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Internet Gold Reports Second Quarter 2011 Financial Results

Internet Gold’s net loss for the second quarter totaled NIS 33 million (US$ 10 million) compared with a net loss of NIS 43 million (US$ 13 million) in the second quarter of 2010. This net loss reflected the impact of two significant expenses:

  • Amortization of tangible and identifiable intangible assets resulting from the Bezeq acquisition: According to the standards of business combination accounting, the total purchase price of Bezeq was allocated to Bezeq’s tangible and identifiable intangible assets based on their estimated fair values. During the second quarter of 2011, Internet Gold's subsidiary, B Communications, recorded amortization expenses of NIS 310 million (US$ 91 million) related to the Bezeq purchase price allocation (“Bezeq PPA”). B Communications is amortizing certain of the acquired identifiable intangible assets in accordance with the economic future benefits expected from such assets using an accelerated method of amortization under which approximately 16% of the acquired identifiable intangible assets were amortized during 2010 and an additional 15% will be amortized during 2011.
  • Financial expenses: B Communications’ financial expenses, net for the second quarter totaled NIS 98 million (US$ 29 million). These expenses consisted primarily of interest on the long-term loans incurred to finance the Bezeq acquisition, which totaled NIS 86 million (US$ 25 million), and expenses related to its debentures, which totaled NIS 14 million (US$ 4 million). In addition, Internet Gold incurred financial expenses, net totaling NIS 27 million (US$ 8 million), reflecting the interest payments it made during the period to holders of its two series of outstanding debentures.

Internet Gold Unconsolidated Financial Results

    Q2 2011
(NIS millions)   (US$ millions)
Revenues - -
Financial expenses (27 ) (8 )
Tax and other expenses 2 -
Interest in BCOM's net loss (8 ) (2 )
Net loss (33 ) (10 )

Comments of Management

Commenting on the results, Mr. Eli Holtzman, CEO of Internet Gold, said, “The second quarter was another period of progress during which we continued to accelerate the debt repayment plan of our subsidiary, B Communications, due primarily to the significant current and special dividends that it received on May 19 from Bezeq. From April 14, 2010 through June 30, 2011, B Communications repaid approximately NIS 1.5 billion (US$ 439 million) of its bank debt, comprised in part of NIS 1,307 million (US$ 383 million) of principal, and its finance plan continues to progress ahead-of-schedule. We are also very pleased with developments at Bezeq, and continue to focus on the smooth execution of our loan repayment plan. In parallel, we continue looking for opportunities to create additional value for our shareholders."

Consolidation of Bezeq Results

  • Bezeq results consolidated for entire second quarter of 2011: Internet Gold’s results for the second quarter of 2011 reflect the consolidation of the operations of Bezeq for the entire three-month period. However, Internet Gold’s results for the comparative period of 2010 included Bezeq’s results commencing April 14, 2010, the date of the acquisition.
  • Supplemental unconsolidated results table: To provide investors with transparent insight into its business, Internet Gold has also provided its results on an unconsolidated basis. Internet Gold’s interest in B Communications’ net income is presented as a single line item in the unconsolidated table (see above, “Internet Gold’s Unconsolidated Q2 Financial Results”).

Bezeq Group’s Q2 Financial Results

To provide further insight into its results, we have provided the following summary of the consolidated financial report of the Bezeq Group’s quarter ended June 30, 2011. For a full discussion of Bezeq’s results for the quarter, please refer to http://ir.bezeq.co.il.

Bezeq Group's revenues for the second quarter of 2011 amounted to NIS 2.9 billion (US$ 849 million), a decrease of 3.0% compared to the second quarter of 2010. Bezeq Fixed-Line revenues and Pelephone revenues were negatively affected by the reduction in mobile termination rates that came into effect on January 1, 2011. The decrease in revenues was moderated by growth in Pelephone's revenues from equipment sales and by the consolidation of Walla! (commencing April 25, 2010).

Bezeq Group's operating profit in the second quarter of 2011 amounted to NIS 935 million (US$ 274 million), a decrease of 5.6% compared with the second quarter of 2010. Net profit attributable to the owners of Bezeq in the second quarter amounted to NIS 585 million (US$ 171 million), a decrease of 8.3% compared with the corresponding quarter. EBITDA for the second quarter amounted to NIS 1.28 billion (US$ 375 million) (EBITDA margin of 44.3%), a decrease of 4.1% compared with the corresponding quarter (EBITDA margin of 44.9%). In the second quarter of 2010, a one-time gain of NIS 57 million (US$ 17 million) was recorded as a result of the consolidation of Walla's operations by Bezeq International. After adjustment for the one-time gain growth was recorded in each of the above parameters.

Cash flow from operating activities in the second quarter of 2011 was down 31.4% compared with the corresponding quarter in 2010, and amounted to NIS 670 million (US$ 196 million), mainly due to the sharp rise in sales of smartphones and the significant increase in supplier payments whereas subscriber payments for those handsets are made in 36 installments.

Gross investments (CAPEX) in the second quarter of 2011 amounted to NIS 495 million (US$ 145 million), an increase of 15.9% compared with the corresponding quarter in 2010. The increase stemmed, among other things, from the investment in a submarine cable by Bezeq International. The CAPEX to sales ratio was 17.1% in the second quarter of 2011, compared with 14.3% in the second quarter of 2010.

As a result of the decrease in cash flow from operating activities and the increase in CAPEX, free cash flow in the second quarter of 2011 amounted to NIS 264 million (US$ 77 million), compared with NIS 606 million (US$ 177 million) in the corresponding quarter in 2010, a decrease of 56.4%.

As of June 30, 2011, the net financial debt of the Bezeq Group was NIS 6.5 billion (US$ 1.9 million), compared with NIS 5.0 billion (US$ 1.5 billion) on June 30, 2010. The increase was attributable to the issuance of NIS 2.8 billion (US$ 820 million) of debt, of which NIS 2 billion (US$ 586 million) was issued in the second quarter of 2011. In contrast, NIS 1.4 billion (US$ 410 million) of debt was repaid. At the end of June 2011, the ratio of the Bezeq Group's net debt to EBITDA was 1.33, compared with 1.07 at the end of June 2010. We note that an issue of NIS 2.7 billion (US$ 791 million) of debentures at the end of June 2011 is not included in the Bezeq Group's balance sheet since the consideration was received after the balance sheet date.

Bezeq Group (Consolidated) 1

 

Q2 2011

   

Q2 2010

   

Change

(NIS millions)
Revenues 2,893 2,981 -3.0 %
Operating profit 935 990 -5.6 %
EBITDA 1,283 1,338 -4.1 %
EBITDA margin 44.3 % 44.9 %
Net profit attributable to Company shareholders 585 638 -8.3 %
Diluted EPS (NIS)   0.21       0.24       -12.5 %
Cash flow from operating activities 670 976 -31.4 %

Capex payments, net 2

406 370 9.7 %

Free cash flow 3

  264       606       -56.4 %

Net debt/EBITDA (end of period) 4

1.33 1.07
Net debt/shareholders' equity (end of period)   2.66       0.92        

1 Bezeq Group results reflect the consolidation of Walla! as of April 25, 2010. 2 Capex data reflects payments related to capex and are based on the cash flow statements. 3 Free cash flow is defined as cash flow from operating activities less net capex payments. 4 EBITDA in this calculation refers to the trailing twelve months.

Notes:

A.

 

Convenience Translation to Dollars: For the convenience of the reader, certain of the reported NIS figures of June 30, 2011 and for the periods then ended, and for the comparative periods have been presented in millions of U.S. dollars, translated at the representative rate of exchange as of June 30, 2011 (NIS 3.415 = U.S. Dollar 1.00). The U.S. Dollar ($) amounts presented should not be construed as representing amounts receivable or payable in U.S. Dollars or convertible into U.S. Dollars, unless otherwise indicated.

 

B.

Use of non-IFRS Measurements: We and Bezeq’s management regularly internally use supplemental non-IFRS financial measures to understand, manage and evaluate our business and make operating decisions. We believe these non-IFRS financial measures provide consistent and comparable measures to help investors understand Bezeq’s current and future operating cash flow performance. These non-IFRS financial measures may differ materially from the non-IFRS financial measures used by other companies.

 
EBITDA is a non-IFRS financial measure generally defined as earnings before interest, taxes, depreciation and amortization. Bezeq defines EBITDA as net income before financial income (expenses), net, impairment and other charges, expenses recorded for stock compensation in accordance with IFRS 2, income tax expenses and depreciation and amortization. We present Bezeq’s EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structure, tax positions (such as the impact of changes in effective tax rates or net operating losses) and the age of, and depreciation expenses associated with, fixed assets (affecting relative depreciation expense).
 
EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations or cash flow data prepared in accordance with IFRS as a measure of profitability or liquidity. EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. In addition, EBITDA, as presented in this press release, may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated.

About Internet Gold - Golden Lines Ltd.

Internet Gold is Israel’s leading telecommunications group. Internet Gold’s main asset is its control of Bezeq, the Israel Telecommunication Corp. ( http://ir.bezeq.co.il) (TASE: BZEQ), Israel’s largest telecommunications service provider, which is based on its approximately 78.11% ownership of B Communications Ltd. (Nasdaq and TASE: BCOM), the holder of the controlling interest (31.23%) and board control of Bezeq.

Internet Gold is controlled by Eurocom Communications, a leading privately-held investment group headquartered in Ramat-Gan, Israel. Internet Gold’s shares are traded on the NASDAQ Global Select Market (Nasdaq: IGLD) and the Tel Aviv Stock Exchange (TASE: IGLD) where its share price is tracked as part of the TA-100 Index.

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