Cellcom Israel posts revenues of $328Mn at Q1’09-end

www.WirelessFederation.com/news: Cellcom Israel Presents a Record Net Income – Increase of 27.5% and an Increase in Operating Income, EBITDA, EBITDA Margin, Despite the Economic Slowdown, Ongoing Price Erosions and Growing Competition

- EBITDA(1) Up by 3.0%; Record EBITDA Margin of Over 39%
- Cellcom Israel Declares a First Quarter Dividend of NIS 3.36 per Share (Totals Approx. NIS 330 Million)

First Quarter 2009 Highlights (compared to the first quarter 2008):

- Total Revenues from services increased 1.1% to NIS 1,373 million ($328 million)
- Revenues from content and value added services (including SMS) increased 36.5%, reaching 14.7% of services revenues
- Total Revenues (including revenues from end-user equipment) totaled NIS 1,561 million ($373 million), a 2.1% decrease resulting from a 20.7% decrease in handset and accessories’ revenues
- EBITDA increased 3.0% to NIS 611 million ($146 million); EBITDA margin 39.1%, up from 37.2%
- Operating income increased 4.2% to NIS 442 million ($105 million)
- Net income increased 27.5% to NIS 348 million ($83 million)
- Subscriber base increased approx. 21,000 during the first quarter; reaching approx. 3.208 million at the end of March 2009
- 3G subscribers reached approx. 833,000 at the end of March 2009, net addition of approx. 102,000 in the first quarter 2009
- The Company Declared first quarter dividend of NIS 3.36 per share

Cellcom Israel Ltd. , announced today its financial results for the first quarter of 2009. Revenues for the first quarter 2009 totaled NIS 1,561 million ($373 million); EBITDA for the first quarter 2009 totaled NIS 611 million ($146 million), or 39.1% of revenues; and net income for the first quarter 2009 reached NIS 348 million ($83 million). Basic earnings per share for the first quarter 2009 reached NIS 3.54 ($0.85).

Commenting on the results, Amos Shapira, Chief Executive Officer said, “We see a direct linkage between the “Public Trust” organization report recently published and the strengthening of Cellcom Israel’s position in the past few years along with the improvement in its financial results. This report stated that Cellcom Israel provides the best quality of customer care in the Israeli Cellular market and that we received the lowest number of customer complaints although we have the highest number of subscribers in the Israeli cellular market. I believe this is the only and the worthwhile way to do business.

This quarter, Cellcom Israel continued to show strong profitability, with operating and net income increasing to new levels. These results are mainly due to our focusing on our core business, efficiency measures and improvement of our subscriber base. These achievements are especially noteworthy in light of the current macroeconomic environment, driving a decline in roaming revenues on inbound and outbound tourism, as well as an increase in allowance for doubtful accounts which may also have been influenced by the global economic slowdown, in addition to the challenging competitive landscape and ongoing price erosions. I want to thank all our employees and managers for the achievements this quarter, as well as for successfully implementing the widespread efficiency measures in this fluid economic environment, further enhancing our status as the leading cellular company in Israel.”

“We at Cellcom Israel, the cellular company which serves the highest number of cellular subscribers in Israel, continue to focus on our primary source of business, mobile communications and value added services over our advanced cellular network characterized by the high speed and capacity of our HSPA technology. This is supported by our expansion into complementary business where we have identified both cost synergies and direct contribution to our business such as the fixed line services to the business community, provided over our fiber-optic cables and microwave links. I am pleased to announce that in the first quarter our content and value added services revenues grew by approximately 36% year over year, as we continued to drive additional growth in fixed line services. Our strategy of focusing in the core business and in those areas where we find synergy, enables us to act vigorously also in the aspect of improving reliability and service quality to our customers and in the aspect of increasing efficiency as well as continue to invest in technology and in
enhancing our network’s speed, subject to supporting equipment availability, while keeping our relative advantage.”

“We continue to grow and expand our 3G subscriber base, and in the first quarter we once again witnessed an ongoing increase in 3G subscribers, reaching 833,000 at the end of March 2009. Most of these 102,000 additional 3G subscribers in this quarter are post-paid subscribers, characterized by higher ARPU.”

Tal Raz, Chief Financial Officer, commented: “We are especially pleased with the substantial growth in our profitability, primarily with the increase in revenues from content and value added services as well as fixed line revenues, while revenue per airtime minute continued to erode by approximately 2% in the first quarter compared to the first quarter last year. The growth in profitability is mainly attributable to our diligent cost management, which led to marketing, sales, general and administrative expenses remaining at the same level as in the first quarter last year. Furthermore, our Free Cash Flow(1) rose once again, totaling NIS 393 million for the quarter, up 454% from the first quarter last year, enabling us a dividend distribution of approximately NIS 330 million, representing 95% of net income, to our shareholders.”

Financial Review

Revenues for the first quarter of 2009 totaled NIS 1,561 million ($373 million), a 2.1% decrease compared to NIS 1,595 million ($381 million) in the first quarter last year. The decrease in revenues resulted mainly from a 20.7% decrease in handset and accessories’ revenues, from NIS 237 million ($57 million) in the first quarter last year, to NIS 188 million ($45 million) in the first quarter 2009, primarily due to the higher number of handsets and accessories sold in the first quarter last year. This decrease was partially offset by an increase in revenues from services, reaching NIS 1,373 million ($328 million), up from NIS 1,358 million ($324 million) in the first quarter last year. The higher service revenues resulted mainly from an increase of approximately 36% in content and value added services (including SMS) revenues in the first quarter 2009, compared to the first quarter last year. Revenues from content and value added services reached NIS 202 million ($48 million), or 14.7% of service revenues. Furthermore, the increase in landline services revenues during the quarter also contributed to the higher service revenues. These increases were partially offset by the reduction of interconnect tariffs, approximately 2% fewer working days in the first quarter of 2009 compared to the first quarter last year, ongoing airtime price erosion as well as a substantial decrease in revenues from roaming services following the significant reduction in incoming and outgoing tourism resulting from the global economic slowdown.

Cost of revenues for the first quarter of 2009 totaled NIS 806 million ($192 million), down 8.3% from NIS 879 million ($210 million) in the first quarter last year. This decline primarily follows the lower handset costs resulting from the decline in number of handsets sold during the first quarter of 2009, in addition to lower depreciation expenses. These decreases were partially offset by an increase in cost of content and value-added services due to increased usage.

Gross profit for the first quarter of 2009 incresed 5.4% reaching NIS 755 million ($180 million), compared to NIS 716 million ($171 million) in the first quarter of 2008. Gross profit margin for the first quarter 2009 increased to 48.4% from 44.9% in the first quarter last year, mainly due to the significant decrease in handsets sales during the quarter compared to the first quarter last year, which produce lower margins.

Selling, Marketing, General and Administrative Expenses (“SG&A Expenses”) for the first quarter of 2009 totaled NIS 311 million ($74 million), similar to the first quarter of 2008. The SG&A Expenses in the first quarter 2009 were mainly impacted by a significant increase in bad debts and doubtful accounts expenses, mainly following number portability, which allows subscribers to switch to another cellular operator without settling their outstanding debt. The increase in bad debt and doubtful accounts may also have been influenced by the global economic slowdown. This increase was offset mainly by a decrease in salaries and related expenses.

Operating income for the first quarter 2009 increased 4.2%, reaching NIS 442 million ($105 million), compared to NIS 424 million ($101 million) in the first quarter last year. Operating income for the first quarter of 2008 included a one-time gain of approximately NIS 19 million, relating mainly to the sale of certain surplus underground pipes for fiber optic cables and the sale of a plot of land in Modi’in, Israel.

EBITDA for the first quarter 2009 increased 3.0%, reaching NIS 611 million ($146 million), compared to NIS 593 million ($142 million) in the first quarter of 2008. EBITDA as a percent of revenues, reached 39.1% compared to 37.2% in the first quarter last year. The higher operating income, EBITDA and EBITDA margins primarily follows the ongoing efficiency measures and prudent expense management throughout the quarter.

Financing Income, net for the first quarter 2009 totaled NIS 28 million ($7 million), compared to financing expenses net of NIS 45 million ($11 million) in the first quarter last year. This change resulted mainly from deflation of 0.7% in the first quarter this year, compared to an inflation of 0.4% in the first quarter last year, which led to an income from linkage to the Israeli Consumer Price Index (CPI), associated with the Company’s debentures, compared to linkage expenses in the first quarter last year. Financing income also benefited from gains from the Company’s hedging portfolio mainly resulted from a
depreciation of 10% of the NIS against the US dollar in the first quarter of 2009, compared to an appreciation of 8% in the first quarter last year, which resulted in a loss from currency hedging transactions in the first quarter last year. The financing income was partially offset by lower interest income relating to the Company’s short term deposits as well as expenses from foreign currency differences relating to trade payables balances in the first quarter 2009, compared to an income from foreign currency differences in the first quarter last year, following the depreciation of the NIS against the US dollar in the first quarter of 2009.

Net Income for the first quarter 2009 increased 27.5%, reaching NIS 348 million ($83 million), compared to NIS 273 million ($65 million) in the first quarter last year. Basic earnings per share for the first quarter 2009 totaled NIS 3.54 ($0.85), compared to NIS 2.80 ($0.67) in the first quarter 2008.

Operating Review

New Subscribers – at the end of March 2009 the Company had approximately 3.208 million subscribers. During the first quarter of 2009 the Company added approximately 21,000 net new subscribers, most of them post-paid subscribers.
In the first quarter of 2009, the Company added approximately 102,000 net new 3G subscribers to its 3G subscriber base, reaching approximately 833,000 3G subscribers at the end of March 2009, representing 26% of the Company’s total subscriber base.
The Churn Rate in the first quarter 2009 was 5.0%, compared to 5.3% in the first quarter last year. The churn for both quarters primarily consists from lower contribution pre-paid subscribers and subscribers with collection problems.
Average monthly subscriber Minutes of Use (“MOU”) in the first quarter 2009 totaled 323 minutes, compared to 327.2 minutes in the first quarter 2008, a decrease of 1.3%. The decline in usage level is mainly due to fewer working days in the first quarter of 2009 than in the first quarter last year. Following the regulatory requirement to change the basic airtime charging units from twelve-second to one-second units commencing January 1, 2009, MOU for the first quarter 2008 has been adjusted to the same per-one second unit basis to enable a comparison. MOU for the first quarter of 2008 based on the former charging units was 350.5 minutes.

The monthly Average Revenue per User (ARPU) for the first quarter 2009 decreased 3.2% and totaled NIS 139.9 ($33.4), compared to NIS 144.5 ($34.5) in the first quarter last year.

Financing and Investment Review

Cash Flow

Free cash flow (Cash provided by operating activities, net of cash used in investing activities) for the first quarter of 2009 totaled NIS 393 million ($94 million), compared to NIS 71 million ($17 million) generated in the first quarter of 2008. The significant increase in Free Cash Flow resulted mainly from payments of expenses related to preparation for number portability which characterized the first quarter last year. The increase in Free Cash Flow also resulted from a decrease in income tax payments due to a one time catch up tax payment in the amount of NIS 70 million for 2007 accrued tax liability, made at the beginning of the first quarter 2008.

Shareholders’ Equity

Shareholders’ Equity as of March 31, 2009 amounted to NIS 439 million ($105 million), primarily consisting of accumulated undistributed retained earnings.

Investment in Fixed Assets and Intangible Assets

During the first quarter 2009, the Company invested NIS 98 million ($23 million) in fixed assets and intangible assets (including, among others, deferred commissions and investments in information systems and software), compared to NIS 116 million ($28 million) in the first quarter 2008.

Subscriber acquisition and retention costs

Under the Company’s current accounting policies, capitalized customer acquisition and retention costs include only those deferred costs in respect of sales commissions related to the acquisition and retention of subscribers, if the costs can be measured reliably and are directly attributable to obtaining a specific subscriber.

The Company’s current accounting policy is to recognize subsidies on handset sales as an expense in the period incurred. Management is evaluating certain subsidies, related to handsets sold together with a service agreement with guaranteed minimum future revenue, as additional costs that might be eligible for capitalization. If the Company were to defer and capitalize such subsidies, management estimates that the Company’s retained earnings as of January 1, 2009 would increase by approximately NIS 90-100 million, the Company’s EBITDA for the first quarter of 2009 would increase by approximately NIS 20-25 million and the Company’s net income for the first quarter of 2009 would decrease by approximately NIS 5-10 million.

Dividend

On May 25, 2009, the Company’s board of directors declared a cash dividend in the amount of NIS 3.36 per share, and in the aggregate amount of approximately NIS 330 million (the equivalent of approximately $0.84 per share and approximately $82 million in the aggregate, based on the representative rate of exchange on May 21, 2009; The actual US$ amount for dividend paid in US$ will be converted from NIS based upon the representative rate of exchange published by the Bank of Israel on June 18, 2009), subject to withholding tax described below. The dividend will be payable to all of the Company’s shareholders of record at the end of the trading day in the NYSE on June 8, 2009. The payment date will be June 22, 2009. According to the Israeli tax law, the Company will deduct at source 20% of the dividend amount payable to each shareholder, as aforesaid, subject to applicable exemptions. The dividend per share that the Company will
pay for the first quarter of 2009 does not reflect the level of dividends that will be paid for future quarterly periods, which can change at any time in accordance with the Company’s dividend policy. A dividend declaration is not guaranteed and is subject to the Company’s board of directors’ sole discretion, as detailed in the Company’s annual report for the year ended December 31, 2008 on Form 20-F, under “Item 8 – Financial Information – Dividend Policy”.

Other developments

Shelf Prospectus and Issuance of Debentures

In March 2009, the Company filed a shelf prospectus with the Israeli Securities Authority and the Tel Aviv Stock Exchange. The shelf prospectus will allow the Company, from time to time, to offer and sell debt, equity and warrants in Israel, in one or more offerings, subject to a supplemental shelf offering report, in which the Company will describe the terms of the securities offered and the specific details of the offering.

In April 2009, subsequent the balance sheet date, the Company issued additional debentures from the Company’s existing Series D in a principal amount of approximately NIS 186 million for a total consideration of approximately NIS 215 million. The interest rate of series D is fixed at 5.19% per annum, linked to the Israeli Consumer Purchase Index. The price for a NIS 1,000 par value unit offered in this issuance was set at NIS 1,161, representing an effective annual yield of 3.73%. The Company also issued a new series E debentures in a principal amount of approximately NIS 789 million at an interest rate of 6.25% per annum, without any linkage, for a total consideration of approximately NIS 785 million. The debentures (rated ilAA/Stable) were issued in a public offering in Israel based on the shelf prospectus and were listed for trading on the Tel Aviv Stock Exchange.

For additional details on the Company’s debentures see the Company’s annual report for the year ended December 31, 2008 on Form 20-F under “Item 5. Operating and Financial Review and Prospects – B. Liquidity and capital resources – Debt service – Public debentures” and the Company’s immediate reports on form 6-K dated March 31, 2009; April 5, 2009 and April 6, 2009.

These reports are available on the Company’s website at: http://www.cellcom.co.il

To access the live webcast of the conference call, please access the investor relations section of Cellcom Israel’s website: http://www.cellcom.co.il. After the call, a replay of the call will be available under the same investor relations section.

About Cellcom Israel

Cellcom Israel Ltd., established in 1994, is the leading Israeli cellular provider; Cellcom Israel provides its approximately 3.208 million subscribers (as at March 31, 2009) with a broad range of value added services including cellular and landline telephony, roaming services for tourists in Israel and for its subscribers abroad and additional services in the areas of music, video, mobile office etc., based on Cellcom Israel’s technologically advanced infrastructure. The Company operates an HSPA 3.5 Generation network enabling advanced high speed broadband multimedia services, in addition to GSM/GPRS/EDGE and TDMA networks. Cellcom Israel offers Israel’s broadest and largest customer service infrastructure including telephone customer service centers, retail stores, and service and sale centers, distributed nationwide. Through its broad customer service network Cellcom Israel offers its customers technical support, account information, direct to the door parcel services, internet and fax services, dedicated centers for the hearing impaired, etc. As of 2006, Cellcom Israel, through its wholly owned subsidiary Cellcom Fixed Line Communications L.P., provides landline telephone communication services in Israel, in addition to data communication services. Cellcom Israel’s shares are traded both on the New York Stock Exchange (CEL) and the Tel Aviv Stock Exchange (CEL).

For additional information please visit the Company’s website http://www.cellcom.co.il