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Edited Transcript of BEZQ.TA earnings conference call or presentation 21-May-20 12:00pm GMT

Q1 2020 Bezeq Israeli Telecommunication Corp Ltd Earnings Call

Jerusalem Jun 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Bezeq Israeli Telecommunication Corp Ltd earnings conference call or presentation Thursday, May 21, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Mizrahi

Bezeq The Israel Telecommunication Corporation Limited - CEO

* Naftali Sternlicht

Bezeq The Israel Telecommunication Corporation Limited - Head of IR

* Ran Guron

Bezeq The Israel Telecommunication Corporation Limited - CEO of Pelephone, DBS & Bezeq International

* Shlomo Rodav

Bezeq The Israel Telecommunication Corporation Limited - Former Chairman of the Board

* Yahali Rotenberg

Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO

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Conference Call Participants

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* Ondrej Cabejšek

UBS Investment Bank, Research Division - Director

* Tavy Rosner

Barclays Bank PLC, Research Division - Head of Israel Equities Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Bezeq's First Quarter 2020 Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded and broadcasted over the web.

At this time, I would like to turn the call over to Mr. Naftali Sternlicht, Investor Relations Manager for Bezeq. Mr. Sternlicht, please go ahead.

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Naftali Sternlicht, Bezeq The Israel Telecommunication Corporation Limited - Head of IR [2]

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Thank you, operator. Welcome, everyone, and thank you for joining us on the call today.

With us from Bezeq's senior management team, we have Mr. Shlomo Rodav, Bezeq's Chairman; Mr. Dudu Mizrahi, Bezeq's Fixed-Line CEO; Mr. Ran Guron, CEO of Pelephone, Bezeq International and yes; and Mr. Yali Rothenberg, Bezeq's Group's Chief Financial Officer.

The speaker's comments will generally follow the slide presentation, which is available under the slides tab on the webcast link and may also be downloaded from Bezeq's IR website. You can go through the presentation by clicking on the arrows on the left or right-hand side.

I would like to draw your attention to the safe harbor statement in -- on Slide #2, which also applies to any statement made during today's call.

Let me now turn the call over to Shlomo for prepared remarks on the COVID-19 pandemic situation and its impact on our business. After which, Yali will continue the presentation with group financial highlights, followed by Dudu discussing Bezeq's Fixed-Line results. Ron will pick up with results of our subsidiaries and Yali will wrap up the presentation, after which management will be available to answer questions.

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Former Chairman of the Board [3]

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Thanks, Naftali. Let's start on Slide 3. In the first quarter, the impact of the COVID-19 pandemic started to be felt in Israel, posing a managerial and operational challenge for us. Thanks to timely preparation and robust operational capabilities, we successfully weathered these challenges. All group companies were ready to provide continuous service to customers who are prepared for emergency situations.

While we have sufficient liquidity to get through the current challenging period, and there is no change in our long-term strategy, we made necessary adjustment to protect the health of our employees and to ensure the smooth operation of our business.

Specifically, we increased the scope of employees working remotely, while making sure that technicians were working at full capacity while protected. We also decreased work hours in sectors where activity declined.

Moving to Slide 4. While potential risks abound, I'd like to point out that the changing landscape of telecommunications service usage in the home and the enterprise levels is also presenting us with opportunities as we see a significant slowdown in retail broadband Internet churn as well as an increase in fixed telephony usage, higher demand for TV content, an increase in business sector demand for remote access and new projects. We are mitigating the impact of the virus and shall implement ways to capitalize on new opportunities.

As of March 31, 2020, there was primarily a decrease in revenues from roaming services in retail sales of end-user equipment in telephone as well as some decrease in revenues from the business sector in all the group companies. However, the total impact of the COVID-19 pandemic on the financial condition of the group companies was immaterial in the first quarter of 2020, especially [I think] impacted only the last few weeks of the quarter.

Looking now to the rest of the year, assuming that the balance of restrictions that still slowdown economic activity will be removed by the end of June. And from the second half of 2020, the economy will gradually return to normal without any additional significant restrictions, except for incoming and outgoing tourism, we expect a decrease in Pelephone's revenue operating profit of approximately ILS 150 million and ILS 100 million, respectively, mainly from the decrease in revenues from roaming services and to a lesser extent, in retail sales of end-user equipment as a result of the pandemic effect on tourism and retail sales.

Now I'll turn the call to Yali to talk about our financial results.

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [4]

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Thanks, Shlomo. Turning to Slide 6. Let me start off by saying we entered the pandemic from a position of financial strength with robust liquidity, continued decline in financial debt and significant improvement in the group's debt structure.

During the quarter, Group revenues rose ILS 2.19 billion, down 3.1% from the prior year quarter. The decrease in revenues was due to lower revenues in Bezeq's Fixed-Line, mainly due to a decrease in revenues from telephony services further to the ongoing trend.

In addition, Bezeq International revenues decreased due to lower revenues from the sales of communications equipment businesses, Internet services and international costs.

On Slide 7, group-wide gross salary expenses decreased from ILS 492 million a year ago to ILS 479 million in the first quarter of 2020, a decrease of 2.6%. The decrease was due to the reduction in the number of employees and associated salary expenses in all key group business segments further to the streamlining plan that we continue to execute over the last few quarters. Group-wide operating expenses decreased from ILS 812 million a year ago to ILS 793 million in the first quarter of 2020, a decrease of 2.3%. The decrease in operating expenses was primarily due to lower equipment expenses for businesses and lower international call expenses in line with the reductions in revenues in Bezeq International.

Turning to Slide 8. After adjusting for other operating income and expenses, group-wide adjusted EBITDA in the first quarter totaled ILS 915 million compared to ILS 952 million a year ago. The decline was primarily in Bezeq Fixed-Line and Pelephone.

Group-wide adjusted net profit increased to ILS 330 million in the first quarter from ILS 291 million a year ago, mainly due to a decrease in financing expenses as Dudu will explain later in the fixed income section of the presentation.

Moving to Slide 9. Free cash flow in the first quarter was ILS 436 million compared to ILS 316 million in the same quarter of 2019, an increase of 38%. The increase in free cash flow was primarily due to increased cash flow in Bezeq Fixed-Line due to changes in working capital and a tax refund received in the current quarter. Gross CapEx in the first quarter amounted to ILS 338 million compared to ILS 373 million in the same quarter a year ago, a decrease of 9.4%. The decrease was mainly due to timing differences in payments for equipment in yes.

On Slide 10, we have broken down subscribers and ARPU by different business segments. Let me just point out that yes updated its ARPU definition in the first quarter so that ARPU does not include revenues from content sales to external broadcasters. As a result, ARPU data from 2019 was adjusted retroactively.

Lastly, turning to Slide 11. We are continuing to improve our debt profile. We recently published a shelf prospectus, increasing the company's financial flexibility. Debt service of principal and interest for the next 12 months significantly improved over the year, and there was the year-on-year decrease of more than ILS 1 billion in net debt as well as a decrease in net debt-to-EBITDA leverage ratio from 2.5 in Q1 2019 to 2.3 Q1 2020. Now Dudu will share with you updates on Fixed-Line operations.

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [5]

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Thank you, Yali. Thanks, Yali. The COVID-19 pandemic has created a complex and challenging reality. But thanks to early preparation, we continue to operate and provide full services to our private and business customers, even at the peak of the pandemic.

At the same time, we have been very successful in dealing with increased usage that reached new highs. Beyond the challenges that businesses in Israel are presently facing, we also see emerging opportunities in various fields and sectors.

I will now discuss the Fixed-Line highlights for the first quarter of 2020. Turning to Slide 13. Despite our competitors' deployment of fibers as well as lower market pricing, we managed to achieve stability in broadband retail lines for the first time in 5 years.

In addition, there was a significant increase in telephony service traffic during the quarter. On the next slide, you can see broadband retail lines over the last 13 quarters and a significant slowdown in churn.

Turning to Slide 15. We are focusing on customer premises through our 3-part strategy, which consists of our BE router as the base home product that ensure broadband quality such as Bspot and Be Mesh and value-added services, such as cyber protection, antivirus and network support. The number of customers with BE router increased from 159,000 in the first quarter of 2019 to 378,000 in the first quarter of 2020. About 38% of our retail customers choose to connect with the BE router.

Meanwhile, the number of customers with WiFi enhancers such as Bspot and Be Mesh increased by 140% over the same period.

Moving on to Slide 16. Our retail ARPU has grown as a result of increased penetration in customer premises services as well as value-added services.

Moving to Slide 17. We are leading the business sector throughout -- through advanced telecommunication solutions supported by a high-quality infrastructure. The outbreak of COVID-19 presents many difficulties for businesses, the ability for businesses to operate remotely and continue to provide service in critical -- is critical these days. Toward the end -- towards that end, we step up our offering of video conferencing and remote access solution to business in addition to virtual exchanges and other IT solutions. On the next slide, our business services also include data hosting solution with high-quality and secure IT system. As you can see on the map, we have a nationwide deployment of data center with 2 large sites and 10 boutique data centers.

Moving on to Slide 19. Revenues in the first quarter were ILS 1.02 billion compared to ILS 1.04 billion in the period year quarter. The slight decrease in revenue is primarily due to a decrease in revenues from telephony services. The other revenues item was stable compared to the corresponding quarter last year.

Meanwhile, total operating expenses were mostly in line with last year. Turning to Slide 20. After adjusting for the impact of other operating income, net adjusted EBITDA in the first quarter was ILS 647 million compared to ILS 669 million in the same quarter of 2019. The moderate decrease was mainly due to the lower telephony revenue.

Meanwhile, adjusted net profit was increased by 9% year-over-year to ILS 295 million, mainly due to a decrease in financing expenses relating to the repayment of debt during the year as well as actuarial adjustment for employee benefits, resulting in financing income.

Now I'll turn the call to Ran to talk about Bezeq subsidiaries.

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Ran Guron, Bezeq The Israel Telecommunication Corporation Limited - CEO of Pelephone, DBS & Bezeq International [6]

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Thanks, Dudu. With the outbreak of the COVID-19 pandemic, this quarter, we saw the strength of the 3 subsidiaries companies, offering products and services that has become more essential than ever. The 3 companies grew their subscribers base telephone for the first consecutive years. And yes, for the first time in 2 years, with significant increase in number of new subscribers in the IP broadcasting platform, mainly notably STING TV.

During the quarter, yes got back to profitability and achieved improvement across all financial metrics balancing the decrease in Pelephone revenue from cellular services.

Meanwhile, Bezeq International continues to maintain revenue and profitability despite the slowdown in its business sector activity.

On Slide 22, yes continues to make progress with IP customers migration as multi-platform launch and quality content are popular among customers. As of last few weeks, yes took another significant step with the launch of yes+ service for Android devices.

Together with our STING TV, there was a significant increase in IP broadcasting, while we continue with our basic satellite broadcasting as well.

Turning to Slide 23. High rates of customer satisfaction translated into return to growth of its subscribers. In the first quarter, yes, returned to subscriber growth for the first time since 2018 and added 1,600 subscribers while also improving financing and operational metrics.

Moving to Slide 24. I'm pleased to share that Pelephone continued to increase subscriber for the third -- fourth consecutive year. In the first quarter, added 29,000 subscribers.

On Slide 25, Bezeq International continues to maintain its position as a leading player in the ICT market. And recently, won number of tenders for projects with large customers. COVID-19 led to a significant increase in corporate demand for large bandwidth base on Bezeq International Internet infrastructure, both for business as well as private customers.

In addition, there was an increase in demand for remote access solutions, cloud services and the use of video conferencing platform.

Moving to Slide 26, while subsidiary revenues experienced a small decline year-over-year, the company has continued to streamline to synergy processes that resulted in a decrease in the key expenses items.

On Slide 27, the streamlining process has resulted in a decrease of 15% in salary expenses over 2 years' period.

On Slide 28, net profit for the quarter grew to ILS 20 million due to an increase in subscribers and ongoing reduction in expenses that offset the revenue decrease.

I would now like to turn the call to Yali with an update on our 2020 outlook.

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [7]

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Thanks, Ran. As stated previously, given the outbreak of the coronavirus and the resulting in ongoing uncertainty in the global and local economy, at this stage, we are unable to publish an accurate outlook for the group's results for 2020. We consider it important to continue to provide guidance and we'll, therefore, continue to closely monitor developments in the coming months and will consider, depending on the situation, the appropriate date for publishing a forecast for the group's 2020 results.

Let me remind you that we will be holding a virtual analyst conference in hebrew for the local market after this call.

This concludes our prepared remarks. Operator, let's begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question is from Tavy Rosner of Barclays.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [2]

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First one for Shlomo, if I may. Over the few past quarters, we've been talking about the outlook for fiber at Bezeq. And the key takeaway was that without any ministry in place, that would be difficult.

So I guess, given the fact that your new one was appointed last week, how do you see the outlook? And I guess, have you guys already discussed with the MOC since the new appointment? Any additional color would be helpful.

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Former Chairman of the Board [3]

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Let me begin and then Dudu can provide you additional information. It's good that it last in Israel. We have a government and then appointed the Minister of Communication. We hope that the minister will see -- and the ministry itself will continue with the existing plan that the ministry have. And it doesn't matter whether we like it or not. But we believe that it's better to implement and not perfect plan rather than reevaluating the whole story from the beginning, which will only result in months of additional delays.

We understand that the ministry is prepared with its recommendation and plans. And the question is whether they'll pass it through a normal procedure or through the arrangement law, okay? Is it the...

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [4]

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Yes. The arrangement.

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Former Chairman of the Board [5]

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The arrangement law in the forthcoming annual budget, which may speed things up. The minister came with a statement yesterday that it's looking for universal service obligation. In the current frame, there is some solution for this, but we hope that it will not mean that the whole issue will be reopened and reconsidered. Although as we said, we don't believe it's a perfect plan by the government, but at least in my opinion, a nonpurpose plan for execution is better than looking and studying what's the perfect one for the future. Dudu?

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [6]

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(inaudible) We are not talking much about this -- the nonpurpose (inaudible) because (inaudible) your question, we haven't...

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [7]

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Sorry. We can't here you, Dudu.

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [8]

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Sorry, Tavy. Yes. Just to add that -- referring to your question, we haven't met the new minister yet. Hopefully, we have those meeting in the next -- in the coming days. And as Shlomo said, we are looking forward for them to push forward the fiber plan.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [9]

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Understood. That's very helpful. And I guess my second question was with regards to the OpEx at the group level. So you did flag the fact that OpEx has been going down since you started the streamlining measure. Where do we stand in terms of the streamlining measures? I mean, it's a multiyear plan, and you already started to do a lot.

I guess, the first question and the second would be first one on the employee side. What's the outline? And on the non-employee-related side, the past, you talked about closing down offices or moving out of your headquarters out of Tel Aviv, I guess, is there an outline and a way for us to quantify the savings down the road on the OpEx side?

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [10]

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We have a long-term plan in terms of streamlining the business, both in Bezeq and in the subsidiaries. And we are doing our best to follow that plan, both in terms of employee streamlining and other things like real estate and all kind of other costs. And there's nothing much to update other than we are trying our best to follow that plan.

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [11]

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Just to add on this note, Tavy, for the fact of the numbers that you can already see in our financial statements. So you can only see both on operating and salary costs. Since the beginning of 2019, we already gained ILS 200 million. So just prove to you that we have spoken of this before, and we have -- already have put numbers in.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [12]

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Yes. That's really helpful. And then a quick last one, if I may. You talked also about the debt level with the net debt-to-EBITDA being one of the lowest in recent history. And I guess, the -- can that trigger an improvement of your debt rating down the road and therefore, even further decrease your interest payments? Are you anywhere near that in the near future?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [13]

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So right now, we are rated AA with a stable outlook or equivalent in both rating agencies. We are satisfied in this vicinity of the rating. I don't think you'll see it rating increase in the near future. And we -- but we do -- we are firm in our intention to keep this rating anyway.

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Operator [14]

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The next question is from Ondrej Cabejšek of UBS.

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Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [15]

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I wanted to ask, there's clearly been an improvement across trends, especially with certain KPIs and ARPU trends. So I was wondering just directionally in terms of what you're seeing in this pandemic, specifically around TV and fixed broadband, has clearly been a sequential improvement for a couple of quarters now.

Based on what you're seeing today, what should we expect in these trends for the next couple of quarters? Do you expect, for example, that you could turn around the fixed broadband business in the current environment in terms of net adds? That would be my first question. So TV and then fixed broadband in particular, please.

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Naftali Sternlicht, Bezeq The Israel Telecommunication Corporation Limited - Head of IR [16]

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Dudu will take the question on the fixed broadband trends in ARPU, and then Ran will take the question on the TV.

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [17]

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So the growth in ARPU on the fixed broadband market is on Bezeq is mainly based on our customer premises strategy, which consists of the BE router and other services that we install in the customer premises and value-added services. That's what fuels the growth in ARPU over the last few quarters. And we expect that to further continue. We are still selling those services in very high numbers. And we expect that to move forward more or less at the same trends that we've seen on -- over the last few quarters.

In terms of churn, so you could see that the churn rate on fixed-line broadband has declined dramatically. This is basically a trend that we're seeing over the last few quarters, and we hope to see it continues over the next few quarters ahead.

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Ran Guron, Bezeq The Israel Telecommunication Corporation Limited - CEO of Pelephone, DBS & Bezeq International [18]

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Yes. This is Ran. As for TV services, what we see is a relatively stable ARPU that it is decreasing over time because we sell more STING TV, which is our discount products. So the ARPU mix takes it down a little bit, but it's relatively stable.

As for net adds, we are -- yes, it's growing this quarter. First quarter was growing. Fourth quarter of last year was a little behind, but the overall trend is improving, and we expect that to continue. So still less churn in yes and ARPU decreasing, but moderately.

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Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [19]

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And just a question on mobile, a similar one. So you reported an improvement in -- obviously, you're continue to grow your customer base. But then in terms of ARPU, could you quantify what impact the roaming hit that you mentioned in the press release had in the quarter on your ARPU trends?

And is there any visibility on ARPU floors relative to what you're seeing commercially happening in the market? Because clearly, you're doing a good job in terms of net additions, but then that is a bit diluted by the ARPU trends, which don't seem to be improving that much. So any comments on that would be helpful.

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [20]

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Well, I'm not going to give any projections about ARPU or commercial trends in the market. We'll see how the market behaves. But we are doing a job in the last 4 years in compensating by growing the number of customers over the ARPU erosion, which brings us to a minor decrease.

As for roaming, roaming takes a few shekels out of the ARPU, and we have to see how that behaves. We assume roaming will come back. We'll reach 50% of normal revenues and fly by December, but the summer is the high season. This summer, we'll have almost a shutdown. So this is the effect that we described in our projections about the loss because of roaming services.

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Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [21]

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A final question for me, if I may. In terms of working capital and receivables. You mentioned some potential issues with the B2B segment. Are there any comments that you can give in terms of bad debt expenses or receivables growth related to the current crisis?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [22]

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Okay, this is Yali. So far, we haven't seen worsening in our collection and our receivables. We have seen -- relative to what we initially thought, the situation is better. We think that part of the collection will be postponed to -- or might be postponed to next year. But we, thus far, haven't seen a substantial worsening in that -- to that end.

As far as -- so it's okay. We see -- we analyze everything by the different customer base. We know the differences between the different lines of business. And so far, there are some reasons for that. But so far, we see the debt collection behaving in line of what we thought.

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Operator [23]

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The next question is from [Abraham Karan] of [Halo Motiflah].

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Unidentified Analyst, [24]

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Wonderful results in an unstable environment. I have a few questions. The first one is regarding the influence of the workforce that went to work at part-time or 70% or 80% in the second quarter at April, how much can we see a decrease in the workforce costs at the second quarter of 2020?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [25]

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I'm sorry, we don't -- we only talk about the results of the Q1 2020. We don't give forecast for this -- for the results of the second quarter. We can say that we have had a substantial workforce in all companies, we -- many, many of the employees did still worked. Most of the workforce still work because we are considered commercial companies, infrastructure companies. We've had workers who are -- employees who took their leave of absence or vacation and gradually coming back. And so that's my comment on this.

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Unidentified Analyst, [26]

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Okay. And the second question is regarding the fibers. Can we see -- I heard before that there is a new government that you guys said, and there is maybe a new ministry that is more open to move ahead, even if it's not the best for Bezeq, but do we see any schedule regarding that issues of the fibers?

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [27]

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Currently, there's no real schedule for that. The new minister has just entered his office, and we hope that in the coming weeks, we'll have more details regarding the ministry plan of moving ahead with the fiber deployment.

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Unidentified Analyst, [28]

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Okay. And the last question is regarding the CapEx of the fixed-line. Are we supposed to see any increase or increases due to the COVID epidemic regarding cost of things that are related to the CapEx?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [29]

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I'm sorry, could you repeat that question. We couldn't fully understand.

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Unidentified Analyst, [30]

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The CapEx of the fixed-line, do we see any changes in costs of services regarding the CapEx of the cost of materials, cost of shipping, cost of whatever it is on the CapEx?

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [31]

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No, no. Not as a result of the COVID-19. No.

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Operator [32]

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(Operator Instructions)

There are no further questions at this time. I would like to remind participants that a replay is scheduled to begin in a period of 3 hours on the company's website at www.bezeq.co.il. Mr. Rotenberg, would you like to make your concluding statement?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [33]

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I would like to thank you all for taking the time to join us today. Should you have any follow-up questions, please feel free to contact our Investor Relations department. Management looks forward to speaking to you on the second quarter 2020 earnings call. Thank you.

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Operator [34]

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Thank you. This concludes Bezeq's First Quarter 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.