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

After this 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 cover the results from telephone and yes. Gil?

Thank you, Tobi. Let's start on Slide #3. Our growth strategy, which we have been executing over the past 2 years has led us to the highest quarterly adjusted net profit since 2017 and the highest quarterly adjusted EBITDA since 2018. We're seeing continued group-level top-line growth. In this quarter, revenues grew 3.3%, driven by growth in Bezeq Fixed-Line and yes. We showed strong execution in our growth drivers with robust fiber take-up in Bezeq Fixed-Line and yes as well as consistent growth in 5G subscriber plans in Pelephone. In accordance with our dividend policy, the Board of Directors recommended the distribution of a semiannual dividend of NIS 392 million or 60% of the net profit for the first half of 2023, reflecting an annual dividend yield of approximately 5%. Lastly, sustainability continues to be a top priority for us as well. We're proud to announce that MSCI has upgraded us to a AA rating, showing our leadership and commitment to ESG. On the following slide, we show that technology and business road map and the process made so far. In Fixed-Line, we now have approximately 1.9 million homes passed and total take-up of 457,000 subscribers on our network, resulting in a 20% increase in broadband ARPU compared to Q4 2020. For the midterm, our goal is to reach 2.7 million homes or about 85% of Israeli households. In Pelephone, 5G subscribers reached 920,000, representing 35% of total subscribers, which led to a 14% increase in service revenues compared to Q4 2020. In the midterm, we expect 5G subscribers to reach 80% of all subscribers as we continue to provide excellent value to our customers. And yes, our total IPTV subscribers reached 370,000 or 64% of total subscribers. We remain the largest Israeli IPTV operator, and we expect roughly all our yes subscribers to migrate to IPTV in the midterm, leading to significant OpEx and CapEx savings. On the next slide, we present the Group's financial highlights for the second quarter that shows that the Group's revenue grew 3.3% year-over-year. Adjusted EBITDA was the highest since 2018 and adjusted net profit was highest since 2017. Turning to the next slide. The group's operational highlights for the second quarter showed excellent results across the board. For Bezeq Fixed-Line, fiber net adds were 73,000 with 44% growth year-over-year in fiber deployment. Additionally, retail Internet ARPU continued to rise, increasing 8% to NIS 122 shareholders. For Pelephone, cellular service ARPU, excluding interconnect fees, grew by 4.7% to reach NIS 45. With cellular service revenues, excluding interconnect fees increasing by 2.9% to NIS 350 million for the quarter. For yes, total TV subscribers remained mostly stable compared to the previous quarter and ARPU grew by NIS 1 year-over-year to NIS 185 despite the competitive market. Looking forward, we intend to continue our progress towards upgrading the technology and fully capturing the potential for future growth with catalysts such as cloud and AI, driving another technology revolution. All companies in the group are well focused on their fields of activity and our actively leading growth initiatives, allowing us to continue to lead the communication market in Israel. Now let me turn the call over to Tobi to discuss the financial results in more details.

Thank you, Gil. The next slide shows the Group's key financial metrics for the quarter. Our revenues and profitability metrics beat consensus with revenues up 3.3% year-over-year to reach NIS 2.3 billion driven by an increase of 5.9% in Bezeq Fixed-Line and 6.3% in yes. Free cash flow was NIS 238 million for the quarter, a decrease of 33.7% due to changes in working capital. Turning to the next slide for a comparison of the first half results. Revenues, adjusted EBITDA and adjusted net profit all grew compared to the corresponding period. 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 both retail broadband Internet and TV subscriber numbers year-over-year with the second consecutive quarter of growth in the wholesale internet subscribers. On the ARPU side of the slide, we saw an 8% increase in retail Internet ARPU. TV ARPU also grew year-over-year, driven by our agreements with international content providers, including our partnership with Disney. Cellular ARPU, excluding interconnect fees, increased by NIS 2. Turning to the next slide. We address our continued effort of reducing debt and maintaining a strong balance sheet. Net debt decreased by NIS 222 million for the quarter or 4% year-over-year to NIS 5.4 billion. The Group's net debt-to-EBITDA ratio is at 1.6x from 1.7x a year ago. And both Israeli credit rating agencies upgraded their outlook from stable, positive in Q2. Moving to the next slide. We would like to highlight the upgrade in our yearly guidance. While other items remain unchanged, we now expect adjusted net profit of NIS 1.32 billion for the full year of 2023, up from the previously guided NIS 1.2 billion, a 10% increase. I will now turn the call over to Ran, who will share more detailed results on our Fixed-Line operations. Ran?

Thank you, Tobi. In the second quarter, we posted the highest quarterly revenue since 2012, reaching NIS 1.13 billion, an increase of 5.9%. We achieved the highest quarterly adjusted EBITDA since 2018, reaching NIS 681 million or a 5.6% increase. Fibernet adds were 73,000 in the quarter and the number of home passed reached almost 1.9 million. As of today, we have 457,000 fiber subscribers. The next slide details the financial highlights for Bezeq Fixed-Line. In addition, record growth in revenues and adjusted EBITDA, as mentioned. Adjusted net profit grew by 8.1% to reach NIS 267 million. Free cash flow increased by 22.6% to NIS 287 million, mainly driven by improved in business results. On the next slide, we highlighted half year results, which are positive across the board and show the same trend that we show for the quarter. The following slide show our achievements in terms of broadband internet, as we reached revenues of NIS 485 million for the quarter, representing a 9.5% increase year-over-year. Retail broadband line increased slightly year-over-year, and Internet ARPU increased by 8% to NIS 122 due to continued growth in fiber customers take up. The next slide details our fiber take-up, which has accelerated both in retail and wholesale. On the retail side, the acceleration plan implemented in the second half of 2022 to improve take-up is clearly working. In the second quarter of 2023, we achieved 3,000 net adds on 269,000 at the end of the quarter and [Technical Difficulty] third fourth quarter we began to publish the fiber-ned. Approximately. Growth approximately NIS 25,000 fiber. In the following slide, you can see that by the second quarter. [indiscernible] almost 1.9 million homes on track to reach 2 million homes target. We set in our guidance for the full year. And we are seeing good momentum in fiber take up penetration in home passed. Average broadband speed grew to 278 megabytes per second, reflecting a 70% increase year-over-year. Moving forward to the next slide, we saw revenue growth across the board, expect for the decrease in telephony services. Cloud and digital revenues grew by 7.2% year-over-year, driven by virtual exchange services and other revenues were up 40% to which NIS 91 million, mainly due to infrastructure projects. On the operating expenses slide, salaries were up slightly mainly to the salary update and the employee recruitment relating to the fiber project. Operating expenses went up year-over-year due to higher subcontractor and material costs related to fiber and other infrastructure projects. As well as timing differences in advertising spending. Moving to the next slide, to summarize, we have a very successful quarter in Fixed-Line. widespread fiber deployment, together with accelerating take-up drove ARPU to a new high. Growth in broadband and business sector revenues offset the impact of the MRC telephony reduction. With that, I will now turn the call to Ilan to discuss Pelephone and yes. Ilan?

Thanks, Ran. Pelephone posted a 2.9% increase in revenues from services, excluding interconnect fees, driven by an increase in roaming revenues and growth in postpaid subscribers, including 5G subscribers plants. On the next slide, we show our continued turnaround in service revenues, excluding interconnect fees, which totaled NIS 350 million compared to NIS 340 million in Q2 2022 and NIS 332 million in Q2 2019, which was recovered. The next slide goes into Pelephone's financial highlights in more detail. Total revenues were down 2.3% due to the decrease in equipment revenues, partially offset by the increase in service revenues. Adjusted EBITDA remained stable at NIS 187 million. Free cash flow was lower due to upfront payment of frequency fees for 2023 and changes in working capital. Moving to the next slide. Revenues and adjusted EBITDA in the first half of 2023 were stable and adjusted net profit declined 13% due to an increase in depreciation expenses due to an update in estimated right-of-use assets for past periods recorded in the corresponding period. Moving on to operational metrics on the next slide. 5G subscribers rose to 898,000 or 32.6% increase. Subscribers on 5G plans were 35% of total subscribers and 42% of postpaid subscribers as of today. Pelephone ARPU, excluding interconnect fees increased by NIS 2, driven by an increase in roaming and the transition to 5G plans. Moving on to yes on the next slide. As the largest IPTV operator in Israel, Q2 2023 was another strong quarter for us. Revenues grew 6.3%, driven by the launch of TV + Bezeq fiber bundle, while TV ARPU grew due to our partnerships with international content providers, among other factors. We processed the highest pro forma adjusted net profit since 2016, reaching NIS 17 million compared to an adjusted net loss of NIS 1 million in Q2 2022. The next slide shows the different phases we have been through yes. As you can see, we went through a period of revenue erosion and had a year of stability beginning in the third quarter of 2021. Since the fourth quarter of 2022, yes, has been in a very healthy growth mode. Looking at the key financial highlights for yes in the next slide. Revenues increased for the third consecutive quarter by 6.3% to NIS 336 million, mainly driven by the TV + Bezeq fiber bundle launch and agreements with leading international content providers. Adjusted net profit was up significantly reaching NIS 17 million compared to a net loss of NIS 1 million in the corresponding quarter. CapEx rose 24.5%, which was binding differences between the first and second quarter of the year. Turning to the next slide. The half year results reflect the same trends in revenues and profitability. Free cash flow increased due to improved business results as well as changes in working capital. Moving on to the following slide on operational metrics for yes. total subscribers were up 2.1% year-over-year and 64% of the yes subscribers are now watching IPTV. STINGTV subscribers reached 111,000 at the end of Q2 2023 and 18.1% increase year-over-year. ARPU grew NIS 1 year-over-year despite the intense competition, and we are seeing continued growth in fiber subscribers for yes, which reached approximately 25,000 as of today. With that, let me now turn the call back to Tobi. Thank you.

Thank you, Ilan. Moving on to Bezeq International. The first half results showed growth in profitability with adjusted EBITDA growing to 3.5% to NIS 100 million and adjusted net profit going from NIS 11 million to NIS 33 million due to cost savings and our continued focus and expansion in the B2B market. On the next slide, let me highlight the increase in adjusted EBITDA, which was up 6.5% for the quarter, mainly driven by lower expenses and reduced consumer ISP activity. Free cash flow totaled NIS 28 million compared to NIS 1 million in the corresponding quarter, mainly due to changes in working capital. The next slide details the financial highlights for the first half of the year. As mentioned, we saw a positive trend in Bezeq International's profitability with significant growth in both adjusted EBITDA and adjusted net profit. The increase in business service revenues was offset by a decrease in consumer ASP revenue following the regulatory reform. Free cash flow was lower due to payments for retirement plans in the first half of the year as well as changes in working capital. Turning to the last slide. We had a terrific quarter, and we are focused on maintaining sustainable growth powered by technological upgrades to meet the demands of a rapidly evolving world. The execution of our strategy continues to be successful, evidenced by revenue and profitability growth. Lastly, I would like to remind our listeners that 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] I will now pass to poll for questions. First question from David Kaplan. Hi, David.

Hi, it's David Kaplan from Psagot Securities. The first question I have is on yes. On a pro forma basis, the OpEx was relatively flat this year. Revenues were up ahead of our expectations. How does that -- how do I think about that going forward? Is that a sustainable result for us going forward? Was there a specific marketing program that was run in the quarter? Because when I look at it sequentially, it was significant growth versus -- sorry, we don't look at it versus last year, there was a significant growth over last year, but sequentially, a little bit less. And when I look last year, Q3 versus Q2, we also saw a relatively flat growth. So what would we be thinking about going ahead for yes, the rest of this year?

Thank you, David. There is a significant amount of work that has done in the past year. We see a few growth engines. First is the, yes, plus basic fiber that helps growth of revenues and the partnerships that we have with Disney that works so well and Netflix and Discovery. And if you can see that in the last year, we -- our subscriber base grew by 12%. So I believe that those metrics will continue with us in the next few quarters. Also the yes bundle and the growth in packages with Disney, Netflix and Discovery. [interpreted] I just wanted to add that on the financial metrics, sometimes in 3 quarters, there are specific things that have a certain impact. There was a small content sale ones, which contributed to revenues. On the other hand, now that we have a very smaller partnership with Disney, which we didn't have in the corresponding quarter as well as the bundle of and fiber, which within the corresponding. Some of these acts are obviously profitable. So we get moving forward and definitely, I think it improving their performance of business-wise and profit wise.

Also one more quick one on yes, the timing of the CapEx and the working capital there. So we think about CapEx, again going forward more on rig basis what we saw this year around somewhere between NIS 45 billion and NIS 50 million a quarter.

We don't give specific guidance, David, on the various companies, but you should look at it on a 12-month -- trailing 12-month performance. And yes, we shouldn't see significant increase in CapEx over time, you know that they are making a great progress in migrating their subscriber rates over to IP. And along with that, they should be able to generate both OpEx and CapEx savings, some of which will come later on.

Great. And then one quick one on the Fixed-Line on the wholesale revenues for broadband or wholesale revenues in general, I think, were relatively flat Q-on-Q. Last quarter, we saw a big bump. I think that, that was largely driven by the recent IRU in part by the IRU with a partner. So what are you seeing on that front part of me would have expected to see continued growth trend this quarter, but they seem to untap that revenue is up?

Wholesale revenues for the Fixed-Line, as you know, includes not just partners, but all the onsale activity, which includes both copper and fiber and including also some revenues from non-partner fiber operators. And what we are seeing now is a combination of continued growth in wholesale. As you can see in the second consecutive quarter where the total wholesale subscribers are growing, which was not the case 2 quarters ago. On the other hand, as you remember, we have reduced slightly the wholesale tariff after reaching the IRU agreement with partner, which is currently NIS 32 for the rest of the [indiscernible].

Great. Thank you so much.

Next question, I think it's from Ondrej from UBS. Hi, Ondrej.

Hi, everyone. I'm Ondrej from UBS. Thank you for the presentation and taking my question. So 3 questions for me, please. One is on the fiber homes passed, you're already at 1.9 million homes, our for your target is obviously just about 2 million. So if you continue the run rate that you've been doing in the first half, you're probably getting easy to like 2.2% or more. So I was wondering because you're not upgrading your CapEx guidance, what it actually means in terms of homes passed in the second half of the year? Are you going to slow down? Or are you going to maybe increase the CapEx guidance? Or are you able to do more homes with the same CapEx envelope that you've been guiding for? That's one question. Second question is on working capital. What kind of evolution you expect for 2023, we've had a negative year-to-date situation. So what is the kind of outlook for the full year? And then third question, please, just the sustainability and visibility in terms of how the 3 factors that you highlight have led to the increase in the net profit guidance are kind of expected to continue in 2024 and beyond or not? Thank you.

So I'll take the first one. Ondrej this year, more than 2 million home passed. And this will be done approximately in the same area of CapEx that you're familiar with will not increase -- it's because we have a very good execution and the company is able to do some basically using the savory sources. So we reached 2 million without any major change in CapEx. And we see that continuing for the following years. So I don't have anything special to add here.

I will take the other questions. And the second one on working capital, we expect to have a solid free cash flow year 2023. What you see in a specific quarter or even in the first half of the year is not necessarily representative of what we would see in the full year. So from time to time, there are certain changes or different timing in working capital ramp we have paid a telephone or for some of the frequencies in advance in the second quarter for the rest of the year. And that's why you see an increase in CapEx year-over-year that was close to NIS 70 million. And on the other hand, versus the corresponding quarter, we had a big change in the way we do the acquiring with the credit card companies, Pelland at Vesic International, and that has resulted in a cash flow in the second quarter. Overall, we expect to have a solid even a very good free cash flow year in 2023 despite that we are not giving specific guidance on this metric. On the net profit guidance, correct me if I'm wrong, but you ask whether we can extrapolate from the increase in the guidance 2024.

And do you have -- are there any of those factors that are contributing are kind of, as you say, we can extrapolate them into next year?

When we issued the updated guidance, we commented that it was driven mainly by changes in depreciation and amortization and also financing expenses. I should also add that it was partly also driven by improved improvement in the business across the group, as you are seeing now in the Q2 and first half results. However, financing expenses is something that it's more difficult to guide more than a year ahead because it depends on inflation rate, it depends on interest rates, depends also on some other elements such as FX fluctuations, which are under our control. In terms of the changes in the fusion amortization, definitely, yes, we expect to keep benefiting from those changes going forward. As was I think that there are good ways of it. We will continue to deliver solid results despite the fact that, again, we are not, at this point in time, guiding specifically into 2024.

Thank you very much and just one follow-up on the first question. So what I meant is that if you continue kind of passing 150 or more 1,000 homes per quarter by the end of the year, you should be significantly above 2 million homes passed. So my question was, would you slow down the rollout in the second half? Or if you get to, say, 2.2 under the current fund rate that you're doing, is that still kind of something that you can do with the current CapEx envelope?

Well, from our calculation, we won't be significantly above 2 million home passed. 2.2 is too high. So I suggest you take it off-line with the team, but it will be approximately 2 million home passed. And I would like also to mention that we will have some CapEx investments that are not related to the fiber project. We are building some data centers and other investments. So this will be in '24 maybe as a onetime investment. But generally saying we'll keep in the same space, and we don't have any intentions to slow down next year.

Thank you so much.

Thank you, Ondrej. Out next question from Tavy Rosner from Barclays.

Hi, thank you for the presentation. I wanted to ask about regulation. A couple of months ago, we discussed the partial new regulation, which would allow a usual to home, more than 50% in Belec. Has the new regulation been passed already? Or when is the expected timing as far as you know?

It's almost there. It's just waiting for the by Minister last signature. So Ministry of Communication has already signed on it, and it's not just waiting for the last signature.

Okay. Thanks for that. And then also on regulation, I mean for investors often ask us about the political landscape and regulation comes up of especially these days, is there anything that worries you? Any specific angle that you think would be detrimental to Bezeq [indiscernible]? Is there anything concrete or [indiscernible]?

As far as we know, there is nothing concrete rationale. As we said in the past, wholesale tariffs are on the table for quite a while. So there could be some decision on that. We've discussed that in the past. It could have impact on us, but not very significant. And there was the issue, as you remember, of examination of the business sector on the Fixed-Line, although we don't know any progress made by regulator on that either. So -- as far as we see right now, we do not see something very significant on the agenda for the near future.

Thank you. And last one on dividend. If we assume CapEx going forward and growth, you would generate incremental free cash flow. When do you -- when will you plan on reviewing the policy?

As we said recently, our policy was upgraded from 50% to 60% of net profit. And we did say that we will examine next year also going up to 70%. So we will examine next year.

Thank you.

Thank you, Tavy. Next question from [indiscernible] from Jefferies.

Hi, thank you for taking my question. I have 2. Could you just give a bit more color into the nature of OpEx savings in subsidiaries, specifically pelephone and yes, in the quarter? And whether this is a sustainable trend? And secondly, a potential for an upgrade to guidance for EBITDA. And -- or do you see the slowdown to EBITDA in the next couple of quarters? Help me?

Take those questions. Thank you. On OpEx savings, yes, and Pelephone. Pelephone, that impact primarily the OpEx in the Q2 result was actually the decline in handset sales. Now it goes together when the handset revenues go down also, they used cost down. That's mostly related to that. And yes, there are continued cost rationalization program going on. It doesn't kick in every quarter in the same manner. And also the timing of content exchange policy started line along the year. This specific quarter, there were less expenses related to content done in previous quarters. But again, it's timing difference. Second question, could you just repeat that, please?

Yes. Do you see any potential for an upgrade to EBIT guidance is the current EBITDA trajectory.

[indiscernible], right. So we just updated our guidance for the adjusted net profit, we remain our adjusted EBITDA guidance unchanged in the fact that our adjusted EBITDA results for the first half of the year has been quite strong. I would say that there is a slight upside to what we have guided, but remember that in July 1, already, we had the second last step down of the telephony tariff reduction reform. So our EBITDA in the second half of the year will not decide to be the same for the Fixed-Line as in the first half, and there are some other elements that could impact that as well. Thank you. Next question from [ Sabina from Leader. ]

Hi, first of all congratulations on the quarter. I have 2 questions. The first one is regarding the fixed segment, the infrastructure. So when I'm examining the subscribers base. So I basically see the retailer side subscriber base is going down, and the wholesale is going up. So I was wondering because you do have additions of fiber subscribers, but the copper is going down rapidly. So I was wondering what should assume regarding the trend going forward. And also eventually for the midterm perspective, how the breakdown between the retail and the wholesale customers will look like? And the second question is regarding Pelephone. So I was just hoping to get some additional color regarding equipment sales, which were relatively weak for the quarter and also the contribution of the due to the improvement of the ARPU, which doesn't seem very significant still. So I was wondering like you have 42% of cost-base subscribers with 5G packages. I always ask this question because every quarter, I'm looking to see more and more improvement in this field, but it still doesn't see so. I was wondering when should I see it in the results. Thank you.

I'll take the first one. Internet customer base is relatively stable. Well, in my point of view, going up 3,000 or down 3,000 doesn't mean a lot. So basically, you can say that the retail internet customer base for basic is stable. And wholesale is stable as well if you take it in general terms. So yes, we see a lot more fiber both in wholesale and retail, replacing copper that, of course, happens and driving ARPU up, but customer base is stable. If you take it to the group level, the U.S. is growing rapidly. We just revealed the figures, the matrix for yes. So it's around 25,000 interfiber customers. So if basically stable and yes is growing, well, Bezeq International is losing some customers because of focus in the business segment. In general, the group is stable, but one day in the future, Bezeq International will stop losing customers. Yes, we'll continue to grow. And we see, we are very optimistic on the prospect that the group will grow in the number of total Internet customers as well. But for the Fixed-Line, we see it as a stable and healthy change between copper and fiber.

Hi, [ Sabina, ] about the equipment in Pelephone. This is a global trend. We see a decline a decrease and set around the world, also Samsung and Apple show the decrease in shipments. It's also happening in Israel also. The macroeconomic environment also reflects. But we expect new handsets launch in the second half of the year, [indiscernible] 15 and another Samsung launch that will be in the second half of 2023. About the ARPU, you're right, we see a very positive contribution of the 5G subscribers and also roaming services. There really is straddling a lot this quarter, and I believe in the next quarters also. But on the other hand, we see changes. One is the end of the Ministry of Education project that was last year, and that impacted the ARPU. I estimate that you will see the impact of the ARPU in the next quarters. Thank you, [ Sabina. ] There are no further questions at this time. I would like to thank you all for taking the time and joining us today. If you have any follow-up questions, please feel free to contact our Investor Relations department. We look forward to speaking to you on the third quarter 2023 earnings call. Thank you all.