Bezeq results fail to distract market from scandals

In the heavy shadow of a number of accounting scandals and a forced vacation taken by CEO Jacob Gelbard, Bezeq announced its 2006 financial results yesterday.

The reports were released one day after the deadline for annual reporting, but the Israel Securities Authority (ISA) has no civil sanctions at its disposal that it can enforce against the company for the delay.

The ISA, which has attacked Bezeq numerous times as of late, can only stop trading a company's stock if it fails to file by the end of April.

A wounded and limping Bezeq is trying to rehabilitate its image, but it appears that the entire group's 2006 results are not going to help.

While financial results actually improved and the group recorded a decent net profit increase, the overall results are far from outstanding. The contrast in performance is even starker when compared to Israel's other telecommunications companies, all of which posted excellent 2006 results.

Bezeq's net profits showed the most improvement, increasing by 21 percent to NIS 809 million. After adjusting for one-time charges, mostly for severance packages, profits rose by NIS 320 million to NIS 1.244 billion. But that was the beginning and end of the good news.

Revenues for the Bezeq group, which, in addition to the fixed line provider includes cellular operator Pelephone, satellite television broadcaster Yes, and Internet and overseas long-distance provider Bezeq International, rose just 1 percent to NIS 12.23 billion.

While all of Bezeq's competitors grew by about 10 percent in 2006, the former national telephone monopoly barely increased its sales. This should worry management, since it is certainly not clear that 2007 will be as good as this past year for telecommunications firms. If Bezeq cannot generate more than a 1 percent gain in a very good year, there is plenty to worry about.

Gelbard's Bezeq had emphasized greater efficiency, more cost cutting and improved profitability for both the parent company and its subsidiaries. Bezeq succeeded in that area, but Gelbard's main achievement, a reorganization agreement and efficiency measures, led to a NIS 596 million charge in 2006. The figure is comprised of NIS 287 million in options for workers and NIS 309 million for early retirement expenses.

As a result, the firm was hard pressed to show improved operating results. Operating profits were NIS 1.565 billion in 2006, just a 2 percent improvement over 2005. Fourth-quarter revenues totaled NIS 3.1 billion, but the company posted an operating loss of NIS 71 million due to more than NIS 500 million in one-time costs relating to a voluntary retirement program and stock options. Excluding one-time items, Bezeq recorded operating income of NIS 525 million.

While Bezeq released its results, investors showed more concern about the company's scandals over executive remuneration, stock options and bonuses. As Gelbard sits out an investigation over the company's approval procedures, the marketplace is wondering who will be the CEO to sign Bezeq's next annual financial statement. In any case, the company's subsidiaries showed improvement, but not at the level originally forecast by management.

Satellite televisin provider Yes improved, but its results are a long way from being impressive after a huge net loss of NIS 320 million. Revenues grew 11 percent, similar to the cable companies. But Yes is still lagging behind in its ability to sign new subscribers, since it still cannot market video on demand (VoD) services.

Bezeq's major problem is still the fixed line telephony market - its main business. The company managed to lower the rate of revenue loss due to high growth in the ADSL Internet market, but there is no expectations for changes in this market.