Cellcom Quarterly Net Tumbles in the First Sting of Competition

Profit plunged 44% to NIS 173m before latest market turmoil.

Amitai Ziv
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Amitai Ziv

Crushing competition in the local telecommunications sector reached a peak earlier this week when Golan Telecom invaded the market with an unlimited talk and text plan for NIS 99 per month, followed close by HOT Mobile undercutting Golan with a NIS 89 monthly plan. Cellcom's bleak first-quarter results did not reflect the recent tumult in the industry but did show the signs of intensifying competition.

Overall revenue, including fully-owned subsidiary 013 Netvision and cellphone sales, were NIS 1.58 billion, down just 0.1% from the same quarter last year. Revenue from services declined 1.6%, to NIS 1.18 billion. Cellcom reported NIS 1.32 billion in revenue, down 16.4% from the parallel, while 013 Netvision reported revenue of NIS 275 million for the quarter. Mobile service revenues were NIS 945 million, a 21.6% plunge from the first quarter of 2011.

Cellcom's profits fell sharply: The Ebitda declined 25.7% from the parallel, to NIS 475 million, reflecting a 30% Ebitda margin, compared to 40% for the first quarter of 2011. Operating income plummeted 41.6%, to NIS 275 million. Net income totaled NIS 173 million, down 43.5% but beating analyst forecasts nonetheless.

Cellcom will distribute just 75% of its first-quarter earnings - NIS 130 million, or NIS 1.31 per share - in dividends, compared to 95% to 100% of earnings for prior quarters.

The company's free cash flow for the quarter totaled NIS 144 million, down 64.1% from the parallel, to NIS 401 million. The company attributed the drop to mounting competition, adding: "Net cash used in investing activities for the first quarter of 2012 increased compared to the first quarter last year, mainly due to increased investment in the upgrade of the company's universal mobile telecommunications system (third generation technology ) and transmission networks during the first quarter of 2012."

Cellcom reported a net increase of 13,000 contract customers in the quarter, for a total of 3.36 million customers at the end of March. The average customer spoke for 365 minutes a month, up 9% from the parallel. The average monthly bill, however, declined 21.4% from the same period in 2011, to NIS 90.50 before VAT.

"I am pleased with the success of the Netvision merger, which already had a positive effect on costs and contributed to revenues this quarter," commented Cellcom CEO Nir Sztern. "Comparing the results of the first quarter of 2012 with the first quarter of 2011, we see a decline in profitability as a result of the regulatory changes and increased competition. However, if we compare the first quarter 2012 with the fourth quarter 2011, we can see a decrease in the company's expenses of approximately NIS 80 million as a result of the efficiency measures we implemented.

"The intensified competition which characterized this past year led to a continued reduction in service revenues," continued Sztern. "The decline in revenues will continue in the following quarters, and may even escalate as a result of the new competition, so we intend to implement additional efficiency measures regarding costs and merger synergies but estimate that these measures will only partly compensate for the decrease in revenues.

"I congratulate the Communications Ministry for its decision to open the landline market for competition," added Sztern. "We see this as an opportunity to grow and strengthen Cellcom's position as a communications group providing a wide variety of solutions to business and private customers. However, the success of opening this market to competition still depends on the active involvement and supervision of the regulator for the benefit of creating competition in the market."

Nir SzternCredit: Dror Artzi