Cellcom’s second quarter results show a slight gain in revenue and an even slighter dip in operating and net profit.
Following the publication of his company’s report, Cellcom president and CEO Jacob Perry said, “Cellcom recruited 122,000 new subscribers in the second quarter, putting it back on top of the growth statistics (compared with Partner, which recruited 107,000 customers in the second quarter – M.B.), in contrast with the first quarter. We have a total of 2.4 million subscribers.”
”Globes”: Active subscribers?
Perry: ”Cellcom, like the other companies (although I can’t speak for them) has a conservative reporting policy. We disregard subscribers who don’t produce traffic on our network for six months; we do this every month. We don’t disconnect them from the network; we simply leave them out of the report. You therefore have to distinguish between recruiting 122,000 subscribers and the regular discounting of customers from the general database. The figure of 2.4 million subscribers doesn’t include inactive subscribers.”
In that case, why has your revenue risen only 1.5%, when you have 4.3% more subscribers?
Cellcom controller Roni Taub: ”The rise in revenue in the inflation-adjusted report was adversely affected by the adjustment. In order to compare revenue in the first and second quarter, you have to eliminate the linkage to the Consumer Price Index (CPI). If you exclude the 3.8% CPI rise in calculating first quarter revenue, you get 5.5% growth in the second quarter over the first quarter revenues of NIS 1.22 billion.”
Cellcom deputy CEO and head of customers division Oren Most: “To get the right idea, you should compare the current quarter with the corresponding quarter last year. Furthermore, we allowed over NIS 20 million for royalties.”
Perry: ”We have a dispute with the Ministry of Communications over royalty payments. Although we’re convinced we’re right, our conservative policy led us to make the allowance, even though we don’t accept the ministry’s position. If you add the allowance, you get a better picture of the ratio between the second and first quarter. Furthermore, we launched the GSM network in the second quarter, so we also deducted it, which was also reflected in the report. A very important aspect that has received suitable attention is that despite our competitors’ behavior, Cellcom hasn’t raised its prices, out of consideration for the state of the economy and our customers. Had we raised prices, it would have had an obvious effect on our revenue and profit.”
Most: ”Because of this decision, we’re actually offering the lowest prices in the market today.”
All your competitors will be quick to explain that’s not true.
”We stand behind it, and we’ll continue to say we’re the cheapest company in the market. Our profit has been affected as a result, although we put our emphasis on it.”
Comparing the second quarters of this year and last, as you want, I see that your operating profit has been greatly eroded from NIS 292 million in the second quarter last year.
Perry: ”To a great degree, this decline, unique to the second quarter, is a result of a combination of several circumstances: royalty payments, subsidization of devices, and a deduction for the GSM network. This should therefore not be regarded as a trend. You can see that our EBITDA continues to be among the highest for cellular companies worldwide. We continued our intensive marketing efforts because of the aggressive competition; these efforts help us achieve a high rate of customer loyalty. Another factor unique to this year should also be taken into account – we aren’t getting money from the Palestinian Authority.”
What proportion of your revenue is from added value services?
Perry: ”Over 4% and rising. It’s catching on nicely, and I hope for a pleasant surprise towards the end of the year.”
That’s lower than Partner’s 6.1% ratio in the second quarter.
”I won’t analyze our competitors, although I could give you a pretty riveting brief on the subject. In any case, there is a certain type of service that Cellcom doesn’t provide, out of consideration for our customers’ feelings, which is the same service that made Partner grow. [The reference is to phone sex services. - Ed.] We think you shouldn’t measure everything in money. There are services that some of our customers can’t stomach, and we take their feelings into account. In our opinion, Cellcom’s diversity and its consideration will eventually pay off.”
Are most of your new customers from other networks? Are most of them prepaid or postpaid customers?
Perry: ”About 30% of our customers come from both of the other networks. 40% are prepaid and 60% are regular customers.”
Most: ”We’re going against the market trend in order to get more regular subscribers, while both the global and Israeli markets are moving toward prepaid customers.”
Taub: ”The rates Perry cited are actually for the first half of the year. The trend has improved. The proportion of prepaid customers among the new subscribers fell to a third in the second quarter.”
How do you change a trend like that?
Most: ”By boosting marketing efforts to recruit postpaid subscribers, although we’re the only network that offers prepaid customers the full range of services, including roaming services.”
Your NIS 300 million investment in all your networks - GPRS, GSM, and TDMA – sounds too low.
Perry: ”We’ve spent many hundreds of millions of shekels on these networks; NIS 300 million is only part of it. We still haven’t begun to invest in the third generation.”
How do you plan to make back your investment in the new GSM network, when the third generation is waiting in the wings?
”The third generation may be waiting in the wings, but the question is when the stage call will come. By the time the UMTS third generation network is operational, most of our customers will have transferred to the new GSM network. No one knows when UMTS will come. Even if it happens in 2004, however, we’ll still have a mass of GSM customers for 18-24 months, which will pay for the investment. In any case, we’re keeping track of the transition to GSM on virtually a day-by-day basis.”
After Partner published its results, some analysts said that with its momentum, it will become the largest cellular company in Israel by 2004.
”I don’t like commenting on analysts’ opinions, because many of them turn out to unfounded. We’re certainly glad that Cellcom isn’t the only company in the cellular market making a profit, although there’s a slight difference between Partner’s profit and the profits that Cellcom has reported and is continuing to report starting in its second year of operations; take a look at our profit in the first half of the year. There’s no doubt that Partner is an innovative and successful company, but it has no chance of overtaking Cellcom. Cellcom will continue to forge new paths and provide high quality. It will be a suitable alternative to Partner, so I’m not worried that Partner will overtake Cellcom, with all due respect to the analysts.”
Most: ”I don’t want to downplay their achievement, but keep in mind their capital structure and their high capital costs, which continue to be a burden on them. They’ve been trying to raise capital for over a year, and they haven’t succeeded. Cellcom, on the other hand, has a very attractive capital structure.”
Perry: ” If Partner CEO Amikam Cohen thinks Cellcom is stagnating, I’d like to ask him in “Globes” whether 122,000 new subscribers, more revenue, and a NIS 334 million profit is stagnation. I wish such stagnation on Partner and the entire Israeli market.”
What will your results be like the rest of this year and next, with a saturated market, intense competition, and still no substantial revenue from added value services?
”There’s no doubt we’ll meet our forecasts for this year, which will be published separately. We’ll meet our targets; we think more can be done in the market. The market will definitely be more saturated in 2003, though, and we’ll have to have better management and quality in order to add to our customer base and preserve a good level of revenue. I can already state that next year will be harder, more complex, and we’ll have to provide more data communications services in order to deliver the goods.”
You quietly launched your GPRS network, but what numbers are you seeing? How many subscribers are joining, and what revenue are you getting from them. Is the user profile changing?
”It’s still too early for all those analyses. We only began GPRS a few weeks ago. We’re seeing enthusiasm, but it’s still too early to determine what it means, although I’m cautiously optimistic. We’ve got a total of 60,000 GSM subscribers, and we’re managing them very carefully. We’re suggesting that our old subscribers transfer to the new network, and there’s a good chance we’ll reach our targets by the end of the year. All in all, our existing customers and the market as a whole are very enthusiastic, but we’re being cautious. The GSM network is still being completed; we’re working at a murderous pace on overseas roaming agreements. We hope the network will be completed by the end of the year, and from what I hear, things sound good.”
"Shamrock's change in commitment is immoral”
Perry: "We support the vast majority of the Croll committee's recommendations," Perry said in reference to the committee's recommendations on opening inland communications to free market competition. "We call on the Minister and Ministry of Communications to implement them as quickly as possible. We’re less satisfied, however, with their recommended timetable of opening the fixed and international call markets to competition in another two years. We think this period is too long and unnecessary, and is liable to undermine the positive recommendations. We’re also disappointed that our position on unbundling was not accepted.”
Does your future lie in an entry into the lucrative national inland communications market?
”We certainly have the infrastructure for transmission in both the customer base and network management. We can therefore get underway fairly quickly. All we need is the go-ahead from the Ministry of Communications. Whether we confine ourselves to niches, with or with the cable companies, only time will tell. We have been and remain great supporters of an entry into the national inland communications market, and we hope the Ministry of Communications will fire the starters pistol.”
What do you think about the Ministry of Communications’ about-face on the issue of Shamrock Holding’s and Haim Saban’s bidding in the Bezeq privatization tender? Is it harmful to the country?
”I don’t usually criticize matters I’m not involved in, but it certainly looks odd to me. Saban is a new competitor, and proper procedures exist for adding him to the race, so I won’t comment on his case. Where Shamrock and its commitment to stay out of the tender are concerned, however, the Ministry of Communications’ attempt to retract its requirements sound to me like Sodom and Gomorrah. It must be verified that these changes won’t result in giving Bezeq an unfair advantage over Cellcom. I back privatization of Bezeq, but I hope those in such a rush to privatize Bezeq don’t leave many corpses on the way by being too flexible. There should be limits to flexibility. It should be kept in mind that Shamrock acquired its holdings in Pele-Phone only a year ago. Cellcom is very much in favor of privatization, as I personally am, but there’s a limit to how much you can stretch the decision you made yesterday morning, and I’m referring not only to the Ministry of Communications, but to the entire State of Israel.”
Published by Globes [online] - www.globes.co.il - on August 13, 2002