Cellcom Israel Ltd. (CEL) Q1 2019 Earnings Call Transcript

Cellcom Israel Ltd. (NYSE: CEL) Q1 2019 Earnings Call May 28, 2019, 9:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Ladies and gentlemen, thank you for standing by. Welcome to Cellcom's First Quarter 2019 Results Conference Call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded.

You should have all received by now the company's press release. If you have not received it, please contact Cellcom's Investor Relations team at GK Investor & Public Relations at 1-646-688-3559 or view it in the News section of the company's website, www.cellcom.co.il.

I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Ehud Helft -- GK Investor Relations

Thank you. I would like to welcome all of you to Cellcom Israel's First Quarter 2019 Conference Call, and I would like to thank management for hosting this call today. With us on the line are Mr. Nir Sztern, the CEO; and Mr. Shlomi Fruhling, the CFO. Nir will open by providing a summary of the main highlights of the results, followed by Shlomi, who will review Cellcom Israel's financial performance in further detail.

Before I turn over the call to Nir, I would like to remind our listeners that in this call, management's prepared remarks may 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 of 1968.

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I'll note that 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, 2018, filed under Form 20-F, which was filed on March 18, 2019 with the SEC. In addition, any projections as to the Company's future performance represent management estimates as of today. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change.

I'll note that certain lines in the condensed consolidated interim statement of cash flow table, including the earnings release published by the company early today, were mistakenly omitted. A full table was included in the form 6-K filed thereafter by the company on the SEC website at www.sec.gov and the ISA website at www.magna.isa.gov.il, and is also available on the company's website at www.cellcom.co.il.

I would now like to hand over the call to Mr. Nir Sztern. Nir?

Nir Sztern -- Chief Executive Officer

Thanks, Ehud. Good day to all of you, and welcome to our First Quarter 2019 Earnings Conference Call. Our fixed line business is performing well, and we are continuing working toward closing the IBC deal and entering in agreement for the sale of our fiber networks. However, the cellular market continues to see high competition. This competition continues to erode the average revenue per subscriber.

Growth in the fixed line business and equipment sales during this quarter mitigated some of this decline. We continue to take efficiency measures alongside the many actions we have taken to improve and streamline the processes of the sales, support and service. We recently announced the signing of a new collective employment agreement with the employee's representatives, which covers the years 2019 and 2020, which cancelled wage rise in 2019 and postponed the 2020 wage rise at least until 2021, while reducing the company's welfare budget.

We have also created a program which enables employees to gain exposure to Cellcom's share price performance through the grant of options and restricted share units, which we believe will better align their interests with those of the shareholders. The new agreement is expected to decrease our costs compared to the expenses under the previous agreement, and will have a positive cumulative effect of approximately NIS54 million on the Company's Adjusted EBITDA for the years 2019 to 2020, compared with the previous collective agreement.

On the positive side, we saw growth in the fixed line segment, and service revenues were 4% ahead of those over last year. This demonstrates successful execution on our long-term strategy to provide a full, comprehensive, and broad range of end-to-end communication services for all our customers.

We continue to bring new subscribers to Israel's best over-the-top television offering and an important market disruptor in the Israeli TV market. As of the first quarter 2019 end, we had 227,000 household subscribers, having grown by 23% year-over-year. Part of the value is the continued enhancement and improvements we're making to the service. We recently announced a collaboration agreement with Netflix for the distribution of their service in Israel, including through direct access to the Netflix service from our Cellcom TV platform.

Broad market acceptance of the Cellcom TV offering, including as part of our appealing Triple and Quattro packages, is continuing to bring us good subscriber recruitment in each and every quarter. With regard to our fiber-to-the-home strategy, we're making progress with our purchase of IBC, which, if completed, will bring the optical fiber communications infrastructure in Israel to the next stage. We continue the rapid deployment of Cellcom's independent fiber optic infrastructure in residential areas, and expect the completion of the transaction for the sale of that fiber infrastructure to IBC in the coming months, subject to the parties entering into a definitive agreement. Together with the investment in IBC, subject to its approval, will contribute significantly to the results of the company's operations and make a positive improvement to its free cash flow.

In summary, as we indicated for a number of years, the cellular market environment in Israel remains tough. However, at the same time, we look to continue the development of our strategy in the fixed line segment, which is progressing successfully.

And with that, I'd like to turn the call over to our CFO, Mr. Shlomi Fruhling, for a review of our financials. Shlomi?

Shlomi Fruhling -- Chief Financial Officer

Thank you, Nir. Good day to all of you. I'll provide you a summary of the results. The details can be found in the press release we issued earlier today.

Revenue for the first quarter of 2019 totaled NIS928 million, markedly lower than the NIS933 million reported last year. The revenue saw a 3% decrease in service revenue, somewhat balanced by an 8% decrease in equipment revenues. The fixed line segment services revenue grew 4% over those of the first quarter of 2018, partly compensating for an 8% decline in the cellular segment service revenues over the last year.

The growth in fixed line segment services revenue was due to the growth in our subscriber base for TV and Internet infrastructure services. The adjusted EBITDA was NIS224 million, or 24% of revenue, a 24.1% increase compared with NIS187 million, or 20% of revenues, in the first quarter of 2018.

Adjusted EBITDA from the fixed-line segment was NIS78 million, compared with NIS68 million last year, and adjusted EBITDA from cellular segments was NIS146 million, compared with NIS119 million last year. The increase in the adjusted EBITDA resulted from a decrease in rent expense in total amount of NIS63 million, due to the recognitions of right-of-use assets as a result of the initial implementation of IFRS 16, starting from 1st January, 2019. In addition, the adjusted EBITDA for the first quarter of 2019 was affected by a reclassification following the voluntary change in accounting policy guiding the revenues from long-term credit arrangement.

Net loss for the first quarter of 2019 totaled NIS16 million, compared to a net income of NIS7 million in the first quarter of 2018. This was negatively affected by the implementation of IFRS 16 by NIS4 million. The free cash flow for the quarter was NIS46 million, versus NIS84 million in the first quarter of last year. Our cash capital expenses during the first quarter of 2019 totaled NIS184 million, versus NIS146 million in the first quarter last year. As of the end of the first quarter of 2019, our net debt stood at NIS2.2 billion.

Our cellular subscriber base amounted to 2.85 million in March 31, 2019, with 2.851 million at the end of last year. The churn rate of cellular subscribers in the first quarter of 2019 was 11%. ARPU for the first quarter of 2019 was NIS47.2, compared to NIS51.8 in the first quarter of 2018.

With that, I would like to open the call for questions. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press *1. If you wish to cancel your request, please press *2. If you are using speaker equipment, kindly pick up the handset before pressing the numbers. Your question will be pooled in the order they are received. Please stand by while we pool for your questions.

The first question is from Tavy Rosner of Barclays. Please go ahead.

Chris Reimer -- Barclays -- Analyst

Hi. This is Chris Reimer on for Tavy. Thank you for taking my questions. What is the timeline now for the closing of the IBC deal? And do you have any idea, looking at deployment versus customer base, if the transition to IBC infrastructure -- could it begin immediately, or are there -- what I mean is, are there current subscribers who could be transitioned immediately, or would you be starting from scratch, so to speak, with marketing infrastructure on IBC infrastructure?

Nir Sztern -- Chief Executive Officer

Regarding the first questions, we're waiting for the approval of the regulators, mainly from the Competition Commission, or what used to be the Antitrust Commissioner, and the Ministry of Communications. We assume we'll get them very shortly. So hopefully, we'll have closing within a few months, I hope. But obviously, we're still waiting to hear their final decisions on the matter.

In terms of your question on customers, we're not moving the customers to IBC, if I understood the question correctly. We're selling the infrastructure. The customers, our Cellcom customers, we'll continue to serve them. The deal is that we'll buy the services or infrastructure from IBC, but we'll continue to be working directly with our customers. So we're not starting from scratch, and the existence of fiber risk will continue to be in Cellcom and continue to grow on Cellcom.

Chris Reimer -- Barclays -- Analyst

I see. Okay. And just another. How should we be looking at the cellular segment over the next, let's say two years, over the near-term, in terms of customer transaction, and the declining ARPU, and the potential upcoming need for investments, like in a 5G network?

Nir Sztern -- Chief Executive Officer

So it's obviously hard for me to give you a projection on -- in the coming two years on the cellular. Prices, as you know, are very low. Competition is fierce. We're continuing to see decline in terms of cellular revenues, but at a declining rate. So basically, prices are pretty low. You can see from the P&L, and in terms of cash flow and the total amount of cash that we're in a pretty good position. We're still waiting for decisions again from the Ministry of Communications in terms of the 5G tender, when it's gonna be, and there're still a lot of unanswered questions regarding the cost in terms of the frequencies and so on. So, it's a little bit early for me to answer these questions. We're still waiting to hear from the Ministry of Communications.

Chris Reimer -- Barclays -- Analyst

I see. Okay. Thank you very much.

Nir Sztern -- Chief Executive Officer

Thanks, Chris.

Operator

If there are additional questions, please press *1. If you wish to cancel your request, please press *2. Please stand by while we pool for more questions.

There are no further questions at this time. Mr. Sztern, would you like to make your concluding statements?

Nir Sztern -- Chief Executive Officer

Thank you. I'd like to thank all of you for joining our conference call and your continued interest in our company, and look forward to hosting you again at our next call. Have a good day.

Operator

Thank you. This concludes the Cellcom Israel Ltd. First Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

Duration: 15 minutes

Call participants:

Ehud Helft -- GK Investor Relations

Nir Sztern -- Chief Executive Officer

Shlomi Fruhling -- Chief Financial Officer

Chris Reimer -- Barclays -- Analyst

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