Cellcom Israel Ltd. Q2 2009 Earnings Call Transcript

| About: Cellcom Israel, (CEL)

Cellcom Israel Ltd. (NYSE:CEL)

Q2 2009 Earnings Call

August 17, 2009; 9:00 am ET


Amos Shapira - Chief Executive Officer

Tal Raz - Outgoing Chief Financial Officer

Yaacov Heen - Incoming Chief Financial Officer

Fiona Darmon - CCGK, Investor Relations


Daniel Meron - RBC Capital Markets

Anupam Palit - Jefferies & Co.

Aram Fuchs - Fertilemind Capital


Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom Israel Ltd. second quarter 2009 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)

I would now like to handover the call to Ms. Fiona Darmon of CCGK Investor Relations. Ms. Darmon, would you like to begin?

Fiona Darmon

Yes, thank you operator. I’d like to welcome all of you to the conference call and thank Cellcom Israel’s Management for hosting this call. With us on the call today are Mr. Amos Shapira, our CEO; Tal Raz, outgoing CFO; and Yaacov Heen, the new incoming CFO. Welcome Yaacov!

Mr. Amos Shapira will open the call by providing a summary of the main highlights of the quarter, followed by Mr. Tal Raz, who will then review Cellcom Israel’s financial performance in more detail.

Before I turn over the call 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, 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, 2008.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, August 17, 2009. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change. You should have by now received a copy of this company’s press release. If you have not received so, please call 1646-797-2868.

I would now like to handover the call to Mr. Shapira. Amos.

Amos Shapira

Thank you, Fiona. Good day everyone and welcome to our second quarter earnings call. The second quarter of 2009 was another quarter of growth at Cellcom Israel, reflecting the solid execution of our strategy to focus on our core competencies, developing new innovative offerings, to drive revenue growth by serving the needs of the always on and anywhere consumer.

Once again we presented growth in revenues, primarily fueled by an increasing content in value-added services revenues, as well as increasing operating and net income. The improved operating and net profit was also driven by our very, very tight expense controls, which contributed to a decline in operating expenses as a percentage of revenues, enabling us once again to achieve the highest EBITDA margin in the local sector.

Cost efficiencies remains a prime focus of our company, as we believe managing an efficient company goes hand in hand with long term growth and value creation to our shareholders. Our results were especially noteworthy, when taking into account the very challenging economic climate, intensifying competition and tightening regulatory environment.

Touching on this, the economic climate primarily impacted our results through the continued decline in both in and outbound tourism. This drew a further decline in roaming revenues. According to formal ministry of tourism data, tourism is down roughly 20% from last year, and this impacted our results to a certain extent. We also witnessed a further increase in receivables this quarter. These too could be attributed to the climate, in addition to the number of portability.

As a reminder, this revenue impact was totally offset by higher value-added service revenues, as well as landline service revenues, which further increased this quarter compared to last year. These landline revenues are especially noteworthy as they require almost no additional investment by leveraging existing infrastructure.

Our strong performance enables us to once again generate very healthy free cash flow, substantially higher than last year. Of NIS 400 million, NIS 300 million of which I’m pleased to note, we are giving back to our shareholders in terms of dividend. Our dividend for the past 12 months has now reached 11.1%, the highest in Israel and among the highest in our sector in Europe.

Clearly, in the quarter Cellcom Israel further strengthened its position as Israel’s leading cellular operator, further distancing itself from its competition. We improved the quality of our subscriber base by adding 20,000, mostly post-paid subscribers, to end the quarter with a total of 3.228 million subscribers.

We continue to focus on delivering premium content and value-added services, viewing this profitable and fast growing area as a key element of our strategy to drive growth. Our success in this area was evidenced by the strong increase in content and value-added service revenues, which together with our fixed line business segment helped offset the weakness in roaming revenues.

As such, this quarter we further increased our 3G subscriber base by adding 44,000 net new subscribers for a total of 877,000. Our 3G subscriber now represents 27.2% of our total subscriber base, up from 26% subscribers represented at the end of last quarter. We are constantly introducing new innovative and advanced handset support and take advantage of this low capital growing 3G customer base.

Turning to our landline services business, we continue to see revenue growth from this business, which contributed to higher service revenues for the quarter. This business leveraged our existing fiber-optic and microwave networks, requiring very limited investments. We remain very excited with the contribution from this segment, for both revenue growth and margin expansion, as we take advantage of synergistic opportunities to optimize our network and to sell both fixed and mobile services to business segment.

As we look to the future, we will continue to focus on our core competencies, in mobility to target the value-added growth drivers for a cellular business, by addressing the key trends of the Always-On, Everywhere Consumer. This includes our mobile broadband service offering, which is accelerating demand for our content and value-added services, and by taking advantage of opportunities that offer well defined synergies, such as leveraging our infrastructure to deliver landline services to the main business parks.

In summary, we are very pleased with our results in the second quarter. I would like to take this opportunity to thank Tal Raz, our outgoing CFO of the last four years for his tremendous dedication and contribution to the company. Tal has played a critical and highly instrumental role in developing and implemented our business strategies, and made an important contribution to bring us to where we stand today, as the largest cellular operator in Israel with industry leading margin structure.

Tal also helped us navigate through complex financing decision, to take advantage of opportunities to restructure our debt in an optimal and more successful manner. Tal leaves us to take on the role of CEO of Clal Finance, another company in the IDB Group, and I wish him the best of success.

I would like also to take the opportunity to welcome Yaacov Heen to the position of CFO. Yaacov, a highly experienced manager has grown through the Cellcom Israel ranks in the past 12 years, and highly attuned and knowledgeable for the company. I wish Yaacov the best of success and believe you will have the opportunity to meet him in person in the near future as he attends several planned conferences, in both London and New York during the month of September. 

With that, I would now like to turn the call over to Tal Raz, our CFO for the detailed review of our financial for the last time. 

Tal Raz 

Thank you very much and good day everybody. Before I begin, I would like to say what an honor and privilege it has been to help you Amos and your team for the past four years.

You have completely turned around this company since you took over several years ago, and a sound role model for all managers and employees in the company than in other companies in Israel. Your attention to detail to customer service is unique and explicit and I look forward to taking with me what I’ve learned, to my next job as CEO of Clal Finance. Thank you, Amos for both the opportunity and the privilege. 

Now to the quarter; according to our first quarter results released in May, Cellcom Israel management decided to change the company’s policy to recognize certain subsidies provided to handsets sold with service agreement that contains a guaranteed future revenue, additional costs eligible for capitalization. This is inline with the other cellular operators in Israel. 

Under the company’s previous policy, capitalized customer acquisition and retention costs, included only deferred costs in respect of sales commissions and the handsets subsidies were recognized as a one-time expense. The changed policies have been retrospectively applied from January 1, 2007 and the comparable data has been amended to reflect this change. 

Revenues for the second quarter of 2009 increased 0.5% to NIS 1.608 billion, compared to NIS 1.6 billion in the second quarter of last year. The increase in revenue is mainly attributed to 0.7% increase in revenue from services, offset in part by a 1.1% decrease in handset and accessories. These higher service revenues were mainly driven by a 30.6% year-over-year increasing content and value-added services, including SMS. 

Landline services revenues also contributed to higher overall service revenues. Both of this have offset the ongoing airtime price erosion, as well as the substantial decrease in roaming revenues, due to a slump tourism resulting from the global economic slowdown. 

SG&A expenses for the second quarter of 2009 totaled NIS 343 million compared to NIS 350 million last year. The decrease in SG&A expenses in the quarter mainly reflects reduced advertising expenses, as well as lower stock-based compensation expenses. This will partially offset by an increase in provision for bad debt, resulting from non-profitability and possibly the weak economy. 

Operating income from the second quarter of 2009 increased 6.5% to NIS 444 million, compared to NIS 431 million last year, after elimination of the one-time result of embedded derivatives in Q2 last year. EBITDA for the second quarter 2009 increased 2.9% to NIS 637 million. EBITDA as a percent of revenue totaled 39.6%, similar to the second quarter last year. 

Financing Expenses, net of the second quarter 2009 totaled NIS 67 million compared to NIS 109 million last year. The decrease resulted from lower CPI inflation, which led to lower linkage expenses on the company’s price index linkage debentures. The decrease also resulted from the one-time reversal in the second quarter last year of financing income in the amount of approximately NIS 29 million related to embedded derivatives. 

Net income for the second quarter increased 15% or 20.4%, without elimination of the one-time effect in Q2 2008 to NIS 277 million, compared to NIS 230 million last year. Basic earnings per share for the quarter totaled NIS 2.82 compared to NIS 2.35 in the second quarter of 2008. 

Free cash flow for the second quarter of 2009 increased 33.3% to NIS 400 million. This increase resulted mainly from an increase in net cash provided by operating activities which totaled NIS 522 million in second quarter of this year, compared to NIS 449 million last year. 

During the quarter we invested NIS 170 million in fixed assets and intangible assets, compared to NIS 143 million last year. Shareholders equity as of June 30, 2009 amounted to NIS 412 million, primarily consisting of accumulated, undistributed retained earnings.

Now to our KPI; the churn rate in the second quarter 2009 declined to 4.6%, compared to 4.7% in the second quarter last year and 5% in the previous quarter. Average monthly subscriber Minutes of Use, MOU in the second quarter 2009 totaled 330.4 minutes, comparing to 331.8 minutes last year, adjusted to the 2009 per one second base unit, representing a decrease of 0.4%.

The monthly Average Revenue Per User, ARPU for the second quarter decreased 3.5% to NIS 143.7, compared to NIS 148.9 in the second quarter last year. This decrease mainly resulted by low roaming revenues recorded during the second quarter following the decline in tourism.

Moving to our dividend; our Board of Directors declared a dividend of NIS 3.05 per share, a total of NIS 300 million, representing approximately 108% of our net income for the second quarter of 2009. As mentioned in the past, our dividend payments are not guaranteed and are subject to our Board of Directors absolute discretion.

Before moving to our Q-and-A part, I would like to wish Mr. Yaacov Heen, Cellcom Israel incoming CFO the best of success in his new role. Yaacov, it has been a pleasure working with you for the last four years. You’re a good professional and has been an excellent aid to me in the past four years. I look forward to continuing to watch you ascend and grow in your new role. Yaacov, please say a few words of introduction before we move to the Q-and-A.

Yaacov Heen

Thank you, Tal and good day everyone. As mentioned my name is Yaacov Heen. I have been with Cellcom Israel for the past 12 years. I worked in a variety of roles serving as Head of the Economy Departments since 2006, responsible for the company’s budget, financial analysis, cost accounting and performance control.

Prior to that, I was Head of the company’s Pricing and Business Research Department. I hold BA in Economic and Business Administration and an MBA in Business Administration from Bar-Ilan University. I would like to thank you for this opportunity, and look forward to the new role, and to meeting you in the coming months. Tal, thank you for an amazing four years and I wish you the best of success in your new role.

I believe we’ll now move to the Q-and-A session. Operator.

Question-and-Answer Session


Thank you. (Operator Instructions) The first question is from Daniel Meron of RBC Capital Markets; please go ahead.

Daniel Meron - RBC Capital Markets

Thank you. Congratulation for the ongoing execution; and Tal, good luck with your new role. It was a pleasure working with you and mazel tov Yaacov on your position. My first question relates to the outlook as you look ahead into the back half of the year. How should we think about the trends in the third quarter? Are we back to normal seasonality by now? Do you think that the macro headwinds are completely out of the way by now?

Amos Shapira

It seems our legal counselor is in the room. I can’t respond to your question. It seems I can’t give you any information about the future, so I apologize.

Tal Raz

I just want to add something more which relates maybe to the trend that we are really seeing in this industry in the second half of the year. Usually we know that from the seasonality sector, we know that the third quarter is usually the highest or the strongest quarter of the year. The fourth quarter is usually the lowest quarter of the year and it is because of the Jewish holiday’s.

Even though in this year we will have a slight shift, because some of Jewish holidays will be falling in the third quarter, so there will be some shift between the third and the fourth quarter. Other than that, I think that Amos mentioned the roaming before; we don’t see any change to this trend at that stage. This goes in hand with the allowance for doubtful accounts. Other than that we cannot give of course any upcoming forecast.

Daniel Meron - RBC Capital Markets

Okay understood. Can you give us a sense on the CapEx funds that you have ahead of you and any change to working capital in the respect of the iPhone launch that is expected in the next few months?

Tal Raz

Well, we will stick to our guidance, that CapEx will be less than 10% of our total revenues. Since we are not seeing any new incoming, new technology, we know that (inaudible) is way ahead of us, we are not changing this guidance.

On the iPhone subsidy, it’s not just the iPhone, its other Smartphones. We don’t know yet when they will be launch and we cannot give that space, the effect to a level of subsidy that will be related to the launch of iPhone or the other Smartphones in Cellcom.

Daniel Meron - RBC Capital Markets

Very good. Thank you. Good luck going forward.


The next question is from Anupam Palit of Jefferies & Co.; please go ahead.

Anupam Palit - Jefferies & Co.

Thank you very much. First of all Tal, thank you very much for all the help you provided us. Best of luck to you in the future, and Yaacov, congrats on your new role. We look forward to the chance to meet you and work with you. You guys still have a very strong balance sheet and in terms of leverage your cash balance is still very high; your free cash flow is still very strong.

Even if we assume some M&A activity that you consider in taking part, you’ll still have a lot of left over cash and a strong cash generation. Can you talk about how the management team is thinking of deploying this cash, in terms of potentially considering the share buybacks or new investments, and technology of potential cash distribution to shareholders, just how the management’s thinking about that?

Tal Raz

Well, I can say what we are not going to do with this cash and we are sticking to our guidance for the last few years. We have seen that Cellcom is not going to invest with its additional cash in the ventures outside of Israel.

Basically we have this new additional debt in order to secure our aggressive dividend policy. As you know, the policy of the company is to distribute 75% of our net accumulated dividend and the company’s a public company and we distributed 95% of the net income. On the way we have done the other special dividends. This quarter for instance we are distributing 108% of net income.

So basically this additional cash is in order to secure solid claim of dividend for our shareholders and nothing other than that in this stage. We don’t have any share buyback on the table for discussion. The return earning of the company is quite minimal and of course it goes inline with the company policy to distribute most of its dividend. So basically this cash has secured dividend to further the ongoing operation and nothing other than that.

Anupam Palit - Jefferies & Co.

Great thanks and if I could just follow-up; if I can turn to the subscriber side. Are you guys…


It appears the questioner has disconnected. The next question is from Aram Fuchs of Fertilemind Capital; please go ahead.

Aram Fuchs - Fertilemind Capital

Yes, I was wondering if you can give us any more detail about the content and data services. What is work in this quarter compared to a year ago; is it continuation of the same trends or has something shifted? Thanks.

Tal Raz

As to the content, I’m sure that you noticed that we are performing better than the industry. Overall, this quarter we kept on the trend of growing more 30% in our data and content. Of course, we are trying to expand as much as we can, our offering as to-date estimates or data content services.

On top of that we are definitely pushed back or pushed forward, by the fact that about nine months ago we started to, actually we launch mobile modem’s activity in Cellcom. We are the only company who is actually providing unlimited packages with mobile modems and this is definitely pushing our results in the data and content arena.

Aram Fuchs - Fertilemind Capital

Okay, and then regarding roaming, I was wondering, you blamed a good portion of the decline in roaming on the economy? I was wondering how you are determining the cause there; why are you confident of the economy and not the increased competition from Pelephone?

Tal Raz

First of all, we are looking carefully on the numbers. Definitely we know the decline in the number of tourists that are coming in and going out and definitely we can translate it very, very easily without assistance to how much we are getting hit by this reduction in tourism.

Also definitely another side effect of that, even when a tourist is going abroad, he will use this phone less than he used it in the past and this is another trend that we are seeing in Cellcom at the last two or three quarters.

Pelephone launched UMTS in the beginning of the year. That states that we’ll enjoy the inbound roaming only on 3G with an 850 mega hertz. This is definitely, I can tell you definitely that we are not feeling Pelephone that area at all, at least up to-date.

Aram Fuchs - Fertilemind Capital

Great, thanks for your time.

Tal Raz

Thank you.


(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 second quarter 2009 earnings conference call. I look forward to hosting you again at our next call and good day.


Excuse me sir, there is a question from Jonathan Schildkraut of Jefferies & Co. Will you take it sir?

Amos Shapira


Anupam Palit - Jefferies & Co.

Hi, thank you. It’s Anupam Palit for Jonathan Schildkraut. I think I got cut-off a little bit earlier. You guided about 44,000 3G subs in the quarter, which is a very strong number, but it’s a little bit of a slowdown from what we seen in the prior couple of quarters. I was wondering, what you guys were doing to kind of increase that number going forward? 

Amos Shapira 

It’s very important to mention that our goal is to increase our total revenue and profit, and we are using this 3G and pushing the 3G subscribers as long as we see a return on our investment, by migrating 2G customers to 3G.

Of course it makes sense that as penetration of 3G is higher, the rate of growth of 3G subscriber is becoming more the rate. This has nothing to say about the future. If we find an opportunity that will justify an acceleration of migrating customer from 2G to 3G, then we’ll accelerate.

So what I wanted to say is, every moment we calculate exactly what is the rate that is worth while for us to invest and this is what we are doing and this is the reason by the way, that at the end of the day our revenues from content is rising the highest, and our revenue from every subscriber from 3G is the highest in the industry. 

Aram Fuchs - Fertilemind Capital 

Great, thank you very much. 


There are no further questions at this time. Mr. Shapira, would you like to continue with your preceding statement. 

Amos Shapira 

As I have already said, I just wanted to thank you for joining us and see you soon in the next quarter. 


Thank you. 

Amos Shapira 

Thank you very much. 


This concludes the Cellcom Israel Ltd. second quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.

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