Bezeq The Israel Telecommunication Corp. Ltd (BEZQ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Bezeq's Fourth Quarter and Full Year 2019 Results Conference call. [Operator Instructions] As a reminder, this conference is being recorded and broadcasted over the web. At this time, I would like to turn the call over to Mr. Naftali Sternlicht, Investor Relations Manager for Bezeq. Mr. Sternlicht, please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us on the call today. With us from Bezeq Group's senior management team, we have Mr. Shlomo Rodav, Bezeq's Chairman; Mr. Dudu Mizrahi, Bezeq's Fixed-line CEO; and Mr. Ran Guron, CEO of Pelephone, Bezeq International and yes; and Mr. Yali Rotenberg, Bezeq Group's Chief Financial Officer. Before we begin today's discussion, I will start with a brief safe harbor statement. Today's conference call and webcast contain partial information from the public reports of Bezeq under the Israeli Securities Law, for which the Hebrew reports can be accessed at the Israeli Security Authority's website. The call and webcast are not a substitute for a review of the detailed reports of Bezeq. Today's conference call and webcast also do not constitute an offer or invitation to purchase or subscribe for any securities and nothing contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. Before I introduce our speakers, please note that their comments will generally follow the slide presentation, which is available under the Slides tab on the webcast link and may also be downloaded from Bezeq's IR website. You can go through the presentation by clicking on the arrows on the left-hand -- left or right-hand side. Let me now turn the call over to our Chairman, Mr. Shlomo Rodav, for prepared remarks on our group quarterly results, after which Yali will continue the presentation on group financial highlights, followed by Dudu, discussing Bezeq Fixed-line results. Ran will pick up with the results of our subsidiaries; and Yali will wrap up the presentation, after which management will be available to answer questions.

Thanks, Naftali. Let's start on Slide 3 with our preparation for the coronavirus outbreak. We're in the midst of our -- of an incredibly challenging period for Israel and the world. More than ever, residents and businesses rely on infrastructure and telecommunication services. All companies in the Bezeq Group have always focused on providing high-quality and reliable service. And at this difficult time, our strength in infrastructure and services and our commitment to customers are particularly prominent. We stand firmly alongside residents and businesses in this difficult time. As a result of the situation, there is an increasing demand for certain services and a decrease in other services. Approximately 50% of our call center employees are working from home, and our technician and infrastructure workers are providing full service. We are responding to many requests for remote work projects and are providing the maximum response to the sharp increase in calls to our service centers. Moving to Slide 4. Bezeq is the largest telecom group in Israel. Here, you can see a high-level snapshot of our latest quarterly operating and financial results. We'll talk about this in more details as we go along. Turning to Slide 5. Over the next few months, as will be proved during the corona crisis, we shall lead the telecommunications market, enabling the country to cope with the social separation and remote communication through the ownership and operation of quality and advanced infrastructures and even at such demanding times shall provide the best service, while fully complying with regulatory restrictions. We are here to meet the technology business and service-oriented needs for all telecom requirements of our customers. We'll adapt ourselves to the possible down cycle in the economy, emphasizing profitability in the medium term. And we'll also continue to strive for financial stability and improvement in aggregate results with ongoing efficiency and controlled risk taking. Lastly, until the removal of the structural separation is complete, the Group will continue to operate in 2 business units, Fixed-Line and the subsidiary companies. Now I'll turn the call to Yali to talk about our financial results.

Thanks, Shlomo. Turning to Slide 7. Let me start off by saying that the 2019 financial results were impacted by a few extraordinary items, specifically, the write-off of the tax assets in respect of losses from yes, impairment loss in telephone assets, impairment loss in Bezeq International assets and capital gains mainly relating to the sale of the Sakia complex. Turning to Slide 8. Group-wide revenues in 2019 totaled ILS 8.93 billion compared to ILS 9.32 billion a year ago, a decrease of 4.2%. The decrease in revenues was primarily due to lower revenues in all key groups business segments. On Slide 9 and 10, group-wide gross salary expenses decreased from ILS 2.57 billion in 2018 to ILS 2.47 billion in 2019, a decrease of 3.9%. The decrease was due to the reduction in salary expenses in all key group business segments. On Slide 11, group-wide operating and general expenses decreased from ILS 3.38 billion in 2018 to ILS 3.26 billion in 2019, a decrease of 3.4%. The decrease in operating expenses was primarily due to streamlining in most expense items of the Group. On Slide 12, after adjusting for the impact of impairment losses as well as other operating income and expenses, group-wide adjusted EBITDA in 2019 totaled ILS 3.73 billion compared to ILS 3.95 billion in 2018. Turning to Slide 13. After adjusting for the impact of impairment losses as well as other operating income and expenses, group-wide adjusted net profit was ILS 950 million compared to ILS 983 million in 2018. Moving to Slide 14. Gross CapEx in 2019 was ILS 1.55 billion compared to ILS 1.73 billion in 2018. The decrease was due to somewhat lower CapEx in all -- in the key group business segments as well as a decrease in gross salaries in Bezeq Fixed-Line, which were capitalized. In addition, CapEx was impacted by a decrease in net payments relating to the sale of the Sakia complex that were capitalized. On Slide 15, we have broken down subscribers and ARPU by different business segments. Let me just point out, retail ARPU in the fourth quarter of 2019 was ILS 98 compared to ILS 96 in the fourth quarter of 2018. Now Dudu will share with you updates on the Fixed-Line operations.

Thanks, Yali. The outbreak of the coronavirus presents many difficulties and challenges for residents and businesses, while highlighting the importance of high-quality, stable telecommunication infrastructure that ensures a high level of service. In the current crisis, we are seeing that telecommunication infrastructure is essential for the country, businesses and residents, as is water, electricity and food. The ability for businesses to operate remotely and continue to provide service is critical these days, as is the ability of citizens to work from home and allow their children to study remotely while having to catch up on news and consume video content. Amid the highly uncertain situation, Bezeq provides certainty when it comes to the quality of our telecommunication infrastructure and services and our absolute commitment to the customers. In recent days, we are seeing a significant increase of new customers connecting to Bezeq broadband Internet as well as growing demand for home-based business services. Despite the fierce competition in the telecommunications market, Bezeq remains the anchor for continuous, reliable and national telecommunications service for all Israel residents and businesses. I will now discuss the Fixed-Line highlights for 2019. Turning to Slide 17. Despite our competitors' deployment of fiber as well as lower market pricing, we have managed to reduce broadband retail customer churn. In the next slide, we are focusing on customers -- on customer premises through a 3-part strategy, which consists of our BE router of the base home products that ensure broadband quality, such as Bspot and Mesh and value-added services such as cyber protection, antivirus and network support. Turning to Slide 19. As a part of our initiative to provide high-quality Internet services at home, we continue to improve broadband experience and customer retention through our BE router and Bspot, Be Mesh services. The number of customers with BE router has increased from 100,000 in the fourth quarter of 2018 to 321,000 in the fourth quarter of 2019. In other words, 1/3 of our retail customers choose to connect with the BE router. Moving on to Slide 20. Our retail ARPU continues to grow as a result of increased penetration in customer premises services as well as value-added services. This is the only telecommunication product in Israel that has consistently shown ARPU growth. Turning to Slide 21. Excellent customer services and high customer satisfaction is our highest priority. You can see that customer satisfaction for technician services improved from 8.9 in 2016 to 9.5 in 2020. Moving to Slide 22. In addition to retail, we are leading the business sector through advanced telecommunications solutions supported by a high-quality infrastructure. The outbreak of the coronavirus presents many difficulties for businesses. The ability for businesses to operate remotely and continue to provide service is critical these days. At this time, reliable telecommunications services is highly important, and this is one -- this is a core strength for Bezeq Group built over many years. We are prepared for emergency situation and a provision of continuous services to our business customers. We provide business services in 3 main segments: business communication solution, which include virtual exchange, Bcam, remote backup, et cetera; integrated solution, which includes managed switches, call centers and data security; lastly, we are simplifying services and sales through digitization of client interfaces. Our market share in business telephony grew from 73% in 2016 to 78% in 2019. Turning to Slide 23. As you can see, Bezeq is a leader in high-quality service for the business market compared to our competitors that is today critical for businesses continuity and social adoption due to the corona crisis. Moving to Slide 24. Our business services include rapid growth in integrated solution in several areas, remote office services, equipment, system management, voice solution and data security. On Slide 25, we show our nationwide distribution of data center with 2 large sites and 10 boutique data centers. Turning to Slide 26. As we have previously reported, Bezeq Fixed-Line entered the terminal equipment market this year. And in the first stage, through the sale of smartphone and televisions, we are showing significant growth in this area, especially in e-commerce, that has shown rapid growth in 2019. On the next slide, we continue to sell real estate in 2019, mainly from the sale of Sakia Complex. In addition, we plan to move Bezeq's corporate headquarters to Holon at the end of 2020. Moving to Slide 28. Employee streamlining has been a big initiative for Bezeq Fixed-Line. During the course of 2019, 267 employees left the company as a result of our streamlining plan. In the fourth quarter of 2019, the company recorded a provision of ILS 130 million for the retirement of 140 permanent employees and 60 employees with flexible status. As a result, in 2019, gross salary expenses decreased by ILS 30 million. Turning to Slide 29. We achieved progress in lowering operating expenses during the year. Total operating expenses went down by 5.2% to ILS 565 million. While after adjusting for terminal equipment and material, total operating expenses went down by 11.2% year-over-year. Now I'll turn the call to Ran to talk about Bezeq subsidiaries.

Thanks, Dudu. Regarding the coronavirus crisis, the subsidiary began their full operational, technical and inventory preparation since the beginning of February, when the crisis erupted around the world and before it began to reach Israel. The company are prepared to provide continuous services and sales and have been working for a few days, whereby 30% of headquarter staff and 50% of service centers employees are working from home, while technical staff are working normally. From a business point of view, during this crisis period, we are witnessing an increase in demand for the services we provide, including mobile communication, continuous and high-quality Internet, high-quality content and advanced remote access solution for business customers. On the other hand, we are experiencing a decline in roaming services revenue. Regarding terminal equipment, the inventories are functioning normally, but there is some decrease in handset sales since some of the sales points are closed. Now I will talk about operational highlights for the 3 subsidiaries, which are covered in Slides 31 through 38. yes is Israel's favorite content brand because of high-quality original shows, such as Fauda as well as international content, and provide a great viewing experience to our customers. Our launch of the yes+ marked the start of our transition from satellite-based broadcasting to Internet-based broadcasting, which is a significant change in the company's history. In addition, our collaboration with Apple includes unique pricing model that offer the customers, Apple TV 4K in a retail -- rental model without a need to purchase the device. Our migration from satellite to IP broadcasting is going well. Over the next few years, yes will gradually replace set top boxes until full transition to IP services. The fixed cost for satellite infrastructure will also be replaced by the use of the Group's infrastructure. As a result, we have started to see decrease in subscribers churn in recent months, mainly due to improved STING service and the launch of the yes+. Bezeq International is a leading ISP in Israel with advanced IP services and high-quality infrastructure. We provide a wide range of business solutions from ICT and cyber to data centers and project management. We have a global network of 12 facilities in Israel and abroad, and we are launching our fifth data center. Pelephone subscriber base has grown for 4 consecutive years. We have an advanced cellular network in Israel with wide distribution, and we are a leading operator in the business sector. We are also continuing to innovate in key technology areas, such as IoT, Big Data, cyber and cloud and ESIM. Meanwhile, the subscriber growth at Pelephone in the number of postpaid subscribers reached 1.91 million users in the fourth quarter of 2019. The growth in number of subscribers helped offset the decrease in price and resulted in a significant slowdown in the reduction of revenues. Moving along to Slide 40. Now let me talk about the synergies and streamlining of the subsidiaries. The starting point of all this was at the end of 2019, when 3 leading telecommunication companies in their fields were dealing with the market crisis and decline in revenue and profitability. Turn to the next slide. 2019 led the foundation for organizational and commercial infrastructure for the implementation of synergies between the 3 companies. The goal of the synergies was to promote a variety of packages and solutions to customers, improve profitability, reduce cost by introducing shared services, increase the benefit to the customer as well as create synergy of operative, technological and downstream capabilities. On the next slide, you can see the key organizational processes that we implemented in 2019. For example, we appointed unified management team for the 3 companies to streamline the decision-making process alongside saving tens of millions of shekels a year. We signed agreements with the 3 companies that allow for the realization of synergies and streamlining and will reduce the workforce by a total of 1,000 employees in the next 2 years. Turning to Slide 43. Let me share some key business processes we undertook in 2019. We launched our very first triple-play package, including leading Internet services for Bezeq International, together with high-quality TV from yes. This package enabled us to enhance the value proposition for both existing and new customers, and offer a full range of telecommunication products under one roof. In addition, we signed a contract to transfer Pelephone corporate headquarters to Petach Tikvah, and signed an agreement for a unified CRM system. Moving to Slide 44. Sharing and maximizing customer interface is the key aspects for realizing synergies. We built One Stop Shop for company's distribution channels and cross sold TV services to Internet customers and vice versa. In addition, we achieved synergies in sales and services for the benefit of customers in the 3 companies on various issues. The decrease in service expenses for our main subsidiary companies is direct reflection of our streamlining efforts. As you can see on Slide 45, such expenses decreased 12% from 2017 to ILS 843 million in 2019. Meanwhile operating expenses decreased by 5% to ILS 5 billion over the same period. I would now like to turn over the call to Yali, which will provide you with some highlights on our debt management.

Thanks, Ran. We are focused on lowering our debt over time. We believe our responsible and prudent management of various financial aspects of the company will provide financial flexibility to ensure its long-term financial strength. Going forward, we will seek to maintain prudent debt management ratios and remain in a AA rating range, continue to adapt the company's debt structure to its needs and operate with high cash balances. The health and strength of our balance sheet and the steps we've taken significantly contribute to our resiliency versus phenomena such as the coronavirus. Turning to Slide 49. Let me review some of the actions we took in 2019 with regards to debt management. We raised ILS 1.87 billion of long-term debt and made early repayments of debt to financial institutions and banks of ILS 1.83 billion. In addition, in September, we completed the repurchase of our Series 7 debentures in the amount of ILS 444 million par value as part of a tender offer. And in December, we completed a private exchange between 2 debentures. All this led to an increase in average duration of our debt from 3.5 in 2018 to 4.4 in 2019. On Slide 50, we are working to further decrease our debt level. Both our gross debt and net debt decreased from 2017 to 2019. And on the next slide, you will find a breakdown of our financial debt by counterparties and by type of instruments. Lastly, slide -- on Slide 52, given the outbreak of the coronavirus and the resulting uncertainties in the global and local economy, at this stage, we're unable to publish an accurate outlook for the Group's results for 2020. We consider it important to continue to provide guidance, and we'll therefore continue to closely monitor developments in the coming months, and we'll consider depending on the situation the possibility of publishing a forecast for 2020, together with the publication of the results for the first quarter of 2020, if feasible. Let me remind you that we will be holding a virtual analyst conference in Hebrew for the local market after this call. This concludes our prepared remarks. Operator, let's begin the Q&A session.

[Operator Instructions] First question is from Tavy Rosner of Barclays.

First, I wanted to go back to the last point that Yali made with regards to you guys not providing guidance given the corona concerns. So I'm just looking at the big picture. You did mention that you are seeing increased demand for Fixed-Line telephony for Internet. I'm just wondering, given how recurring revenues are and the visibility you are seeing across the different segments, are you being too conservative? And I guess the follow-up to that question would be, what are the risks to the business that could be related to corona? I cannot picture people decreasing their yes subscriptions and so on. So I guess a lot of it is really recurring. So what's not recurring? And how bad can it get in your view?

It's Shlomo. The question is or the problem is that the corona puts us in a situation that we have never been here before. And to assume now that we can forecast what the situation is going to be even in the short term, when our results are highly affected by government decision is not prudent in our opinion. What we can tell you is what is our assessment at present. At present, we see positive factors and we see negative factors. However, some of them, especially the positive factor are influenced by possible onetime events. For example, if many industry -- many of our business customers are looking to increase their infrastructure at present. So this may be onetime, it may be long term. We don't know yet. So what we have told you is that we are going to review the situation, study, analyze it and hopefully, we'll be able to give you a guidance for 2020, together with the results of the first quarter, which is expected in about 60 days. We believe to give you guidance now without full understanding of the potential implication, which are not only in our hand, is not prudent.

Okay, I understand. Moving on to fiber. I mean lots of the talks have been about corona throughout the market. I guess looking beyond that, can you tell us where we stand on the regulatory process? Last quarter, on your earnings call, you mentioned the different hearings that were about to take place discussing the different issues. Did these hearings take place given the current corona restrictions? And I guess, how much is left before a potential minister will be able to sign on the latest regulatory framework?

Tavy, this is Dudu. Currently, things are entirely in the hands of the MOC. The hearing processes, there were several hearings are already been answered and are waiting for the final decision of the ministry or the minister himself. We asked them a few times to take decision as quickly as they can. We even done so this week. We are still calling them to decide as quickly as possible. And currently, we are waiting for the final decision. It's entirely in their hands currently.

Do you get a sense that the framework is ready and just waiting for sign off? Or are you not entirely sure that they've made decisions with regards to all the moving parts?

Well, we don't have any clear knowledge. But as far as I can tell, I think the policies are more or less decided upon and just waiting for the final approval.

Next question is by Roni Biron of Ion Asset Management.

Well, my first question was answered -- just answered. I was just wondering, if given the current circumstances, obviously, it highlights a greater need for a more robust telecom infrastructure in Israel. Do you get a sense that anyone on the regulatory side is paying attention to this in a way that may expedite the process? Anything on that front? Is it still reasonable to expect a policy in place this year?

Well, Roni, as I said, it's not -- it's entirely in their hands. As I said, we met them a few times. We've met the minister himself this week, and we are calling -- and called him and we are still calling them to take decision as quickly as possible. If they'll take decision quickly, that we can launch the project this year, and it will have no effect the life in Israel during this year. So we do hope that, that will be the case. We don't have any more information to give other than that.

Okay. And maybe a question on the mobile side. There have been more tangible consolidation efforts recently. Do you see that as more of a threat to Bezeq or maybe an opportunity to repair the mobile market and the overall telecom fundamentals?

Ran?

Well, the merger that is possible to happen is between Cellcom and Golan, which are operating on the same network nowadays. So it may be approved, we don't know yet. We don't have an opinion on that. It can affect the market one way or another. So we're just holding and waiting to see how that's going to go.

And I understand there was a regulatory decision -- a minister decision to freeze all package pricing and the number portability and provide some leeways for the mobile companies. Should that be -- is that something that is going to contribute significantly to Pelephone during this situation?

Well, this is a short-term decision now for 14 days, so we'll have to see. I don't see a significant contribution. This can go one way or the other. But if this crisis continue and this decision continues for the medium term, we might see some effect. We will have to see.

Roni, it's Shlomo. With your permission, just a few more words on the ministry. The problem here is that the government is mainly dealing with trying to provide a solution in the short term. Instead of taking a much longer view and understanding that the actions that are being taken now may lead the market into some sort of a recession, depends on the period and the depth of it. And instead of thinking about how to already plan for the market, to go out of the recession, all of them are dealing only with short-term aspects. We strongly urge the government and basically everybody to take now a long-term view in order to take steps already now in order to ensure that the market will go out of the recession in a successful manner and fast. Otherwise, all of the citizens of Israel will suffer significantly. And the problem is that at present, although it's for only a short period, the ministry have decided to hold all of their decisions on long-term projects. It's both the tender for 5G and also the fiber project, and we believe it's a grave mistake.

Is it a temporary suspension? For how long is it?

I suggest you ask the minister. At present, they say it's short term, but you know how it is. In Israel, every short term is long term.

It's Ran, if I may say, the 5G tender was for now postponed for 1 month. I mean the process should continue at the end of April, but we don't know yet how much it will take. It looks like a few months at least.

Next question is by Ondrej Cabejšek of UBS.

I'm sorry if I'm repeating questions. My call dropped for a couple of minutes. I was interested relating to the situation that you're speaking of, for example, in your distribution, you have always said that you have a strength in distribution because of the quantity of outlets that you have versus your competition. I was curious now with the current shutdown of many of these if the company is taking any steps in, for example, moving or changing your digital channels? That's the first question. Second question, if -- I know you don't provide guidance, but at this stage do you have any items that you can sort of highlight as one-offs for next year? You were mentioning, you again expect, for example, real estate sales. If you could tell us more about the planned efficiency programs at this stage and any color would be appreciated.

It's Ran. I'll take...

No, no, I'll deal with the second question first. As we've spoken before, there are different direction of the short-term effect. As an example, reduction in revenues from roaming. This is something which is very clear. It's both outgoing and incoming. It's very simple in significant percentages. There is going to be a decrease in the revenue. On the business side, we see a surge in the upside direction because of requirement from customers, business customers to increase the weight of the services, the type of services, et cetera. In laptops, for example, we had huge surge in the sales of it. However, in other sectors, mainly on the SoHo and the businesses that are related to tourism, restaurants, et cetera, there is a strong reduction. So again, we need to see how things are settling, and we believe that in a couple of weeks, we'll have a better visibility to the situation. So there are both positive and negative aspects.

And if I can follow up on this, please. Do you have a number in mind in terms of, for example, digitization of the SoHo and SME segments in Israel? Once things calm down do you expect companies to significantly start investing into being prepared for something similar ever happening again? And then second, a follow-up on this, if you could give us a number in terms of the roaming that you had, for example, this year that we might expect some impact on 2020.

Ran, please provide some insight to the roaming.

Well, the roaming, we can expect a damage of a few tens of millions of shekels. It depends on how long this crisis is. But we expect that going out of this current crisis, people will go abroad, businesses and residential as well. So we'll have some compensation from a boom effect of going out of this country once the lockdown is released. So we'll have to see about that. This is not a major damage, and we'll have to see how this will evolve. Regarding SoHo, we -- I cannot give any figures. We'll have to see how long the crisis is to see how much this segment is affected by the loss of business that they suffer.

And if you could just please clarify on the first question that I had on the potential digitization of your distribution channels, which now are no longer, I guess, competitive advantage especially in mobile.

Yes, we have strong distribution. So we are now switching to digital and call centers, selling CPEs. We would still be strong because the open market here is decreasing, shop -- street-level shops and shopping mall shops are closing down. People still want to upgrade because they use their phone very much now because they stay home and because of the situation. So we'll see some compensation. It will not be the same, but it will not be damaged as much as the roaming. But let me just say that these 2 areas are not a big share of our total revenue in the subsidiaries or in the whole Bezeq Group. So it's only a few percent of the total revenue of the group and the companies.

[Operator Instructions] There are no further questions at this time. I would like to remind participants that a replay is scheduled to begin in a period of 3 hours on the company's website at www.bezeq.co.il. Mr. Rotenberg, would you like to make your concluding statement?

Yes. Thank you. I would like to thank you all for taking the time to join us today. Should you have any follow-up questions, please feel free to contact our Investor Relations department. Management looks forward to speaking to you on the first quarter 2020 earnings call. Thank you.

Thank you. This concludes Bezeq's Fourth Quarter and Full Year 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.