Form 20-F Cellcom Israel Ltd. For: Dec 31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 20–F

 

 

OR

 

 

For the fiscal year ended December 31, 2020

 

OR

 

 

 

OR

Date of event requiring this shell company report …………………………….

Commission file number 001-33271

 

CELLCOM ISRAEL LTD.

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(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)

 

ISRAEL

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(Jurisdiction of incorporation or organization)

 

10 Hagavish Street, Netanya  4250708, Israel

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(Address of principal executive offices)

 

Liat Menahemi Stadler, 972-52-9989595 (phone), 972-98607986 (fax), [email protected], 10 Hagavish Street, Netanya 4250708, Israel

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(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class	Trading Symbol	Name of each exchange on which registered
Ordinary Shares, par value NIS 0.01 per share	(CEL)	New York Stock Exchange (“NYSE”)*1

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

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(Title of Class)

 

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

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(Title of Class)

 

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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2020, the Registrant had outstanding 162,775,715 Ordinary Shares, par value NIS 0.01 per share.

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

☐  Yes    ☒  No

If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  

☐  Yes    ☒  No

Indicate by check mark whether the Registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒  Yes    ☐  No

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer , or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company”  in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐

Accelerated filer  ☒

Non-accelerated filer  ☐

Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 762(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☐

International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒

Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant elected to follow.

Item 17 ☐           Item 18 ☐

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).          

☐  Yes          ☒  No

 

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

☐  Yes          ☐  No

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TABLE OF CONTENTS

INTRODUCTION

 

In this annual report, “Cellcom,” the “Company,” “we,” “us” and “our” refer to Cellcom Israel Ltd. and its subsidiaries.  The terms “NIS” refers to new Israeli shekel, and “dollar,” “USD” or “$” refers to U.S. dollars. The term "Companies Law" shall mean the Israeli Companies Law of 1999.

 

Presentation of Financial and Share Information

 

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board ("IASB").

Unless we indicate otherwise, U.S. dollar translations of the NIS amounts presented in this annual report are translated for the convenience of the reader using the rate of NIS 3.215 to $1.00, the representative rate of exchange as of December 31, 2020 as published by the Bank of Israel. The translation is for the convenience of the reader only, and it does not represent the fair value of the translated assets and liabilities.

 

Trademarks

 

We have proprietary rights to trademarks used in this annual report which are important to our business. We have omitted the “®” and “™” designations for certain trademarks, but nonetheless reserve all rights to them.  Each trademark, trade name or service mark of any other company appearing in this annual report belongs to its respective holder.

 

Industry and Market Data

 

This annual report contains information about our market share, market position and industry data. Unless otherwise indicated, this statistical and other market information is based on statistics prepared by the Ministry of Communications of Israel and Sapio Research & Development. Industry publications generally state that the information they contain has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. We have not independently verified the accuracy of market data and industry forecasts contained in this annual report that were taken or derived from these industry publications.

 

Special Note Regarding Forward-Looking Statements

 

We have made statements under the captions “Item 3. Key Information - D - Risk Factors,” “Item 4 – Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” and in other sections of this annual report that are forward-looking statements.  In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other comparable terminology.  These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business.  These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Item 3. Key Information - D. Risk Factors.”  You should specifically consider the numerous risks outlined under “Item 3. Key Information - D. Risk Factors.”

 

Although we believe the expectations reflected in the forward-looking statements contained in this annual report are reasonable, we cannot guarantee future results, level of activity, performance or achievements.  Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements.  We assume no duty to update any of these forward-looking statements after the date of this annual report to conform our prior statements to actual results or revised expectations, except as otherwise required by law.

 

PART I

 

Not applicable.

 

 

Not applicable.

 

 

 

You should read the following selected consolidated financial data in conjunction with the section of this annual report entitled “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements, the notes thereto, the independent registered public accounting firms’ report and the convenience translation of the consolidated financial statements as of and for the year ended December 31, 2020 into U.S. dollars solely for the convenience of the reader, included elsewhere in this annual report.

 

The selected data presented below under the captions “Income Statement Data” and “Statement of Financial Position Data” for, and as of the end of, each of the years in the five-year period ended December 31, 2020, are derived from the consolidated financial statements of Cellcom Israel Ltd. and subsidiaries. The consolidated financial statements as of December 31, 2019 and 2020 and for each of the years in the three-year period ended December 31, 2020, and the report thereon, are incorporated by reference into this annual report. Data for 2017 and 2016, and the selected consolidated balance sheet data as of December 31, 2018, 2017 and 2016, have been derived from our previously reported audited consolidated financial statements, which are not included in this annual report. The selected financial data should be read in conjunction with our consolidated financial statements and accompanying notes and “Operating and Financial Review and Prospects” appearing in Item 5 of this annual report, and are qualified entirely by reference to such consolidated financial statements.

 

The information presented below under the caption “Other Data” contains information that partly is not derived from the financial statements.

 

For your convenience, the following tables also contain U.S. dollar translations of the NIS amounts presented at December 31, 2020, translated using the rate of NIS 3.215 to $1.00, the representative rate of exchange on December 31, 2020 as published by the Bank of Israel.

 

 

The following is a reconciliation of net income to adjusted EBITDA:

 

As from January 1, 2019 we apply International Financial Reporting Standard 16, Leases (hereinafter: “IFRS 16” or “the standard”), see note 3-O to our financial statements.

 

 

 

 

We have set out below the calculation of cellular ARPU for each of the periods presented:

 

 

 

Not applicable.

 

 

Not applicable.

 

 

We believe that the occurrence of any one or some combination of the following factors could have a material adverse effect on our business, financial condition or results of operations.

 

Risks Related to our Business

 

We face intense competition in all aspects of our business.

 

The Israeli telecommunications market is highly competitive in many of its elements. The competition level has increased substantially in recent years, following the entry of additional competitors and regulatory changes alleviating entry barriers and transfer barriers, which the MOC continues to advance. This led to price competition and erosion, high churn rate and high subscriber acquisition costs and adverse effects to our revenues and profitability. The current level of competition in most of the markets in which we operate and aggressive price plan offerings by our competitors are expected to continue. See also the "Competition" section under “Item 4. Information on the Company - B. Business Overview","—Competition – Fixed-line Segment– Internet infrastructure and Connectivity Business" and "– Telephony Business". Should the current level of competition in the cellular market continue, it will continue to adversely affect our results of operations. Any of the following developments materializing in our market, may result in increased competition and further materially adversely affect our profitability:

 

 

 

 

 

 

 

 

 

 

 

 

We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results.

 

A substantial part of our operations is subject to the Israeli communications laws and the licenses for the provision of different telecommunications services that we received from the Ministry of Communications in accordance with the Communications Law.  The interpretation and implementation thereof are not certain and subject to change and disagreements have arisen and may arise in the future between the Ministry of Communications, or MOC, and us. The Communications Law and regulations thereunder grant the Ministry of Communications extensive regulatory and supervisory authority with regard to our activities. The MOC may modify our licenses without our consent and in a manner that could limit our freedom to conduct our business and harm our results of operations. Frequent changes, or changes made on a timetable we cannot meet, to our licenses and legislation can increase the risk of noncompliance with our licenses or violation of such legislation and our exposure to lawsuits and regulatory sanctions. The MOC has the authority to impose substantial sanctions in the event of a breach of our licenses or the applicable laws and regulations and the authority to revoke them, in case we materially violate their terms.

 

Our licenses are limited in time and may be extended upon our request to the Ministry of Communications and its confirmation that we have complied with the provisions of our license and the applicable law, have continuously invested in the improvement of our service and network and have demonstrated the ability to do so in the future.

 

Our operations are also subject to the regulatory and supervisory authority of other Israeli regulators which have the authority to impose criminal and substantial administrative sanctions against us.

 

Further, our business and results of operations could be materially and adversely affected by new legislation and decisions by regulators or the courts that:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If we fail to compensate for lost revenues, increased expenses (objectively or in comparison to our competitors) or additional investments resulting from past or future legislative or regulatory changes with alternative sources of income or otherwise, our results of operations may be materially adversely affected.

 

Our operating results, profitability and cash flow have decreased significantly in the past several years, resulting in loss. Further decline may adversely affect our financial condition.

As a result of substantial and continuing changes in our regulatory and business environment, our business results, profitability and cash flow decreased significantly over the past several years and in 2018, 2019 and 2020, resulted in loss. Further decline may adversely affect our financial condition. The main factors leading to the continued decrease in our results of operations were regulatory developments intended to increase competition in the Israeli communications market, which resulted in significant erosion in the prices charged for the provision of cellular services. Should the aggressive competition in the various markets in which we operate continue and given our large amount of debt and the additional investments we are required to make in relation to the 2020 frequencies tender, our results of operation and financial condition may be adversely affected and we may be prevented from making the investments necessary in order to maintain  our competitive standing and potential future growth, and we may be required to raise additional debt on unfavorable terms.

 

We may not be able to obtain permits to construct and operate cell sites

 

We depend on our network of cell sites to maintain and enhance network coverage for our cellular subscribers. We also deploy and operate microwave sites as part of our transmission network. The construction and operation of these various facilities are highly regulated and require us to obtain various consents and permits.

 

We have experienced difficulties in obtaining some of these consents and permits, particularly in obtaining building permits for cell sites from local planning and building authorities. As of December 31, 2020, we operated a small portion of our cell sites without building permits or applicable exemptions and approximately 33% of our cell sites without building permits in reliance on an exemption from the requirement to obtain a building permit, mainly for radio access devices. In October 2018, regulations setting procedures for the construction, changes and replacement of radio access devices exempt from building permits were enacted. These regulations reflect previous judicial limitations placed upon our ability to make changes and replace radio access devices and also introduce a new licensing procedure that further reduces our ability to construct new radio access devices based on such exemption. This may adversely affect our existing networks and our networks' build out, more so in light of the necessity to support the new frequencies we won in the 2020 frequencies tender (see "Item 4. Information on The Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Spectrum allocation").  In addition, the Ministry of Justice expressed an opinion that such regulations and the exemption do not relate to the radio access devices' ancillary equipment and related legal proceedings are awaiting the court's decision. The exclusion of the ancillary equipment from the exemption, if adopted, could adversely affect our existing networks and our networks' build out.

 

 Additionally, District Court rulings adopted a narrower interpretation of the exemption, including in regards to 'rooftops' to which the exemption may be applied and other legal proceedings, including such claiming an extraordinary usage permit is required in certain circumstances, await the court's decision.

 

We also rely on the exemption for our rooftop microwave sites and signal amplifiers (known as 'repeaters'). It is unclear whether other types of repeaters require a building permit.

 

In addition, we may be operating a significant number of our cell sites in a manner that is not fully compatible with the building permits issued for these cell sites, which may, in some cases, also constitute grounds for termination of our lease agreements for those sites or claims for breach of such agreements.

 

Pursuant to the Israeli Non-Ionizing Radiation Law, 2006, the granting or renewal of an operating permit by the Commissioner of Environmental Radiation at the Ministry of Environmental Protection of Israel, or the Commissioner, for a cell site or other facility is subject to the receipt of a building permit or an exemption from such a permit.

 

Operation of a cell site or other facility without a building permit or operating permit or not in accordance with the permits or other legal requirements may subject us and our officers and directors to criminal, administrative and civil liability, to eviction orders in respect of the cell sites in breach, revocation or suspension of the operating permit, as well as to withholding the grant of operating permits to additional cell sites or demolition orders. As a result, we may be required to relocate cell sites to less favorable locations or stop operation of cell sites.

 

If we are unable to obtain or rely on exemptions from obtaining or to renew building or other consents and permits for our existing cell sites or other facilities, or if the Plan is changed to include additional restrictions and requirements on the construction and operation of cell sites, it could adversely affect our existing network and its build-out, delay the deployment of our networks, negatively affect the extent, quality and capacity of our network coverage and our ability to continue to market our products and services effectively, all of which may have a material adverse effect on our results of operations and financial condition.

 

  For additional details see “Item 4.B – Business Overview – Government Regulations – Cellular Segment – Permits for Cell Site Construction”.

 

We may be required to indemnify certain local planning and building committees in respect of claims against them.

 

Under the Israeli Planning and Building Law, 1965, by approving a building plan, local planning and building committees may be required to compensate for depreciation of properties included in or neighboring the approved plan.

 

As a precondition to obtaining a cell site construction permit from a planning and building committee, we are required to provide a letter to the committee indemnifying it for possible depreciation claims and have provided hundreds of such indemnification letters to local planning and building committees. Calls upon our indemnification letters may have a material adverse effect on our financial condition and results of operations. We may also decide to demolish or relocate existing cell sites to less favorable locations or not at all, due to the obligation to provide indemnification. As a result, our existing service may be impaired or the expansion of our network coverage could be limited.

 

Alleged health risks relating to non-ionizing radiation generated from cell sites and cellular devices may harm our prospects

 

Handsets, accessories and various types of cell sites are known to be sources of non-ionizing radiation emissions and are the subject of an ongoing public debate and concern in Israel. Radio frequency electromagnetic fields were classified by the International Agency for Research on Cancer (an agency of the World Health Organization) as possibly carcinogenic to humans (Group 2B), based on an increased risk for glioma, a malignant type of brain cancer associated with wireless phone use, and research is being conducted in regards to cellular handsets use and cancer and other health risks. Recommendations to take precautionary measures when using cellular handsets were published by the Israeli authorities and in March 2020, the international committee for protection from radio frequency radiation updated its guidelines for protection from radio frequency radiation. While, to the best of our knowledge, the handsets that we market comply with the applicable legislation that relate to acceptable “specific absorption rate,” or SAR, levels, we rely on the SAR levels published by the manufacturers of these handsets and do not perform independent inspections of the SAR levels of these handsets. As the manufacturers’ approvals refer to a prototype handset, we have no information as to the actual level of SAR of the handsets throughout the lifecycle of the handsets, including in the case of handset repair. See also “Item 4. Information on the Company – B. Business Overview – Government Regulations – Cellular Segment – Handsets”.

 

Health concerns regarding cell sites have caused us difficulties in obtaining permits for cell site construction and obtaining or renewing leases for cell sites If health concerns regarding non-ionizing radiation increase further, or if adverse findings in studies of non-ionizing radiation are published, non-ionizing radiation levels are found to be higher than the standards set for handsets and cell sites, we may be subject to health-related claims for substantial sums. Consumers may also be discouraged from using cellular handsets and regulators may impose additional restrictions on the construction and operation of cell sites or handset and accessories marketing and usage. As a result, we may experience increased difficulty in constructing and operating cell sites and obtaining leases for new cell site locations or renewing leases for existing locations, or be exposed to property depreciation claims; and we may lose revenues due to decreasing usage of our services and be subject to increased regulatory costs. We have not obtained insurance for these potential claims. An adverse outcome or settlement of any health-related litigation against us or any other provider of cellular services could have a material adverse effect on our results of operations, financial condition or prospects.

 

The unionizing of our employees may impede necessary organizational and personnel changes, result in increased costs or disruption to our operation.

 

From 2015 we have been a party to several collective employment agreements with our employees' representatives and the Histadrut, an Israeli labor union and in April 2021, we entered into a new collective agreement. The collective agreements have consistently increased our employment costs. The agreement defines employment policy and terms in various aspects, including payments to the employees, procedures relating to manning a position, change of place of employment and dismissal, including management's and the employees' representative's respective authority with regards to each. As a result, our day-to-day operations and our ability to execute organizational and personnel changes is more limited, cumbersome, costly and lengthy, and requires more management attention that would otherwise be available for our ongoing business. On several occasions, the Histadrut announced a labor dispute at the Company and on one occasion the employees' representatives commenced a sudden and unlawful strike which ended the following day. Our subsidiary Golan is a party to a different collective agreement, valid until October 2022.

 

Further disagreements with the employees' representatives or an inability to reach a new collective employment agreement, may trigger work stoppages or other disruptions to our operation and an adverse impact on our services or customer service, changes may fail to be executed or be executed in a materially different way than planned, resulting in substantially lower savings than expected or requiring materially increased employment costs. Increased costs, inability or limited ability to make organizational and personnel changes, as well as work stoppages or other disruption to our operations and limitations on management's discretion, may damage the efficiency and quality of our operations, and may lead to damage to our reputation, increased customer churn, loss of market share and reduced profitability.

 

We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits.

 

We provide services to millions of subscribers on a daily basis. As a result of the scope and magnitude of our operations, as well as the multitude of pricing plans for stand-alone and bundles of services, the large amount of usage data our information systems need to process and record with relation to our subscribers according to their respective pricing plans, the frequent and multiple changes to our operation and pricing plans due to regulatory changes or in response to the changing market conditions, and the involvement of thousands of sales and customer service representatives in the sale process and after sale contacts with our existing or prospective customers - all increasing the risk of discrepancies occurring between a pricing plan and the information processed by our internal information systems or inadequate information provided, despite our continued efforts to the contrary - we are subject to the risk of a large number of lawsuits, including class action suits by consumers and consumer organizations. These actions are costly to defend and could result in significant judgments against us, which may materially and adversely affect our financial results. We are currently engaged in dozens of purported class action suits as a defendant, many of which are for substantial amounts. For a summary of certain material legal proceedings against us, see “Item 8 – Financial Information - A. Consolidated Statements and Other Financial Information –Legal Proceedings”.

 

We employ thousands of employees and are therefore subject to the risk of employee lawsuits, including class action suits by employees.

 

We are subject to the risk of intellectual property rights claims against us, in relation to our products and services including TV service and other content related services, we purchase from third party content providers. These claims may require us to initiate or defend protracted and costly litigation, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages or may be required to obtain licenses for the infringing product or service, which, if in substantial sums, could harm our results of operations. If we cannot obtain all necessary licenses on commercially reasonable terms, we may be forced to stop using or selling the products and services.

 

Our operations are dependent on complex technology and information systems.

 

Our operations are dependent on a number of complex technological and information systems, including billing systems. The occurrence of malfunctions in such complex and ever changing and expanding systems is inevitable. In addition, we are in the process of developing and implementing a unified customer relation management, or CRM, system for both our cellular and fixed-line operations, which may result in larger expenditures than anticipated, require significant management attention that would otherwise be available for our ongoing business, or lead to unforeseen operating difficulties and malfunctions. A malfunction in any of our systems which severely impacts our ability to provide products and services to our customers or adequately bill them, may result in loss of revenues to us, may adversely impact our brand and service perception, and expose us to legal claims and regulatory sanctions, all of which may adversely affect our results of operations.

 

Cyber attacks impacting our networks or systems could have an adverse effect on our business.

 

Cyber attacks, including through the use of malware or ransomware, computer viruses, dedicated denial of services attacks, credential harvesting and other means for obtaining unauthorized access to or disrupting the operation of our networks and systems and those of our suppliers, vendors and other service providers, could have an adverse effect on our business. Cyber attacks against companies, including Cellcom Israel, have increased in frequency, scope and potential harm in recent years. Cyber attacks may cause equipment failures, loss, disclosure, access, usage, corruption, destruction or the appropriation of information, including sensitive personal information of customers or employees, or valuable content and technical and marketing information, as well as disruptions to our or our customers’ operations. Further, the perpetrators of cyber attacks are not restricted to particular groups or persons. These attacks may be committed by company employees and agents, advertently or inadvertently, or by external actors operating in any geography, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective, and may even be launched by or at the behest of nation states. The preventive actions we take to reduce the risks associated with cyber attacks, including protection of our systems and networks, may be insufficient to repel or mitigate the effects of a major cyber attack in the future, as they become more sophisticated and harder to repel.

 

The inability to operate our networks and systems or those of our suppliers, vendors and other service providers as a result of cyber attacks, even for a limited period of time, may result in significant expenses to us, loss of market share to other communications providers, lost revenues from business interruption and civil and administrative litigation and proceedings. The potential costs associated with these attacks could exceed the insurance coverage we maintain. Further, certain of our businesses, such as those offering security solutions and infrastructure and cloud services to business customers, could be negatively affected if our ability to protect our own networks and systems is called into question as a result of a cyber attack. Any of these occurrences could damage our reputation and could further result in material adverse effect on our results of operation or financial condition.

 

There are certain restrictions in our licenses relating to the ownership of our shares.

 

Our cellular license restricts ownership of our ordinary shares and who can serve as our directors, as follows:

 

 

 

 

 

 

If these requirements are not complied with, we could be found to be in breach of our license and our license could be changed, suspended or revoked.

 

 In addition, our license provides that, without the approval of the Ministry of Communications, no person may acquire or dispose of shares representing 10% or more of our outstanding share capital.  Further, our directors and officers and any holder of ordinary shares representing 5% or more of our outstanding share capital may not own 5% or more of Bezeq or any of our competitors or serve as a director or officer of such a company, subject to certain exceptions, which require the prior approval of the Ministry of Communications.

 

To ensure that an unauthorized acquisition of our shares would not jeopardize our license, our articles of association provide that any shares acquired without approval required under our license will not be entitled to voting rights.

 

We may be adversely affected by the significant technological and other changes in the telecommunications industry.

 

The telecommunications market is known for rapid and significant technological changes and requires ongoing investments in advanced technologies in order to remain competitive. We estimate that data traffic will continue to rapidly grow in the future on both cellular and landline networks. To meet the growing demand for cellular data traffic, we are required, among other things, to continue our investment in our 4G network, invest in 5G network and to continue the upgrade of our transmission network to allow larger capacity and higher data speed rates. To meet the growing demand for landline data traffic and find more cost effective alternatives for the capacity we purchase from Bezeq who owns a widespread landline broadband infrastructure, we have invested in deploying our own infrastructure, invested in IBC and entered an indefeasible right of use agreement with IBC for its network (see also "Item 4. Information on the Company – B. Business Overview – Network and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure – Investment in IBC and sale of fiber-optic infrastructure to IBC"). Such endeavors are both costly and require management attention which could have been directed elsewhere.

 

Further, in March 2020, the MOC determined that the replacement of our and another operator's 850 MHz frequencies with frequencies compatible with international standardization for our region will be effected in several phases. Currently, our 2x10 850MHZ frequencies were reduced and replaced with other 2x5 MHz 850MHZ frequencies; in the next phase - at a later date to be determined, the MOC will enable us to receive a 800 frequencies band and the final phase  - at a later date to be determined, the aforesaid 850MHz frequencies band will be annulled and instead we will be offered another band in the 800 frequencies.  Such replacement, will involve material investments in our networks, including the replacement of radio equipment in the majority of our cellular sites.

 

Some of the frequencies we use were allocated to us for a limited period, including the frequencies we and our sharing partner won in the 2020 frequencies tender and the frequencies originally allocated to Golan. In a public hearing published by the MOC in December 2020, in relation to the shutting down of 2G and 3G networks in Israel, the MOC opined that our 2G and 3G frequencies' allocation shall terminate on 2022 and the MOC consider extending such allocation until 2025, in line with the timeline proposed in the hearing for the shutting down of the networks. The MOC shall further consider allocation of such frequencies thereafter, including by conducting a tender or extending the present allocation. In addition, The MOC may further decrease the frequency band allocated to us under the 2020 frequency tender, or demand that we share it with other operators, after the lapse of four years from its allocation. If the MOC doesn't extend our 2G and 3G frequencies or if alternate frequencies aren't allocated to us, or if our new frequencies bands under the 2020 frequency tender are reduced or shared with other operators, we may not be able to maintain our quality of services.   In addition, the frequencies we and our sharing partner won in the 2020 frequencies tender require us to make substantial investments in purchasing the frequencies and in our networks, including building new cell sites and making changes to the majority of the existing ones. The difficulties in obtaining the required consents and permits, may prevent us from meeting the deployment requirements set in our license which may entitle us to performance based incentives, as well as expose us to additional litigation and such litigation's consequences. See also "We may not be able to obtain permits to construct and operate cell sites".

 

Furthermore, the frequencies won by our sharing partner, shall be available for usage by us subject to conditions agreed with the sharing partner, including with regards to their usage period, and after such frequencies are no longer available to us, we may not have sufficient frequencies to maintain prior quality.

 

See "Item 4. Information on the Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Spectrum allocation" and "Network sharing agreement", including with regards to our dispute with Xfone.

 

If we fail to compensate for increased expenses or investments (especially in comparison to our competitors, not all of which will be required to make similar investments or pay increased expenses), due to, among other things, the competitive environment, our results of operations may be materially adversely affected.

 

Transferring to new technologies and using new equipment, such as our transfer to a new OTT TV services platform, exposes our systems and services to malfunctions, whether due to malfunctions not discovered and resolved in the new technology or equipment or whether due to the transfer process itself.

 

Our handsets profitability have decreased and may decrease further.

 

Handsets sales account for a substantial portion of our revenues and profitability. In recent years additional competitors have entered the handset market and increased the competition in this market, which has contributed to the decrease in our profitability from handsets. The variety of marketing channels we use, including the increased part of transactions using our digital platform also led to a decrease in our profitability in 2020. Continuance of this trend or additional changes to this market, including the entry of additional competitors, including domestic and international retailers, changes of distribution channels or customers purchasing habits, inability to continue to market certain suppliers' products, which account for a big part of our sales (such as Samsung and Apple, which currently account for the majority of our sales, may materially adversely affect our handset profitability and our profitability in general. See also "We face intense competition in all aspects of our business." Further, if the Corona virus effects and regulatory restrictions on our operations continue for a long duration, they would adversely affect our handset sales and profitability therefrom. See "The Corona virus may adversely affect our results of operations.

 

Our network sharing agreement consideration constitute a significant portion of our revenues

 

Consideration from our network sharing agreement with Xfone is material to our results of operations. If the sharing agreement is terminated or its terms are changed such that payments to us are under the agreement are materially reduced or payments are not made to us over a period of time, for any reason whatsoever, it may lead to a material adverse effect on our results of operations. For details regarding breach of the sharing agreement by Xfone, notification of termination of the agreement by Xfone and legal proceedings the Company has initiated, see "Item 4. Information on the Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Network sharing agreement".

 

Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability

 

As of December 31, 2020, our total indebtedness and long-term loans were approximately NIS 3,349 million ($1,042 million), with our net debt at approximately NIS 2,276 million ($708 million). For additional details see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – General". The terms of our debentures and other credit facilities currently permit us to incur additional indebtedness (subject in some cases to certain limitations). Our substantial debt could adversely affect our financial condition by, among other things:

 

 

 

 

 

Israeli institutional investors must follow certain procedures and requirements before investing in non-governmental debentures. As a result, our indentures include certain limitations and covenants, including a covenant not to issue additional debentures if it involves a rating downgrade, certain financial covenants, negative pledge, cross default, limitation on the distribution of dividends, obligation to pay additional interest in case of certain rating downgrades. For details regarding such limitations and covenants see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – Debt Service". These limitations are expected to apply to any additional debt incurred by us. These procedures, limitations and covenants limit our freedom to conduct our business, may impose additional costs on us and may limit our ability to borrow additional debt from Israeli institutional investors as well as adversely affect the terms and price of such debt raising. Further, future increases of the interest rates may increase costs for future debt raising.

 

In August 2019 our rating in relation to our debentures traded on the Tel Aviv Stock Exchange, or TASE was downgraded to ilA and our rating outlook was maintained at “negative”. Any further downgrade in our rating, and any adverse change in our financial results, including any increase in our Net Leverage (defined in our indentures and other credit facilities as the ratio of net debt to EBITDA during a period of 12 consecutive months, excluding one-time events), may adversely affect the terms and price of debt raised.

 

Our business results may be affected by currency fluctuations, by our currency hedging positions and by changes in the Israeli Consumer Price Index

 

A portion of our cash payments are incurred in, or linked to, foreign currencies, mainly U.S. dollars. As almost all of our cash receipts are in NIS, any devaluation of the NIS against the foreign currencies in which we make payments, will increase the NIS cost of our foreign currency denominated or linked expenses and capital expenditures.

 

Furthermore, since the principal amount of and interest that we pay on our Series H and J debentures, are linked to the Israeli CPI, any increase in the Israeli CPI will increase our financing expenses and could adversely affect our results of operations.

 

We purchase derivative financial instruments in order to hedge part of the foreign currency risks and CPI risks deriving from our operations and indebtedness. Derivatives are initially recognized at fair value.

 

We rely on certain suppliers for key equipment and services. We do not own a widespread infrastructure in the landline market for the private sector and are dependent on infrastructure providers.

 

We depend upon a small number of suppliers to provide us with key equipment and services. For example, Nokia Networks Israel, or NSN, provides our GSM/GPRS/EDGE/UMTS/HSPA/LTE core system, radio access network and related products and services; LM Ericsson Israel, or LM Ericsson, supplies part of our radio access network and related products and services based on UMTS/HSPA technology .

 

We are further dependent on infrastructure providers for our internet connectivity, broadband infrastructure for the private sector (using the landline wholesale market and our IRU agreement with IBC), International Long Distance calls, or ILD, landline telephony (using Voice over Broadband, or VOB, technology), and OTT TV services. Those providers include Bezeq and Hot, which provide broadband infrastructure in Israel, TI Sparkle Ireland Telecommunications Ltd. and TI Sparkle (Israel) Ltd., or collectively TI Sparkle and Tamares Telecom Ltd., which connects the Israeli internet network to the global internet network, as well as Israeli telephony, via an underwater communications cable. We are dependent on Bezeq for the provision of our wholesale broadband infrastructure services (as IBC's infrastructure is more limited in scope). We are further dependent on IBC with regards to the infrastructure service we have committed to purchase from IBC in the next 15 years (10% of IBC's 'home pass'), which in turn is dependent on Bezeq for the deployment of its infrastructure using Bezeq's infrastructure. See also "Item 4. Information on The Company – B. Business Overview – Fixed-line Segment".

 

In addition, our cellular end-user equipment sales have been dominated in recent years by Apple and Samsung products. See "Item 4. Information on the Company – B. Business Overview – Cellular Segment – Handsets" for additional details.

 

Kaltura Europe Ltd. provides our TV content management platform, Vubiquity Management Ltd., or VU, provides us international content and content operation services for our OTT TV services. RGE Group Ltd., or RGE, ONE Sport TV services Ltd., or ONE, and Charlton Ltd., or Charlton, each provides us with unique sports content. The Israeli  Public broadcasting corporation, or the Broadcasting Corporation, Keshet Broadcasting Ltd., or Keshet, and Reshet Media Ltd., or Reshet, provides us each with a license to use content on our TV service. Netflix International B.V., or Netflix, and Amazon Europe Core S.a.r.l., or Amazon, provide our TV customers with access to their variable content, including direct access to the Netflix and Amazon services from our set-top box.  Israeli copyrights organizations provide us usage rights in content for our music and TV service.

 

We rely on agreements with foreign carriers to provide cellular roaming capabilities to our cellular subscribers and ILD services to our cellular and landline subscribers.

 

In general, if these suppliers fail or refuse to provide equipment, content or services to us that meet requisite quality standards or on a timely basis, at unfavorable terms to us or provide our competitors more favorable terms and conditions, or if these suppliers fail to produce successful and desirable products or content when no equivalent alternatives are available, or if such suppliers raise the pricing of their products or content (for example, TV sports content prices in Israel have substantially increased with the entry of additional competitors), we may be unable to provide services or products to our subscribers in an optimal manner until an alternative source, if one is available, can be found or the situation is rectified, which may harm our ability to compete and result in loss of customers and revenues or place our licenses at risk of revocation for failure to satisfy the required service standards and subject us to customers' lawsuits.

 

Further, the Coronavirus may result in suppliers failing to supply us with equipment or services required for our continued operation, such as maintenance and construction of our network, due to absence of personnel, all of which may have an adverse effect on our results of operations.

 

Our investment in new businesses involves many risks.

 

We have invested and expect to continue to invest in exploration and development of new business opportunities in order to extend and complete our capabilities and offerings, such as the investment in IBC, the purchase of Golan, and our offerings in the Internet of things (IOT) field. .

 

Such endeavors may involve significant risks and uncertainties. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not materially adversely affect our reputation, financial condition, and operating results. Moreover, entry into such new ventures may trigger increased competitive pressure by the incumbent providers of competing services on our core business, aiming at preventing our efforts to compete with them at the relevant market

 

The Coronavirus may adversely affect our results of operations

 

The Coronavirus was declared a global pandemic by the World Health Organization in March 2020. As of March 2020, the State of Israel (similar to many additional countries) took significant steps in an attempt to prevent the spread of the virus. Among these steps were, restrictions on citizens’ movement and employment, restrictions on gatherings and events, restrictions on commercial activity, the closure of borders between states, the closure of places of culture and leisure, and a considerable reduction of the presence of employees in workplaces. These restrictions led to a significant decrease in both inbound and outbound international tourism and to a significant adverse effect on our roaming revenues in 2020. We expect there to also be a substantial adverse effect on our roaming revenues in the near future, as long as the restrictions on the movement of outbound and inbound tourists continue.

 

Similarly, as a result of the restrictions on commerce and the closure of shopping malls and retail centers, we closed our points of sale and service centers during the lockdowns.

 

Continued restrictions and other adverse effects of the Coronavirus on us and the market in general, including on the financial condition in Israel and around the world, the scope of unemployment, the scope of private consumption, the concern of a local or global recession, or a renewed outbreak of the virus, may adversely affect our operations.

 

Risks Relating to Operating in Israel

 

We conduct our operations in Israel and therefore our results may be adversely affected by political, economic and military instability in Israel.

 

Our operations, our network, our customers and some of our suppliers are located in Israel.  Accordingly, political, economic and military conditions in Israel may directly affect our business.  Any armed conflicts, terrorist activities or political instability in the region or hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our operations, including due to a decrease in the number of tourists visiting Israel and increasing criticism of Israel in the international community (such as the increasing international pressure to boycott Israeli companies, including through the United Nations' Human Rights Council "name and shame list", especially when such companies operate in territories held by Israel in Judea and Samaria, as we and other Israeli operators are required to do under our license). Further, a substantial part of our network and information systems is located within range of missile strikes from the Gaza Strip and Lebanon. Any damage to our network or information systems may damage our ability to provide service, in whole or in part or otherwise damage our operation and could have an adverse effect on our business, financial condition or results of operations.

 

In addition, in the event that the State of Israel relinquishes control over certain territories currently held by it to the Palestinian Authority, we will not be able to provide service from our cell sites located in Israeli populated areas and on connecting roads in these territories. This may result in the loss of subscribers and revenues and in a decrease in our market share.

 

Our freedom and ability to conduct our operations may be limited during periods of national emergency.

 

 Israeli law permits the Prime Minister of Israel, for reasons of state security or public welfare, to order a telecommunications license holder to provide services to or to establish a telecommunications facility for the security forces, and entitles the Israel Defense Forces to register or take engineering equipment and facilities as may be required for the security forces to carry out their duties. Israeli law also permits the Israeli Government, during national emergencies or for reasons of national security, to take all necessary actions in order to ensure state security, including taking control of our network. If national emergency situations arise in the future and if we are to be subject during such time to any of the foregoing actions, this could adversely affect our ability to operate our business and provide services during such national emergencies and adversely affect our business operations.

 

Provisions of Israeli law and our license may delay, prevent or impede an acquisition of us, which could prevent a change of control.

 

The Companies Law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Further, the provisions of our licenses require the prior approval of the Ministry of Communications for changes of control in our Company.

 

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when the time expires, tax then becomes payable even if no actual disposition of the shares has occurred.

 

These provisions could delay, prevent or impede an acquisition of us, even if such an acquisition would be considered beneficial by some of our shareholders.

 

Risks Relating to Our Ordinary Shares

 

A substantial number of our ordinary shares could be sold into the public market, which could depress our share price.

 

Our largest shareholder, Koor, holds approximately 46.1% of our outstanding ordinary shares, as of March 31, 2021 (of which 5% are held (through a lending transaction which DIC recently informed of its termination) by two shareholders, which are considered joint controlling shareholders with Koor).  The market price of our ordinary shares could decline as a result of future sales by Koor or other existing shareholders or the perception that these sales could occur. Sales may be made pursuant to a registration statement, filed with the U.S. Securities and Exchange Commission, or the SEC, pursuant to the terms of a registration rights agreement or otherwise, or in reliance on an exemption from or transaction not subject to the registration requirements of the Securities Act, including the exemptions provided by Rule 144. Any decline in our share price could also make it difficult for us to raise additional capital by selling shares.

 

In addition, we may issue additional options for a price lower than our market price, which could, in turn, decrease our share price as well. See "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – General".

In addition, under our 2015 option plan, options and Restricted Stock Units, or RSU, are subject to vesting schedules but vesting will be accelerated upon certain events including any sale or other disposition of all, or substantially all, of our outstanding shares. As of December 31, 2020 we had 14,493,651 shares reserved for issuance upon the exercise of options and RSUs. See "Item 6. Directors, Senior Management and Employment – E. Share Ownership –Share Incentive Plans".

 

 

Our History

 

Cellcom Israel Ltd. was incorporated in 1994 in Israel. Our principal executive offices are located at 10 Hagavish Street, Netanya 4250708, Israel and our telephone number is (972)-52-999-0052. Our authorized U.S. representative, Puglisi & Associates, is located at 850 Library Avenue, Suite 204 Newark, Delaware 19711 and our agent for service of process in the United States, CT Corporation System, is located at 111 Eighth Avenue, New York, NY 10011.

 

In February 2007 we listed our shares on the NYSE and in July 2007 we dual listed our shares on the Tel Aviv Stock Exchange and began applying the reporting leniencies afforded under the Israeli Securities Law to companies whose securities are listed both on the NYSE and the TASE. On February 8, 2021 we voluntarily delisted our shares from trading on the NYSE and have commenced reporting in accordance with the reporting obligations under the Israeli Securities Law applicable to reporting corporations in Israel which are not dual-listed. Our shares continue to be registered in the United States in accordance with the provisions of the United States securities laws and therefore, we will continue to be subject to the reporting obligations under the U.S. Securities Exchange Act of 1934, as amended, in addition to the reporting obligations under Israeli Securities Law, for as long as our shares remain so registered.

 

As of March 31, 2021, Koor, wholly owned by DIC, held approximately 46.1% of our share capital (including through being joint controlling shareholder together with two shareholders of 5% of our outstanding share capital held by them through a lending transaction as of January 2018 which DIC recently informed of its termination) and the voting rights in respect of an additional approximately 2.1% of our share capital.

As of the date of this Annual Report on Form 20-F, there has been no indication of any public takeover offer by any third party, in respect to our ordinary shares, or by us, with respect to another company’s shares.

 

In December 2014 and May 2015, we entered the TV and internet infrastructure markets, respectively, which completed our communications offering to include all communications services in Israel.

 

In 2017, our network sharing and hosting agreements with Golan and Xfone, and a third agreement combining the 4G network arrangements in the previous two agreements into a three-way agreement  came into force and in August 2020, following our acquisition of Golan's share capital, our sharing agreement with Golan and the three-way agreement came to an end. For details of our network sharing and hosting agreement, see "B. Business Overview – Network and Infrastructure – Cellular Segment – Network sharing agreement" below.

 

In 2019, we completed an investment transaction in IBC, a communications company supplying communications infrastructure services using fiber-optics it deploys, including on the Israeli Electricity Company, or IEC's electricity network, and sold our fiber-optic infrastructure in residential areas to IBC.

 

In August 2020, we completed the acquisition of Golan's share capital, for the sum of approximately NIS 613 million.

 

In February 2021, we completed another investment transaction in IBC, with Hot becoming a partner to our investment. For details see "Item 4. Information on the Company – B. Business Overview – Network and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure – Investment in IBC and sale of fiber-optic infrastructure to IBC".

 

We hold a general license for the provision of cellular telephone services in Israel, granted by the Ministry of Communications in 1994 and valid until 2022. We also hold a unified general license for the provision of fixed-line services, granted by the MOC in 2015 and valid until 2026. Golan's unified licenses, both for its fixed line and cellular services, were granted by the MOC in 2020, are valid until 2023.

 

The SEC maintains an internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. The Company's website address is www.cellcom.co.il. The information contained on, or that can be accessed through, the Company's website is not part of, and is not incorporated into, this Annual Report.

 

   Principal Capital Expenditures

 

Our accrual capital expenditure in 2018, 2019 and 2020 amounted to NIS 648 million, NIS 562 million and NIS 547 million, respectively. Accrual capital expenditure is defined as investment in fixed assets and intangible assets, such as investments in our communications networks, information systems, software and TV set-top boxes and capitalization of part of the customer acquisition costs as a result of the adoption of IFRS15.

 

 

General

 

We operate in two main segments, “Cellular” and “Fixed-line”. The cellular segment includes the cellular communications services, end user cellular equipment and supplemental services. The fixed-line segment includes landline and long distance telephony services, internet infrastructure and connectivity services, television services, transmission services end user fixed-line equipment and supplemental services.

 

Services and Products

 

Cellular Segment

 

Services

 

We are the largest provider of cellular communications services in Israel based upon number of subscribers and estimated market share as of December 31, 2020. As of December 31, 2020, we provided cellular communications services to approximately 3.2 million subscribers in Israel with an estimated market share of 31%. We offer a broad range of cellular services, including cellular telephony services and additional features such voice mail, cellular fax, call waiting, call forwarding, caller identification and conference calling; text and multimedia messaging; data services (download and upload); international roaming services (inbound and outbound); value added services such as cyber security, anti-virus and back-up services. To our business customers we offer additional services, such as work force and vehicles management applications and IOT solutions, such as "smart city" end-to-end cellular and fixed line solutions. We also offer repair services on most handsets we offer. Not all services are supported by all handsets or by all of our networks.

 

We are constantly considering and evaluating the possibility of introducing additional products and services to our customers.

 

We offer our cellular subscribers a variety of pricing plans and bundles, including combining cellular services with other communications services our group offers, such as internet infrastructure service and connectivity, long distance telephony and TV service. We offer two methods of payment: post-paid and pre-paid. Post-paid services are offered to subscribers who are willing to pay for our services through banking and credit arrangements, such as credit cards and direct debits. Pre-paid services are offered to cellular subscribers who pay for our services prior to obtaining them, usually by purchasing our “Talkman” pre-paid cards or “virtual” Talkman cards. The majority of our sales are post-paid.  In line with regulation, our pricing plans do not include a commitment to purchase our services for a predefined period, other than in large business agreements.

 

We provide national roaming services to Xfone, under our Sharing Agreement and we provide the Joint Corporation services as a subcontractor. See "-Networks and Infrastructure - Network sharing agreement" below.

 

 Handsets

 

We sell a wide selection of handsets (which for purposes of this report may include other types of communications and electronic end-user equipment, such as tablets, smart watches, lap-tops, gaming consoles, loudspeakers and headphones). We offer a variety of installment plans for handsets, with consideration to be paid for one or several installments, as per the customer's choice. The vast majority of our handset sales in 2019 and 2020 have been by Samsung and Apple. The handset models we sell offer Hebrew language displays in addition to English, Arabic and Russian (in most of the models). For details regarding end user equipment repair services see "Customer Care" below.

 

               Fixed line Segment

 

Our main fixed line services include our internet infrastructure (for private customers based mostly on the landline wholesale market and IBC's fiber-optic infrastructure and for business customers based on our landline infrastructure) and connectivity services, OTT TV services, ILD services, landline telephony services and transmission services (for business customers). We also offer bundles of these services. Additional services include transmission and data services to selected business customers and telecommunications operators (including transmission revenues from Xfone according to the network sharing agreement), using our fiber-optic infrastructure and complementary microwave links, IP switchboard services, operation and management of business telecommunications systems and tailored made communications solutions, including supporting equipment and maintenance service, data protection and IOT solutions such as "smart city" end-to-end cellular and fixed line solutions. Some services are cloud based. We also offer end-user fixed-line equipment.

 

In line with regulation, our pricing plans do not include a commitment to purchase our services for a predefined period, other than in large business agreements.

 

We are constantly considering and evaluating the possibility of introducing additional products and services to our customers.

 

 

We are a major provider of internet connectivity services. Prior to the formation of the landline wholesale market, the Israeli internet market was characterized by a separation between the internet infrastructure providers (mainly Bezeq and Hot) and the internet connectivity service providers. Consequently, the internet customer was required to enter into a contractual arrangement with both types of these providers. The infrastructure provider is responsible for the connection of the customer from his computer or other device to the infrastructure provider's operator. The internet service provider is responsible for providing access to the customer from the infrastructure provider's operator, through its own network, to the local and global internet network. As of May 2015, we provide end-to-end internet service (infrastructure and connectivity) using Bezeq's infrastructure and more recently, over IBC's fiber-optic infrastructure (previously our independent fiber-optic internet infrastructure). We sell internet infrastructure services bundled with internet connectivity, as well as with our other services. We also offer supporting equipment and support services for such equipment. For details regarding the landline wholesale market see "Business Overview – Competition – Fixed-line Segment – Landline" and "Government Regulation – Fixed-line Segment – Landline".

 

As of December 31, 2020, we provide end-to-end internet service, to approximately 293,000 households.

 

In addition, we offer our internet subscribers value added services, such as data protection services and to our business customers we also offer connectivity integration solutions and global communications solutions.

 

OTT TV services

 

 As of December 2014, we offer OTT-TV services, branded 'Cellcom tv' mostly to private customers. Cellcom tv is an hybrid OTT-DTT TV service provided to the Israeli market. The service includes a bundle of linear channels and other commercial channels and Video on Demand library subscription (SVoD). Pay per view movies (TVOD) and additional channels for an additional subscription are also available. Our TV services further includes a music streaming service and additional advanced features such as cloud recording and a 'catch up'  feature allowing content aired in the previous week, for a highly competitive price. Cellcom tv service can generally also be accessed by smartphones, tablets, Smart TV and additional TV services' equipment like Apple TV and Android TV devices (TV anywhere). Our VoD catalogue and linear channels offer international and local content from top content suppliers. As of December 31, 2020, we provide OTT TV services to approximately 252,000 households.

 

ILD services

 

We are one of the major players in the Israeli ILD market. Our principal service in the ILD market is the provision of outgoing and incoming telephone calls with substantially worldwide coverage. We provide these services mostly to post-paid customers, but also to pre-paid customers mainly through the sale of calling cards. Most of the customers of the pre-paid services are foreign workers who reside in Israel.

 

In addition, we provide "Hubbing" services to non-Israeli international operators. Hubbing services are bridging services between two non-Israeli international operators. Such services are provided by us where there is no direct connection between two non-Israeli international operators or where pricing differences in different locations make such bridging service desirable.

 

Landline telephony services

 

We offer advanced, voice and data landline services to selected business customers. We also offer basic landline telephony services to private customers by VOB technology. Landline telephony service enables an end user to conduct a telephone conversation with another end user who uses either another landline or a cellular telephone or computer, either in Israel or overseas.

 

We estimate that our current market share in the Israeli landline telephony market is not material.

 

Internet of Things

 

IOT solutions provide the ability to connect various devices to the internet. We, together with strategic partners, offer IOT solutions based on a variety of communications solutions, including landline (WiFi) and cellular. We offer smart city solutions which include a central management and control system to manage the various solutions, water and electricity meter readout from a-far, smart parking, smart and efficient street lighting, smart cameras which include analytic capabilities for security solutions, smart sensors for efficient waste disposal, various environmental factors and flood alert, stress buttons for educational institutions as well as WiFi and broadband communication capabilities in public areas.

 Networks and Infrastructure

 

Cellular Segment

 

General

 

We have built an extensive, durable and advanced cellular network system, enabling us to offer high-quality services to substantially the entire Israeli populated territory, while using a cost-effective design, utilizing shared components for our networks, where applicable. We seek to satisfy quality standards that are important to our subscribers, such as high voice quality, high data throughput rate, low “blocked call” rate (average rate of call attempts that fail due to insufficient network resources), low “dropped call” rate (average rate of calls that are terminated not in the ordinary course) and deep indoor coverage. Therefore, we have made substantial capital expenditures and expect to continue to be required to make substantial capital expenditures on our network system.

 

Cellular Infrastructure

 

Our cellular network has developed over the years since we commenced our operations in 1994.

 

Our “fourth generation” LTE, or Long Term Evolution technology, was launched in 2014, offers data throughput of up to 150 Mbps on the downlink path and up to 50 Mbps on the uplink path and with the addition of the frequencies we won in the 2020 frequency tender, up to 400 Mbps and 70 Mbps, respectively. Our LTE network covers most of the population of Israel and supports the majority of data traffic on our networks. Voice services are provided through our 3G network. Once we operate Voice Over LTE (VOLTE) service allowing voice calls on 4G network, voice calls shall gradually transfer from our 3G network to our 4G network. After winning additional 4G frequencies in the 2020 frequency tender we intend to continue the deployment of this network in support of the new frequencies, in order to enable higher data throughput rate. The average throughput indicator is not set in our license. Our 4G network is shared with Xfone and operates in Multi Operation Core Network, or MOCN, mode.

 

Our “third generation” UMTS/HSPA+, or high-speed packet data access, technology, offers full interactive multimedia capabilities with current data rates of up to 42 Mbps on the downlink path and up to 5 Mbps on the uplink path and supports the majority of voice calls  traffic on our networks. In 2020 we intend to continue to support the demand for data traffic, while maintaining its quality of service. This network, considered to be a “3.9” technology, uses the same core as our GSM/GPRS/EDGE network and covers substantially all of the populated territory in Israel. Moreover, our UMTS/HSPA+ network supports types of services that require higher throughput and lower delay, such as video conferencing, and provides an adequate fallback for our LTE network by means of smart features and network load sharing. Our “second generation” GSM/GPRS/EDGE network allows for voice calls, data transmission and multimedia services, although at slower speeds than our LTE and UMTS/HSPA+ networks, and covers substantially all of the populated territory in Israel. Our GSM/GPRS/EDGE technology is an advanced second-generation technology and considered to be a “2.75G” technology.  It enables us to deliver multimedia and services at speed rates that are higher than the rates offered through regular “second generation” digital cellular technology.  Packet data rates vary from 50 Kbps to 200 Kbps, depending mainly on handset capabilities. In addition, in the case of coverage gaps and for voice services supported by our GSM/GPRS/EDGE technology, the network provides a partial voice fallback for our LTE and UMTS networks.

 

In 2020 we commenced deployment of our "fifth generation" NR 5G network in selected areas and intend to continue to do so in the coming years. The 5G network is based on an advanced technological standard (78N), allowing higher data download and upload of up to 1.3 Gbps and 120 Mbps, respectively, in a 100 Mhz frequency band. As such, it is expected to allow wider usage for IOT technologies solutions.

 

Our primary objective going forward is to continue to support the demand for data traffic on our UMTS/HSPA+, while maintaining its quality of services, and to continue deploying our LTE network, including with new additional 4G frequencies and deployment of 5G network in selected areas, and to continue to perform extensive optimization work to provide our subscribers with maximum capability to support video and other broad-bandwidth content. See "Item 3. Risk Factors – We may be adversely affected by significant technological and other changes in the telecommunications industry".

 

In December 2020, the MOC published a public hearing, in relation to the shutting down of 2G and 3G networks in Israel by 2025 year-end. This step, if executed, will allow us to save operating expenses for these networks and use the frequencies freed, in as much as they shall remain in our possession, to enhance our 4G and 5G networks performance.

 

We provide connectivity for our cellular network mainly through our independent transmission network (based on our fiber-optic network and complementary microwave infrastructure), in substantially all of the populated territory of Israel. We lease complementary capacity from Bezeq, Hot and IBC. For additional details regarding our transmission network see "- Fixed-line segment – Fixed-line Infrastructure" below.

 

Pursuant to the requirements of all telephony service providers in Israel, our cellular network is interconnected, either directly or indirectly, to the networks of all other telephony service providers in Israel.

 

Our network operations center is located in our Netanya headquarters. Our network monitoring system provides around-the-clock surveillance of our entire network. The network operations center is equipped with sophisticated systems that constantly monitor the status of all switches and cell sites, identify failures and dispatch technicians to resolve problems. Operations support systems are utilized to monitor system quality and identify devices that fail to meet performance thresholds.  These same platforms generate statistics on system performance such as dropped calls, blocked calls and handoff failures. In addition, we have a duplicate back-up center in a separate location and a disaster recovery plan, or DRP, for all our engineering and information systems. The DRP also provides our network with additional advantages, including increased capacity in some cases and also provides us better durability and resilience. We also adopted a business continuity plan and a disaster recovery plan to ensure our ability to continue our operation in emergency situations in accordance with our license.

 

Spectrum allocation

 

Spectrum availability in Israel is limited and is allocated by the Ministry of Communications through a licensing process. We have been allocated 2 X 5 MHz in the 850 MHz frequency band use by our 3G network, 2 X 25 MHz in the 1800 MHz frequency band (out of which 3MHz were allocated in 2015 for a period of 10 years and 5MHz were originally allocated to Golan and upon completion of its purchase by us – to us, for a period of 3 years from the closing of the transaction), which are used by our 4G network and our 2G network and 2 X10 MHz  in the 2100 MHz frequency band used by our 3G network.  In the 2020 frequency tender, we were allocated 2X5 MHz in the 700 MHz frequency band and 2X10 MHz in the 2600 MHz frequency band both, for a period of 15 years and 2X80 MHz in the 3500-3600 frequency band, for a period of 10 years. For the frequencies we and Xfone won in the 2020 frequency tender, we and Xfone shall pay the MOC the sum of NIS 115 million in 2022. The MOC may further decrease the frequency band allocated to us under the 2020 frequency tender or demand that we share it with other operators, after the lapse of 4 years from its allocation. Our other frequencies allocated to us for the duration of our license.

 

 The shared 4G network further use additional 2X5 MHz in the 1800 MHz frequency band, allocated to Xfone. In the 2020 frequency tender, Xfone further won 5MHz in the 700 MHz frequency band and 10 MHz in the 2600 MHz frequency band for a period of 15 years and 20 MHz in the 3500-3600 MHz frequency band for a period of 10 years. Those frequencies have not yet been allocated to Xfone. We were allocated temporarily and for a limited use, 5 MHz in the 700 frequency band and 10 MHz in the 2600 frequency band designated to be allocated to Xfone under the 2020 frequency tender. The frequencies won by our sharing partner, shall be available for usage by us subject to conditions agreed with Xfone, including with regards to their usage period. Should such frequencies cease to be available to us, we may not have sufficient frequencies to maintain our current level of service. In this Case, we shall be required to request the MOC to finitely allocate us the frequencies temporarily allocated to us, or other frequencies, as the case may be. See "– Network sharing agreement" for additional details.

 

We pay frequency fees to the State of Israel.

 

Following an instruction from the International Telecommunications Union to commence a process to accord the frequencies used by Israeli cellular operators with European standards, we and another cellular operator that use some frequencies according to American standards, were required by the MOC to migrate to frequencies compatible with international standardization for our region. In March 2020 the MOC determined such replacement shall be effected in several phases. Currently, our 2x10 850MHZ frequencies were reduced and replaced with other 2x5 MHz 850MHZ frequencies; in the next phase - at a later date to be determined, the MOC will allocate us a 800 frequencies; and in the final phase 3 - at a later date to be determined, the aforesaid 800MHz frequencies will be replaced with another band in the 800 frequencies. The MOC will further consider allocating partial 800MHz or 900 MHz frequencies tender revenues, if such tenders are executed, to expedite such frequencies replacement.  Such replacement will involve material investments and replacement of radio equipment in the majority of our cellular sites.

 

In a public hearing published by the MOC in December 2020, in relation to the shutting down of 2G and 3G networks in Israel, the MOC opined that our 2G and 3G frequencies' allocation shall terminate on 2022 and the MOC shall consider extending such allocation until 2025, in line with the timeline proposed in the hearing for the suiting down of the networks. The MOC shall further consider allocation of such frequencies thereafter, including by conducting a tender or extending the present allocation.

 

For additional details see "Item 3. Key Information – D. Risk Factors – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results", "-We may not be able to obtain permits to construct and operate cell sites" and "- We may be adversely affected by significant technological and other changes in the telecommunications industry".

 

Cell site construction and licensing

 

We construct cell sites based on our strategy to expand the geographical coverage and improve the quality of our network and as necessary to replace cell sites that need to be removed. Our acquisition teams survey the area in order to identify the optimal location for the construction of a cell site.  In urban areas, this would normally be building rooftops.  In rural areas, masts are usually constructed. Our transmission teams also identify the best means of connecting the base station to our network, based on our independent transmission network, either by physical optical fiber, microwave link or Bezeq, Hot or IBC landlines. Once a preferred site has been identified and the exact equipment configuration for that site decided, we begin the process of obtaining all necessary consents and permits. The construction of cell sites requires building permits from local or regional authorities, or an applicable exemption, as well as a number of additional permits from governmental and regulatory authorities, such as construction and operating permits from the Ministry of Environmental Protection in all cases, permits from the Civil Aviation Authority in most cases and permits from the Israeli Defense Forces in some cases. In special circumstances, additional licenses are required. See “Item 4. Information on the Company – B. Business Overview – Government Regulations – Cellular Segment – Permits for Cell Site Construction.”

 

Network sharing agreement

 

In March and April 2017 the following sharing agreements came into effect – (1) the 4G network sharing and 2G and 3G hosting services agreement with Xfone (which commenced operating in the cellular market in April 2018), (2) the 3G and 4G network sharing and 2G hosting services agreement with Golan, which ended upon completion of Golan's acquisition by us,  and (3) an agreement combining the relevant 4G network sharing arrangements of the Xfone agreement and the Golan agreement into one three-way agreement. This agreement also ended upon completion of Golan's acquisition by us.

 

The Xfone sharing agreement, or the Sharing Agreement, sets the terms under which the 4G shared network operates and the terms under which 2G and 3G hosting services shall be provided to Xfone, including:

 

 

 

 

In November 2020, Xfone stopped paying us under the Sharing Agreement and thereafter paid part of the monthly consideration for the months August - December 2020. Xfone raised several arguments regarding its unwillingness to pay the consideration set forth in the Sharing Agreement. Xfone has also argued that Golan’s acquisition by us and its conversion into an MVNO (while terminating Golan's general cellular license and ending the three-way agreement) constituted breach of the agreements with it and on January 31, 2021, Xfone sent a notice of termination to the agreements, for their alleged fundamental breach by us. We utterly reject Xfone’s termination notice of the Sharing Agreement and arguments, which we estimate, were made in order to alter the terms of the Sharing Agreement. On February 8, 2021, we filed a claim for enforcement of the Sharing Agreement including payment of Xfone’s debts to that date (for the sum of NIS 34 million) against Xfone and its controlling shareholder, Mr. Hezi Bezlael, a motion for a temporary injunction that prohibits Xfone from executing the termination of the Sharing Agreement or from engaging in an agreement that contradicts the Sharing Agreement and a motion for temporary foreclosure on funds belonging to Xfone up to a total of NIS 34 million. An ex parte temporary foreclosure order was given that same day which was extended on February 24, 2021 to also include funds held by Xfone's parent company (Xfone 018 Ltd.). On March 3, 2020, the claim was amended to include the parent company as an additional defendant. On February 17, 2019, it was agreed, upon the court recommendation with respect to our motion for a temporary injunction, and while each party maintains all of its arguments, that in the period until March 17, 2021, Xfone would not engage in a contradicting agreement, we would continue charging Xfone under the same commercial terms as we had until then, and Xfone would bear the payment for the services to be received in that period; during that period, the parties would hold discussions through a mediator, and on March 17, 2021, they would inform the court whether to give a decision in the motion or to postpone it for an additional period. The agreements were granted validity of a court decision. On April 11, 2021, following the unsuccessful termination of the mediation, the court granted the aforementioned temporary injunction, to remain in force until the claim is decided. Xfone did not pay the monthly payments due during this period for the months of December 2020 and January 2021.

 

Failure to pay the consideration set forth in the Sharing Agreement by Xfone, or its termination, may cause material adverse effect to our revenues and financial results. See. "Item 3. Risk Factors - Our network sharing agreement consideration constitute a significant portion of our revenues" above. The Golan Agreement was in an identical format to the Xfone Agreement (without the alternative mechanism during the first five years). The average annual consideration from Golan in the years 2017 - 2020 (until completion of Golan's acquisition) for the components described above, were in the range of NIS 180-200 million per annum.

 

Fixed-line Segment

 

Fixed-line infrastructure

 

We operate an SDH transmission network and a Carrier Ethernet network and expand and upgrade them from time to time. These networks cover the central populated areas in Israel and business parks and include real-time monitoring and fault management. These networks enable us to provide our business customers with telephony and high speed and high quality transmission and data services and provides us with our own wireline connectivity / backhaul services for our cellular networks while reducing our need to lease capacity from other landline operators in Israel.

 

Our optical transmission network is strategically deployed in order to cover the major portion of Israel’s business parks from Nahariya in the north to Beer Sheva in the south and Afula and Jerusalem in the east, consisting of approximately 1,990 kilometers. The fiber-optic network is monitored by a fault-management system that performs real-time monitoring in order to enable us to provide high quality service. In order to efficiently complete our transmission network’s coverage to the majority of our cell sites and business landline and transmission subscribers, we use a microwave network as a complementary solution in those areas that are not served by our fiber-optic network. As of December 31, 2020, we had approximately 2,617 microwave links to both our cell sites and our business landline and transmission customers.

 

Additional transmission capacity required for our fixed line services to business customers is leased from Bezeq and Hot. In 2019, we completed an investment transaction in IBC, the purchase of an indefeasible right of use, or IRU, in IBC's fiber-optic network and the sale of our independent fiber-optic infrastructure in residential areas - deployed since 2017, using certain physical infrastructure of Bezeq - to IBC. In 2021 we completed an investment transaction of Hot in IBC. See "- Investment in IBC and sale of fiber-optic infrastructure to IBC" below.  IBC's expanding network will allow us to reduce our costs and our dependency on Bezeq.

 

We pay frequency fees for frequencies used by our microwave network to the State of Israel.

 

Our internet infrastructure is currently comprised of connectivity sites in two locations in Israel (Haifa and Petah-Tikvah), which provide our customers, through overseas connectivity points in London and Frankfurt, with connectivity to the global internet network. This internet infrastructure contains backup capability in order to ensure continuity of service.

 

Investment in IBC and sale of fiber-optic infrastructure to IBC

 

 

 

 

        The sale of Residential fiber-optic

 

Further in July 2019, we and IBC entered an agreement and completed the transaction for the sale of our independent fiber-optic infrastructure in residential areas to IBC, for the sum of approximately NIS 181 million. The consideration for the sale was financed entirely through shareholders' loans, provided to IBC by IIF and the Company. Once the sale was completed, the IRU Agreement, including our obligation to purchase percentage of IBC's fiber optics 'home pass' (as detailed above), applies to the infrastructure purchased from us.

 

In March 2020, IBC entered into an agreement with an Israeli financial institution, under which the financial institution extended to IBC a credit line of up to NIS 350 million, to be repaid until December 31, 2032, to further its business operation, including deployment of fiber-optic infrastructure in Israel. The agreement includes customary commercial terms and conditions. In addition, the partnership jointly held by the Company and Israel Infrastructure Fund undertook to provide IBC with an additional investment of NIS 50 million before 2021 year end, out of which the partnership has invested NIS 10 million and the balance of the amount was replaced by Hot 's Investment.

 

 

      In September 2020, we and IIF entered into investment agreements with Hot (together with entities affiliated with it) to invest in IBC. Further to standard and customary conditions, the transaction includes an undertaking to substantially increase the deployment of IBC’s fiber-optic network in the forthcoming years and the following main points:

 

 IBC also undertakes to continue purchasing certain services provided to it by us, beyond the completion date.

The transaction was completed on February 11, 2021, after obtaining necessary regulatory approvals. The MOC's approval for the transaction included amendments to IBC’s license, including an undertaking to deploy the network whereby 1.7 million households shall have access to the network upon the lapse of 5 years, which generally reflects the contractual agreements of the transaction, as stated above, and to provide a shelf offer for any operator interested in purchasing IBC's services.

 

Suppliers

 

 

In April 2014, we entered into a framework agreement with NSN Israel, of Nokia Networks group, a worldwide leading network manufacturer, for the purchase of an LTE network, which also supports LTE Advanced technology (4.5 generation) and related services. This agreement also governs the purchase and services provided under our previous agreement with NSN, in relation to our GSM/GPRS/EDGE /UMTS /HSPA core system, radio access network and related products and services. We have an option to purchase maintenance services on an annual basis until March 2030. In 2020, we purchased network core components from NSN to allow calls over 4G network (VOLTE) and radio access equipment for our joint  network with Xfone, in support of the new 4G and 5G frequencies won in the 2020 frequency tender.

 

In September 2005, we entered into an agreement with LM Ericsson for the purchase of UMTS radio access network and ancillary products and services and in December 2011 for the purchase of upgraded UMTS /HSPA products and related services. We have an option to purchase additional maintenance services on an annual basis until 2026.

 

We use Telcordia’s (which was acquired by Ericsson) intelligent platform, or IN, which provides services to our networks and allows us, at minimal cost, to internally develop sophisticated services with a short time-to-market that are customized to local market requirements.

 

 

Samsung International Co. Ltd. provides us Samsung handsets and spare parts for such products, under terms, including price of products, agreed between us and Samsung from time to time. In 2020, our purchases from Samsung constituted approximately 13% of our total purchases for that period.

 

In October 2016, we entered into an agreement with Apple Sales International for the purchase and distribution of iPhone handsets in Israel. The agreement is in force until April 2021.

 

 

We have entered into a number of agreements with TI Sparkle and Tamares Communications Ltd. between 2013 and 2020 for the purchase of rights of use of certain telecommunications capacities in underwater communications cables, connecting the Israeli internet network to the "entry points" of the global internet, as well as maintenance and operation services relating to these cables. The rights of use in the majority of the capacities purchased are in force until May 2032.

 

 We have entered into agreements with Bezeq and Hot, the primary internet infrastructure providers in the Israeli market, for the provision of our connectivity services. Due to the increase in customer demand for broadband width in recent years, we are required from time to time to increase the capacity we purchase from Bezeq and Hot, although at a lower pace than before, due to advanced efficient technologies, the wholesale market alternative for purchasing internet infrastructure services and IBC's fiber-optic alternative.

 

Since 2015, we have been purchasing bit-stream access (BSA) internet infrastructure services from Bezeq according to the terms of the wholesale market regulating both the service specifications and the service prices, which include a fixed component and a component based on the capacity required by us for our customers. The scope of BSA service procurement from Bezeq has increased over the years, according to the increase in our customers who purchase internet infrastructure services from us, and the increased demand by our customers for greater bandwidth (capacity), although at a lower pace in recent years due to alternatives as set forth above. For more details regarding the terms of the wholesale market, see "Government Regulations – Fixed-line Segment – Wholesale landline market" below.

 

For our IRU agreement with IBC, see "Investment in IBC and sale of fiber-optic infrastructure to IBC" above.

 

In February 2015, we entered into an agreement with Bynat Communications Computers Ltd., or Bynat, for the purchase and maintenance of an MBH transmission network by Cisco. We purchase maintenance services from Cisco. In 2020, we entered an agreement with Cisco to upgrade this network. The Group also purchases maintenance services from Cisco for the system and for other IP systems.

 

 

In June 2004, we entered into an agreement with Nortel Networks Israel (Sales and Marketing) Ltd., or Nortel, (currently, with Ribbon Communications that acquired Nortel’s operations), for the provision of our international communications switch, on which we base our ability to provide international calling service, as well as related equipment and services.

 

Our system for the provision of advanced cloud-based centrex services solutions to our business landline customers, is supplied by Broadsoft, Inc.

 

 

In 2019, we entered into an agreement with Kaltura Europe Ltd  for the provision of a new cloud-based content management platform for our OTT TV service (replacing Ericsson LM’s system for OTT TV services, we used until the end of 2020), allowing, among others functionalities, the integration, management, distribution, analysis and protection of the OTT TV content.

 

In 2013, we entered into an agreement with VU (which was purchased thereafter by Amdocs (Israel) Limited), or Amdocs, a leading international supplier of multiplatform video services and solutions, for the supply of international video content and content operation and management services for our OTT TV service. The Agreement is valid until the end of 2022; thereafter, it is renewable for additional periods of one year each, unless terminated by either party, subject to prior notice.

 

In October 2014, January 2016 and December 2016, we entered into agreements with RGE, ONE and Charlton, respectively, for the provision of sport channels, in which each of these suppliers holds exclusive broadcasting privileges. Each of the agreements is for a period of 6 to 7 years.

 

We entered agreements with Israeli copyright organizations for arranging the use of content in the music services and Cellcom tv service. The consideration paid to the royalties organizations varies and is set according to the market standards, based on the scope of using the rights on our services.

 

In October 2014 and July 2017, we entered into agreements with Keshet, Reshet and the Broadcasting Corporation, respectively, in the framework of which we received a license to use content of Keshet, Reshet, and the Broadcasting Corporation on Cellcom tv; the agreements are in force for 5 to 8 years; the agreements with Reshet and Keshet include consideration arrangements, based on the number of Cellcom tv subscribers.

 

 

We maintain a variety of information systems that enable us to deliver customer service while enhancing our internal processes. Our billing and CRM (Customer Relations Management) systems are supported mostly internally. Our main IT suppliers are as follows:

 

In July 2020, we entered into an agreement with Amdocs, in the framework of which we and Amdocs shall jointly perform work to develop a CRM system that shall be owned and maintained by us, to replace the other CRM systems we use and to subsequently reduce our costs.

 

We use an Avaya system for managing incoming calls into our customer service call centers.

 

We use ERP solutions provided by SAP.

 

Sales and Customer Care and Marketing 

 

Sales and customer care

 

We combine our sales and customer care efforts in order to maximize opportunities and achieve cost efficiency alongside accessible and quality customer service. Our customer service unit is our main channel for preserving the long-term relationship with our subscribers and we focus on customer retention through the provision of quality service and customer care. In addition, we offer our subscribers additional value-added and content services as well other communications services. We offer pricing plans, value-added services, handsets, accessories and related services using a variety of sales methods aimed at attracting new subscribers and enhancing our existing subscribers' loyalty.

 

We operate both though independent dealers and sales personnel we employ. All of our, and our dealers', sales, customer facing representatives go through extensive training prior to commencing their work and thereafter regularly undergo training, and review of their performance in order to assure the quality of our services and to identify areas where we can improve.

 

In addition, we constantly apply preventive and preemptive measures aimed at reducing churn.

 

In our efforts to adjust our costs to market conditions, we have closed or unified points of sale and service in neighboring locations and reduced or relocated call centers, while placing greater focus on self-service channels and proactive malfunction resolution, identifying and solving problems ahead of customer complaint. Such efforts are expected to continue in 2021 as well.

 

Our sales and customer care operation is conducted primarily through the following channels:

 

 Points of sale.  We distribute our products and services through a nationwide network of hundreds of physical points of sale, the majority of which are operated by our dealers and approximately 70 are operated independently by us.

 

 These points of sale generally offer the entire spectrum of products and services that we provide to our subscribers and potential subscribers and also offer handset repair service or serve as a contact point for depositing the handsets for repair and receiving the repaired handset (in the same center or at a location of their choice by a courier), with the repair services conducted in a central lab. These points of sale are mostly located in central and other frequently visited locations to provide our subscribers with easy and convenient access to our products and services.

 

In our efforts to enhance our presence in certain sectors in order to enlarge our potential subscriber base, we select dealers with proven expertise in marketing to such sectors.

 

 

 

 

 

We constantly invest time and efforts making our services compatible to persons with disabilities, as required by law. We provide customers with disabilities convenient accessibility to our premises and adapted services, including text to speech services as well as support services through chat. We also train our representatives to provide accessible service to all our customers.

 

Marketing

 

Our marketing strategy emphasizes our position as a leading, fair and initiating communications group, providing value for money and able to provide a comprehensive solution for all our customers' communication needs, by offering bundles of services and a wide array of services. We believe the provision of bundles of our services strengthen loyalty and increase customer satisfaction. We aim to provide our customers a fair and quality service.

 

 From surveys that we conduct from time to time, we learn that subscribers base their choice of communications provider. Our marketing activities take into consideration these parameters.

 

We leverage our extensive interactions with our customers to provide the requested services and also to cross- and up-sell cellular and fixed-line products and services according to customer needs, usage trends and profitability, mostly by using advanced CRM system models, to increase customer satisfaction and loyalty.

 

Competition

 

Competition – General

 

The Israeli telecommunications market is extremely competitive in many of its areas. The level of competition significantly increased in recent years following the entry of additional competitors and regulatory changes that reduced both the barriers to entry into the field and the barriers for customers transferring among the operators. As a result, the prices for the various services we and our competitors provide eroded significantly and caused a continuous decrease in our revenues and results of operation in recent years.

 

The principal competitive factors in the telecommunications market include the services included in the bundle, perceived price, brand perception, perceived network quality and customer service. The variety of cellular handsets and how they meet customers' needs and the quality and diversity of television content are also factors influencing the level of competition in this market.

 

In response to the enhanced competition in the Israeli telecommunications market, we have implemented various steps and strategies, including:

 

 

 

 

 

 

 

 

Our ability to compete successfully will depend, in part, on our ability to anticipate and respond to trends and events affecting the industry, including the introduction of new services and technologies, changes in consumer preferences, demographic trends, economic conditions, pricing strategies of competitors and changes to the legal and regulatory environment.

 

 Competition may intensify further as a result of the occurrence of any of the events described under “Item 3. Key Information – D. Risk Factors – Risks Related to our Business – We face intense competition in all aspects of our business.”

 

Communications groups and structural separation

 

The competition in the Israeli telecommunications market has in recent years been characterized by competition among telecommunication groups, which are simultaneously active in several arenas, although additional competitors who do not belong to any telecommunications group, do operate in the various fields. The Israeli telecommunications market is currently dominated by four communications groups: Bezeq, Hot, Partner and Cellcom. Each of the Bezeq and Hot groups are subject to certain structural separation requirements in relation to sale of bundles of services by each of them and their respective subsidiaries, as a result of being the incumbent and monopoly in their respective core business – landline and multichannel television services. Those requirements include Bezeq's obligation to offer some of the services in its bundle separately under the same terms as in the bundle, and the requirement that Bezeq allow its competitors to participate in a similar bundle (if it includes internet connectivity, VOB or ILD services) under the same terms and equally markets such bundles as its own bundle (though the second requirement does not apply to the sale of the bundle by a subsidiary of Bezeq). The same requirements apply to Hot in the case of bundles that include internet connectivity services, with respect to the internet connectivity service component of the bundle.

 

Following a certain relaxation of the structural separation imposed on the Bezeq group, Bezeq is allowed to offer bundles of services with its subsidiaries under certain conditions. Bezeq's subsidiaries are allowed to sell and market each other's services, including through bundles of their services. Although the Hot group is also subject to structural separation limitations between its multi-channel television, connectivity, cellular and landline services, it was allowed to offer a bundle of landline telephony, multichannel television and internet infrastructure services and under certain conditions connectivity services as well, and Hot and Hot Mobile are also allowed to sell and market each other's services and exchange information. In 2018 Bezeq partially merged the operation of its subsidiaries – Pelephone, Yes and Bezeq International - thereby reinforcing their ability to compete with our triple offering. In February 2019, Bezeq filed a petition with the Supreme Court of Justice, against the MOC, requesting the immediate cancellation of the structural separation imposed on Bezeq. The state’s position with respect to the petition is that Bezeq’s petition should be dismissed, inter alia in light of recommendations of the inter-departmental team for examining an update to the structural separation obligations in the Bezeq and Hot groups, submitted to the MOC, whereby at this time there is no room to terminate the structural separation in the Bezeq and Hot groups, and that the matter should be further examined according to changes in the market. In February 2021, Bezeq withdrew its petition upon the court's recommendation.

 

In April 2019, the MOC resolved to further relax Hot's structural separation allowing marketing of Hot and its subsidiaries' services to medium – large business customers without any limitations. Also, in June 2020, the MOC resolved to allow the Hot group to market certain service bundles for the private sector, starting July 15, 2020, which also include the Hot-Net connectivity provider services, under certain conditions.

 

In February 2021, the MOC resolved to allow the Hot group to market a bundle that would include the cellular (quattro) and ILD in addition to home internet and TV. According to the resolution, Hot would be required to obtain the MOC’s advance approval for each bundle, and with respect to bundles offered by some of the companies in the Hot group, it would also be required to offer competitors' services.

 

In October 2020, MOC published a public hearing regarding its intention to terminate the policy and current separation between the broadband infrastructure service and the internet connectivity service, which requires a customer interested in connecting to the internet to purchase these two complementary services. The proposed change refers solely to the private sector. In February 2021, the MOC published a secondary hearing in this matter. In the framework of the proposed policy in the secondary hearing, it is recommended to determine that Bezeq and Hot may themselves provide internet connectivity services together with infrastructure services, after the completion of a process which shall include a shelf offering to be agreed with the service providers, which includes service indicators for the wholesale market and agreed compensation for non-fulfillment thereof. In this framework, the parties shall be allocated two months, as of the resolution date, for holding negotiations on the service indicators and agreed compensation mechanism. Thereafter, the MOC would examine the shelf offering and may approve it, reject it, or amend it. After the MOC's approval, a 3 months calibration phase would begin, during which the shelf offering would be exercises without the agreed compensation part, and amendments would be made to it as necessary. At the end of the calibration phase, the MOC would announce the commencement of a 3 months preparation phase, during which the shelf offering, including the agreed compensation, would be executed. At the end of the preparation period, Bezeq and Hot would be allowed to provide internet connectivity and infrastructure services together.

 

Bezeq would be allowed to market the internet connectivity and infrastructure services together, only after the lapse of the preparation period, with respect to wholesale market services both on copper and optic-fiber infrastructure.

 

The current regulation may change. See also "Item 3. Risk Factors - We face intense competition in all aspects of our business".

 

Cellular Segment

 

There is intense competition in all aspects of the cellular communications market in Israel, with a penetration rate (the ratio of cellular subscribers to the Israeli population) of approximately 113%, representing approximately 10.4 million cellular subscribers at December 31, 2020, and the average annual churn rate in Israel in 2020 is estimated to be 32%, higher than the churn rates in other developed economies. Our churn rate in 2020 was 40.2%. We currently compete for market and revenue share with ten other cellular communications operators: four MNOs (Partner, Pelephone, Hot Mobile and Xfone) and six MVNOs, including Rami Levy Hashikma Communications Marketing Ltd., or Rami Levy, Azi Communications Ltd., or Azi, Free Telecom Ltd., or Free Telecom and Cellact Communications Ltd., or Cellact. The competition in the cellular market further increased after the entry of Xfone into the market in April 2018. The intense competition resulted in current cellular tariffs in Israel being among the lowest in the world.

 

Our estimated market share based on number of subscribers was approximately 31% as of December 31, 2020. The market shares at such time of Partner, Pelephone, Hot Mobile and Xfone were estimated to be approximately 26%, 23%, 15% and 2%, respectively, and the MVNOs' collective market share was estimated to be 2.0%. These estimates are based on the public reports of other operators and our estimate of the market share of the operators who do not publish reports.

 

Hot Mobile commenced its UMTS operations in 2012. Rami Levy, Azi, Free Telecom and Cellact, all MVNOs, commenced operations in 2011 - 2013. Xfone commenced its operations in 2018.

 

Partner started operations in 1998. As of November 2019, Partner's previous controlling shareholder  - S.B. Israel Telecom Ltd. (indirectly controlled by the media entrepreneur Haim Saban)'s shares are held by Adv. Ehud Sol as a permanent receiver. In March 2011, Partner purchased the outstanding shares of 012 Smile Telecom Ltd., or Smile Telelcom, an ISP and ILD operator, now also serving as Partner's cellular low cost brand dealer, and in 2015, its network sharing agreement with Hot Mobile was approved and the two companies began joint operation through a joint subsidiary.

 

Pelephone is a wholly-owned subsidiary of Bezeq, and started operations in 1986. As of January 2015, its low cost brand services are sold by another subsidiary of Bezeq – Walla Communications Ltd., an internet portal. Bezeq is controlled by B Communications Ltd., or B Communications,. B Communications is an Israeli company traded on the NASDAQ and the TASE and as of December 2019, is controlled by Searchlight II BZQ L.P and T.N.R Investments Ltd..

 

Hot Mobile operated in the cellular market as of 2001. In 2012 it began its UMTS operation. Hot Mobile is owned by Hot, which is indirectly controlled by the French businessman Patrick Derhy. In 2015, its network sharing agreement with Partner was approved and the two companies began joint operation through a joint subsidiary.

 

Xfone is controlled by Xfone Communications Ltd., an Israeli ISP, which is owned by the Israeli businessman Hezi Bezalel. For details of our network sharing and hosting agreement with Xfone, see "-Network and Infrastructure – Cellular Segment – Network sharing agreements" above.

 

Rami Levy is a subsidiary of a major Israeli discount supermarket chain. Azi is owned by Telzar, an ILD operator. Cellact is owned by Cellact Ltd., a content provider.  Free Telecom is owned by an Israeli business man.

 

Competition may remain in its current heightened condition. Non-the-less it should be noted that following the 2020 frequency tender, cellular operators announced 5G price plans, which include enlarged data packages and at a price level higher than packages which do not include 5G services.

 

 

In the handsets market, we compete with numerous vendors (cellular operators, importers and other stores, international commerce platforms) selling handsets, including through parallel import.  The variety of marketing channels we use, including the increased part of transactions using our digital platform, led, among others, to a decrease in our profitability in 2020. We expect this trend to continue. See "Item 3.Risk Factors - Our handsets revenues and profitability have decreased and are expected to decrease further" for additional details.

 

              Fixed-line Segment

 

The fixed-line communications segment includes activity in several sub-segments, mainly internet infrastructure and connectivity services, local and international telephony services, and television services.

 

A landline wholesale market was formally launched in Israel in 2015 and to date, includes internet infrastructure (BSA) and to some extent - usage of certain physical infrastructure elements by operators who do not own infrastructure. See "-Government Regulations – Fixed-line Segment – Wholesale Landline Market" below. The landline wholesale market implementation allowed for the entry of additional operators that do not own infrastructure into additional sub-segments and led to an expansion of the competition to all activities and to increased offerings of bundles of services from various sub-segments.

 

Internet Infrastructure

 

The only groups having their own nation-wide (or substantially so) landline infrastructure in Israel are Bezeq and Hot. Bezeq's infrastructure is copper cable based and Hot's infrastructure is cable based. They are the two main internet infrastructure providers for the private sector in Israel and as of 2015 are also providing internet infrastructure services to operators that do not own their own infrastructure under the landline wholesale market, who, in turn, provide this service to the end customer. As of September 30, 2020, internet infrastructure services were provided by Bezeq and Hot to approximately 988,000 and 705,000 households in Israel, respectively.

 

Partner further provides internet infrastructure services to the private sector over its independent fiber-optic network, deployed in selected areas.

 

IBC's fiber-optic infrastructure is deployed in selected areas and includes as of July 2019, the independent fiber-optic infrastructure we deployed in residential areas and sold to IBC.  IBC provides broadband infrastructure services to other licenses holders as well as directly to large business customers. For our and Hot's IRU agreement with IBC see " – Networks and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure - Investment in IBC and sale of fiber-optic infrastructure to IBC" above.

 

We rely on Bezeq, Hot and IBC's infrastructure for the provision of infrastructure services to our customers in the private sector. In as much as IBC becomes a nation-wide alternative, it is expected to have a positive effect on our competitive position in the fixed-line segment, by reducing our costs and dependency on Bezeq.

 

Providing fiber-optic based internet infrastructure service by Bezeq or Hot may substantially increase competition in the field but will also increase public awareness to the service. Bezeq has executed a substantial part of the investments required for the operation of its own fiber-optic network and commenced marketing the service to its customers as at March 2021. This service is not yet available in the framework of the wholesale market. Hot commenced marketing a fiber-optic based internet infrastructure service to its customers in April 2021. For details regarding Hot's investment in IBC, see " – Networks and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure - Investment in IBC and sale of fiber-optic infrastructure to IBC" above.

 

As of December 31, 2020, we had approximately 293,000 households subscribed to our infrastructure internet services, with an estimated market share of 12%.

 

We bundle this service with our internet connectivity service and also as part of our triple play offering.

 

Internet connectivity

 

The Israeli internet connectivity market is highly competitive and saturated. As of the date of this report, there are a few dozen ISPs in Israel, though most of them do not hold significant market shares. Competition among the various players concentrates mainly on pricing. Internet connectivity access is currently provided by three major ISPs: us, Bezeq International, Partner, and some other smaller players including Hotnet (a subsidiary of Hot) and Xfone Communications Ltd. (Xfone's controlling shareholder).

 

The offering of bundles of services and the aggressive campaigns of both Bezeq and Hot offering substantially higher bandwidth for lower tariffs to end-users, resulted in a substantial decrease in internet connectivity service prices.  The decreased price and the constant increased usage, led to demand for greater bandwidth, which requires us to increase the capacity we purchase from Bezeq and Hot, but tariffs remained high. In December 2020, the MOC announced the reduction of wholesale tariffs for 2021, in line with usage growth. We are active in the demand that tariffs for internet connectivity be reduced separately of the internet infrastructure service tariffs and continue to await the MOC decision inthe matter.

 

Further, the offering of bundles of internet infrastructure and connectivity using the wholesale market increased the competition in this field, resulted in loss of some of our internet connectivity customers. If competition remains at current levels, the adverse effect on our results of operations is expected to continue.

 

Global internet connectivity is provided by three underwater cables. The main provider, which also provides us with the majority of our global internet connectivity, is TI Sparkle, and two additional underwater cables are owned by each of Tamares Telecom and the Bezeq group.

 

Television services

 

Until our entry to this market in December 2014, the Multichannel pay-TV market was dominated by Hot (the incumbent cable based TV provider and monopoly in this field) and YES (a satellite based TV provider and a subsidiary of Bezeq) with approximately 777,000 and 556,000 households, respectively, as of September 30, 2020. The multichannel pay-TV market is also highly penetrated.

 

We offer a multi-channel over the internet (OTT)- television service which includes direct access from our TV platform to Netflix and Amason Prime applications. As of December 31, 2020 we have approximately 252,000 households subscribed to our Cellcom tv services, which amounts to an estimated 14% market share.

 

Partner offers its OTT TV solution to approximately 176,000 households subscribers as of September 30, 2020. Hot and Yes each launched an OTT TV low cost brand solution – branded Next and Sting, respectively and . Yes has further launched another OTT solution branded Yes+, in the framework of gradually transferring from satellite broadcasting to OTT. Partner's OTT TV solution includes Netflix and Amazon's applications integration. Hot's offer also includes Netflix's application integration. Also, Netflix and Amazon Prime provide their services to viewers in Israel, as complementary service to the existing competitors' content. We expect this competitive trend to continue and may include additional global players and also additional local participants.

 

ILD services

 

In recent years this market greatly changed. The use of free of charge alternative technologies such as voice-over-IP has resulted in downsizing of the telephony market, especially the ILD services revenues. This trend is expected to continue in the future.

 

We are one of the major service providers in the Israeli ILD market. Our main competitors in this market are Bezeq (through its wholly-owned subsidiary Bezeq International) and Partner (through a wholly-owned subsidiary). Additional competitors include Xfone, and Hot, through wholly-owned subsidiaries or affiliates. At the end of September 2020, our market share in the ILD market is estimated to be approximately 20-30%.

 

Landline telephony

 

The Israeli landline telephony market has been dominated for many years by Bezeq, the incumbent landline monopoly, which held as of September 30, 2020 (according to the Ministry of Communications report) approximately 3/4 of the landline telephony market (and an even larger revenues market share in the business landline telephony sector(. Hot, the incumbent TV monopoly, was the second entrant to this market. Other players include us, Partner's subsidiary and Bezeq International.

 

We offer landline telephony to selected business customers and landline telephony using VOB technology to private customers. We estimate that our current market share in the Israeli landline telephony market is not material. The landline wholesale market was to allow wholesale landline telephony service as well. For details, see "– Government Regulation – Fixed-line Segment – Wholesale landline market".

 

Other fixed-line services

 

Transmission and landline data services are provided by Bezeq, Hot, Partner and us and as of 2019, IBC as well. These services are provided to business customers and to telecommunications operators. During 2019, the competition in these fields of operation intensified following HOT's and Partner's offerings and Bezeq lowering its prices, and the usage of bandwidth of transmission increased.

 

IOT services are provided by Bezeq, Pelephone, Partner and other software integration companies and additional participants are entering this field. We offer a wide range of advanced IOT services and solutions, through cooperation with leading IOT technology and services vendors. The IOT market is characterized by intense competition and includes the offerings of communications providers which offer both connectivity solutions and end-to-end solutions.

 

Intellectual Property

 

We are a member of the GSM Association, together with other worldwide operators that use GSM technology. As a member of the association, we are entitled to use its intellectual property rights, including the GSM logo and trademark.

 

We are the proprietor of over 160 domain names and approximately 100 trademarks and trademarks applications, the most important of which are “Cellcom”, “Talkman”, "Cellcom tv," "Netvision" and "013 Netvision" and "Golan Telecom".  We are also the proprietor of a few registered patents.

 

Government Regulations

 

The following is a description of various regulatory matters that are material to our operations, including certain future legislative initiatives that are in the process of being enacted.  There can be no certainty that the future legislation described here will be enacted or that it will not be subject to further change before its final enactment.

 

General

 

A significant part of our operations is regulated by the Israeli Communications Law, 1982, the regulations promulgated under the Communications Law and the provisions of our licenses, which were granted by the Ministry of Communications pursuant to the Communications Law. We are required by the Communications Law and the Wireless Telegraph Ordinance (New Version), 1972, to have a license in order to provide certain communications services in Israel and be allocated the spectrum to do so.

 

In August 2020, the Israeli Ministry of Communications published a bill memorandum for amending the Communications Law, whereby the licensing obligation for most actions of establishing and providing communications services shall be cancelled. Regulation shall be carried out through a “general permit”, whereby parties wishing to provide communications services may do so subject to certain terms and to prior registration with the MOC. Regulation of activity under the general permit shall be carried out by way of retroactive supervision and enforcement. Key services, such as cellular infrastructures, fixed-line infrastructures, etc., shall continue to be subject to a license. If the memorandum evolves into binding legislation it shall lower entry barriers for competitors and could increase competition in the market. Also, accepting the proposed change could create gaps between regulation that applies to license holders (including consumer protection regulation) and regulation that applies to competing service providers that operate pursuant to the permit, and gaps in the level of regulation and enforcement on different competitors, but it may also include changes that would make it easier for us to adopt technological changes and new business models. Such gaps could affect our competitive position.

 

The Israeli communications market is characterized by high regulatory intervention in the affairs of the companies operating in the market. See also “Item 3. Key Information – D. Risk Factors – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results. ”

 

In addition, our activity is subject to the Israeli laws that govern our relationships and manner of engagement with our customers. These provisions include, among others, the Consumer Protection Law and the Privacy Protection Law and the regulations promulgated therefrom. We are also subject to the general provisions of Israeli law, including contract law, import and customs law, standardization, accessibility, labor law, and business licensing.

 

Tariff supervision

 

Interconnect tariffs among landline operators, international call operators and cellular operators are subject to regulation. The MOC may also provide instructions in relation to unreasonable payments or payments raising competitive concerns.

 

 In case of a disagreement as to the terms of a hosting service (including the consideration), whether for national roaming of an MNO or hosting of an MVNO, the regulators may intervene in the terms of the agreement, including by setting the price of the service. Unfavorable terms and consideration for the hosting service, may result in material adverse effect on our results of operations. For additional details, see "– Mobile Virtual Network Operators" below.

 

 The MOC is authorized to give instructions and to set interconnect tariffs and usage of another operator's network rates and supervised services prices, based not only on cost  plus reasonable profit, but also on the basis of comparison to other licensees, comparable services or such services or interconnect tariffs in other countries. In addition, the MOC was authorized to give instructions in relation to structural separation for the provision of different services.

 

Cellular Segment

 

Our Cellular license

 

We provide our cellular services under a non-exclusive general license granted to us by the Ministry of Communications in June 1994, which requires us to provide cellular services in the State of Israel to anyone wishing to subscribe. The license expires on January 31, 2022, but may be extended by the Ministry of Communications for successive periods of six years, provided that we have complied with the license and applicable law, have continuously invested in the improvement of our service and network and have demonstrated the ability to continue to do so in the future. The main provisions of the license are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

In the event that we violate the terms of our license, we may be subject to substantial penalties, including monetary sanctions under the Communications Law, the sum of which shall be calculated as a percentage of our income and based on the gravity of the breach. The maximum amount per violation that may be imposed is approximately NIS 1.6 million plus 0.225% of our annual revenue for the preceding year, but not more than 20% of its annual revenue, subject to criteria published by the Ministry of Communications. In recent years the MOC has substantially increased its supervision activities and imposed monetary sanctions, including on us (in immaterial amounts).  In the event that we materially violate the terms of our licenses, the Ministry of Communications has the authority to revoke them.

 

The joint corporation for our shared network holds a special license for the provision of radio telephone infrastructure services to cellular operators, which includes similar provisions to those included in our cellular license, in relation to management, construction, operation and maintenance of a cellular network.

 

 For Golan's cellular license, see " – Fixed-line Segment – Our Fixed-line licenses – Our unified licenses" below.

 

Services in Judea and Samaria

 

The Israeli Civil Administration in Judea and Samaria granted us a non-exclusive license for the provision of cellular services to the Israeli-populated areas in Judea and Samaria.  This license is effective until 2022. The provisions of the cellular license described above, including as to its extension, generally apply to this license.

 

Mobile virtual network operators

 

A mobile virtual network operator, or MVNO, is a cellular operator that does not own its own spectrum and usually does not have its own radio network infrastructure. Instead, MVNOs have business arrangements with existing cellular operators to use their infrastructure and network for the MVNO’s own customers. See also "– Tariff Supervision" above.

 

Six MVNOs are currently active.

 

Network Sharing

 

Network sharing is conditioned upon certain conditions, including: (i) other operators may be allowed to join on terms similar to the terms granted to the sharing operator with the smallest market share; (ii) each sharing operator may host a MVNO without the other sharing operators' consent; (iii) the shared radio network must be operated through a joint entity held equally by the sharing operators, which entity will be required to obtain a license from the MOC and will use the frequencies allocated to sharing operators; and (iv) the radio elements of the shared network will be held in equal parts by the sharing operators, and (v) each of the sharing operators will have the right to use other sharing operators' passive infrastructure including following termination of the agreement.

 

In February 2021, the MOC decided to alter current regulation that only allows national roaming and active network sharing between established cellular operators (i.e. us, Pelephone, and Partner) and “new” cellular operators (Xfone and Hot Mobile) and to allow all cellular operators to collaborate using national roaming or a MOCN configuration, in certain peripheral areas, at a limited number of sites.

 

For details regarding our network Sharing Agreement, see "– Network and Infrastructure – Cellular Segment – Network sharing agreement".

 

Permits for cell site construction

 

General

 

In order to provide and improve network coverage to our subscribers, we depend on cell sites located throughout Israel.  The regulation of cell site construction and operation are primarily set forth in the Israeli National Zoning Plan 36 for Communications, or the Plan, and in the Communications Law.

 

The construction and operation of cell sites are subject to permits from various government entities and related bodies, including:

 

 

 

 

 

 

National Zoning Plan 36

 

The Plan includes guidelines for constructing cell sites in order to provide cellular broadcasting and reception communications coverage throughout Israel, while preventing radiation hazards and minimizing damage to the environment and landscape and sets forth the considerations that the planning and building authorities should take into account when issuing building permits for cell sites. The Plan also determines instances in which the public must be informed of requests for building permits prior to their issuance, so that they may submit objections to the construction of a site. In November 2018 the Supreme Court resolved that amelioration charges may be charged in relation to building permits issued in reliance on a national zoning plan. Such decision limits our ability to oppose the charges of amelioration charge in connection to our cell sites and may substantially increase the costs of constructing a site.

 

If the Plan is amended so as to include additional restrictions and requirements on the construction and operation of cell sites, this will harm our ability to construct new cell sites, make the process of obtaining building permits for the construction and operation of cell sites more cumbersome and costly, and could adversely affect our existing network and delay the future deployment of our network.

 

Site licensing

 

We have experienced difficulties in obtaining some of the permits and consents required for the construction of cell sites, especially from local planning and building authorities. The construction of a cell site without a building permit (or applicable exemption) constitutes a violation of the Planning and Building Law, which is criminal in nature.  The Planning and Building Law contains enforcement provisions to ensure the removal of unlawful sites. As of December 31, 2019, a small portion of our cell sites operated without building permits or applicable exemptions. Although we are continually seeking to obtain building permits for these sites, we may not be able to obtain them and in several instances we may be required to relocate these sites to alternative locations or to demolish them without any suitable alternative. In addition, we may be operating a significant number of our cell sites, in a manner which is not fully compatible with the building permits issued for them, although they are covered by permits from the Ministry of Environmental Protection in respect of their radiation level.  In some cases we will be required to relocate these cell sites to alternative locations, to reduce capacity coverage or to demolish them without any suitable alternative.

 

We have not requested building permits under the Planning and Building Law for rooftop radio access devices. In October 2018, regulations setting procedures for the construction, changes to and replacement of radio access devices exempt from building permits, or the 2018 Regulations, were enacted. These regulations reflect previous judicial limitations placed upon our ability to make changes and replace radio access devices in 2010and also introduce a new licensing procedure that further reduces our ability to construct new radio access devices based on such exemption, more so in light of the necessity to support the new frequencies which we won in the 2020 frequencies tender (see "Item 4. Information on The Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Spectrum allocation"). This may adversely affect our existing networks and our networks' build-out.

 

Other legal proceedings relating to the exemption, including as to its application to certain rooftops, were decided against our position, and others, including as to the requirement to obtain an extraordinary usage permit in certain circumstances, including as to the radio access devices' ancillary equipment, are still under consideration. The Ministry of Justice expressed an opinion that the 2018 Regulations and the exemption do not relate to the radio access devices' ancillary equipment nor to certain rooftops.

 

Inability to rely on, or substantial limitation of, the exemption,  the dismantling of radio access devices and cell sites due to reasons out of our control and the objection of some local planning and building authorities to grant due permits where required, or the exclusion of the ancillary equipment from the exemption, if adopted, could have a negative impact on our ability to obtain environmental permits for these sites, could negatively affect the extent, quality, capacity and coverage of our network (specifically in urban areas), and our ability to continue to market our products and services effectively and may have a material adverse effect on our results of operations and financial condition.

 

Radio access devices do receive the required permits from the Ministry of Environmental Protection.

 

In addition to cell sites, we provide repeaters (also known as bi-directional amplifiers) and femto-cells to subscribers seeking a solution to weak signal reception within specific indoor locations. Based on advice received from our legal advisors, we have not requested building permits under the Planning and Building Law for outdoor rooftop repeaters, which are a small part of the repeaters that have been installed. It is unclear whether other types of repeaters and femto-cells require building permits. Some repeaters and femto-cells require specific permits and we receive such permits, and others require a general permit from the Ministry of Environmental Protection in respect of their radiation level, and we ensure that each repeater functions within the parameters of the applicable general permit. Should it be established that the installation of repeaters and femto-cells requires a building permit, we will perform cost-benefit analyses to determine whether to apply for permits for new and existing repeaters and femto-cells or to remove them.

 

In addition, we construct and operate microwave sites as part of our transmission network. The majority of microwave sites are exempted from receiving permits from the Ministry of Environmental Protection (due to their low output) or require a general permit in respect of their radiation level. Based on advice received from our legal advisors, we have not requested building permits for such microwave facilities on rooftops. If the courts determine that building permits are necessary for the installation of these sites, it could have a negative impact on our ability to obtain environmental permits for these sites and to deploy additional microwave sites and could hinder the extent, quality and capacity of our transmission network coverage and our ability to continue to market our landline services to our business customers (based on our own infrastructure) effectively.

 

Operating a cell site or a facility without the requisite permits or not in accordance with permits granted could subject us and our officers and directors to criminal, administrative and civil liability. Should any of our officers or directors be found guilty of an offence, although this has not occurred to date, they may face monetary penalties and a term of imprisonment. In addition, our sites or other facilities may be the subject of demolition orders and claims of breach of contract and we may be required to relocate cell sites to less favorable locations or stop operation of cell sites. This could negatively affect the extent, quality and capacity of our network coverage and adversely affect our results of operations.

 

Indemnification obligations

 

Under the Planning and Building Law, local building and planning committees require letters of indemnification from cellular operators indemnifying the committees for possible depreciation claims against the committees, as a condition for issuing a building permit for a cell site. The limitation period within which depreciation claims may be brought under the Planning and Building Law is the later of one year from receiving a building permit under the Plan and six months from the construction of a cell site. The Minister of Interior Affairs retains the general authority to extend such period further.

To date we have provided approximately 430 indemnification letters in order to receive building permits. As a result of the requirement to provide indemnification letters, we may decide to construct new cell sites in alternative, less suitable locations, to reduce capacity coverage or not to construct them at all, which could impair the quality of our service in the affected areas.

 

Environmental radiation issues

 

Under the Non-Ionizing Radiation Law, it is prohibited to construct and operate cell sites without construction and operating permits from the Ministry of Environmental Protection. Receiving a construction permit is a precondition to receiving a building permit from the planning and building committee and receiving a building permit or an exemption therefrom is a precondition for the receipt of an operating permit.  For both permits, the applicant must present the means taken (including technological means) to limit exposure levels from each cell site or facility.

 

The validity of a construction permit is for a period not exceeding three months, unless otherwise extended by the Commissioner, and the validity of an operating permit is for a period of five years, subject to the submission of annual reports regarding radiation surveys of our cell sites and other facilities by third parties that were authorized to conduct such surveys by the Commissioner. These permits contain various conditions that regulate the construction and/or operating of cell sites, as the case may be.  Our cell sites routinely receive both construction and operating permits from the Commissioner within the applicable time frames. In addition, Cellular operators are required to provide the Commissioner with online, ongoing data regarding the radiation level on each of their cell sites and other facilities. We provide the Commissioner with the requested data. See "– Site licensing" above for additional details in regards to obtaining a building permit or relying on an exemption.

 

The Non-Ionizing Radiation Law also regulates permitted exposure levels and provisions for supervision of cell site and other facility operation and grants the Commissioner authority to issue eviction orders if a cell site or other facility operates in conflict with its permit, and it imposes criminal sanctions on a company and its directors and officers for violations of the law. Failure to comply with the Non-Ionizing Radiation Law or the terms of a permit can lead to revocation or suspension of the permit, as well as to withholding the grant of permits to additional cell sites of that operator.

 

Any amendment to the Non-Ionizing Radiation Law and the Planning and Building Law  that will prohibit or substantially limit the grant of permits under such laws, will, among other things, limit our ability to construct new sites (and if applied to existing cell sites, it will also limit our ability to renew operating permits for many of our existing sites), will adversely affect our existing networks and networks build out, specifically in urban areas, and could adversely affect our results of operations.

 

Handsets

 

The Israeli consumer protection regulations determine how customers are to be informed on non-ionizing radiation from handsets and include the maximum permitted level of non-ionizing radiation emitted by handsets, measured by SAR. The maximum level of radiation is also included in the information brochure for the handsets and on the Internet sites of cellular operators, where is also refer our customers to recommendations made by relevant authorities in regards to preventive safety conduct when using handsets.

 

SAR levels are a measurement of non-ionizing radiation that is emitted by a hand-held cellular handset at its specific rate of absorption by living tissue. Although to the best of our knowledge, SAR levels for handsets we sell meet the SAR levels required by law, SAR tests are performed by the manufacturers and we include the information published by the manufacturer regarding SAR levels as we do not perform independent SAR tests. SAR tests are performed by the manufacturers on prototypes of each model of handset, not for each and every item. As the manufacturers’ approvals refer to a prototype handset, we have no information as to the actual SAR level of each specific item and throughout its lifecycle, including in the case of equipment repair. We inform our customers that there may be changes in the SAR levels in the event of equipment repair.

 

We obtain certain approvals from the Ministry of Communications and the Office of Standards in connection with the importation of handsets. These approvals require the specific model to meet all relevant standards, including SAR level.

 

We are required to provide a warranty during the first year and maintain spare parts for certain end user equipment purchased from us, for certain malfunctions for certain periods. We are also required to annul equipment sales in certain circumstances, at the request of the customer.

 

Fixed-line Segment

 

Our Fixed-line Licenses

 

Our Unified licenses

 

We provide landline telephone, ILD, internet connectivity and infrastructure services as well as a "network end point" services, under a non-exclusive general unified license granted to our wholly owned subsidiary - Cellcom Fixed Line Communications Limited Partnership - in 2015. The license expires in 2026 but may be extended by the MOC for successive periods of 10 years.  The provisions of our cellular license, including as to its extension, generally apply to the unified license, subject to certain modifications, including a 20% minimum Israeli holding requirement which can be waived by the Minister of Communications when the unified license operator is controlled by a general license holder (as was done in our case).

 

Golan holds additional unified licenses, for both its cellular and fixed-line services, granted in 2020 and valid until 2023, with similar provisions, other than as to its extension, as   those licenses are not expected to be renewed.

 

IBC holds a general unified infrastructure license, with similar provisions. IBC's license includes a deployment obligation whereby 1.7 million households shall have access to the network upon the lapse of 5 years from approval of Hot's investment in IBC, as well as a certain deployment ratio between the periphery and the center of Israel.

 

Services in Judea and Samaria

 

The Israeli Civil Administration in Judea and Samaria granted us a non-exclusive unified license for the provision of internet connectivity and infrastructure, ILD, landline and 'network end point' services to the Israeli-populated areas in Judea and Samaria. This license is effective until 2026. The provisions of the cellular license described above, including as to its extension, generally apply to this license, subject to certain modifications.

 

Golan holds similar licenses for its cellular and fixed-line activities.

 

Data and transmission services

 

We hold a non-exclusive special license for the provision of local data communications services and high-speed transmission services only to Cellcom Fixed Line Communications Limited Partnership, effective until May 2026. Data and transmission services are being provided to our customers by Cellcom Fixed Line Communications Limited Partnership. The provisions of our cellular and unified licenses described above, including as to their extension, generally apply to this license, subject to certain modifications.

 

Fiber-optic network

 

The Communication Law provides operators certain privileges in the deployment of fiber-optic cables and exempts them (including auxiliary facilities) from the requirement to obtain building permits. The deployment in a public domain is subject to advanced notification to the occupier of the land and coordination with other infrastructure owners, and on private land, the consent of the owner of the land.

 

In addition, operators that do not own their own nation-wide landline infrastructure may use certain physical infrastructure of Bezeq and Hot, based on the wholesale landline market, and certain wholesale obligations are applied on all landline operators, including us. See "- Wholesale landline market" below.

 

In December 2020, the Communications Law was amended and updates fiber-optic deployment and service obligations of landline operators who own their own infrastructure (which under the former regulation were required to universally deploy each network they deploy) and sets deployment incentives in areas where no deployment obligations be determined, after economic viability tests. The main terms of the amendment are as follows:

 

 

 

 

 

 

Bezeq's obligations regarding its already existing infrastructure shall remain unchanged.

 

In June 2020, the MOC decided that when providing connectivity services to private customers using fiber-optics, license holders may not offer subscribers offers at different terms or different tariffs, depending on the offered infrastructure.

 

In July 2020, the MOC determined that holders of a general license for providing domestic fixed-line telecommunication services that wish to deploy a fiber-optic infrastructure in an existing building (five apartments or more) must offer other license holders to share the use of the fiber-optic infrastructure they shall deploy in the building and bear the cost of constructing the infrastructure according to their relative share. It was also set forth that the fiber-optic infrastructure deployed in the building must allow shared use in the future, to at least one more unified license holder in addition to the operators that agreed on shared use.

 

See "Item 3. Key Information – D. Risk Factors – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results","-We face intense competition in all aspects of our business", and "Item 4. Information on The Company –B. Business Overview – Competition – Fixed-line Segment" and "- Government Regulations – Fixed-line Segment – Wholesale land-line market".

 

See also "- Cellular Segment – Permits for cell site construction - Site Licensing" above for a discussion regarding microwave sites forming a part of our transmission network and for building permits, an exemption from building permits and the applicability of the Radiation Law to communications facilities constructed as part of fixed-line communications networks.

 

Wholesale landline market

 

A policy document regarding landline wholesale services published by the MOC in 2012 provided for the creation of an effective wholesale telecommunications access market in Israel and the gradual annulment of the structural separation in the Bezeq and Hot groups and its replacement with an accounting separation and change of the supervision on Bezeq retail tariffs to maximum tariffs rather than the current setting of fixed tariffs. The latter generally depends on the development of a wholesale market and the state of competition in the market, and with relation to television services, if there is a reasonable possibility of providing a basic package of OTT services providers without a nation-wide landline infrastructure.

 

 In 2015, a wholesale landline market was formally launched in Israel in regards to internet infrastructure services and to some extent – the usage of certain physical infrastructure elements by operators who do not own such infrastructure. Regulations set the maximum tariffs of the wholesale landline services to be provided by Bezeq.

 

Under the Communications Law, certain wholesale obligations apply to all landline operators, including us, and requiring all landline operators to grant all other landline operators access to their passive infrastructure (except IBC's passive infrastructure over the Israeli Electricity Company infrastructure), the terms of which (with the exclusion of Bezeq and Hot, whose terms are set by the regulator) will be negotiated by the parties. For details of the Minister of Communications' authority to give instructions and set usage of another operator's network rates, see "–Government Regulation – Cellular Segment - Tariff supervision" above.

 

Although the wholesale market was set to include landline telephony services as of May 2015, to the best of our knowledge, such service has not been used to date in the framework of the wholesale market. A reduction of Bezeq’s fixed-line telephony service tariffs, as proposed in the December 2020 hearing (as set forth hereunder) shall significantly reduce to nearly eliminating the economic profitability of buying wholesale telephony services from Bezeq.

 

In December 2019 the MOC published a public hearing proposing to set fix tariffs (rather than the current volume-dependent tariffs) for Hot's internet infrastructure wholesale services, which are lower than Hot's current retail tariffs. In June 2020 the MOC adopted a proposed voluntary tariffs reduction for such services made by Hot, including a tariffs updating mechanism. In August 2020, the MOC set maximum fix (rather than volume-dependent) tariffs for infrastructure internet service over Bezeq's fiber-optic infrastructure, significantly higher than those set for Bezeq's current maximum tariffs over its copper cables infrastructure and the tariffs we pay IBC.

 

A hearing published by the MOC in 2014, which was further elaborated in 2017, proposing a method of inspecting whether Bezeq and Hot reduce their retail tariffs and thereby reduce the difference between the wholesale and retail tariffs ("margin squeeze") for certain landline services, aiming at reducing the profit of operators who do not own landline infrastructure and preventing their operation in the market, has not been concluded yet by the MOC.

 

For Bezeq’s obligation not to charge ISPs for certain volume of connectivity services used for TV service, see "OTT TV" below.

 

OTT TV

 

Television services over the Internet are currently not subject to specific regulation in Israel.

 

Pursuant to the 2016 recommendations of a committee for the regulation of broadcasting nominated by the MOC, in July 2018, a new bill for the regulation of broadcasting was published and includes classification of audio visual providers into four categories and determination of the regulation applied to each category, including mandatory investment in original Israeli content in a  rate derived from revenues for subscription fees The bill is focused on audio-visual providers, where the content provided is mainly aimed at the audience in Israel and therefore is expected not to apply to foreign TV content providers operating in Israel. We do not expect the bill, if enacted in its current form, to materially change the regulation that applies to us, but the bill requires legislative proceedings in the Israeli parliament, which may include material changes to it. If the legislation adopted requires us to make additional investments or impose unfavorable regulation on our OTT TV service, or apply such regulation to us and not to other OTT TV providers, it may adversely affect our OTT TV business.

 

In October 2020, the Committee for Examining Super-Regulation in the Area of Broadcasting, or the Committee, published a call for comments. The Committee’s work relies on recommendations by previous committees that examined the area and noting the aforementioned bill. The Committee is considering recommending a regulatory outline that does not differentiate between broadcasting entities according to broadcasting technology, and it shall examine the need of applying a regulatory scale according to a differentiating criterion, such as market share (by number of subscribers or by revenues). The main issues on the Committee’s agenda, the public was requested to address, are:  more focused, simplified regulation – including a request to address the super-objectives of regulation (such as the protection of minors, accessible broadcasting, lowering entry barriers for new players, and consumer protection); examining the application of regulation to international content providers; examining whether and how the duty to invest in original productions is to be applied to OTT players and to international companies that operate in the Israeli market; examining the issue of financing the broadcasting market (subscription fees and commercials), and the duty to distribute the commercial channels on the broadcasting platforms free of charge. The public was also asked to address multiple possibilities for regulating sports broadcasting.

 

Under the Israeli Competition Commissioner's 2014 instructions, aiming to facilitate the entry of new competitors to the TV market by reducing entry barriers, preconditions for the approval of any merger in the Bezeq group were published, including (A) the requirement that Bezeq is to generally not bill ISPs Internet providers for consuming a certain volume of connectivity services deriving from multichannel television broadcasting over the internet, and (B) Yes was also prohibited from selling a bundle of services that includes television services at a different tariff than that for television service sold separately. Furthermore, it was determined that (C) all exclusivity arrangements Bezeq and Yes are party to on non-original production television content shall be cancelled, and that engaging under such exclusivity arrangements in the future shall be prohibited. In April 2021, the Competition Commissioner revised the conditions as follows: (1) revoking (B); (2) modifying (C), whereby it does not apply to the procurement of foreign content but continues to apply to sports content and original content that is not considered an original production, as defined in the Commissioner’s terms. Such amendment is unlikely to have a material effect on our results of operations.

 

Contributing to the Community and Protecting the Environment

 

We and our employees have been contributing to the community since our inception. We consider contribution to the community in Israel an important component of our business vision and believe we have a responsibility toward the Israeli community, as we acknowledge that business leadership goes hand in hand with social leadership.

 

During 2020, approximately 150 of our employees participated in volunteering activities in the community and we donated an additional sum of NIS 130,000 for food trays to the elderly.

 

We are aware of the importance of environmental protection. We seek to operate responsibly to continuously reduce negative impacts on the environment and the landscape, aiming at a better environmental performance than required by local law. We dedicate personnel, funds and technologies to reduce our ecological footprint , through activities such as efficient deployment of infrastructure subject to the applicable standards, recycling of electronic components and packages, reduction of paper usage by managed printing, reduction of pollutants' emissions and energy usage, collection of used batteries, provision of a monthly bill and other correspondence  to our subscribers via e-mail or SMS, transfer to usage of environment friendly raw materials and separation between different types of waste in our repair services and purchasing of electricity produced by a private natural gas based power station.

 

 

Our largest shareholder, Koor, is a wholly-owned subsidiary of DIC.  DIC is an Israeli public holding company traded on the Tel-Aviv Stock Exchange. See footnote no. 1 to the table under “Item 7.A – Major Shareholders” for information on the holdings of DIC.

 

We, Golan, Dynamica (our wholly owned dealer), and Cellcom Fixed Line Communications Limited Partnership (see "- Government Regulations - Fixed-line Segment - Our Fixed-line Licenses - Our Unified Licenses"), are incorporated in Israel. Golan, Dynamica and Cellcom Fixed-line , are our significant subsidiaries.

 

 

Headquarters

 

In 2003, we entered into an agreement for the lease of our headquarters in Netanya, Israel. The leased property covers approximately 57,800 square meters, of which approximately 26,000 square meters consist of underground parking lots.  The lease is in effect until December, 2022 and is renewable for two additional periods of five years each, upon our notice. As of 2015, we started subleasing part of the property, which currently amounts to a quarter of our headquarters to several sub-lessees for a period of up to three years. The sub-lessees have options to renew the lease for additional periods, subject to certain conditions.

 

Netanya Property

 

In 2010, we entered into a lease agreement for our techno-logistic center, in Netanya, Israel.  The leased property covers approximately 11,000 square meters. The lease expires in December 2022 and is renewable until July 2026, at our option. In case we do not exercise the option we shall be required to pay approximately NIS 8 million. As of 2015, we started subleasing part of the property, which currently amounts to approximately 6,100 square meters of the leased property, for periods of five to six years. The sub-lessees have an option to renew the leases for an additional period subject to certain conditions.

 

Haifa, Tel-Aviv and Rosh-Ha’ayin Properties

 

We lease properties in Haifa, Tel-Aviv and Rosh-Ha'ayin. We use these properties for offices, for call centers, for network servers and for equipment storage. The Haifa lease covers approximately 8,900 square meters, is in effect until December 2021, and is renewable for two additional periods of two years each, upon our notice. The Tel-Aviv lease covers approximately 1,500 square meters, is in effect until December 2023, and is renewable for two additional periods of two and a half years each, upon our notice. The Rosh-Ha'ayin lease covers approximately 3,300 square meters, is in effect until December 2021 and is renewable for three additional periods of two years each, upon our notice. We sublease part of the property in Haifa to third parties and part of the property in Rosh-Ha'ayin to our wholly-owned dealer and a third party.

 

Service Centers, Points of Sale and Cell Sites

 

As of December 31, 2020, we leased approximately 70 service centers, points of sale and other facilities, which are used for sales and customer service. Such lease agreements are generally for periods of three years, with extension options that vary by location. We routinely size down or close of sale points with losing activity and open points of sale which improve our reach and increase sales.

 

Cell sites

 

We lease from various parties, including the Israeli Land Authority, or ILA, municipalities and private entities sites for the establishment, maintenance and operation of cell sites for our cellular network. The duration of these lease agreements are generally for two to five years, with an option to extend the lease for successive similar periods and exit windows that enable us to terminate the agreement prior to its scheduled expiration under certain circumstances. In some of the agreements, the lessor is entitled to terminate the agreement at any time without cause, subject to prior notice. Based on our past experience, we encounter difficulties in extending the term of approximately 5% of the lease agreements for cell sites, which at times results in our having to pay higher rent in order to remain in the same locations or to find alternative sites.

 

Fixed-line sites

 

In addition, we lease a number of points of presence in Israel that are used for equipment and servers storage and other communications equipment for the provision of landline services, and storage space for our servers and equipment in London and Frankfurt.

 

Authorization Agreement with Land Regulatory Authorities

 

In June 2013, we renewed an authorization agreement with the ILA that authorizes us to use lands managed by the ILA for the establishment and operation of cell sites. The authorization agreement was effective until December 2019 and we are negotiating the terms of a new agreement. The authorization agreement provides that subject to the receipt of approval from the ILA, we will be entitled to establish and operate cell sites on the lands leased to third parties throughout the agreement’s term. We undertook to vacate at the end of the agreement’s term all facilities installed in the authorized area unless the authorization period is extended. Under the authorization agreement, the ILA is entitled to revoke authorizations granted to us in certain circumstances, subject to prior notice.

 

 

None.

 

 

 

This discussion contains forward-looking statements.  We have based these forward-looking statements on our current expectations and projections about future events.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Item 3. Key Information – D. Risk Factors” and elsewhere in this annual report.

 

A.            OPERATING RESULTS

 

Overview

 

General

 

We are one of the four major communications groups in Israel and the largest provider of cellular communications services in Israel, further strengthened following the acquisition of Golan in August 2020, with approximately 3.2million cellular subscribers as of December 31, 2020, with an estimated market share of 31%. In recent years we have increased our presence in the fixed line market, adding TV and internet infrastructure services (the latter through the landline wholesale market and also over IBC's fiber-optic infrastructure), to our veteran ISP and landline telephony (both inland and long distance).

 

 We earn revenues and generate our primary sources of cash by offering a broad range of communications services, including cellular, Internet services (connectivity and infrastructure), TV services and fixed-line telephony services (inland and international), as well as by selling handsets and other end-user equipment.

 

As of 2016, as a result of business and regulatory changes, as well as the Group’s entry into new fields of operation in the fixed-line market, the Group’s management attention in general and its chief operating decision maker's attention in particular, have shifted to focus on two main fields of operations, “Cellular” and “Fixed-line.”

 

Our cellular segment’s services include cellular telephony services and additional features, data transfer, download and upload, as well as text and multimedia messaging services, international roaming services, value added services and services designated for our business customers. We also offer a wide selection of handsets of various leading global manufacturers as well as repair services on most handsets we offer. We provide national roaming services to Xfone and our revenues from our network sharing agreement with Xfone are material to our results of operations.

 

Our fixed-line segment’s services include internet  infrastructure (through the landline wholesale market and also over IBC's fiber-optic infrastructure) and connectivity services (ISP), television services (OTT TV), transmission services, IP switchboard services, operation and management of business telecommunications systems, tailored made communications solutions and IOT services for our business customers, international calling services (ILD)  as well as selling end user fixed-line equipment.

 

We sell our various services on a stand-alone basis or bundled with certain other services offered by us, including a triple play bundle of end-to-end internet service, landline telephony and TV services.

 

Our management evaluates our performance through focusing on our key performance indicators, which include among others:  adjusted EBITDA (as defined in “Results of Operations”), operating income, net income, Free Cash Flow*, cellular subscribers and average revenue per user of cellular, or ARPU, internet and TV subscribers – both stand alone and as a part of a bundle, subscriber churn rate and handset sales and profitability. These key performance indicators are primarily affected by the competitive and regulatory landscape in which we operate and our ability to adapt to the challenges posed.

 

In 2020, the Company dealt with the effects of the Coronavirus crisis which significantly harmed the Company’s results. In light of the many challenges, the Company succeeded to adjust its expenditure structure and focused on continuing to improve the quality of its customer service. The Company continued to grow in television and internet subscriptions, concurrently with converting them to IBC’s fiber optics infrastructure, so that at the end of 2020 the Company’s fiber optics subscriber base was approximately 93,000 customers out of approximately 560,000 households in buildings connected to the IBC infrastructure, which constitutes an increase of approximately 79% compared to its customer base at the end of 2019.

 

In 2020, the Company executed two central and material transactions that continue to strengthen its standing as a leading telecommunications group: (a) The Golan acquisition transaction. The transaction is expected to significantly contribute to our adjusted EBITDA and free cash flow, further to its actual contribution in the 4 months period since its completion at the end of August 2020; (b) a transaction wherein Hot became a partner in IBC. This agreement enables a significant expansion of the scope of the fiber optics deployment at an accelerated pace (1.7 million households to have access to the network within a few years). The transaction enables us to turn into a group with extensive and independent landline infrastructure. The transaction was completed in February 2021.

 

A frequency tender was completed in 2020, in the framework of which the Company received a license and 5G frequencies, and additional 4G frequencies, and the Company is vigorously acting towards establishing 5G sites alongside continuing to upgrade and expand the 4G network, with the purpose of continuing to improve the network’s performances as well as the quality of its customer service.

 

Revenues in 2020 totaled NIS 3,676 million, compared with NIS 3,708 million in 2019, reflecting a decrease of only 0.8% despite the Coronavirus crisis. The intense competition in the cellular market continued to affect the cellular segment and led to erosion in ARPU and a decline in revenues from services, as well to a significant decrease in the roaming revenues,   from the Coronavirus crisis. However, in light of the Golan acquisition and the consolidation of the results of its activity in the Company’s reports since the end of August 2020, the revenue from services in the cellular segment in 2020 compared to 2019 only decreased by approximately 1.1% compared to 2019, despite the Coronavirus crisis which led to a significant decrease in the Company’s revenues from roaming services. On the other hand, the revenue from services in the fixed-line segment grew by approximately 3.8% compared to 2019, in light of the continued recruitment of new internet and television customers.

 

Revenues from equipment in 2020 totaled NIS 878 million, a decrease of 5.8% compared to 2019, mainly due to a decrease in revenues from equipment in the fixed-line segment (inter alia in light of the Coronavirus crisis, which affected the scope of transactions for the business customers). The decrease in equipment sales in the fixed-line segment was offset against an increase equipment sales in the cellular segment (an increase of 6.5% compared to 2019) in light of the actions we took, which led to a significant increase in the scope of sales on the digital channels and to business customers, and despite the Coronavirus crisis that was accompanied by the closing of points of sale and service centers for a certain period.

 

Given the efficiency measures taken by the Company over the course of the year, the Company’s total expenses (without depreciation costs and without Golan’s expenses that were consolidated from the end of August 2020) decreased by approximately NIS 110 million compared to 2019. The Company’s adjusted EBITDA in 2020 amounted to NIS 918 million, an erosion of only 2.3% compared to 2019. The erosion mainly derived from a decrease in revenues from roaming services and from a decrease in profit from equipment sales (in light of a shifting to digital sales and to business customers) and was partially offset in light of consolidating Golan’s results.

 

The Company's net loss for 2020 totaled NIS 170 million compared to NIS 107 million in 2019. The increase in loss resulted mainly from the Coronavirus crisis and despite the efficiency measures taken by the Company.

 

Notwithstanding the many challenges of the past year, the Company succeeded in increasing the free cash flow (FCF) which amounted to approximately NIS 250 million compared to NIS 210 million in 2019 (excluding the proceeds from selling our fiber-optics network in residential areas to IBC, for NIS 181 million), an increase of 19%.

 

In May 2020, we completed a public offering of NIS 222,000,000 par value of debentures (Series L) and 2,220,000 warrants (Series 4) of the Company, for immediate gross proceeds of approximately NIS 201 million and in December 2020, we completed a private placement of NIS 400 million par value of debentures (Series L), in consideration for approximately NIS 391 million. For additional details see "Issuance of equity securities" and "Debt Services" below.

 

In August 2020, we completed the acquisition of Golan's share capital, for the sum of approximately NIS 545 million, net, following which, our sharing and hosting agreements with Golan came to an end.

 

In November 2020 Xfone ceased making payments under our network sharing and hosting agreement and in January 2021 notified us of termination of the agreement, which we strongly rejected and commenced legal proceedings against Xfone. For details see "B. Business Overview – Network and Infrastructure – Cellular Segment – Network sharing agreement" below.  Consideration from our network sharing agreement with Xfone is material to our results of operations. If payments to us are under the agreement are materially reduced or not made over a period of time, for any reason whatsoever, it may lead to a material adverse effect on our results of operations.

 

In February 2021, we completed another investment transaction in IBC (the first one completed in 2019), with Hot becoming a partner to our investment in IBC. For details see "Item 4. Information on the Company – B. Business Overview – Network and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure – Investment in IBC and sale of fiber-optic infrastructure to IBC".

 

We have completed the main points of the restructuring plan announced and put to motion on September 2019, mainly the reduction of expenses and reduction in manpower and investments and a capital raise, in order to return to positive net income, to reduce the Company’s net debt to EBITDA (excluding IFRS16 ramifications and special and unusual items) ratio to below 3 and prepare the Company to better cope with market conditions and the intense competition. Those include: cost cutting expenses – mainly through a reduction in manpower and capital raise (see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – Issuances of equity securities" below). The Coronavirus pandemic resulted in a loss for 2020 despite the measures implemented.

 

On March and April 2021, shares representing approximately 52.4% of our indirect controlling shareholder DIC's share capital, were purchased by a group of investors, led by Mega Or Holdings Ltd., of which approximately 29.9% were purchased by Mega Or itself. For additional details see "Item 7. Major shareholders and related part transactions - A. Major Shareholders" below.

 

 

In 2020, our results were also adversely affected by the Coronavirus pandemic. Restrictions imposed by the State of Israel as preventive measures against the pandemic, which included restrictions on citizens’ movement and employment, restrictions on commercial activity, the closure of borders between states, and a considerable reduction of the employees’ presence in workplaces, led to a significant decrease in both inbound and outbound international tourism and to significant adverse effect to our roaming revenues in 2020. We expect there to also be a substantial adverse effect on our roaming revenues in the near future, as long as the restrictions on the movement of outbound and inbound tourists shall continue. Similarly, as a result of the restrictions on commerce and the closure of shopping malls and retail centers, we closed our points of sale and service centers during the lockdowns. Continued restrictions and other adverse effects of the Coronavirus on us and the market in general, may adversely affect our operations.

 

 

As of February 8, 2021 we voluntarily delisted our shares from trading on the NYSE and have commenced reporting in accordance with the reporting obligations under the Israeli Securities Law applicable to reporting corporations in Israel which are not dual-listed. Our shares continue to be registered in the United States in accordance with the provisions of the United States securities laws and therefore, we will continue to be subject to the reporting obligations under the U.S. Securities Exchange Act of 1934, as amended, in addition to the reporting obligations under Israeli Securities Law, for as long as our shares remain so registered.

 

 

We intend to drive revenue primarily by: (1) offering our customers full and comprehensive mobile and wireline solutions while leveraging  our leading position and large market share in order enlarge our offering and investing in providing quality service to our customers; (2) sustaining quality networks in support of providing advanced communications solutions to our customers, including by upgrading capacity and enlarging coverage of our cellular networks, specifically our 4G and 5G networks and acting to substantially enlarge deployment of IBC's fiber-optic infrastructure and a faster pace, so we become a partner in a wide and independent fixed-line infrastructure rather than dependent on other's fixed-line infrastructure; (3) continue our efforts to optimize our costs and adjust our operations to the changing market conditions, while continuing to thrive to improve our customer service as a leverage to increasing our revenues and improving our profitability . For details see "Item 4. Information on the Company –B. Business Overview – Network and Infrastructure".

 

In 2018, we entered into a collective employment agreement with the Company's employees' representatives and the Histadrut for a term of three years (2018-2020) and in 2019 and 2020 we entered additional agreements. In 2021 we entered into a new employment collective agreement for a term of three years (2021-2023). See also "Item 3. Key Information – D. Risk Factors – Risks Related to our Business – The unionizing of our employees may impede necessary organizational and personnel changes, result in increased costs or disruption to our operation."

The Israeli telecommunications market is currently dominated by four communications groups: Bezeq, Hot, Partner and Cellcom, with the first two having a full (or substantially full) landline infrastructure.

 

The communications market is primarily regulated by the Ministry of Communications. Regulatory changes have had material adverse effects on our results of operations in recent years, including by facilitating the entry of additional competitors into the cellular market which dramatically increased competition. Such and other future amendments, if implemented, may continue to materially adversely affect our results of operations, should we not succeed to mitigate such effects. See “Item 4. Information on the Company – B. Business Overview – Government Regulations".

 

Competition may increase further or our competitive standing may suffer if: current trends continue, services provided by our competitors not in line with the wholesale market criteria and not enforced by the MOC or unfavorable pricing or regulation harming our ability to provide competitive bundles, or further escalation of the competition by Bezeq and Hot; the structural separation imposed on the Bezeq and Hot groups; new competitors enter the communications markets; self-provision of communications services is substantially wider; IBC fails to deploy a widespread landline infrastructure; handset increased competition continues or we do not make the necessary investments in our networks or in our business in general, technological and regulatory changes and if our servies are harmed by cyber attacks or other malfunction. We intend to continue to implement changes in order to continue our efforts to mitigate the adverse effects of the increased competition. We cannot guarantee the success of these measures. See "Item 3. Key Information – D. Risk Factors – Risks Related to our Business - We face intense competition in all aspects of our business", "- Our operating results, profitability and cash flow have decreased significantly in the past several years, resulting in loss. Further decline may adversely affect our financial condition", Cyber attacks impacting our networks or systems could have an adverse effect on our business", Our handsets revenues and profitability have decreased and are expected to decrease further" and "Item 4. Information on the Company - B. Business Overview – Competition" for additional details.

 

The construction and operation of our cell sites and other transmission facilities are highly regulated and require us to obtain various consents and permits. See “Item 4. Information on the Company – B. Business Overview - Government Regulations – Cellular segment – Permits for Cell Site Construction.” We have experienced difficulties in obtaining some of these consents and permits and our ability to rely on an exemption from obtaining a building permit was severely limited. Also, we may be operating a significant number of our cell sites in a manner not fully compatible with the building permits issued for them. Additional restrictions on the construction and operation of cell sites and other facilities have been enacted and may be enacted in the future or we may be required to demolish or relocate these cell sites and facilities, which may adversely affect our existing networks and networks build out, specifically in urban areas, may prevent us from meeting our license requirements and could adversely affect our results of operations.

 

Maintenance and upgrade of our networks involve material investments and operational risks to the Company. See "Item 3. Risk factors – Risks related to our business - We may be adversely affected by the significant technological and other changes in the telecommunications industry" and "Item 4. Information on the Company – B. Business Overview - Network and Infrastructure ".

 

Our profitability is also affected by other factors, including changes in our cost of revenues and selling, marketing, general and administrative expenses, including depreciation and financing expenses.

 

Our results are also impacted by currency fluctuations.  Substantially all of our revenues are denominated in NIS, but a portion of our payments are incurred in foreign currency, mainly U.S. dollars. Changes to the Israeli CPI, may also impact our results as part of our debentures (Series H and J) and some of our expenses are linked to the Israeli CPI. Any devaluation of the NIS against the U.S. dollar or other foreign currencies will therefore increase the NIS cost of our expenses that are not denominated in NIS or are linked to those currencies, and any increase in the Israeli CPI will increase the financial expenses associated with our debentures. We enter into derivative instruments to mitigate the effect of the various market risks associated with these expenses.  See “Item 11 – Quantitative and Qualitative Disclosures About Market Risk.”

 

Further, we have incurred significant debt by issuing debentures and receiving loans, the aggregate outstanding principal amount of which as of December 31, 2020 was NIS 3,209 million. See “ – Liquidity and Capital Resources– Debt Service” and "-Other Credit Facilities” and "Item 3. Risk factors – Risks related to our business - Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability.

 

Our dividend policy targets a distribution of at least 75% of our annual net income on a quarterly basis. In respect of 2018, 2019 and 2020, our board of directors chose not to declare dividends given the intensified competition and its adverse effect on our results of operations and in order to strengthen our balance sheet. We undertook limitations on our dividend distributions in connection to the issuance of our debentures and other credit facilities. See “Item 8. Financial Information – A. Statements and Other Financial Information - Dividend Policy” and “- B. Liquidity and Capital Resources- Dividend payments” and "– Debt Service" and "– Other Credit Facilities".

 

As of January 1, 2017, we apply International Financial Reporting Standard (IFRS) 15 following early adoption thereof, and capitalize part of the salaries expenses and commissions related to customer acquisition costs..

 

As from January 1, 2018 we apply IFRS 9 regarding financial instruments, which replaced IAS 39. The standard was applied using the cumulative effect approach as from the initial date of application without amendment of the comparative data, other than with respect to certain hedging items, with an adjustment to the balance of retained earnings and other components of equity as of the initial date of application. For additional details see note 3-I-1 to our financial statements.

 

As from January 1, 2019 we apply International Financial Reporting Standard 16, Leases (hereinafter: “IFRS 16” or “the standard”), which replaced International Accounting Standard IAS 17, Leases .The main effect of the standard’s application is reflected in annulment of the existing requirement from lessees to classify leases as operating (off-balance sheet) or finance leases and the presentation of a unified model for lessees to account for all leases similarly to the accounting treatment of finance leases in the previous standard. Until the date of application, we classified most of the leases in which it is the lessee as operating leases, since it did not substantially bear all the risks and rewards from the assets. See note 3-O to our financial statements.

 

Revenues

 

We derive our revenues in the cellular segment primarily from the sale of cellular network services (such as airtime and data surfing), including content and value added services, roaming services as well as revenues derived from network sharing and hosting services, handset sale and handset repair services. Roaming services include roaming charges that we bill to our subscribers for the use of the networks of our roaming partners outside Israel, to which we refer as outbound roaming, and charges that we bill to our roaming partners whose subscribers use our network, to which we refer as inbound roaming.  Originating calls on our network and from interconnect revenues from other operators for calls terminating on our network.

 

Our revenues in the fixed-line segment are derived from the sale of fixed-line communications services which include: internet infrastructure (through the landline wholesale market, or IBC's fiber-optic network , and connectivity services, OTT TV services, transmission services, provided to other operators and to Xfone  and  Golan according to our network sharing agreement ( Golan-until August 2020 when it became an MVNO operator  and  our wholly owned  subsidiary) , international calling services (ILD), landline telephony services, operator services and teleconferencing services and equipment sales that are related to this segment.

 

Our revenues from cellular services are usually affected by seasonality with the third quarter of the year characterized by higher roaming revenues due to increased incoming and outgoing tourism. Equipment sales of the fixed-line segment are usually higher in the fourth quarter.

 

Cost of revenues

 

The principal components of our cost of revenues are the purchase of equipment, interconnect fees, content cost, cell site leasing costs, salaries, transmission services cost, internet connectivity services cost, purchase of call minutes related mainly to international calling services, outbound roaming services fees and cost of Internet infrastructure. Our cost of revenues also includes depreciation of the cost of our network equipment, tv set-top boxes, amortization of our spectrum licenses and rights of use of communications lines.

 

Selling and marketing expenses

 

Selling and marketing expenses consist primarily of sales force salaries and dealers' commissions, advertising, public relations and promotional expenses. We compensate our sales force through salaries and incentives. Since January 1, 2017 part of our customer acquisition costs (salaries and dealers commissions) are capitalized as a result of the early adoption of an International Financial Reporting Standard (IFRS 15). Our selling and marketing expenses also include depreciation, mainly of leasehold improvements and equipment in our service centers and points of sales, and amortization of intangible assets related to the acquisition of subsidiaries.

 

General and administrative expenses

 

General and administrative expenses consist primarily of salaries and compensation, professional and consultancy fees, leases and maintenance of our offices, bad debt and doubtful accounts allowance, and other administrative expenses. Our general and administrative expenses also include depreciation and maintenance fees, mainly for our billing and information systems.

 

Other income and expenses

 

Other income and expenses consist primarily of revenues from long-term credit arrangements (more than 12 monthly payments) are recognized on the basis of the present value of future cash flows, discounted according to market interest rates at the time of the transaction and from performing contracting work of deploying the fiber optics network and  of expenses related to employee retirement plans in 2019 and 2018 .

 

Financing income and expenses

 

Financing income and expenses consist primarily of interest expense on long-term loans and interest on our debentures and other credit facilities, the effects of fluctuations in currency exchange rates, Israeli CPI adjustments related to the Israeli CPI-linked debentures, and income or losses relating to financial derivative instruments that do not qualify for hedge accounting according to IFRS. Financing income and expenses also include interest income on deposits, discount amortization associated with our debentures, and gains and losses from our current investment in tradable securities.

 

Income Tax

 

Generally, Israeli companies were subject to corporate tax on their taxable income at the rate of 23% for the tax years 2018 and onward.

 

Israeli companies are subject to capital gains tax at the corporate tax rate. A deferred tax asset or liability is created for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

 

Results of Operations - Comparison of 2018, 2019 and 2020

 

The following table sets forth key performance indicators for the periods indicated:

 

 

 

 

 

 

The calculation of cellular ARPU for each of the periods presented is detailed in "Item 3. – Key Information – A. Selected financial data"  above.

 

The reconciliation of adjusted EBITDA with net income and operating income is detailed in "Item 3. – Key Information – A. Selected financial data" above.

 

 

 

 

Revenues

 

The decrease in revenues in 2020 compared with 2019 mainly derived from decrease in revenue from roaming services as a result of the Coronavirus crisis and a decrease of equipment sales in the fixed- line segment which was partially offset by Golan’s revenue from four months of activity (consolidated from September 2020).

 

The increase in revenues in 2019 compared with 2018 is attributed to a 3.1% increase in equipment revenues and an increase of 4% in recurring revenues from the fixed-line segment in the Internet and TV fields, offset by 2.5% decrease in service revenues in the cellular segment.

 

The following table sets forth the breakdown of our revenues for the periods indicated based on the various sources thereof:

 

 

**	Consists of repair services fees.

During 2020, service revenues (comprising 76.1% of total revenues) increased 0.7%, compared with 2019. This increase in service revenues resulted mainly from revenues of our subsidiary Golan consolidated from September 2020 as well as an increase in fixed-line service revenues mainly from TV and internet services partially offset by decrease in roaming services as a result of the Coronavirus crisis.

 

During 2019, service revenues (comprising 74.8% of total revenues) decreased 0.3%, compared with 2018. This decrease in service revenues resulted mainly from a 2.5% decrease in cellular service revenues resulting mainly from the ongoing erosion in the prices of these services. The decrease was partially offset by a 4% increase in the fixed-line service revenues resulting mainly from an increase in revenues from TV and internet services.

 

Fixed-line service revenues totaled NIS 1,153 million in 2020 compared to NIS 1,111 million in 2019. This increase resulted mainly from an increase in revenues from TV and internet services

 

Fixed-line service revenues totaled NIS 1,111 million in 2019 compared to NIS 1,068 million in 2018. This increase resulted mainly from an increase in revenues from TV and internet services

 

During 2020, revenues from other services totaled NIS 102 million compared with a total of NIS 124 million in 2019.

 

During 2019, revenues from other services totaled NIS 124 million compared with a total of NIS 135 million in 2018.

 

During 2020, equipment revenues (comprising 23.9% of total revenues) decreased 5.8%, compared with 2019. This decrease resulted mainly from a decrease in end user equipment sales in the fixed-line segment, partially offset by an increase in the quantity of cellular handsets sold during 2020 as compared to 2019.

 

During 2019, equipment revenues (comprising 25.1% of total revenues) increased 3.1%, compared with 2018. This increase resulted mainly from an increase in end user equipment sales in the fixed-line segment, partially offset by a decrease in the quantity of cellular handsets sold during 2019 as compared to 2018.

 

The following table sets forth the breakdown of our revenues for the periods indicated based on the types of subscribers:

 

 

 

A breakdown of revenues according to types of subscribers (individual and business) during 2020 compared with 2019, shows a 0.2% decrease in revenues attributed to individual subscribers and a 5.1% decrease in revenues attributed to business subscribers. The decrease in the revenues attributed to individual subscribers resulted mainly by a decrease in roaming services as a result of the Coronavirus crisis partially offset from revenues of our subsidiary Golan (consolidated from September 2020) as well as an increase in fixed-line service revenues, mainly from TV and internet services. The decrease in revenues from business subscribers resulted mainly from the decrease in equipment revenues in the fixed line segment.

 

A breakdown of revenues according to types of subscribers (individual and business) during 2019 compared with 2018, shows a 0.1% decrease in revenues attributed to individual subscribers and a 4.8% increase in revenues attributed to business subscribers. The decrease in the revenues attributable to individual subscribers resulted mainly from the ongoing erosion in the price of cellular services, resulting from the intensified competition in the cellular market, partially offset by an increase in revenues of internet and TV services The increase in revenues attributed to the business subscribers resulted mainly from the increase in equipment revenues in fixed line segment.

 

Segment Revenues Discussion

 

We operate in two operating segments:

 

Cellular Segment – this segment includes the cellular communications services, cellular equipment and supplemental services.

 

Fixed-line Segment – this segment includes landline telephony services, internet infrastructure and connectivity services (ISP), television services, transmission services landline equipment and supplemental services.

 

These segments are managed separately for the purposes of allocating resources and assessing performance.

 

We started presenting our operations in these two segments as of January 1, 2016.

 

We measure revenues on an operating segment basis. The following is a discussion of our revenues for our two operating segments:

 

 

Cellular Segment

 

Revenues from the cellular segment in 2020 totaled NIS 2,364 million (including inter-segment revenues), compared to NIS 2,340 million in 2019. The increase was primarily due to an increase in cellular equipment revenues of 6.5% as a result of an increase in sales on the Company’s website and sales to business customers.

 

 Revenues from the cellular segment in 2019 totaled NIS 2,340 million (including inter-segment revenues), compared to NIS 2,385 million in 2018. The decrease was primarily due to a decline in service revenues of 2.9% resulting mainly from the ongoing erosion in the price of these services offset by an increase in revenues from our sharing agreement with Golan and Xfone.

 

Fixed-line Segment

 

Revenues for the fixed-line segment (including inter-segment revenues) in 2020 totaled NIS 1,480 million, compared to NIS 1,529 million in 2019. This decrease resulted mainly from a decrease in revenues from in fixed-line equipment revenues. Partially offset from an increase in fixed-line service revenues TV and internet services.

 

Revenues for the fixed-line segment (including inter-segment revenues) in 2019 totaled NIS 1,529 million, compared to NIS 1,464 million in 2018. This increase resulted mainly from an increase in revenues from TV and internet services, as well as an increase in fixed-line equipment revenues.

 

 

We measure adjusted EBITDA on an operating segment basis. See note 6 to our financial statements incorporated by reference into this report for details of this measure of segment profitability. We define segment adjusted EBITDA as reviewed by the Group's CODM, represents earnings before interest (financing expenses, net), taxes, other income (expenses) not part of the Company’s current activity, depreciation and amortization, profits (losses) of equity account investees and share based payments.

 

Cellular segment

 

In 2020, the cellular segment generated adjusted EBITDA of NIS 525 million compared to NIS 627 million in 2019, a 16.3% decrease. This decrease resulted mainly from decrease in revenues from roaming services as a result of the Coronavirus crisis

 

In 2019 the cellular segment generated adjusted EBITDA of NIS 627 million compared to NIS 418 million in 2018, a 47.6% increase. This increase resulted mainly due to the adoption of IFRS 16 standard (which excluding such effects, would have continued to decrease), in comparison with 2018 as a result of ongoing erosion in cellular service revenues.

 

Fixed-line segment

 

In 2020, the fixed-line segment generated adjusted EBITDA of NIS 393 million compared to NIS 313 million in 2019, a 25.6% increase. The increase arose mainly as a result of an increase in revenues from internet and TV services and a decrease in the wholesale market costs as a result of a retrospective update of Bezeq’s tariffs.

 

In 2019, the fixed-line segment generated adjusted EBITDA of NIS 313 million compared to NIS 269 million in 2018, a 14.5% increase. The increase arose mainly as a result of an increase in revenues from internet and TV services.

 

Cost of revenues and gross profit

 

The increase in cost of service revenues in 2020 compared with 2019 resulted mainly from an increase in first-time consolidation of Golan costs and an increase in costs of interconnect tariffs as a result of an increase in call minutes. This increase was partially offset by a decrease in the wholesale market costs as a result of a retrospective update of Bezeq’s tariffs.

 

The increase in cost of equipment revenues resulted mainly from an increase in cellular segment handset costs as a result of an increase in sales of handsets, partially offset by a decrease in equipment sales in the fixed-line segment.

 

The increase in cost of service revenues in 2019 compared with 2018 resulted mainly from an increase in costs of TV services content and in costs related to internet services in the fixed-line segment, offset by a decrease in expenses of international operators.

 

The increase in cost of equipment revenues resulted mainly from an increase in fixed-line equipment costs, primarily as a result of an increase in revenues from fixed line equipment sold during 2019 as compared to 2018, which was partially offset by a decrease in cellular segment handset costs.

 

Selling and marketing expenses and general and administrative expenses

 

*reclassified

The decrease in selling and marketing expenses in 2020 compared with 2019, derived mainly from a decrease in salary costs as a result of the temporary closure of the frontal points of sale and putting employees on unpaid leave due to the Coronavirus over the course of the year, and from the Company’s streamlining of manpower as a result of employees retiring in the framework of the voluntary retirement plan, which was implemented during 2020.

 

The increase in selling and marketing expenses in 2019 compared with 2018, is primarily a result of an increase in depreciation expenses due to the capitalization of part of the customer acquisition costs. This increase was partially offset by a decrease of salaries expenses and doubtful accounts expenses.

 

The increase in general and administrative expenses in 2020 compared with 2019 resulted mainly from an increase in the Company’s depreciation costs and from Golan’s first-time consolidation.

 

The decrease in general and administrative expenses in 2019 compared with 2018 resulted mainly from a decrease of lease expenses due to the adoption of International Financial Reporting Standard ( IFRS 16), decrease in salaries and related expenses and decrease in doubtful debts. The decrease in general and administrative was partially offset by an increase in depreciation due to the adoption of IFRS 16.

 

Other income (expenses), net

 

In 2020 the other revenue was from revenue from credit arrangements of handset sales and other revenue from performing contracting work of deploying the fiber optics network for IBC.

 

 Other expenses in 2019 mainly includes expense of NIS 45 million following employee voluntary retirement plan. Offset by revenues from credit arrangements of handset sales and from capital gain from selling our fiber optic network in 2019 to IBC.

 

Financing expenses, net

 

The increase in 2020 compared to 2019 mainly derived from losses in the 2020 investments portfolio compared to profits in the previous year, which was partially offset by a decrease in interest costs for the Company debentures as a result of a decrease in the average debt. The decrease in 2019 compared to 2018 derived from financing revenues for profits in the Company’s tradable investments portfolio and a decrease in offset interest costs, inter alia from an increase in the financing costs as a result of implementing IFRS 16 starting from January 1, 2019.

 

Income tax

 

The increase in 2020 compared to 2019, and in 2019 compared to 2018 derived mainly from an increase in losses for tax purposes and a recognition of deferred taxes for expected tax. 

Loss

 

The loss in 2020 totaled 170 million, primarily due to a decrease in operating profit mainly decrease in revenues from roaming services as a result of the Coronavirus crisis.

 

The loss in 2019 totaled 107 million, primarily due to a decrease in operating profit mainly from the ongoing erosion in the price of cellular services as well as from an expense of NIS 45 million following employee voluntary retirement plan which was recorded on the fourth quarter of 2019.

 

B. LIQUIDITY AND CAPITAL RESOURCES

 

General

 

Our liquidity requirements relate primarily to working capital requirements, debt service, capital expenditures for the expansion and enhancement of our networks, including rights to additional frequencies, end user equipment and payment of dividends, to the extent declared. We fund these requirements through cash flows from operations, raising new debt and issuances of equity securities, including ordinary shares.

 

 For limitations applied to our debentures and other credit facilities see "– Debt Service" and "– Other Credit Facilities" below. These limitations are expected to apply to any additional debt incurred by us.

 

In May 2012, June 2013 and August 2019, the rating of our debentures was downgraded. Any downgrade in our ratings may adversely affect the terms and price of our debt or additional debt raised, may limit our ability to obtain additional financing to operate, develop and expand our business or to refinance existing debt. We believe that our sources of liquidity and capital resources, are adequate for our current requirements and business operations and should be adequate to satisfy our anticipated cash needs for working capital, capital expenditures, other current corporate needs and debt service for at least the next 12 months. Our future capital requirements will depend on many factors, including the level of revenues, the timing and extent of spending to support marketing and subscriber retention efforts, the expansion of sales and marketing activities and the timing of introductions of new products and enhancements of existing products, the level and timing of investing in our networks and services. Our Board of Directors would not expect to reinstate dividends unless it believes that our cash flow and available reserves will be sufficient to fund our needs, including our dividends. In February 2006, our Board of Directors adopted a policy to distribute each year at least 75% of our annual net income, on a quarterly basis, as dividends, subject to compliance with applicable law, our license and contractual obligations and so long as the distribution would not be detrimental to our cash needs or to any plans approved by our Board of Directors. We undertook limitations on dividend distributions in our indentures and in other credit facilities. See “Item 8. Financial Information – A. Consolidated Statements and Other Financial Information – Dividend Policy”, "– Debt Service" and "–Other Credit Facilities" below. In respect of 2020, our Board of Directors chose not to declare dividends given the intensified competition and its adverse effect on our results of operations and in order to strengthen our balance sheet. Should our Board of Directors decide to reinstate dividends, it is possible that our Board of Directors’ estimate of our cash needs will be incorrect, or that events could occur that could increase our cash needs beyond anticipated. If that occurs, we may not have sufficient cash to cover these needs as a result of various expenditures previously made by the Company, including prior investments and expenses and prior dividend payments, and we would need to identify additional sources of financing, which could include equity or debt financing. We may not be able to obtain such financing on acceptable terms or at all.

 

Dividend payments

 

In 2018, 2019 and 2020 our Board of Directors chose not to declare dividends given the intensified competition and its adverse effect on our results of operations and in order to strengthen our balance sheet.

 

Shelf Prospectus

 

In April 2021, we filed a shelf prospectus with the Israeli Securities Authority, or ISA, and the Tel Aviv Stock Exchange, or TASE. The shelf prospectus allows us, from time to time, until April 2023 (or if extended by the ISA, subject to certain conditions, until April 2024), to offer and sell various securities including debt and equity, in Israel, in one or more offerings, subject to filing a supplemental shelf offering report that describes the terms of the securities offered and the specific details of the offering and the prior approval of the TASE of the supplemental shelf offering report.

 

At this stage, no decision has been made as to the execution of any offering, nor as to its scope, terms and timing, if executed, and there is no certainty that such offering will be executed.

 

Issuances of equity securities

 

In December 2019, the Company issued in an offering to the public in Israel and to certain institutional investors outside of Israel, for an immediate total net consideration of approximately NIS 309 million: