Bezeq Group 2024 Investor Presentation

Welcome everyone. We are here to recap 2024, a very volatile year in Israel but a stable and strong year for Bezeq. It is great to see familiar faces and many people we have recently met in person in New York, London, and other cities in Europe and in the US. We start on slide four. We are continuing to successfully implement our group strategy which we presented to the market over three years ago. Fiber has been a key pillar in our strategy and Bezeq is successfully leading the fiber revolution in Israel. We are near completion this year of our fiber project with over 90% of our project already completed. We already have 32% take-up on the network and expect this to grow to at least 40% in the near term with continued ARPU growth. yes is accelerating fiber growth with 10% of the group's fiber subs today and supporting our group market share in retail broadband. This will be further illustrated if structural separation between Bezeq and yes is removed. Pelephone is leading the 5G revolution in Israel and benefiting from the positive contribution to ARPU. Bezeq International, still in its transformation process, focusing on the ICT and cloud services market with a successful new collective labor agreement signed in Q4. In 2024, we entered the electricity supply sector to create additional sources of growth and the management teams here are actively working on complementary services and partnerships in other verticals. We continue to maintain a very strong balance sheet and alongside upgrading our rating to AA this year, we also increased our dividend policy this quarter to 80% payout, reflecting more than 5% yield. Let's move to the next slide, slide number five. This slide really reiterates the successful evolution of our strategy on our path to reaching our midterm target KPIs, including the completion of the fiber deployment this year, the migration from satellite TV to IP in 2026, and the transition to 5G. On slide six, we actually see the excellent visibility to achieving our midterm targets and we are now increasing some of our midterm targets, expecting 2% annual growth in adjusted EBITDA and an increase of at least 500 million shekels in adjusted EBITDA minus CapEx. We also added a new financial target this quarter of 2 to 3% CAGR in core revenues. On slide seven, we see the recap of 2024 where we delivered growth of 1.3% in our core revenue due to growth in Pelephone and Fixed Line. Adjusted EBITDA was down slightly due to the decrease in telephony revenues resulting from the MOC decrease in tariffs and the impact of the war on roaming revenues. Q4 was excellent with adjusted EBITDA growth of almost 6% and adjusted net income growing at 23% year-over-year, positively impacted by Universal Fund and the roaming rebound. We continued to grow in our strategic drivers, recording 43% increase in fiber take-up and 20% growth in 5G subscriber plans. We are experiencing a very rational regulatory environment with an emphasis on the wholesale market and active ongoing efforts to remove the structural separation. Turning to slide eight, here you can see the key highlights of 2024 and after adjusting for the impact of the war on roaming revenues, core revenues are actually up 1.7% this year and adjusted EBITDA and adjusted net profit were down almost 23% respectively. We'll turn to slide number nine where you can really see how even in a year with volatile geopolitical situation, our core business continued to perform and outperform. Total FTTH subscribers as of today reach 850,000 with 2.64 million Home Pass above our plan and 5G subscriber plans reach 1.3 million. yes ARPU from subscribers, which includes the TV and the fiber activity, reach 185 shekels. Before I turn the call back to Tobi to talk about our financial results, I'd like to thank you on behalf of Nir, Elan, myself, and the rest of management for your professionalism, commitment, and partnership and dedication over the past four years. You've been a great partner. And on this occasion, I would also like to welcome Yaki Benita, the new Group CFO. Yaki has been with the group as the CFO of Pelephone and yes for the past three years and he knows the group extremely well. Tobi, please take it from here.

Thank you, Tobi. On the next slide, Bezeq Fixed Line core revenue increased 1% to 3.8 billion shekels, mainly due to higher revenues from broadband services. Broadband retail fiber customers reached 546,000 today and ARPU rose 6.4% to 133 shekels in the third quarter. On the following slide, we show moderate decrease in adjusted EBITDA and adjusted net profit in 2024, mainly due to lower telephony revenues resulting from the tariff reduction in 2023. Turning to the next slide, we show growth in adjusted EBITDA and adjusted net profit in the third quarter due to the reversal of the provision of the universal fiber fund as well as lower operating and salary expenses. Turning to the next slide, the fourth quarter saw 2% growth in broadband revenues despite decrease in wholesale tariffs from use of the passive network. Moving to the next slide, we show the take-up trends. Q4 saw 38,000 retail fiber net adds and 13,000 wholesale fiber net adds. Turning to the next slide, we show continued fiber deployment and the result of our increased focus on take-up. Today we have approximately 2.64 million Home Pass and over 850,000 active subscribers in our fiber networks today, resulting in continued growth of our take-up rate which has reached 32%. The next slide shows continued revenue growth in transmission and data communication. Telephony revenues declined mainly due to the MOC tariff reduction in July 2023 and other revenues were impacted by lower revenues from infrastructure projects. On the next slide, we show a 4% increase in operating expenses due to lower subcontractor and employee expenses as well as lower interconnection fees resulting from the decrease in tariffs. Other expenses decreased due to a one-time provision for the future grant to employees recorded in 2023. With that, I will now turn the call to Elan to discuss Pelephone and yes.

Thank you, Nir. Tobi, I'd like to join in on the good wishes already expressed by Tomer and wish you the best of luck in your new position. I would also like to congratulate Yaki on his appointment as Bezeq Group CFO and Suki Ash on his appointment as the new CFO of Pelephone and yes. Good luck to you both. Moving to slide 27, Pelephone posted its highest revenues from services in 7 years, reaching 1.4 billion shekels despite the impact of the war on roaming revenues, which is estimated at 65 million shekels for 2024. 5G subscriber plans continued to grow with 208,000 net adds during the year. Moving to the next slide, we show 5G subscriber plans reached approximately 1.3 million subscribers as of today. Subscribers on 5G plans amounted to 55% of postpaid subscribers. On the next slide, we show adjusted EBITDA increased 1.3%. After adjusting for the impact of the war on roaming revenues, adjusted EBITDA would have increased by 5%. Moving to the quarterly results on slide 30, revenues rose 8.5% due to higher roaming revenues compared to the corresponding quarter which were impacted by the war and the continuing growth in postpaid subscribers including 5G subscriber plans. Adjusted EBITDA and adjusted net profit which showed strong growth mainly due to higher revenues and the reversal of the provision for the universal fiber fund. The next slide shows the Q4 key operational metrics. As seen, we recorded an additional increase in postpaid subscribers including 5G subscriber plans and decline in prepaid due to the impact of the war. ARPU rose 7.1% or three shekels year-over-year due to higher ARPU from cellular plans and roaming revenues. Turning to yes on slide 32, we showed stable revenues for the fifth consecutive quarter. Your revenues were impacted by increased competition and the war, mainly the non-billing of customers in the line of conflict estimated at 20 million shekels in 2024, partially offset by higher revenues from the TV and fiber bundle. We continued the migration from satellite to IP with over 473,000 IP customers today. Fiber continues to grow and we have now over 880,000 fiber subscribers as of today. yes continued growth in IP-based TV subscribers which increased 19% year-over-year. As of today, 84% of yes subscribers are watching TV through IP. Moving to the next slide, adjusted EBITDA and adjusted net profit were down in 2024 mainly due to the decrease in revenues. On the next slide, free cash flow in the fourth quarter was impacted by timing differences in working capital and higher CapEx. On slide 35, we show yes Q4 key operational metrics. This quarter we began providing ARPU from subscribers which grew by four shekels year-over-year due to higher revenues from the TV and fiber bundle. We also recorded strong growth in fiber subscribers which almost doubled year-over-year. With that, let me now turn the call back to Tobi.

Hi, David Kaplan from UHO Securities based in Tel Aviv. A quick question I guess first for Tomer on the regulation. You mentioned removal of structural separation. It seems that currently the regulatory environment is a bit benign. Can you talk to us a little bit about what's going on, what's being discussed, and what is in the pipeline for the next year to two years?

Sure, and thanks, David. Look, just recapping our regulatory comment I made last year, we have seen a very rational regulatory approach with growing competition in the market over the past three years and especially as it relates to telecom infrastructure, both on fixed and mobile. We see a better approach over the past three years. It started with the removal of structural separation between the fixed line and the infrastructure and the ISP, which is now mostly almost fully merged with 90% of Bezeq Fixed Line infrastructure customers having a unified service with ISP and that separation is basically long gone. And in the past two years, we've also seen a rational approach to the wholesale market, pretty consistent with what we see in Europe with relaxed intervention in the active wholesale market and more focus on the passive, the same as you saw in the hearings and RFI published by the MOC in the past 12 months. And as it relates to structural separation, which is really part of this evolution of the more rational market consistent with what we see in Europe, nine months ago the Ministry of Communication announced, after many years of not touching that topic, that he is formally reviewing removal of structural separation as part of the 2024 work plan. We are in formal active discussions with the minister around the topic. It's too early to put timelines on that, so we're not putting any timelines. We also announced a couple of times that we are in discussions with our unions at both Bezeq and yes, who both understand, both the unions, the employees, and the company, why the right thing to do both for the companies and for the consumers is to have one service, unified service, one customer service, and obviously potentially slightly lower price as you usually get with bundled. The regulators understand that and we will update the market as soon as we have more updates on the topic.

Great, thanks, I appreciate that. Now just one comment I guess and or question about the guidance that you gave. It seems that the guidance was relatively in line with where consensus already was for the coming years. How much of that is related to competitive pressures, how much of that is related to geopolitical machinations, and how much of that is related to the mandated regulatory continued reduction in interconnect fees and such? And if you were to neutralize some of those effects, do you think that guidance could actually be above what you've given?

So let me break down some of the comments you made because you know the market extremely well. First, our core revenues do not include interconnect fees, so when we guide for core revenue growth, it does not include interconnect fees. The legacy ISP at Bezeq International and telephony, all these together are roughly 10% of revenue, so core revenues excludes interconnect and interconnect is a wash, it doesn't really impact the bottom line, EBITDA. So we take into account really all the drivers and the KPIs we mention around fiber, 5G, and TV. When we look at our EBITDA growth and CapEx reduction, which predominantly comes from, by end of this year we finish the fiber project, we are down from the satellite which you'll see in OpEx next year, and we are reducing employees across Bezeq International, Fixed Line as part of our union agreements in both companies. This will come into effect this year and more into effect next year. That all comes into the midterm plan. In terms of this year, unlike last year, we did take into account some gradual recovery and some war impact given the geopolitical volatility, but the impact on the business is not material at all. We also have some events this year like the elimination of the discount of the 5G spectrum at Pelephone that is going to increase our CapEx by 40 to 50 million shekels. So this is a one-off impact compared to last year and that's part of the tender also. Sorry, and we have also a big tender that the government may come later this year that impacts this year. But we've been pretty cautious on giving guidance to the market this year, but we feel we stand very confident behind it. Last year, as you all know, when we budgeted in early 2024, we did not fully take into account, I don't think anyone did, so we were more cautious and calculated this time on that front.

Great, thanks very much.

Hi guys, thanks for taking my questions. I only have two short ones, please. First one around regulation. So you mentioned structural separation, what else is in the pipeline from the MOC perspective? I mean, we saw headlines about passive regulation for wholesale internet. What else should we be looking at in 2024?

So the, and they relate to the group really, the two or three important elements that are on the table of the MOC in the coming year or two. One is really spectrum fees that are up but potentially go down when we are in discussion with the MOC to understand the needs of the mobile market to get spectrum to where they were last year. So that's number one. Number two, as you mentioned, is the wholesale rates. There was an RFI, a request for information, that was published by the MOC last month that is evaluating whether there's a need to even regulate active wholesale prices, which as I mentioned before, very consistent with what you see in Europe when you know it well. There was a reduction in early 2024 in the passive wholesale rate, so we do not expect additional significant reduction there or at all. And the last one is really structural separation, which I mentioned, an active work stream for us. We do not believe this should continue to exist and we are in formal dialogue with the MOC that hopefully will yield results in the near term.

Thanks for that. And then lastly on the competitive dynamics, I guess in the wireless market, cellular, do you feel that all the players are into more for more aspect, they want to just try to get as much as possible and not really compete on pricing these days? Thank you.

Yeah, I think one thing I'll mention on that, and Elan, feel free to add, but look, I think what you've seen over the past probably two or three years is a rational pricing environment with rational players. Competition is high, the price of the mobile services in Israel are still low, so a lot of upside there. But there's still competition. I don't think there's a lot of shift between market shares both in the fixed line and definitely not in the wireless sector, although Pelephone now is number two in the market. I think, you know, net net over the years, you don't see major shift in market share. 5G helped with ARPU but slowly, gradual, because there's still pretty significant competition. It's a four significant player market and two or three additional smaller ones. So that's, you know, still healthy competition but with gradual rising ARPU. Pelephone rose, you know, this quarter versus last year by three shekels, that's, you know, and over the past two years net excluding everything by two shekels. So that's not bad, I'll say.

There is a healthy competition in all three segments. In mobile there's nine players, so it's still competition. Also in, of course, in TV all over the world and of course in Israel there's five players in Israel only, only Israeli companies. But there is more competition from foreign companies and of course in fiber. So it's a healthy competition and we believe it will stay like that. And we're looking at Pelephone, if we talk about 5G, we are moving customers from 4G plans to 5G and trying to take the ARPU up.

Great, thanks guys, that's all for me. And I wanted to wish Tobi best of luck with your next challenges and adventures.

Hi, hi everyone. Andre here from UBS. Also best wishes to you Tobi and best of luck to you. I want to touch upon the guidance please. So I guess primarily around your adjusted EBITDA guidance, which kind of at the back doesn't make much sense to me because number one you are kind of now giving us guidance on core revenues, right, which should be growing at 2 to 3%. So these are usually, I would say, if I look at where the growth is coming from, then these are pretty profitable. So the fiber business primarily, but then also, you know, as you guys already spoke about in terms of what should drive the profitability going forward, it is union agreements, it is things like the satellite shutdown, etc. So all these things should be improving profitability. You are at the same time, or you finished '24 with EBITDA guidance of, sorry, EBITDA margin of 42% roughly. You are guiding for that margin to improve, but at the same time and given all that I said, you are still guiding for EBITDA growth or adjusted EBITDA growth kind of below what you are guiding for on the revenue side. So I just wanted to understand what the reason for that is and whether, you know, taking all of this into account, the adjusted EBITDA CAGR is probably quite conservative. So that is one area of the consensus I wanted to kind of challenge you a bit on. And the second question more on the CapEx side. So the kind of state of the CapEx sales ratio, and I presume this is kind of a '27 target. As you know, 16% at the bottom, so just looking at your kind of industry peers, that would still appear to be pretty high given that you are already ending the, or will have ended the fiber campaign which is usually the most CapEx intensive part of any incumbent business. You're kind of at the end of the 5G or approaching the end of the 5G upgrade cycle. So why would not the ratio be kind of, you know, safely below that into the midterm? That would be my second question. Thank you.

I'll start with EBITDA and I'll let Tobi also touch CapEx. You're, we are guiding to 2 to 3% growth in core revenues and 2% CAGR in EBITDA on average, right, for the next, for the midterm, which is the next three to five years. Core revenues excludes two very profitable declining profit items, which is telephony and ISP, both very high margin businesses. So when you think about the blend, that explains exactly your question, okay, one to one. So right, the non-core revenues are less than 10% and declining quickly from the revenue, but it was very profitable revenue streams and the impact, the delta you see between the numbers in the midterms, the major OpEx items that are being pulled out of the business, putting aside our ARPU growth and subscriber growth, is really satellite and employees that you'll see run rate full year in 2026, right, because the end of the satellite will basically happen in Q1 2026, so the major OpEx item will be pulled out only end of Q1 2026. You'll see it really impacting yes OpEx in 2026 full year. You see almost 300 employees going out of the Bezeq Fixed Line business part of the union agreements end of this year, which flows into 2026 as well, and few other very important items in the, you know, part of our drivers. But that's kind of I think answers your question both on the main OpEx items and the explanation between the delta of 2 to 3% growth. We also have, you know, salaries still tied to CPI and FX and stuff like that that are impacting our OpEx, but we are working on efficiencies and AI projects across the group which would support this OpEx reduction as well, non-headcount OpEx reduction across the group. You want to touch the CapEx question?

Thank you both. If I may follow up with each of you. So on the, maybe just a follow-up on some of the cost items or specifically the subcontractor costs, which obviously have been up quite a bit as a result of the fiber campaign. So if I just look historically, that's kind of something that's grown by about 100 million shekels over the past two years. Is the level that we should think of going forward similar to the one that we saw in the past? Where is there something that should kind of have the subcontractor costs still above or significantly above say 100 million per year? So that would be one kind of follow-up on the OpEx side. And then maybe Tobi just on CapEx. So you guys have clearly achieved, you know, more homes passed than you initially guided for with actually even less CapEx than you I think initially guided for. So it would be interesting to just hear from you how you actually achieved that. Thank you.

Thank you. So for the first question on subcontractor costs, the ones you are referring to are the cost of actually connecting households to our fiber network, because the cost of deploying are mostly capitalized. And those costs of connection of households are going to come down over time because although there are still people without fiber and now they're moving to fiber for the first time from copper, and we will continue to see that as a cost in our OpEx, but as we move along there will be more churn from different players that they already come with the fiber connection, so we don't have to spend again that subcontractor cost. So over time, not specifically to a certain amount, but that should go down over time over the years.

Understood. Thank you, Tobi, and best of luck to you again.