The cellular companies recently published their 2014 financial statements, it being clear to all of them that their 2015 results will be considerably worse. Intensifying competition in the sector is taking its toll on the companies, and one of them may even post a loss for several quarters. With the financing expenses of Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) being so high, any slight change in the interest rate or the Consumer Price Index can easily put them into the red.
The CEO of one of the cellular companies predicts that if the current situation persists, and five companies continue operating in the cellular market, the companies will be forced to make huge lay-offs to eliminate 1,000-1,500 jobs. The companies currently employ an aggregate 3,500 employees.
After the elections, the new government, regardless of who leads it, is likely to institute major macroeconomic changes. The Bank of Israel's negligible interest rate is helping Cellcom and Partner, but the expected rise in the US interest rate is likely to upset everyone's calculations. The new Minister of Communications will have to deal with this issue.
It is possible that the way 2015 began may indicate which way the wind is blowing. The most significant measure in this context is Cellcom's entry into the television market, which is revolutionizing the market. Golan Telecom Ltd. is apparently slated to enter the television market during the year, and Partner is also considering it, measures that will reshape the communications market. Reform is also taking place in the landline market, in which the companies will sell communications service packages.
These changes will require a new strategy from each of the companies, and it can be assumed that only at the end of the year, and perhaps only next year, will it be possible to distinguish which companies have sown the wind and reaped the whirlwind. As of now, it is not at all clear how many players there will be in the saturated cellular market, and whether 018 Xphone will enter the market as a sixth operator. It is difficult to imagine Xphone entering the market and applying more downward pressure on prices, while at the same time no mergers are taking place in the market.
At this stage, a drop in the average revenue per subscriber to below NIS 50 a month is considered an unreasonable scenario. If this occurs, the veteran companies will lose billions of shekels a year in revenue.
This is a nightmare scenario for the investors. The 2014 financial statements of Partner and Cellcom already reflect the downtrend in profit margins. As of now, it appears that Cellcom has done the best job of coping with the challenge.
It should be kept in mind that Partner reported the revenue it received in 2014 from HOT Mobile Ltd. for the use of Partner's network, indicating that Partner indeed has reason for concern. The exclusive report in "Globes" on Tuesday that Partner is delaying its payments to suppliers is also ominous, and the feeling is that 2015 will be a very challenging year.
Published by Globes [online], Israel business news - www.globes-online.com - on March 19, 2015
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