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Cellcom Israel Announces Second Quarter 2012 Results

Stocks in this article: CEL

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

                                              Change
                             Q2/2012 Q2/2011    (%)
    Cellular subscribers at
    the end of period (in
    thousands)                 3,333   3,366     (1.0%)
    Churn Rate for cellular
    subscribers (in %)          8.1%    6.4%     26.6%
    Monthly cellular ARPU
    (in NIS)                    90.3   108.2    (16.5%)
    Average Monthly cellular
    MOU (in minutes)             375     342      9.6%

Financial Review (financial data for Q2/2012 only in this section, includes Netvision's data)

Revenues for the second quarter of 2012 totaled NIS 1,498 million ( $382 million), a 5.7% decrease compared to NIS 1,589 million ( $405 million) in the second quarter last year. The decrease in revenues is attributed to a 31% decrease in equipment revenues, which totaled NIS 316 million ( $81 million) in the second quarter 2012 as compared to NIS 458 million ( $117 million) in the second quarter last year. This decrease was partially offset by a 4.5% increase in service revenues, which totaled NIS 1,182 million ( $301 million) in the second quarter 2012 as compared to NIS 1,131 million ( $288 million) in the second quarter last year. Netvision's contribution to total revenues for the second quarter of 2012 totaled NIS 259 million ( $66 million) excluding inter-company revenues. Excluding Netvision's contribution, total revenues decreased by 22% compared with the second quarter last year.

The increase in service revenues is attributed to Netvision's contribution to service revenues for the second quarter of 2012 in the amount of NIS 240 million ( $61 million) (excluding inter-company revenues). After elimination of Netvision's contribution to service revenues for the second quarter of 2012, service revenues decreased by 16.7% mainly due to the ongoing price erosion, resulting from the intensified competition in the market. The Company has ceased to detail separately the revenues from content, SMS and value added services, since most of the marketing plans, which are currently sold, include service packages which include unlimited air time minutes and SMS as well as cellular surfing.

Equipment revenues decreased by 31%, from NIS 458 million ( $117 million) in the second quarter last year, to NIS 316 million ( $81 million) in the second quarter 2012. Netvision's contribution to those revenues for the second quarter of 2012 totaled NIS 19 million ( $5 million). After elimination of Netvision's contribution to equipment revenues for the second quarter of 2012, equipment revenues decreased by 35.2% compared to those revenues for the second quarter last year.

Cost of revenues for the second quarter of 2012 increased by 4.2% totaling NIS 838 million ( $214 million). Netvision's contribution to cost of revenues for the second quarter of 2012 totaled NIS 176 million ( $45 million) (after elimination of inter-company expenses of NIS 18 million ( $5 million)). After elimination of Netvision's contribution, cost of revenues decreased by 17.7% and totaled NIS 662 million ( $169 million) in the second quarter of 2012, compared to NIS 804 million ( $205 million) in the second quarter last year. This decline in cost of revenues after elimination of Netvision's contribution primarily resulted from a significant decrease in cellular handsets cost due to a decrease in the number of handsets sold during the second quarter of 2012 compared with the second quarter last year. The decrease in cost of revenues also 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, as well as a decrease in amortization expenses, attributable mainly to a decrease in amortization expenses associated with capitalized handsets subsidies, and a reversal of an accrual for compensation in the amount of approximately NIS 9 million ( $2 million), which will not be paid, in light of the expected continued adverse effect on our results of operations, resulting from the intensified competition in the market.

Gross profit for the second quarter of 2012 decreased 15.9% to NIS 660 million ( $168 million), compared to NIS 785 million ( $200 million) in the second quarter of 2011. Gross profit margin for the second quarter 2012 decreased to 44.1% from 49.4% in the second quarter last year.

Selling, Marketing, General and Administrative Expenses ("SG&A Expenses") for the second quarter of 2012 decreased 1.8% to NIS 381 million ( $97 million), compared to NIS 388 million ( $99 million) in the second quarter of 2011. SG&A Expenses for the second quarter of 2012 excluding Netvision's contribution decreased by 17.5%. The decrease in SG&A Expenses after elimination of Netvision's contribution mainly resulted from a decrease in payroll expenses, mainly due to efficiency measures and in amortization expenses related to capitalized sales commissions, as well as a decrease in advertising expenses and a reversal of an accrual for compensation in the amount of approximately NIS 15 million ( $4 million), which will not be paid, as detailed above. Netvision's contribution to SG&A Expenses for the second quarter of 2012 amounted to NIS 61 million ( $16 million), including amortization expenses of intangible assets, attributable to the merger, in the amount of NIS 29 million ( $7 million).

Operating  profit for the second quarter of 2012 totaled NIS 282 million ( $72 million), compared to NIS 397 million ( $101 million) in the second quarter last year, a 29% decrease.

EBITDA for the second quarter of 2012 decreased 16.3% to NIS 474 million ( $121 million) representing 31.6% of total revenues, compared to NIS 566 million ( $144 million) represented 35.6% of total revenues in the second quarter 2011. Netvision's contribution to EBITDA for the second quarter 2012 totaled NIS 75 million ( $19 million). EBITDA as a percent of total revenues for the second quarter of 2012 after elimination of Netvision's contribution to EBITDA and total revenues totaled 32.2%.

Financing expenses, net for the second quarter of 2012 totaled NIS 117 million ( $30 million), compared to NIS 75 million ( $19 million) in the second quarter last year. This increase primarily resulted from an increase in Consumer Price Index (CPI) linkage expenses and interest expenses, associated with the Company's debentures, due to the higher debt level following the issuance of additional debentures in August 2011 and March 2012.

Net Income for the second quarter of 2012 totaled NIS 121 million ( $31 million), compared to NIS 244 million ( $62 million) in the second quarter last year, a 50.4% decrease.

Basic earnings per share for the second quarter of 2012 totaled NIS 1.22 ($0.31), compared to NIS 2.45 ($1.22) in the second quarter 2011.

Operating Review (data refers to cellular subscribers only)

New Cellular Subscribers - at the end of June 2012, the Company had approximately 3.333 million cellular subscribers. During the second quarter of 2012, the Company's cellular subscriber base decreased by approximately 29,000 net subscribers.

In the second quarter of 2012, the Company added approximately 42,000 net new 3G cellular subscribers to its 3G subscriber base, reaching approximately 1.430 million 3G subscribers at the end of June 2012, representing 42.9% of the Company's total cellular subscriber base, an increase from the 36.2% 3G subscribers represented of total subscribers at the end of June 2011.

The Churn Rate of cellular subscribers in the second quarter 2012 was 8.1%, compared to 6.4% in the second quarter last year. The increase in the churn rate mainly resulted from the increased competition in the market following the entrance of the new operators during the second quarter 2012.

Average monthly cellular Minutes of Use per subscriber ("MOU") in the second quarter 2012 totaled 375 minutes, compared to 342 minutes in the second quarter 2011, an increase of 9.6%.

The monthly cellular Average Revenue per User (ARPU) for the second quarter of 2012 decreased 16.5% and totaled NIS 90.3 ($23.0), compared to NIS 108.2 ($27.6) in the second quarter last year. The decrease is attributed to the ongoing price erosion.

Financing and Investment Review (financial data for Q2/2012 only, includes Netvision's data)

Cash Flow

Free cash flow for the second quarter of 2012 increased by 63.2% and totaled NIS 284 million ( $73 million), compared to NIS 174 million ( $44 million) generated in the second quarter 2011.  Cash flows from operating activities for the second quarter this year increased, compared with the second quarter last year, mainly as a result of a decrease in payments related to cellular handsets purchases due to the decrease in sales of these handsets. Net cash used in investing activities for the second quarter of 2012 (excluding changes in current investments, net) increased, compared with the second quarter last year, mainly due to an increased investment in the upgrade of the Company's UMTS and transmission networks during the first half of 2012.

Total Equity

Total Equity as of June 30, 2012 amounted to NIS 280 million ( $71 million), primarily consisting of accumulated undistributed retained earnings.

Capital expenditure

The Company's accrual capital expenditure for the second quarter of 2012, totaled NIS 110 million ( $28 million) (including, among others, investment in information systems and software), compared to NIS 80 million ( $20 million) in the second quarter of 2011. The increase primarily resulted from an increased investment in the upgrade of the Company's UMTS and transmission networks during the second quarter of 2012 compared with the second quarter last year. Furthermore, the consolidated capital expenditure for the second quarter of 2012 includes Netvision's capital expenditure, whereas it was not consolidated in the second quarter last year.

Dividend

On August 13, 2012, the Company's board of directors decided not to declare a cash dividend for the second quarter of 2012. In making its decision, the board of directors considered the Company's dividend policy and business status and determined, that although the Company can satisfy its existing and foreseeable obligations, given the challenging regulatory environment, intensified competition and substantial changes in pricing and their current and expected adverse effect on the Company's results of operations, it would be prudent not to distribute dividends at this time. 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, 2011 on Form 20-F, under "Item 8 - Financial Information - Dividend Policy".

Debentures

For information regarding the Company's summary of financial undertakings and details regarding the Company's outstanding debentures as of June 30, 2012, see "Disclosure for Debenture Holders" section in this press release.

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

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