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Partner Communications Reports Second Quarter 2013 Results1

Stocks in this article: PTNR

Overall, operating profit for the cellular segment in Q2 2013 was NIS 59 million (US$ 16 million), decreasing by 74% compared with NIS 231 million in Q2 2012. The decrease reflected the impact of the decrease in service revenues and in gross profit from equipment revenues, partially offset by the reduction in operating expenses, as described above.

Adjusted EBITDA for the cellular segment totaled NIS 198 million (US$ 55 million) in Q2 2013, a decrease of 46% from NIS 367 million in Q2 2012, reflecting the impact of the decrease in service revenues and in gross profit from equipment revenues, partially offset by the reduction in operating expenses, as described above. As a percentage of total cellular revenues, Adjusted EBITDA in Q2 2013 was 22%, compared with 32% in Q2 2012.

7 Includes intersegment revenues and costs of revenues. 8 Operating expenses include cost of service revenues, and selling, marketing and administrative expenses, and exclude depreciation and amortization and impairment charges.

Cellular Segment Operational Review

At the end of the second quarter 2013, the Company's cellular subscriber base (including mobile data and 012 Mobile subscribers) was approximately 2.92 million including approximately 2.1 million Post-Paid subscribers or 72% of the base, and approximately 818 thousand Pre-Paid subscribers, or 28% of the subscriber base.

During the second quarter of 2013, the Company's subscriber base declined by approximately 11 thousand and the Post-paid subscriber base increased by 1 thousand, compared with a decrease in the subscriber base of 55 thousand in Q2 2012. The decrease in the subscriber base this quarter is due to the decrease in Pre-paid subscriber base of 12 thousand.

The quarterly churn rate for cellular subscribers in Q2 2013 was 9.4%, compared with 8.9% in Q2 2012 and 10.4% in Q1 2013 . The high rate of churn reflected mainly the impact of the high level of competition in the market.

Total cellular market share (based on the number of subscribers) at the end of Q2 2013 was estimated to be approximately 29%, similar to the end of the first quarter of 2013.

The monthly Average Revenue Per User (“ ARPU”) for cellular subscribers for Q2 2013 was NIS 83 (US$ 23), a decrease of approximately 18% from NIS 101 in Q2 2012 and an increase of 1% from NIS 82 in Q1 2013. The decrease compared to the second quarter of last year mainly reflected the continued price erosion in the key cellular services including voice, content and roaming services due to the competition in the market. The increase compared to the first quarter 2013 was primarily due to a decrease in price erosion together with seasonality effects.

The monthly average Minutes of Use per subscriber ( “MOU”) for cellular subscribers in Q2 2013 was 532 minutes, an increase of 22% from 437 minutes in Q2 2012 9. This increase largely reflected the continued increase in the proportion of cellular subscribers with bundled packages that include large or unlimited quantities of minutes. In view of this trend, the Company believes that reporting MOU is no longer beneficial to understanding the results of operation, and therefore the Company is considering ending reporting MOU as of the end of 2013.

9 MOU data includes total incoming minutes to subscribers of those MVNO operators which Partner hosts on its network.

Fixed Line Segment Review 10

NIS Millions Q2’13 Q2’12 Change %
Total Revenues 286 308 -7%
Service Revenues 277 300 -8%
Equipment Revenues 9 8

+13%

Operating Profit 43 14 +207%
Adjusted EBITDA 82 56 +46%

Total Revenues in Q2 2013 for the fixed line segment were NIS 286 million (US$ 79 million), a decrease of 7% compared with NIS 308 million in Q2 2012.

Service revenues for the fixed line segment reached NIS 277 million (US$ 77 million) in Q2 2013, a decrease of 8% compared with NIS 300 million in Q2 2012. The decrease mainly reflected price erosion in fixed line services including domestic fixed line, international calls and internet services, as well as a decrease of 6% in the average number of internet service subscribers over the period.

Revenues from equipment sales in the fixed line segment in Q2 2013 totaled NIS 9 million (US$ 2 million), compared with NIS 8 million in Q2 2012.

The total number of active fixed lines was approximately 294 thousand at the end of Q2 2013, an increase of 5% compared with approximately 281 thousand at the end of Q2 2012, and compared to 293 thousand at the end of Q1 2013.

The ISP subscriber base was approximately 572 thousand as of the end of Q2 2013, compared with approximately 609 thousand at quarter-end of Q2 2012, and approximately 581 thousand at the end of Q1 2013. The decrease in the number of ISP subscribers was mainly due to the increased competition in the market.

Operating expenses 11 for the fixed line segment (excluding inter-segment costs) totaled NIS 186 million (US$ 51 million) in Q2 2013, a decrease of approximately 22% or NIS 53 million from Q2 2012. The decrease mainly reflected lower payroll and related expenses as a result of the reduction in the level of workforce. Including depreciation and amortization expenses, operating expenses for the fixed line segment in Q2 2013 decreased by 20% compared with Q2 2012.

Operating profit for the fixed line segment was NIS 43 million (US$ 12 million) in Q2 2013, an increase of 207% compared to NIS 14 million in Q2 2012.

Adjusted EBITDA for the fixed line segment in Q2 2013 was NIS 82 million (US$ 23 million), an increase of 46% from NIS 56 million in Q2 2012, reflecting the impact of the reduction in operating expenses, partially offset by the lower service revenues.

10 The analysis includes intersegment revenues and costs of revenues. 11 Operating expenses include cost of service revenues, and selling, marketing and administrative expenses, and exclude depreciation and amortization and impairment charges.

Business and Regulatory Developments

Regulatory Developments

1. Wholesale market in the Fixed-line market

On August 5, 2013, the Communications Law (Telecommunications and Broadcasting), 1982 (the “ Telecommunications Law”) was amended to grant the Minister of Communications the power to set interconnect tariffs and usage tariffs of another operator's network and supervised services prices, based not only on cost plus reasonable profit (according to a calculation method determined by the Minister), but also based on a benchmark which refers to one of the following: (a) tariffs of services provided by the licensee; (b) tariffs for other services which are comparable; or (c) tariffs for comparable services in other countries.In addition, this amendment to the Telecommunications Law granted the Minister of Communications with the power to mandate a separation between services provided to a licensee and services provided to a subscriber and to set provisions for the manner in which such separation is to be implemented.

For further information, see the Company's 2012 Annual Report (20-F) filed with the SEC on March 19, 2013 (" 2012 Annual Report") "Item 3D. Key Information - Risk Factors - 3D.1.a RISKS RELATING TO THE REGULATION OF OUR INDUSTRY - we operate in a highly regulated telecommunications market in which the regulators limit our flexibility in managing our business, seeks to increase competition, and adversely affects our business and results of operations" and "Item 4 - Information on the Company - Business Overview - Regulation - Regulatory Developments - Public Committee recommendations regarding the fixed-line telecommunications sector."

2. Ministry of Communications Hearings

a. In July 2013, the Ministry of Communications published a hearing that is intended to regulate the manner of provision of premium services so that all of the services will be provided through only three prefixes, two of which shall be blocked as a default. An international operator will be able to provide premium services without having to route the call abroad as long as the services will be provided through the prefixes designated for the provision of premium services. The revenues of the Company may be adversely affected by the results of this hearing.

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