Partner Communications, the operator of the Orange cellular phone network, said Tuesday that net income dropped dramatically in the third quarter of 2005 due to efforts to boost its 3G subscriber penetration.
Net income for the three months ended September 30 decreased 73.1 percent to NIS 30.9 million from NIS 114.9m. in the parallel quarter last year. Diluted earnings per share were NIS 0.20 for the quarter, down from NIS 0.62 in the third quarter of 2004 and down sequentially from NIS 0.72 in the second quarter of 2005.
The company had revenue of NIS 1.35 billion for the period, which were 0.3% higher than the NIS 1.34b. recorded last year, boosted by an increase in its subscriber base. Earnings before interest, tax, depreciation and Amortization (EBITDA) was NIS 382.7m., down 7.5% from the third quarter of 2004.
"The third quarter was the one in which we intensified our efforts to lead the 3G revolution in Israel," said Amikam Cohen, CEO of Partner. "We launched three more 3G handsets and a range of 3G content services and significantly increased, for a limited period in the third quarter, the introductory handset subsidies we offered to new and upgrading 3G subscribers."
Compared with the second quarter of 2005, the decrease was almost entirely from the additional handset subsidies to increase 3G subscriber penetration, the company said in a statement.
Alan Gelman, Partner's chief financial officer, said the decision to temporarily increase handset subsidies cost the company an additional NIS 40m. when compared with the third quarter of 2004, and NIS 35m. over the previous quarter this year.
The company reported that its 3G subscriber base more than doubled during the quarter to over 73,000 users, while its total subscribers rose 9.3% to 2.48 million, from 2.27 million in the 2004 quarter. Partner said it has the same 32% market share as a year ago.
Some 71,000 new subscribers joined the Orange network during the three months.
Following the earnings announcement shares in Partner rose NIS 0.08 to NIS 38.51 in Tel Aviv and lifted 1% to $8.23 during afternoon trade on the Nasdaq.
Despite the drop in income, analysts were upbeat about the results.
"It was a great quarter for Partner," said Clal Finance Batucha analyst Ran Israeli, who has a NIS 50 price target and a "buy" recommendation on the shares. "The cellular companies are in a position at the moment where they have high one-time costs on new recruitments, so while new subscribers cause revenues to rise, their margins are low."
Israeli added that he expects the fourth quarter to be the opposite, "which will show in a very positive EPS."
The company said it expects to meet its guidance on end of year results since "handset subsidies next quarter will be lower than the third."