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

Welcome, everyone, and thank you for joining us on Bezeq's 2023 First Quarter Earnings Call. I'm Tobi Fischbein, Bezeq Group CFO. With us from the Bezeq Group's senior management team are Mr. Gil Sharon, Bezeq's Chairman; Mr. Ran Guron, Bezeq's CEO; and Mr. Ilan Sigal, CEO of Pelephone and yes. Before we start, I would like to draw your attention to the safe harbor statement on Slide 2 of our Q1 2023 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 presenting our quarterly results, we will have a Q&A session. Let me now turn the call over to our Chairman, Mr. Gil Sharon, for his opening remarks. After his introduction, I will continue the presentation of our group financial highlights, followed by Ran, who will discuss Bezeq fixed-line results, and Ilan, who will address the results of Pelephone and yes. Gil?

Thank you, Tobi. Let's start on Slide 3. We are proud to announce that the first quarter of 2023 we have achieved two record-breaking results. In terms of revenues, which showed growth in all key group companies, leading to our best quarterly revenue results since 2018. We also had a record quarter in fiber take-up in both retail and wholesale subscribers. Yes revenues continued to grow as it successfully market its TV and fiber bundle and Disney+ package. Pelephone continued to grow its 5G subscriber base contributing to ARPU. As a result of our continued debt reduction, and improved leverage ratios, both Israeli credit rating agencies upgraded our outlook to positive, reflecting our financial strength and positive momentum. The dividend payout was upgraded this year to 60% of net profit, reflecting a yield of roughly 4%. The next slide demonstrates our technology and business roadmap and the progress made so far. In Bezeq Fixed Line, we have over 1.7 million homes passed and total take-up of 380,000 subscribers on our network, resulting in an 18% increase in broadband ARPU since 2020. For 2023, our goal is to reach 2 million homes and in the midterm ambition to pass 2.7 million homes, about 85% of Israeli households. In Pelephone, 5G subscribers reached 860,000, representing 33% of total subscribers and led to a 12% increase in service revenues compared to Q4 2020. In the midterm, we expect 5G users to reach 80% of all subscribers as we continue to provide excellent value for our customers. And yes, the total TV subscribers reached 580,000 of which 356,000, or 61%, are IPTV customers, making yes the largest Israeli IPTV operator. In the midterm, we expect 100% of our yes subscribers to migrate to IP, which will lead to significant OpEx and CapEx savings. In the next slide, we present the group's financial highlights for the first quarter, showing that the group's revenues in the quarter amounted to NIS 2.3 billion, up 2.4% year-over-year and the highest since 2018. Adjusted EBITDA was NIS 936 million, down 2.3% and adjusted net profit was stable at NIS 321 million. Free cash flow for the quarter was lower at NIS 345 million, mainly due to timing differences in working capital. Our financial debt decreased by NIS 331 million that helped improve our leverage ratio. Turning to the next slide, which showcases our operational highlights. For Bezeq Fixed Line, we achieved excellent results across the board. Our fiber subscribers reached 380,000, and we have now passed 1.75 million homes with our fiber deployment, 47% growth year-over-year. For Pelephone, our cellular service revenues increased 1.8% to NIS 445 million for the quarter. And our ARPU, excluding interconnect fees, was up NIS 1 year-over-year. For yes, total TV subscribers reached 580,000, representing the 10th consecutive quarter of subscriber growth. ARPU was up NIS 4 sequentially and reached NIS 185, driven mainly by successful marketing of Disney+ package. Looking ahead, industry reports expect that artificial intelligence will become the catalyst that redefines the telecom industry, leveraging fiber optic and 5G networks. Our continuous investments in advanced communication infrastructures and technological leadership will allow us to continue leading the market and meet the exponentially growing data needs. Now let me turn the call over to Tobi to discuss the financial results in more detail. Thank you.

Thank you, Gil. The next slide shows the group's key financial metrics for the quarter. We posted record revenue since 2018, up 2.4% year-over-year to reach NIS 2.3 billion driven by enhanced performance in all key segments. On the profitability side, adjusted EBITDA declined slightly due to a decrease in telephony tariffs following the Ministry of Communication regulatory change as of April 2022 as well as a onetime grant to fixed line permanent employees following a salary agreement in principle in the public sector. Free cash flow was NIS 345 million, a decrease of 39.5% due to timing differences in working capital relating to employee sanctions that resulted in higher cash flow in Q1 of 2022. Moving to the next slide, where we show the key operational metrics for the past 5 quarters. On the subscriber side, we saw growth in cellular, retail, broadband Internet and TV subscriber numbers. One thing to note here is that for the first quarter of 2023, we are seeing a sequential increase in total wholesale Internet subscribers for the first time since 2018. On the ARPU side, this slide, we see an impressive 9.1% increase in retail Internet ARPU and a NIS 4 sequential increase in yes TV ARPU, driven by our agreements with international content providers. Telephony ARPL decreased year-over-year due to the MOC tariff reduction in Q2 of 2022. Turning to the next slide. Net debt decreased by NIS 331 million or 6% year-over-year to NIS 5.3 billion. The group's net debt-to-EBITDA ratio is now at 1.6, down from 1.7 a year ago. And both Israeli credit rating agencies have upgraded our outlook from stable to positive due to our continued progress in improving the group's financial ratios as well as the group's overall strategy and business positioning. Moving to the next slide. We would like to reaffirm our guidance for the year and remain confident in our progress. Turning to the next slide. We are sharing our ESG milestones and targets. We have signed United Nations Women's Empowerment principles to help further advance gender equality movement. This commitment is in line with our goal to have equal representation of women within Bezeq management with at least 40% of the Board of Directors being female by 2030. Similarly, we aim to have at least 20% of our workforce come from diverse populations by 2030. This year, our subsidiary companies joined the ESG program and commitment to our ESG targets. Now I will hand it over to Ran, who will share results from our fixed-line operations. Ran?

Thank you, Tobi. In the first quarter of 2023 was another strong quarter for us with a recording fiber take-up of NIS 84,000 for the quarter. The number of homes passed reached 1.75 million with 263,000 retail fiber customers as of today. Total revenues grew 1.4%, driven primarily by broadband Internet and cloud and digital services, which grew by 10.4% and 7.4% year-over-year, respectively. Further, retail Internet ARPU grew 9.1% and reached NIS 120. The next slide details the financial highlights. The decrease in adjusted EBITDA by 3% was mainly due to the MOC decrease in telephony tariffs and the onetime grant to employees following a salary agreement in principle in the public sector. Decrease in cash flow was primarily due to changes in working capital. The following slide showed our achievements in the broadband Internet that reached revenue of NIS 479 million for the quarter, representing a 10.4% increase year-over-year. Retail Internet ARPU increased by 9.1% to NIS 120, through continued growth in both fiber customers take-up and increase in ISP customers. The next slide details our fiber take-up both in retail and wholesale. On the retail side, our acceleration plan in the second half of 2022, greatly improved retail take-up since the third quarter of 2022, and momentum accelerated with 48,000 net adds in the first quarter, pushing total retail fiber take-up to 263,000 today. On the wholesale side, our IRU agreement with partner, which began in the first quarter this year, accelerated our wholesale take-up for the quarter with 36,000 net adds. Moving on to fiber deployment on the next slide. Bezeq continues to lead Israeli in fiber take-up with 380,000 retail and wholesale customers. Also notable is the improvement in average broadband bandwidth, which is now at 250 megabytes per second, 66% higher year-over-year. On the next slide, we share our roadmap for technology development in Israel. By the end of the year 2024, we are expecting to provide our customers with the Be multi-fiber router, which will bring the average broadband bandwidth to 10 GIGA. And by the year 2027, we expect that our Be 4 router will provide Israeli users with bandwidth of 25 GIGA. This quarter, we also conducted a pilot with Nokia in which we demonstrated the ability to provide Broadband bandwidth for up to 25 gigabyte using advanced technologies. Moving forward to the next slide, we saw growth across the board, expect for the decrease in telephony revenues due to the MLC tariff reduction. Our data revenues continue to grow, but were offsetted by the decrease in tariffs and revenues from ISP companies. Cloud and digital services grew 7.4 year-over-year from virtual exchange services and other revenues were also up mainly from infrastructure projects. Our operating expenses -- on the operating expenses slide, salaries were up mainly due to the onetime grant to permanent employees following a salary agreement in principle in the public sector as well as fiber optic recruitment operating. Expenses went up year-over-year due to higher subcontractors and material costs related to the fiber optic infrastructure projects. Other expenses declined mainly due to higher provisions for legal claims in the first quarter of 2023. Moving on to the next slide, in summary, despite the impact of the MOC telephony tariff reduction, our accelerating fiber take-up and continued deployment of fiber network combined with the IRU agreement with partner has further solidified our leading position in Israel. We are confident about our strategy, which has been proven effective with this quarter record results. Looking forward, our widespread fiber deployment, combined with our strong take-up, will help Bezeq to maintain its leadership and capture additional growth potential. With that, I will now turn the call to Ilan to discuss Pelephone and yes.

Thank you, Ran. Pelephone posted strong results with the highest quarterly revenue since 2018, driven by a recovery in roaming revenues, growth in total subscribers and 5G subscribers as well as an increase in equipment revenues. In the next slide, our total revenue reached NIS 616 million in the first quarter, representing growth of 2.7%. Adjusted EBITDA and adjusted net profit decreased mainly due to an update in estimated right-of-use assets for past periods recorded in Q1 2022. Free cash flow was impacted by timing differences in working capital related to the deferral of customer debt collection from 2021 to 2022, which was due to employee sanctions. Moving to the next slide. Total Pelephone subscribers reached 2.58 million for the quarter, including 11,000 postpaid net adds. 5G subscribers reached 860,000 today, representing 33% of total subscribers. ARPU, excluding interconnect fees increased by NIS 1 year-over-year. The graph displayed on the next slide shows the continued turnaround in service revenues over the last few years. We continue to show positive momentum, and we have posted higher service revenues in Q1 2023 than pre-COVID levels in Q1 2019. Moving on to yes on the next slide. As the largest IPTV operator in Israel, Q1 2023 marked the 10th consecutive quarter of subscriber growth for yes. We reached 580,000 subscribers, 356,000 of them are watching now through IP broadcasting, of which 110,000 are STING TV customers today. Looking at the key financial highlights for yes in the next slide. Revenue for the quarter increased by 4.1% to NIS 329 million, mainly driven by the TV plus Bezeq Fiber bundle launch and agreements with leading international content providers. Adjusted EBITDA decreased due to an increase in content expenses and the launch of the bundle. Free cash flow for the quarter increased by 115% due to timing differences in working capital. Moving on to the following slide, on the yes operational metrics, net subscribers grew for the 10th consecutive quarter by 2.8% year-over-year to 580,000 and 61% of yes subscribers are now watching IPTV. STING TV subscribers reached 108,000 at the end of Q1 2023, a 21.3% increase year-over-year. ARPU also grew NIS 4 sequentially driven by agreements with leading international content providers. The graph on the following slide showcases our continued turnaround in yes. As you can see, our strategy has consistently enabled us to grow revenues for this segment over the last few quarters. Now with that, let me now turn the call back to Tobi. Thank you.

Thank you, Ilan. Moving on to Bezeq International. In the next slide, revenue growth was driven by the increase in ICT activity, which offset the decrease in consumer ISP revenues following the regulatory reform as of April 2022. The next slide details the financial highlights for the business. Adjusted EBITDA increased by 45.7% to NIS 51 million, mainly due to lower expenses driven by lower consumer ISP activities. Adjusted net profit for the quarter was NIS 20 million compared to a net loss of NIS 4 million in Q1 of 2022. Our focus on ICT solutions for the business sector is paying off, and we are investing significant resources in this sector, which will continue to be the growth focus of Bezeq International in the coming years. Turning to our concluding slide. Bezeq's Q1 results showed record quarterly results in revenues and fiber take-up. Yes, revenues continue to grow as it successfully marketed [indiscernible] TV and fiber bundle and Disney + package. Pelephone continued to grow its 5G subscriber base contributing to ARPU. As a result of our continued debt reduction and improved leverage ratios, both Israeli credit rating agencies upgraded our outlook to positive, reflecting our financial strength and positive momentum. And the dividend payout was upgraded this year to 60% of net profit reflecting a dividend yield of roughly 4%. Lastly, I want to remind our listeners today and after this call in English, we will hold an earnings call with Israel investors and analysts in Hebrew. With that, I will open the Q&A session.

[Operator Instructions] The first question comes from Tavy Rosner with Barclays.

I wanted to touch on Pelephone, please. If we look at Slide 23, with the underlying ARPUs between 42% and 43%. But in the same period, you talked about an increase in the level of penetration of 5G to 33% this quarter. I guess I was kind of expecting that a higher 5G penetration would translate into higher ARPU. So am I seeing something or is there a driving force that's kind of keeping ARPUs where they are now?

As you can see on the slide, we reported an increase of NIS 1 in ARPU without the incoming airtime and with it. On one hand, the ARPU was positively affected by increase in roaming and the transition to 5G packages. But on the other hand, we see a decrease in other revenues. One is at the end of the Ministry of Education project that we had last -- in the Q1 2022. And then some content services in 4G packages that reflected the ARPU. But 5G and roaming are taking the ARPU up.

Got it. Okay. And I wanted to touch on costs. So we're seeing wage inflation in Israel, not specifically to Bezeq, but I was thinking how you guys are thinking of cost going forward? And -- I mean, last 2 years, you've kind of managed to keep the OpEx rather flat. Is that something that you think is manageable in '23, '24?

I will address the question on cost. Naturally, the group is expanding and growing its revenues, also the cost base growth as well. In this quarter, we have some onetime costs such as, for example, the onetime grant to the permanent employees at Bezeq fixed line, which, by the way, has to do with the public sector agreement in principle and not necessarily anything new at Bezeq. But as I said, it's a onetime. There are some other areas that are growing together with the business, together with revenues. But as we get more experience in deploying fiber and making installations, we are also becoming more efficient in doing so. And in other parts of the group, we can look, for example, at yes, where we have now contribution from the bundle from the TV and fiber bundle. That also comes together with some cost, but it's going to contribute to our bottom line group-wide already now this year. And at Pelephone, we have some, again, comparison with Q1 of 2022, which had some reduction in cost, but again, of a onetime nature, and that's how it seems like a bit of an increase in costs there. But going forward, we see the group revenue growth contributing also to the EBITDA growth. And we have actually reiterated our full year guidance, which calls for an increase in EBITDA, stable net profit on an adjusted basis. And when you look also at the reported net profit, you would see probably an increase there as well. Next question from Ondrej from UBS.

Ondrej here from UBS. I have two questions, please. One was a follow-up on Tavy's question on cost and specifically on the subcontractor cost. So I understand you now have an accelerated kind of trend in terms of take up every quarter in terms of fiber homes. So when is -- or how should we basically think about the relationship between various KPIs that you have in these subcontractor costs? And when do you expect them to kind of level off or even start coming down? I guess this is not a very short-term period, but what are kind of the considerations here and the relationships? And second was just what was the one-off basically that you mentioned in terms of the employee cost that you had with the unions this quarter, please?

Do you want to discuss the subcontractor...

Subcontractor. Well, since we are growing above plan, may we install a lot more than we intended to do. We, in fact, use more subcontractors, but we renegotiated our contract with subcontractors. So the tariff is actually lower. So we managed to maintain the cost of subcontractors relatively moderate, referring to the quantities of installations that we do. And I believe that the level that you see now is approximately the level that you'll see in the future, even though we intend to accelerate the installation even more. And in the future -- in the 2, 3 years future, in the next future, this cost will be lower once we get out of the first growing phase of the network.

I will address the second question, Ondrej. Part of the collective agreement of Bezeq goes back over 20 years now or almost 20 years, and it provides for the permanent employees, which today are less than 50% of the employee base, about 1,800 employees the ability to get whatever public sector employees in this country gets and there has been recently an agreement in principle, and we paid a onetime grant of about NIS 11 million, which we recognized in the first quarter, most of that amount is in the salary cost line. There will be some additional components to that going forward, but this was just a specific onetime grant.

That is clear. And if I may have a second question, please, on regulated rates. If you can remind us, I think you're now stepping down to another kind of lower rate in terms of the fixed voice. Is the run rate decline from 2Q '23 onwards expected to be roughly the same that you've seen over the past year? That's one. And then also, you mentioned new products in terms of fiber over the next couple of years, higher speed. So what is the kind of negotiating process with respect to wholesale rates on those new fiber products with the regulator, please?

Could you please, Ondrej, repeat the first question because I didn't get it completely. Something about regulation?

So the first question was on fixed voice rates because I think from -- yes, so from 1st April, I believe you have a new rate applied. So I was just curious if the rate of decline that you are expecting going forward is quite similar to what you've seen in the prior year. And then the second one was around rates that you expect to be negotiated on this 10 and 25-gig tariffs that you expect to launch in the coming years, if those will also create an opportunity for upsell you think?

Right. So I'll take the first one and the second one on the telephony tariff reduction -- we -- the second step down is in July. So in the second quarter, actually, we will have a quarter which is comparable sort of apples-to-apples to Q2 of 2022 when the first step down took place. Ran?