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

Welcome, everyone, and thank you for joining us on Bezeq's 2022 Second Quarter Earnings Call. I am Tobi Fischbein, Bezeq Group's CFO. With us from the Bezeq Group senior management team are Mr. Gil Sharon, Bezeq's Chairman; Mr. Ran Guron, Bezeq's newly appointed CEO; Mr. Yochai Benita, CFO of our subsidiaries Pelephone, yes and Bezeq International. Before we start, I would like to draw your attention to the safe harbor statement on Slide 2 of our Q2 investor presentation, which also applies to any statement made during this call. We would like to inform you that this event is being recorded. After presenting our quarterly results, you will have the ability to ask questions by raising your hand virtually. Let me now turn the call over to our Chairman, Mr. Gil Sharon, for his opening remarks. After his introduction, I will then continue the presentation of our group financial highlights, followed by Ran, who will be discussing Bezeq Fixed-Line's results. And Yochai will conclude with the results of our subsidiaries. Gil?

Thank you, Tobi. Let's start on Slides 3 and 4. Our second quarter results continued the growth trend in line with the group's strategic plan. We successfully grew revenues in the group's core activities with revenue growth of 2.7% in Bezeq Fixed-Line and 4% in Pelephone. Bezeq Fixed-Line continued its accelerated deployment of fiber optics to 1.36 million homes, with 180,000 fiber subscribers already connected. Retail broadband Internet ARPU once again increased nearly 7% year-over-year to reach ILS 113, an increase of ILS 3 versus previous month. Pelephone showed significant improvement in its financial results with improved adjusted EBITDA, adjusted net profit and free cash flow. This was the fifth consecutive quarter with a year-over-year increase in service revenues driven by further recovery in roaming revenues, an increase in subscribers and growth in 5G subscriber plans. The number of subscribers increased by 53,000 in Q2 '22, of which 700,000 are on 5G plans as of today. Our financial strength and strong cash flow generation enables us to reduce our net debt by ILS 1 billion while maintaining a relatively high CapEx level supporting a massive deployment of fiber. Today, we're announcing the Board's recommendation for a distribution of a semiannual dividend of ILS 294 million. I am convinced that the continued focus on our growth engines, high-speed fiber optic Internet infrastructure and 5G network will further drive us towards continued growth. We will continue to devote ourselves to maximizing our shareholders' returns. Now let me turn the call back to Tobi to discuss our -- in details our financial results.

Thank you, Gil. In the next slide, we present the group financial highlights for the second quarter and first half of the year. Revenues in the second quarter of 2022 amounted to ILS 2.23 billion, up 1.1% year-over-year, mainly driven by the growth in fixed line and Pelephone. Adjusted EBITDA slightly decreased in the quarter by 2.1% year-on-year to ILS 924 million but is up 1.1% year-over-year to ILS 1.9 million in the first half. Adjusted net profit rose 2% year-over-year to ILS 310 million in Q2, mainly driven by improved profitability in Pelephone, totaling ILS 632 million of adjusted net profit for the first half of the year, representing a 4.8% increase year-on-year. Turning to the next slide. Free cash flow for the first half of the year was up significantly year-over-year to ILS 929 million mainly due to timing differences and improved working capital across the group. Next slide shows the group's key operational metrics for the fast -- for the past 5 quarters. On the subscribers side, we saw continued increases in TV and cellular subscribers, with stable retail Internet subscribers as fiber take-up offsets churn from our copper network. On ARPU, retail Internet and cellular ARPU increased year-over-year, with a moderate decrease in TV ARPU due to the change in subscriber mix. Telephony ARPU was down due to the MOC tariff reduction that was implemented in Q2 of 2022. Moving to the next slide, let me discuss Bezeq's financial strength and success in debt reduction. By the end of Q2, our net debt decreased by over ILS 1 billion or 15% year-over-year. Our net debt-to-EBITDA ratio is now 1.7x compared to 2.0x a year ago. Moving on to the next slide. We recently announced an update to our 2022 financial guidance. We have updated our adjusted EBITDA, and it is now in the range of ILS 3.65 billion to ILS 3.75 billion compared to ILS 3.6 billion to ILS 3.7 billion previously. Adjusted net profit is now between ILS 1.1 billion to ILS 1.2 billion from ILS 1 billion to ILS 1.1 billion announced before. And CapEx remains unchanged at a range between ILS 1.7 billion to ILS 1.8 billion. Lastly, we have also raised our expectation for total homes passed for this year to 1.5 million compared to 1.4 million homes previously set. Now Ran will share with you updates on fixed line operations. Ran?

Thank you, Tobi. We finished another strong quarter with a 2.7% year-over-year increase in overall revenues, reflecting a resilient revenue base, as the MOC telephony tariff reduction was implemented in the second quarter of 2022. Revenue growth was driven by an increase in broadband Internet and business services. Fiber connections and robust sales of equipment led to a 6.6% increase year-over-year in retail broadband ARPU to ILS 113. Moving on to the next slide. Adjusted EBITDA and adjusted net profit were down moderately year-over-year. The next slide shows significant increase in free cash flow in the first half of 2022 driven by timing differences and improved working capital. The following slide shows our achievements in broadband Internet that reached revenues of ILS 443 million for the quarter, representing a 9.9% increase year-over-year. Fiber subscriber take-up offsets copper churn -- and increased average broadband speed by 87% year-over-year, reaching 164 megabytes. Moving on to fiber optic on the next slide. We continue to sweep the nation with our advanced network. Our fiber network has now reached over 1.36 million Israeli homes, with 180,000 fiber customers connected as of today. The WiFi broadband home Internet strategy has also greatly benefited the on-premises equipment business as well, with 708,000 customers with the Be router and 386,000 customers with Be Spot and Be Mesh by the end of second quarter of 2022. As shown in the next slide, the business sector continued to have healthy growth with 4% year-over-year revenue growth in transition -- in transmission and data as well as 9.2% year-over-year growth in cloud and digital services. Other revenues grew 18.2% year-over-year to ILS 65 million due to the Blue-Raman submarine cable project with Google, among others. Moving forward to the next slide, we detailed our expenses and show a salary increase due to employee recruitment relating to the fiber project. Depreciation was up 7.4% in the quarter due to CapEx increased. Higher operating expenses were due to higher sub constructors (sic) [ subcontractors ] and equipment expenses also relating to the fiber project. In summary, the accelerated fiber deployment, combined with increased focus on take-up, reflected potential for continuing growth and strengthening of our position in the residential broadband Internet market. With that, I will now turn the call to Yochai to talk about Bezeq subsidiaries.

Thank you, Ran. As you can see, it has been an excellent quarter for Pelephone with service revenue growth for the fifth consecutive quarter and improved profitability metrics. The next slide shows adjusted EBITDA increased 18.4% year-over-year to ILS 187 million. And adjusted net profit grew 130% year-over-year to ILS 45 million due to a recovery in roaming revenues, an increase in the numbers of subscribers and growth in 5G subscribers plan. Moving to the next slide. Free cash flow in the first half of 2022 was ILS 276 million, compared to negative free cash flow in the corresponding period, due to improved profitability as well as timing differences and improved working capital. The graph display on the next slide shows the continued turnaround in service revenues over the last 5 quarters. The following slide shows the key operational metrics. Pelephone's ARPU rose 5.6% year-over-year in Q2 2022, while total subscribers increasing by 4.6% year-over-year to reach nearly 2.6 million, of which 53,000 were added during the quarter. Moving to yes on the next slide. The number of yes subscribers grew further, with 291,000 now watching TV through IP broadcasting, out of which 97,000 are STINGTV customers. In Q2 2022, we launched the agreement for the distribution of the Disney+ streaming services in Israel. And we continue to lead in original production in Israel with professional and high-quality local content. Looking at the key financial metrics for yes in the next slide, we see that revenues were stable despite the decrease in ARPU due to an increase in STINGTV subscribers. Adjusted EBITDA decreased 13.7% year-over-year to ILS 63 million due to an increase in content and original production expenses. The next slide shows free cash flow in the first half of 2022 was positive ILS 14 million and was impacted by timing differences in payments for content. On the next slide, you can see yes' key operational metrics. The numbers of net subscribers [ has ] -- grew again for the seventh consecutive quarter by 1.3% year-over-year to 567,000 mainly due to the growth of 27% year-over-year in STINGTV subscribers. ARPU decreased slightly to ILS 184 due to the change in the mix of subscribers. Moving on to the next slide. Bezeq International is focusing on expanding its ICT activities for the business market and growing cloud solution and service contracts. In Q2 2022, there was a reduction in ISP consumer activity due to the regulatory removal of the Internet infrastructure and ISP separation as of April 2022. The next slide shows Q2 2022 financial highlights with a moderate decrease in revenues due to the reduced ISP activity, partly offset by an increase in business services. Adjusted net profit improved mainly due to the lower depreciation and amortization expenses. Moving to the next slide: Free cash flow in the first half of 2022 totaled ILS 78 million, a significant increase year-over-year mainly due to timing differences in working capital relating to customer debt collection. Let me now turn the call back to Tobi for concluding remarks.

Thank you, Yochai. Turning now to our last slide. Bezeq's Q2 results show the progress made thus far, showing record results and growth in numerous metrics. Moving forward, we are devoted to continuing our momentum in implementing the growth strategy by advancing our fiber optics deployment, focusing on fiber take-up, promoting additional subscriber growth in Pelephone and yes and generating higher ARPU with the transition to 5G plans. With that, I will open the Q&A session. [Operator Instructions] I will now pause for questions.

Let us take the first question from Ondrej.

Ondrej here from UBS. I want to clarify basically your guidance mostly. So you obviously raised the EBITDA guidance. You keep the CapEx guidance despite increasing the target of homes passed to 1.5 million at the end of the year from 1.4 million. I just want to understand because obviously you're capitalizing some costs -- or rather expensing some costs in terms of personnel that you were previously capitalizing. So the free cash flow guidance is upgraded, but so is the number of homes, so is the home passed cheaper than previously expected? Or is this just a function of moving costs from one place to another and your EBITDA guidance was initially very conservative?

Thank you, Ondrej. I will address your question. In fact, when we originally came out with our yearly guidance, there were a couple of major changes ahead of us, some of which took place or started in Q2, such as the telephony tariff reduction reform; and the ISP reform, the removal of the separation between infrastructure and ISP service. And we didn't know in advance how these will roll out, so that's among other things. We gave a range of guidance and we didn't necessarily say that we are guiding for the middle of the range. Now after 6 months of actual results, we are in a position to update that guidance. And as you know, the update is not parallel or proportionate between the different metrics. That's how we came up with a 10% increase in the net profits metric, a little bit less on adjusted EBITDA. And we remain our CapEx unchanged because we find out as we go along that, part of what we are doing, we are doing with the existing CapEx capacity.

So can I just clarify? In terms of the homes -- or in terms of the costs for the fiber rollout, clearly that is now slightly below per home than you were expecting before. Can I just clarify that? And will that be the case going forward as well?

Well, I -- no, I wouldn't necessarily derive from the specific amounts done in a certain period about the cost per home. As you know, we are moving in the first phase from buildings to more residential areas and homes. And as a result of that, the change -- there is a change in the costs of doing that, but given the work of our own technicians plus the subcontractors that we are using, we are able to keep a very good pace. And part of our plan is actually trying to bring forward part of the deployment instead of delaying it to later years. Jerry? Next question, Jerry Dellis from Jefferies.

I've got 2 questions, please. The first one is the status of plans for Bezeq Fixed-Line to offer TV services. Is that still an active discussion with the MOC? And if so, is there a time line attached to a decision there, please? And then the second question is, ahead of the legislative elections in November, what are the leading parties saying about their industrial policy objectives in telecoms? And specifically has there been any discussion about possible interventions to support consumers through the cost-of-living crisis?

I will address your questions. In terms of Bezeq bundling with TV, since the government is changing -- so I think there will not be any advancement on that probably in the next months. So we're having a change of government and a change of minister, so everything is probably on hold. To your second question, you're assuming that parties talk about these things. Well, not really. So we don't know the intentions of anyone, but I don't see telecom as being on the major target of helping reduce cost of living. The focus in Israel is more about grocery goods, supermarket prices, et cetera.

Next questions, Michael Klahr from Excellence.

Well done on a good quarter. I had a few questions. Firstly, I wanted to ask about Pelephone and the increase in subscribers there. I also saw there was a large increase at Cellcom and just wondering if anything is going on there. Is that market share gains? Is that, I don't know, additional SIMs? Where is that coming from, if you have an answer?

Okay. This quarter, we managed to reach 29,000 new -- net new customers. In a way, it's a compensation for the first quarter. Overall in the first half, we reached [ 26 ]. This quarter, we have decided to invest in this area, again, in order to gain back the positive trend.

Okay. And a related question. I see that some of the -- in Pelephone too, [ in ] mobile, we see that some operators have started to raise pricing in the last month. On the other hand, another operator, one of the MVNOs, came with quite -- an offer around -- there was quite a bit of noise about their offer around free international calls, free international roaming. I just wanted to kind of get your view on where you think -- what you think in terms of mobile pricing, how the -- how competitive the market feels at the moment to you.

I think we're in general -- I would say in general we're -- I would say we're seeing stability in mobile prices in Israel; and most importantly the 5G package, which is priced around ILS 10 higher than basic 4G packages or even a bit more than ILS 10 higher. And as more customers migrate to those plans, we would see continuous growth in ARPU.

Okay, that's helpful. And then just 2 other questions, 1 on costs. You mentioned some of the inflationary pressures. You mentioned, I think, content and production at yes. And I think you also mentioned the operating expenses in the fixed business. I am just kind of wanting to get a -- like a sweeping overview. Obviously with -- there's a lot of inflation anywhere. Where are you most feeling it? Or where you most -- are you worried about it? Maybe in terms of salaries, equipment costs. Is it across the board? Or do you kind of see it moderating if we look a bit further out maybe 12 months out?

Okay. So part of the increases that you have mentioned, for example, in content is not necessarily coming from inflation, just from utilizing more content during the quarter, but to your question, the area where we are obviously more exposed to inflationary pressure is through our CPI-linked debt, which is still quite significant, although we have a partial hedge on that debt. But the more inflation there is, then the more finance expenses there will be on that. And we have also included in our Board of Directors' report some explanation about the potential impact of that going forward.

How much of your debt is CPI linked, how much of your gross debt? What percentage?

It's -- so it's -- after hedging, it's around 25%. Chris Reimer, with the next question, please.

2 quick ones for me. What would you consider -- what would you say the roaming and contribution to cellular ARPU was this quarter? And also what kind of upselling opportunity are you seeing, as a result of fiber, into maybe television and cellular or vice versa?

Okay, we don't specify specific roaming contribution. We don't split our ARPU. Yochai, do you want to explain a bit more about that?

So yes. The second quarter ARPU is slightly higher than the first one, the first quarter ARPU, about ILS 0.5 higher. As Tobi mentioned, we do not provide breakdown of the components that we have in the ARPU, but definitely the roaming is getting a -- is having a positive impact on the results. And this is what I can elaborate.

Could you repeat the second question, please?

I was wondering about the upselling opportunity if you're seeing any traction from new fiber customers into cellular or TV or vice versa.

I will answer this. You have to remember that we're still under the regime of structural separation. That means that we cannot do joint marketing between Bezeq Fixed-Line and the other group subsidiaries. Of course, once it will be removed, then like all operators in the world, we can do bundling and upselling, but currently it's impossible from Bezeq Fixed-Line. What we can do and started doing is that -- yes, our TV subsidiary, has started just last month selling bundles of TV together with Bezeq fiber. So this is allowed, but of course, yes go-to-market and total market presence is less than what Bezeq Fixed-Line can do when it will be allowed.

Next question, David Kaplan with Psagot.