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Cellcom Israel Ltd (CEL) Q3 2020 Earnings Call Transcript

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Cellcom Israel Ltd (NYSE: CEL)
Q3 2020 Earnings Call
Nov 23, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, welcome to Cellcom's Third Quarter 2020 Results Conference call. [Operator Instructions] You should have all received by now the Company's press release. If you have not received it, please contact Cellcom's Investor Relations team at GK Investor and Public Relations at 1 (646) 688-3559 or view it in the News section of the Company's website, www.cellcom.co.il.

I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

Ehud Helft -- Managing Partner

Yeah. Thank you, operator. I would like to welcome all of you to Cellcom Israel's third quarter 2020 results conference call, and I would like to thank management for hosting this call today. With us here on the call are Mr. Avi Gabbay, the CEO; and Mr. Shai Amsalem, the CFO. Mr. Gabbay will open by providing a summary of this quarter results and Mr. Amsalem will review the financials. We will then open the call for any questions that you may have.

Before I turn the call over to Mr. Gabbay, I would like to remind our listeners that in this call, management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make any additional forward-looking statements in response to your questions. Therefore, the Company claims protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995 and the Israeli Securities Law of 1968.

I note that actual results may differ from those discussed today, and therefore we refer you to the more detailed discussion of the risks and uncertainties in the Company's filing with the Securities and Exchange Commission, including under Risk Factors in the Company's annual report for the year ended December 31, 2019, filed under the Form 20-F, which was filed on March 23, 2020, with the SEC. In addition, any projections as to the Company's future performance represents management estimates as of today. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change.

I would now like to hand over the call to Mr. Avi Gabbay. Avi, go ahead, please.

Avi Gabbay -- Chief Executive Officer

Thank you, Helft. Good day to all of you, and welcome post Golan. Following the closing of the Golan deal at the end of August, Cellcom enhances its position as Israel's largest mobile service provider with 3.6 million subscribers. The deal strengthens Cellcom Israel's position as the leading communication company in Israel, and we expect Golan to contribute to our adjusted EBITDA and free cash flow. I would like to welcome both the new employees to Cellcom Group as well as all Golan customers that will now benefit from being part of the larger Cellcom family.

Another important milestone that happened in the quarter is the investment agreement with the Hot Telecommunication to invest in IBC, our fiber network infrastructure subsidiary. Through our partnership with the Israel Infrastructure Funds, which is still pending regulatory approvals, Hot's entry would significantly strengthen IBC market position as a fiber optic company that would service a significant portion of the market.

About the coronavirus, looking at the results over the third quarter like everyone else, we continue to be impacted by the effect of the corona pandemic. We have worked hard to reduce our expenses, while at the same time ensuring excellent service to all of our customers. Our ongoing cash flow generation and positive adjusted EBITDA demonstrates that. Our efforts to tightly control expenses offset the part of the impact of the crisis on us. Combined with our efforts to improve our efficiencies and lower our expenses, we believe that once the COVID crisis will be behind us, we will be more efficient and more focused with more opportunities to grow and enhance our financial results.

In a normal year, our third quarter is seasonally strong due to the roaming services, roaming revenues from both tourists in Israel and Cellcom's Israeli subscribers in other countries. However, the ongoing travel restrictions meant that the roaming revenues were largely absent this quarter.

In the third quarter, our stores were opened as many of our staff that were on leave during the previous quarter returned to work. However, at the end of the third quarter and into the fourth quarter, we have seen a further countrywide and extended shutdown, and some of our points of sales and service centers has been closed again. Therefore, we will continue to see an impact on our revenues in the near-term.

I would like to spend a few moments updating you on our specific strategic steps which support our long-term growth. About the fifth generation, with fifth generation's technology standard for cellular networks, we expect to dramatically outweigh the telecommunication capabilities in Israel. In August, we successfully completed participating in the frequency tender in Israel, which including -- included the fifth generation frequencies.

We are pleased with the results and -- which will allow us to start selling higher speed [Phonetic] to customers in the near future. It will also enable us to improve our existing 4G services, given our larger range of frequencies providing a higher quality of service to existing customers. We expect to increase capex in order to strengthen our network and our quality of service.

About IBC, we are holding in IBC. Cellcom Israel is well positioned to benefit from the market demand and growth of the fiber optic market in Israel with up to 1 gigabyte Internet. Furthermore, as we move our fixed line subscribers from Bezeq to the more advanced infrastructure, it allows us to reduce our landline wholesale access fee.

As I mentioned earlier, during the quarter together with IIF, we signed an investment agreement for us to enter an equal partnering IBC pending regulatory approvals. This agreement will allow for a significant expansion in the scope of optical fiber deployment and the accelerated pace. IBC's wide deployment will transform Cellcom Israel from a company that relies on the fixed network of others to partner in an extensive and independent infrastructure. IBC already has 500,000 households in building connected throughout Israel to its fiber infrastructure and 80,000 of our customers have already joined IBC. By Hot joining IBC, should this transaction be approved would significantly strengthen IBC's potential to reach more customers.

About Cellcom tv, Cellcom tv service continues to gain momentum at 251,000 household subscribers as of the end of the third quarter, adding 6,000 new subscribers in the quarter.

In summary, the third quarter was a difficult period, not just for Cellcom Israel, but all around the world. However, we continue to support and service all our customers throughout Israel with all their communication needs, whether telephone, Internet, or via television.

That ends my summary, and I would like to hand over to Shai Amsalem, our CFO. Shai, please.

Shai Amsalem -- Chief Financial Officer

Thank you, Avi, and good day to you all. I will provide you with a summary of our results. The details can be found in the press release we issued earlier today. This quarter, we consolidated for the first time the result of Golan Telecom, but only for one month as the acquisition was completed at the end of August.

Revenues for the third quarter of 2020 totaled to ILS956 million compared with ILS928 million reported in the third quarter of last year. Out of those, the service revenues were ILS695 million, 2% below the ILS709 million reported in the third quarter of last year and the revenues from equipment were ILS261 million, 19% above the ILS219 million reported in the third quarter of last year, due to among others the increase of the online activities, though this type of revenue carry a lower profitability.

In addition, I would like to note that the fixed-line segment service revenue grew 5% over the third quarter of last year to ILS327 million. This increase resulted mainly from the net increase in the revenues from Internet and TV services. Cellular revenues were ILS414 million compared with ILS439 million in the third quarter of last year. The main reason for the decline is the absent of roaming revenues incoming and outgoing due to the lack of international travel.

Our adjusted EBITDA in the third quarter of 2020 was ILS231 million, or 24% of revenues and reflects a 15% decrease compared with ILS271 million or 29.2% of the revenue in the third quarter of last year. The main reason for the decline is the absence of roaming revenue incoming and outgoing due to the lack of international travel as mentioned above. Adjusted EBITDA from the fixed-line segment was ILS117 million compared with ILS86 million last year, an increase of 32% and adjusted EBITDA from the cellular segment was ILS114 million compared with ILS185 million last year.

The net loss in the third quarter of 2020 totaled to ILS37 million compared with net loss of ILS2 million in the third quarter of last year. Our free cash flow was ILS44 million versus ILS53 million, excluding the proceeds from the sale of fiber infrastructure to IBC, which totaled to ILS181 million in the third quarter of last year.

Our cash capital expenditure for the third quarter of 2020 totaled ILS108 million versus ILS149 million [Phonetic] in the third quarter of last year. As of the end of third quarter of 2020, our net debt stood at approximately ILS2.4 billion. The increase in the net debt is mainly due to the acquisition of Golan that was completed during this quarter and was paid in cash.

At the end of the third quarter of 2020, the Company had approximately 3.6 million cellular subscribers compared with 2.7 million at the end of the prior quarter. The increase was due to the new subscribers gained through the Golan acquisition. The churn rate of cellular subscribers in the third quarter of 2020 was 11.4% compared with 10% in the third quarter of 2019.

Finally, the monthly cellular ARPU for the third quarter was ILS45.7 compared with ILS53.2 in the third quarter last year. The primary reason for the lower ARPU is because of the lack of roaming revenues during the quarter.

With that, I would like to open the call to questions. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.

Chris Reimer -- Barclays -- Analyst

Hi. This is Chris Reimer on for Tavy. Thank you for taking my question. First, if we could talk a little bit about the cellular market. We saw your announcement about Xfone. Can you give us more color about the situation and what it means in terms of potential financial impact on Cellcom, if they don't pay and potentially go out of business?

Avi Gabbay -- Chief Executive Officer

Okay. As you mentioned, the Xfone failed to pay the monthly payments that should have been paid at the beginning of the month. We don't really understand the reason they didn't pay. They actually said that there are issues regarding the agreement between us that we tend to complete. We don't accept it. We don't really understand or cannot now for the meantime give any expectations about what we're going to do with it or what's going to happen with it. I believe that, very soon, we will know and report about this.

Chris Reimer -- Barclays -- Analyst

Okay. And regarding fiber, can you go over the agreement between Hot and the IBC? And just looking at the big picture, do you think -- sorry there's a risk of overbuild maybe with competition, does it get 80% and partner going full speed ahead with IBC as well deploying?

Avi Gabbay -- Chief Executive Officer

Well, we see it -- as you know, we see the IBC deal that we did with Hot is very, very important and significant issue for us. You have to understand that today, as for now, you can see that Cellcom and partner are kind of second tier in the fixed-line market means that Hot and Bezeq has the facilities across the country. And we have some limited facilities across the country. And this deal with Hot will allow us to be part of the network that will be deployed all over the country and actually we're going to be part of Tier 1 and not Tier 2. That's why we see it as very important. It will allow us an access to fiber optic over the country in a price that the overall infrastructure pace not some of that has leased on this infrastructure. So, it's going to give us the advantage in the competition between us and other ISPs.

Chris Reimer -- Barclays -- Analyst

Okay. Thank you. That's helpful.

Operator

[Operator Instructions] There are no further questions at this time. Mr. Gabbay, would you like to make your concluding statement?

Avi Gabbay -- Chief Executive Officer

Yes. Thank you very much. And I would like to thank all of you for joining our conference and your continued interest in our Company. I look forward to hosting you again in our next call. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 17 minutes

Call participants:

Ehud Helft -- Managing Partner

Avi Gabbay -- Chief Executive Officer

Shai Amsalem -- Chief Financial Officer

Chris Reimer -- Barclays -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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