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Partner Communications Reports Third Quarter 2012 Results

The term of the Agreement is three years, during which Partner has agreed to purchase a minimum quantity of iPhone handsets per year, which will represent a significant portion of the Company's expected handset purchases over that period.

The total cost of the purchases is significant and will depend on the prices of the handsets and accessories at the time of purchase .

2. Organizational Changes and Changes in Management

During the third quarter, the Company decided on a number of organizational changes that resulted from an operational efficiency process mandated by the changing needs of the market. The new structure included the unification of the Private and the Business Customers Divisions into one Customers Division under Mr. Avi Cohen, who until now served as VP Business Customers Division; the dismantling of the Operations Division and the transferring of its departments to report to the Chief Operating Officer, Mr. Menahem Tirosh, and to VP Human Resources, Ms. Einat Rom. Ms. Einat Rom, who served until now as VP Private Customers Division, will replace Mr. Guillermo Codner as VP Human Resources upon his requested to retire from his office. In addition, Mr. Shachar Landau, VP Operations, will retire from his office in the next few months.

Mr. Yacov Kedmi, Head of Marketing, Content & Growth Engines Division, who rejoined the Company in March 2010 for a pre-defined period of 3 years, will retire from the Company at the end of this period.

Adv. Roly Klinger has been appointed as VP Legal Affairs, Regulatory and Business Development as well as Company Secretary, upon her return from a leave of absence. Adv. Yonit Raviv, who served as interim Legal Counsel and Company Secretary during Adv. Klinger's absence, will serve as her deputy.

Cellular Segment Financial Review 8

NIS Millions   Q3’12   Q3’11   Change %
Total Revenues   1,049   1,449   -28%
Service Revenues 892 1,070 -17%
Equipment Revenues 157 379 -59%
Operating Profit 184 300 -39%
EBITDA   328   447   -27%
 

Total revenues for the cellular segment in Q3 2012 were NIS 1,049 million (US$ 268 million), a decrease of 28% from NIS 1,449 million in Q3 2011.

Service revenues for the cellular segment were NIS 892 million (US$ 228 million) in Q3 2012, decreasing by 17% from NIS 1,070 million in Q3 2011. The decrease mainly reflected the ongoing price erosion of cellular services including voice, data and roaming services, following the entry of new competitors in recent months, as described in the results release for Q2 2012. The decrease also reflected the lower postpaid cellular subscriber base which has decreased by 6% on an average basis over the past year.

Revenues from cellular data and content services excluding SMS 9 in Q3 2012 totaled NIS 129 million (US$ 33 million), a decrease of 25% compared with NIS 172 million in Q3 2011. The decrease mainly reflected price erosion of data and content services including browsing and other services, the lower postpaid subscriber base, and the impact of new consumer regulations in 2011 which reduced demand for content services.

SMS service revenues 8 totaled NIS 105 million (US$ 27 million) in Q3 2012, a decrease of 11% compared with NIS 118 million in Q3 2011. Since over half of outgoing airtime and content and data (including SMS) revenues is derived from customers who subscribe to bundled packages which include airtime, data and SMS, the reporting of data and content service revenues relies heavily on the allocation of those revenues between the different services offered in the bundled packages. Since this distinction is not as significant as in the past. The Company is considering ending the reporting of data and content service revenues separately in the future.

8 Includes intersegment revenues and costs of revenues.

9 In Q4 2011, the Company adjusted its allocation of credits between the different cellular services. The services revenues for Q3 2011 have been restated under the new methodology for the purposes of comparison.

In Q3 2012, the gross profit from cellular services totaled NIS 289 million (US$ 74 million), compared with NIS 384 million in Q3 2011, a decrease of 25%. This mainly reflected the reduction in cellular service revenues, partially offset by a reduction in the cost of cellular service revenues. The cost of cellular service revenues decrease was primarily due to a decrease in payroll and related expenses and 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, partially offset by an increase in interconnect expenses as a result of growth in network traffic.

Revenues from cellular equipment sales in Q3 2012 totaled NIS 157 million (US$ 40 million), decreasing by 59% from NIS 379 million in Q3 2011. The decrease was due to a significant reduction in the quantity of cellular equipment (including handsets, modems and laptops etc.) 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, increasingly 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.

The gross profit from cellular equipment sales in Q3 2012 was NIS 16 million (US$ 4 million), compared with NIS 87 million in Q3 2011, a decrease of 82%. This was mainly due to the lower quantity of cellular equipment sales, as well as a decrease in the profit achieved per equipment device sold.

Gross profit for the cellular segment in Q3 2012 totaled NIS 305 million (US$ 78 million), a decrease of 35% compared to NIS 471 million in Q3 2011.

Selling, marketing, general and administration expenses for the cellular segment in Q3 2012 amounted to NIS 148 million (US$ 38 million), decreasing by 26% from NIS 201 million in Q3 2011. The decrease mainly reflected decreases in payroll and related expenses, selling commissions and marketing and advertising expenses.

Overall, operating profit for the cellular segment in Q3 2012 was NIS 184 million (US$ 47 million), decreasing by 39% compared with NIS 300 million in Q3 2011.

EBITDA for the cellular segment totaled NIS 328 million (US$ 84 million) in Q3 2012, a decrease of 27% from NIS 447 million in Q3 2011. As a percentage of total cellular revenues, EBITDA in Q3 2012 was 31%, no change from 31% in Q3 2011.

Cellular Segment Operational Review

During the third quarter of 2012, the cellular subscriber base (including mobile data and 012 Mobile subscribers) decreased by approximately 56,000, to total approximately 3.04 million subscribers at quarter-end. The post-paid cellular subscriber base, including 012 Mobile and mobile broadband subscribers, decreased by approximately 53,000 and totaled approximately 2.15 million (71% of the base) at quarter end. The pre-paid subscriber base decreased by approximately 3,000 and totaled approximately 0.9 million (29% of the base) at quarter end.

The quarterly churn rate for Q3 2012 was 10.4% compared with 7.2% in Q3 2011 and 8.9% in Q2 2012. Following the trend of the second quarter, the high rate of churn, primarily due to increased churn in the months of July and August, largely reflects the impact on postpaid subscribers of the two new cellular operators which entered the market during the second quarter with aggressive offerings, and the MVNOs. The churn rate for September was lower than that for July and August.

Total cellular market share at the end of the third quarter is estimated to be approximately 30%, compared with 31% at the end of the previous quarter.

The monthly Average Revenue Per User (“ ARPU”) for cellular subscribers for Q3 2012 was NIS 97 (US$ 25), a decrease of 13% from NIS 111 in Q3 2011. The decrease mainly reflects the ongoing price erosion, as described above.

The monthly average Minutes of Use per subscriber ( “MOU”) for cellular subscribers in Q3 2012 was 457 minutes, an increase of 11% from 410 minutes in Q3 2011. This increase largely reflects the continued increase in the proportion of cellular subscribers with bundled packages that include large or unlimited quantities of minutes, and occurred despite the continued increase in the proportion of mobile broadband and laptop subscribers in the subscriber base which puts downward pressure on the MOU since such subscribers do not generate significant airtime use.

Fixed Line Segment Review 10

NIS Millions   Q3’12   Q3’11   Change %
Total Revenues   304   347   -12%
Service Revenues 296 341 -13%
Equipment Revenues 8 6 +33%
Operating Profit 33 14 +136%
EBITDA   73   82   -11%
 

10 The analysis includes intersegment revenues and costs of revenues.

In Q3 2012, total revenues for the fixed line segment was NIS 304 million (US$ 78 million) compared with NIS 347 million in Q3 2011, a decrease of 12%.

Fixed line segment service revenues totaled NIS 296 million (US$ 76 million) in Q3 2012, a decrease of 13% compared with NIS 341 million in Q3 2011. As described above, the decrease 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.

The total number of active fixed lines including 012 Smile was approximately 282,000 at the end of Q3 2012, compared with approximately 295,000 at the end of Q3 2011 and 281,000 and the end of the previous quarter. The ISP subscriber base was approximately 594,000 as of the end of Q3 2012, compared with approximately 632,000 at the end of Q3 2011 and 609,000 at the end of the previous quarter.

Revenues from equipment sales in the fixed line segment in Q3 2012 totaled NIS 8 million (US$ 2 million), compared with NIS 6 million in Q3 2011.

Gross Profit for the fixed line segment was NIS 76 million (US$ 19 million) in Q3 2012, compared with NIS 70 million in Q3 2011, an increase of 9%. The increase was attributable to a decrease in the cost of fixed line service revenues, which more than offset the decrease in service revenues. The decrease in the cost of service revenues mainly reflected one-time impairment expenses in Q3 2011 in the amount of NIS 17 million, and a one-time reduction in fixed-line infrastructure expenses in Q3 2012 in an amount of approximately NIS 8 million, as well as lower payments made to infrastructure providers and lower depreciation and amortization expenses.

Selling, marketing, general and administration expenses for the fixed line segment totaled NIS 44 million (US$ 11 million) in Q3 2012, a decrease of 21% from NIS 56 million in Q3 2011. The decrease was primarily related to decreases in salaries and related expenses, and in marketing and advertising expenses.

Operating profit for the fixed line segment was NIS 33 million (US$ 8 million) in Q3 2012, an increase of 136% compared to NIS 14 million in Q3 2011. The increase largely reflected the impact of the decrease in revenues, offset by the lower depreciation and amortization expenses as well as lower cost of service revenues and operating expenses, as described above.

EBITDA for the fixed line segment in Q3 2012 totaled NIS 73 million (US$ 19 million), compared with NIS 8 2 million in Q3 2011, a decrease of 11%, largely reflecting the impact of the lower service revenues, partially offset by a reduction in operating expenses. Over than half of the decrease in EBITDA is due to the change in the inter-segment charging following an adjustment made to transmission service prices (as reported in Q2 2012).

Conference Call Details

Partner will hold a conference call on Wednesday, November 21, 2012 at 10.00 a.m . Eastern Time / 5.00 p.m. Israel Time .

Please call the following numbers (at least 10 minutes before the scheduled time) in order to participate: International: +972.3. 918.0609, North America toll-free: + 1.888.668.9141

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