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Cellcom Israel Announces First Quarter 2012 Results

Stocks in this article: CEL

"The free cash flow for the first quarter 2012 totaled NIS 144 million, a 64.1% decrease compared with the first quarter of 2011, but an improvement compared with the fourth quarter 2011. For the first quarter of 2012, the Company will distribute a dividend of approximately NIS 130 million, representing approximately 75% of the first quarter net income to our shareholders."

Main  Consolidated    Financial  Results (financial data for Q1/2012 only, includes Netvision's results ) :

                                  Q1/2012      Q1/2011 % Change   Q1/2012 Q1/2011
                                                                    million US$
                                                                   (convenience
                                        million NIS                 translation)
    Total revenues                  1,585        1,587   (0.1%)   426.6   427.2
    Operating Income                  275          471  (41.6%)    74.0   126.8
    Net Income                        173          306  (43.5%)    46.6    82.4
    Free cash flow                    144          401  (64.1%)    38.8   107.9
    EBITDA                            475          639  (25.7%)   127.9   172.0
    EBITDA, as percent of total
    revenues                         30.0%        40.3% (25.6%)
 

Main Financial Data  by Companies :

                 Cellcom Israel without             Consolidation
                                                     adjustments  Consolidated
                       Netvision          Netvision      (*)        results
                                  Change
               Q1/2012  Q1/2011    (%)     Q1/2012                  Q1/2012
    Total
    revenues     1,327    1,587  (16.4%)       275       (17)        1,585
    Total
    service
    revenues
    (including
    revenues
    from
    content
    and value
    added
    services)      945    1,205  (21.6%)       258       (17)        1,186
    Revenues
    from
    content
    and value
    added
    services       316      285   10.9%          -         -           316
    Equipment
    revenues       382      382      -          17         -           399
    Operating
    Income         263      471  (44.2%)        37       (25)          275
    EBITDA         410      639  (35.8%)        65         -           475
    EBITDA, as
    percent of
    total
    revenues     30.9%     40.3% (23.3%)      23.6%        -          30.0%

(*)Include inter-company revenues between Cellcom Israel and Netvision, and amortization expenses attributable to the merger.

Main  Performance Indicators  (data refers to cellular subscribers only) :

                                                Change
                             Q1/2012 Q1/2011      (%)
    Cellular subscribers at
    the end of period (in
    thousands)                 3,362   3,395    (0.9%)
    Churn Rate for cellular
    subscribers (in %)           6.3%    7.1%  (11.3%)
    Monthly cellular ARPU
    (in NIS)                    90.5   115.2   (21.4%)
    Average Monthly cellular
    MOU (in minutes)             365     334     9.3%

Financial Review (financial data for Q1/2012 only in this section, includes Netvision's data)

Revenues for the first quarter of 2012 totaled NIS 1,585 million ( $427 million), a slight decrease compared to NIS 1,587 million ( $427 million) in the first quarter last year. The decrease in revenues is attributed to a 1.6% decrease in service revenues, which totaled NIS 1,186 million ( $319 million) in the first quarter 2012 as compared to NIS 1,205 million ( $324 million) in the first quarter last year. The majority of this decrease was offset by a 4.5% increase in equipment revenues, which totaled NIS 399 million ( $107 million) in the first quarter 2012 as compared to NIS 382 million ( $103 million) in the first quarter last year. Netvision's contribution to total revenues for the first quarter of 2012 totaled NIS 258 million ( $69 million) excluding inter-company revenues. Excluding Netvision's contribution, total revenues decreased by 16.4% compared with the first quarter last year.

The decrease in service revenues resulted mainly from the ongoing price erosion, due to the increased competition in the market. The decrease was partially offset by an increase of 10.9% in content and value added services (including SMS) revenues in the first quarter 2012, compared to the first quarter last year. Revenues from content and value added services for the first quarter 2012 totaled NIS 316 million ( $85 million), or 33.4% of service revenues (excluding Netvision's service revenues). After elimination of Netvision's contribution to service revenues for the first quarter of 2012 in the amount of NIS 241 million ( $65 million) (excluding inter-company revenues), service revenues decreased by 21.6%.

Equipment revenues increased by 4.5%, from NIS 382 million ( $103 million) in the first quarter last year, to NIS 399 million ( $107 million) in the first quarter 2012. Netvision's contribution to those revenues for the first quarter of 2012 totaled NIS 17 million ( $5 million). After elimination of Netvision's contribution to equipment revenues for the first quarter of 2012, equipment revenues were similar to those for the first quarter last year.

Cost of revenues for the first quarter of 2012 increased by 19.9% totaling NIS 899 million ( $242 million). Netvision's contribution to cost of revenues for the first quarter of 2012 totaled NIS 188 million ( $51 million) (after elimination of inter-company expenses of NIS 17 million ( $5 million)). After elimination of Netvision's contribution, cost of revenues decreased by 5.2% and totaled NIS 711 million ( $191 million) in the first quarter of 2012, compared to NIS 750 million ( $202 million) in the first quarter last year. This decline in cost of revenues after elimination of Netvision's contribution primarily resulted from a decrease in cost of content services and in cost of cellular handsets repair services due to efficiency measures implemented in these areas. The decrease in cost of revenues also resulted from a decrease in amortization expenses, attributable mainly to a decrease in amortization expenses associated with capitalized handsets subsidies.

Gross profit for the first quarter of 2012 decreased 18% to NIS 686 million ( $185 million), compared to NIS 837 million ( $225 million) in the first quarter of 2011. Gross profit margin for the first quarter 2012 decreased to 43.3% from 52.7% in the first quarter last year.

Selling, Marketing, General and Administrative Expenses ("SG&A Expenses") for the first quarter of 2012 increased by 11.5% to NIS 408 million ( $110 million), compared to NIS 366 million ( $99 million) in the first quarter of 2011. SG&A Expenses for the first quarter of 2012 excluding Netvision's contribution decreased by 3.8%. The decrease in SG&A Expenses after elimination of Netvision's contribution mainly resulted from a decrease in amortization expenses related to capitalized sales commissions. Netvision's contribution to SG&A Expenses for the first quarter of 2012 amounted to NIS 57 million ( $15 million), including amortization expenses of intangible assets, attributable to the merger, in the amount of NIS 25 million ( $7 million).

Operating income for the first quarter of 2012 totaled NIS 275 million ( $74 million), compared to NIS 471 million ( $127 million) in the first quarter last year, a 41.6% decrease.

EBITDA for the first quarter of 2012 decreased 25.7% to NIS 475 million ( $128 million) representing 30.0% of total revenues, compared to NIS 639 million ( $172 million) represented 40.3% of total revenues in the first quarter 2011. Netvision's contribution to EBITDA for the first quarter 2012 totaled NIS 65 million ( $18 million). EBITDA as a percent of total revenues for the first quarter of 2012 after elimination of Netvision's contribution to EBITDA and total revenues totaled 30.9%.

Financing expenses, net for the first quarter of 2012 totaled NIS 36 million ( $10 million), compared to NIS 67 million ( $18 million) in the first quarter last year. This decrease was primarily due to a decrease in Consumer Price Index (CPI) linkage expenses, associated with the Company's debentures, since the CPI did not change in the first quarter this year while it increased by 0.9% in first quarter last year. The decrease in financing expenses, net, also resulted from an increase in interest income, associated with handsets sales. These effects were partially offset by an increase in interest expenses, associated with the Company's debentures, in the first quarter of 2012, compared to the first quarter of 2011, due to the higher debt level following the issuance of additional debentures.

Net Income for the first quarter of 2012 totaled NIS 173 million ( $47 million), compared to NIS 306 million ( $82 million) in the first quarter last year, a 43.5% decrease. This decrease mainly resulted from the decrease in service revenues.  

Basic earnings per share for the first quarter of 2012 totaled NIS 1.74 ($0.47), compared to NIS 3.09 ($0.83) in the first quarter 2011.

Operating Review (data refers to cellular subscribers only)

New Cellular Subscribers - at the end of March 2012 the Company had approximately 3.362 million cellular subscribers. During the first quarter of 2012 the Company recruited approximately 13,000 net subscribers (all of them post-paid subscribers).

In the first quarter of 2012, the Company added approximately 57,000 net new 3G cellular subscribers to its 3G subscriber base, reaching approximately 1.388 million 3G subscribers at the end of March 2012, representing 41.3% of the Company's total cellular subscriber base, an increase from the 35% 3G subscribers represented of total subscribers at the end of March 2011.

The Churn Rate of cellular subscribers in the first quarter 2012 was 6.3%, compared to 7.1% in the first quarter last year. The churn rate for both quarters was impacted, among others, by the churn of pre-paid subscribers, characterized by lower contribution, and subscribers with collection problems.

Average monthly cellular Minutes of Use per subscriber ("MOU") in the first quarter 2012 totaled 365 minutes, compared to 334 minutes in the first quarter 2011, an increase of 9.3%.

The monthly cellular Average Revenue per User (ARPU) for the first quarter of 2012 decreased 21.4% and totaled NIS 90.5 ($24.4), compared to NIS 115.2 ($31.0) in the first quarter last year. The decrease is attributed to the ongoing airtime price erosion.

Financing and Investment Review (financial data for q1/2012 only, includes netvision's data)

Cash Flow

Free cash flow for the first quarter of 2012 totaled NIS 144 million ( $39 million), compared to NIS 401 million ( $108 million) generated in the first quarter 2011.  Cash flows from operating activities for the first quarter this year decreased, compared with the first quarter last year, mainly as a result of the decrease in service revenues, due to the intensified competition. Net cash used in investing activities for the first quarter of 2012 (excluding changes in short-term investment in deposits and tradable debentures) increased, compared with the first quarter last year, mainly due to an increased investment in the upgrade of the Company's UMTS and transmission networks during the first quarter of 2012.

Total Equity

Total Equity as of March 31, 2012 amounted to NIS 282 million ( $76 million), primarily consisting of accumulated undistributed retained earnings.

Capital expenditure

The Company's accrual capital expenditure for the first quarter 2012, totaled NIS 188 million ( $51 million) (including, among others, rights of use of communication lines, information systems and software), compared to NIS 73 million ( $20 million) in the first quarter 2011. The increase primarily resulted from an increased investment in the upgrade of the Company's UMTS and transmission networks during the first quarter of 2012 compared with the first quarter last year. Furthermore, the consolidated capital expenditure for the first quarter of 2012 includes Netvision's capital expenditure, while it was not consolidated in the first quarter last year.

Dividend

On May 14, 2012, the Company's board of directors declared a cash dividend in the amount of NIS 1.31 per share, and in the aggregate amount of approximately NIS 130 million (the equivalent of approximately $0.34 per share and approximately $34 million in the aggregate, based on the representative rate of exchange on May 10, 2012; The actual US$ amount for dividend paid in US$ will be converted from NIS based upon the representative rate of exchange published by the Bank of Israel on July 24, 2012), subject to withholding tax described below. The dividend will be payable to all of the Company's shareholders of record at the end of the trading day in the NYSE on July 11, 2012. The payment date will be July 26, 2012. According to the Israeli tax law, the Company will deduct at source 25% of the dividend amount payable to each shareholder, as aforesaid, subject to applicable exemptions. The dividend per share that the Company will pay for the first quarter of 2012 does not reflect the level of dividends that will be paid for future quarterly periods, which can change at any time in accordance with the Company's dividend policy. A dividend declaration is not 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, 2011 on Form 20-F, under "Item 8 - Financial Information - Dividend Policy".

In making the decision of dividend distribution, the Company's board of directors considered and determined the following: (1) the distribution complies with the Profit Test given that the Company's cumulative retained earnings, as such term is defined in the applicable Israeli law, as of March 31, 2012 ( NIS 277 million) exceeds the amount of dividend declared (and after the reduction of the dividend declared will total approximately NIS 147 million); (2) the distribution complies with the Solvency Test after considering the Company's financial condition, including the Company's free cash flow, the Company's financial debt balance, the Company's net debt, including the Company's investment portfolio, the Company's forecasted cash flows for the years 2012-2014 and the Company's ability to raise additional debt; (3) the distribution complies with the license limitation and the Company's covenants in certain of its debentures related to dividend distribution; (4) the distribution of the dividend shall not materially adversely effect the Company's financial condition, including the Company's capital structure, leverage level, liquidity, the fulfillment of the Company's covenants and undertakings and the Company's ability to continue the Company's operation as conducted prior to the dividend declaration, including the Company's ability to fulfill our investments plans. In making the aforementioned determinations, which involve forecasts, the board assumed (a) the Company will continue to be leveraged at a rate complying with the Company's covenants and undertakings; and (b) market and regulation conditions will not change drastically.

Debentures

For information regarding the Company's summary of financial undertakings and details regarding the Company's outstanding debentures as of March 31, 2012, see "Disclosure for Debenture Holders" section in this press release.

Other developments during the first quarter of 2012 and subsequent to the end of the reporting period

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