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

Welcome, everyone, and thank you for joining us on Bezeq 2024 Second Quarter Earnings Call. I'm Tobi Fischbein, CFO of the Bezeq Group. Joining us from the senior management team today, we have Mr. Tomer Raved, Bezeq's Chairman; Mr. Nir David, Bezeq's Fixed-Line CEO; and Mr. Ilan Sigal, CEO of Pelephone and yes. Before we start the call, I would like to direct your attention to the safe harbor statement on Slide 2 of our Q2 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's financial highlights, followed by Nir, who will discuss Bezeq's fixed-line results; and Ilan, who will cover the results from Pelephone and yes. I will conclude the presentation with Bezeq International results. Tomer?

Thank you, Tobi. Welcome, everyone. Good afternoon, and good morning. We'll start on Slide 3. Interesting times and a lot to say. We continue to see to grow in our strategic drivers, which actually resulted in a 64% year-over-year increase in fiber take-up, 28% in 5G subs plan and 6% increase in retail broadband. Both the second quarter and the first half of the year, results were affected by the continuation of the conflict in Israel. But despite the complex period, the group has shown stable core revenue and continued progress in our strategy execution, which is what we care about the most in both fiber, 5G and the transition of TV subs to IP, along with very strong free cash flow year-to-date. The group's profitability year-over-year was negatively impacted by the second tranche of the MOC telephony reform, which you are all aware and familiar with, as well as several infrastructure projects that has positively impacted the corresponding quarter due to 2023 last year. Additionally, there were nonmaterial impacts from the war, given the decrease in cellular roaming revenues and the voluntary non-billing of evacuated communities in both the South and the North. In addition, the quarter saw several developments in the regulatory environments, more specifically in the process for the removal of structural separation by the MOC and hearing on the shutting down or decommissioning of the copper network in the wholesale market and the universal fund, which we explained in more detail in our earnings results. The Board of Directors recommended a distribution of NIS 407 million in accordance with our 70% payout policy, resulting in a 4% increase in total dividends compared to the corresponding quarter. On the following slide, we see the highlights of the quarter. I want to point out that free cash flow declined this quarter, mainly due to timing differences in working capital, but we reported almost 11% growth for the first half of the year, consistent with our expectations. The next slide shows KPIs for the business. Bezeq's fixed-line had 59,000 fiber net adds in Q2, and the retail broadband ARPU is growing nicely, increasing to NIS 129 consistent and on pace to get to the 140 in the midterm. On the mobile side, we saw continued growth in our 5G subs plan, reaching 1.2 million subs as of today, which correspond to 52% of total postpaid subscribers. On Slide 6, the slide you are familiar with, we see where we are today in the evolution of all of our businesses as well as the road map for the midterm, which is very important. We are on target to reach the completion of our fiber rollout with a 40% take-up rate, which to reach 80% of mobile Southern 5G plan in the midterm and complete our satellite migration in the yes and the TV business. Our execution on our strategy continued to be successful, and we will remain focused on the free cash flow growth in the midterm and reiterate the guidance for the year, which is consistent and we hope to and we plan not to significantly deviate from. Now I would like to turn over the call to Tobi to discuss the financial results in more detail.

Thank you, Tomer. Slide 7 shows a 0.9% decline in core revenues due to lower revenue from infrastructure projects in Bezeq's fixed line and lower roaming revenues in Pelephone impacted by the conflict. Adjusted EBITDA and adjusted net profit were impacted by lower telephony revenues, timing of infrastructure projects and the impact of the word, lower Pelephone roaming revenues and the non-billing of customers in the line of conflict mainly in Bezeq Fixed-Line and yes. In the next slide, half year results show a 0.6% increase in core revenues, with free cash flow growth of almost 11%. Free cash flow in the last 12 months was approximately NIS 1.4 billion. Turning to the next slide. We show our operational metrics. I would like to highlight a 6% increase year-over-year in our retail broadband ARPU, along with a continued increase in cellular and 5G subscribers as well as a sequential increase in cellular and TV ARPU. The next slide shows a decrease of NIS 400 million or 7% year-over-year in our net debt to NIS 5 billion. We remain committed to maintaining our high credit rating, which improved in Q2 and provides further support to our dividend policy, which as of today reflects a 7% dividend yield. I will now turn the call over to Nir, who will share more detailed results from our fixed-line operations.

Thank you, Tobi. On the next slide, fixed-line core revenues decreased 1.8% due to lower revenues from infrastructure projects, and we are partially offset by higher revenues from broadband services and transmission and data communication. Fiber take-up continued to grow while Broadband retail ARPU rose 5.7% to NIS 129. This quarter, we launched our electricity supply activities and joint venture with Powergen. On the following 2 slides, we show that revenues and profitability metrics in the second quarter and in the first half were impacted by the MOC telephony tariff reduction in July 2023 as well as timing of infrastructure projects. Turning to Slide 14. In the second quarter, we saw moderate growth in broadband revenues mainly due to decrease in wholesale tariffs from use of the passive network. Moving to the next slide, we show that take-up trend Q2 so 35,000 retail fiber net adds and 24,000 wholesale fiber net adds. Turning to the next slide, we saw continued fiber deployment with an increased focus on take-up. Today, we have over 2.3 million homes passed and more than 700,000 active subscribers in our fiber network, resulting in continued growth of our take-up rate, which has reached approximately 30% as of today. In Slide 17 shows continued revenue growth in the second quarter and of 2024 in transmission and data communication. Telephony revenue declined as explained due to the second reduction in MOC tariffs, and our revenues were impacted by the completion of the various infrastructure projects in the corresponding quarter include Bezeq's part in the blue Raman submarine cable. Next slide shows a 5.1% decrease in operating expenses due to lower subcontractor expenses related of fiber deployment and infrastructure projects, partially offset by higher advertising expenses. With that, I will now turn the call to Ilan to discuss Pelephone and Yes.

Thank you, Nir. Moving to the next slide. Pelephone posted growth in revenues, adjusted EBITDA and free cash flow despite the impact of the war on roaming revenues. The results were driven by higher ARPU from cellular plans and an increase in equipment revenues. In addition, 5G subscriber plans continue to grow with 60,000 net adds in the quarter. Moving to Slide 20. We show 5G subscriber plans reached approximately 1.2 million subscribers as of today. Subscribers on 5G plans amounted to 45% of total subscribers and 52% of total postpaid subscribers. Revenues from services were stable year-over-year despite the impact of the war on roaming revenues. On the next slide, total revenues rose 1.2% and adjusted EBITDA increased 2.1%. Free cash flow improved significantly due to the payment of frequency fees for all 2023 in the corresponding quarter when compared to the quarterly payments in 2024. We saw similar trends in the half year results. Slide 23 shows the Q2 key operating metrics. As you can see, we saw a continued increase in postpaid subscribers, including 5G subscriber plans and a decline in prepaid subscribers due to the impact of the war. ARPU rose NIS 1 from the previous quarter despite the impact of the war on roaming revenues. This is our second consecutive quarter with an increase in ARPU. Turning to yes on the next slide. We continued the migration from satellite to IP with 440,000 IP customers today. We continue to grow in fiber subscribers and have reached 60,000 as of today. In addition, we recently signed an agreement with Partner for the distribution of STING+ to its customers, which is subject to certain approvals. The Q2 and half year financial highlights slides show a decline in revenues and profitability, mainly due to increase in market competition and the non-billing of customers in the line of conflict due to the war, as well as higher sales of content in the corresponding periods. The decrease was partially offset by higher revenues from the TV + fiber bundle. On Slide 27, we show yes Q2 key operational metrics. We saw continued growth in IP-based TV subscribers, which increased 18.4% in the period as of today. 80% of our subscribers are watching TV through IP. We also saw continued growth in fiber subscribers, up 163%. With that, let me now turn the call back to Tobi.

Thanks, Ilan. Moving on to Bezeq International. Revenues were impacted by lower consumer and business ISP revenues due to the MOC unified inter regulatory reform as well as lower international long-distance revenues. The decrease was partially offset by higher ICT revenues from cloud services and data centers. On the next slide, we saw similar trends in the quarterly and half year results. Let me point out that adjusted net profit in Q2 2024 increased to NIS 19 million from NIS 13 million in Q2 of last year, mainly due to lower depreciation expenses. Free cash flow in the quarter and half year was impacted by employee severance payments as well as timing differences in working capital. Turning to the last slide, I want to reiterate that we remain focused on executing our strategy by focusing on our key growth drivers, robust fiber take-up in Bezeq and yes, and a consistent growth in 5G subscriber plans in Pelephone. We continue to focus on ESG, and we are recently awarded a Platinum rating for the first time by Maala ESG rating agency in Israel. Finally, I would also like to mention that we will be attending the following 3 conferences in September to further engage with international investors. We will participate in Citi Global TMT Conference in New York in the beginning of September, September 4, Jefferies Israel Tech Trek in Tel Aviv on September 11, and Goldman Sachs European Communacopia Conference in London on September 18. We look forward to meeting you there. And with that, I will open the Q&A session.

If you would like to ask a question, please raise your hand virtually. As you hear your name, please be sure to unmute your microphone and ask your questions. For the benefit of the people in the room, please introduce yourself and share the name of the company you represent. We will address questions as we see the hands raised. I will now pause to call for questions. First question, Sabina, Hello.

Sabina Levy from Leader Capital Markets. I wanted to ask about the results of the fixed segment, especially the infrastructure segment. So we are still seeing a decrease in the number of the subscribers in the retail subscribers. The quarter looks a little bit better than the previous one, but still the numbers are negative. So I was wondering how should we forecast the next quarters? And if this trend should continue or you're taking measures in order to improve the trend. And also, I saw some decrease in the total connections in total fiber connection wholesale and retail together in the quarter. And I was wondering if it represents the trend going forward? Or is it something just for this quarter?

So I'll address that also from a group perspective. And thank you, Sabina, for the question. First one, thanks for the smart questions. First, remember that from the fiber rollout perspective, we are targeting the factors of a smaller market, meaning if copper subs represent 100% of the households, we elected to deploy slightly less than 90% of the country. So the market share that Bezeq targeting is 90% on fiber versus 100%, okay? We're not allowed to roll out or compete in the 10% -- more than 10%, which are areas that are covered by the universal fund, if you are familiar with. So put that into perspective. Secondly, from a group perspective, while retail subs was slightly less on the Bezeq side, although in line with expectations. We also have, yes, a very strong growth driver from a retail customers' perspective. So together, you actually see a growth, a market share and weaker market share from a group perspective. And from that perspective, it's very important as we count these customers as part of the group. On the wholesale market, we did see slightly slower pace this quarter, but we still see all the players playing on our infrastructure, including Cellcom and Partner, taking more and more subs on wholesale. And we expect to continue, as you see more and more deployment of fiber, which is actually more than or faster in the pace we planned. You will see the take-up growing in line on both the retail and the wholesale side.

And I would like to complement those comments with 2 important facts. One is that the economics of a fiber subscriber are much better than a copper one, and we are actually increasing our fiber market share. And you've seen this over the previous quarters as well. So this is very important. And the other factor is that we are also an infrastructure company. So the blend between retail and wholesale in fiber, as we see the market upgrading sales over to fiber is an important trend that will benefit Bezeq in the long term. Thank you, Sabina. Next question from Tavy...

I only have one. It's about the regulatory outlook. So in your prepared remarks in the press release this morning, you mentioned seeing a positive horizon for regulation. And I'm always skeptical when we talk about positive outlook for things that are beyond the company's control. So I'm wondering, is it because you have a high degree of confidence that the outlook will improve? Or it's just based on conversation with the MOC or based on committees happening right now? Anything that you can share would be great.

Thank you, Tavy. I'll start. So first, I don't think we mentioned positive, although I think we mentioned meaningful. And there were meaningful announcement by the MOC over the past few months, active regulator with a few significant developments, some related to competition, some related to the cellular market in some of the fixed line market. I highlighted a few of them. One, the discussion around the wholesale market, which we reported, the MOC evaluating, they need to intervene in the active wholesale market, and it's actually significantly reduced the rates on the passive wholesale market. -- which has obviously negative -- marginal but negative impact on the group. Secondly, the announcement regarding structural operation. The first is the fact that it's under review. It's additive. It doesn't mean we have a time line or can quantify the chance of that happening. In addition to that, the decommissioning of the copper network, currently a hearing is an important development for the market and for the evolution of the communication markets. So all these announcements were meaningful. I don't want to create them as positive or negative, but they are meaningful to the market, to the competition and to the group specifically...

Great. That's all for me. Thank you, Tavy. Next question from Liran Lublin, lira.

My question is on the TV market and specifically on yes. We're seeing some movements in the market after long years of nothing really happening. We see the impacts, it's the first time that you stated there's an impact of the free TV and then there's your agreement with Partner. And still, the numbers from yes, are not very good to say the least. How do you look at it for the next coming years? How do you see the Israeli TV market?

First of all, thank you, Liran, for the question. The Q2 results was impacted by -- first of all, by the war because we stopped charging is fibers in the conflict areas. In the north, in the south, we stopped in October 7 till now. It's a few millions every month. This is one. Secondly, -- the competition is also reflected the results because we see a trend that our customers move from premium packages to Sting to discount packages. And third, there was a onetime impact from Q2 '23 that we sold content, the beauty queen of Jerusalem, and we didn't see this one on this year quarter. This is -- there is a competition in the market right now. But what yes doing is doing a lot to move to transfer customers from the satellite to IP and we'll see those things that we are doing impacted in the next few quarters until we go down from the satellite in 2026 so that's the main impact that we see right now on yes.

And I would like to add that even the ARPU metric, has grown sequentially. And I think it's important in a challenging market, as Ilan has cried before Liran. Yes, is utilizing various tools to try to keep up with both the subscriber base, revenue base. And at the end of the day, undergo this migration from satellite to IP that will enable it as of 2026 to reduce a significant amount of OpEx as well as CapEx going forward. And this is very important for yes, and for the group.

Thank you very much...

Thank you. If there are no further questions. Okay. So we see we have another question. It's Andre from UBS.

I've got 2, please. Maybe just first of all, if you could speak about the non-billed revenues that you highlight were a bit of a headwind this quarter. Can you just put some numbers on that, where primarily they are in there may be across more services, but presumably maybe just on the connectivity side. And what is the outlook going forward? Is this something that you see as very temporary? Is this something that could even get worse over the next couple of quarters? That's one question, please. And then the second question would be -- if you could elaborate a bit more on the impact that you're seeing in international. I think specifically, you mentioned some kind of retail impact primarily due to some migrations, et cetera. So if you could speak a bit about that, please.

Okay. Andre, I apologize, but I don't think any of us have heard the last part of your second question, if you could please raise your voice a little bit. I got the first question -- and the second one is about international, I guess, investments.

No. So you flagged in the report today some negative impacts from international, and I think it was related to some customer migration. So if you could maybe elaborate on that and the future of that, that would be helpful.

Okay. So you mean at Bezeq International, right?

Yes. Okay.

So I'll let explain. In terms of the non-billing both Bezeq Fixed Line and yes, since the beginning of the conflict as of Q4 of last year, have voluntarily stopped billing customers in the complex areas. That's specifically in the South and in the north, close to the border. And in the first half of this year, these amounts are not significant for the group, obviously, but still are about a couple of dozens of millions of NIS together, both for Bezeq and for us. Of course, for years, even the relative size is more significant. It's a couple of NIS on the ARPU for them. So that's on the first question. On the second question, if I got it correct, Bezeq International is seeing a transition as a result of the regulatory reform of the unified Internet where we see actually the consumer business coming down. Most of those consumers, which were on the ISP side are moving over to -- over to Bezeq at the fixed line. And the company sees increasing the focusing on growing the ICT space. And so far, it's going well. We see growth in cloud activity. We see growth in data centers and also in some of the integration activities that they are promoting. But this is a relatively longer transition. It's not just half a year or even not 1 year. It takes a number of years. I think we said that in the past. And we should also highlight that the company along this transition is being able to streamline their operations and expenses, and I think you've seen that in the quarter and also in the first half of the year.

And maybe just to follow up. So the ISP ARPU, like what's happening in the market? Is there pressure on that? Or is it just the case of pure migration one-to-one from international to fixed? Or is there may be more competition that is leading to some of the dilution now that the regulatory changes, is allowing for the ISP unification with the infrastructure bid?

So I want to address this and also give a couple of sentences of backdrop on this. The first step in moving structural separation, taking you 3 years back, structural operation was basically TV, ISP and infrastructure. And the first major step in removing that because of the different milestones that the market and the company achieved was fully removing the separation between ISP and infrastructure, allowing Bennet to offer a unified service they exist in the rest of the world. What this results in the past 2 years is basically the migration of the customers from Bezeq International Bezeq fixed-line. Today, roughly 80% of Bezeq customers are unified customers, meaning they have ISP and infrastructure together. I know Andre, for you is obvious. But for us in Israel, they took a couple of decades to get there. So that -- these are the trends that you see in the -- the result of that, we basically went into a restructuring plan and a retransition of this business to an ICT business services and telco services, we include the subsea and telcos and data centers and integration services, basically a newborn ICT that is now reaching the NIS 1 billion short of revenue, mostly without the ISP customers, the legacy revenue. In our noncore -- sorry, in our core revenue that we report, we exclude this ISP revenue because it's just going away from one side to the other. So don't get confused by the stand-alone better international picture.

And in terms of the ARPU that you asked about, although we don't disclose ISP ARPU, at Bezeq fixed line, it's just Internet service. And we charge what we charge for that. We disclose the ARPU you've seen that it has increased nicely. So there are 2 effects here. On one hand, subscribers that leave Bezeq international, of course, stop paying Bezeq International and are paying -- what they are paying to Bezeq fixed line or maybe to other players. But at the same time, Bezeq International is able to reduce payments to Bezeq in terms of transmission services to provide those services to the ISP consumers and at the same time, to streamline their operations, as I said before. Thank you, Andre. We have a question from Siyi from Citi.

I just have 2 questions, please. The first one, I just want to circle back to your comments on the ball competition in the TV market. Just wondering if you can just talk us through where do you see the competition coming from? Are the streaming services or your traditional telco operators? And if I can also elaborate on this question is whether you can talk about competition in general in Israel on the fixed and mobile side. And my second question is, I'm wondering if you can give us some indication of the drag from the MOC changes and also the roaming? And how should we think about the development for the rest of the year?

Okay. I'll start and I'll let the team add. So different from the rest of the market, we sell fixed line and fiber on one side of the house and TV and also bundle on the other side of the house, right? So our competition deviates between Internet-only players and bundle players. The TV market in Israel, most of the players are streaming or skinny bundle ones. There are only 2 real MVPD players, Multi channel TV players yes, and hot. And you see a migration to skinny bundle discount model, but still a lot of the householders buying multichannel TV and VPDs, -- and you can see this market under very fierce competition. But still, most of the houses are not going into cord-cutting cord never type trend that you see elsewhere. More than 70% of the house on a still buy a TV, whether it's discount or premium and we have both. But it is the market that is probably under the most fierce competition between fixed line cellular and TV, TV is the most competitive one with a lot of rising discount players or free TV is one of them and others are also skinny bundles one. On the fixed line market, we play both the retail and wholesale you are familiar with. It's a 2 infrastructure market, which we have the benefit of being the largest infrastructure with now more than 2.3 million households. We will finish the deployment of most of the country by mid-next year as previously communicated. But there, you see a rational market with competitive rational market with stable prices with very high demand for fiber. And I think both Bezeq and yes and the rest of the players in the market are benefiting from the demand for fiber, both in the number of subscribers and also in the ARPU and the demand for higher speeds from the 300 to the 600 to 1 gig, we actually now people buying slightly more 2.5 and 5 gigs, which is what we're probably going to see more in the next 3 to 5 years. And we enjoy both right, retail and the wholesale market as well.

I'll add Mobile? First of all, there is intense competition in the Israeli TV market, 5 players, skinny bundle and regular players thematic TV and also the streaming from a broad international streamers like Netflix and Disney also in Israel. But as Tomer mentioned, we see that still 70% to 80% of our customers still using our premium packages is a multichannel TV. And what also we are doing with the competition is that we sell bundles, the TV and fiber together, and that holds our customers and yes, and not moving to other companies. Also, the mobile market is very, very intensive competition. There's 9 players in the mobile market. But Pelephone is doing well. As you saw, we are growing 15,000 in this quarter and 60,000 5G subscribers and Pelephone has around 25% market share.

And I will address the last part of your question Siyi , which, if I understood correctly, was about the impact of the MOC telephony tariff reduction and the impact on roaming in terms of the complex. Is that right? Okay. So in telephony, and we disclose these figures on our reports and on our materials, telephony revenues came down by almost NIS 40 million in the quarter and close to NIS 80 million in the first half of the year. This was fully expected and as planned due to just the second and last tranche of those MLC driven tariff reductions on the roaming side, we do not disclose specifically the amounts. But I can say that if you look at our core revenues, the figure has still increased in the first half of the year by 0.6% despite the impact of the conflict on roaming revenues and on the non-billing at Bezeq and yes. Had it not been for the war, we would have been at a positive core revenue figure in terms of change in the quarter and a much higher growth in the first half of the year. And I think that, that underlines the importance of remaining focused on our strategy and on the growth engines that we have defined in this strategy. 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 we 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 earnings call. Thank you.