Welcome everyone, and thank you for joining us on Bezeq's 2023 Fourth Quarter and Full-Year Earnings Call. I'm Tobi Fischbein, Chief Financial Officer of the Bezeq Group. Joining us from the senior management team, we have Mr. Tomer Raved, Bezeq's chairman, Mr. Ran Guron, Bezeq's outgoing CEO, and Mr. Ilan Sigal, CEO of Pelephone and yes. Before we start, I would like to direct your attention to the Safe Harbor statement on slide 2 of our presentation, which also applies to any statement made during today's call. We would like to inform you that this event is being recorded. After presenting our quarterly results, we will have a Q&A session. With that said, let me now turn the call over to Tomer for his opening remarks.
After his introduction, I will continue the presentation of our group financial highlights, followed by Nir, who will discuss Bezeq fixed line results, and Ilan, who will cover the results from Pelephone and yes. Tomer?
Hi everyone. Great to see familiar names and faces. I'm proud to present Bezeq's reports for the first time as chairman of the group. I'm sure that the group will continue to grow and strengthen its position as the leader of the telecom market in Israel while maintaining its value and strategic compass that has guided the group's employees and management. Before we start, I want to thank Ran Guron, Bezeq fixed-line CEO, for his 18 years of service at the Bezeq Group, eight of which as CEO of our various companies, and four working with him closely together. We wish him the best on his journey forward.
I would also like to wish Bezeq's incoming CEO, Nir , great success in his position, and I would look forward to working together with him and the other CEOs in the group to advance the group's strategy, to reinforce the group as an innovative leader in its field and as the leading incumbent in the Israeli telecommunications market. Now, let's discuss our strategy update and fourth quarter and full-year 2023 results. Beginning on slide 4, let's return to our six key strategic pillars, reminding you how we are executing on our strategy and moving ahead dramatically with fiber, using yes as a triple-play growth engine successfully, as well as continuing our transition to 5G throughout Pelephone's subscriber base. We remain focused on the growing areas of the ICT market and maintaining a balanced capital structure while increasing our dividend distribution from 0% in 2021 up to 70% today.
We are now diversifying our portfolio by adding electricity supply to consumers and SMEs to our sources of growth, which we'll address later in the presentation. On the following slide, we show our transformation since 2020, and I'm very proud of that. We began with the launch of our fiber network, the 5G spectrum auction, and the early days of yes migration from satellite to IP, as well as significant cost savings which we achieved in our subsidiaries over the year. In the midterm, we expect to reach 40% fiber takeup, cellular ARPU of 45-50 shekels, and yes ARPU between 155 and 160 shekels. On top of that, we also launch an operational efficiency improvement that will be reflected in both OPEX and CAPEX in the medium term.
We are also acting actively to remove the structural separation through discussion with the regulator, specifically with the Minister of Communications. The next slide highlights an improvement in our midterm ambitions. We expect 1.5%-2% growth in adjusted EBITDA, with adjusted EBITDA margin growing to the range of 42%-44%. Our EBITDA minus CAPEX, which is the first time we give such guidance, is expected to grow by ILS 400-500 million in the midterm, up from ILS 100 million growth between 2021 and 2023. Our free cash flow is now expected to grow on an annual basis between 7%-9%, and we aim to continue and increase our dividend distributions, obviously subject to maintaining healthy credit ratings within the AA Group. On slide 7, the next slide, we show our tech and business roadmap across fiber, 5G, and IP-based TV.
Today, we actually have approximately 2.2 million homes passed in Israel, which is roughly 70% of the country, and over 600,000 fiber subs in both retail and wholesale, with a takeup of almost 30%. In the midterm, we expect retail internet ARPU to reach over 140 ILS, up from our previous guidance of 130 ILS, which we actually gave in November 2021. Our 5G subs plan reached 1.1 million today, and this represents 41% of our total subs, and we have over 400,000 IP-based TV subs, which is now 70% of yes total subscribers. In the next slide, we can see our infrastructure development, and we are entering a multi-year operating efficiency, which I mentioned before, at all our key subsidiaries between Bezeq, Bezeq International, Pelephone, and yes.
We aim to streamline OPEX and CAPEX as we reach the later phase of the investment cycle as we retire the satellites and basically complete the fiber rollout. The following slide highlights our continued ESG focus. I'm very proud of that. We actually can spend an hour talking only on this slide. We recently signed the UN Women Empowerment Principles to advance gender equality. We have also transitioned more than 50% of our fleet to hybrid vehicles, which is above and beyond what you see in the local in Israel, in the domestic community, and we reduced electricity and water consumption significantly. We doubled our scope of electronic waste recycling in 2 years to 95 tons. We are very proud of our immense efforts and progress across the different ESG verticals, and we will continue to be a market leader in the field, both locally and globally.
Slide 10 summarizes our consistent execution in 2023, notably our increase in fiber takeup, achieving the highest fixed line revenue in over a decade, the highest Pelephone revenue in the past seven years, and the highest yes TV revenue in the past five years. Additionally, our adjusted net income grew this year by 11%, and on the following slide, I want to highlight our top line and bottom line growth as well, as well as our strong free cash flow generation at ILS 1.3 billion, which has allowed us to continue to reduce our net debt, as mentioned, which actually decreased this year by over ILS 400 million. In the next slide, before I turn it over to Tobi, you can see the key indicators for our business.
Bezeq fixed line alone added 300,000 net adds in 2023, which sums up to more than 600,000 retail and wholesale subs on our network as of today. Our Pelephone net adds in 2023 were 53,000, and our 5G subs plan, as I mentioned, reached 41% of our sub, which sums up to 1.1 million subs as of today. Finally, our yes revenue grew 2.5% despite a mild decline in TV subs to 574,000, as you can see, of which 71% are already IP subs. Now, I would like to turn the call over to Tobi to discuss the financial results in more detail.
Thank you, Tomer, and welcome on board. Slide 13 shows revenue growth for the full year driven by a 2.5% increase in Bezeq fixed line and yes revenues, despite the second tranche of the MOC telephony reform in July 2023 and the decrease in Pelephone interconnect revenues in June 2023. Adjusted EBITDA and adjusted net profit both increased in 2023 due to improved business results in most of the group's activities. As seen in the next slide, revenues remained stable in Q4 despite the war, and adjusted net profit grew 18% in the quarter, primarily due to a decrease in depreciation and financing expenses. Moving to the next slide, we show a 16% increase in retail internet ARPU since 2021, as well as expansion in Pelephone ARPU due to an increase in roaming and continued transition to 5G plans. Pelephone subscribers grew in 2023 with stabilizing wholesale internet subscribers.
On slide 16, we show stable internet subscribers for the quarter, along with a decrease in TV and cellular ARPU due to impacts from the war. The next slide shows a 41% decrease of ILS 3.7 billion in net debt since 2018. Our net debt-to-EBITDA ratio has decreased from 2.5x to 1.6x in the same period, and both Israeli credit rating agencies maintain their positive outlook. On slide 18, we address our upgraded dividend policy, moving to a 70% payout ratio in 2024 from 60% in 2023. In addition, the board recommended a distribution of ILS 374 million, or 13.5 agorot per share, which reflects a dividend yield of approximately 6% on an annual basis. Turning to the next slide, our 2023 results successfully met our guidance for the year.
For 2024, we expect roughly similar targets with a one-time increase in CAPEX due to two projects: building a new data center for the group and upgrading core infrastructure networks. The next slide reflects our improved midterm ambitions, now targeting 1.5%-2% annual growth in adjusted EBITDA, CAPEX-to-Sales ratio of 16%-18%, a 7%-9% annual growth in free cash flow, and a ILS 400 million-ILS 500 million increase in adjusted EBITDA minus CAPEX. I will now turn the call over to Ran, who will share more detailed results from our fixed line operations. Ran?
Thank you, Tobi. As seen on slide 21, in 2023, we saw growth in all activities except for the telephony due to an MOC reduction in tariff, but we still managed to record the highest revenue of the past decade. Adjusted net profit grew 8.3% to ILS 1.02 billion, the highest since 2020. Free cash flow increased 14.1% to ILS 1.1 billion for the year. On the following slide, we show an increase in adjusted EBITDA and adjusted net profit for the year, primarily due to the higher revenue and lower net financing expenses. We also saw an increase in free cash flow for the year due to improved business results and timing differences in working capital. The next slide shows 3.1% growth in adjusted EBITDA for the fourth quarter and 21% growth in adjusted net profit despite the decrease in fixed line telephony tariff.
Turning to slide 24, in 2023, we saw again significant growth in broadband internet revenues driven by an increase in fiber customers' takeup, which also resulted in continued growth in retail ARPU. On the following slide, we see growth across the same areas for the fourth quarter, including fiber customers' takeup, broadband revenues, and retail ARPU. Moving to the next slide, we saw an increase in the takeup rate. Q4 saw lower retail net adds, resulting from a slowdown in subcontractors' activity due to the war and a temporary dispute with the labor union. Slide 27 highlights continued fiber deployment with an increased focus on takeup. As you can see, we have added a graph showing 74% of Bezeq's total internet retail customers as of Q4 2023 with Unified Internet Service, that means ISP.
The next slide shows continued growth in 2023 in transmission and data revenues, offset by a decrease in traffic revenues from ISP companies. We also saw growth in cloud and digital revenue driven by higher vertical exchange services. The increase in other revenues was mainly driven by infrastructure projects. Similarly, the next slide shows the same continued growth in transmission, data, cloud, and digital other revenues for the fourth quarter. The operating expenses slide shows an increase in salaries due to salary updates, recruitments for the fiber project, and the impact of the public sector wage agreements on contract employees. Other expenses in 2023 increased due to a special grant to be paid to employees pursuant to an amendment in the labor agreement.
Slide 31 shows operating expenses for the fourth quarter, with a decrease in operating expenses due to a lower interconnect payment to telecom operators as tariff decreased as of June 2023, as well as lower payment to the fund for incentivizing deployment of fiber optics pursuant to an MOC decision. As for the next slide, we recently announced our entry into the field of electricity supply through the establishment of a joint venture with PowerGen, an expert in electricity production. With this joint venture, for the first time, Bezeq is taking advantage of a major regulatory reform in the power sector to expand into an adjusted utility area with the goal of becoming a leading electricity supplier and adding new sources of growth. The Israeli Electric Corporation is not permitted to offer a discount until it loses 40% market share in the low-voltage customer market.
According to BDO Consulting, an estimate of ILS 10 billion of the market share of the Israeli Electric Corporation will pass to competitors by 2030. We are excited to take advantage of this unique business opportunity. Continuing to the next slide, our rationale for this investment considers increased customer stickiness, no telecom regulatory exposure, no significant CAPEX, and various exposures which can create a neutral hedges for the group. Our expertise lies in retail marketing and services to mass market. Our partners will provide the energy along with the CAPEX needed for this venture. Overall, we are well positioned to handle mass market services, and there is a lot of room for growth. In summary, fixed line operation saw growth across all financial metrics in 2023.
After 18 years in the group and 8 years as a CEO of various group companies, I am leaving Bezeq at the end of the month with great satisfaction and appreciation of the results we have presented. I leave Bezeq in an excellent position as a healthy and growing company. I would like to thank Tomer and the board of directors for years of cooperation and wish Nir a great success. With that, I will now turn the call to Ilan to discuss Pelephone and yes.
Thank you, Ran. I also want to wish you good luck and success after 15 years of working together. Good luck. Let me begin stating that all of my references to Pelephone revenues and ARPU will be excluding interconnect fees. Moving to slide 35, Pelephone posted a 1.5% increase in service revenues to almost ILS 1.4 billion, the highest since 2017, driven by an increase in ARPU and increase in 5G subscribers, plans as well as an increase in postpaid subscribers, all despite the impacts of the war. The next slide shows a strong turnaround in service revenues. 5G subscribers as of today totaled almost 1.1 million subscribers on 5G plans, amounting to 41% of total subscribers and 49% of postpaid subscribers. Moving to the next slide, adjusted EBITDA in 2023 decreased by only ILS 11 million despite the impacts of the war.
Free cash flow in 2023 was impacted by timing differences in working capital related to the deferral of customer debt collection due to employee sanctions, as well as improved credit terms with acquiring companies, both of which benefited the corresponding period. The next slide shows the Q4 financial highlights, which has similar trends again, reflecting the impact of the war. On slide 39, we show how prepaid subscribers and ARPU were impacted in Q4 by the war, with a decrease in roaming revenues affecting the quarterly ARPU figure. Turning to yes on the next slide, in 2023, we recorded the highest revenues since 2019, reflecting 2.5% year-on-year growth to ILS 1.3 billion, driven by the launch of a TV and Bezeq fiber bundle, as well as agreements with leading international providers such as Netflix, Disney, etc.
For the first time in the history of the company, we also transitioned on a performer basis to a positive adjusted net profit of ILS 3 million. Lastly, free cash flow improved significantly to ILS 11 million, compared to a negative ILS 17 million in 2022. The next slide shows revenue growth turnaround from 2018 to 2023, with the second consecutive year of revenue growth in 2023. Slide 42 shows how the revenue growth was translated into improved profitability and free cash flow metrics. The Q4 financial slide highlights the impact of the war and lower content sales on revenues compared to Q4 2022. Adjusted EBITDA was impacted by lower revenues and an increase in the U.S. dollar/shekel exchange rate. In the period, adjusted net profit was affected by higher financial expenses. Lastly, free cash flow was impacted by timing differences in working capital.
I will wrap up with yes Q4 key operational metrics. We saw continued growth in the IP-based TV subscribers, with 71% of yes subscribers watching through IP as of the fourth quarter. We also continued growth in the fiber subscribers, up 28%. Sequentially with that, let me now turn the call back to Tobi.
Thanks, Ilan. Moving on to Bezeq International, we saw a general trend of increased ICT activity, offsetting most of the decrease in consumer ISP revenues. Adjusted EBITDA and adjusted net profit showed significant increases in 2023 with 11.9% and 24.4% growth, respectively. On the next slide, we see that revenues decreased slightly, mostly as the decrease in consumer ISP revenues in the year was offset by higher business services revenues due to activity growth and our CloudEdge acquisition. We recorded significant cost savings in 2023 due to a reduction in the consumer ISP activity. The following slide shows a decrease in free cash flow, which was impacted by an increase in CAPEX as well as changes in working capital.
Turning to the last slide, I want to reiterate that we had a strong year, and we remain focused on executing our strategy with our key growth drivers of vast fiber takeup and consistent growth in 5G subscriber plans in Pelephone. Our strategy's execution continues to be successful, evidenced by achieving milestone marks in revenue and profitability growth. Finally, I would also like to mention that we will be attending two conferences over the next few weeks to further engage with international investors. The first is the Jefferies Pan-European Mid-Cap Conference in London on March 19th and the Mizu ho Israel Growth Conference in New York on March 25th. We look forward to meeting you there. With that, I will open the Q&A session. If you would like to ask a question, please raise your hand virtually.
As you hear your name, please be sure to unmute your microphone and ask your question. For the benefit of the people in the room, please introduce yourself and share the name of the company you represent. We will address questions as we see the hands raised. If you later change your mind about raising your hand, you can lower it by clicking Lower Hand. I will now pause to poll for questions. We have our first question from David Kaplan, Psagot. Hi, David.
Hi. You did the introduction for me, so I guess I don't have to. Quick question. You guys reported that you had an agreement with the employees as it regards to structural separation. You didn't mention that at all in the conversation just now, so could you talk a little bit about that?
Yes. Thank you, David. I'll address this shortly. It's been five years since we've actively engaged with the regulators regarding the topic, and we recently re-engaged with the regulator discussing the topic. It's early days to discuss chances or timeline, but as you know and as we state almost every year, that we don't see a reason to keep the current structural separation. We think that in a competitive market with efficient wholesale market and all the terms that the regulator actually set for Bezeq more than a decade ago have met and are less relevant for the existing scenario. There isn't actually other country in the world where you have such a separation. We find that the regulator is listening to our basically comments and arguments, but it's still early days.
Regarding the union, they also understand why it's the right thing to do, specifically the unions of Bezeq and yes, and we work hand in hand in our discussions with the different regulators, specifically with the MOC.
Just a follow-on to that, is any form of structural separation modeled into the midterm guidance that you guys provided today?
No. We don't have any uncertain regulatory reform or something that is like this baked into our projections.
Okay. Thanks.
Thanks. Say again, please. Okay. We have a question from Chris from Barclays. Hi, Chris. Chris, please go ahead. We cannot hear you.
Hi. Yeah. Thanks. Chris from Barclays. Two questions about the outlook, if I could. When you talk about the 1.5%-2% CAGR for the adjusted EBITDA, is that including, sorry, is that post the completion of the fiber rollout and the yes transition and the efficiency programs that you mentioned earlier on? And two, the increased CAPEX for the year, will that require increased headcount, or are the current levels reasonable?
Thank you, Chris, for the questions. So the first question relates or the answer about the 1.5%-2% adjusted EBITDA CAGR in the midterm reflects, yeah, the, let's say, 2026 to 2028 ambitions. It relates to our plans going forward. It's the end of the fiber project and ability also to reduce our workforce to a certain extent within the group. Of course, the operational efficiency project that we are embarking on right now. As for the second question, the answer is no. We won't need any additional significant workforce to accomplish those CapEx projects.
Great. Thanks. That's it for me.
Thank you.
Next question from Sabina from LEADER. Sabina, can you hear us?
Yes. Hi. Good afternoon. I have several questions regarding the infrastructure market. Maybe you can provide us some color regarding the market growth and how do you see it in the next coming years. And you have also provided data regarding your market share, both within the retail segment and the total segment of the infrastructure, which is stable despite the severe competition. So I was wondering, how should I analyze it going forward also? Do you assume that you'll be able to keep the same market share or maybe increase with the deployment of the fiber optic infrastructure? Thank you.
Yeah. I'll start. When you say infrastructure market, you mean retail and wholesale internet, right?
Yes.
Yeah. Okay. So we see significant growth in all aspects of Bezeq fiber optic business. It means takeup, wholesale, retail, deployment. And basically, we're leading in all five parameters of this market. As for deployment, we are almost in 2.2, 2.16 right now. And the total number that we will achieve is around 2.7. So we are not far from that. It will take 2024 and 2025, around that. Partner is not deploying anymore. There isn't our network and other networks as well. And IBC is in 1.5. They say they will reach 2 million or 2.2. It should take them several years. So we see full deployment in the Israeli market from all players within two to three years.
As for the total number of retail customers, you should look at the group level because from our point of view, if you take copper and fiber for Bezeq, the number is relatively stable. But yes is growing rapidly in wholesale internet, fiber optic internet. So if you take yes wholesale and we release this number, it's public. And Bezeq retail, both copper and fiber, you'll see a very nice trend. And this kind of trend should be accelerating in the next years.
Okay. Thank you. But what about the general perspective of the total market, the total end users of the infrastructure, both copper and fiber optics? And the other question that I have in this regard is you don't provide the exact number, but according to my calculations, you have approximately ILS 400 million revenue from the wholesale market. And I was wondering how it might be impacted by further developments and the upcoming decision of the Ministry of Communications regarding the updated tariff of the fiber optics.
So I'll let Tomer take the second one. I'm not sure I understood the first one, so maybe Tomer can help.
I'll try. I'll try. You're asking about market share in the internet-wide market, both.
No. I'm asking regarding the total market.
No. No. I understand.
The growth of the total market, not the market share.
Okay. Okay. So we expect the transition that we've seen over the past two years, and we expect to see in the next several years from copper to fiber, to see it also in the wider market. That's natural. We expect most of the market to move over to fiber from all operators, not 100%, but we think it will reach a relatively high percentage of the whole market. But again, this is our own assumptions. We are not sharing them with everyone. But that's how we are building our own models.
I added another point on that, and thank you, Toby. Sabina, the market in Israel is roughly 3 million households. We committed to roll out almost 90% of them when we are guided to that, which is 2.7 million households, right? So we'll get to this number, as Ron mentioned, in 2 years or so. We also gave you the data regarding current takeup on the network, wholesale and retail, 30%-ish. We will get to 40% in the medium term, which is what you see in many markets and also based on our data pretty fast for incumbent player over a relatively short period in Israel, even faster than average. That's what you'll see probably 5 years from the launch of fiber project or 2 or 3 years from today.
So I think that gives you rough estimates of how the market is going to evolve over the next 2 or 3 years between retail and wholesale. Specifically on your question, reminding you that most of our wholesale subs are partner subs, and they are part of an IRU deal, which even if there is some impact on the wholesale rate, we expect this to have a marginal impact and not a significant impact or material impact on our broadband revenues. That's number one. And number two, I would mention that we are in active and healthy discussion with the regulator regarding this topic and the direction they will be taking regarding wholesale rate in general, given that globally, you see, first, the rates in Israel are relatively low on wholesale, A, and B, you see a competitive market both on our networks and on other networks.
There are two other networks in Israel. So we believe, A, no material impact from every change that would come, A, and B, that the regulator understands the market and where it's heading.
Thank you, Sabina. Our next question comes from Liran Lublin from IBI.
Hi, guys. Good afternoon. I have a question about Bezeq International. Maybe you've been entering a new market, and you've been doing it in baby steps. Do you have any thoughts about maybe M&As or any major M&As in the coming future?
So I'll touch that briefly. First, we did our first acquisition at Bezeq International, a successful one in the cloud integration world a little bit less than two years ago. We are looking at small tuck-ins, small tuck-ins, but we do not expect significant M&A on that front. But we are looking at tuck-ins that are, A, synergistic, and B, help diversify the product and the market set that Bezeq International is offering, specifically within ICT.
Maybe I'll ask another one about that issue. Can you maybe give us a look forward, maybe a few years from now, about how do you see Bezeq International evolving or what kind of market you're aiming at?
Yes. Bezeq International is still transitioning, as you know well, away from the private retail ISP market. It's really two parts to the business. One, it's critical infrastructure services like the subsea cable, the data centers, and hosting services. The other side, it's really integration classic ICT business. We are aiming at the high end of B2B market, government, military project, large integration project we excel in. We consider ourselves the leader in the market or one of the leaders in the market within these sectors and will continue to grow, especially targeting these type of integration projects.
Thank you.
Thank you, Liran. If there are any further questions, we'll pause for a moment to see them coming. If there are no further questions at this time, I would like to thank you all for taking the time to join us today. Should you have any follow-up questions, please feel free to contact our investor relations department. We look forward to speaking to you on the first quarter 2024 earnings call. Thank you all.