Cellcom Israel Announces First Quarter 2018 Results

NETANYA, Israel, May 30, 2018 /PRNewswire/ -- Nir Sztern, Cellcom Israel CEO said:

"The strong growth trend of the fixed line segment also continued in this quarter. Fixed line revenues were up approximately 9% compared to the first quarter of 2017 and EBITDA of this segment reached NIS 68 million.

Cellcom Israel is the only Company in Israel that offers the quatro package. This advantage allows us to face the competition in the cellular segment, such that even as cellular prices decrease, we are successful in selling a complete communications package, and through this we increase total income per household."

First Quarter 2018 Highlights (compared to first quarter of 2017):

• Total Revenues totaled NIS 933 million ($265 million) compared to NIS 959 million ($273 million) in the first quarter last year, a decrease of 2.7%
• Service revenues totaled NIS 701 million ($199 million) compared to NIS 739 million ($210 million) in the first quarter last year, a decrease of 5.1%
• Operating income totaled NIS 45 million ($13 million) compared to NIS 67 million ($19 million) in the first quarter last year, a decrease of 32.8%
• Net income totaled NIS 7 million ($2 million) compared to NIS 26 million ($7 million) in the first quarter last year, a decrease of 73.1%
• EBITDA¹ totaled NIS 180 million ($51 million) compared to NIS 201 million ($57 million) in the first quarter last year, a decrease of 10.4%
• Net cash flow from operating activities totaled NIS 230 million ($65 million) compared to NIS 77 million ($22 million) in the first quarter last year², an increase of 198.7%
• Free cash flow¹ totaled NIS 84 million ($24 million) compared to NIS 66 million ($19 million) in the first quarter last year, an increase of 27.3%

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

"The strong growth trend of the fixed line segment also continued in this quarter. Fixed line segment revenues grew by approximately 9% compared to the first quarter of 2017 and the EBITDA from this segment reached NIS 68 million (61.9% growth from the same quarter last year).

We continued to broaden our TV services, adding 14,000 new subscribers to our service in the first quarter of 2018.

Alongside the continued competition in the cellular segment, we continued to recruit new customers, among others, through a quatro package that offers cellular, television, internet and fixed line home telephony.

Cellcom Israel is the only Company in Israel that offers a quatro package. This advantage allows us to face the competition in the cellular segment, such that even as cellular prices decrease, we are successful in selling a complete communications package, and through this we increase total income per household. In the cellular segment, we finished the first quarter with an addition of 5,000 subscribers, all post-paid subscribers.

In this quarter also, we continued to lay down our fiber-optic infrastructure to the home, in order to make "Super Fiber", our fast and quality internet service, accessible to households, as part of our quatro, triple and bundle offerings.

Further, we continued to advance a possible investment in Israel Broadband Company (IBC) and after we issued a non-binding letter of intent and reached understanding with the Israeli Electric Company (IEC) regarding an update of IEC's services prices to IBC, if we invest in IBC, we conduct negotiations with IBC and its shareholders for investing in IBC. In the last few days, the Ministry of Communications published a hearing as to the reduction of the universal deployment to which IBC is bound by its license, the approval of which shall assist in advancing the negotiations among the parties.  

We recently have been informed that, once again, the IDF (the Israeli Defense Forces) selected Cellcom Israel Group to be the cellular operator for the IDF soldiers for the coming three years. This win reflects, once again, the significant trust in Cellcom Israel's network as well as our high level of service, and we are very proud of it.

We continue to act in order to reduce the Company's expenses and examine various ways to become more efficient, in order to cope with the price erosion in the cellular segment. A few days ago we announced the launch of a voluntary retirement plan that will be another layer of streamlining the Company's expenses."

Shlomi Fruhling, Chief Financial Officer, said:

"During the first quarter of 2018 the erosion in revenues from cellular services continued as a result of the intensified competition in the market, as well as due to the change in the classification of the consideration from Golan as of the coming into force of the sharing agreement with Golan in the second quarter of 2017, compared to national roaming revenues in the same quarter last year. Despite the continued competition, we experienced a decrease in the churn rate of cellular subscribers as compared with the previous quarter and the same quarter last year. After the end of the quarter, Xfone launched its services as the 6th Mobile Network operator (MNO) in Israel, and since its entrance, we are experiencing an additional increase in the competition level in the market, reflected in an increased amount of transfers among the operators and a decrease in the pricing level in the market. The continuation of this trend is expected to negatively impact the Company's cellular segment results. 

Our subscriber base in the TV and internet services continued to grow during the quarter, with most of the subscribers joining these services as part of our triple and quatro offering. Fixed line segment revenues grew by approximately 9% compared with the same quarter last year due to the continued growth in subscriber base and the classification of part of the consideration from the sharing agreement with Golan to the fixed line segment.

The free cash flow in the first quarter of 2018 reached NIS 84 million, a 27.3% increase compared to the same period last year. The increase in the free cash flow was mainly due to a reduction in payments to suppliers and was partially offset by a decrease in receipts from customers for services and end user equipment.

The Board of Directors decided not to distribute a dividend for the first quarter of 2018, in light of the intense competition in the market and its negative impact on the Company's results of operations and in order to continue to strengthen the Company's balance sheet. The board will review its decision in the future, taking into consideration developments in market conditions and the Company's needs."

Cellcom Israel Ltd. (NYSE: CEL) (TASE: CEL) ("Cellcom Israel" or the "Company" or the "Group") announced today its financial results for the first quarter of 2018.
The Company reported that revenues for the first quarter of 2018 totaled NIS 933 million ($265 million); EBITDA for the first quarter of 2018 totaled NIS 180 million ($51 million), or 19.3% of total revenues; net income for the first quarter of 2018 totaled NIS 7 million ($2 million). Basic earnings per share for the first quarter of 2018 totaled NIS 0.08($0.02).

Main Consolidated Financial Results:

Main Financial Data by Operating Segments:

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

Revenues for the first quarter of 2018 decreased 2.7% totaling NIS 933 million ($265 million), compared to NIS 959 million ($273 million) in the first quarter last year. The decrease in revenues is attributed to a 5.1% decrease in service revenues, which was partially offset by a 5.5% increase in equipment revenues.

Service revenues totaled NIS 701 million ($199 million) in the first quarter of 2018, a 5.1% decrease compared to NIS 739 million ($210 million) in the first quarter last year.

Service revenues in the cellular segment totaled NIS 437 million ($124 million) in the first quarter of 2018, a 14.1% decrease compared to NIS 509 million ($145 million) in the first quarter last year. This decrease resulted mainly from the ongoing erosion in the price of these services as a result of the competition in the cellular market and from the difference between the national roaming services revenues in the first quarter of 2017 and the revenues for rights of use in cellular networks according to the network sharing agreement with Golan Telecom Ltd. ("Golan", the "Network Sharing Agreement with Golan")³, which came into force as of the beginning of the second quarter of 2017.

Service revenues in the fixed-line segment totaled NIS 304 million ($87 million) in the first quarter of 2018, a 9.0% increase compared to NIS 279 million ($79 million) in the first quarter last year. This increase resulted mainly from fixed-line communications services provided according to the Network Sharing Agreement with Golan, as well as from an increase in revenues from TV and internet services.

Equipment revenues totaled NIS 232 million ($66 million) in the first quarter of 2018, a 5.5% increase compared to NIS 220 million ($63 million) in the first quarter last year. This increase resulted mainly from an increase in the amount of end user equipment sold in the cellular segment.

Cost of revenues for the first quarter of 2018 were similar to the first quarter of 2017 and totaled NIS 665 million ($189 million). In the first quarter of 2018, there was an increase in cost of equipment, which resulted mainly from an increase in the quantity of end user equipment sold in the cellular segment and an increase in costs of TV services content and in costs related to internet services in the fixed-line segment, which were fully offset, mainly from Golan's participation in operating costs according to the Network Sharing Agreement with Golan, a decrease in depreciation expenses and a decrease in costs of extended warranty services for end user equipment.

Gross profit for the first quarter of 2018 totaled NIS 268 million ($76 million), an 8.8% decrease compared to NIS 294 million ($84 million) in the first quarter of 2017. Gross profit margin for the first quarter of 2018 amounted to 28.7%, down from 30.7% in the first quarter of 2017.

[3] According to the terms of the Network Sharing Agreement with Golan, part of the consideration is recognized as revenues and part is recognized as a reduction of operation costs. In addition, revenues from the Network Sharing Agreement are divided between the cellular and fixed-line segments.

Selling, Marketing, General and Administrative Expenses ("SG&A Expenses") for the first quarter of 2018 decreased 1.8% to NIS 223 million ($63 million), compared to NIS 227 million ($65 million) in the first quarter of 2017. This decrease is primarily a result of a decrease in doubtful accounts expenses. This decrease was partially offset by an increase in amortization expenses of salaries and commissions expenses which were capitalized as part of the customer acquisition costs, as a result of early adoption of a new International Financial Reporting Standard (IFRS 15) as of the first quarter of 2017 (the "Adoption of IFRS15").

Operating income for the first quarter of 2018 decreased by 32.8% to NIS 45 million ($13 million) from NIS 67 million ($19 million) in the first quarter of 2017.

EBITDA for the first quarter of 2018 decreased by 10.4% to NIS 180 million ($51 million), compared to NIS 201 million ($57 million) in the first quarter of 2017. EBITDA as a percent of revenues for the first quarter of 2018 totaled 19.3%, down from 21.0% in the first quarter of 2017. The decrease in EBITDA is attributed to a 29.6% decrease in the cellular segment EBITDA, which was partially offset by a 61.9% increase in the fixed line segment EBITDA.

Cellular segment EBITDA for the first quarter of 2018 totaled NIS 112 million ($32 million), compared to NIS 159 million ($45 million) in the first quarter last year, a decrease of 29.6%, which resulted mainly from a decrease in service revenues as mentioned above, and from the difference between national roaming services revenues in the first quarter of 2017 and the revenues for rights of use in cellular networks according to the Network Sharing Agreement with Golan in the first quarter of 2018.

Fixed-line segment EBITDA for the first quarter of 2018 totaled NIS 68 million ($19 million), compared to NIS 42 million ($12 million) in the first quarter last year, a 61.9% increase, mainly as a result of an increase in revenues from fixed-line communications services provided according to the Network Sharing Agreement with Golan, and from an increase in activity in the internet and TV fields.

Financing expenses, net for the first quarter of 2018 increased by 6.5% and totaled NIS 33 million ($10 million), compared to NIS 31 million ($9 million) in the first quarter of 2017.

Net Income for the first quarter of 2018 totaled NIS 7 million ($2 million), compared to NIS 26 million ($7 million) in the first quarter of 2017, a 73.1% decrease.

Basic earnings per share for the first quarter of 2018 totaled NIS 0.08($0.02), compared to NIS 0.25($0.07) in the first quarter last year.

Operating Review

Main Performance Indicators - Cellular segment:

Cellular subscriber base - at the end of the first quarter of 2018 the Company had approximately 2.822 million cellular subscribers. During the first quarter of 2018 the Company's cellular subscriber base increased by approximately 5,000 net cellular subscribers.

Cellular Churn Rate for the first quarter of 2018 totaled to 9.5%, compared to 12.0% in the first quarter last year.

The monthly cellular Average Revenue per User ("ARPU") for the first quarter of 2018 totaled NIS 51.8($14.7), compared to NIS 60.2($17.1) in the first quarter last year. The decrease in ARPU resulted mainly from the ongoing erosion in the prices of cellular services, resulting from the intensified competition in the cellular market and from the difference between national roaming services revenues in the first quarter of 2017 and the revenues for rights of use in cellular networks according to the Network Sharing Agreement with Golan in the first quarter of 2018.

Main Performance Indicators - Fixed-line segment:

In the first quarter of 2018, the Company's subscriber base in the internet infrastructure field increased by approximately 13,000 net households, and the Company's subscriber base in the TV field increased by 14,000 net households.

Financing and Investment Review

The Company's liquidity requirements relate primarily to working capital requirements, debt service, capital expenditures for the expansion and enhancement of its networks, end user equipment and payment of dividends, to the extent declared. The Company has historically funded these requirements through cash flows from operations and raising new debt. Going forward, the Company may also seek to fund these requirements through issuances of equity securities, including ordinary shares.

Cash Flow

Free cash flow for the first quarter of 2018, totaled NIS 84 million ($24 million), compared to NIS 66 million ($19 million) in the first quarter of 2017 (after elimination of a loan provided to Golan Telecom in the amount of NIS 130 million, as previously reported), a 27.3% increase. The increase in free cash flow, resulted mainly from decrease in payments to suppliers and was partially offset by a decrease in receipts from customers for services and end user equipment.

Total Equity

Total Equity as of March 31, 2018 amounted to NIS 1,414 million ($402 million) primarily consisting of undistributed accumulated retained earnings of the Company.

Cash Capital Expenditures in Fixed Assets and Intangible Assets and others

During the first quarter of 2018, the Company invested NIS 146 million ($42 million) in fixed assets and intangible assets and others (including, among others, investments in the Company's communications networks, information systems, software and TV set-top boxes and capitalization of part of the customer acquisition costs as a result of the adoption of IFRS 15), compared to NIS 140 million ($40 million) in the first quarter 2017.

Dividend

On May 29, 2018, the Company's Board of Directors decided not to declare a cash dividend for the first 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 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 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 March 31, 2018, see "Disclosure for Debenture Holders" section in this press release.

For information regarding the Company's material loans as of March 31, 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 March 31, 2018, see "Disclosure for Debenture Holders" section in this press release.

Other developments during the first quarter of 2018 and subsequent to the end of the reporting period

Network Sharing Agreement

In April 2018, Marathon 018 Xfone Ltd., with which the Company entered a network sharing agreement, commenced operating in the Israeli cellular market.

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" and "Item 4. Information on the Company – B. Business Overview - Networks and Infrastructure - Cellular Segment- Network Sharing Agreements" and "- Competition – Cellular Segment".

Negotiations regarding Collective Employment Agreement and Voluntary Retirement Plan

The Company is in advanced stages of negotiations with its employees' representatives and the Histadrut (an Israeli union labor) regarding a new collective employment agreement, which the Company anticipates will be similar to the Company's previous collective employment agreement (which expired at the end of 2017) and will include certain nonmaterial additions.

In addition, in May 2018, the Group, in collaboration with the employees representatives, launched a new voluntary retirement plan for employees. As of the date of this report, the number of employees who will join the plan and the expense the Company will record with respect to this plan, are unknown.

For additional details including regarding the Company's previous collective employment agreement see the Company's 2017 Annual Report under "Item 3. Key Information – D. Risk Factors – Risks Related to our Business – The unionizing of our employees may prevent us from executing necessary organizational and personnel changes, result in increased costs or disruption to our operation" and "Item 6. Directors, senior management and employees – D. Employees."

Regulation

In May 2018, the Ministry of Communications amended the Group's licenses to regulate the manner of response of call centers, including measurable parameters for response times. The amendment shall come into force in March 2019. The Company is studying the amendment and at this stage cannot estimate the amendment's effect on its results of operations.

For additional details see the Company's 2017 Annual Report under "Item 3. Key Information – D. Risk Factors – Risks Related to our Business – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results" and under "Item 4. Information on The Company – B. Business Overview – Government Regulations – Cellular Segment - Our Cellular License."

Conference Call Details

The Company will be hosting a conference call regarding its results for the first quarter of 2018 on Wednesday, May 30, 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.

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 2.822 million cellular subscribers (as at March 31, 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 (as of December 2014), internet infrastructure (as of February 2015) 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 3.514 = US$ 1 as published by the Bank of Israel for March 31, 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

Comments: 

Cellcom Israel Ltd.

Summary of Financial Undertakings (according to repayment dates) as of March 31, 2018 

a. Debentures issued to the public by the Company and held by the public, excluding such debentures held by the Company's parent company, by a controlling shareholder, by companies controlled by them, or by companies controlled by the Company, based on the Company's "Solo" financial data (in thousand NIS).

b. Private debentures and other non-bank credit, excluding such debentures held by the Company's parent company, by a controlling shareholder, by companies controlled by them, or by companies controlled by the Company, based on the Company's "Solo" financial data (in thousand NIS).