The resuslts of the first quater of Cellcom are low

Cellcom published weak 1Q15 numbers, although no weaker than the market had expected. The central question remains how long the price war in the cellular market continues, and how much further ARPU falls as a result of it. We see no end in sight at the moment, but after a 50% decline in the share price YTD we feel that most of the bad news is reflected in the share price.

Revenue declined 6% YoY, mainly on lower cellular service revenues, partially offset by higher equipment revenues. EBITDA declined 33.5% adjusted for a onetime cost relating to the new collective labour agreement. Excluding one-time items, net income decreased by 55%, although the bottom line was helped by a 33% decrease in financing expenses.

Cellular services: subscriber numbers declined 82k due to aggressive new price offerings launched at the end of 2014. This compares with a loss of 125k subs for all of 2014. ARPU declined 12.3% YoY to 65.5. We expect further ARPU erosion for the remainder of 2015.

Fixed line services: revenue came in at ILS 224m, similar to 1Q14, which is a good result for the segment.

Equipment revenues came in at ILS 263m, a 29% increase on 1Q14, though relatively in line with the levels we saw in 1H15.

Operating costs totaled ILS 257m adjusted for the onetime cost related to the labour agreement. This represents an annual run rate of ILS 1,028m, a 9.4% reduction versus 2014. If this level holds (a question given the launch of new services), this represents an impressive achievement in cost reduction. In 2Q15 the company is forecasted to take another onetime charge related to a voluntary retirement plan.

New services. So far this year Cellcom has launched its PayTV service and its triple play at an aggressive pricing point. It's too early to gauge the potential given that it is early in the day and new players have yet to enter the arena. We believe that new competition in fixed-line services will occur gradually, but will occur. For the cellular companies it will be relatively low margin, but will help shore up earnings and increase loyalty.

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This research has been prepared by the analysts of Bank Leumi Israel, 35 Yehuda Halevi Street, Tel Aviv, which is regulated by the Israeli Securities Authority (ISA) and by the Bank of Israel. All opinion expressed in this analysis accurately reflects the view of the author(s) at the time of the writing.