Good afternoon, everyone. I am Roberta Versiani. I am part of the U.S. Telecommunications team at Citi, and I am pleased to be joined here today by Tomer Raved at our Global TMT Conference. Tomer is the Executive Chairman of Bezeq Telecom, and I want to welcome Tomer, and thank you so much for being here today.
Thank you so much.
All right. Let us get started. To start at a high level, you provided a few months ago a medium-term outlook through 2029, and I just wanted to ask, what gives management confidence in achieving those targets, and which assumptions do you view as the most critical to delivering on revenue, EBITDA, and free cash flow ambitions?
Thanks, everyone, and thank you for hosting me. We made a significant strategic shift in the business six, seven years ago, and we were able to start providing three or four years guidance every couple of years. So far, if you look at our track record in the past decade, we met or even beat every one of these targets. The way we have very detailed bottom-up planning, the way we structure our business and our budgets, and also the investment cycle. A lot of telecom companies, they get to end of the CapEx cycle, which is never ending. Where we go into a project, we have very good visibility. First, because we are by far the number one incumbent in Israel. If you think in U.S. terms, put Verizon, AT&T, and Lumen combined, we have a much broader fiber network.
Secondly, we enjoy the tailwind of Israel. Small country, dense country, mostly concentrated around the main cities, and it is very easier to plan the cost per passing in our CapEx cycle. As a result, we were able to really deliver on our results in the past five years, and we really believe in transparency to our shareholder. We do not have any controlling stake. 50% of our shareholders are global shareholders, mostly pension funds from U.S. and Europe and also Israeli ones, and they view us, and I think that the right model for other telcos as well, as someone who is able to deliver sustainable results for the long term. We marry that with growth because we are able to invest in the network and really create a fiber network, and a 5G network that is ready for the next two decades in terms of capacity and bandwidth.
We have very good visibility on the strategy to converge customers from the old network to the new network, from copper to fiber, from 4G to 5G. You have seen consistently every quarter the growth in ARPU, as a result, the growth in cash flow, and the decline in CapEx over the past year, which really allow you to see what the right KPI, to your question, to deliver our ILS 3 billion revenue target for 2029, married with almost ILS 1.5 billion EBITDA. That translate into a double-digit growth in free cash flow, and that does not include any new strategic initiatives and other mergers we talked about that are currently in planning. This is the base case. The base case for Bezeq, the double-digit growth in free cash flow with 80% dividend payout and incremental buyback that we have started in the past year.
Mm-hmm. Very helpful. We are going to talk about fiber in a little bit, but before that, when you think about EBITDA growth specifically, what are likely the biggest drivers over the next few years? For example, fiber penetration, fiber-related ARPU, mobile growth, cost efficiencies. Where are you seeing this growth coming from?
If you look a few years back, we invested a lot in efficiencies, and our business is a lot more efficient now with still some operating leverage, but we operate at a 45% EBITDA margin with 60+ at fixed line business, so pretty healthy margins. But still, we continued, and we did communicate this number to the market. We expect additional 14% reduction in headcount over the next three to four years, which would allow for flattish salaries, expenses, and as a result, the growth really go to the bottom line. You asked about what the levers are. The levers come mostly from, A, fiber take-up. We have 90%+ of the country already rolled out with fiber to the home, de facto done with the country. When you have more than 3 million households, the main focus is take-up. We are today around 35% take-up.
We are targeting to reach 43% take-up on our fiber network. It is a growing network, given that Israel is the largest or the fastest-growing population in the Organisation for Economic Co-operation and Development. First in terms of population, and second in terms of GDP per capita, you have the strongest macro tailwind you want for a telco and for a financial services firm to really rely on the growth, even without gaining incremental market share and staying where we are today. We will reach the 43% take-up in the next three years. At the same time, we are targeting ILS 150 ARPU, which is $50 ARPU per household. We are already now at ILS 142.
Historically, and also going forward, we are very confident, and to some extent even conservative on where we are heading from the KPI perspective. These are the main levers to generate the single digit, mid-single digit EBITDA growth, and we can probably do more than that.
Mm-hmm. Okay, maybe staying on the topic of growth, let us talk a bit about the competitive environment. How are the competitive dynamics evolving across fixed broadband, mobile, and TV, and how do you think that could affect your medium-term targets if anything changes in the competitive intensity?
Infra-wise, infrastructure-wise, the fiber network in Israel is more or less established. There is one nationwide fiber player, which is us. There is an Alt-net that covers 65% of the country, and that is de facto it. In two-thirds of the country, you have two players, and the other third you have us with 100% market share. But de facto, you have two networks competing, healthy competition, but with long-term agreement to most players, just so you know who plays in which networks for the next 25 years. In terms of retail broadband, you have four players. We are the largest one, and the number two and number four are also riding our networks, we have an advantage there.
It's a competitive market, but given the ongoing conversion from copper to fiber across the market and the fact an expensive country with relatively low telco costs, the willingness to pay for the higher bandwidth. We started with 100 MB five years ago. Now, 90%+ of our customers are 1 gig plus, and we already have more than 15% of our customers at north of 1 gig, 2.5, and 5 gig download speeds. That gives us comfort of the willingness to pay because each incremental speed is additional 15%-20% of ARPU. Mobile is probably the most difficult segment in Israel. You have four MNOs, three networks, and 20 MVNOs. Israel has the lowest ARPU for cellular on the planet, with sub $15 for unlimited packages. Very cheap for an expensive country.
That continues to be the most difficult place to compete with, and that's an area where cost-cutting is more important, but every shekel and ARPU go directly to the bottom line. One shekel and ARPU in cellular derive roughly $10 million in annual EBITDA, speaking about EBITDA levers. As a result, we're focusing on normalizing and playing more rational in the competition around cellular. The change in ownership we are now seeing, the three main players already have private equity or private equity-like owners. The fourth one is now changing hands, which is, by the way, [NRT's] subsidiary. That way you hope you see more rational behavior, in terms of ARPU play, in terms of go- to- market, and not continue to drive ARPU like you've seen 10 years ago. The last topic, which I think is similar to the rest of the world, is TV.
TV is competitive. We're the number one IPTV player with the best content. We've seen some consolidation and some content sharing on that front, but that's eventually TV, the tool to sell broadband. If you can lever that the right way, we should be in a good place.
Mm-hmm. Very clear. Staying a bit on the topic of mobile, where do you see the biggest opportunities for growth despite all the competition, and where do you think it's mostly going to come from? For example, market share gains or customer usage because it's growing everywhere. Migration to premium plans. How is your pricing power in the market compared to previously?
Surprisingly, although the mobile market is very competitive in Israel, you don't see significant shift in market share.
The market is growing very fast, at 3% per year, even more. Given the population growth and given the need for IoT and additional connectivity, Israel is very fast to adopt tech-enabled product. You have more than 1.5 average per person in terms of SIM cards. We see the mobile market healthy. We see high single-digit growth in EBITDA. You've seen some bumps with roaming given the regional conflict, but overall, the mobile market had a lot of opportunities given, again, each shekel in ARPU does not require incremental cost. The more usage you see to 5G and probably in the next five, six years, even 6G, there's a significant opportunity to use the existing cost structure, with the existing spectrum fees, to grow very fast. It starts and ends with rational regulator, which I think we have today on mobile, and with rational competition.
Okay.
We may see eventually, like we see in Europe, consolidation. We started seeing some consolidation. We just announced that number two player buying number five. We are very close to completing this transaction, and I believe that in the next three to four years, we will see more and bigger consolidation in the market. Whether it's been driven by us or by others, we will definitely see that.
Okay. Very interesting. Let's talk about fiber. It has been a key pillar of your strategy, so let's spend a few minutes here. You have more than 3 million homes passed and an ambitious target of take-up rate. How should we think behind the scenes about your go-to-market strategy, and which initiatives do you have or you are working on right now to reach this higher penetration in the medium term?
Bezeq was late to fiber, right? The market started selling fiber gradually between 2015 - 2020. We had some debate with the regulator. When we launched, the entire market realized pretty fast we are the leading player, and we became number one in less than two years. Fiber is the present and the future of fixed-line communication, especially in a country like Israel where it's very dense. You can get with fiber to the home to every single household. In cost per passing, if in the U.S., in New York, it's $1,000 per passing, and in the rural area, it's $15,000 per passing. In Israel, the average cost per passing is ILS 150. Give you some context on ROI.
As a result, even with $50 ARPU, you can make significant ROI on fiber, both on the consumers on the B2C side, on the private sector, and also on the business sector. We have very significant market share on the business sector. We sell a lot of value-added services, speaking about go-to-market in the business sector. We also, on the private sector, sell a lot of complementary product, like routers and boosters and additional smart home solutions. But the output strategy need to start with managing the right speeds, being able to invest the CapEx ahead of time. So we upgraded the core network to allow the network and to ourself to service 25 or even 50 gig per household. So you tell me when you think you need 25 gig downloaded at home. At least 10, 20 years, we are ready for that.
Wow.
This fiber strategy, which started with terrestrial, and we will talk about it later in the discussion, really evolved into a more regional play, given we really developed one of the strongest fiber ecosystem in Asia, all terrestrial, all underground, and that's complement not just the needs of data centers, NVIDIA, Google, and Microsoft at putting a lot of AI training centers in Israel. Eventually, all of them need fiber connectivity. We have the ducts, we have the conduit, and we have the active network on the back end and the front end to basically serve this entire ecosystem.
Very helpful. You talked a bit about the gig plus customers. How do you see this potential opportunity for continued higher speed tier migrations over the next few years? Do you think it's something that's going to continue? Now people think 1 gig is enough, and then it becomes like 3, 4.
It's an excellent question. Look, the usage of data in context globally is doubling itself every three years. Now with AI, people talk about two to 2.5 years to double the data consumption and broadband needs. Pretty fast, right?
Yeah.
When you think about compounding. So, in 8 to 10 years, we're talking about 10x. As a result, the fact we really put in ILS 3 billion of CapEx over the past five years to bolster the network, we can manage the right supply, demand, mostly demand, the right way. So when we launched 1 gig four, five years ago, 90% of the package I mentioned earlier were like 300-ish, 600. Now we're talking about everyone asking one gig and more. I expect that you'll see probably closer to 50% of our customer with north of 1 gig in three years. Luckily, the network does not require incremental CapEx to support that. So that, I think answers the right, and the fact that you can really charge incremental 20% in ARPU for each speed level really helps.
We do not have symmetric speed in Israel, so you do 10% of the upload for any 1 gig of download. So one gig is actually 100 MB in terms of upload. So when we sell 5 gig, we sell 500 of upload. It also another customer behavior strategy to help manage the network demand.
Interesting. Great. Shifting gears to capital allocation. With leverage of roughly 1.6 net debt to EBITDA, what are you currently evaluating in terms of investment opportunities beyond your existing business footprint?
We published a very nice pyramid of how we manage our capital allocation decision. Yes, we have, I would call it optimal leverage and very strong balance sheet with 1.6, 1.5 net debt to EBITDA. Historic low for the group, but really gives you a lot of flexibility. First, we focus on the maintenance CapEx, which has been declining, but is roughly ILS 500 million a year of maintenance CapEx. The decline come mostly from fiber, because we finished the project deploying the country, and the cellular CapEx stays elevated because we continue to deploy more and more towers on different spectrums. The second layer is really growth CapEx.
We focus on high return projects, mostly organic and some inorganic, as I mentioned, buying cellular companies, buying cloud related companies, and also investing in new initiatives like subsea cables, which I will elaborate in, but we have a lot of flexibility to do both organic and inorganic growth CapEx initiatives to make sure we further grow net income and free cash flow yield as a result. Our threshold for ROI are very high given the almost double digits free cash flow yield we trade in. Then eventually we see, and we started with the debt management, but we really like where we are from a leverage perspective. Even if we go towards the 2x levers, we are still in a very good place. We focus on shareholder remuneration, so dividend and buyback.
We are very consistent on our 80% payout, which we have seen growing in DPS because net income is growing at 88%, at least based on our guidance. You have 80% payout, 8% growth in net income, 10 %+ growth in free cash flow. Given the free cash flow is growing faster than net income, we started doing also buybacks. You have the combination of all this pyramid, that is how we make capital allocation decisions. So far it is working, but you see us doing more both on the DPS growth on one hand, and also on the M&A front as we started doing in the past couple of years.
Mm-hmm. Within organic investment versus M&A opportunities you just mentioned, what do you look for? What would be your goals with any possible upcoming M&A, and that compared to your own organic investments, where do you see opportunity?
First, we did a lot of work studying where other telcos globally went wrong.
Media, healthcare, finance, data centers, even the hyperscaler one. We have seen a lot of great case studies with AT&T and Verizon on that verticals. You know it well. We are looking things that we can be very complementary to the core. Whether it is directly related, like buying another carrier, or whether it is a subsea cable opportunity, whether it is buy or build, because there we have a very strong terrestrial network that connects the Mediterranean to the Red Sea. If you are taking a step back, today, there is a very large congestion of broadband between Europe and Asia because all the traffic goes through the Red Sea, through Egypt, Suez Canal, the Red Sea. Everybody here in the room understand the risks that you have in the Red Sea, both traffic-wise and also conflict-wise, today very topical with the Houthis.
You cannot have the entire worldwide web in that region, especially when you think about the trillion-dollar investment of Saudis and Emiratis and India even, in target program and data centers and AI without having proper redundancy and infrastructure. The only way to get from Europe to the Saudi, Emirati, and eventually India is through Israel. There is one company in Israel that have a terrestrial network that can connect the region, that can really create the bridge from Mediterranean to the Red Sea, and it is Bezeq. Once we understand that, we said, okay, we see demand today coming, and we are connecting the Gulf country to Europe through our network by land, and then by sea, since we have a subsea cable. It is not enough. The demand is very significant. We are talking about 20x - 40x demand of what we have today.
We announced three different cable systems we are currently putting together, and that, call it inorganic growth, but the factor is very close to the core, and it is leveraging our strengths, the only player that can really move the traffic between the continents. We announced three project, one of them 50% owned by the Italian government in Telecom Italia subsidiary, and we are going to do more on that front, a lot more. Since hyperscalers and global telcos, they have no other way to move traffic around. Yes, Starlink is not the solution. It does not replace the speed of light fiber network, especially not to data centers and hyperscalers. It is nice for rural connectivity and digital divide in the U.S., and that is something that we have going to focus on a lot more because it is really the future.
What is the level of capital investors should expect and the return profile you are targeting?
On subsea cable.
On subsea cable? Yeah.
Round numbers, and we did communicate some of it to the market, but to put a cable from Israel to Europe, one cable system would cost in the ILS 150 million-ILS 200 million. Whether you land in Italy or Spain or France, they are roughly the same numbers. That is, we are talking about 20 - 24 fiber pairs. So that like, call it 300- 400 terabits per second. We are going to put three cables like that. The nice things about this cable, especially in the hyperscaler world, you can pre-sell a lot of the capacity, which fund your entire CapEx, and you can make 2x - 3x your investment over the three years of the investment period. So it is pretty significant return. The more the merrier. We also have the synergy with our terrestrial network, which obviously is incremental revenue with very, very high margin.
Some of it also touches the data center world, mostly on the collocation and landing points, but that is of a smaller scale.
I see. Over time, how material could be the contribution from the subsea cable business relative to the traditional telecom business you have right now?
Fiber and fixed line terrestrial are going to continue to be the main driver. It is 70%+ of our EBITDA today. But subsea cables will definitely start moving the needle over the mid-term, even before. But it is not going to replace the significant EBITDA and cash flow we generate, but it is going to be very significant, something that will move the needle of both net income and free cash flow.
Mm. Okay. Okay, let us switch a bit to profitability. AI has been a topic that gets a lot of attention across the telecom industry. Do you see artificial intelligence becoming a more meaningful source of cost savings for Bezeq? Which use cases you think are the most promising nowadays?
Bezeq strategy around AI really touches the three verticals. First, we are the enabler. Everything around digital era and AI touches our network. When NVIDIA want to put together a data center in Israel, they need connectivity. When Google want to connect their R&D center, they need connectivity. All this AI trend creates more demand for bandwidth, and more solutions, and more data center solution and connectivity. Our core business is really enjoying this hype. That is easy to say, and that our strengths in terms of where AI touches the network.
Before I get to the adopter part, on the consumer side, we are also enjoying because we see consumers like AI tools. We have very unique innovation team that helps to drive consumer solutions like cyber solution to the home, smart Wi-Fi routers that learn your behavior at the home with AI solution, with third-party solutions, and protect you better and help you manage your devices at home in a much smarter way, and we charge more ARPU for that. The AI strategy on the back end and front end is clear. On the adoption part, look, I think the AI implementation is relatively nascent in terms of where it could reach. Today, we were one of the first telecom to use Wonderful. We actually are the first company towards Wonderful, the AI solution for the call center.
Today the bot answers end to end and solve end-to-end calls, almost 20% of our calls every day. Could reach 50%, 60%, yes. In terms of cost savings, yes, could add 50 - 100 basis point to the EBITDA margin, but it is still early days. We use it for other use cases, marketing, accounting, finance. I still think there is a lot more to see in how the cost benefit and how it evolved over the next 24- 36 months. But, we like to be the first in terms of AI, in terms of quantum solution that we start to experiment, because that is also an interesting part directly relevant to the network.
Yes, it creates cost savings, but given we are a very efficient company to begin with, and given that it does not replace the people that put together the infrastructure or the technician at home, it does not replace these individuals. However, because AI solutions can monitor the network better, we can prevent malfunction and we can identify ahead of time. We do that with AI tools. We can forecast churn ahead of time, so their forecasting have become a lot better. We can call you the day before you decide to leave, don't even know you are going to decide to leave. That is very interesting use cases. We are experimenting a lot. We are saving money on call center predominantly. Now you will see a lot more from us.
We're going to communicate even numbers to the market in terms of quantum of cost savings over the next six to 12 months.
Mm-hmm. You mentioned a few areas where they also had to do with your relationship with the customer. Do you see any changes in behavior among your customers, especially when it comes to bundling or looking for any changes in the demographics of the country that you think could be positives or negatives for your investment growth thesis?
Yeah, look, I think there are a lot of tailwinds around customer behavior at the home, more content, more screen, more connectivity, more work from home post-COVID that really benefits telcos. Bundling is not something that the behavior change. TV, the leading product or a value-add service to buy broadband, but there isn't a significant change in customer behavior except for excess usage of broadband everywhere, and that really support our business. What's interesting when you think about that, the world has been through a lot over the past six years, Israel specifically. We did not see any change in behavior that impacted the telecom business over these six years.
What we also are very proud of, that even with the global black swans and the local horrors that Israel and the region have been through, our business was more than impacted by any of these COVID, supply chain inflation, October 7th, and the current conflict with Iran. There hasn't been any impact to infrastructure to the business. It's not as obvious when you look from the outside. We're able to really sustain in any such event. Investors saw, we continue to perform in any quarter, every quarter, outperform, upgrade guidance, and targets every year, even within the chaotic macro that the world had been through in the past six years. I think that really tells our story. Growing cash flow, very constant and growing net income and business, standing behind what we do and planning ahead.
Because in telco and infrastructure in general, you cannot plan one year ahead. The fact we really came up with a five or even a 10-year plan really proved itself. The past five years and the next five years give me a lot of confidence that we can continue to achieve and over deliver our plan. The world can throw at us any black swan it wants. We are very resilient. Customer behaviors, no matter from which angle you look at it, is playing in our favor.
Very helpful. Thank you. Now let's touch base on a couple of long-term industry considerations. Starlink has become a very frequent topic of discussions globally, I'd guess. How do you view the long-term competitive threat from satellite-based broadband services, especially in both broadband and wireless, actually? How you view that long term?
First, broadband. I understand well the Starlink and satellite story in the U.S. since you have 30% with no fiber and 20% with fixed wireless. In small countries where you can get fiber to the home, not fiber to the cabinet, not fiber to the not street passes, but to the home, and you have the speed of light in every single apartment in very low cost per passing, satellite will never be able to compete. No matter, Elon Musk's satellite for the next 10, 20 years will not be able to serve the entire city of New York and compete with fiber to the home. So in countries like Israel or in very dense area, I don't see this as a threat in terms of broadband and fixed wireline and fiber.
Eventually, it's spectrum and radio frequencies compete with speed of light physics, especially with attractive output, that's not a real threat. On mobile, it may be a different story. The question is, again, in countries like Israel, the outputs are very low, very hard to compete with satellite solution. Could be complementary, could be interesting solution to use as a mobile operator, as a reseller, but it's not a significant threat as you see it now. Again, in rural areas, in the 30% digital divide in the U.S., it's definitely an interesting story and something that the cable companies and fixed wireless companies should be attentive to. In smaller countries, it's not a major risk, and there's a reason why there's no Starlink in Israel.
Got it. So maybe to wrap up, are there any underappreciated areas of your investment thesis that you would like to share with investors today?
Yeah, I think we started this discussion, and thank you, by talking about our midterm targets. I would like to emphasize that these targets do not include the subsea cable or M&A we talked about at all. This is the base case. It also does not include one of the most important catalyst and value creation levers we are currently working on, which is structural separation, which is merging Bezeq and Yes, our broadband and TV business. We hope to get the final approval from the regulator the next quarter, and that is something that would create. We have a tax asset of ILS 1.2 billion we can use, meaning another 15% of free cash flow every year over the next eight years. That is before massive cost savings because of duplicate role between technicians and call centers and IT and G&A, we can eliminate by merging these businesses.
Not to speak about lower churn and bundling. So you can see 20%-25% + incremental free cash flow to our business if this merger is successful. This is not in our target, this is not priced in, and this could be a significant game changer to our business.
Great. I think that is a great place to leave it. That is all the time we had for today.
Thank you so much for your time.
Thank you so much for being here and for the discussion.
Thank you, everyone. Thank you.