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

Welcome, everyone, and thank you for joining us on Bezeq's 2024 First Quarter Earnings Call. I'm Tobi Fischbein, CFO of the Bezeq Group. Joining us from the senior management team, we have Mr. Tomer Raved, Bezeq's Chairman; Mr. Nir David Bezeq's new Fixed-Line CEO. Welcome here. Ilan Sigal, CEO of CEO, Pelephone and yes. And before we start, I would like to direct your attention to the safe harbor statement on Slide 2 of our 2024 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. With that said, let me now turn the call over to Tomer for his opening remarks. After his introduction, I will continue the presentation of our Group financial highlights, followed by Nir, who will discuss basic fixed line results; and Ilan, who will cover the results from Pelephone and yes. Tomer?

Hey, guys, thanks for joining and great to see familiar faces. We continue to see strong execution in strategic growth across all our drivers with 80% year-over-year growth in our fiber subscribers and 30% growth in 5G subs. We actually also saw a 6% growth in our broadband ARPU, which is very consistent with our expectations. Our core revenue grew 2.1% to NIS 2 billion, driven mostly by higher revenues in the Fixed-Line business and also in Pelephone despite the war. The war did impact in a non-material way our results, mostly coming from areas of roaming and the areas of conflict where we don't charge. The core revenue represented 90% of total Group revenues in Q1. This is the new term we are using, and this excludes revenues from interconnect feeder telephone, the legacy ISP business at Bezeq International and the legacy and discontinued telephony. These are the second financial statement that we are publishing during the war, which as mentioned, does not have a material impact on the Group. We did see a slight decrease in EBITDA, mainly due to the reasons I mentioned, both from roaming and the non-billing customers at the line of conflict. Notwithstanding that, the quarterly results met our expectations. On the following slide, we see the highlights of the quarter. I want to point out the strong free cash flow growth, which grew by almost 36% year-over-year and a significant decrease of net debt by 11%, which led to 2 rating agencies upgrading our credit rating to AA. The next slide shows our KPIs. You can see the business -- the Bezeq Fixed-Line business actually grew by 70,000 fiber net adds in Q1 alone, showing improvement from the previous quarter and the business sector already coming back to market following the volatile Q4 with the conflict. The retail broadband ARPU is growing nicely, increasing to NIS 127. And on the mobile side, we continue to see growth in 5G subs plan, reaching over 1.1 million subscribers as of today or actually 43% of total service on our track to reach our target of 80%. Moving to Slide 6, which really demonstrates the slide you are familiar with, it's our road map and our main thesis and compass. It shows the evolution of all our businesses and the road map for the midterm. We are on target to reach the completion of our fiber rollout next year, currently with 30% take-up on our path to the target of 40% take-up. And we're probably going to reach beyond the 2.5 million households we targeted for the year and we complete the fiber rollout by end of next year even before. Even at this time, Bezeq is currently and continue to be island of stability despite all the major local and global events. We talked about a lot about the past four years with COVID, macro aspects, Russia, Ukraine and especially the local conflict now in Israel. We continue to deliver strong results, consistent results, and as I mentioned, island of stability for the country and for our investors. Our execution on our strategy continues to be successful, and we will remain focused on both revenue growth and profitability growth and free cash flow. Turning the call back to Tobi. Thank you to discuss the financial statements in more detail.

Thank you, Tomer. Slide 7 shows a 2.3% decline in reported revenues for the first quarter of 2024, mainly as a result of the second tranche of the Ministry of Communications telephony reform as of July 2023 and the decrease in telephone interconnect revenues and other regulatory reform as of June 2023. The adjusted EBITDA was slightly lower by 2% and the adjusted net profit decreased 6.9% in the first quarter of the year. The growth of 36% in free cash flow stems primarily from timing differences in working capital and CapEx. In the next slide, we show our operational metrics. I would like to highlight the 6% increase in our retail growth and ARPU in the quarter, along with the continued increase in cellular and 5G subscribers. On Slide 9, we see an 11% decrease in our net debt to NIS 4.7 billion, the lowest debt level since 2010, which has resulted in improved coverage ratios and our net debt-to-EBITDA ratio decreased further from 1.6x to 1.4x. Both domestic credit rating agencies recently upgraded our credit rating to AA with stable outlook. This is a major achievement, especially amidst a challenging macro background, further reflecting Bezeq's resilience. We also continue to pay dividends and recently upgraded our payout ratio to 70%, which shows careful management of our capital structure. Turning to the next slide. For the full year 2024, we reiterate our full year guidance given last quarter. I will now turn the call over to Nir, who will share more detailed results from our Fixed-Line operations. Nir?

Thank you, Tobi. I'm proud to present the fixed line reports for the first time as the CEO. It is a great honor to be leading Bezeq in this exciting time. And I'm sure that we will continue to grow and strengthen our position as the leader of the telecom market in Israel. On the next slide, we note that 2% growth in Fixed-Line core revenues due to higher revenues from broadband services, transmissions and data communications. Fiber take-up continued to grow in both retail and also subscribers and broadband retail ARPU grew 5.8% to NIS 127. We also recently signed an agreement to enter the electricity supply sector. We expect to launch this service very soon. On the following slide, we show an increase of 1.6% adjusted net profit due to the decrease in the financing expenses. We also saw a 58% increase in free cash flow, mainly due to timing difference in working capital. Turning to the next slide. In the first quarter of 2024, we saw again significant growth in both in broadband revenues, driven by increase in fiber take-ups, which also resulted in continued growth in broadband retail ARPU. Moving to the next slide, we show the take-up trends. Q1 saw 40,000 retail net adds, up 8,000 from the last quarter. As today, we have a total retail fiber take-up of 424,000. I would like to note that fiber subscriber recently present 40% of total return subscribers and saw a wholesale take-up increase of 117% on a year-over-year base. Slide 15 shows continued fiber deployment with an increased focus on take-up. As of this quarter, we have known more than 650,000 active subscribers on Bezeq fiber networks and over 2.2 million homes passed resulting in the continued growth of our take-up rate, reaching approximately 20% today. The next slide show continued revenue growth in the first quarter of 2024 in transmission and data communication offset by a decrease in traffic revenues from ISP companies. Cloud and digital revenues were stable in the quarter, but telephony revenue declined due to the second decrease in MOC traffic -- tariffs, sorry. That said, telephony revenues were only 30% of total fixed line revenues in Q1 2024. The operating expenses slide shows a decrease in salaries due to the credit received from the national insurance of employees on military reserve duty. There was also a onetime grant in the previous quarter following the public sector wage agreement. Operating expenses were positively impacted by lower materials and subcontractor expenses and lower interconnected fees. In summary, Fixed-Line operations saw solid results with a continued increase in the company's growth drivers, both residential, broadband and business sector. With that, I will turn the call to Ilan to discuss Pelephone and yes.

Thank you, Nir, and good luck. Moving to Slide 18. Pelephone posted stable service revenues despite the impact of the war on roaming revenues, driven by higher 5G subscriber plans and postpaid subscribers. This is our third consecutive quarter with an increase in equipment revenues. Adjusted EBITDA rose 1.6% to NIS 185 million. Moving to the next slide. Here, we show 5G subscriber plans reached over 1.1 million subscribers today. Subscribers on 5G plans amounted to 43% of total subscribers and 50% of postpaid subscribers. On Slide 20, we recorded a 1.6% increase in adjusted EBITDA, following the rise in revenues from 5G subscriber plans and postpaid subscriber growth. The decrease in adjusted net profit reflects the decline in roaming revenues and a lower interest income from Bezeq. The next slide shows the Q1 key operating metrics. We saw a continuing increase in postpaid subscribers, including 5G subscribers plans and decline in prepaid subscribers due to the impact of the war. ARPU rose NIS 1 compared to the previous quarter despite the impact of the war on roaming revenues. Turning to yes on the next slide. Revenues decreased 4.3% to NIS 315 million, mainly due to the non-billing of customers in the line of conflict as well as a change in the subscriber mix, moving from premium to discount. Yes is the largest IP operator in Israel with 422,000 customers today. We continue to grow in fiber subscribers and reached 50,000 as of today. In addition, we have approximately 150,000 subscribers with international streaming services through agreements with yes. The Q1 financial highlights slide shows a 4.3% decline in revenues and a lower adjusted EBITDA and adjusted net profit, which were impacted by the revenue decline. Lastly, free cash flow was affected by timing differences in working capital. On the next slide, we show yes Q1 key operational metrics. We saw continued growth in IP-based TV subscribers, up 18.4%. As of today, 75% of the subscribers were watching TV through IP. We also saw continued growth in fiber subscribers, up 230% sequentially. With that, let me now turn the call back to Tobi.

Thanks, Ilan. Moving on to Bezeq International. We saw a general trend of increased ICT activity, offsetting most of the decrease in consumer ISP revenues. Our focus continues to be on growth in the ICT market with emphasis on cyber integration, public cloud and data centers. On the next slide, we see that revenues decreased 7.4%, mostly due to lower consumer ISP revenues due to the Ministry of Communications regulatory reform for unified internet service. Free cash flow was positively impacted by the payments for employee retirement in the corresponding quarter. Turning to the last slide, I want to reiterate that we had a strong quarter despite the ongoing war in Israel, and we remain focused on executing our strategy with our key growth drivers, robust fiber take-up in Bezeq and yes, consistent growth in 5G subscriber plans in Pelephone. Our core revenues grew to NIS 2 billion in the quarter, driven by the stronger fixed line revenues. Finally, I would also like to mention that we will be hosting our first ever Capital Markets Day on July 1 here in Israel. We invite the investment community in Israel and abroad to participate. I look forward to seeing you there.

With that, I will open the Q&A session. [Operator Instructions] First question from David Kaplan.

I am from Psagot, an equity analyst here. I'll start out with a question on the 5G infrastructure and your investments you're making in 5G for now. Are you also moving over some of your competitors talked about to a new core network? And if you are or what kind of 5G investments are you making in 2024? Or are those going to also spill over into 2025? That's the first one for now? That's the first one for now.

David, thank you for your question. First, a month ago, we announced our 5G stand-alone core that we are going to launch in a few weeks. We also showed our capabilities of slicing operation and the new 5G core. So, it will be ready, I believe, in the few weeks. About the CapEx investments, like in previous years, CapEx will stay stable and continue the rollout of 4G and 5G in the next year. So, the CapEx will stay stable in the next years with the 5G stand-alone core.

Sorry, you said you're also going to be investing in 4G over the next couple of years?

The 4G is about the new frequencies that we need to deploy, like 700 and that will help customers in 4G and 5G also. So, we're deploying 700 for 4G and 5G, and the frequency of 3,500 for 5G.

And then a quick question on the Fixed-Line. Where you are now with your rollout of that fiber network? First of all, when is that project going to be finished? I think it's supposed to be completed in the middle of next year, middle 2025? And secondly, at what point of time -- at what point in time will we see the copper network end of life?

I'll take that. Like what I mentioned in the beginning, David, and thanks for your question. So we are currently around 2.1 million households. We continue at the same pace and actually a faster pace of rolling out our fiber across the country. We're going to finish the fiber projects according to our schedule sometime next year as expected, even slightly sooner than expected. But the CapEx around fiber, as previously mentioned, will continue to stay elevated this year and also through next year at slightly lower CapEx but still completing the coverage. This year, we expect to surpass our target that we gave 2.5 million households of fiber. Regarding the copper -- retirement of the copper network, we've seen and you all saw some formal chatter from the regulators around copper retirement, which has a variety of elements. And this is something that will happen over the course of the next few years, both the element of deploying new copper but also retirement of the network. It is a multiyear project, which we did not underwrite in our projections, important to note, yet, but it is -- process that started. It will have both OpEx, positive OpEx implication and CapEx savings in the coming years. And again, we did not underwrite for that.

Next question from Tavy Rosner.

First question is on telephony. I'm wondering what was the impact of the war on revenues. I think you mentioned in the press release that households that were displaced are not being charged. I'm just wondering to get a sense of what kind of proportion of revenue that accounts for? And I think more generally speaking, down the road, I think once we're pricing the decrease in pricing, where do you see telephony revenues kind of stabilizing? What kind of run rate we should be looking at?

I'll take that, Tavy. We did not specify the amount of the impact of not bidding those customers of ours, both from Bezeq and yes, in the south of the country near Gaza and in the north of the country, people that have to leave their homes. It's not material. It's not necessarily related to telephony. Some of it is also related to Internet revenues. So, there is an impact, which is, let's say, single digit in millions of shekels in the quarter for Bezeq and for yes. Of course, for yes, it's a big normal representative, but still not meaningful. But that's one of the explanations to the decline in the ARPU of yes. We -- and as for the second question, we have not given specific guidance on where are the telephone revenue is going. But it's going to be reasonable to expect for this to continue coming down. I would say that we still have one more quarter, which is now Q2, where it's a challenging comparison versus Q2 of last year because it was before the second tranche of the tariff reduction. But after that, we will have apples-to-apples comparisons going forward. There are no further tranches. They are on telephony. So we will see some continued erosion until a certain point where we're probably keeping some customers on revenues because people still need fixed line telephony and we'll continue needing it for the long term. But again, it's not an area where we are investing in any specific efforts.

Second one, we saw last week the Ministry of Communication mentioned potentially examining the removal of structural separation. That's part of their agenda for 2024. And I'm just wondering to get your thoughts. Obviously, everyone here been through a different cycle of discussions throughout the past decade. So, I'm wondering if you see any potential here or it's just noise and something that the MOC feel they have to mention. But practically speaking, is unlikely to happen. I mean any color would be helpful.

I'll take that, and we actually also provided an update in Chapter A of our report, which will be published in English very soon. But some history for more than five or six years now, the MOC has not discussed or mentioned anything around removal of structural separation. You all know our position, and we reiterated why we think the time and the terms were set to remove this unnecessary structural separation, specifically between Bezeq and yes. We have been having discussions with various regulators, including the Ministry of Communications for quite some time. And as you noted, that the first time formal notice around that was issued by the MOC, they specifically said that it's part of their work plan for 2024 to evaluate the need for structural operation. Specifically, to your question, Tavy, we cannot put timeline or chances of when and if it's going to happen but we are putting effort and informal dialogue with the regulators, and also as published with the support of both companies, unions and management to try and progress the project. So, I think the only new element and the update we provided also in writing and here on the call is the fact that the MOC did issue a note that includes the fact that it will be evaluated this year.

Thank you, Tavy. Next question from Liran Lublin, I.B.I.

My question is more of a high-level question. The company has been showing remarkable stability and growth in core business. And when I look at the stock performance, there's obviously a risk premium building up. And we're aware of what's been happening, I mean, here in Israel. But do you see any other major risks down the road that we should be aware of? Or how do you look at it?

I like high-level question, so that I can take it. First, we don't comment on stock price but we do feel the macro trend on one hand and the impact of the geopolitical arena on Israel economy on one hand. On the other hand, the business is very resilient and most of this impact, as mentioned before, does not impact the results nor the interest that we and the conversation we've been having with you guys and with the global community. To be honest, we're actually getting more demand for these types of interactions face-to-face globally with investors. But the macro definitely impacts the Israeli stock market directly. And as a result, also the Bezeq's stock, again, less comment on price and trends. In terms of risks, we mitigated as you noted, and that you can see a lot of the significant risks that were around the company by adopting and changing the structure and the strategy over the past few years on across all the different lines of businesses. So, there are always risks but there isn't one specific major risk, I can color even the resiliency and given the business trend and given the trajectory growth on the declining CapEx that you know in the end of the fiber project and of satellite project in a very, very healthy balance sheet. It truly prepares us almost for every rainy day. And that allows us to invest flexible, really a lot of operational and initial leverage and continue to increase ARPUs transition to 5G to also lead to stability on 5G and really transition to the IPTV, which eventually will lead that to retire from the satellite. So, the trends and these risks were identified most of them now with Black Swans in this world. But we've proven and we prove -- and I think we proved to the market over the past five years or even more than that, that the business can face most of them and from some of them, they actually benefit. So, we don't see specific risk that could materially impact the business. But we are very transparent regarding also the war impact, even though are not material, they definitely have a slight impact on the results.