Cellcom Israel Announces Third Quarter 2018 Results

NETANYA, Israel, Nov. 22, 2018 /PRNewswire/ -

Nir Sztern, Cellcom CEO said:

• "Approximately 120,000 households are within the coverage range of Cellcom Israel's fiber optic network (as of today)" 
• "The Company entered into a memorandum of understanding with the Israel Infrastructure Fund ("IIF") for co-investment in IBC"
• "Cellcom tv service continues to succeed, and we maintain our position as the largest OTT TV player in the market with approximately 213,000 subscribing households (as of today)"

Third Quarter 2018 Highlights (compared to third quarter of 2017):

• Total Revenues totaled NIS 910 million ($251 million) compared to NIS 975 million ($269 million) in the third quarter last year, a decrease of 6.7% 
• Service revenues totaled NIS 712 million ($196 million) compared to NIS 737 million ($203 million) in the third quarter last year, a decrease of 3.4%
• Operating income totaled NIS 33 million ($9 million) compared to NIS 83 million ($23 million) in the third quarter last year, a decrease of 60.2%
• Net income totaled NIS 1 million ($0.3 million) compared to NIS 32 million ($9 million) in the third quarter last year, a decrease of 96.9%
• EBITDA¹ totaled NIS 184 million ($51 million) compared to NIS 226 million ($62 million) in the third quarter last year, a decrease of 18.6%
• Net cash from operating activities totaled NIS 194 million ($48 million) compared to NIS 205 million ($57 million) in the third quarter last year, a decrease of 5.4%
• Free cash flow¹ totaled NIS 34 million ($9 million) compared to NIS 105 million ($29 million) in the third quarter last year, a decrease of 67.6%

¹ Please see "Use of Non-IFRS financial measures" section in this press release.

Nir Sztern, the Company's Chief Executive Officer, referred to the results of the third quarter of 2018:

"During this quarter, we continued the implementation of the Company's strategic plan by deepening our activities in the fixed-line market with continued growth in the television service and in investment in independent optic-fiber infrastructure, which are expected to facilitate future saving in costs and improvement of the fixed-line segment profitability.

We are operating to improve the results in the cellular segment despite the competitive environment in this segment.

In recent months, we substantially accelerated the Company's independent fiber optic deployment, so that as of today approximately 120,000 households are within the coverage range of Cellcom Israel's fiber optic network and are able to join the "Super Fiber" service. This is only the first step towards the provision of widely deployed internet service over fiber optic.

Simultaneously, we are preparing for the completion of the IBC (the fiber optic initiative) transaction, so that within the next three years we will offer internet services over fiber optic to more than half a million households in Israel. 

We announced today that we entered into a memorandum of understanding with the Israel Infrastructure Fund ("IIF"), for IIF's co-investment in IBC, which shall be carried out in equal parts between the Company and IIF. IIF's entry as equal partner to IBC, subject to completion of the transaction, is an important step in advancing both IBC and Internet infrastructure in Israel.

IIF, established in 2007, is the first and largest infrastructure fund in Israel specializing in the infrastructure sector. IIF currently manages $1.9 billion on behalf of its managed funds and is backed by leading Israeli financial institutions as well as investors from Europe & North America.  

We believe that entering IBC in partnership with IIF and alongside Israel Electricity Company, will generate - already in the near future - a real revolution in the Internet infrastructure field in Israel and will place Cellcom Israel in a leading competitive position in the advanced landline infrastructure market.

Cellcom tv service continues to succeed, and we maintain our position as the largest OTT TV player in the market with approximately 213,000 subscribing households (as of today).

In the third quarter as well we continued to invest in the viewing experience of our customers and in adding new sports content as well as content for children. We are continuing to add new customers to the TV services including through our triple and quad paly packages, and we concluded the third quarter with an increase of 6.2% in services revenues in the fixed-line segment compared to the same quarter last year.

The impact of competition in the cellular segment continues and is reflected also in the current quarter, with a decline in service revenues of 9.2% compared to the corresponding quarter of last year, which is mainly due to the ongoing erosion in the prices of these services in light of the competition in the market.

During November, we launched a number of new and simple cellular plans, which include a higher monthly rate, along with an increase in the package's contents, without a built-in price increase at the end of the first year, as was customary until now.

During the third quarter, the Company's cellular subscriber base grew by approximately 16,000 net."  

Shlomi Fruhling, Chief Financial Officer, said:

"The third quarter of 2018 was characterized by continued growth in the fixed-line segment due to continued recruitment of subscribers for television and internet services and further by an increase in international calling activity compared to the previous quarter. In the cellular segment the quarter was characterized by the continued increased competitive environment, despite a decrease in the amount of transfers between operators compared to the previous quarter. The increase in the cellular segment services revenues compared with the previous quarter is mainly due to positive seasonality in revenues from calls and internet packages overseas.

The decrease in revenues from end-user equipment compared with the previous quarter was due mainly to the decrease in the number of business days in the third quarter, due to the high number of holidays in the quarter.

EBITDA amounted to NIS 184 million in the quarter, compared with NIS 133 million in the previous quarter. The improvement in EBITDA is due to expenses recorded in the previous quarter in respect of the voluntary retirement plan of employees in the amount of NIS 26 million and other expenses, as well as an increase in service revenues and a decrease in operating expenses.

Free cash flow in the third quarter of 2018 amounted to NIS 34 million, compared with NIS 56 million in the previous quarter. Most of the decrease is due to a decline in collection from customers, from payments in respect of the voluntary retirement plan of employees, and on the other hand, a decrease in payments to the tax authorities."

Cellcom Israel Ltd. CEL CEL ("Cellcom Israel" or the "Company" or the "Group") announced today its financial results for the third quarter of 2018.

The Company reported that revenues for the third quarter of 2018 totaled NIS 910 million ($251 million); EBITDA for the third quarter of 2018 totaled NIS 184 million ($51 million), or 20.2% of total revenues; net income for the third quarter of 2018 totaled NIS 1 million ($0.3 million). Basic earnings per share for the third quarter of 2018 totaled NIS 0.01 ($0.002).

Main Consolidated Financial Results:

Main Financial Data by Operating Segments:

Financial Review (third quarter of 2018 compared to third quarter of 2017):

Revenues for the third quarter of 2018 decreased 6.7% totaling NIS 910 million ($251 million), compared to NIS 975 million ($269 million) in the third quarter last year. The decrease in revenues is attributed to a 16.8% decrease in equipment revenues and a 3.4% decrease in service revenues.

Service revenues totaled NIS 712 million ($196 million) in the third quarter of 2018, a 3.4% decrease from NIS 737 million ($203 million) in the third quarter last year.

Service revenues in the cellular segment totaled NIS 443 million ($122 million) in the third quarter of 2018, a 9.2% decrease from NIS 488 million ($135 million) in the third quarter last year. This decrease resulted mainly from the ongoing erosion in the prices of these services as a result of the competition in the cellular market.

Service revenues in the fixed-line segment totaled NIS 310 million ($85 million) in the third quarter of 2018, a 6.2% increase from NIS 292 million ($81 million) in the third quarter last year. This increase resulted mainly from an increase in revenues from internet and TV services. This increase was partially offset by a decrease in revenues from international calling services. 

Equipment revenues totaled NIS 198 million ($55 million) in the third quarter of 2018, a 16.8% decrease compared to NIS 238 million ($66 million) in the third quarter last year. This decrease resulted mainly from a decrease in the amount of end user equipment sold in the cellular segment, which was partially offset by an increase in equipment sales in the fixed-line segment.

Cost of revenues for the third quarter of 2018 totaled NIS 645 million ($178 million), compared to NIS 670 million ($185 million) in the third quarter of 2017, a 3.7% decrease. This decrease resulted mainly from a decrease in the amount of end user equipment sold in the cellular segment and from a decrease in interconnect fees. This decrease was partially offset by an increase in fixed-line segment costs related to internet services and costs of TV services content.

Gross profit for the third quarter of 2018 decreased by 13.1% to NIS 265 million ($73 million), compared to NIS 305 million ($84 million) in the third quarter of 2017. Gross profit margin for the third quarter of 2018 amounted to 29.1%, down from 31.3% in the third quarter of 2017.

Selling, Marketing, General and Administrative Expenses ("SG&A Expenses") for the third quarter of 2018 increased by 4.5% to NIS 232 million ($64 million), compared to NIS 222 million ($61 million) in the third quarter of 2017. This increase is primarily a result of an increase in amortization expenses of salaries and commissions expenses which were capitalized as part of customer acquisition costs, as a result of early adoption of an International Financial Reporting Standard (IFRS 15) as of the first quarter of 2017 (the "Adoption of IFRS15").

Operating income for the third quarter of 2018 decreased by 60.2% to NIS 33 million ($9 million) from NIS 83 million ($23 million) in the third quarter of 2017.

EBITDA for the third quarter of 2018 decreased by 18.6% totaling NIS 184 million ($51 million) compared to NIS 226 million ($62 million) in the third quarter of 2017. EBITDA as a percent of revenues for the third quarter of 2018 totaled 20.2%, down from 23.2% in the third quarter of 2017.

Cellular segment EBITDA for the third quarter of 2018 totaled NIS 111 million ($31 million), compared to NIS 160 million ($44 million) in the third quarter last year, a decrease of 30.6%, which resulted mainly from the ongoing erosion of service revenues.

Fixed-line segment EBITDA for the third quarter of 2018 totaled NIS 73 million ($20 million), compared to NIS 66 million ($18 million) in the third quarter last year, a 10.6% increase, which result mainly from an increase in activity in the internet and TV fields. 

Financing expenses, net for the third quarter of 2018 decreased by 23.1% and totaled NIS 30 million ($8 million), compared to NIS 39 million ($11 million) in the third quarter of 2017. The decrease resulted mainly from a decrease in the Company's average debt level and from a decrease in the interest rate on the Company's debt.

Net Income for the third quarter of 2018 totaled NIS 1 million ($0.3 million), compared to NIS 32 million ($9 million) in the third quarter of 2017, a decrease of 96.9%.

Basic earnings per share for the third quarter of 2018 totaled NIS 0.01 ($0.002), compared to NIS 0.32 ($0.09) in the third quarter last year.

OPERATING REVIEW

Main Performance Indicators - Cellular segment:

Cellular subscriber base - at the end of the third quarter of 2018 the Company had approximately 2.825 million cellular subscribers. In this quarter, the Company's counting mechanism of M2M (machine to machine) subscribers was changed, so as that M2M subscribers are added to the cellular subscriber base only upon first use instead of at the time of sale as was done until the change. This change did not have a material effect on the prior subscriber data. During the third quarter of 2018 the Company's cellular subscriber base increased by approximately 16,000 net cellular subscribers.

Cellular Churn Rate for the third quarter of 2018 totaled 10.0%, compared to 11.5% in the third quarter last year.

The monthly cellular Average Revenue per User ("ARPU") for the third quarter of 2018 totaled NIS 52.5 ($14.5), compared to NIS 57.8 ($15.9) in the third quarter last year. The decrease in ARPU resulted mainly from the ongoing erosion in the prices of cellular services, resulting from the intense competition in the cellular market.

Main Performance Indicators - Fixed-line segment:

In the third quarter of 2018, the Company's subscriber base in the internet infrastructure field increased by approximately 11,000 net households, and the Company's subscriber base in the TV field increased by 11,000 net households.

FINANCING AND INVESTMENT REVIEW

Cash Flow

Free cash flow for the third quarter of 2018 totaled NIS 34 million ($9 million), compared to NIS 105 million ($29 million) in the third quarter of 2017, a 67.6% decrease. The decrease in free cash flow resulted mainly from a decrease in receipts from customers and operators, from higher cash capital expenditures in fixed assets and from an increase in payments to employees due to the employee voluntary retirement plan from the second quarter of 2018. This decrease was partially offset by a decrease in purchase of end user equipment.

Total Equity

Total Equity as of September 30, 2018 amounted to NIS 1,654 million ($456 million) primarily consisting of undistributed accumulated retained earnings of the Company.

Cash Capital Expenditures in Fixed Assets and Intangible Assets and others

During the third quarter of 2018, the Company invested NIS 160 million ($44 million) in fixed assets and intangible assets and others (including, among others, investments in the Company's communications networks, investments in optic fibers deployment, information systems, software and TV set-top boxes and capitalization of part of the customer acquisition costs as a result of the Adoption of IFRS15), compared to NIS 114 million ($31 million) in the third quarter of 2017.

Dividend

On November 22, 2018, the Company's Board of Directors decided not to declare a cash dividend for the third quarter of 2018. In making its decision, the board of directors considered the Company's dividend policy and business status and decided not to distribute a dividend at this time, given the intensified competition and its continued adverse effect on the Company's results of operations, and in order to strengthen the Company's balance sheet. The board of directors will re-evaluate its decision in future quarters. No future dividend declaration is guaranteed and is subject to the Company's board of directors' sole discretion, as detailed in the Company's most recent annual report for the year ended December 31, 2017 on Form 20-F dated March 26, 2018, or the 2017 Annual Report, under "Item 8 - Financial Information – A. Consolidated Statements and Other Financial Information - Dividend Policy".

Debentures, Material Loans and Financial Liabilities

For information regarding the Company's outstanding debentures as of September 30, 2018, see "Disclosure for Debenture Holders" section in this press release.

For information regarding the Company's material loans as of September 30, 2018, see "Aggregation of the Information regarding the Company's Material Loans" section in this press release.

For a summary of the Company's financial liabilities as of September 30, 2018, see "Disclosure for Debenture Holders" section in this press release.

OTHER DEVELOPMENTS DURING THE THIRD QUARTER OF 2018 AND SUBSEQUENT TO THE END OF THE REPORTING PERIOD

IBC

In November 2018, following the Company's previous reports regarding the Company entering into an MOU for an investment in Israel Broadband Company, or IBC, (the "IBC MOU"), the Company entered into a memorandum of understanding with the Israel Infrastructure Fund ("IIF"), for IIF's co-investment in IBC together with the Company, which shall be carried out in equal parts between the Company and IIF through a joint investment vehicle (the "IIF MOU").

The IIF MOU includes, in addition to standard and customary conditions, principles of cooperation between the parties towards the execution of the definitive agreements for the investment in IBC, which shall be carried out in accordance with the IBC MOU, and other transaction documents and after the consummation of such investment in IBC, if and when occurs, including, among others, joint decision making processes and equal participation  in costs and financing of the investment, as well as certain adjustments in case an additional strategic investor joins the Company and IIF in investing in IBC.  

The terms of the definitive agreement between the Company and IIF (to be entered together with the other transaction documents) as well as the terms of the definitive agreement and other transaction documents for the investment in IBC, are subject to further negotiations between the parties and approvals of the parties' Boards of Directors. If entered, the execution of the transaction will be subject to the previously reported precedent conditions, including regulatory approvals. There is no assurance that the parties will enter any of the said agreements, or that such agreements will be approved and executed, nor as to their timing and terms.

For additional details see the Company's 2017 Annual Report under "Item 3. Key Information – D. Risk factors – Risks related to our business - We face intense competition in all aspects of our business", "- Our investment in new businesses involves many risks" and "Item 4. Information on the Company –B. Business Overview – Competition – Fixed-Line Segment- Fixed-Line Infrastructure" and the Company's current reports on form 6-K dated August 8, 2018 and August 16, 2018 under "-Other developments during the second quarter of 2018 and subsequent to the end of the reporting period - Investment in IBC" and November 22, 2018.

Regulation

Cell sites

In October 2018, the previously reported draft regulations setting procedures for the construction, changes and replacement of radio access devices exempt from building permits, were enacted. Though these regulations reflect existing judicial limitations placed upon the Company's ability to make changes and replace radio access devices, they also introduce a new licensing procedure that may further reduce the Company's ability to construct new radio access devices based on such exemption. This may adversely affect the Company's existing networks and networks build-outs.

In addition, following conflicting district decisions concerning the company's ability to receive building permits in reliance on the current National Zoning Plan, or Plan, for cell sites operating in frequencies not specifically detailed in the frequencies charts attached to the Plan, the matter will now be decided by the supreme court.  In addition to the Company's existing frequencies not specifically detailed in the Plan, some of the frequencies to which the Company is required to transfer following the previously reported Ministry of Communication's requirement for frequency's migration, are also not specifically detailed in the Plan. Should the supreme court rule against the Company, it would have a material negative impact on the Company's ability to deploy additional cell sites or make any changes to them, and could adversely affect the Company's existing networks, which could negatively affect the extent, quality and capacity of the Company's network coverage and ability to continue to market the Company's products and services effectively.

For additional details see the Company's 2017 Annual Report under "Item 3. Key Information – D. Risk factors – Risks related to our business - We may not be able to obtain permits to construct and operate cell sites", "- We may be adversely affected by the significant technological and other changes in the telecommunications industry" and "Item 4. Information on the Company –B. Business Overview – Government Regulation – Cellular Segment - Permits for Cell Site Construction" and the Company's current report on form 6-K dated August 16, 2018 under "-Other developments during the second quarter of 2018 and subsequent to the end of the reporting period – Regulation – Frequencies".

CONFERENCE CALL DETAILS

The Company will be hosting a conference call regarding its results for the third quarter of 2018 on Thursday, November 22, 2018 at 10:00 am ET, 07:00 am PT, 15:00 UK time, 17:00 Israel time. On the call, management will review and discuss the results, and will be available to answer questions. To participate, please either access the live webcast on the Company's website, or call one of the following teleconferencing numbers below. Please begin placing your calls at least 10 minutes before the conference call commences. If you are unable to connect using the toll-free numbers, please try the international dial-in number.

US Dial-in Number: 1-888-668-9141      UK Dial-in Number: 0-800-917-5108
Israel Dial-in Number: 03-918-0685        International Dial-in Number:  +972-3-918-0685
at: 10:00 am Eastern Time; 07:00 am Pacific Time; 15:00 UK Time; 17:00 Israel Time

To access the live webcast of the conference call, please access the investor relations section of Cellcom Israel's website: www.cellcom.co.il. After the call, a replay of the call will be available under the same investor relations section.

About Cellcom Israel
Cellcom Israel Ltd., established in 1994, is a leading Israeli communications group, providing a wide range of communications services. Cellcom Israel is the largest Israeli cellular provider, providing its approximately 2.825 million cellular subscribers (as at September 30, 2018) with a broad range of services including cellular telephony, roaming services for tourists in Israel and for its subscribers abroad, text and multimedia messaging, advanced cellular content and data services and other value-added services in the areas of music, video, mobile office etc., based on Cellcom Israel's technologically advanced infrastructure. The Company operates an LTE 4 generation network and an HSPA 3.5 Generation network enabling advanced high speed broadband multimedia services, in addition to GSM/GPRS/EDGE networks. Cellcom Israel offers Israel's broadest and largest customer service infrastructure including telephone customer service centers, retail stores, and service and sale centers, distributed nationwide. Cellcom Israel further provides OTT TV services, internet infrastructure and connectivity services and international calling services, as well as landline telephone services in Israel. Cellcom Israel's shares are traded both on the New York Stock Exchange (CEL) and the Tel Aviv Stock Exchange (CEL). For additional information please visit the Company's website http://investors.cellcom.co.il.

Forward-Looking Statements
The following information contains, or may be deemed to contain forward-looking statements (as defined in the U.S. Private Securities Litigation Reform Act of 1995 and the Israeli Securities Law, 1968). In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about the Company, may include projections of the Company's future financial results, its anticipated growth strategies and anticipated trends in its business. These statements are only predictions based on the Company's current expectations and projections about future events. There are important factors that could cause the Company's actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause such differences include, but are not limited to: changes to the terms of the Company's license, new legislation or decisions by the regulator affecting the Company's operations, new competition and changes in the competitive environment, the outcome of legal proceedings to which the Company is a party, particularly class action lawsuits, the Company's ability to maintain or obtain permits to construct and operate cell sites, and other risks and uncertainties detailed from time to time in the Company's filings with the U.S. Securities and Exchange Commission, including under the caption "Risk Factors" in its Annual Report for the year ended December 31, 2017. 

Although the Company believes the expectations reflected in the forward-looking statements contained herein are reasonable, it cannot guarantee future results, level of activity, performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The Company assumes no duty to update any of these forward-looking statements after the date hereof to conform its prior statements to actual results or revised expectations, except as otherwise required by law.

The Company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). Unless noted specifically otherwise, the dollar denominated figures were converted to US$ using a convenience translation based on the New Israeli Shekel (NIS)/US$ exchange rate of NIS 3.627 = US$ 1 as published by the Bank of Israel for September 30, 2018.

Use of non-IFRS financial measures

EBITDA is a non-IFRS measure and is defined as income before financing income (expenses), net; other income (expenses), net (excluding expenses related to employee voluntary retirement plans and gain (loss) due to sale of subsidiaries); income tax; depreciation and amortization and share based payments. This is an accepted measure in the communications industry. The Company presents this measure as an additional performance measure as the Company believes that it enables us to compare operating performance between periods and companies, net of any potential differences which may result from differences in capital structure, taxes, age of fixed assets and related depreciation expenses. EBITDA should not be considered in isolation, or as a substitute for operating income, any other performance measures, or cash flow data, which were prepared in accordance with Generally Accepted Accounting Principles as measures of profitability or liquidity. EBITDA does not take into account debt service requirements, or other commitments, including capital expenditures, and therefore, does not necessarily indicate the amounts that may be available for the Company's use. In addition, EBITDA as presented by the Company may not be comparable to similarly titled measures reported by other companies, due to differences in the way these measures are calculated. See the reconciliation of net income to EBITDA under "Reconciliation of Non-IFRS Measures" in the press release.

Free cash flow is a non-IFRS measure and is defined as the net cash provided by operating activities (including the effect of exchange rate fluctuations on cash and cash equivalents) excluding a loan to Golan Telecom, minus the net cash used in investing activities excluding short-term investment in tradable debentures and deposits and proceeds from sales of such debentures (including interest received in relation to such debentures) and deposits. See "Reconciliation of Non-IFRS Measures" below.

Financial Tables Follow