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

Welcome, everyone. Thank you for joining us on Bezeq's 2022 First Quarter Earnings Call. I'm Tobi Fischbein, Bezeq Group CFO. With us from the Bezeq Group's senior management, we have Mr. Gil Sharon, Bezeq's Chairman; Mr. Dudu Mizrahi, outgoing Bezeq CEO; and Mr. Ran Guron, CEO of Pelephone, Bezeq International and Yes, and also our incoming Bezeq CEO. Before we start, I would like to draw your attention to the safe harbor statement on Slide 2 of our Q1 investor presentation, which also applies to any statement made during today's call. We would like to inform you that this event is being recorded. After reading our quarterly results, you will have the ability to ask questions by raising your hand virtually. Please note that as previously announced, this will be Dudu's last call with investors as Bezeq's CEO as he will be leaving Bezeq next month. Ran will replace him as our new CEO, and Ilan Siegel who was appointed to replace Ran as CEO of Pelephone, Yes and Bezeq International. We would like to express our deep appreciation for all the contribution vision and insights that Dudu has brought to Bezeq over the years, which have been instrumental to what Bezeq is today. Dudu, we wish you all the best in your future endeavors.

Thank you.

Let me now turn the call over to our Chairman, Mr. Gil Sharon, for his opening remarks. I will then continue the presentation on group financial highlights, followed by Dudu, who will be discussing Bezeq Fixed-Line results and Ran will pick up with the results of our subsidiaries. Gil?

Thank you, Tobi. I would like to use this opportunity to thank Dudu for all his dedicated hard work. Dudu has been with us for the last 4 years, bringing the company back to growth, leaving us with a terrific company with excellent results and significant potential ahead of us. Moving forward, we're very excited about the prospects of our newly structured management team will bring. I'm confident that with Ran's vast experience and leadership, Bezeq will continue its course on the upward path Dudu has started and will lead the company to new heights. The growth trends in our revenues and profits that began in recent quarters is continuing. We presented excellent group financial results in the first quarter of the year with growth in key parameters, attesting to the strategic plan present 6 months ago with a focus on growth. We successfully grew revenues in the group's core activities with growth of 4% in Bezeq Fixed-Line and 5% in Pelephone. Looking forward, we have built capabilities to develop the growth in the future, while maintaining a solid financial base to ensure the sustained leadership of the group. As we see on Slide 3, we have deployed our broadband network to 1.25 million homes with 143,000 customers already connected, resulting in a year-over-year ARPU increase of almost 7% to ILS 110. We're well ahead of the target to reach 1.4 million home passed by the end of the year. Pelephone's cellular subscribers amounted to 2.58 million, which is a 3.7% increase of which 624,000 of them are on 5G plans. The ARPU of cellular subscribers reached ILS 57, 7.5% year-over-year increase and up 3.6% sequentially. The group's robust financial results and accelerated deployment of fiber and 5G infrastructure are building a strong groundwork for future growth. We will continue to develop ourselves to maximizing our shareholders' return. In times of uncertainty in the global economy and capital markets, Bezeq offers investors solid, stable financial performance, spanning wide consumer and business customer bases with sustainable demand for advanced telecom services, allowing us to generate strong cash flow and shareholder returns supported by our dividend policy reflecting about 3.5% to 4% yield. Now let me turn the call back to Tobi to discuss our detailed financial results. Thank you.

Thank you, Gil. On the next slide, we present the group's financial highlights. Revenues in the first quarter of 2022 amounted to ILS 2.26 billion, up 1.5% year-over-year, mainly driven by the growth in fixed line and telephone. Adjusted EBITDA in Q1 rose 4.4% to ILS 958 million and adjusted net profit rose 7.7% to ILS 322 million, driven mainly by Pelephone's top and bottom line improvement. Free cash flow rose 76% to ILS 570 million mainly due to timing differences in working capital in Pelephone and Bezeq International. The next slide shows the group's key operational metrics for the past year, which overall reflects positive trends in subscribers and ARPU in our main activity areas. I would like to point out the 7.5% increase in cellular ARPU to ILS 57 and the 7% increase in retail broad on ARPU to ILS 110 as well as yes, relatively stable TV ARPU despite the change in subscriber mix. Moving to the next slide. Let me discuss Bezeq's financial strength and progress on debt reduction. By the end of March 31, 2022, our net debt decreased by 15% over the last year to ILS 5.6 billion, which is the lowest level of net debt since 2010. Our net debt-to-EBITDA ratio is now 1.7%. The group's financial stability enabled Bezeq to return to dividend distributions. And for the first time in 3.5 years, a dividend of ILS 240 million was distributed to shareholders this month. I would also like to highlight that the rating agencies recently reaffirmed the company's high credit rating with a stable outlook, showing further evidence of the company's financial robustness. Moving on to the next slide. We reaffirm Bezeq's 2022 outlook and continue to target adjusted EBITDA in the range of ILS 3.6 billion to ILS 3.7 billion, adjusted net profit between ILS 1 billion to ILS 1.1 billion and CapEx between ILS 1.7 billion to ILS 1.8 billion. Now Dudu will share with you updates on fixed line operations.

Thanks, Tobi. We finished another strong quarter with a 4% increase in overall revenues, which was the highest quarterly revenue since the end of 2015. The increase was driven by a 9% increase in broadband Internet revenues as well as 6.7% increase in revenues from transmission and data communications. On the next slide, adjusted net profit, saw an 11.7% decreased to ILS 256 million due to higher depreciation and financial expenses and free cash flow was decreased due to the sale of real estate in the corresponding quarter. The following slide shows our success in broadband Internet. As previously mentioned, our broadband revenues jumped 9% to ILS 434 million, primarily due to the growth in retail broadband lines, which was up 2.3% year-over-year with ARPU reaching ILS 110, representing a 6.8% increase year-over-year. Our average broadband speed increased significantly to 151 megabytes, an increase of 94% year-over-year. We expect our broadband speed to further strengthen the group's competitive advantage and benefit our customers. In terms of fiber optics, as seen on the next slide, we continue to sweep the nation with our advanced network. Bezeq fiber network has now reached 1.25 million Israeli homes with 143,000 homes connected as of today. We continue to benefit from our full WiFi broadband home Internet strategy with almost 700,000 customers using our BE router, representing 68% of total customers. As you can see in the next slide, revenues from the business sector grew by 6.7% to ILS 286 million and other revenues grew 17.2% year-over-year to ILS 75 million due among others to the Blue-Raman submarine cable project with Google. Moving forward to the next slide, we detailed our expenses and show an increase in salaries due to the employees' recruitment relating to the fiber project. Depreciation was up in the quarter due to CapEx increase and operating expenses increased due to fiber project equipment and higher subcontracting expenses. In summary, the nationwide deployment of fiber together with our customer premises strategy as well as our leading position in the business sector, strengthened our position as a leading telecom operator in Israel. On a personal note, after having spent the last 4 years as a CEO, I'm bidding the group farewell. I would like to thank -- I would like to thank all of the excellent professional whom I have worked with over these years, both within the company and outside it. I feel pleased to leave Bezeq at the present growth momentum I leave behind the growing stable and solid company with a clear leadership in the telecommunication market. Thank you. With that, I'll now turn the call to Ran to talk about Bezeq subsidiaries.

Thanks, Dudu. As you can see, it has been an excellent quarter for Pelephone and Yes. Pelephone showed subscriber growth of 4% growth in revenues from services and a significant improvement in all financial metrics. We now have 624,000 5G plan subscribers, contributing to higher ARPU. Yes is now officially the largest Israel IPTV operator with 265,000 customers watching through IP broadcasting, of which 91,000 of them are STING TV customers. We recently signed a strategic agreement with Disney, which will provide Yes with a number of important marketing advantages in relation to the soon-to-be launched Disney+ service in Israel. The next slide marks our ambition, next steps to set -- to transform Bezeq International into a growth-focused ICT company. First, we expect a reduction in Bezeq International ISP customers activity following the regulatory removal of the separation between broadband infrastructure and Internet access. We expect this to result in a significant cost reduction along with a lower CapEx requirement at Bezeq International. In parallel, we plan to set Yes ISP activity and make Yes the group's triple-play arm, combining fiber and TV. The launch of Yes ISP is expected to take place during the second half of the year. Moving to the next few slides. Pelephone posted excellent financial results with a 5.3% increase in revenues, a 32% increase in adjusted EBITDA and a significant improvement in adjusted net profit from ILS 9 million to -- last year to ILS 55 million in the first quarter of 2022. Cash flow increased to ILS 145 million from a negative cash flow of ILS 59 million last year. Revenue and profit growth was mainly due to growth in 5G plan subscribers and partial recovery in roaming revenues. Free cash flow was positively impacted by timing differences relating to consumer debt collection due to employee sanctions in the second half of 2021. In the next slide, we show Pelephone key operational metrics. We show continued growth in subscribers for the 6 consecutive years, adding more than 7,000 net subscribers this quarter. Additionally, the return to roaming revenue grows together with a higher number of 5G plan subscribers, increased our ARPU to ILS 57 in the first quarter, which represents a 3.6% sequential increase and a 7.5% increase year-over-year. We expect to continue as more and more people switch to 5G and are traveling again. On the next slide, the graph demonstrates the turnaround in Pelephone we've been talking about. Starting in the second quarter of 2021, we recorded positive revenue growth and the upward momentum is accelerating. Moving to Yes, next slide. The number of Yes subscribers grew further with 265,000 Yes customers now watching TV through IP broadcasting. As of today, we can say we are the leading IPTV operator in Israel. Yes have been focusing on maintaining its leadership position by providing original productions, making it the leader of professional and high-quality content. On the next slide, we see the positive momentum at Yes has resulted in stable revenues on a year-to-year basis, improved adjusted EBITDA and adjusted net profit as well as positive cash flow. On the next slide, you can see Yes' key operational metrics. The number of subscribers grew again for the 6th consecutive quarter to a total of 564,000 and of which 89,000 of them are also STING TV subscribers, compared to only 70,000 in the previous year. The ARPU of Yes subscribers decreased slightly due to the change in the mix of subscribers. Moving on to Bezeq International slides. Bezeq International provide a wide range of business solutions, including cloud services, data center services and cybersecurity services. Our focus here is on growing ICT and cloud solution for the business market and for the customer ISP activity, fade away following the after-mentioned regulatory changes. On the next slide, in terms of the key metrics for the first quarter of 2022, Bezeq International revenues decreased slightly to ILS 307 million due to the decrease in ISP activity. Free cash flow increased significantly to ILS 77 million and was positively impacted by timing difference relating to the customer debt collection, following employee sanction in the second half of 2021. Turning to the next slide. Our road map for Bezeq International is to build a strong growth focused ICT company, enabling migration of companies and organization to the public cloud while offering cyber protection services and solutions as well as our international data services for global Israeli companies and operators abroad. I will now turn the call back to Tobi.

Thank you, Ran. Our Q1 results show that we are progressing with the implementation of our growth strategy with revenue growth in Bezeq Fixed-Line and Pelephone, an accelerated deployment of fiber optics as well as increased customer connections. Pelephone and Yes are showing subscriber growth as well as improved profitability in Pelephone and positive free cash flow in Yes. Lastly, we continue to focus on ESG improvements as well as on ESG disclosure and ratings.

With that, I will open the Q&A session. [Operator Instructions] I see one question from Jerry Dellis.

I would be interested, please, your thoughts on the recently announced core proposals in relation to the medium and large segment with an enterprise. What do you think that the regulator might have in mind here? And what do you think your potential exposure might be? Also be interested in how you intend to respond? And then second question, please, in relation to your strong free cash flow performance this quarter. You mentioned that, that was partly related to the customer debt collection issue. I'd be interested, please, if you're able to quantify the impact of customer debt correction phasing, please?

Thank you, Jerry. I'll take the second question, but let's first Dudu address the first question, we dealt with the announcement by the Ministry of Communications about their inquiry on the B2B market.

Jerry, I think it's still very, very -- we are very early stage of the process and still it's way too early to react and say anything about the subject. It's just Ministry of Communication asking the companies offering -- which currently offering services, data services to business customers in Israel, what they think the Ministry should do to increase competition in the field. We obviously think there's a very aggressive competition in the business segment in Israel. We have 4 -- at least 4 infrastructure-based operators competing on those business customers. But for now, that's the most we can say.

On the second question about the free cash flow improvement in the quarter, about ILS 200 million were related actually to the timing differences in collection -- in debt collection, resulting from the sanctions, employee sanctions in the second half of 2021 as Pelephone and Bezeq International, we collected all that -- all those amounts. And in addition, we made a change in the way we work with the credit card companies on the acquiring field, adding about ILS 100 million additional. The balance between the those ILS 300 million and the ILS 570 million we reported as free cash flow comes from the business. But there are also some, of course, working capital changes but are specific of the first quarter and of course, the improved in profitability at Pelephone. I see a question from Ondrej from UBS.

I think my line was pretty bad. I will try my best. Apologies if you don't hear me. I want to just take it up. Sorry for this. So first of all, I would like to over that future analytics. And then a couple of questions for me, please or some terms of the wholesale ARPU and broadband impact this has gone up quite significantly, about 20%. This is my [indiscernible] break down for us the impact between just the corporate retail and the impact of fiber upsell? And then if you could talk about the retail and in broadband because [indiscernible] down a bit quarter-over-quarter in terms of time. When do you expect this to pick up in '23, if at all. And then if you mentioned something in terms of the second question, you mentioned [indiscernible] from the ISP infrastructure removal [indiscernible] for me, I felt that there were no clear revenue synergies, but can you maybe walk us through the details on any potential...

You're welcome. And I'll just try to briefly repeat the question for those that couldn't hear it clearly. So you're asking about the trends in Internet ARPU. As we've reported it and how much that is related to the upsell from copper to fiber? And also, what's the contribution, if any, from the change in ISP following the change in regulation, the removal of the separation between infrastructure and ISP. So Dudu, you want to address this?

First of all, the ISP part is not an event of -- it's not a Q1 event. It's -- we started selling ISP unified packages on the beginning of April. So that starts the Q2 event. So it hasn't had any effect on the ARPU in Q1. Regarding the ARPU growth on Q1, so basically, there's two main trends. One is what we've seen on previous quarter is the penetration of BE router and WiFi enhancer, et cetera, which we are aggressively promoting and selling. And of course, the second part is the upgrading to fiber. We haven't provided a breakdown of that, but I would say that most of the ARPU growth now is coming from fiber upgrades.

Thank you, Ondrej. Michael Klahr from Excellence.

Can you hear me okay?

Yes.

Yes, good. Okay. A few questions. Firstly, I just wanted to follow up on the last question. I saw you had 40,000 additions in fiber connections, is wholesale -- are there any wholesale connections included in that? And if so, how much? And also, could you give us some color as in how many of those connections were our existing Bezeq customers or copper customers? Is it most of them, i.e., how many new customers are you winning or winning back? That's my first question. And then on Pelephone, I was interested in how much of the pickup the year-on-year increase in service revenues is related to roaming as opposed to kind of real ARPU gains? And then on Yes, I wanted to ask about the Disney agreement, whether it was exclusive, whether it's an exclusive agreement. So I'll stop there.

Thank you, Michael. So I'll ask Dudu to address this question on the 40,000 additions on the fiber customer base. We don't disclose the split between retail and wholesale. So that, of course, includes wholesale. Dudu, you want to address about new and existing customers? .

Michael, so as Tobi said, we are not providing the breakdown of fiber customers. But I would say that most of the customers, our retail customers, small part or the smaller part is wholesale customers, mainly coming from Cellcom who operates as a wholesaler on Bezeq fiber network. And the same goes for the question for new versus upgrades. Most of our customers are upgrading customers, upgrading from copper. And here, we are -- again, we are not providing the breakdown, but big customers are upgrading customers.

Tobi, you can address the ARPU question...

So on the question about the Pelephone's ARPU. Of course, we don't disclose specific roaming contribution, but we can say that the improvement in service revenues year-on-year, certain not negligible part of that is from roaming. And also -- but also we see that the Bezeq plans that we sell, especially the 5G plans have also contributed more or less a similar amount. So the improvement is coming both from transition to 5G plans as well as the recovery in roaming. And just to give you a bit of flavor about that, we see in Q1 roaming revenues reaching about 80% of the level in Q1 2019, which is pre-COVID-19. On the ARPU basis, it's more like 70% because we have also increased our subscriber base. So that's for your information. And you want to take the Yes question about the Disney plan agreement?

What was the question, please?

The question was to give a bit more color on the benefits of the agreement.

Yes. No, sorry, is it an exclusive. I want to know is it an exclusive?

Yes. Well, I will not discuss exclusivity because some of these items are still confidential, but it certainly gives Yes an advantage Disney+ will operate in Israel in the open market. Anyone can join the application, but it will be bundled for Yes customers as a part of the TV offer. This is a huge advantage, and we'll be very proud to be the operator that offer our customers and other customers to join Disney to our call centers and digital interface. So it's a main advantage for us, both on recruiting new customers and preventing churn. So -- we're very proud that Disney has chosen us.

And they haven't signed with anyone else.

We have a question from Tavy Rosner from Barclays.

Hi, can you hear me?

Yes.

Sorry, I was disconnected for a few minutes. So apologies if you already touched on some of the questions. The first one was on the regulatory side, I went through your draft proposal or on reduction of interconnect's fees, can you add any color on that and on the potential impact you think it may have?

Overall, for the group, the impact is going to be not meaningful. We will see the impact on the interconnect season telephone, which will come down both from the revenue side and also from the cost side. So you will see, of course, that coming down from the ARPU, but it will have no effect on EBITDA and on the bottom line. And Bezeq Fixed-Line is going to be mild effect, mild impact and overall for the group, it's not going to be significant.

Thanks for that. And on the fiber side, so you disclosed your number of active lines and also the number of home passed. Do you have a set target in mind of how many active fiber customer you're going to reach in the foreseeable future? And I guess, I mean, how do you think about it in general? Is it a percentage of upset in your existing broadband customer base? Or also when we look at your competitors and the effort they're putting out there, how should we think of the competitive landscape? .

Tavy, this is Dudu. Of course, we have our plan regarding how the level of penetration we want to achieve in fiber. And basically, as a percentage of our rollout -- of the fiber rollout. So basically, we are aiming on achieving 2 million households in Israel in the time frame of 2 to 3 years from now. And of course, we expect a very high penetration on fiber during the next few years. But we are not providing any guidance on those numbers currently.

I think you should expect that Israel on a whole -- I think you should expect that Israel as a country will pass the European take up. That's what we saw in the past on digital services.

[Operator Instructions].

Ondrej here from UBS again. Can you hear me now on the phone line? .

Yes.

Okay. So apologies for the computer audio issues before that. So I just wanted to follow up because I think you had lost a bit on the line. So first question was in terms of the broadband, please. So the ARPU that I was specifically asking about was the wholesale ARPU. So if I kind of back out what the trend there was? And I'm getting something like a 20% year-over-year increase in the wholesale ARPU. So my question really was if we break that down, what part of that 20% is due to the copper rate reset that we've had in January as usual. And then what part of that is driven by wholesale migration from copper to fiber? That was one question on broadband. And the second question on broadband was basically in terms of net adds. Do you expect these to pick up now that you are rolling out in areas where you don't have as much infrastructure competition, please?

Ondrej, of course, we don't provide the breakdown of the ARPU effect on wholesale, but you -- I think you touched the two main points that -- there was an increase on wholesale copper rates at the end of last year that this is a regulated price, and it was updated and it was increased. And of course, the other big effect is the fact that some of the wholesalers are starting wholesaling fiber and the fiber price on wholesale is ILS 80 vis-a-vis roughly ILS 50 on copper. So those basically are the two main reasons. We haven't provided any breakdown on those. Regarding your second question, of course, we are now going into rural areas in Israel, which -- on areas on which we are the sole fiber provider other than the fact that other operators can wholesale our network. So obviously, we expect higher penetration on those areas regarding the roughly 1 million households, which are targeted by 3 to 4 different networks and higher -- much, much higher competition.

We have a follow-up question from Jerry.

You mentioned, I think, earlier the larger part of the fiber broadband net adds were existing customers being sort of upsell. I'm interested in whether you have been actively trying to use fiber to attract market share from your competitors? And how are you going about that process? Or whether that is a program that you envisage ramping up in the future? And then secondly, in relation to the combined Internet service, as you mentioned, started beginning of April, I wonder if you could give us any sort of early indications as to how that's going and what we might expect in the second quarter?

Well, Jerry, regarding your first question, if I heard it correctly, of course, we are aiming -- through our fiber rollout, we are aiming both on existing customers and attracting customers who are currently being served by other operators. So this is our main tool now in the competition on the fixed line. And of course, we are aiming our full efforts on those two markets doing the best we can. And you could see our net adds thing quite high if you compare it to the other operators. Regarding the ISP bundles. So of course, it's not a Q1 event, but we started selling ISP packages on early April. And we are seeing very, very high demand for those services. So the take-up is very high, but we haven't yet provided any numbers on that as obviously, it will happen on Q2.

I have a follow-up question from Michael.

There's a question for Ran about Pelephone. You were talking about the 5G packages. I just wanted to understand, if an operator wanted to invest in real 5G, is -- are they able to or the limitations of the market and the fact that the licensing wouldn't allow you to do so in any case. I mean with the mini base stations, et cetera. Is that something that's just possible? Or is it impossible for various reasons?

Well, we can -- if I understood the question correctly, we can divide 5G into 3 segments. First of all, radio, radio within existing sales sites. This has been deployed, we've been employing for 1.5 years. We assume that the deployment of countrywide will take 4 to 5 years. That is if we deploy 5G radio in something like 50% on the existing sales side, because it's mainly focused on populated areas. So this is the first segment. Second is 5G core, which enable further advanced services. Everyone is going to 5G core these days, so we'll do the same. And as for mini base stations, this we'll have to see in the future how much this is needed and where it, of course, will be part of our plan. But in general, I can say that Pelephone will be in full deployment in 5G in all of these three areas or three technologies. I hope this was the question.

Ondrej here from UBS again. I've got two, if I may, both around the cost side. So first of all, just in terms of the higher employee expenses that you flag in terms of the fixed business related to the fiber rollout, both, I guess, in terms of the technical side and on the selling side. Are those -- do you see those more as temporary costs for the medium term as you roll the network? Or do you see those more as temporary, and, say, permanent, of course? And then second question on the cost side. You mentioned some synergies on the ISP removal. Can you just maybe give us some idea of the scale that you can achieve here taking part of the international business into the fixed side, et cetera.

Well, regarding your first question, Ondrej, of course, as we said, the increase in headcount was related to the fiber deployment and the customers' connection. So connecting 40,000 customers a quarter requires a lot of technician force, and we've recruited employees, both for the deployment and the connecting the customers. And as we go along and conclude the deployment, those employees over time will be redundant and we can decrease our workforce.

I'll take the second question Okay. Second question was regarding Bezeq International. So we expect that in the next 2 to 3 years, the residential segment of Bezeq International will decline. And so we have informed before that we estimate that we can release around 500 employees. We didn't reveal any numbers, but you can make the maths yourself. I would say that at least half of them is our service representatives and some are headquarters employees as well. And there will be less investment, but we will have to invest in Bezeq International ICT business. So this is moving in the contrary direction. So you can take this 500 employees figure and then do some of the calculations yourself.

And obviously, as Bezeq Fixed-Line takes up ISP customers. We won't have to recreate those costs that we are having today at Bezeq International and it's going to be eventually reduced. We have time for one last question, if there are any. So if there are no further questions at this time, 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, and we look forward to speaking to you on the second quarter 2022 earnings call. Thank you very much.