Profits at Cellcom Fall Less Than Expected

A woman walks past a branch of Cellcom, Israel's No. 1 mobile phone operator, in Tel Aviv, Israel, in this file picture taken January 28, 2014.
Cellcom sales center.Credit: Reuters

Cellcom Israel, which has made a bid for smaller cellular rival Golan Telecom, reported a 62% drop in third-quarter net profits on Tuesday, hurt by intense competition in the mobile phone industry.

Cellcom, the country’s largest mobile operator, made 40 million shekels ($10 million) in the quarter, down from 106 million a year earlier but above an average forecast of 29.75 million shekels in a Reuters poll of analysts. Shares in Cellcom closed up 1.8% at 28.98 shekels on the Tel Aviv Stock Exchange Tuesday.

UBS analyst Roni Biron attributed the better than expected results to lower taxes and financial expenses in the quarter but said the results were secondary to prospects of sector consolidation following the announcement of the Cellcom-Golan deal.

Cellcom said this month it would buy smaller, low-cost rival Golan Telecom for 1.17 billion shekels but there is political opposition to the deal over competition concerns.

“While the number of mobile network operators and international benchmarks make a clear case for at least one M&A [merger and acquisition] transaction, in our view, the prospects for antitrust and Ministry of Communications approvals still remain to be seen in the current Israeli environment,” said Biron, who rates Cellcom shares “neutral.”

Israel’s mobile phone industry was shaken up in 2012 with the entry of six new operators, including Golan, sparking a price war that led to steep drops in subscriber numbers, revenue and profit for Cellcom and two incumbent rivals.

Cellcom is hoping to take advantage of telecom reforms, in which Bezeq Israel Telecom, the owner of a nationwide DSL network, must lease its infrastructure to smaller rivals. Cellcom has already launched an Internet-based television service that has 50,000 customers and it now offers a low-price package of TV, home phone and high-speed Internet.

In the third quarter, revenue fell 9.6% to 1.03 billion shekels, led by a 10.3% fall in service revenue. Cellcom lost 16,000 customers in the quarter, trimming its subscriber base down to 2.832 million at the end of September.

“We expect that the competition level will remain high in the coming quarters,” Chief Financial Officer Shlomi Fruhling said. “As such, the group is committed and continues to adjust its cost structure and investments to the market conditions.”

Rival Partner Communications, which does business as Orange, last week reported a 9 million shekel loss in the third-quarter. Cellcom opted not to distribute a dividend for the third quarter.