Welcome everyone, and thank you for joining us on Bezeq's 2023 first quarter earnings call. I am Tobi Fischbein, Bezeq Group CFO. With us from the Bezeq Group senior management team are Mr. Gil Sharon, Bezeq's Chairman, Mr. Ran Guron, Bezeq's CEO, and Mr. Ilan Sigal, CEO of Pelephone and yes. Before we start, I would like to draw your attention to the safe harbor statement on slide two of our Q1 2023 investor 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. Let me now turn the call over to our Chairman, Mr. Gil Sharon, for his opening remarks.
After his introduction, I will continue the presentation of our group financial highlights, followed by Ran, who will discuss Bezeq Fixed Line results, and Ilan, who will address the results of Pelephone and yes. Gil?
Thank you, Tobi. Let's start on slide three. We're proud to announce that the first quarter of 2023, we have achieved two record-breaking results. In terms of revenues, we showed growth in all key group companies, leading to our best quarterly revenue results since 2018. We also had a record quarter in fiber take-up in both retail and wholesale subscribers
Yes revenues continue to grow as it successfully markets its TV and fiber bundle and TV and Disney+ package. Pelephone continued to grow its 5G subscriber base, contributing to ARPU. As a result of our continued debt reduction and improved leverage ratios, both Israeli credit rating agencies upgraded our outlook to positive, reflecting our financial strength and positive momentum. The dividend payout was upgraded this year to 60% of net profit, reflecting a yield of roughly 4%.
The next slide demonstrates our technology and business roadmap and the progress made so far. In Bezeq Fixed Line, we have over 1.7 million homes passed and total take-up of 380,000 subscribers on our network, resulting in an 18% increase in broadband ARPU since 2020. For 2023, our goal is to reach 2 million homes and in the midterm ambition, to pass 2.7 million homes, about 85% of Israeli households. In Pelephone, 5G subscribers reached 860,000, representing 33% of total subscribers and led to 12% increase in service revenues compared to Q4 2020. In the midterm, we expect 5G users to reach 80% of all subscribers as we continue to provide excellent value for our customers.
In Yes, the total TV subscribers reach 580,000, of which 356,000 or 61% are IPTV customers, making Yes the largest Israeli IPTV operator. In the midterm, we expect 100% of our Yes subscribers to migrate to IP, which will lead to significant OpEx and CapEx saving. In the next slide, we present the group's financial highlights for the first quarter, showing that the group's revenues in the quarter amounted to ILS 2.3 billion, up 2.4% year-over-year and the highest since 2018. Adjusted EBITDA was ILS 936 million, down 2.3%, and adjusted net profit was stable at ILS 321 million.
Free cash flow for the quarter was lower at ILS 345 million, mainly due to timing differences in working capital. Our financial debt decreased by ILS 331 million. That helped improve our leverage ratio. Turning to the next slide, which showcases our operational highlights. For Bezeq Fixed Line, we achieved excellent result across the board. Our fiber subscribers reached 380,000, and we have now passed 1.75 million homes with our fiber deployment, 47% growth year-over-year. For Pelephone, our seller or service revenues increased 1.8% to ILS 445 million for the quarter, and our ARPU, excluding interconnect fees, was up 1 shekel year-over-year. For yes, total TV subscribers reached 580,000, representing the tenth consecutive quarter subscriber growth.
ARPU was up ILS 4 sequentially and reached ILS 185, driven mainly by successful marketing of Disney+ package. Looking ahead, industry reports expect that artificial intelligence will become the catalyst that redefines the telecom industry, leveraging fiber optic and 5G networks. Our continuous investments in advanced communication infrastructures and technological leadership will allow us to continue leading the market and meet the exponentially growing data needs. Let me turn the call over to Tobi to discuss the financial results in more detail. Thank you.
Thank you, Gil. The next slide shows the group's key financial metrics for the quarter. We posted record revenue since 2018, up 2.4% year-over-year to reach ILS 2.3 billion, driven by enhanced performance in all key segments. On the profitability side, adjusted EBITDA declined slightly due to a decrease in telephony tariffs following the Ministry of Communications regulatory change as of April 2022, as well as a one-time grant to fixed line permanent employees following a salary agreement in principle in the public sector. Free cash flow was ILS 345 million, a decrease of 39.5% due to timing differences in working capital relating to employee sanctions that resulted in higher cash flow in Q1 2022. Moving to the next slide, where we show the key operational metrics for the past five quarters.
On the subscriber side, we saw growth in cellular, retail, broadband internet, and TV subscriber numbers. One thing to note here is that for the first quarter of 2023, we are seeing a sequential increase in total wholesale inter-internet subscribers for the first time since 2018. On the ARPU side of the slide, we see an impressive 9.1% increase in retail internet ARPU and a 4 ILS sequential increase in yes TV ARPU, driven by our agreements with international content providers. Telephony ARPL decreased year-over-year due to the MOC tariff reduction in Q2 of 2022. Turning to the next slide, net debt decreased by 331 million ILS, or 6% year-over-year, to 5.3 billion ILS. The group's net debt to EBITDA ratio is now at 1.6, down from 1.7 a year ago.
Both Israeli credit rating agencies have upgraded our outlook from stable to positive due to our continued progress in improving the group's financial ratios as well as the group's overall strategy and business positioning. Moving to the next slide, we would like to reaffirm our guidance for the year and remain confident in our progress. Turning to the next slide, we are sharing our ESG milestones and targets. We have signed the United Nations Women's Empowerment Principles to help further advance gender equality movements. This commitment is in line with our goal to have equal representation of women within Bezeq management, with at least 40% of the board of directors being female by 2030. Similarly, we aim to have at least 20% of our workforce come from diverse populations by 2030.
This year, our subsidiary companies joined the ESG program and commitment to our ESG targets. I will hand it over to Ran, who will share results from our fixed line operations. Ran?
Thank you, Tobi. In the first quarter of 2023 was another strong quarter for us, with a recording fiber take-up of 84,000 for the quarter. The number of home passed reached 1.75 million, with 263,000 retail fiber customers as of today. Total revenues grew 1.4%, driven primarily by broadband internet and cloud and digital services, which grew by 10.4% and 7.4% year-over-year respectively. Further, retail internet ARPU grew 9.1% and reached 120 ILS. The next slide details the financial highlights. The decrease in adjusted EBITDA by 3% was mainly due to the MOC decrease in telephony tariffs and a one-time grant to employees following a salary agreement in principle in the public sector. Decrease in cash flow was primarily due to changes in working capital.
The following slides show our achievements in the broadband internet that reached revenue of ILS 479 million for the quarter, representing a 10.4% increase year-over-year. Retail internet ARPU increased by 9.1% to ILS 120 through continued growth in both fiber customers take-up and increase in ISP customers. The next slide details our fiber take-up both in retail and wholesale. On the retail side, our acceleration plan in the second half of 2022 greatly improved retail take-up since the third quarter of 2022. Momentum accelerated with 48,000 net adds in the first quarter, pushing total retail fiber take-up to 263,000 today. On the wholesale side, our IRU agreement with Partner, which began in the first quarter this year, accelerated our wholesale take-up for the quarter with 36,000 net adds.
Moving on to fiber deployment on the next slide. Bezeq continues to lead Israeli in fiber take-up with 380,000 retail and wholesale customers. Also notable is the improvement in average broadband bandwidth, which is now at 250 Mbps, 66% higher year-over-year. On the next slide, we share our roadmap for technology development in Israel. By the end of 2024, we are expecting to provide our customers with the Be Multi Fiber router, which will bring the average broadband bandwidth to 10 Gbps. By 2027, we expect that our Be4 router will provide Israeli users with bandwidth of 25 Gbps. This quarter, we also conducted a pilot with Nokia in which we demonstrated the ability to provide broadband bandwidth for up to 25 gigabytes using advanced technologies. Moving forward to the next slide.
We saw growth across the board, except for the decrease in telephony revenues due to the MOC tariff reduction. Our data revenues continued to grow, but were offset by the decrease in tariffs and revenues from ISP companies. Cloud and digital services grew 7.4% year-over-year from virtual exchange services, and other revenues were also up, mainly from infrastructure projects. Our operating expenses, on the operating expenses slide, salaries were up mainly due to the one-time grant to permanent employees following a salary agreement in principle in the public sector, as well as fiber optic recruitment. Expenses went up year-over-year due to higher subcontractors and material costs related to the fiber optic infrastructure projects. Other expenses declined mainly due to higher provisions for legal claims in the first quarter of 2022. Moving on to the next slide.
In summary, despite the impact of the MOC telephony tariff reduction, our accelerating fiber take-up and continued deployment of fiber network, combined with the IRU agreement with Partner, has further solidified our leading position in Israel. We are confident about our strategy, which has been proven effective with this quarter record results. Looking forward, our widespread fiber deployment, combined with our strong take-up, will help Bezeq to maintain its leadership and capture additional growth potential. With that, I will now turn the call to Ilan to discuss Pelephone and yes.
Thank you, Ran. Pelephone posted strong results with the highest quarterly revenue since 2018, driven by a recovery in roaming revenues, growth in total subscribers and 5G subscribers, as well as an increase in equipment revenues. In the next slide, our total revenue reached ILS 660 million in the first quarter, representing growth of 2.7%. Adjusted EBITDA and adjusted net profit decreased mainly due to an update in estimated right of use assets for past periods recorded in Q1 2022. Free cash flow was impacted by timing differences in working capital related to the deferral of customer debt collection from 2021 to 2022, which was due to employee sanctions. Moving to the next slide, total Pelephone subscribers reached 2.58 million for the quarter, including 11,000 postpaid net adds.
5G subscribers reached 860,000 today, representing 33% of total subscribers. ARPU, excluding interconnect fees, increased by 1 ILS shekel year-over-year. The graph displayed on the next slide shows the continued turnaround in service revenues over the last few years. We continue to show positive momentum. We have posted higher service revenues in Q1 2023 than pre-COVID levels in Q1 2019. Moving on to Yes on the next slide. As the largest IPTV operator in Israel, Q1 2023 marks the 10th consecutive quarter of subscriber growth for Yes. We reached 580,000 subscribers. 356,000 of them are watching now through IP broadcasting, of which 110,000 are STINGTV customers today.
Looking at the key financial highlights for yes in the next slide, revenue for the quarter increased by 4.1% to ILS 329 million, mainly driven by the TV plus Bezeq fiber bundle launch and agreements with leading international content providers. Adjusted EBITDA decreased due to an increase in content expenses and the launch of the bundle. Free cash flow for the quarter increased by 115% due to timing differences in working capital. Moving on to the following slide on the yes operational metrics. Net subscribers grew for the 10th consecutive quarter by 2.8% year-over-year to 580,000, and 61% of yes subscribers are now watching IPTV. STINGTV subscribers reached 108,000 at the end of Q1 2022, at 21.3% increase year-over-year.
ARPU also grew ILS 4 sequentially, driven by agreements with leading international content providers. The graph on the following slide showcases our continued turnaround in yes. As you can see, our strategy has consistently enabled us to grow revenues for the segment over the last few quarters. With that, let me now turn the call back to Tobi. Thank you.
Thank you, Ilan. Moving on to Bezeq International in the next slide. Revenue growth was driven by the increase in ICT activity, which offset the decrease in consumer ISP revenues following the regulatory reform as of April 2022. The next slide details the financial highlights for the business. Adjusted EBITDA increased by 45.7% to ILS 51 million, mainly due to lower expenses driven by lower consumer ISP activities. Adjusted net profit for the quarter was ILS 20 million, compared to a net loss of ILS 4 million in Q1 of 2022.
Our focus on ICT solutions for the business sector is paying off. We are investing significant resources in this sector, which will continue to be the growth focus of Bezeq International in the coming years. Turning to our concluding slide, Bezeq's Q1 result showed record quarter results in revenues and fiber take-up. Yes, revenues continue to grow as it successfully market its TV and fiber bundle and Disney+ package. Pelephone continued to grow its 5G subscriber base, contributing to ARPU. As a result of our continued debt reduction and improved leverage ratios, both Israeli credit rating agencies upgraded our outlook to positive, reflecting our financial strength and positive momentum. The dividend payout was upgraded this year to 60% of net profit, reflecting a dividend yield of roughly 4%.
Lastly, I want to remind our listeners today that after this call in English, we will hold an earnings call with Israeli investors and analysts in Hebrew. With that, I will open the Q&A session. If you would like to ask a question, please raise your hand virtually using the raise hand button in the Participants tab. In the mobile app, you can raise your hand by tapping the Raise Hand option in the More tab. 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 the 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. The first question, comes from Tavy Rosner with Barclays. Hi, Tavy.
Hi. Good afternoon. Thanks for taking my questions. I wanted to touch on Pelephone, please. If we look at slide 23 with the underlying ARPUs, between 40%-43%, in the same period, you talked about an increase in the level of penetration of 5G to 33% this quarter. I guess I was kind of expecting that, you know, a higher 5G penetration would translate to higher ARPUs. Am I missing something or is there a driving force that's kind of keeping ARPUs where they are now?
Thank you for the question. As you can see on the slide, we reported an increase of ILS 1 in ARPU, without the incoming airtime and with it. On one hand, the ARPU was positively affected by increase in roaming and the transition to 5G packages. On the other hand, we see a decrease in other revenues. One is at the end of the Ministry of Education project that we had Q1 2022, and in some content services in 4G packages that reflected the ARPU. 5G and roaming are taking the ARPU up.
Got it. Okay, thanks for that. I wanted to touch on costs. We're seeing, you know, wage inflation in Israel, not specifically to Bezeq, but I was thinking, you know, how you guys are thinking of costs going forward. I mean, last two years, you've kind of managed to keep the OpEx level rather flat. Is that something that you think is manageable in 2023 and 2024?
I will address the question on cost. Naturally, you know, as the group is expanding and growing its revenues, you know, also the cost base grows as well. In this quarter, we have some, you know, one-time costs, such as, for example, the one-time grant to the permanent employees at Bezeq Fixed Line, which, by the way, has to do with the public sector agreement in principle and not necessarily anything new at Bezeq. As I said, it's a one-time. There are some other areas that are growing together with the business, together with the revenues. As we get more experience in deploying fiber and, you know, making installations, we are also becoming more efficient in doing so.
In other parts of the group, we can look, for example, at yes, where we have now contribution from the bundle, from the TV and fiber bundle. That also comes together with some cost, but it's going to contribute to our bottom line group wide already now in this year. At Pelephone, we have some again, you know, comparison with Q1 of 2022, which had some reduction in cost, but again, of a one-time nature, and that's how it seems like a bit of an increase in cost there. Going forward, we see the group revenue growth contributing also to the EBITDA growth. We have actually reiterated our full year guidance, which calls for an increase in EBITDA, stable net profit on an adjusted basis.
When you look also at the reported net profit, you would see probably an increase there as well.
Great. Thank you. That's all for me.
Thank you, Tavy. Next question from Andre from UBS. Hi, Andre.
Hi, everyone. Thank you for the presentation. Andre here from UBS. I had two question, please. One was a follow-up on Tavi's question on cost and specifically on the subcontractor cost. I understand you now have an accelerated kind of trend in terms of, you know, take up every quarter in terms of fiber homes. Or how should we basically think about the relationship between, you know, various KPIs that you have and these subcontractor costs? When do you expect them to kind of, you know, level off or even start coming down? I guess this is not a very short-term period, but what are kind of the considerations here and the relationship?
Second was just what was the one-off basically that you mentioned in terms of the, in terms of the, employee costs that you had with the unions, this quarter, please?
Sure.
Do you want to discuss the subcontractor, you know, cost behavior?
Subcontractor. Since we are growing above plan, meaning we install a lot more than we intended to do, we in fact use more subcontractors. We renegotiated our contract with subcontractors, the tariff is actually lower. We managed to maintain the cost of subcontractor relatively moderate, referring to the quantities of installations that we do. I believe that the level that you see now is approximately the level that you will see in the future, even though we intend to accelerate the installation even more. In the future, in the 2, 3 years future, in the next future, this cost will be lower once we get out of the fast-growing phase of the network.
thank you very much.
I will address the second question, Andre. In part of the collective agreement of Bezeq, goes back over 20 years now, or almost 20 years, and it provides for the permanent employees, which today are less than 50% of the employee base, about 1,800 employees, the ability to get whatever a public sector employees in this country gets. There has been recently an agreement in principle, and we paid a one-time grant of about ILS 11 million, which we recognize in the first quarter. Most of that amount, it's in the salary cost line. There will be some additional components to that going forward, but this was just a specific one-time grant.
Thank you. That is clear. If I may have a second question, please, on unregulated rates. If you can remind us, I think you're now stepping down to another kind of lower rate in terms of the fixed voice. Is the run rate decline from 2Q23 onwards expected to be roughly the same that you've seen over the past year? That's one. Then also you mentioned, you know, new product in terms of fiber over the next couple of years, higher speed. What is the kind of negotiating process with respect to wholesale rates on those new fiber products with the regulator, please? Thank you.
Could you please, Andre, repeat the first question because I didn't get it completely.
Sure.
Something about regulation.
The first question was on fixed voice rates.
Telephone.
Yeah. From first April, I believe you have a new rate applied. I was just curious if the rate of decline that you are expecting, you know, going forward is quite similar to what you've seen in the prior year. The second one was around, you know, rates that you expect to be negotiated on this 10 and 25 gig tariffs that you expect to launch in the coming years, if those will also create an opportunity for upsell, you think?
I'll take the first one and on the second one on the telephony tariff reduction. We now the second step down is in July. In the second quarter, actually, we will have a quarter which is comparable, sort of apples to apples to Q2 of 2022 when the first step down took place. Sam?
I'll take the second one. Well, in general, upgrades, fiber to fiber will be a day-to-day part of our lives during, I believe, 2024 to 2025. In fact, nowadays, most of the customers are in 1 gigabyte, so there is a lot of room to upgrade them to 2.5, which is in the existing technology. As we announced during 2024, we'll also launch, 10 gigabytes, so it will leave more room for upgrades. Of course, we'll announce it when it's ready, and it will be available to our competitors that are using our network as well.
Thank you very much.
Thank you. Next question from Sabina from Leader. Hi, Sabina.
Hi, good afternoon. First of all, congratulations on the results.
Thank you.
Another impressive quarter. I have a question regarding the fiber optics you've mentioned. First of all, it was a very positive surprise, of additions both in the retail and the wholesale segment. I was just wondering if it's a... If we should see in the next coming quarter, you know, the same scope and how much Partner influenced the wholesale, and should it continue or maybe at a lesser extent during the next quarter, just to understand how to model it for the rest of the year.
Okay. So I'll take this one. Second quarter includes the Passover vacation and many national holidays. What we've seen nowadays is the same pace. Meaning second quarter, of course, will be lower because of lack of working days, but should be in the same pace. I cannot say how it will be in the second half of the year, but of course, we intend to keep it going the same way. Pushing for number one in the retail market. That's for Bezeq. For Partner can use the whole agreement. It's 124,000 lines, and then 48 more, so they can use as much as they want.
I don't know if they will keep on growing, but they are growing good pace and you can see it, and you've seen probably in Partner quarterly reports in two weeks or so, we'll see their result. I can not say anything about the future, but they have a lot more to take as part of that agreement.
Maybe another follow-up on that. Regarding the competitive dynamics in this segment, so you guys are doing very impressive job, and I assume that your competitors are not very happy with this. As, you know, stronger you get, they might be more stressed. Do you see any changes in the competitive environments regarding, you know, pricing environment and some marketing campaigns of the competitors? Because you're growing, the ARPU is growing, and I'm just trying to understand going forward, how sure... what confidence level you have that there will be no significant change in the pricing environment or competitive pressure in the segment?
Well, I cannot say, but I assume that in the coming year, the main dynamic in the market will be strong demand for fiber optics. Once we reach new territory, there is at least 20%-30% of the population of the household that are waiting for us, and there is a strong demand. You know, the market is growing, the fiber optic market is growing rapidly. As I see it now, there is enough for everyone. I can say that maybe this dynamic will continue in the next year. When the market becomes more saturated, we might see a change in dynamics, but now, the market is only accelerating, so there is enough for everyone.
Thank you.
Thank you, Sabina. Next question from Siye, from Citi. Hi, Siye.
Oh, hi. Good afternoon. It's Siye from Citigroup. I just have two question, please. The first question is actually on your international business. I understand that you would face a tailwind from the ISP shutting down. You continue to report growth on the ICT side. I'm just wondering if you can elaborate and where is it growing and how should we expect the trends going forward? The second question is on TV. You mentioned that you have content cost increases. I'm just wondering if you could give us an update of where are you with that negotiation, and should we expect the content cost to stay at the current level going forward? Thank you.
All right. Thank you, Siye. I'll take the first question and let Ilan address the second one. At Bezeq International, you know, we are managing a transition, where, as you rightly said, you know, our consumer ISP business is coming down due to regulatory changes, and we are focusing in growing our ICT business. In this quarter, we have delivered that kind of growth, some of which came as a result of a small acquisition we did a year ago, of a company called CloudEdge, which focuses on the, you know, Microsoft Azure's cloud. We are actually growing in most areas of the ICT business.
At the same time, reducing costs as we are, laying off employees as part of the agreement we reached with the unions of Bezeq International. We have more of that, you know, in the next several quarters. Ilan?
Yes. About the content, payments, the main increase is due to payments in connection with international content providers. This is the main increase. We, we continue our collaboration with those international content providers like Disney+, Netflix and Discovery. We will continue to collaborate. We're very happy with the cooperation, so we will stay here.
Thank you very much.
Thank you, Si. Have a questions from David Kaplan, Psagot. Hi, David.
Unmuted.
The first question is on the a little bit, I guess, on the regulatory side, as was just brought up by one of the other analysts. I'm sorry. I'm David Kaplan from Psagot. Forgot that part. On the yeah, on the, on the. Sorry, I lost my train of thought.
Thank you.
On Bezeq International. First of all, as we talked a little bit about, we, you know, we see the beginning of the, I guess, the tailwinds or the beginning of the lowering of the cost. Is that something we should see accelerating over the course of this year, or should we expect it all as coming all at once in 2024?
Basically, you know, when this quarter was very good, very positive for Bezeq International. You know, in managing that transition, we cannot promise that every quarter will be the same. We still have, you know, a substantial amount of, you know, ISP consumers there, but eventually, you know, we'll shift. Some of them will move over to Bezeq or elsewhere. We cannot, you know, anticipate exactly what will be the magnitude of those shifts vis-a-vis with the growth that we are experiencing on the ICT side. Having said that, we definitely, you know, into the medium term, see this company, you know, overcoming that kind of turnaround and focusing completely on the ICT business, which is a growth area and improving profitability along the way.
Okay. The second question is on the wholesale on the Bezeq Fixed Line side. To the question of regulation, I think if we're able... If we, if I'm doing my calculations correctly, I believe the average revenue per line on the wholesale actually increased significantly in the first quarter relative to where it was in the past. Now, I know part of that has to do with or most of it has to do with Partner and an agreed upon price set in the IRU with Partner. Is that something that you think the regulators might look at and come and have something to say? That's it for me.
It's Ran. I'm not sure what your calculation exactly is, there are more fiber optics wholesale lines. The output for fiber is more than copper, obviously. Once the share of fiber is increasing in the line base of the wholesale, obviously the average will go up. Of course, IRU deals with Partner accelerate the number of wholesale fiber lines that are active. That's the case from my point of view. Thank you, David. We have a question from Omri Lapidot from Leumi Partners. Hi, Omri.
Hi. Yeah. Omri Lapidot from Leumi Partners here. I wanted to touch on IFRS 16 costs. It seems like this quarter you had an increase roughly of over 10% on IFRS 16 costs. Is there something unusual here, do you think? Is it representative? What, what do you see for the upcoming years? Is it mostly inflation? Thanks.
Thank you for the question. We have two elements here. One is of a 1-time nature, especially comparing to the Q1 of 2022, where we had actually a reduction in our IFRS 16 costs at Pelephone due to an agreement that we have with, you know, the State of Israel that manage the lands. It's related to the, you know, the rights of use of certain assets related to the cellular network. When you do the comparison, you see that kind of an increase that you mentioned. In addition, there are some additional, you know, increases to energy and a little bit of inflation also influencing the IFRS 16 costs. We wouldn't see a similar increase as you have seen this quarter going forward.
Okay, thanks.
You're welcome. 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 second quarter 2023 earnings call. Thank you.