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spk03: Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications second quarter 2022 results conference call. All participants are present in a listen-only mode. For operator assistance during the conference, please press star zero. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Amir Adar, Head of Investor Relations and Corporate Project. Mr. Adar, please begin.
spk06: Thank you. And thank you to all our listeners for joining us on this conference call to discuss partner communications second quarter results for the year 2022. With me on the call today is Avi Gabay, Partner CEO, and Tamir Amar, our Deputy CEO and CFO. Avi will provide an update on partners' business development. He will then hand over to Tamir, who will provide a detailed discussion of our quarterly financial and operational results. 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 conference call may be forward-looking statements within the meaning of Section 27A of the U.S. Security Act of 1933, as amended, Section 21E, of the U.S. Security Exchange Act of 1934 is amended and the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Regarding such forward-looking statements, you should be aware that partners' actual results might vary materially from those projected in the forward-looking statement. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in partner press release dated August 11, 2022 as well as partners filing with the U.S. Security and Exchange Commission on forms 20S, F1, and 6K, as well as the F3 shelf registration statement, all of which are readily available. Please note that the information in this conference call related to the projection 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 also being broadcast over the Internet and can be accessed through our website. If you have any further questions following the call, please feel free to contact me at 972-54-781-5051. I will now turn the call over to Partner CEO Avi Gabay. Avi?
spk07: Thank you, Amir, and good morning, everyone, and welcome to our conference call. As you are all aware, I joined partner this June, so this quarter I will keep my statement brief and will focus on bringing you more color on our point of view. So firstly, bringing value to our customers in 5G and fiber optics infrastructures of the highest quality B2B potential. These are just some of our revenue growth engines for the future. Secondly, execution capabilities to preserve and enhance our operations. such as the fiber deployment, customer service, sales and marketing, and thirdly, strengthening activities such as equipment sales, and last but definitely not least, maintaining partners' robust financial position. I hope this gives you some indication to our upcoming journey, and I would be happy to discuss more on that in future calls. So I would like to turn the call over to Tamir Amal for a detailed review of the financial results for this quarter.
spk05: Thank you, Avi. In the second quarter of 2022, we reported the highest revenue in the past six years due to growth in both the seller and fixed-line segment. Together with the decrease in the level of OPEX, we have succeeded in bringing about an increase in profit and profitability compared to the corresponding quarter last year. Adjusted EBITDA presented for the second quarter of 2022 was the highest in the past seven years and totaled 276 million shekels, an increase of 30% compared to 213 million shekels in the corresponding quarter last year. In the third segment, we continue with the expedited 5G infrastructure deployment and expect to achieve over 40% per pollution coverage by the end of the year. On a KPI level, seller subscriber base increased in the quarter by 32,000 subscribers, of which 25,000 were post-paid subscribers. Excluding the churn of Ministry of Education subscribers who joined for limited periods, the seller churn rate in the second quarter of 2022 totaled just 6.6%. I'm happy to share with you that for the first time in five quarters, partner recorded an increase in cellular ARPU. In the second quarter, ARPU totaled 49 shekels compared to 48 shekels in the previous quarter. The increase reflects, among other things, an increase in roaming service revenues that was partially offset by the continued price erosion and by the decrease in interconnect revenues. Turning to the fixed line segment, the number of homes connected within buildings connected to our fiber optic infrastructures increased by 67,000 in the second quarter. The increase in the fiber optic subscriber base was negatively impacted by the relatively low number of working days and total 17,000. Still, a 30% penetration rate from potential customers in connected buildings was maintained. As of today, the number of homes connected within buildings connected to our fiber optics infrastructures reached 866,000 and the fiber optics subscriber base as of today totaled 258,000. Now let us briefly review funding and investing. Adjusted free cash flow for the quarter totaled 57 million shekels. CAPEX payments in the second quarter of 2022 totaled 174 million shekels. For the first half of 2022, the increase of capex payments compared to first half of 2021, totaled 56 million shekels, reflecting the acceleration of the fiber optic deployment plan with the goal of reaching approximately 1 million households by the end of the year. Net debt was 706 million shekels. at the end of the quarter, an increase of 36 million shekels from the corresponding quarter last year. The company's net debt to adjusted EBITDA ratio stood at 0.7 at the end of the quarter, compared to a ratio of 0.8 in the corresponding quarter last year. I will now be happy to open the call for questions. Moderator, please begin the Q&A.
spk03: Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Please ask your question in a loud and clear voice. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Tabby Rosner of Barclays.
spk02: Please go ahead. Hi, this is Chris Reimer on for TAVI. Thank you for taking my questions. Just touching on 5G, I realize you don't break out the number of customers, but I was wondering if you could provide any color on customer behavior or traction for 5G services. And then following on that, could you just touch on the coverage number? You mentioned 40%. How does that relate to your broader service? plans for coverage.
spk05: Avi, do you want to answer or I will answer that? You can answer. Okay. So, first of all, the reason that we are not mentioning the numbers of subscribers that are connected to 5G plans is due to the fact that we first want to be with a sufficient coverage that will enable us to reach the customer and supply them a real 5G services. So we are targeting to reach this 40% real coverage for 5G by the end of the year. And following that, we are going to increase our targeting customers to connect to this kind of plan for 5G. What was the second question, please?
spk02: The plans for your future coverage?
spk05: Yes. So for sure, we are targeting to reach all the areas with 5G. As I mentioned, by the end of this year we are going to be with coverage of 40%. We are not providing our coverage for the year 2023 in the north for that, but be sure that our coverage will not end by this. that from the beginning of 2023 and three years from this point, the major part of Israel will be with the coverage of 5G.
spk02: Understood. Just one more on costs. You reported a 3.3 decrease in costs this quarter, I think, and this follows previous quarters of year-on-year reductions. I'm wondering how realistic is it to expect further cost reductions at this point? And if so, is there anything you can specify or point to or an area where there's further optionality for cost reductions?
spk05: Are you relating to OPEX or CAPEX or both?
spk02: Just OPEX.
spk05: Just OPEX. Okay. So we are quite stable with the OPEX level. We can see that for the last two years, our OPEX are quite stable and around 470 million shekels for a quarter. That means that operationally we are doing improvement in OPEX inherently in our report by increasing subscriber of fibers and also TV for the last two years, but still keeping OPEX stable at the same level. So by that we are doing efficiency in the company. What will be next? I think that I think even now we can see that there is enough room to save OPEX, but I don't think that with increasing numbers of subscribers in the cellular and at the same time in fibers and in the TV, we will face it with a decreased OPEX level. I think that to reach for the... same OPEX level that we are facing nowadays, it will be to improve ourselves by itself. By the way, you can see it by the EBITDA percentage. If you are looking the same quarter last year, it was 25%. Now we are in 32%. So we are increasing our revenues and we are with the same OPEX That's giving us increasing the EBITDA percentage.
spk02: Got it. Thank you. Thank you. That's very helpful. That's it for me.
spk03: The next question is from David Kaplan of Sagot. Please go ahead.
spk05: Thank you.
spk00: I have a couple of questions just about the progression of ARPU over the next couple of years looking forward. There are three major, as I understand them, potential changes coming down the road, some potentially negative, some potentially positive, on interconnect, the introduction of eSIMs into the market, but then lastly, and continuing on Chris's question, in terms of the integration of 5G and increasing ARPU from that. How do you see ARPU playing out over the next couple of years?
spk05: Okay, so if I just put aside the interconnect in which is going in the coming three years to eliminate from the ARPU and from the revenues, but it will not influence the last row of the P&L because it's just a washing game. So, of course, this will reduce the ARPU. On the other hand, we have, of course, the roaming in which we are facing increasing in this quarter. I'll say major increase. from roaming compared to the last quarter, for sure from the last quarter last year. And I think that the main point is what is dependent on us. And I think that what's dependent on us is the fact that increasing ARPU by connecting more and more customers to the 5G plans. As I already mentioned in the first question of Backlist, It depends on the coverage that we will achieve, and this will enable us to connect more and more customers to the 5G plan, which reflects with much higher ARPU.
spk00: Right, so if you could just expand a tiny bit around the roaming revenues, because if I look at your ARPU from Q2 of 2019, which is pre-pandemic, And I compare that to Q2 of 2020 in which there were global shutdowns and therefore probably zero roaming revenues. We can see what the difference was. And I presume that much of that had to do with roaming. So when I think about going forward as eSIMs become more prevalent for travel and as a real option for travelers to use, what do you think happens to roaming revenues?
spk05: I think that we see that roaming is decreasing because people have other alternatives to use roaming when they are flying abroad. But at the same time, we see that more and more customers are buying roaming services because they want to rely on reliable roaming services and when taking under consideration that a major part of roamers are from the business sector in which not playing with what is more cheap or not, they want reliable services. So we can see that although comparing to 2019 we are We didn't reach to this kind of level, but we are very, very close this quarter to the level of 2019. So I think that this reliable roaming that you are taking via your cellular company, it gives you more confidence that you will be able to be connected to any application or email or whatever. This is one thing. On the other hand, I think that eSIM will enable you to use also roaming in more easy way anywhere. But on the other hand, it will enable us to be also part of this game, whereas nowadays we are enabling only our customers to use these kind of services, but in the future when we'll, roamers will be able to use roaming via eSIMS, then we will be able to offer these kind of services to other customer all worldwide.
spk00: Great, okay, thank you for that. And just a quick question on CapEx going forward. In terms of how you think about incremental CapEx, Is more of it going towards passing more homes on fiber, or is more of it going towards the 5G rollout, or is it kind of split evenly between the two of them, and that's all for me.
spk05: Okay, so reaching the one million by the end of this year, we are going to continue with fiber optic deployment, but in a much low scale. So this will save a lot of CapEx in 2023 and forward. Regarding 5G, it's more like doing trade-offs between investing in 4G and to 5G. Maybe a couple of millions more in years, but this is not a drama in CapEx terms. So if I will summarize it, we are going to face much less capex in next year. Thank you.
spk00: Thank you.
spk03: The next question is from Ori Lapidot from Leumi Partners. Please go ahead.
spk01: Hey, Omri from Leumi Partners here. I have a couple of questions. The first one is regarding the equipment revenues. I was wondering how much of the decrease in equipment revenues is due to the transition to subscription and what should we expect further? The reason I'm asking that is the seller equipment also witnessed a significant decrease this quarter and not only the fixed line one.
spk05: Okay, so if I'm going to the bottom line, we did much less good results in the equipment sales. So we have to improve ourselves. This is a good potential, and improving in this area will take our results much better in the coming quarter. This is the bottom line. Regarding the equipment sales, we can say that from the fixed line segments, Much of it came because we changed the way we are selling equipment to our customers. Instead of selling some of our equipment to our customers, we lease the equipment to customers, and we are reaching with much better service to our customers. The customer journey will be much better. and we will face where is the churn rate in the fixed line segment will be much lower, and we are facing lower churn rate compared to other segments, we will enjoy financially better results because we will enjoy for the longer period from revenues compared to selling it in one time. So in the fixed line segment, this is something that we did it in purpose. But still, also in this segment, and for sure in the server segment, we did less good results, and we have to improve ourselves there.
spk01: Do you think the current run rate of the fixed line is representable, or should it be decreased even further in the next couple of quarters before it will stabilize?
spk05: No, it should be improved from this point, because I think that the main influence of our changing in selling, and instead of at least this equipment, is already in the reports.
spk01: Okay. And for my second question, are you experiencing any slowdown in Fiverr customer recruitment? Do you see the growth slowed? I saw the penetration rate. You mentioned 30%. It's a little bit lower. It seems like it decreased from previous quarters. And it's also the first time we see a slight decrease in the fixed line revenues compared to previous quarters. And I was wondering what do you see further? Is the competition getting a lot harder and it's harder to recruit Fiverr customers? Any color on that will be great.
spk05: Okay, so first of all, we see a slightly decrease in the fixed line segment revenue, but it's, as I already mentioned, mainly due to the fact of the equipment. If you unnaturalize the equipment, we see an increase in the service revenue, which is the most important thing for us, because we are more focused on recurrent revenues than for the equipment revenue, and we are, on the same time, we have to improve ourselves in the equipment, as already mentioned by me. This is the first thing. Regarding the pace of recruiting subscribers in the fibers, the competition is much higher. We saw Bezek what did this quarter. Their deployment is much faster and also for IBC. and we fill them anywhere we are working, still we are with 30% penetration rate, and we are still recruiting 17,000 customers this quarter, compared to lower results of our competitors. So as I already mentioned, we face a much harder competition, but we are still getting very good results.
spk01: And when you see yourself going forward in the next couple of quarters from what I know you don't want to recruit your subscribers on basic infrastructure and you want to do it on IBC but according to the stats I see and know your coverage is similar to IBC so at this point it doesn't give you any edge What do you see yourself doing after you finish your 1 million target? Will you consider recruiting on BASIC infrastructure or not?
spk05: Okay, so first of all, we have a couple of alternatives. Once is BASIC. We didn't decide any decision to terminate this alternative, so we are going to sell BASIC Our fiber is also on BEZEC. And we have the new alternatives also for riding on IBC, whether it's with IRU or with the regular tariff. And this is the second potential. So I think that we are the only operator in the country that can offer any fiber in any area. So this is the first thing. Beyond that, we are focusing mainly on our independent infrastructure. This is the first thing, but we are also offering wholesale on our own infrastructure. This is also a new channel that we are starting to work on. The main business that we are going to face in the coming months is the free TV contract. in which any TV that Free TV will going to hire, it will be on our own fibers. So we are working in any stream, also on our own fibers and also on wholesale fibers or IRU fibers.
spk01: Okay, great. And maybe for the last question, I was wondering, does the cellular subscriber base include stuff like SIM cards for smartwatches, tablets, etc. Do you also recruit those kind of things which pay a lesser ARPU and maybe contributes to a lighter increase in ARPU compared to, I don't know, a regular recruitment of subscribers in higher costs?
spk05: Okay, so, of course, I think the most potential in the world to increase revenues from cellular segment is because of this IoT, machine-to-machine customers. Of course, we are doing that also. For their influence on ARPU, there isn't any influence on the ARPU because we are doing some... extrapolation on the tariff in order to not to dirty the subscriber base and to count them as a regular tariff which means that let's say that any IoT customer is for 10 shekels and our ARPU is 40 shekels so we are going to count four customers of IoT as one customer
spk01: Okay. Makes sense. Thank you. That's it for me. Thank you.
spk03: The next question is from Michael Klar of Excellence. Please go ahead.
spk04: Hi. Good afternoon, everyone. I had a few questions. Firstly, I wanted to follow up on the question from the caller before me about fiber. And you mentioned about, you know, we see it in the numbers that pick up in competitive intensity. And I just wanted to kind of understand from you what you, you know, how does that look like? Is that, you know, how are your competitors competing with you or, you know, how do you see that? Is that something about price? Is it something about customer service? Is it something about coverage? You know, what are your challenges here? I also wanted to ask about dividend policy and whether we can, obviously the unlevered nature of the balance sheet is clear for us to see and how you think about the balance sheet and how we should think about potential for dividends in terms of timing and also in terms of magnitude. Thank you.
spk05: I will answer the first question. I will leave the second question to Avi. As for the first question, I think for sure the real competition in fibers is, of course, where you are present. So it's all about presence. If you are there and you are the only one that's there, there isn't any real competition. But where you are in the building, we're also IBC and Bezogzer. So it's all about... Service and price are both the major factors that influence whether the customers will be yours or for the competitors. And also other factors that if you are taking money in first time to bring the fibers to the customer or not. So this is where we are competing. But if you are looking at the results, you can see that in the bottom line, about all customers in the country now, any second customer belongs to partners. So we are more or less 50% of the customers, of fiber customers in the country. So we know how to bring good solutions, good presence, and good competition.
spk04: Okay, thank you.
spk07: Avi? Yes, regarding the dividend issue, as you know and I know that it was told in the prior quarters, the company is actually checking the issues. We are new as a CEO and we are going to make all the calculations that we need to do in order to take this decision. Evidently, we believe that at the end, all the stakeholders in the company should enjoy the company, and the dividend for the shareholders is part of it. So at the end, I think it's going to happen in the next quarters.
spk04: Okay. Thank you. Good luck.
spk03: Thank you. If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Gabbai 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 1-888-254-7270. In Israel, please call 03-925-5921. And internationally, please call 972-39255-921. The recording is also available on the company's website, www.us.gov. Mr. Gabay, would you like to make your concluding statement?
spk05: Okay, I will do it instead of Avi. So first, yes, thank you, everyone. We are pleased with the good results, which reflect stability and growth. We will continue to invest in infrastructure and 5G services in order to bring more value to our customers. I want to thank you again for joining us today. And we look forward to speaking to you next quarter. Have a good day.
spk03: Thank you. This concludes the Partner Communications second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.
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