Pele-Phone to write off NIS 643 million on capitalized customer acquisition costs

The write off will impede the cellular operator's profitability until 2003
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Bezeq Q3 reports show Pele-Phone Communications is to write off NIS 643 million due to capitalized customer acquisition costs. In the Bezeq reports, the NIS 643 million appears under an item called "Other Assets", which includes capitalized customer acquisition costs. The write off will stretch over a two-year period, meaning every quarter for eight consequetive quarters, NIS 80 million will be written off.

The cost of customer purchases consists of the subsidy on the cellular device and the marketing expenses per customer. The expense is initially entered as an expense on stock, and, once the cellular device is fully purchased, the capitalized and amortized expense moves into another asset item. Estimates are the subsidy price for Pele-Phone subscribers is NIS 1,000.

In the end of 1999 Pele-Phone reported a total of NIS 470 million expense on the Other Asset article. Since then the expense has grown steadily, reaching a peak NIS 710 million in Q1 2001.

In Q2 and Q3 of this year that number went down to NIS 643 million in Q3, apparently the result of decreased customer acquisition costs. Pele-Phone recruited 80,000 new subscribers in each of the two quarters (Q2 and Q3).

Partner Communications (Nasdaq, TASE:PTNR, LSE:PCCD), another major Israeli cellular provider, wrote off NIS 600 million over several quarters in 1999-2000 on its capitalized customer acquisition costs. The write off was the result of the company's switch to financial reports using the American (USGAAP) accounting method.

Analysts estimate Pele-Phone may decide to write off the entire amount in one quarter, making for a clean start in 2002.

Pele-Phone itself said that being committed to the Israeli accounting system it would divide the write off evenly over the next eight quarters.

Leader DS Investments & Finance communications analyst Yuval Ben Ze'ev feels "there's a big question mark hanging over Pele-Phone's decisions for the near future, and this may affect its profitability. The company will have great difficulty generating profit with such a major write off on its hands. Two thirds of the write off will take place in 2002 and the rest in 2003."

Nessuah Zannex analyst Haim Israel said he "hoped Pele-Phone will make it a one-time write off. In general, the write off indicates Bezeq's business is more negatively affected by its subsidiaries rather than its core business. The company will see no net profit prior to 2003."

Other analysts have estimated that a write off of this magnitude will make it difficult for Pele-Phone to achieve profitability in the foreseeable future.