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Cellcom Israel Announces Third Quarter 2012 Results

Stocks in this article: CEL

5. Including revenues from national roaming services and hosting services to operators on the Company's communications networks.

Equipment revenues decreased 36.4%, from NIS 472 million ( $121 million) in the third quarter last year, to NIS 300 million ( $77 million) in the third quarter 2012. The decrease in equipment revenues resulted mainly from a significant decrease in the number of cellular handsets, which were sold in the third quarter of 2012 as compared to the third quarter last year. Netvision's contribution to equipment revenues for the third quarter of 2012 totaled NIS 15 million ( $4 million). After elimination of Netvision's contribution to equipment revenues, equipment revenues for the third quarter of 2012 decreased by 38.8% as compared to the third quarter last year.

Cost of revenues for the third quarter of 2012 decreased 3.1% to NIS 853 million ( $218 million) compared to NIS 880 million ( $225 million) in the third quarter of 2011. Netvision's contribution to cost of revenues for the third quarter of 2012 totaled NIS 190 million ( $49 million) (after elimination of inter-company expenses of NIS 30 million ( $8 million)). After elimination of Netvision's contribution, cost of revenues decreased 18.1% and totaled NIS 663 million ( $169 million) in the third quarter of 2012, compared to NIS 810 million ( $207 million) in the third 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 third quarter of 2012 as compared with the third 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 depreciation and amortization expenses, and a decrease in royalties expenses paid to the Ministry of Communications due to the reduction in royalties' rate and in revenues, which are subject to royalties.

Gross profit for the third quarter of 2012 decreased 24.2% to NIS 595 million ( $152 million), compared to NIS 785 million ( $201 million) in the third quarter of 2011. Gross profit margin for the third quarter 2012 decreased to 41.1% from 47.1% in the third quarter last year.

Selling ,  Marketing ,  General and Administrative Expenses ("SG&A expenses") for the third quarter of 2012 decreased 18.2% to NIS 356 million ( $91 million), compared to NIS 435 million ( $111 million) in the third quarter of 2011. SG&A expenses excluding Netvision's contribution decreased 24.6%. The decrease in SG&A expenses after elimination of Netvision's contribution mainly resulted from a decrease in payroll expenses and sales commissions, mainly due to efficiency measures, and in amortization expenses related to capitalized sales commissions, as well as a decrease in advertising expenses. Netvision's contribution to SG&A expenses for the third quarter of 2012 amounted to NIS 50 million ( $13 million), including amortization expenses of intangible assets, attributable to the merger, in the amount of NIS 26 million ( $7 million).

Operating  profit for the third quarter of 2012 totaled NIS 239 million ( $61 million), compared to NIS 349 million ( $89 million) in the third quarter last year, a 31.5% decrease.

EBITDA for the third quarter of 2012 decreased 19.9% to NIS 430 million ( $110 million) representing 29.7% of total revenues, compared to NIS 537 million ( $137 million) represented 32.3% of total revenues in the third quarter 2011. Netvision's contribution to EBITDA for the third quarter 2012 totaled NIS 75 million ( $19 million). EBITDA as a percent of total revenues for the third quarter of 2012 after elimination of Netvision's contribution to EBITDA and total revenues totaled 29.9%.

Financing expenses ,  net for the third quarter of 2012 totaled NIS 64 million ( $16 million), compared to NIS 90 million ( $23 million) in the third quarter last year, a 28.9% decrease. This decrease resulted from three main elements: (1) a gain from Israeli Consumer Price Index ("CPI") hedging transactions in the third quarter of 2012 due to an increase in inflation expectations, as compared to a loss from such hedging transactions in the third quarter of 2011 due to a decrease in inflation expectations in that quarter; (2) income from foreign currency differences related to trade payables balances in the third quarter of 2012, which resulted from an appreciation of 0.3% of the NIS against the US dollar, as compared to expenses from such foreign currency differences in the third quarter of 2011, which resulted from a depreciation of 8.7% of the NIS against the US dollar in that quarter; and (3) an increase in interest income, related to cellular handsets sales, in the third quarter of 2012 as compared to the third quarter last year. These three impacts were partially offset by an increase in interest expenses, associated with the Company's debentures, due to the higher debt level and the increased inflation, as well as by a decrease in gain from currency hedging transactions, resulted from the appreciation of the NIS against the US dollar in the third quarter of 2012, compared to the depreciation of the NIS against the US dollar in the third quarter last year.

Net Income for the third quarter of 2012 totaled NIS 124 million ( $32 million), compared to NIS 199 million ( $51 million) in the third quarter last year, a 37.7% decrease.

Basic earnings per share for the third quarter of 2012 totaled NIS 1.25 ($0.32), compared to NIS 2.00 ($0.51) in the third quarter 2011.

Operating Review (data refers to cellular subscribers only)

New Cellular Subscribers - at the end of September 2012, the Company had approximately 3.338 million cellular subscribers. During the third quarter of 2012, the Company's cellular subscriber base increased by approximately 5,000 net subscribers.

In the third quarter of 2012, the Company added approximately 19,000 net new 3G cellular subscribers to its 3G subscriber base, reaching approximately 1.449 million 3G subscribers at the end of September 2012, representing 43.4% of the Company's total cellular subscriber base, an increase from the 37.8% 3G subscribers represented of total subscribers at the end of September 2011.

The Churn Rate of cellular subscribers in the third quarter 2012 was 8.6%, compared to 5.7% in the third 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 third quarter 2012 totaled 399 minutes, compared to 357 minutes in the third quarter 2011, an increase of 11.7%.

The monthly cellular Average Revenue per User (ARPU) for the third quarter of 2012 decreased 17.5% and totaled NIS 86.7 ($22.2), compared to NIS 105.1 ($26.9) in the third quarter last year. The decrease is attributed to the ongoing price erosion. ARPU includes revenues from national roaming services and hosting services to operators on the Company's communications networks.

Financing and Investment Review  (financial data for Q3/2011, includes Netvision's results for September 2011 only )

Cash Flow

Free cash flow for the third quarter of 2012 increased by 58% and totaled NIS 414 million ( $106 million), compared to NIS 262 million ( $67 million) generated in the third quarter of 2011.  The increase in free cash flow mainly resulted from a decrease in payments to vendors, primarily those related to handsets purchases due to a decrease in handsets sales in the third quarter of 2012 as compared to the third quarter last year, which was partially offset by a decrease in receipts from customers, which resulted from the decrease in total revenues in the third quarter of 2012 as compared to the third quarter last year.

Total Equity

Total Equity as of September 30, 2012 amounted to NIS 400 million ( $102 million), primarily consisting of accumulated undistributed retained earnings.

Capital expenditure

The Company's accrual capital expenditure for the third quarter of 2012, totaled NIS 99 million ( $25 million) (including, among others, investment in information systems and software), compared to NIS 134 million ( $34 million) in the third quarter of 2011. The decrease primarily resulted from a difference in timing of investments between the quarters.

Dividend

On November 12, 2012, the Company's board of directors decided not to declare a cash dividend for the third 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 with a dividend distribution, given the continued intensified competition and substantial changes in pricing and their continued current and expected adverse effect on the Company's results of operations, the Company should wait for the competitive situation to clarify, to strengthen the Company's balance sheet and not distribute a dividend 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 September 30, 2012, see "Disclosure for Debenture Holders" section in this press release.

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

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