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Partner Communications Reports Third Quarter 2012 Results

The Company continues to adjust its workforce to the changing market conditions and, in the third quarter, the number of positions was reduced by approximately 850. In total, from September 2011 until the end of October 2012, the number of positions has been reduced by approximately 2 ,725 positions, mostly by reducing the level of new recruits. The number of employees on a FTE basis at the end of October 2012 was 5,863. The Company will continue in the coming quarters to implement operational efficiency measures and to reduce operating expenses.

The Company’s investments in fixed assets totaled NIS 125 million in the third quarter and over the past nine months the Company has invested approximately NIS 371 million in the network and IT systems. Investments in the fourth quarter of 2012 are expected to be at a higher level than in the previous quarters; however, total annual investments will not reach the level of approximately NIS 650 million that was estimated in the annual forecast for 2012.

The Company's net debt at the end of the quarter totaled NIS 4.1 billion, reflecting a decrease of approximately NIS 600 million over the past year. The company intends to use its strong cash flow and to take measures to reduce the level of net debt by an additional amount of approximately NIS 800 million. In light of the decreasing net debt trend, the Company took measures in recent months to reduce the financing costs including, among others, early repayment of bank loans, a significant reduction in our unused credit facility and the adoption of a buy-back plan of bonds.”

Key Financial and Operating Indicators 5
    Q3’12   Q3’11   Change
Revenues (NIS millions)   1,315   1,751   -25%

Operating Expenses 6
942 1,252 -25%
Operating Profit (NIS millions) 217 314 -31%
Net Profit (NIS millions) 110 172 -36%
Free Cash Flow (NIS millions)   375   376   -
EBITDA (NIS millions) 401 529 -24%
EBITDA Margin (%) 30% 30% -
Cellular Subscribers (end of period, thousands) 3,042 3,201 -5%
Quarterly Cellular Churn Rate (%) 10.4 7.2 +3.2
Average Monthly Revenue per Cellular Subscriber (NIS) 97 111 -13%
Average Monthly Usage per Cellular Subscriber (minutes)   457   410   +11%

Partner Consolidated Results
  Cellular Segment   Fixed Line Segment   Elimination   Consolidated
NIS Millions   Q3’12   Q3’11   Change %   Q3’12   Q3’11   Change %   Q3’12   Q3’11   Q3’12   Q3’11   Change %
Total Revenues 1,049   1,449   -28% 304   347   -12% (38)   (45) 1,315   1,751   -25%
Service Revenues 892 1,070 -17% 296 341 -13% (38) (45) 1,150 1,366 -16%
Equipment Revenues 157 379 -59% 8 6 +33% - - 165 385 -57%
Operating Profit 184 300 -39% 33 14 +136% - - 217 314 -31%
EBITDA   328   447   -27%   73   82   -11%   -   -   401   529   -24%

5 See also definitions on first page.

6 Operating expenses including cost of revenues, selling, marketing and administrative expenses and excluding depreciation and amortization (NIS millions)

Financial Review

In Q3 2012, total revenues were NIS 1,315 million (US$ 336 million), a decrease of 25% from NIS 1,751 million in Q3 2011.

Service revenues in Q3 2012 totaled NIS 1,150 million (US$ 294 million), decreasing by 16% compared with NIS 1,366 million in Q3 2011.

For the cellular segment, service revenues in Q3 2012 were NIS 892 million (US$ 228 million), a decrease of 17% from NIS 1,070 million in Q3 2011. The decrease largely reflected the continuing price erosion of cellular services including voice and data services, following the entry of new competitors (MVNO’s and new operators) in the first half of the year, as well as the continued decrease in revenues from roaming services. The decrease also reflected the lower postpaid cellular subscriber base which has decreased by 6% on an average basis over the past year. For the fixed line segment, service revenues totaled NIS 296 million (US$ 76million) in Q3 2012, a decrease of 13% from NIS 341 million in Q3 2011. The decrease in service revenues for the fixed line segment mainly reflected the decrease in the average subscriber base in the fixed line market over the period, as well as price erosion in fixed line services.

Equipment revenues in Q3 2012 were NIS 165 million (US$ 42 million), decreasing by 57% from NIS 385 million in Q3 2011. The decrease was due to a significant reduction in the quantity of cellular equipment sold in Q3 2012 compared with Q3 2011. In line with the second quarter, the main factors that led to the reduction compared with the parallel quarter included strengthened competition for handset sales, the Company’s strategy to require more stringent payment terms, a general decrease in market demand reflecting the high proportion of smartphones sold last year, and an end to the use of special discounts for customers with new handsets.

Gross profit totaled NIS 381 million (US$ 97 million) in Q3 2012, decreasing by 30% compared to NIS 541 million in Q3 2011, principally reflecting the decrease in gross profit from cellular services and cellular equipment sales.

Operating profit in Q3 2012 was NIS 217 million (US$ 55 million), decreasing by 31% compared with NIS 314 million in Q3 2011. For the cellular segment, operating profit decreased by 39%, whereas for the fixed line segment, operating profit increased by 136%.

EBITDA in Q3 2012 totaled NIS 401 million (US$ 103 million), a decrease of 24% from NIS 529 million in Q3 2011. The cellular segment contributed EBITDA of NIS 328 million (US$ 84 million) in Q3 2012, decreasing by 27% from NIS 447 million in Q3 2011. The fixed line segment contributed EBITDA of NIS 73 million (US$ 19 million) in Q3 2012, a decrease of 11% compared with Q3 2011.

Operating expenses (including cost of service revenues, selling, marketing and administrative expenses and excluding depreciation and amortization) totaled NIS 793 million (US$ 203 million) in Q3 2012, a decrease of 17% or NIS 159 million from Q3 2011. Operating expenses in Q3 2012 were positively affected mainly by the efficiency measures implemented by the Company as well as from a one-time reduction in cellular royalty expenses in an amount of approximately NIS 20 million, which was recorded following an amendment to the royalty regulations, as well as a one-time reduction in fixed-line infrastructure expenses in an amount of approximately NIS 8 million.

Financial expenses, net in Q3 2012 were NIS 68 million (US$ 17 million), a decrease of 16% compared with NIS 81 million in Q3 2011, mainly reflecting the lower debt level (see Funding and Investing Review below).

Net profit in Q3 2012 was NIS 110 million (US$ 28 million), a decrease of 36% from NIS 172 million in Q3 2011. Based on the weighted average number of shares outstanding during Q3 2012, basic (reported) earnings per share or ADS, was NIS 0.71 (US $ 0.19), a decrease of 36% compared to NIS 1.11 in Q3 2011.

Funding and Investing Review

In Q3 2012 , cash flows generated from operating activities before interest payments, net of cash flows used for investing activities (" Free Cash Flow") totaled NIS 375 million (US$ 96 million), approximately no change from NIS 376 million in Q3 2011.

Cash generated from operations decreased by 4% from NIS 513 million in Q3 2011 to NIS 491 million (US$ 125 million) in Q3 2012. The decrease was due to the decrease in net profit, partially offset by a larger decrease in trade receivables in Q3 2012 than in Q3 2011.Cash generated from operations for Q3 2011 was positively affected by arrangements made by 012 Smile with credit card companies to advance the billing cycle payments by a number of days. These arrangements improved operating cash flow by approximately NIS 37 million in Q3 2011.

The level of investment in fixed assets in Q3 2012 including intangible assets but excluding capitalized subscriber acquisition and retention costs, net, was NIS 125 million (US$ 32 million), a slight decrease of 5% compared with NIS 132 million in Q3 2011. Investment in the final quarter of 2012 is expected to be a higher level than in the previous quarters of the year; however, total annual investments will not reach the level of approximately NIS 650 million which was provided in the annual 2012 guidance in March 2012. Further to the Company’s press release in August 2012 regarding the Board of Directors’ resolution to approve a debt Buy-Back plan of the Company’s Notes, the Company executed a repurchase of Series E Notes in the amount of approximately NIS 650,000 Par value, during the same month. The Notes have subsequently been cancelled and deleted from trading.

The level of net debt 7 at the end of Q3 2012 was NIS 4. 07 billion, compared with NIS 4.64 billion at the end of 2011, a decrease of NIS 0.57 billion.

7 Total current and non-current borrowings less cash and cash equivalents.

Dividend Policy

As the Company reported in its press release and immediate report dated September 20, 2012, the Board of Directors resolved on September 19, 2012 to cancel the existing dividend policy for 2012, and to assess dividend distributions (and their scope) from time to time, by reference to, inter alia, the Company's cash flow, profitability, debt level, debt coverage ratios and the business environment in general.

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