls has been doubled every day. And now, we handle most of the calls using IVR and self-service and internet. And what we see, and we listen to our customers very carefully, I think I can say, all the customers – most of the customers are not asking to leave, they’re asking to get a better offer because the market is now booming and they’re trying to get the best offer in the market. And we see that the most customers, I would say, the majority of the customer, when you give them NIS 125, NIS 135 service, and they don’t want to leave because they appreciate the service and for them having NIS 35 or NIS 45 and getting a better service level, it’s okay.

So the problem, the main problem is not stopping the churn, the problem is billing and taking care of the customers that are calling us, and we’ve some service level today, (indiscernible) because we want to answer to all our calls, but you don’t feel that the customers are calling and they’re asking you to reduce their packages or the bills, otherwise they’ll leave. They’re not threatening us. And the atmosphere and the relationship between our customers and the Company is not like it’s been described in the Medias.

Most of the customers are satisfied, and see the customers that left the Company and came back after one or two days because they were disappointed from what they’ve faced in the new company.

So I think many customers are just waiting to see what’s going on and to see those new players will keep the promise or not. You’ve to remember that the perception about HOT as a very big service provider (indiscernible) very good customer service approach. And for the cellular industry customer service is a big deal.

About Golan, most of the people look at it as a gimmick until now, and let’s look at it and see in the future, it’s just…

David Kaplan – Barclays Capital

Okay. So, if I think about your answer and – and what you’re describing, but then I look at total subscriber loss for Partner on the first quarter, those two things don’t necessarily match?

Haim Romano

No, I’ll tell you, it’s not just loss. The reason that you said the numbers was of the two issues. The first one is our retention plan. We decided not to open the market here and I decided to close the retention departments because I decided that the first offer that you get is the last offer that you get. You don’t shop, if you call and say, listen I want to get an offer and if not, I’ll leave, there is not a better offer that you’ll get.

And we signed, we did it with the Clear package, and we’re very consistent in that. This is one big deal that we did and we manage to stop the bleeding and the dilution in our ARPU. This is the reason that the ARPU power company was not included in telecom or telephone because they’re still bargaining with the customers. And we decided to try to stop this market approach. This is one reason.

The second reason is that we, as I said – mentioned before, we decided not to subsidize handsets by giving special offers when you buy handsets or not buying handsets. The offer is the same and if you upgrade your handsets, buying handsets for us, and we don’t give discounts for new customers that we don’t give to our customers.

And if you see the level of churn on postpaid, and ignore the prepaid, the level of churn of postpaid, us and Cellcom and telephone is around the same numbers. You don’t see that we – that the numbers of the new customer acquisition was lower because of the acquisition cost, because of the strategy that you don’t give the new customer, the other company customers something which you don’t give to your customers.

And because of two main – those two main reasons and we managed it because our estimation is that we know that 30,000 subscribers are NIS 1 in the ARPU. And if you manage to return most of the customers without reducing the ARPU, and I’m not talking about what’s going on today, it’s a different ballgame, but it was relevant in the first quarter and the second quarter. And we prefer to keep our ARPU and not bargain with the customers that are getting better offers from our competitors.

And the results, you can see the results in the numbers. You see that service revenues for Partner are the highest in the markets. Although we have less than, I think, 200,000 subscribers than Cellcom, and see our revenues are higher than – and our MOU is higher than Cellcom. So, if you take out the revenues from handsets, and look at the ARPU and look at the service revenue, you see that if you go down there, the major challenge is still in the OpEx.

David Kaplan – Barclays Capital

Okay. And then just lastly do you have – can you give us a number or percentage, the number of customers of Partner that are currently on a Clear program?

Haim Romano

250,000 subscribers are already in the Clear program and every day there are more than I think 5,000 that are joining this new Clear program.

David Kaplan – Barclays Capital

Okay, great. Thank you very much.

Haim Romano

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 two hours. In the U.S. please call, 1888-326-9310. In Israel, please call 039-255-918 and internationally please call 972-3925-5918. Mr. Romano, would you like to make your concluding statement?

Haim Romano

Just to say thank you for – to everyone for the participation for your questions. And see you soon.

Operator

Thank you. This concludes the Partner Communications Company first quarter 2012 results conference call. Thank you 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' CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts