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

Welcome, everyone, and thank you for joining us on Bezeq's 2024 Third 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; 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 Q3 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. Following the presentation of 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 Fixed-Line results and Ilan, who will cover the results from Pelephone and yes, and I will conclude the presentation with Bezeq International results. Tomer?

Thank you, Tobi. Welcome, everyone. Let's start on Slide 3. So despite the challenges of the war, all the group companies posted another quarter, it evidences the implementation of our strategic plan as well as our resiliency as a company and as a country. We recorded an increase of over 2% in core revenue, mostly due to 4% growth in Bezeq Fixed-Line despite the war impact on Pelephone roaming revenues. Adjusted EBITDA was impacted by the reversal of the Universal Fiber fund in Q3 2023 as well as the war's impact on roaming revenues. After adjusting for these, Bezeq Fixed-Line and Pelephone EBITDA -- adjusted EBITDA increased by 2% and 6%, respectively. Group adjusted EBITDA decreased by only 1% after adjusting for these. We continue to grow in our strategic drivers, recording a 50% year-over-year increase in fiber subs and 25% growth in 5G subscriber plans. I am very proud that we have now reached 2.5 million homes passed faster than expected and already have 31% take-up on our network. This reflects over 780,000 fiber subs. And for the first time, we have more fiber subscribers than copper subs on the network. Our strategic focus on the group's core activity led to the sale of Bezeq Online last week for NIS 50 million contributing to financial efficiency and reflecting our commitment to creating value to our shareholders. On the following slide, we represent the highlights of the quarter. After adjusting for the universal fund and the roaming revenue of the Pelephone, adjusted net profit decreased by 2.6%. Free cash flow declined this quarter, mainly due to an increase in CapEx. However, we reported 2.2% growth in free cash flow for the first 9 months of the year to over NIS 1 billion. The next slide shows some KPIs by business. Bezeq Fixed-Line had 65,000 fiber net adds in Q3. The retail broadband ARPU growth now continue to grow nicely, increasing to NIS 131 thereby reaching our midterm ambition that we communicated to you 3 years ago. Moreover, we are now on path to reaching our NIS 140 ARPU guidance that we gave in the previous -- earlier this year. On the mobile side, we saw continued growth our 5G subs reaching over 1.2 million subs. This is equivalent to 53% of total postpaid subs and our cellular business continued to drive and without the roaming impact, demonstrated significant growth in both top line and adjusted EBITDA. The TV sector continues to be extremely competitive but yes market share has been relatively stable with a moderate 1% decline in TV subs. On Slide 6, we see the evolution of all our businesses to where we are today as well as the road map to the midterm. At the beginning of the year, we published the group's business roadmap, and we are on our way to achieving all the ambitions in the medium term, including the completion of the fiber deployment, the completion of the migration from satellite TV and significant growth in free cash flow from the combination of higher adjusted EBITDA and lower CapEx. With the great progress in these milestones and the successful execution of our strategy, we remain focused and confident in our ability to deliver our target of increasing EBITDA minus CapEx by NIS 400 million to NIS 500 million in the midterm. Now I would like to turn the call over to Tobi to discuss the financial in more detail.

Thank you, Tomer. Slide 7 shows a 2.1% increase in core revenues, primarily due to the growth in core revenues at Bezeq Fixed-Line. Adjusted EBITDA and adjusted net profit were impacted by the continued provision for the universal fiber fund due to the reversal of the provision in Q3 of last year, which resulted in a NIS 30 million impact. Together with the effects of the war on Pelephone's roaming revenues in the next -- on Pelephone roaming revenues. On the next slide, the 9-month results of 1.1% growth in group core revenues as well as 2.2% increase in free cash flow. Turning to the next slide, we show our operational metrics. I would like to highlight 6% increase year-over-year in our retail broadband ARPU, along with the continued increase in cellular and 5G subscribers. The next slide highlights a decrease of NIS 290 million or 6% year-over-year in our net debt to NIS 4.7 billion, while improving the coverage ratio from 1.6 to 1.5x. We remain committed to maintaining our high credit rating. 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 increased 3.6% to NIS 970 million, mainly due to higher revenues from broadband services, transmission and data communications as well as infrastructure projects, broadband retail customer reach over 50,000 daily and ARPU rose 5.6% to NIS 131 in the third quarter. On the following slide, we show that adjusted EBITDA in the third quarter was impacted by the reversal of the provision of the Universal Fiber Fund in Q3 2023 as well as higher salary expenses. Turning to the next slide. adjusted EBITDA and adjusted net profit in the first 9 months of 2024 were impacted by lower telephony revenues, mainly in the first half of 2024 due to the MOC tariff reduction. Turning to Slide 14. In the third quarter, we saw moderate growth in broadband revenues, mainly due to risk in wholesale tariffs for use of the passive networks. Moving to the next slide, we showed the take-up trends, Q3 -- so 45,000 retail fiber net adds and 42 -- 24, excuse me, 1,000 wholesale fiber net adds. Turning to the next slide, we show continued fiber deployment with an increased focus on take-up. Today, we have over 2.5 million home passed and over 80,000 active subscribers in fiber networks, resulting in continued growth of our take-up rate, which has reached approximately 31% as of today. Slide 17 shows continued revenue growth in the third quarter of 2024 in transmission and data communication. Other revenues were positively impacted by higher recorded revenues from infrastructure projects. The next slide shows an 8.5% increase in operating expenses resulting from higher expenses related to the Universal Fiber Fund due to the reversal of the provision in Q3 2023 as well as higher subcontractor expenses related to infrastructure projects for the defense industry. Salary expenses increased 6% due to increase in minimum wage, wage creep as well as lower vacation days used due to the war. 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 stable revenues despite the impact of the war on roaming revenues, which is estimated at NIS 20 million. 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 52,000 net adds in the quarter. Moving to Slide 20. We show 5G subscriber plans reached over 1.2 million subscribers as of today. Subscribers on 5G plans amounted to 53% of postpaid subscribers today. On the next slide, we see that adjusted EBITDA decreased 5.9% due to the impact of the war and the reversal of the provision for the Universal Fiber Fund in Q3 2023. Free cash flow was negatively impacted by timing differences in the payment of the frequency fees. We saw similar trends for the 9 months results on Slide 22. We Slide 23 shows the Q3 key operational metrics. As seen, we recorded an additional increase in postpaid subscribers, including 5G subscribers and a decline in prepaid subscribers due to the impact of the war. ARPU rose NIS 2 from the previous quarter despite the impact of the war on roaming revenues. This is our third consecutive quarter with an increase in ARPU. Turning to Yes on the next slide. We continue the migration from satellite to IP with 456,000 customers today. Fiber continues to grow, and we have now reached 68,000 as of today. The Q3 and 9 months financial highlights showed declines in revenues due to the increased market competition and the nonbilling of customers in the line of conflict partially offset by higher revenues from the TV fiber bundle. Adjusted EBITDA and adjusted net profit were impacted by the decrease in the revenues and the timing of the provision for the Universal Fiber Fund partially offset by lower content expenses. On Slide 27, we show Yes Q3 key operational metrics. Yes showed continued growth in the IP-based TV subscribers, which increased 20% in the period. As of today, 81% of their subscribers are watching TV through IP. We also recorded growth in fiber subscribers, jumping 120% year-over-year. With that, let me now turn the call back to Tobi.

Thanks, Ilan. Moving on to Bezeq International. Revenues and profitability metrics were impacted by lower consumer and business ISP revenues due to the Ministry of Communications unified internet regulatory reform as well as lower international long-distance revenues. The decrease was partially offset by higher ICT revenues from cloud services. On the next slide, we see similar trends in the quarter and 9-month results. Let me point out that free cash flow in the quarter and 9 months period was positively impacted by timing differences in working capital, a decrease in CapEx and lower employee severance payments compared to the third quarter and 9-month period in 2023. Turning to the last slide. I want to reiterate that we remain focused on executing on our strategy by focusing on our group's core activities and key growth drivers, robust fiber take-up in Bezeq and yes continued growth in Bezeq's data business as well as consistent growth in 5G subscriber plans at Pelephone. Finally, I would also like to mention that we will be attending the Morgan Stanley European TMT Conference this week in Barcelona. For those attending, we look forward to meeting you there.

With that, I will open the Q&A session. [Operator Instructions] First question from Liran Lublin, IBI.

I have a quick question about your guidance. You're obviously falling behind the NIS 3.8 million EBITDA that you guided for. But on the other hand, CapEx is also well behind the numbers that you guided 3 quarters ago. How should we think about CapEx for this year and for next year. And about EBITDA, what are the main reasons that you're falling behind? And what are the drivers for the next quarter?

So Liran, I'll start, thanks for the question. Tobi, feel free to add if you have anything. So great question. Look, our impact from the war is not material, but as you see definitely has some impact mostly coming from the roaming side of things. Will likely be a little bit below on EBITDA guidance, around the 2%-ish, not more than that, but CapEx will also be below. So free cash flow will actually be better than expected this year while still meeting all of our investment plan, even rolling out more fiber than expected. So keeping our plans as a planned, but free cash flow will be better, slightly better by the end of the year. On the adjusted net income side, we expect to meet our guidance for the year and reiterating that number that we gave out. Going forward to your question, we are at the end, really very end of the CapEx cycle, given that we are nearing the completion of our fiber project and the migration from satellite to IP -- so you'll see sometime second half of next year and definitely into 2026, a significant drop in CapEx. And with the growth of EBITDA really reaching towards our lead term guidance that I mentioned around EBITDA minus CapEx of increase of up to NIS 500 million in net metric. So overall, everything is working according to plan. Yes, there is some slight impact from the war on EBITDA this year, but nothing significant or nothing that makes us worry.

So just to follow up on that one. So considering that cash flow is going up and -- and your net debt is obviously very low. Any thoughts about increasing the dividend payouts?

Yes. And it's part of our communication also to the market and the guidance that we gave. We just -- this past March, increased our payout from 60% to 70%. We will evaluate at management and the Board level in coming March again, the dividend policy we will communicate the market. Obviously, the metric supports this ongoing trend.

Next question from Tavy Rosner from Barclays.

I have 3, please. First, I wanted to ask about the Universal Fiber Fund. How should we think of the operating assumption next coming quarters, would you just use the flat 50 basis points? Or do you see a chance that the MOC might lower the requirement to a lower percentage going forward?

I'll answer. I'll take this one. Complicated topic, but simpler for you and the guys on the line because you know the material as well. So as you see, the Ministry of Communications also offered Bezeq take on more areas that were unsuccessfully covered by the Universal Fund, and we took upon ourselves additional areas that all of the -- most of them were covered this year and some will be rolled out next year. This led last year to basically the MOC not to basically charge anything from Universal Fund. It was 0%. There was a draft published by the MOC that this year, it would go down from 0.5% to 0.2%. We expect it to be less this year and we expect this to be resolved in the coming weeks before end of year. With that said, since the country has almost rolled out. We do not expect to have significant universal fund provision going forward, but it's still TBD and looking for more formal communication from the regulators around that.

Okay. That's helpful. On to my next question, in my note, I have you guys pulling about 300 employees on earlier retirement next year. I'm wondering if that's the correct number? And how should we think of onetime costs and also potential cost saving benefits down the road?

So as you are aware, we have every year under our agreement with the employees at the Bezeq Fixed-Line. We have the option to retire 50 people -- and in the last year going into end of 2025, 2026, we have additional 300. It's an option, we're probably going to use a significant part of that option, given that we are nearing the completion of the fiber rollout next year. And so we will communicate properly next year regarding numbers and plan and savings. I think it's premature to provide numbers. But yes, it's an option that we will seriously contemplate using next year.

And lastly, structural separation. I think the MOC said they would finalize this issue in Q4. We are late November now? Do you still expect them to make some kind of decision now or it's just going to get pushed away to next year?

First, I expect MOC always to abide by its work plan. But I think the regulatory environment incurs across the country delays. So it's an active work stream between us and the MOC. I think it's too early to provide time line on that. But as you correctly alluded to, this is part of the formal work of the MOC. It's an active work stream. Too early to provide additional color on that.

Next question from Sabina from Leader.

First of all, congratulations on the quarter. It's good to see that you continue to show and report strong results despite everything that is happening in the country and the market and the competition. I have one follow-on regarding the regulations and then another one regarding the TV sector. So should we expect any developments in the next coming futures regarding the wholesale tariffs? And if -- because I understand that the processes within the Ministry of Communications are slow. So in case maybe there could be a delay or it would take longer to -- for them to decide on the updated wholesale tariffs. So -- is it possible that we'll see agreements with another company like something that you have with partner, maybe we should see additional players making same deals or similar deals with Bezeq?

So I'll start and if you want to add anything. But look, we are -- first, on the regulatory front, the MOC set the tariff to be valid by June 2025. So we fully expect them to have some sort of hearing or announcement around wholesale rate in the coming 6 months. We do not know whether they will stay the same or potentially change up or down. But connecting into the second question, we are always open and in discussions with all the players in the market regarding wholesale rate IRU. We are very open to do that on that front. Most of the players in the market, wholesale our network. On the regulated field, did sign an IRU, we may see more in the future, reminding you that we did make a change in the IRU with partners to allow them basically to resell to smaller players at the same term of our IRU, meaning everybody can use the same term by reaching out to partner. So I hope that answers your question. And on the slide, please go ahead.

Yes. Well, my question was regarding the recent announcement of Cellcom about the transaction with HOT. Do you believe it should impact or could impact the time frame regarding the transaction between yes and partner?

It is Ilan. Actually, we still don't know. We believe that we will have some answer in the next few weeks. We understand where it goes. The authority made us believe that in a few weeks, we will have any kind of answer which direct it will go.

But can I reasonably assume that there is more than 50% probability that both of the transactions will be approved?

Maybe. I really don't know.

Thank you, Sabina. If there are no further questions, let me -- okay. 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 you have any follow-up questions, please feel free to contact our IR department and we look forward to speaking to you on the fourth quarter and full year 2024 earnings call. Thank you.