Table of Contents

 

SUBJECT	SECTION	PAGE
Part One: Description of the General Development of the Company’s Business
The Group’s Activity and Description of the Development of its Business	1	1
Areas of activity	2	3
Investments in the Company’s equity and transactions in its shares	3	4
Distribution of dividends	4	5
Part Two: Other Information
Financial information regarding the Company’s areas of activity	5	6
General environment and the effect of external factors on the Group’s activity	6	8
Part Three: Description of the Group’s Business According to Area of Activity
Mobile communications	7	10
Structure of the area of activity and changes to the scope of activity in the area	7.1	10
Products and services	7.2	14
Breakdown of revenues of the products and services	7.3	17
Fixed-line communications	8	17
Structure of the area of activity, changes in the scope of activity, developments in the markets of the area, and changes in the characteristics of its customers	8.1	17
Products and services	8.2	23
Breakdown of the revenue of the products and services	8.3	26
Part Four: Matters Pertaining to the Group’s Activity as a Whole
Customers	9	27
Marketing and distribution	10	27
Competition	11	31
Fixed property, land, and facilities	12	40
Intangible Assets	13	47
Human capital	14	52
Vendors	15	57
Working capital	16	61
Investments	17	63
Financing	18	66
Taxation	19	70
Environmental risks and management thereof	20	70
Limitations and control on the Group’s activity	21	74
Material agreements	22	96
Cooperation agreements	23	97
Legal proceedings	24	100
Goals, business strategy and anticipated development in the forthcoming year	25	105
Discussion of risk factors	26	106
Definitions	27	119

 

Part One: Description of the General Development of the Company’s Business

 

 

 

Cellcom is an Israeli telecommunications group that provides a wide range of telecommunication services in Israel in two areas, mobile communication and fixed-line communication. The Group is Israel’s largest provider of cellular services and is the second largest communications group in Israel in terms of revenue, with a significant presence both in the private and business sectors.

 

In its twenty-five years of operations Cellcom led significant revolutions in the Israeli communications market, starting from breaking Bezeq’s monopoly in the cellular market, through establishing a business transmission network, and presenting a world class innovative solution for internet-based television (OTT) while breaking the Hot-Bezeq duopoly in this field. Cellcom continued to develop and grow through mergers in the communications market, the main such mergers include: The acquisition of the fixed-line operations of 013 Netvision Ltd. and its merger with the cellular activity into a communications group, an investment together with IIF – Israel Infrastructure Fund in IBC, while reducing dependency on the fixed-line infrastructure providers, acquiring Golan in 2020 and strengthening the Group’s standing as the country’s largest cellular provider, and the entry of Hot as a partner in IBC as a lever for expanding and developing the fiber-optic infrastructure.

 

On January 19, 2021, after the report period, the Company announced the delisting of the Company’ shares from the New York Stock Exchange, starting from February 9, 2021. From that date, the Company transitioned to a reporting format under the provisions of Chapter F to the Securities Law 1968, which apply to corporations reporting in Israel, while up to that point the Company had been filing reports in Israel under the provisions of Chapter E3 of the law, which apply to dual listed companies. Nevertheless, the Company’s shares continue to be registered according to the US securities provisions, and therefore the Company shall continue submitting reports to the United States Securities and Exchange Commission, under the provisions of the US securities laws, as long as its shares are registered in the US as foregoing. For additional details, see the Company’s current report on Form 6-K dated February 9, 2021.

 

 

Below is a chart depicting the structure of the Group’s material holdings as of the Report date:

 

 

 

 

 

 

1.3.1.          Investment transaction in IBC

 

In 2019, the Group completed an investment transaction in IBC. In addition, the Group purchased an indefeasible right to use IBC’s existing and future fiber-optic infrastructure and sold its independent fiber-optic infrastructure in residential areas to IBC. For additional details regarding the investment transaction and the transaction for sale of the fiber-optic infrastructure to IBC, see Section 17.1 below.

 

1.3.2.          Golan acquisition transaction

 

On August 26, 2020, the transaction for Cellcom’s acquisition of all of Golan’s issued share capital was completed, in consideration for approximately NIS 613 million. For additional details see Note 4 to the Financial Statements.

 

1.3.3.          Hot transaction

 

In September 2020, the Group and IIF – Israel Infrastructure Fund executed an investment agreement with the Hot group, whereby Hot would become an equal partner in the IBC partnership, which is held in equal parts by the Company and IIF – Israel Infrastructure Fund, with the purpose of significantly increasing coverage of IBC’s fiber-optic infrastructure. In addition, Hot executed an agreement whereby Hot shall acquire the right to use IBC’s existing and future fiber-optic infrastructure, and IBC undertook to continue purchasing certain services from Hot and the Group. On February 11, 2021, the transaction was completed, after obtaining the required regulatory approvals. For additional details see Section 17.2 below.

 

 

As of the Report date, the Group is engaged in two areas of activity, as follows:

 

 

In the framework of mobile communications, the Group provides cellular communication services in Israel and related services to its customers, as well as hosting services to other local operators under licenses granted by the Israeli Ministry of Communications, on an independent nationwide cellular network (including through network sharing). Similarly, the Group provides its customers with overseas roaming services and cellular communication services to customers of foreign operators that visit Israel. As of the date of the Financial Statements, the Group provided cellular services to approximately 3.2 million subscribers,¹ on a number of countrywide networks,² which include calls, sending and receiving messages (SMS, MMS), and internet browsing and data transfer.³ In this field, the Group provides its customers with related services and value-added services such as roaming services, data security services, and IOT services. In addition, the Group offers its customers equipment and repair services for equipment. Moreover, the Group provides construction, operation, and maintenance services to the radio network that it shares with Xfone. For additional details about the field of activity see Section 7 below.

 

 

In the area of fixed-line communications, the Group provides internet services (connectivity and infrastructure), Cellcom tv services, international phone services, fixed-line phone services (domestic operator), and transmission services for business customers and communication operators. The Group also offers its customers plans for these services (for example: The triple plan). The communication services are provided under the licenses granted by the Israeli Ministry of Communications (except for the internet television services that do not require a license). Similarly, the Group provides additional services such as: Conferencing services, hosting services and servers and websites, information security services, backup services, IOT solutions and solutions on the customer’s premises on the basis of products from globally leading manufacturers. Some of the services are cloud services. Similarly, the Group offers fixed-line equipment (such as computer equipment etc.). For additional details about the area of activity see Section 8 below.

 

In the area of fixed-line communications the Company operates through an independent fiber-optic network, primarily deployed between industrial areas and business complexes, for providing transmission and domestic operator services to the business sector and through using the infrastructure of Bezeq and Hot in the framework of the Wholesale Market. In recent years, the Company reduced its dependency on Bezeq and Hot’s infrastructure by increasing use of IBC’s fiber-optic infrastructure.

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Share lending agreement - For details regarding the share lending agreement, see regulation 21A in Chapter D of this Report.

 

 

 

 

 

 

 

 

In addition, it should be noted that the Israeli Minister of Communications may cancel the Cellular License held by the Company before its expiration if one or more of the causes set forth in the license are fulfilled, including if the joint equity of the Company and its shareholders, who hold 10% or more thereof, falls below USD 200 million.

 

Part Two: Other Information

 

 

 

* The consolidated adjustments derive from transactions between the various areas of activity.

 

** Variable costs are costs that are under the Group’s short-term control and which are also affected by revenue turnover. Fixed costs are not flexible in the short term, and the Group shall bear them even in case of a decrease in revenue.

 

 

* The consolidated adjustments derive from transactions between the various areas of activity.

 

** Variable costs are costs that are under the Group’s short-term control and which are also affected by revenue turnover. Fixed costs are not flexible in the short term, and the Group shall bear them even in case of a decrease in revenue.

 

 

* The consolidated adjustments derive from transactions between the various areas of activity.

 

**Variable costs are costs that are under the Group’s short-term control and which are also affected by revenue turnover. Fixed costs are not flexible in the short term, and the Group shall bear them even in case of a decrease in revenue.

 

For the explanations of the board of directors with respect to the Company’s financial data as set forth in the Financial Statements, see the Board of Directors’ Report attached in Chapter B to this Report.

 

 

Below are factors of the macro-economic environment that affect or may affect the Group’s activity:

 

The Israeli communications market is characterized by extensive and dynamic regulatory involvement, and the regulatory changes may have a material effect on the Group’s activity.

 

A substantive part of the Group’s activity is subject, inter alia, to the provisions of the Telegraph Ordinance, the Communications Law and the regulations promogulated thereunder, and of the licenses granted to the Group by the Israeli Minister of Communications.

 

 

The Group is active in a highly competitive market in all areas of its operations. For additional details see Section 11 below.

 

 

The communications area is a highly dynamic and competitive field, which is characterized by a fast pace of technological changes, which require appropriate preparation and capital-intensive investments in telecommunications infrastructure, in order to meet the changing needs of consumers and to retain the competitive position of the players active therein. Accordingly, the Group is required to invest in advanced technologies in order to remain competitive. For additional details see Section 26.2.6 below. In addition, the activity in the area of communications establishes a dependency of the parties active therein on the communications infrastructure, and on data systems and complex technological systems, while the lack of an independent infrastructure means being dependent on the various infrastructure providers. Malfunctions in such technologies may adversely affect the Group’s ability to provide services and products to the customers, adversely affect the Group’s goodwill, and expose it to claims. For details regarding the technological changes and the technological systems in the area of mobile communications and in the area of fixed-line communications, see Sections 7.1(2) and 8.1(1) below.

 

For additional details about the Group’s investment and the Group’s dependency on infrastructure and the networks, see Sections 12.2 and 26.3.2 below.

 

 

For details regarding the possible effect of environmental risks on the Group’s activity, see Section 20 below.

 

 

For details regarding the effect of the Coronavirus on the Group’s activity, see Section 1.5 of the board report attached in Chapter B to this Report.

 

Part Three: Description of the Group’s Business According to Area of Activity

 

 

In addition to that set forth in Section 6 above, below is a description of trends, events, and developments in the macro-economic environment of the Group that have or may have an effect on the area of mobile communications:

 

 

The area of activity includes cellular communication services⁴ and related services, as well as sales and repairs for cellular equipment, as set forth in Section 7.2 below. The cellular telecommunication services are provided by MNO - the owners of the infrastructure, and MVNO who are hosted on the MNO infrastructure.

 

In August 2020, the Group completed the acquisition of Golan and strengthened its position as a market leader. For additional details see Note 7 to the Financial Statements.

 

The cellular telecommunications market is characterized by fierce competition, which leads to frequent and extensive transfers of subscribers between the various cellular operators. Such churn leads to erosion of service package prices, concurrently with increasing the volume of services included in these packages, thus leading to erosion of the Group’s average revenue per cellular subscriber and harming the Group’s profitability.

 

Similarly, the end equipment market is also characterized by intense competition between the various providers (cellular operators, importers, many additional shops, international e-commerce platforms, etc.), which sell end equipment, including through parallel imports. The variety of marketing channels in which the Group is active (including the digital platform and its development in the Group), inter alia, harmed the gross profitability deriving from the sale of end equipment in the Group in 2020. This trend, also increased in light of Coronavirus crisis (which led to the closure of Group service centers and shops and a shift to selling via digital channels, which is characterized by lower profitability). For additional details see Section 1.5 of the board report.

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The cellular telecommunications market is characterized by low growth rates, due to a saturated penetration rate⁵ and due to large mobility rates between the various operators. In recent years cellular telecommunications became a central means of day-to-day conduct of private customers and businesses. The users are expanding the usage methods and transferred from using the communication services mainly for the purpose of phone calls, to an expanding use of the communication services, especially the cellular surfing services, use of applications, and use of connected equipment (IOT). The Company believes that this trend shall continue and get stronger, mainly with the entry of 5G.

 

 

The cellular communications market is characterized by frequent and significant technological changes, for which the cellular operators are required to continuously invest in development and adjustments to advanced technologies. Thus, even continuous growth in the scope of cellular data traffic, which in recent years has been occurring on the cellular and fixed-line communication networks, dictates the necessity of upgrading the networks as foregoing, and it requires the purchase of ever-increasing capacity for providing the connectivity service to the internet and the Group’s infrastructure. In the Group’s estimate, such growth in data traffic shall inter alia continue due to the development of content and television services in high resolutions, which rely on internet communication, in addition to the large demand that has existed since the Israeli government imposed restrictions due to the Coronavirus spread.

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In order to respond to the increasing demand for cellular data traffic, the Group is inter alia required to continue its investments in the operation and development of the 4G network that it operates, in order to allow for larger capacity and faster data transfer capabilities.

 

Further to the Company winning the 2020 frequencies tender as described in Section 13.5 below, the Company is acting towards upgrading and expanding the deployment of the 4G network and its adjustment to the new frequencies, as well as deploying the 5G network.

 

For additional details about the Group’s rights to use the frequencies, the Company winning the 2020 frequencies tender, and the requirement of the Israeli Ministry of Communications to replace frequencies, see Section 13.5 below.

 

The Company is continuously examining the technologies in the market and the need to upgrade the technology of its current networks, according to the state of market competition and the economic feasibility of investing in technological upgrades.

 

 

In the Company’s estimate, the critical success factors in this area of activity are as follows:

 

 

 

 

 

 

 

 

 

In the Group’s estimate, the main barriers to entry into the area of activity are:

 

 

 

 

 

 

It is noted that most of the barriers to entry described above with respect to the establishment of the infrastructure and using the frequencies do not constitute an entry barrier for virtual operators.

 

In the Group’s estimate, the main exit barriers from the area of activity are:

 

 

 

 

 

As of the Report publication date, the Group is the Israel’s largest provider of cellular telecommunication services based on the number of subscribers and estimated market share.

 

As of the Report publication date, the Group is providing cellular communication services to approximately 3.2 million subscribers in Israel, who constitute an estimated market share of approximately 31% of the cellular telecommunications market.

 

The Group offers its subscribers a wide range of services in this area of activity, including:⁶

 

 

 

 

 

 

 

 

 Similarly, the Group is continuously examining the offering of additional products and services to its customers.

 

The Group offers the cellular subscribers a wide range of packages and pricing packages, including packages that combine additional services of the Group, such as television, internet, and international operators.

 

The Group offers two payment methods: Advance payment (prepaid) and retroactive payment (post-paid). In the framework of the retroactive payment, the subscriber provides a payment method of a bank account debit order or a credit card charge. Services for advance payment are usually paid by purchasing physical or virtual “Talkman” cards. Most of the Group’s sales in this area are made by way of retroactive payment. According to the industry regulation, the cellular service packages do not include an undertaking to purchase the Group’s services for a predefined period, except in connection with agreements with large business entities. For additional details about restrictions and oversight in the area of mobile telecommunications, see Section 21.4 below.

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According to the network sharing agreement with Xfone, the Group provides Xfone with domestic roaming services and subcontractor services to the Joint Corporation (as defined in Section 23.1A below). For additional details about such sharing agreement, see Section 23.1 below.

 

End Equipment

 

Cellcom makes sales on a wide range of sale channels, including in physical shops (including the Dynamica chain that constitutes the Group’s retail arm) and on the website, a wide range of cellular phones, accessories, and additional electronic equipment, such as tablets, laptops, gaming consoles, loudspeakers, earphones and smart watches. The Group offers a variety of payment plans for such equipment. The consideration is paid in one payment or in a number of payments, according to the customer’s choice. The vast majority of the Group’s cellular phone sales in 2019 and 2020 were from the Samsung and Apple brands (for additional details regarding the Group’s agreements with Samsung and Apple, see Section 15 below). The cellular handset models sold by the Company support the Hebrew, English, Russian and Arabic languages (in most models).

 

For details about the effects of the Coronavirus on demand for the Group’s products, see Section 1.5 in the Board of Director’s Report.

 

 

Below is the data about customer revenue in the field of mobile telecommunications, the rate of which constitutes 10% or more of the Company’s total revenue (as presented in the Company’s consolidated financial statements) for 2018, 2019, and 2020 (in NIS millions):

 

(*) Calculated rate of the Company’s total revenue in the consolidated financial statements of every period.

 

(**) Including revenue from Xfone and Golan for the sharing agreements. For details see Section 23.1 below.

 

 

In addition to that set forth in Section 6 above, below is a description of trends, events, and developments in the macro-economic environment of the Group that have or may have an effect on the area of fixed-line communications:

 

 

The area of activity includes a variety of fixed-line communication services, including internet services (connectivity and infrastructure), OTT television services, international operator services, fixed-line telephone services, transmission services that are offered to its business customers and various communication operators and communication solutions, such as IOT solutions. For details see Section 7.2 below.

 

Communication operators that own fixed-line infrastructure with nationwide deployment, such as Bezeq, generally provide communication services to their customers through their independent infrastructure, and communication operators that do not own fully independent infrastructure, such as the Group, use infrastructure of the infrastructure owners for purpose of providing their services, including in the framework of the services and costs provided in the framework of the Wholesale Market.

 

The Group’s investment in IBC and the completion of the investment with the Hot group, shall allow IBC to significantly increase the deployment of its fiber-optic infrastructure and to decrease the Group’s dependence on the other fixed-line infrastructure owners. For additional details see Section 17.1 below.

 

Internet

 

This market includes internet connectivity services and internet infrastructure. For details see Section 8.2A below.

 

In recent years, the internet market recorded an increased use and scope of data movement transferred on the communication networks, alongside a drop in prices per given volume of traffic.

 

As of the Report date, the Hot group and Bezeq are the only entities in the State of Israel that own (and they are also obligated to own) countrywide (or nearly countrywide) fixed-line infrastructure. Bezeq’s infrastructure is based on the deployment of copper wires, whereas Hot’s infrastructure is cable-based.

 

IBC has fiber-optic based infrastructure in selected residential areas. Part of that is deployed on the electricity infrastructure of the Israel Electric Corporation, and part of that through using the Wholesale Market (through Bezeq’s physical infrastructure).

 

For additional details about IBC’s investment and the IRU agreement for the Group’s use of IBC’s network, see Section 17.1 below.

 

The Group has fiber-optic infrastructure deployed between the industrial areas and business centers in Israel, which is used for the provision of transmission services and domestic operators to business customers and telecommunication operators, as well as infrastructure between the Group’s communication sites.

 

Partner also has fiber-optic based infrastructure in selected areas.

 

The Bezeq group made a significant part of the required investments for operating a fiber-optic network of its own but has not yet begun operating it.

 

As of the Report date the Company is dependent on the broadband services of Bezeq, Hot and IBC for purpose of providing internet service to its customers. The increasing demand on the part of the Company’s customers for data capacity increased the Company’s dependency on these services.

 

The Wholesale Market allowed the internet connectivity providers who do not have internet infrastructure, including the Group, to compete with the Bezeq and Hot groups and to provide service plans that include internet connectivity and internet infrastructure.

 

In 2015 the Israeli Wholesale Market in the area of internet infrastructure services was officially launched, and to a certain extent also in the area of certain physical infrastructure being used by operators that do not own infrastructure. Even though the Wholesale Market also formally applies with respect to the infrastructure of the Hot group, implementation of the wholesale services on the Hot network was delayed for various reasons, inter alia due to tariffs that are higher than the wholesale tariffs of the Bezeq network. Until the Report publication date, the usage of the wholesale services on the Hot network was extremely limited.

 

For details regarding additional developments in the Wholesale Market, see Section 21.5(2) below.

 

For additional details and hearings pertaining to the prices of the wholesale internet infrastructure on the Bezeq network, see Section 21.5(2) below. For details regarding wholesale fixed-line telephony, see in this section below under the title “fixed-line telephony”.

 

Television services

 

Until the Group’s entry into the multi-channel television market in December 2014, the multi-channel television market was controlled by Hot (a declared monopoly in this field) and Yes, which provided television services mainly through cable and satellite technologies, respectively. Cellcom for the first time in Israel presented an innovative streaming television broadcasting method (OTT) which was a significant milestone in developing the audiovisual market for consuming programs on the internet. The Group’s OTT service presented innovation in additional parameters, including the option to simultaneously view content on a number of mobile and stationary handsets, continue viewing content across devices, concentrated recording that enables viewing content that was broadcast on the commercial channels a week back, and more, alongside a variety of Israeli and international content and sport content. Since the Group presented the OTT service in Israel, additional players adopted the solution.

 

Fixed-line telephone (domestic operator)

 

The Group offers fixed-line telephony services to business customers and fixed-line telephone services through VOB technology to its private customers.

 

The Wholesale Market was supposed to include fixed-line wholesale telephony starting from May 2015. Bezeq avoided providing the wholesale telephony service, and only in June 2020 did it claim to be prepared to provide the service. To the best of the Group’s knowledge, as of the Report date, the service has yet to be used in the framework of the Wholesale Market. The lack of an effective Wholesale Market of wholesale telephony services harmed the Company’s ability to offer this service to its customers.

 

For additional details about the Wholesale Market, see Section 21.5(2) below.

 

International calls (international operators)

 

The international calls services market is extremely competitive, and the competition is mainly based on the operator’s ability to offer attractive pricing and an integrated service plan with additional services, such as cellular services. In recent years, the use of free and alternative communication technologies over the internet (such as voice over IP) led to a reduction of the telephony market, in particular the international telephony services and revenue thereof. This trend is also expected to continue in the future.

 

For additional details about the structure of the area of activity in all such markets and the competition therein, see Section 11.4 below.

 

 

The fixed-line communication market, similar to the cellular communication market, is a dynamic field, in light of the fast pace of technological changes and vast competition, which require appropriate assessments and investment in advance technologies in order to remain competitive.

 

In recent years there has been major growth in fixed-line data traffic, which requires the Group to upgrade its networks and to purchase larger capacities for the internet services (connectivity and infrastructure) that it offers. Transferring to new technologies and using new equipment involves risks and administrative attention.

 

In order to meet increasing demand for fixed-line network data traffic, and to find more lucrative alternatives for purchasing capacity from Bezeq and Hot, the Group invested many resources in deploying independent infrastructure and thereafter in IBC.

 

For details about technological changes and dependency on technology as a risk factor in the Group’s activity, see Section 26.2.6 below.

 

 

In the Group's estimate, the critical success factors in this area of activity are as follows:

 

 

 

 

 

 

In the Group’s estimate, in light of the possibility to operate as a provider with no infrastructure, the main barriers to entry into the area of activity are low and include the need to obtain a license. Nevertheless, in order to operate as a provider with infrastructure in the area of activity, apart from the license, large capital investments in infrastructure are necessary for the purpose of establishing such and for the purpose of maintaining, upgrading, and continuously operating it.

 

It is noted that in October 2020, in the framework of the Israeli Ministry of Communication’s efforts to reduce barriers to entry into the various communication fields, the Israeli Ministry of Communications decided to incentivize the deployment of bandwidth infrastructure through removing barriers for obtaining a license to deploy and provide broadband infrastructure services through a special license for providing broadband infrastructure services (in a fiber-optic or wireless configuration of microwave/extremely high frequency arteries). In this framework the threshold requirements to obtain a license were reduce and restrictions were set forth with respect to the scope of services to be provided under the license (restriction on the number of subscribers) and the period of time during which the license owner may use its license.

 

It is noted that the provision of internet television services does not require a license, but there is a need for financial means in large scopes, including the need to engage in agreements for purchasing content and technological infrastructure.

 

In the Group’s estimate, the main exit barrier from the area of activity, except in the matter of providing internet television services, is the Israeli Minister of Communications’ approval for ceasing the provision of the service, which may be contingent upon an arrangement for continued provision of the service that is provided to the customers of the operator asking to exit the field.

 

The Uniform License sets forth restrictions, inter alia on transferring shares from corporations that hold such license and on transferring or charging assets that are used by the Group for fulfilling the terms of the license.

 

 

The main services that the Group provides in this area include internet services (connectivity and infrastructure), internet television services (OTT), international phone services (international operators), fixed-line phone services, and transmission services for business customers and communication operators. Additional services include key services, communication systems management, information security services, and IOT services. Some of the services are provided on the cloud. The internet infrastructure services that the Group provides to its private customers are primarily based on the Wholesale Market and on IBC’s fiber-optic infrastructure, while these services for business customers are primarily based on the Group’s independent fixed-line infrastructure.

 

The Group offers packages of such services to its customers, such as the triple plan that includes internet (connectivity and infrastructure), fixed-line telephony and television services.

 

According to industry regulation, the service plans do not include an undertaking to purchase the Group’s services for a predefined period, except in connection with agreements with large business entities. For additional details about restrictions and oversight in the area of mobile and fixed-line telecommunications, see Section 21.4 below.

 

The Group from time to time considers and assesses the option of offering additional products and services to its customers.

 

For details about the effects of the Coronavirus spread on demand for the Group’s products, see Section 1.3 in the board of director’s report attached to Chapter B of this Report.

 

 

The Group is a primary provider of internet connectivity services (ISP).

 

The infrastructure provider is responsible for connecting the customer from the home’s first outlet to the infrastructure. The internet connectivity services provider is responsible for providing the customer with an internet connection, from the infrastructure of the infrastructure provider, through its network, to the local and global internet network. Since May 2015, the Group has been providing end to end internet services through infrastructure of the Bezeq group (on the basis of the Wholesale Market), and since 2017 until its sale to IBC, also through independent infrastructure, and after selling the independent infrastructure to IBC (in 2019) also through IBC’s fiber-optic infrastructure.

 

As foregoing, the Group offers the internet infrastructure services together with the internet connectivity services. For details regarding the Wholesale Market, see Section 21.5(2) below. In addition, the Group provides ISP services separately from the internet infrastructure. The Group also provides end equipment required for its service and support.

 

In addition, the Group offers value added services to its internet subscribers, which include information security services, hosting, and backup of servers and websites (for business customers), and global communication solutions (for business customers).

 

 

Since December 2014, the Group has been offering private customers multi-channel internet television services (OTT service at competitive prices, branded as “Cellcom tv”. In the framework of the service, a package is offered that includes linear channel broadcasts and additional commercial channels and a VOD library. In addition, the customer can watch a movie with per-view payment (TVOD) or join additional channels for additional payment (such as sport channels, foreign language channels, and more). The television service also includes music services and additional advanced services such as cloud recording and the Catch Up feature which allows viewing content that was broadcast on the service channels a week or more back (according to the agreements with the content copyright holders).

 

 

The Group is one of the main players in the international operators market in Israel. The main service in this market is outgoing and incoming telephone calls with global coverage of a significant and extensive scope. The Group provides this service mainly to customers who pay retroactively, but also to customers who pay in advance, mainly through selling calling cards. Most of the customers who pay in advance are foreign workers in Israel.

 

In addition, the Group provides hubbing services to international operators that are not Israeli operators, whose role is to connect two international operators that are not Israeli. The Group provides these services while there is no direct connection between the two operators, or when the pricing differences in the different places make the connection services profitable.

 

 

The Group offers business customers advanced telephony services which include calls and the transfer of data, and a PBX cloud service. Similarly, the Group offers private customers basic fixed-line telephony services through VOB technology. Fixed-line telephony services allow the end-user to manage telephone calls with another end-user who is using a fixed-line, mobile phone, or computer, in Israel or abroad.

 

 

The Group provides business customers and communication operators with transmission services and data communications, connectivity service, as well as added value services such as information security services and IPVPN service (private network).

 

 

The IOT technology enables the connection between different devices to the internet. The Group, together with strategic partners, offers IOT solutions that are based on a variety of communication solutions which include fixed-line communication (Wi-Fi) and cellular communication, including “smart city” solutions.

 

 

The Group provides it business customers with server and website hosting solutions, including value added services (such as monitoring and control), information security services, and IT solutions (such as system networking, cyber & information security). The Group constitutes a “one stop shop” for the customer (a comprehensive solution for one point) and the services and solutions partially include specification and adjustment of a specific solution for the customer, installation and ongoing support, as well as the sale of accessories and maintenance and warranty services.

 

 

Below is the data about customer revenue in the area of fixed-line communications, the rate of which constitutes 10% or more of the Group’s total revenue (as presented in the Company’s consolidated financial statements) for 2018, 2019, and 2020 (in NIS millions):

 

The Group is not dependent on a specific customer the loss of whom would materially impact its activity or any of its areas of activity.

 

 

 

The Group consolidates its customer service and sale efforts, in order to maximize the Group’s opportunities, alongside maximum efficiency and quality customer service.

 

The Group’s customer service department is the central channel for maintaining long-term relationships with the Group’s customers, while focusing efforts to cultivate customer loyalty through providing quality service. In addition, the Group allows its customers to comfortably join complementary services and additional communication services.

 

The Group offers marketing plans, complementary services, end equipment, and related services through a variety of sale methods, with the purpose of attracting new customers and cultivating the loyalty of current customers.

 

The Group acts both through independent resellers and through workers that it employs. All Company representatives (both internal and independent) who directly interface with customers, undergo intensive training at the beginning of their employment, and during the period of their employment, in order to ensure quality service.

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The Group continuously performs initiated quality controls, in order to guarantee quality service and to identify areas for improvement, and it continuously acts for the implementation of means to avoid and reduce the rate of leaving customers.

 

In the framework of the streamlining processes that the Group is implementing, the Group closed, reduced, and consolidated points of sale and service in nearby locations, and it reduced or changed locations to call centers, while focusing efforts in self-service channels and in proactively identifying and solving problems, before receiving a complaint from the customer. The Company predicts that the streamlining processes and the reduction and closure of points of sale shall also continue in 2021.

 

The Group’s sale activity and customer service is mainly performed in the following channels:

 

 

The Group distributes its products and services through hundreds of nationwide physical points of sale, most of which are operated by external dealers, and some of which are directly and independently operated by the Group.

 

As of the Financial Statements date, the Group independently operated approximately 70 countrywide service and sale points. According to most, the service and sale points are located in central locations or in locations with high customer traffic, which allow for easy and comfortable access to the Group’s customers and potential customers. Most service and sale points and Dynamica shops offer the entire range of the Group’s products and services, and they offer a repair service for mobile handsets (and in some of them also additional equipment) or serve as delivery points for depositing them for repair and receiving them after the repair (in the same center or through delivery to the customer’s home), while the repair service itself is performed in a central laboratory.

 

In addition, in the framework of the Group’s efforts to expand in certain sectors in order to amplify the Group’s sale potential and points of contact with customers and potential customers of the Group, the Group is engaging with distributors with proven expertise in those sectors.

 

 

The call centers operated by the Group focus on providing customer service in financial matters, services, overseas plans, technical support in cellular, fixed-line, and television, and telephone sale efforts to current and potential customers. The Group’s sales representatives offer the Group’s customers a wide range of products and services, both proactively and in response to their requests. The Group’s call center service is divided into sub-centers (for example: general services; technical services; charges; sales; etc.). The Group is continuously examining the efficiency of the service, and it also operates a multi-purpose call center that provides all the services. As of the publication date of this Report, the Group is operating 15 call centers that provide service to private customers, and six of them are outsourced. During peak hours, the Group’s call centers have the capability to provide service to approximately 1,000 customers at the same time.

 

 

A designated sales team maintains regular contact with the Group’s large and medium business customers. In addition, the Group provides a telephone support and sale system to small and medium business customers, a service center for large business customers, and a support center for fixed-line communication customers. The Group’s expertise in the various communication areas allows it to fully treat the needs of the business customers, including personally adjusted solutions, when needed. It is noted that the process of selling to large business customers and to government and local authorities sometime involves the Group’s participation in a tender process.

 

 

The Group offers its customers the option of purchasing products and services and to receive details regarding the Group’s website. Similarly, the Group provides its current and potential customers with various self-service channels, such as an interactive voice response service (IVR), a website, and a chat through the Group’s Facebook page. The self-service channels allow the Group’s customers to inter alia clarify details and purchase end equipment on the website, track data usage, receive digital monthly invoices, self-service tutorials, online help for problems with the internet service, and chat with a service representative. The Group invests efforts in directing its customers to the self-service channels.

 

 

The customer service for Cellcom tv service and the Group’s internet infrastructure is also provided through technicians (who are employed by the Company and through external contractors) who provide the services at the customers’ homes.

 

 

The Group invests efforts in adjusting its services for people with disabilities, as required under law. The Group provides special-needs customers with comfortable access to the physical points of sale and adjusted services that include text to speech and support service through a chat. The Group trains the service representatives to provide accessible service to all its customers.

 

 

The Group’s marketing strategy emphasizes the Group being a leading, fair, and initiating communications group, which provides great value to the customer in consideration for its money and has the ability to provide an extensive solution for all communication needs, through plans and a wide array of services. In the Group’s view the provision of service plans strengthens the customers’ loyalty and increases their satisfaction.

 

The Group seeks to be a fair and quality service provider for its customers.

 

The Group’s marketing activity is based on parameters that are important to its customers, as these are manifested in surveys the Group conducts from time to time.

 

The Group leverages interactions with its customers for providing the requested service, for selling products and services according to the customer’s needs, market trends and profitability considerations. All this mainly through an advanced customer relationship management system (CRM), for maximizing the customer’s satisfaction and increasing its loyalty.

 

 

The Israeli telecommunications market is an extremely competitive market 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 the barriers to entry into the field, and the barriers for customers transferring between the companies active therein. As a result, the prices for the various services provided by the Group (and its competitors) were significantly eroded and caused a continuous decrease in the Group’s revenue the operating results in recent years.

 

The main competitive factors in the telecommunications market are the services included in the service plans that are offered to customers, price perception of the services and equipment, brand perception, network quality perception and level of customer service. Thus, both the variety of cellular handsets and the need to adjust them to the customer’s requirements, and the variety and quality of the television content, affect the increased level of competition in this market.

 

 

The competition in the Israeli telecommunications market has in recent years been characterized by competition between telecommunication groups, which are at the same time active in a number of market activity segments. It is noted that in the Group’s areas of activity there are also competitors that do not belong to any telecommunications group. As of the Report date, there are four telecommunication groups active in Israel - the Cellcom group, Bezeq group, Hot group, and Partner group.

 

Since the Bezeq and Hot groups are monopolies in each of their core businesses - the Bezeq group in the fixed-line telephony market and in the internet infrastructure market, and the Hot group in the multi-channel television market – an obligation of certain structural separation is imposed on them, and accordingly various restrictions apply to them in connection with the sale of telecommunication plans. The restrictions applicable to the Bezeq group inter alia include a requirement that Bezeq separately offer some of the services included in the service plans, at the same terms as in the plan, which would allow its competitors to offer their services in the framework of service plans at identical terms (if the plans include internet connectivity services, fixed-line internet based calls, or overseas calls) and it would market them as it markets its plans (the second requirement does not apply to the sale of the plan by a subsidiary of Bezeq). With respect to the Hot group, a similar restriction applies in connection with the internet connectivity component in the plans that include internet connectivity services.

 

The Bezeq group was granted reliefs in the structural separation that allow it to offer plans together with its subsidiaries, subject to a few conditions. Similarly, Bezeq’s subsidiaries were allowed to sell and market the services of one another, including in the framework of their service plans. Notwithstanding that, Hot too is imposed with requirements to structurally separate the multi-channel television services, internet connectivity services, cellular services and fixed-line telephony services, Hot was allowed to offer fixed-line telephony plans, multi-channel television and internet infrastructure services, and under certain circumstances even connectivity services. Similarly, Hot and Hot Mobile are allowed to sell and market each other’s services and exchange information with one another.

 

In 2018, Bezeq partially merged the activity of its subsidiaries (Pelephone Communications Ltd., Yes, and Bezeq International Ltd.) and thus strengthened its ability to compete with the triple plan offered by the Group. In February 2019, Bezeq filed a petition with the High Court of Justice against the Israeli Ministry of Communications, for the immediate termination of the structural separation obligation in the Bezeq group. 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, which were submitted to the Israeli Minister of Communications, 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 High Court of Justice’s recommendation

 

In April 2019, the Israeli Ministry of Communications decided to grant the Hot group additional relief regarding the structural separation, which allows it to market the services of Hot and its subsidiaries to medium and large business customers with no restrictions. Similarly, in June 2020, the Ministry of Communications decided to, starting from July 15, 2020, to allow the Hot group to market certain joint service baskets for the private segment, which also include the Hot-Net connectivity provider services, under certain circumstances.

 

In February 2021, the Israeli Ministry of Communications decided to allow the Hot group to market a “joint services basket” that would in addition to the home internet and broadcasts also include the cellular (quattro) and international operator. According to the decision, Hot would be required to obtain the Israeli Ministry of Communication’s advance approval for each services basket, and with respect to the services basket to be offered by some of the companies from the Hot group, it would be required to also offer services of competitors that are not from the Hot group.

 

In October 2020, the Israeli Ministry of Communications published a hearing about 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 only refers to the private sector. In February 2021, the ministry 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 in the framework of which a shelf offering would be offered, which would be agreed with the service providers, which include service indicators for the Wholesale Market and agreed compensation for non-fulfillment thereof. In this framework two months would be allocated to the parties as of the resolution date for holding negotiations on the determination of indicators and an agreed compensation mechanism. Thereafter, the Israeli Ministry of Communications would examine the shelf offering, and it would be permitted to approve it, reject it, or amend it. After the Israeli Ministry of Communication’s approval, the calibration phase would begin, which would continue for 3 months, during which the shelf offering would exercise without the agreed compensation part, and amendments would be made to it if necessary. At the end of the calibration phase, the Israeli Ministry of Communications would announce the commencement of the evaluations phase which would continue for 3 months, during which the shelf offering including the agreed compensation would be executed. At the end of the evaluations period, Bezeq and Hot would be allowed to provide internet connectivity services together with the infrastructure services.

 

Bezeq would be allowed to market the internet connectivity services, together with the infrastructure services, only at the end of the evaluations period, with respect to the Wholesale Market services both on copper and fiber infrastructure.

 

The Company is studying the hearings, and at this stage it cannot evaluate the extent of their impact on the Group’s results.

 

 

In the Group’s estimate, its ability to successfully cope with competition in the telecommunications market is partially dependent on constant diligence and striving for providing quality service to customers, as well as its ability to predict and respond to trends and events that affect the market, including presenting new services and technologies, changes to the customers’ preferences, demographic trends, economic conditions, pricing strategies of competitors, and changes in the legal and regulatory environment.

 

 

In the Group’s estimate, among the negative factors that affect or may affect its competitive standing, are the following factors: (1) The Group’s high debt rate which decreases the free capital available for financing and developing its business, and which decreases the flexibility of its response to changes in the market and economy, and it imposes heavy financial costs on them; (2) a partial merger of the activity of the Bezeq group’s companies in a manner that their activity shall be similar to the Group’s activity and shall strengthen their ability to offer service plans similar to the plans offered by the Group (see additional details below); (3) insofar as regulation shall apply that would burden the OTT services offered by the Group to its customers; (4) termination and/or granting additional reliefs in the structural separation obligation of Bezeq and/or Hot; (5) providing fiber-optic based internet infrastructure services by Hot and/or Bezeq; (6) the inability to turn IBC into the owner of extensive fiber-optic infrastructure form which the Group would be able to purchase services, or an adverse change to IBC’s competitive abilities; (7) an inability to make the required investments in the Group’s networks and in its business in general; (8) malfunctions and/or cyber-attacks that would harm the provision of telecommunication services by the Group and its image; (9) the provision of telecommunication services by the State of Israel or granting entities the option to provide telecommunication services to themselves, and (10) short and medium-term implications on the Group arising from terminating or changing the sharing agreement with Xfone.

 

The Company’s estimates regarding the negative factors that could affect its competitive position is deemed forward-looking information as such term is defined in the Securities Law, which are based on the Company’s current information as of the Report date, and include estimates and analyses of the Company according to its experience in the telecommunications market. These estimates could not materialize or could partially materialize, being subject to factors outside the Group’s control, including the materialization of all or some of the risks set forth in the framework of the risk factors in the Group’s area of activity, as set forth in Section 26 below.

 

 

There is intense competition in all aspects of the Israeli cellular telecommunications market, with penetration rates of approximately 113% which represent 10.4 million cellular users as of December 31, 2020, and an average churn rate of approximately 32% in 2020, a high churn rate compared to the churn rates in other developed countries. The Group’s churn rates in, 2019 and 2020 stood at 48.8% and 40.2%, respectively.

 

As of the Report date, the Group is active alongside ten additional cellular telecommunication operators: Four mobile network operators that own infrastructure (MNO): Partner, Pelephone, Hot Mobile, and Xfone, six virtual operators (MVNO) including: Rami Levy Hashikma Marketing Communication Ltd. (“Rami Levy”), Azi Communications Ltd., Free Telecom Ltd., and Cellact Communications Ltd.

 

The fierce competition in the cellular market increased even further after Xfone’s market entry in April 2018. The intense competition led to the current cellular services prices in Israel being among the lowest in the world.

 

In the Group’s estimate, the subscriber market shares of the various cellular operators, as of December 31, 2020, are: The Group approximately 31%, Partner approximately 26%, Pelephone approximately 23%, Hot Mobile approximately 15%, Xfone approximately 2%, and the virtual operators together approximately 2%.⁸

 

Competition may remain at current levels. Nevertheless, it should be noted that following the 5G tender, the cellular operators published offers for 5G plans that include expansive surfing plans at higher price levels than the prices of plans that do not include 5G services.

 

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The Company’s estimates regarding the continued competition in the mobile communications market and equipment market as foregoing is deemed forward-looking information as such term is defined in the Securities Law, which are based on the Company’s current information as of the Report date, and include estimates and analyses of the Company according to its experience in the telecommunications market. These estimates could not materialize or could partially materialize, being subject to factors outside the Company’s control, including the materialization of all or some of the risks set forth in the framework of the risk factors in the Group’s area of activity, as set forth in Section 26 below.

 

 

The activity in the area of fixed-line communications includes activity in a few sub-areas, mainly infrastructure and internet connectivity services, local and international telephony services, and television services. Wholesale Market implementation allowed for the entry of additional operators that do not own infrastructure into addition sub-areas and led to an expansion of competition in all activities and to increased offerings of service plans from a few areas to the customer.

 

 

The Hot group and Bezeq are the only entities in the State of Israel that own countrywide (or almost countrywide) fixed-line infrastructure. These groups are the main internet infrastructure providers for the private sector in Israel, and they also provide internet infrastructure services to operators that do not own infrastructure in the framework of the Wholesale Market. As of September 30, 2020, Bezeq has been providing internet infrastructure services to approximately 988,000 households, and Hot to approximately 705,000 households.⁹

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The Company’s estimates regarding the possible effect of expanding IBC’s deployment and Bezeq and Hot entering the field of fiber-optics on its competitive position is deemed forward-looking information, as such term is defined in the Securities Law, which are based on the Company’s current information as of the Report date, and include estimates and analyses of the Company. These estimates could not materialize, could partially materialize, could materialize differently than expected, or they could not materialize at all, being subject to factors outside the Company’s control, including the progress of fiber-optic infrastructure deployment by IBC, and Bezeq entering the field, as well as the materialization of all or some of the risks set forth in the framework of the risk factors in the Group’s area of activity, as set forth in Section 26 below.

 

 

The internet connectivity market is a competitive market saturated with competitors. As of the Report date, there are a few dozen internet connectivity providers in Israel, most of whom have no significant market share. Competition in this field is mainly concentrated on pricing the service. As of the Report publication date, the three main internet connectivity providers are: The Group, Bezeq International, and Partner. This is in addition to additional small providers, including a company in the Hot group and Xfone 018 Ltd. (the controlling shareholder of Xfone).

 

 

Moreover, the offering of service plans for internet infrastructure and connectivity by using the Wholesale Market and increased competition in this field led to a loss of customers in the Group’s internet connectivity services. Insofar as competition in this field shall remain at current levels, the negative effect on the Group’s operating results is expected to continue.

 

As of the Report date, the Group cannot estimate what the effect shall be of adopting the proposed change by the Israeli Ministry of Communications regarding the termination of separating between internet connectivity and infrastructure, as set forth in Section 11.2 above, on the connectivity services and competition in this area.

 

The Company’s estimates regarding the possible effect of continued competition in the area of internet connectivity services on its results is deemed forward-looking information, as such term is defined in the Securities Law, which are based on the Company’s current information as of the Report date, and include estimates and analyses of the Company. These estimates could not materialize, could partially materialize, could materialize differently than expected, or they could not materialize at all, being subject to factors outside the Company’s control, including changes in the regulatory environment in which the Group is active, as well as the materialization of all or some of the risks set forth in the framework of the risk factors in the Group’s area of activity, as set forth in Section 26 below.

 

 

The international calls services market changed a lot in recent years. The use of free and alternative communication technologies such as VOIP and WhatsApp calls led to a decreasing trend of the telephony services market, in particular the revenue from international telephony services, which in the Group’s estimate is expected to also continue in the future.

 

The Group is one of the main providers of international calls services in Israel, while the Group’s main competitors are Bezeq (through its subsidiary - Bezeq International) and Partner (through a fully owned corporation). Similarly, there are additional competitors such as Xfone Communication Ltd. and Hot (through fully owned corporations or related companies).

 

In the Group’s estimate, as of December 31, 2020, the Group’s market share in the market for international calls services is approximately 20-30%.

 

 

The fixed-line telephony market has for many years been controlled by the Bezeq group, a monopoly in the fixed-line telephony market, and by the Hot group. According to publications by the Israeli Ministry of Communications, as of December 31, 2018, Bezeq held approximately 66% of the market share in Israel’s fixed-line telephony market (and a larger market share among business partners). Additional providers in the area of domestic fixed-line telephony services are the Group and Partner.

 

The Group offers fixed-line telephony services to business customers and fixed-line telephony services through VOB technology to its private customers. In the Group’s estimate, its market share in the market for fixed-line telephony services is not material.

 

For details regarding fixed-line telephony services in the framework of the Wholesale Market, see Section 21.5(2) below.

 

 

Transmission and data communication services, which are designed for business customers and for communication operators, are provided by the Group and the Bezeq group, Hot and Partner, and since 2019 also by IBC. In 2019 competition in the field intensified, mainly due to plans offered by the Hot and Partner groups, the Bezeq group’s price reductions, and increased consumption.

 

IOT services are provided by the Group, the Bezeq group, Pelephone, Partner, other integration companies in the software sector, and by additional players entering this market. The Group competes with these companies through offering a wide range of advanced IOT solutions in cooperation with leading providers of IOT technologies and services. The market for IOT services is characterized by large competition, and in its framework communication operators offer both communication solutions and end to end solutions for the customers. The Group cannot estimate its share in this market.

 

 

Until the Group’s entry into the multi-channel television market in December 2014, the multi-channel television market was controlled by Hot (a declared monopoly in this field) and Yes (from the Bezeq group), which as of September 30, 2020, provided this service to approximately 777,000 and 556,000 households, respectively.¹⁰

 

The Group offers internet based multi-channel television services (OTT services which integrate Netflix and Amazon Prime (internet-based VOD content providers), including through direct access from the Group’s television platform. As of December 31, 2020, the Group has been providing this service to approximately 251,000 customers. In the Group’s estimate, its market share in this field is approximately 14%.

 

Similarly, Partner markets an OTT solution that includes Netflix and the Amazon Prime service. Hot and Yes each market a discounted OTT brand, called Next TV and Sting TV, respectively. In addition to this, in the framework of transitioning from satellite broadcasts to OTT technology, Yes launched an additional OTT brand referred to as Yes+.

 

The service offered by the Hot group also includes Netflix. It should be noted that Netflix and Amazon Prime provide their services to viewers in Israel, as a complementary service to existing content of the current competitors. In the Group’s estimate, the competitive trend shall continue in the future and may include the entry of international players, as well as additional Israeli players.

 

 

 

The net balance of the Group’s fixed property as of December 31, 2019, and December 31, 2020, is approximately NIS 1,402 million and approximately NIS 1,432 million, respectively.

 

For details regarding restrictions on pledging the fixed property and the equipment used for providing services in the framework of the Group’s licenses, and additional restrictions on the Group in creating a pledge on its assets, see Sections 18 and 18.5 below.

 

For details regarding a backup system for disaster recovery, a business continuity plan and a disaster recovery plan, see Section 12.2 below.

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The Company’s entire activity is based on its networks, below are details regarding the Company’s networks in its areas of activity:

 

Mobile communications

 

The Group’s cellular networks equipment, including cell sites spread out all over the country, which provide telecommunication coverage to the vast majority of populated areas in Israel.

 

As of the Report date, the Group operates networks with LTE technology (“4G Network”), UMTS/HSPA+ (3G and 3.5G) (“3G Network”), and GSM/GPRS/EDGE (2G and 2.5G) (“2G Network”), which cover the vast majority of populated areas in Israel, and it is in the process of deploying and operating a 5G network.

 

In February 2021, the Israeli Ministry of Communications decided to require cellular operators to perform an additional stage of their universal deployment commitment with respect to the 4G Network, generally within two years from the date of the decision (excluding Xfone, for which the instruction date to perform an additional stage applies only in 2022).

 

In December 2020, the Israeli Ministry of Communications published a hearing regarding the closure of the 2G and 3G Networks by the end of 2025. This process, if carried out, would allow the Group to save on the operating costs of these networks and utilize the frequencies that would be freed up, should they remain in the Group’s possession,¹¹ to improve the performance of the 4G and 5G networks.

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Below are details about the Group’s cellular networks:

 

 

 

 

 

 

The Group intends to continue responding to demand for data communication and UMTS/HSPA+ technology while maintaining quality service. In addition, the Group intends to continue the optimization of its networks in order to provide its customers with the maximum support in videos and additional content that require broadband.

 

The connectivity to the Group’s cellular network is primarily provided through an independent fiber-optic network, while using microwave equipment¹² as a complementary solution. Similarly, the Group leases additional supplementary capacity from Bezeq, Hot, and IBC.

 

According to the regulator’s requirements from all telephony service providers in Israel, the Group’s cellular network is directly or indirectly connected to the networks of the other telephony services providers in Israel.

 

The Group has an operations center, located at the Group’s Netanya headquarters, which is equipped with the means required for the purpose of continuously monitoring all frequencies and sites, for identifying malfunctions, and for dispatching technicians to treat malfunctions. The Group’s support systems allow the supervision of the system’s quality and for locating equipment that does not meet the threshold performance requirements. Similarly, these systems create a statistical mapping of the system’s performance and a failure alert (such as: blocked calls, disconnected calls, equipment malfunctions, etc.). In addition to this, the Group has a backup system on a separate site, and a disaster recovery plan for the Group’s engineering and information systems. The backup system even grants the system additional advantages, including larger capacity in certain cases and greater durability that increases the network’s survivability in case of damage to one of its components. Similarly, the Group also has a business continuity and disaster recovery plan for guaranteeing the continuation of its business in accordance with the license requirements.

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The Group’s forecasts with respect to the deployment of the 4G and 5G Networks, including optimization of these networks and its results, are deemed forward-looking information as such term is defined in the Securities Law. These are predictions the materialization of which are not certain, being subject to factors outside the Group’s control, and among others is subject to the effects of the risks set forth in the framework of the risk factors in the Group’s area of activity, as set forth in Section 26 below.

 

Fixed line communications

 

Most of the Group’s fixed assets in this area of activity is a transmission network connecting the majority of populated areas and most business centers in Israel to the Group’s systems, and connecting most of its cell sites, in the area of cellular communications, to the Group’s switches. The transmission network allows the Group to provide its business customers with telephony services, transmission services, and advanced data transfer and fixed-line communications services.

 

The Group established and is operating a SDH transmission network as well as a Carrier Ethernet network, and from time to time it expands and upgrades these networks. These networks, which cover the majority of populated areas and most of the business centers in Israel, and which include real-time malfunction management and monitoring systems, allows the Group to provide its business customers with telephony data transfer (transmission) services at high speeds and quality, while reducing the need on its part to lease additional capacity from external providers.

 

The Group’s fiber-optic transmission network is strategically deployed with the purpose of providing coverage to most of Israel’s business centers, from Nahariya in the north to Beer Sheva in the south and to Afula and Jerusalem in the east, and its length is approximately 1,990 km. The fiber-optic transmission network is monitored by a malfunction management system that monitors in real time, in order to allow the Group to provide high quality services. In order to efficiently complete coverage of the Group’s network to most of its cellular sites and to the Group’s transmission and domestic business operator customers, the Group uses a microwave network as a complementary solution for regions that are not covered by the Group’s transmission network, which is based on fiber-optics. As of December 31, 2019, the Group has approximately 2,617 microwave links to the Group’s cellular sites, and to the transmission and domestic business operator customers of the Group.

 

 

 

The Group owns no property, and its activity (the Group’s headquarters, call centers, warehouses and stores) is conducted on property that is leased. Below is a description of the material lease agreements that the Group is party to:

 

 

 

 

 

 

The Company’s estimate regarding an exacerbation of the difficulties in extending lease agreements for purpose of its cellular telecommunication installations is deemed forward-looking information as defined in the Securities Law, which is based on the Company’s current information as of the Report date, and it includes an estimate and analysis of the Company according to the Company’s cumulative experience in connection with such lease agreements. Such estimate may not materialize or may partially materialize, since it is affected by an abundance of factors that are outside the Company’s control, including the materialization of all or some of the risks set forth in the framework of the risk factors in the Group’s area of activity, as set forth in Section 26 below.

 

 

 

The rent that was attributed in the Company’s consolidated financial statements (whether as rental income or as amortization expenses, in light of implementing IFRS 16) for the foregoing land, summed up in 2018, 2019, and 2020, to approximately NIS 256 million, NIS 252 million, and NIS 256 million, respectively.

 

 

 

 

 

For additional details regarding the manner of allocating the surplus costs created in the acquisition of Golan and the examination of the impairment of goodwill, see Note 17 to the Financial Statements.

 

 

 

Allocation of frequencies

 

The availability of frequencies in Israel is limited, and the allocation of the frequencies is made by the frequencies commission through a licensing process. The Group has the right to use frequencies for purpose of providing telecommunication services on its communication networks. The license fees that the Group paid on the date it won the frequencies and prior to obtaining the license, are deducted in the Company’s financial statements over the license period. In addition, the Group pays quarterly fees in fixed amounts (index-linked) for the right to use these frequencies. For additional details see Note 34E to the Financial Statements.

 

As of the Report date, the following frequencies were allocated to the Group for purpose of providing cellular communications services:

 

Xfone, the Group’s partner in the joint network, won 5 MHz in the 700 MHz frequency band, for a period of 15 years; 10 MHz in the 2,600 MHz frequency band for a period of 15 years; and 20 MHz in the 3,500-3,600 MHz frequency band for a period of 10 years. These frequencies have not yet been allocated to it.

In the hearing with respect to shutting down the 2G and 3G Networks mentioned in Section 12.2 above, the Israeli Ministry of Communications expressed a position whereby the validity of allocating the frequencies that were allocated to the Company for the services of the cellular 2G and 3G networks shall expire in 2022 (the expiration date of the Company’s license, if not extended), and it also noted that it is considering to recommend the extension of such allocations until the end of 2025, according to the proposed outline in the hearing and as of the last date offered for the closure of the 2G and 3G technologies. In addition, the ministry announced that it intends to examine the manner of allocating the frequency bands after the end of the extension period, including the examination of possibilities to conduct a tender with respect to the relevant frequency bands and to continue extending the current allocations.

Insofar as the allocation of such frequencies shall not be extended, or alternatively if the Company shall not be allocated substitute frequencies, the Group may not be able to maintain the same quality level of the cellular telecommunication services that it offers.

 

Winning the frequencies in the 2020 Tender

 

For the new frequencies that the Group and Xfone won in the frequencies tender conducted in 2020 (“2020 Tender”), the Group and Xfone shall pay NIS 115 million in 2022.

 

The 700 MHz frequency bands shall be used as the main frequency increasing the coverage for the 4G services, and in the future also for the 5G services.

 

 

The use of the additional frequencies that the Group and Xfone won in the 2020 Tender requires the establishment or change of most cellular sites, which involves material investments, and which in the Company’s estimate shall be made within a period of up to 4 years. The difficulties in obtaining the required approvals and permits may prevent the Group from complying with the deployment requirements set forth in its license, which may credit it with performance-based incentives, as well as expose it to legal proceedings and the implications of such proceedings.

 

Notwithstanding the above, the Israeli Ministry of Communications may, after the passage of four years from the frequency allocation, without compensation or consideration, reduce the frequency area within which the Group is allowed to act, in general or in certain geographical locations, for the purpose of more efficiently utilizing the frequency spectrum in Israel, and it may even order the Group to share such a frequency with additional operators, in coordination with them.

 

The Company’s estimates regarding the possible implications of the lack of option to use Xfone’s frequencies and the 2G and 3G frequencies as set forth above are deemed forward-looking information as defined in the Securities Law. The Company cannot estimate to what extent the difficulties in allocating the frequencies and obtaining the approvals and permits shall affect the Group’s operating results. The Company’s estimates may not materialize or may partially materialize or in a manner different than expected, since they are affected by an abundance of factors that are not in the Company’s control and they are inter alia subject to the effect of the factors set forth above and any change that shall occur in them, and to the effect of the risk factors in the Group’s area of activity, as set forth in Section 6.26 below.

 

Requirement to switch frequencies

 

In March 2020, the Israeli Ministry of Communications informed the Group and an additional cellular operator that they are required to switch from the 850 MHz frequency band that was allocated to them, to the 800 MHz frequency band, so that they shall be compatible with the European standards and the region where the State of Israel is located.

 

As of the Report date, the Group’s bandwidth in the 850 MHz frequency band was reduced from 10 MHz to 5 MHz, and it was moved to a substitute band. At the next transfer stage, on a later date to be determined, the Israeli Ministry of Communications shall allow the Group to receive a frequency band in the 800 MHz area, and at the last stage, on a later date to be determined, the frequency band in the 850 MHz area shall be terminated, and instead the Group shall be offered a frequency band that is completely in the 800 MHz frequency band. The Israeli Ministry of Communications shall consider allocating part of the revenue from frequency tenders in the 800 or 900 MHz frequency bands, if any such tenders shall be conducted, towards accelerating the process of switching frequencies, as aforesaid.

 

The completion of the foregoing frequencies switch shall require material investments and replacing radio equipment in most of the Group’s cellular sites.

 

The Company’s estimates regarding the possible effects of transferring to frequencies that are compatible with the European standards as set forth above, are deemed forward-looking information as defined in the Securities Law. The main facts and data that served the Company as a basis for such estimate are its experience over the years with upgrading the network to new technologies. These estimates may not materialize or may partially materialize, since they are affected by an abundance of factors that are not in the Company’s control and they are inter alia subject to the effect of the risk factors in the Group’s area of activity, as set forth in Section 26 below.

 

 

As of the Report date, the Group has more than 160 domains and nearly 100 trademarks and registration requests. The Group’s main trademarks are Cellcom, Talkman, Cellcom tv, Netvision, 013 Netvision, and Golan Telecom. In addition, the Group has a number of registered patents.

 

According to its needs, the Group submits requests to register trademarks from time to time, and it also constantly tracks validity renewal dates of its registered trademarks, and it from time to time extends the validity of those that it uses.

 

Such trademarks that include the Group’s main brands, help differentiate its services and products compared to its competitors.

 

 

 

 

The Group’s ability to achieve its strategic goals to a large extent depends on the quality of its employees, and therefore the Group is acting to hire the most suitable candidates for every position, and to grant the employees the training that they require for effectively performing their tasks. The Group sees great importance in its employees being satisfied, while making sure they are efficient and productive. The Group implements a performance appraisal system that from time to time analyses the employees’ performance and helps the Group to improve their performance and accordingly their compensation, and it helps identifying, maintaining, and promoting its best employees. In accordance with the Group’s service concept, approximately 74% of the Group’s manpower is engaged in roles directly dealing with customers.

 

 

 

 Below are details about the number of employees in the Group according to its organizational structure:¹³

 

 

* Units that provide services to the customer, including business customers, sales, retail apparatus, customer home apparatus and customer service.

 

** Companies of which the Group holds more than 50% of their issued share capital, but not including employees of Golan, which was acquired by the Company and Dynamica in August this year, whose employees are included in the various units.

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As set forth in Section 14.20 above, the decrease in the Company’s employee headcount in 2020 compared to 2019, and in 2019 compared to 2018, mainly derives from voluntary retirement plans adopted by the Company, as set forth in Section 14.6 below. On the other hand, the headcount data as of December 31, 2020, includes the employee headcount in Golan, the acquisition of which was completed at the end of August 2020.

 

 

The Group customarily sends its employees for training, which includes professional courses, general training in the area of customer service, management training, etc.

 

The representatives of the telephone and frontal customer service and the other employee teams that interact with customers undergo extensive training before starting to perform their functions in the Group, and ongoing training during the course of their performance.

 

 

The Group has personal employment agreements with its employees, some of whom earn a monthly global salary, and some of whom are employed on a monthly or hourly salary. A performance-based incentive is added to most of the service and sale employees .

 

In addition, most of the Group’s employees are subject to the provisions of the Group’s current collective employment agreements. The vast majority of the Group’s employees is signed on confidentiality and non-competition agreements.

 

For details about the collective employment agreements, see Section 14.6 below.

 

For details about senior officer's compensation, see Section 21 in Chapter D of this Periodic Report.

 

 

In July 2018, the Company and Dynamica engaged in a collective employment agreement with the employees’ representative and the Histadrut for a period of three years, until the end of 2020 (the “2018 Agreement”). The 2018 Agreement applies to all of the Group’s employees, except for employees in certain roles. The 2018 Agreement defined the Group’s policies and employment terms in different aspects, which are better than the requirements of Israeli law, including provisions regarding minimum salary, raising the annual salary, incentives, benefits, provisions to the advanced study fund, participation in the Group’s operating profit (from a certain threshold) and annual or one-time payments. In addition, a welfare budget for employees and various procedures were determined that inter alia pertain to staffing company positions, changing the place of employment, and dismissals. In May 2019, the Group, the employee representatives, and the Histadrut engaged in a new collective employment agreement (the “2019 Agreement”), which amends the 2018 Agreement, in the framework of which the Group’s costs with respect to the collective employment agreement were reduced, and the Group granted eligible employees options and RSUs, and RSUs to the employees association.

 

In Q4 of 2019, the Group, the employee representatives, and the Histadrut reached agreements, and in February 2020 the parties engaged in a new collective employment agreement (the “2020 Agreement”), whereby, inter alia: a voluntary retirement plan would be launched; the Group would grant eligible employees options and RSUs, in three installments, subject to the fulfillment of certain conditions and subject to the vesting set forth in the agreement; and the employees would be entitled to propose a candidate to serve as a director in the Company’s board of directors (subject to approval of the Company’s competent organs).

 

Each collective employment agreement set forth that it terminates an earlier collective dispute that was announced by the Histadrut.

 

In Q2 2018 and Q1 2020 (according to the 2020 Agreement as set forth above) the Group together with the employees’ representative launched voluntary retirement plans for employees. The Group’s costs for such plans were approximately NIS 26 million and NIS 45 million, respectively.

 

As of the Report date, the Group is negotiating with the employees' representatives on a new collective employment agreement.

 

In April 2016, Golan engaged in a collective employment agreement with the National Workers’ Union and the company’s employees’ representative, which with respect to some of Golan’s employees (most of the sales and customer service employees) inter alia regulates the working relationship with Golan, employment of employees and terms of employment, trial period, terms of salary and welfare, grants, advanced study fund, pension arrangements, termination of employment relationship, dispute settlement, etc. The collective employment agreement was extended on October 31, 2019, with certain changes, and is valid until October 31, 2022.

 

In June 2020, following the intention to sell Golan to the Group, a special collective employment agreement was executed between Golan and the National Worker’s Union and Golan’s employees’ representative. The agreement inter alia set forth that all agreements, arrangements, and current practices in Golan prior to the agreement’s execution shall continue to apply to the employment relationship until October 31, 2022, and that during this period Golan’s status as a separate bargaining unit would be maintained; permanence was granted for current employees with seniority determined in the agreement; a sale grant was agreed upon that is to be distributed to eligible employees and a grant for purpose of the welfare activity.

 

 

 

 

 

 

The Group has agreements with many vendors for buying communication equipment, information systems, content services, end-user equipment, etc.

 

Primary vendors

 

The Group considers primary vendors those vendors accounting for more than 10% of the Group’s total annual purchases. Accordingly, Samsung International Co. Ltd. (“Samsung”) was a primary vendor of the Group in 2020, as the Group’s purchases from it constituted approximately 13% of the Group’s total purchases during such period. Samsung provides the Group with Samsung cellular phones and spare parts for such handsets. The purchase terms, including price, are determined from time to time in negotiations between the parties.

 

Dependence on vendors

 

Termination of the engagement with some of the Group’s vendors could harm the quality of some of the Group’s services or result in having its licenses revoked due to noncompliance with the license requirements and therefore the Group is dependent on them. Details on such vendors follow:

 

 

 

 

 

 

 

 

 

 

 

(8)

Since 2015, the Group has 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 the Group for its customers. The scope of BSA service procurement from Bezeq has increased over the years, according to the increase in the Group’s engagements with customers who purchase Internet infrastructure services from the Group, and the increase in the demand by the Group’s customers for greater bandwidth (capacity), although the pace has been lower in recent years due to alternatives as set forth above. For more details regarding the terms of the Wholesale Market, see Section 21.5(2) below.

 

 

 

 

 

 

 

 

 

 

 

The Group uses a variety of information systems that allow providing customer service while improving internal processes in the Group. The Group’s billing and CRM (Customer Relationship Management) systems are mostly supported internally by the Group. Below are the primary vendors of the Group’s information systems:

 

 

 

 

 

The Group’s working capital mostly includes customer credit and vendor credit, as follows:

 

 

Credit from transactions to sell end-user handsets – The Group provides most customers that purchase end-user handsets an option to pay in 36 equal installments. In order to mitigate credit exposure risk, the Group occasionally reviews its credit policy, including a review of its customers’ financial robustness (according to parameters it set).

 

Credit from the monthly bill for communication services – Group customers are charged monthly on varying dates for the communication services consumed in the previous month.

 

Most payments by Group customers are made by monthly credit card charge.

 

 

The Group receives credit from vendors for varying periods, according to agreements with the different vendors.

 

 

 

(*) Net of doubtful debts.

 

 

As of December 31, 2020, there is a decrease of NIS 563 million in surplus current assets to current liabilities compared to the balance at the end of 2019. This decrease mostly derived from a decrease in the cash in light of Golan acquisition which was financed from the Company's cash balance, and as result of a decrease in the customers item, considering the first time consolidation with Golan.

 

 

 

 

 

 

 

 

 

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

 

The transaction was completed on February 11, 2021, after obtaining necessary regulatory approvals. Approval of the Israeli Ministry of Communications 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 its services.

 

 

 

The Company’s above estimates, regarding the described effects of its investment and Hot’s investment in IBC, are deemed forward-looking information, as such term is defined in the Securities Law. The Group’s estimates are based on the information available to the Group as of the Report date, including the Group’s estimates and analysis. These estimates might not materialize, materialize only in part, materialize differently than expected, or not materialize at all, because they are affected by many factors outside the Company’s control, including the progress of deploying fiber-optic infrastructure by IBC according to the projected pace of deployment, and the materialization of all or some of the risk factors detailed in the Group’s area of activity as set forth in Section 26 below.

 

 

The Group finances its activity primarily with cash flow from current operations, with loans from banking corporations and financial corporations, and by issuing securities, including debentures and ordinary shares.

 

 

Below are details regarding the average and effective interest rates on the Company’s long-term loans and debentures (including current maturities) that are in effect, or were in effect in  2018, 2019, and 2020, which are not designated for unique use by the Company, while distinguishing bank credit sources and off-bank credit sources:

 

 

 

Currently debentures Series H to L issued by the Company are in circulation (the “Debentures”).

 

For information about the Debentures, see Section 16 of the Board of Directors’ Report and Note 20 to the Financial Statements.

 

 

Below is concentrated data regarding material loan and credit agreements as of the Report date or which were in effect during the Report period:

 

 

 

 

Under the Loan Agreement, the interest could be subject to adjustments in certain instances. The Company is entitled to effect early repayment of the loans or either loan, subject to an early repayment fee. The Loan Agreement includes standard terms and undertakings, including a negative charge, restrictions on distribution (as set forth in Section 18.5 below), events of default and financial covenants, similar to the terms set forth in the Company’s Debentures. As of December 31, 2020, and as of the Report publication date, the Company has been and is in compliance with all terms of the loans.

 

 

In June 2017, the Company engaged with the Lender under another deferred loan agreement in the amount of NIS 150 million, subject to certain conditions, unlinked. The loan was provided to the Company in March 2019 and it bears fixed annual interest at the rate of 4%. According to the terms of the loan, principal is repaid in for equal annual installments in the years 2021 to 2024 (inclusive). Interest is paid in semiannual installments starting on September 30, 2019, and until March 31, 2024.

 

According to the Loan Agreement, the interest could be subject to adjustments in certain instances. Subject to an early repayment fee, the Company is entitled to perform early repayment of the loan. Furthermore, upon the occurrence of certain events not authorized by the Lender, the Lender shall be entitled to inform the Company that repayment of the loan has been accelerated.

 

The loan agreement includes standard terms and undertakings, including a negative charge, restrictions on distribution (as set forth in Section 18.5 below), financial covenants and events of default, similar to those set forth in the Company’s Debentures (including due to change of control in the Group), with certain changes. In October 2020, the Company performed partial early repayment in the amount of NIS 113 million out of the loan principal. As of December 31, 2020, the principal balance of the loan was approximately 38 million and it shall be repaid in March 2021. As of December 31, 2020, and as of the Report publication date, the Company has been and is in compliance with all terms of the loan.

 

 

 

 

For details regarding the Company’s undertakings to comply with financial covenants, restrictions on distribution, and other restrictions set forth in the deeds of trust for the Debentures (Series H) to (Series L) issued by the Company and not yet repaid, see Note 20 to the Financial Statements.

 

Restrictions by virtue of agreements with financial corporations – The restrictions set forth in the Company’s loan agreements with financial corporations are similar to the restrictions set forth in the Company’s Debentures, with certain changes.

 

As of the date of approving the annual financial statements and as of the Report publication date, the Company is in compliance with all financial covenants and other restrictions described above.

 

 

For details of the bank guarantees the Company has provided, see Note 33 to the Financial Statements.

 

 

As of the publication date of this Report, the Company’s Debentures (Series H) to (Series L) are rated ilA \ Negative by Standard & Poor’s Maalot Ltd. (“Maalot”) as of August 18, 2020 (including a rating ratification within the framework expanding the Debentures (Series L) on November 23, 2020). For more details regarding the ratings, see Section 16 of the Board of Directors’ Report.

 

 

The Company estimates that the Group’s liquidity and capital sources shall be sufficient for financing its current cash need, including investments and repayment of debts in the forthcoming year.

 

The Company’s above estimate is deemed forward-looking information, as such term is defined in the Securities Law. The Company’s estimate is based on many factors, including its revenues, the timing and size of investment in marketing and customer retention, expanding its sales and marketing activity and the timing of launching new products or improvements to existing products, the timing and size of investment in networks and services, including Cellcom tv, the Group’s Internet infrastructure, an investment in IOT, investment in frequencies and any decision to resume dividends distribution. The Company’s estimate might not materialize, materialize only in part, or materialize differently than the Company estimated, should there be any change in the above-described factors.

 

 

For details regarding tax laws that apply to the Company and the Company’s tax assessments, see Note 31 to the Financial Statements.

 

 

General

 

The Group works to protect the environment and mitigate its negative impact on the environment and the landscape. The Group dedicates human resources, money, and technologies to minimizing its ecological footprint, including by way of efficient deployment of infrastructures, recycling electronic components, reducing use of paper through efficient printing, reducing pollutant emissions, collecting used batteries, sending the monthly statement and other customer correspondences via email or SMS, using environmentally friendly raw materials, waste separation and purchasing electricity from a natural gas-based private powerplant.

 

 

End-user equipment and various types of cellular antenna sites are known as sources of non-ionizing radiation. They are subject to regulation, including the Radiation Law, and are a source of public concern and debate. The International Agency for Research on Cancer (part of the World Health Organization) classified the electromagnetic radiofrequency fields as possible causes of cancer in humans, based on the increased risk of glioma, a malignant type of brain cancer that is linked to the use of cellular phones. There are other studies, and more studies are being conducted, on the connection between exposure to electromagnetic radiation and the use of cellular handsets and cancer and other health risks.

 

The guiding principle regarding exposure to non-ionizing radiation in general and to cellular phones in particular is the precautionary principle. The authorities published recommendations on this subject, including the Israeli Ministry of Health and Tnuda, the national knowledge center on the health effects of non-ionizing radiation. According to Tnuda’s recommendations, exposure to radiation from cellular phones can be mitigated using simple measures according to the following principles: distance, time, power. There are specific recommendations for infants, children, and teens, who are considered high-risk populations, on all that concerns the health effect of various exposures.

 

Also, in March 2020, the International Committee for Non-Ionizing Radiation Protection (ICNIRP) updated the guidelines for protection against radiation in the radio frequencies it published in 1998. The exposure limits have been examined and validated in the 22 years since the previous publication, and they were revised according to the scientific knowledge accumulated in this period.

 

 

The regulation of cell site deployment, the manner of construction and the required approvals, are mostly governed by the Radiation Law, the Planning and Building Law, and National Zoning Plan 36. The regulation of deployment of wireless access facilities, which are smaller-scale cell sites, is mostly regulated in the Communications Law and in the Radiation Law. For details regarding the provisions of the Planning and Building Law in connection with deployment of cell sites and access facilities, see Section 21.4 below.

 

The Radiation Law prohibits constructing and operating cell sites or facilities without a construction permit or an operating permit, as applicable, from the Israeli Ministry of Environmental Protection. Obtaining a construction permit from the Israeli Ministry of Environmental Protection is a preliminary condition for obtaining a building permit or an exemption therefrom from the planning and building committee, and obtaining a building permit or an exemption therefrom is a preliminary condition for obtaining an operating permit from the Israeli Ministry of Environmental Protection. With respect to a construction permit and an operating permit, the applicant must present the measures taken (including technological measures) to limit exposure levels from each cell site or facility.

 

The construction permit is valid for no more than three months, unless extended by the Radiation Commissioner at the Ministry of Environmental Protection (“Radiation Commissioner”), and the operation permit is valid for five years, subject to annual radiation surveys for the other facilities or sites, carried out by third parties authorized by the Radiation Commissioner. The construction and/or operation permits set forth the different terms that govern the construction and/or operation of the sites. The Group obtains construction and operating permits from the Radiation Commissioner in the relevant timeframe for its cell sites and transmission facilities. In addition, cellular operators, including the Group, must provide current data regarding capacities at each of their cell sites or other transmission facilities to the Radiation Commissioner. The Group submits the required data to the Radiation Commissioner. For details with respect to obtaining the permits for the transmission facilities required under the Planning and Building Law, see Section 21.4 above.

 

The Radiation Law governs the permitted levels of exposure to radiation and the regulation of activity of cell sites and/or transmission facilities, and it authorizes the Radiation Commissioner to order the removal of cell sites or other facilities operating contrary to any permit. The Radiation Law also imposes criminal sanctions on the Group and on its directors and officers for violations of the law. Noncompliance with the Radiation Law or the terms of the permit could result in the permit being revoked or suspended and cause a delay in obtaining a permit for other sites by the same operator.

 

Any amendment to the Radiation Law or to the Planning and Building Law significantly prohibiting or limiting the issuance of permits under such laws could, inter alia, limit the Group’s ability to construct new site (and if it applies to its current sites, could limit the Group’s ability to renew the operating permits for many of its current sites), adversely affect the Group’s current and future networks, especially in urban areas, and could have an adverse effect on the results of its operations.

 

 

Cellular services are provided through end-user equipment that emits non-ionizing radiation.

The Consumer Protection (Details regarding Non-Ionizing Radiation from Cellular Phones) Regulations, 5762-2002 (“Radiation Regulations”) stipulate how customers are to be informed of this. The Radiation Regulations and the pamphlet issued pursuant to them state maximum permissible radiation levels from cellular telephones, measured according to the SAR level.¹⁵ The manufacturer measures the SAR levels for each model prototype. To the best of the Group’s knowledge, the end-user equipment models it markets comply with required SAR levels according to law. Nevertheless, the Group does not perform SAR examinations of the end-user equipment, and it relies on publications by the manufacturers for each model. The Group obtained certain permits from the Israeli Ministry of Communications and the Standards Institute in connection with importing end-user equipment. The permits require the model to comply with all applicable standards, including the SAR levels. The Group publishes details regarding the SAR levels from cellular phones on its website, and it refers to recommendations by the relevant authorities on the precautionary principle rules for using cellular phones.

 

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As of the Report date, to the best of the Group’s knowledge, it is not exposed to material events or matters relating to environmental protection, except as described above.

 

 

As of the Report date, to the best of the Group’s knowledge, it is not exposed to material legal or administrative proceedings relating to environmental protection, except as described above.

 

 

The Group implements a work procedure with respect to procurement of cell sites and site licensure, an environmental protection licensing procedure for cell sites and periodic radiation tests, conducted by the Group among others to verify compliance with applicable standards under the law. As set forth in the procedures, the Group has appointed supervisors for implementation thereof.

 

On the performance of periodic radiation tests and the online submission of current data to the Commissioner on the capacities in each other cell site or Group transmission facilities, see Section 21.4 below.

 

 

Below are details on laws, regulations, instructions and other matters that are subject to regulatory control, which are considered material to the Group’s activity, including reference to legislative or regulation initiatives which to the best of the Group’s knowledge are in various stages of legislation or regulation stages, but it is uncertain if or when they shall be enacted and if enacted, there is no certainty regarding the final language of the provisions of the law or the license on matters described.

 

 

General

 

The Israeli communications market is characterized by high regulatory involvement in the affairs of companies operating in this area. A substantial part of the Group’s operations is subject to the provisions of the Communications Law, regulations promulgated by the Israeli Ministry of Communications, and the provisions of licenses issued to the Group by the Israeli Minister of Communications. According to the Communications Law and the Telegraph Ordinance, the supply of certain communications services in Israel is contingent upon obtaining a permit and allocation of frequencies to such services.

 

In addition, the Group’s activity is subject to the laws that govern its relationships and manner of engagement with its customers. These provisions include, inter alia, the Consumer Protection Law, as well as specific provisions to its area of activity, as stated below.

 

The Group’s activity is also subject to the general provisions of law, including contract law, import and customs law, standardization, accessibility, labor law, and business licensing.

 

 

 

The interpretation and implementation of the Communications Law and the regulations promulgated thereunder are uncertain and subject to changes. In the past, disputes arose between the Group and the Israeli Ministry of Communications in this respect and disputes could also arise in the future. The Communications Law and its regulations grant the Israeli Ministry of Communications vast regulatory powers over the Group’s activity, by virtue of the licenses. The Israeli Ministry of Communications can alter the Group’s licenses without its consent, thus limiting the Group’s freedom to conduct its business and impacting the results of its operations. Frequent changes to the licenses and/or legislation, or changes made at a timetable the Group cannot meet, increase the risk of noncompliance with the Group’s license terms or the risk of being in breach of the law, and consequently, the Group’s exposure to lawsuits and regulatory sanctions. The Israeli Ministry of Communications can impose material sanctions if the relevant licenses, laws, or regulations are breached, and revoke the licenses if the Group commits material breach of their terms.

 

In August 2020, the Israeli Ministry of Communications published a bill memorandum for amending the Communications Law, whereby the licensing duty for most actions of establishing and providing communications services shall be cancelled. The area shall be regulated through a “general permit”, whereby parties that wish to provide basic services may do so subject to certain terms and to prior registration with the Israeli Ministry of Communications. 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 still be subject to a license.

 

If the memorandum evolves into binding legislation it shall lower barriers to entry 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 could include changes that make it easier for the Group to adopt technological changes and new business models. Such gaps could affect the Group’s competitive position.

 

The Group’s above estimate is deemed forward-looking information, as defined in the Securities Law. The Group cannot estimate whether such changes shall materialize and to what extent they shall affect its operations. The Group’s estimate could not materialize, materialize only in part, or differently than the Group estimated, because such estimate is affected by factors outside the Group’s control, and among others, is subject to the influence of factors described above and any change occurring thereto, and to risk factors in the Group’s area of activity, as set forth in Section 26 below.

 

 

 

The interconnectivity fee rates between communications operators are regulated (meaning, payments to cellular operators or domestic operators or international operators, for completing a call on a network belonging to another operator, or for forwarding SMS messages between cellular operators). The Company estimates that a further reduction or cancellation of the interconnectivity fees is unlikely to have a material effect on the results of the Group’s activity.

 

The Company’s above estimates are deemed forward-looking information, as such term is defined in the Securities Law. These estimates could not materialize, or materialize differently, in the event of legislative interference or caselaw that is different than known as of the Report publication date.

 

The Israeli Ministry of Communications may also provide instructions regarding communications service rates in the event of an unreasonable payment or a payment that raises concern of harm to competition. Such instructions could be based on a calculation of cost plus a reasonable margin, or based on reference points of comparison with other license holders, similar services, or connectivity rates in other countries. The Israeli Ministry of Communications is also authorized to issue orders on separating payment for a particular telecommunications service from the payment for a cluster of services. The Group’s licenses also stipulate the types of payments operators are entitled to charge, and specific services are subject to specific regulation.

 

According to the Communications Law, if the guest and host operators do not agree on the terms for providing hosting services, whether by domestic MNO roaming or MVNO hosting services, the Minister of Communications can interfere with the terms of the agreement, including by setting the price for the services. Terms or consideration not beneficial to the Group could have a material adverse effect on the results of its operations.

 

The Group’s above estimate is deemed forward-looking information, as defined in the Securities Law. The Group cannot estimate whether regulators shall intervene in such way, and the extent of its effect on the Group’s activity. The Group’s estimate could not materialize, materialize only in part, or materialize differently than the Group estimated, because this estimate is affected by factors outside the Group’s control, and among others, is subject to the influence of the factors described above, and any change thereto, and to risk factors in the Group’s area of activity, as stated in Section 26 below.

 

 

In recent years, various changes to the Group’s licenses came into effect, having a material effect on its conduct, investments, and expenses, including the Group’s conduct vis-à-vis its customers, its investments in its communication networks, and increased competition in the market.

 

 

 

The Company operates in the cellular sector pursuant to the General License to provide radio cellular telephone mobile services by the cellular method¹⁶ (“Cellular License”), that is valid until January 31, 2022, and that sets the terms, duties (such as the duty to provide cellular services to any interested subscriber in the State of Israel), and limitations on the Company’s activity, its officers, and shareholders holding specific rates of the Company. Should the Company comply with the provisions of the Cellular License and the provisions of the law, and invests in improving its service and cellular network, the Israeli Ministry of Communications may renew the license by ten more years at a time. The Company obtained a license to provide cellular services in Judea and Samaria, valid until 2022, which includes, and in general, the terms of the Cellular License.

 

With respect to the license under which Golan provide services, see the unified license section below.

 

It is uncertain that the Company’s Cellular License shall be renewed by the Israeli Ministry of Communications. If it is renewed, it could be renewed at inconvenient terms for the Company. The Israeli Ministry of Communications has changed the terms of the Cellular License before and could change them again without the Company’s consent, thus limiting its ability to manage its business and impacting the results of its operations.

 

These are the main provisions of the Cellular License:

 

Other terms included in the Cellular License set forth, inter alia, that:

 

 

The Joint Corporation (as defined in Section 23.1 below) has a special license to provide radio cellular infrastructure services to cellular operators, including similar provisions to those of the Cellular License, on managing, establishing, operating, and maintaining the radio cellular network.

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The Group provides Internet services (connectivity and infrastructure), fixed-line telephone services, international call services, and access point services to the network, under a unified license.²¹ This license is in effect until 2026, but the Israeli Ministry of Communications can extend it by additional periods of up to 10 years. The terms of the unified license require the Group to deposit a bank guarantee with the Israeli Ministry of Communications. In general, the unified license provisions are similar to those of the Group’s Cellular License, as described above in Subsection (1), subject to certain changes, including the requirement for Israeli entities to hold at least 20% of the Group’s share capital. However, the Minister of Communications may waive this demand if the holder of the unified license for telecommunication services is controlled by the holder of a general license (which applies to the Group).

 

Golan operates under a unified general license to provide telecommunication services dated August 26, 2020 (“Golan’s Unified License”), the terms of which are generally similar in essence to those of the unified license (and on the relationship with customers, including similar terms to those of the Group’s Cellular License). The license is in effect for three years, starting on the license grant date.

 

Golan Telecom International Ltd. (“Golan International”), the entire share capital of which is held by Golan, holds another unified license to provide international call services. When the Group acquired Golan, this license was modified whereby it is valid for a period of 3 years from the license amendment date.

 

IBC holds a general unified license of a unique general type (infrastructure), which includes similar provisions.

 

The Group also has other licenses to provide fixed-line communication services: A special license to provide transmission services and domestic data communications (valid through April 2021) and licenses corresponding to the unified licenses, as described above, for Judea and Samaria (for the license to provide telecommunication services granted to the Cellcom Partnership, valid until 2026, and for the license to provide international calls granted to Golan International, valid until 2023). These licenses include essentially similar terms to those of the above-described Cellular License.

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Construction of cell sites

 

 

In order to guarantee and improve coverage for transmission and reception of the wireless network for Group customers, the Group is dependent on cell sites throughout the country. The deployment of cell sites, the manner of construction, and the required permits, are mostly governed by the National Master Plan for Communication – National Zoning Plan 36 – Part A – Small and Very Small Transmission Handsets" (“National Zoning Plan 36”), the Planning and Building Law, and the Radiation Law. The deployment of wireless access facilities, which are smaller-scale cell sites, is mostly regulated by the Communications Law, the Planning and Building Law, and the Radiation Law.

 

Construction of cell sites requires permits from various government entities and related entities, including obtaining a building permit under the Planning and Building Law, granted by various planning authorities, including planning and building committees (if there is no exemption from the building permit), and other permits from other bodies and entities, including a permit from the Civilian Aviation Authority (in most instances), from the Israel Defense Force (in certain instances), and other individual permits, as applicable. Also, permits must be obtained from the Radiation Commissioner.

 

The Group encountered difficulties in obtaining permits for constructing sites, mainly from local authorities. Installation and operation of cell sites without the necessary permits, or not in accordance with the terms of the issued permit, constitute a criminal offense. Failure to obtain the necessary permits could require the termination of the activity of the relevant cell sites or moving to a suboptimal alternative location in terms of network requirements, which could harm the quality and coverage of the cellular network, thus harming the Group’s business results. The Group regularly works to obtain the necessary permits, and as necessary, find alternative locations for its sites.

 

Operating sites and other facilities without the required permit or not in accordance with the terms of the issued permit could expose the Group, its directors and functionaries to civil action and/or criminal and administrative proceedings. Sites and facilities could also be subject to a demolition order and to claims of breach of contract.

 

As of the Report date, very few cell sites of the Group operate without a permit. It is possible that the Group operates a substantial number of sites in a way that is not fully compliant with the building permit pursuant to which they were constructed, although permits were obtained for such sites from the Radiation Commissioner with respect to their radiation levels.

 

Legal proceedings are pending against the Group criminal and administrative in the framework of which claims were raised regarding unlawful operation of a small number of the Group’s cell sites, due to alleged absence of permits according under the Planning and Building Law, or for construction allegedly in deviation from the permit.

 

The Group’s estimate on difficulties in obtaining permits and the possible harm to the cellular network quality and coverage is deemed forward-looking information, as defined in the Securities Law. The main facts and figures the Group used as a basis for the above estimates are its experience in obtaining building permits and permits from the Radiation Commissioner over the years, its experience in finding alternative locations for sites, and the difficulties this involves. These estimates could not materialize or materialize only in part, because they are affected by factors outside the Group’s control, including legislative interference or intervention or adjudication that differs from that known as of the Report date, and they are also subject to the effect of risk factors in the Group’s area of activity, as stated below in Section 26.

 

 

National Zoning Plan 36

 

National Zoning Plan 36 establishes, inter alia, guidelines for constructing cell sites, in a manner allowing coverage for transmission and reception of wireless communications throughout the country, while preventing radiation hazards and minimizing damage to the environment and landscape. National Zoning Plan 36 lists the considerations planning authorities must weigh when issuing cell site building permits. National Zoning Plan 36 also lists cases in which the public must be notified of the building permit application before the permit is issued, for the public to submit appropriate objections according to the provisions of the Planning and Building Law.

 

In November 2018, the Supreme Court found that it is possible to charge a betterment levy for building permits issued based on a national zoning plan. Such decision limits the Group’s ability to object to claims directed against it with respect to paying betterment levies on cell sites constructed with a permit under National Zoning Plan 36, and it could significantly increase the cost of constructing cell sites.

 

If changes are made to National Zoning Plan 36, including additional limitations and requirements to and on the process of constructing and operating cell sites, this could have an adverse effect on the Group’s ability to construct new cell sites, make the site licensing process more cumbersome and expensive, have an adverse effect on the Group’s current network, and delay its future distribution.

 

The Company’s above estimates are deemed forward-looking information, as such term is defined in the Securities Law. These estimates could not materialize, or materialize differently, insofar as legislative interference or different adjudication occurs than that known as of the Report publication date.

 

Building permit exemptions

 

Wireless access facilities are exempt from obtaining a building permit if they are constructed according to the terms of the Communications Law and Section 266C of the Planning and Building Law and its regulations (the “Exemption”). The Group relies on an exemption from a building permit for approximately 33% of the cell sites it constructed, especially the Exemption for wireless access facilities.

 

In October 2018, the Planning and Building (Installing a Wireless Access Facility for Cellular Communication) Regulations, 5779-2018 were enacted, setting forth rules regarding processes for construction, making changes and replacement of wireless access facilities, which are exempt from obtaining a building permit. The regulations reflect the restrictions formerly established by the courts on the construction of access facilities, and include restrictions on the Group’s ability to make changes to and replace wireless access facilities, and a new licensing procedure that reduces the number of new access facilities that the Group may establish, based on the Exemption, which shall make it difficult for the Group to construct access facilities with an exemption from the permit, that it shall need, especially to support the new frequencies it won in the 2020 Tender. The Israeli Ministry of Justice also stated its opinion that the Exemption does not apply to wireless access facilities auxiliary equipment and to the construction of access facilities on some rooftops under certain circumstances.

 

Other legal proceedings relating to the exemption from obtaining a building permit, including with respect to its applicability to certain rooftops, were decided against the Group’s position. Also, other legal proceedings, including the requirement to obtain a permit for deviating use under certain circumstances and the exclusion of auxiliary equipment for wireless access facilities from the exemption from obtaining a building permit, are still pending.

 

The inability to rely on an exemption from the need to obtain a building permit for an access facility or imposing a material restriction on the Group in the framework of the exemption, disassembly of wireless access facilities and cellular sites for reasons outside of the Group’s control, objections by local planning and building authorities to granting the necessary permits and approvals, and the exclusion of wireless access facilities auxiliary equipment from the building permit exemption, could have an adverse effect on the Group’s ability to obtain permits for these sites and on the scope, quality and coverage capacity of the network (especially in urban areas), on the Group’s ability to continue to market its services and products effectively, and they could have a material adverse effect on the results of the Group’s activity and on its financial situation.

 

The Company’s above estimates are deemed forward-looking information, as such term is defined in the Securities Law. The main facts and figures the Group used as a basis for the above estimates come from its experience over the years and its knowledge accumulated with respect to site construction and licensing. These estimates could not materialize or materialize partially in the event of legislative interference or caselaw that is different than known as of the Report publication date.

 

The Group supplies repeaters and femtocells for subscribers seeking solutions for weak reception inside structures, some of which require a specific permit, and some require a type permit from the Israeli Ministry of Environmental Protection, based on radiation levels. The Group makes sure each repeater works according to the established parameters in the relevant type exemption. It is uncertain whether installing certain types of repeaters and inter-structure micro-sites requires a building permit. Based on the opinion the Group received from its legal advisors, it did not request and did not obtain building permits to install repeaters on rooftops. Note that the repeaters installed on rooftops are a very small part of the total repeaters the Group installed.

 

If it is found that installing repeaters requires a building permit, the Group shall examine the economic feasibility of handling permit applications for existing repeater opposite the option of removing them, and the economic feasibility of installing additional repeaters.

 

The Group also constructs and operates microwave facilities in its transmission network, which serve both the cellular network and the purpose of providing fixed-line telecommunication services. Most microwave facility types are exempt from obtaining permits from the Israeli Ministry of Environmental Protection because of their low output, or require a general permit for their radiation level. Based on the opinion the Group received from its legal advisors, it did not request and did not obtain building permits to install microwave facilities on rooftops.

 

If it is found that installing these facilities requires a building permit, such could have an adverse effect on the Company’s ability to obtain radiation approvals for these facilities and install additional facilities, and it could harm the scope, quality and coverage of the Group’s transmission network, and harm the Group’s ability to continue to effectively market its fixed-line communication services to business customers (based on Group independent infrastructures).

 

The Company’s above estimates are deemed forward-looking information, as such term is defined in the Securities Law. The main facts and figures the Company used as a basis for the above estimates come from its experience over the years and the knowledge it accumulated in the area of site construction and licensing. These estimates could not materialize, or materialize partially, insofar as legislative interference or different adjudication occurs than that known as of the Report publication date.

 

 

The Group estimates that the materialization of any of the following factors could have an adverse effect on its business and financial results: (1) a change in legal requirements regarding construction of cell sites, including reducing or revoking the exemption from obtaining a building permit for the facilities used for the Group’s networks; and (2) changes to National Zoning Plan 36, including additional restrictions and requirements on the process of constructing and operating sites. If one or more of these factors materializes, such could cause, inter alia, the following: (i) harm to the continued construction or establishment of networks or dismantling existing cell sites; (ii) harm to the Group’s ability to obtain permits under the Radiation Law for its cell site; (iii) harm to the quality and coverage of the Group’s networks (especially in urban areas); and (iv) harm to the continued effective marketing of Group services and products, and subsequently - harm to the Group’s results.

 

The Company’s above estimates are deemed forward-looking information, as such term is defined in the Securities Law. The main facts and figures the Company used as a basis for the above estimates come from its experience over the years and its knowledge accumulated with respect to site construction and licensing. These estimates could not materialize, or materialize partially, insofar as legislative interference or different adjudication occurs than that known as of the Report publication date.

 

 

Under the Planning and Building Law, local planning and building committees must request, as a condition for granting a cell site building permit, a letter of indemnification against claims for damages under Section 197 of the Planning and Building Law.²³ The period in which it is possible to submit claims for damages under the Planning and Building Law is the latter of one year from obtaining the building permit for the site or six months from constructing the site, while the Minister of the Interior is authorized to extend such period. By the Report date, the Group has deposited 430 letters of indemnification as a condition for issuing such building permits.

 

As a result of requirement to deposit letters of indemnification with local planning and building committees, the Group may disassemble or move cell sites to less suitable locations or not establish certain cell sites if it finds that the risk of providing such letters of indemnification exceeds the benefit of constructing such sites. The Group’s decision to disassemble or move cell sites, if any, could harm the quality of cellular services in such places and harm network deployment.

---

 

The Group’s above estimate is deemed forward-looking information, as defined in the Securities Law, based on the Group’s work plan to construct sites in the coming years, and on the Group’s knowledge and experience accumulated with respect to finding site locations. The above estimate could not materialize, or they could materialize in part, because of lack of details regarding future claims under Section 197 of the Planning and Building Law, on cellular sites.

 

 

The construction of cell sites, access facilities, and other transmission facilities, is governed by the Radiation Law. For details on the provisions of the Radiation Law and the required permits under it, see Sections 20.1 and 21.4(5) above.

 

 

Cellular services are provided using end-user equipment that emits non-ionizing radiation. The Consumer Protection (Details Regarding Non-ionizing Radiation from Cellular Phones) Regulations, 5762-2002, contain, inter alia, duties to provide information. These regulations and the pamphlet issued under them state among others the maximum permissible radiation level for end-user equipment. For information about the restrictions under these regulations, see Section 20.3 above.

 

 

A network sharing agreement, including active frequency sharing between mobile network operators (MNOs) is possible between operators when at least one of them does not own a fully distributed cellular network, and is subject to certain conditions, including: (a) other operators may join at similar terms to those granted to the operator with the smallest market share; (b) an operator that shares a network may host a virtual operator with no need for the consent of the other joint operators; (c) the shared radio network must be operated by a joint entity to be held equally by all joint operators, that must obtain a license from the Israeli Ministry of Communications, and the shared network shall use the frequencies allocated to the joint operators; (d) the shared radio network components shall be held equally by all joint operators; and (e) each joint operator shall have an effective right of use of the other joint operators’ passive infrastructure, including if the agreement is terminated.

 

In February 2021, the Israeli Ministry of Communications decided to alter current regulation that only allows domestic roaming and active network sharing between established cellular operators (the Company, Pelephone, and Partner) and “new” cellular operators (Xfone and Hot Mobile) and allow all cellular operators to collaborate using domestic roaming or a MOCN configuration in certain peripheral areas, at a limited number of sites. In the Group’s estimate, this change shall not affect the Group’s results, in light of the limited cooperation that is possible.

 

Such Company estimate is forward looking information, as defined in the Israeli Securities Law, which is based on the Group’s estimates with respect to the scope of future cooperation and the knowledge and experience that the Group accumulated with respect to the construction of the sites. Such estimate may not materialize or may materialize in part, in light of the lack of information with respect to the scope of use and the affiliated costs.

 

For details regarding the network sharing and hosting agreement between the Group and Golan (formerly) and Xfone, see Section 23.1 below.

 

 

The Communications Law provides operators certain powers to deploy fiber-optic infrastructure and exempts them from the requirement of obtaining building permits (including auxiliary facilities). Deploying fiber-optic infrastructure in public areas is subject to prior notice and coordination with other infrastructure owners. Deploying fiber-optic infrastructure in private property is subject to the property owner’s consent. With respect to using the infrastructure of other operators in the framework of the Wholesale Market, see Subsection (2) below.

 

In December 2020, an amendment to the Communications Law was approved, updating the duty to deploy fiber-optics and duties to provide the service for operators with a general license - that own their own infrastructure (which under current regulation are required to perform universal deployment for all networks they deploy), and setting incentives for the encouraging infrastructure deployment in areas where there is no duty of deployment, according to economic profitability tests. The main terms of the amendment are as follows:

 

 

 

 

 

 

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

 

In July 2020, the Israeli Ministry of Communications 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 establishing 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.

 

 

 

In 2012, the Israeli Ministry of Communications published a policy document regarding a Wholesale Market for fixed-line communication services, the main points of which are:(1) establishing an effective Wholesale Market for communication connectivity services; (2) gradual cancellation of the structural separation in the Bezeq and Hot groups and replacing it with accounting separation and changing the method of control over Bezeq’s retail rates, determining maximum rates. This instead of the current method that sets fixed rates depending, as a rule, on the development of the Wholesale Market, competition in the market, and with respect to television services – the reasonable option to supply a basic package of OTT services by suppliers that do not have a national fixed-line communication infrastructure.

 

As stated above in Section 8.1(1), in 2015, the Wholesale Market for Internet infrastructure in Israel was officially launched, and to a certain degree, also in the area of using certain physical infrastructure by operators that do not own infrastructures. The maximum wholesale rates for fixed-line communication services to be provided by Bezeq were set in the Communications (Bezeq and Broadcast) Regulations (Use of the Public Telecommunications Network of a Domestic Operator), 5775-2014.

 

According to the Communications Law, certain wholesaler duties apply to all fixed-line operators, including the Group, according to which fixed-line operators must provide all other fixed-line operators access to their passive infrastructure (excluding the IBC’s passive infrastructure on IEC’s infrastructure), at terms to be discussed between the parties (excluding Bezeq and Hot, for which the regulator sets the terms).

 

Furthermore, the Wholesale Market should have featured wholesale fixed-line telephone services from May 2015. To the best of the Group’s knowledge, as of the Report date, the service has not yet been used within the Wholesale Market. A reduction Bezeq’s fixed-line telephone service rates, as proposed in the renewed hearing in December 2020 (as set forth hereunder) shall significantly reduce to nearly eliminating the economic profitability of buying wholesale telephone services from Bezeq.

 

In December 2019, the Minister of Communications published a public hearing proposing to set fixed rates (instead of the current rates that depend on traffic volumes) for the wholesale service of Hot’s Internet infrastructure, which are lower than Hot’s current retail rates. In June 2020, the Israeli Ministry of Communications adopted Hot’s proposal to voluntarily reduce the wholesale rates for Internet infrastructure service on its network, including a mechanism for updating rates.

 

In February 2020, the Israeli Ministry of Communications announced a retrospective reduction of the wholesale services rates it set in the past for using Bezeq’s copper wire infrastructure and a rate updating mechanism for 2019 and 2020. This reduction led to reimbursement of the amounts the Group paid to Bezeq, and to offsetting additional amounts in 2020 against payments paid or payable to Bezeq for use of the copper wire infrastructure, totaling NIS 31 million. In December 2020, the Israeli Ministry of Communications announced the annual rate update for using Bezeq’s copper wire infrastructure in the Wholesale Market. Because rates are updated according to a formula taking into account the number of subscribers and traffic on Bezeq’s network in the previous year and assumptions regarding on the forthcoming year, as a result of the increased demand for Internet traffic, and especially considering the coronavirus crisis, the wholesale rates on Bezeq’s network have been significantly reduced for 2021.

 

In August 2020, the Israeli Ministry of Communications decided that for the supply of Internet infrastructure services on Bezeq’s fiber-optic infrastructure, Bezeq shall be paid fixed maximum amounts (regardless of traffic), a payment of NIS 71 for the wholesale fiber infrastructure in total rate of 55000 mb/s and NIS 79 for fiber infrastructure at a total rate of 1100 mb/s per month. These tariffs significantly exceed the maximum rates set for Bezeq for the Internet infrastructure service using its copper wire infrastructure and the rates the Group pays IBC.

 

In 2014, the Israeli Ministry of Communications published a hearing that was expanded in 2017 and has not yet been concluded, proposing a method for checking whether Bezeq and Hot reduce their retail rates and thus reducing the margin between wholesale rates and retail rates for certain fixed-line communication services (“margin squeeze”), to reduce the margins for operators that do not own and infrastructure thus excluding them from the market.

 

With respect to Bezeq’s duty not to charge Internet providers for the consumption of a certain volume of connectivity services, see Section (3) below.

 

 

As of the Report date, online television services are not regulated in Israel.

 

Nevertheless, in July 2018, according to recommendations published in 2016 by the Broadcast Regulation Committee appointed by the Minister of Communications, published a bill for regulating broadcasting including a classification of audiovisual providers²⁴ into four categories, and setting regulatory arrangements for each category, including imposing a duty to invest in original Israeli content at a rate derived from revenues for subscription fees (in this Section, the “Bill”).

 

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The Group’s activity is subject to legislation that regulates the relationship and manner of engagement between the Group and its subscribers. AS such, the Group’s activity is governed by the Consumer Protection Law and its regulations. Changes to consumer protection legislation regularly affect the activity of the companies of the Group. In recent years, various amendments to the Consumer Protection Law and its regulations were adopted, among others regarding the cancellation of transactions even after commencement of service; disconnecting from ongoing services; the manner of updating rates for a limited term; provisions on reimbursing funds collected from subscribers not in accordance with the engagement agreement plus the fixed handling fee under the law; restrictions on debt collection processes; the maximum duration of wait for human response; and expanding applicability of regulation regarding technician visits to additional instances. Furthermore, there is a variety of proposed amendments to the Consumer Protection Law on the Knesset’s agenda, that could affect, inter alia, the terms of engagement and conduct of companies of the Group vis-à-vis their subscribers.

 

 

The Group companies’ activity is affected by the provisions of the Protection of Privacy Law and its regulations with respect to managing and maintaining databases and protecting the data they contain. In May 2018, the Protection of Privacy (Data Protection) Regulations, 5777-2017, came into effect, imposing various duties on database owners, including the duty to set procedures and carry out data protection risk assessments, and the duty to use state-of-the-art data protection measures to protect information.

 

 

The Group is subject to Israeli labor law in connection with terms of employment, including the Minimum Wage Law, 5747-1987; Severance Pay Law, 5723-1963; Annual Leave Law, 5711-1951; Hours of Work and Rest Law, 5711-1951; the Law for Increased Enforcement of Labor Laws, 5772-2011, and various expansion orders regarding fringe benefits and pension contributions Group employees are entitled to.

 

According to the Minimum Wage Law (Minimum Wage Increase – Temporary Provision), 5775-2015, the monthly minimum wage was updated gradually until January 2017, and the hourly minimum wage increased again in April 2018 as result of shortening the workweek in Israel.

 

For details regarding price control for products and services offered by the Group, above see Section 6.21.2 above

 

In recent years, the enforcement and supervision authorities of various regulators have been expanded, including the Israeli Ministry of Communications, the Competition Authority, and the Consumer Protection and Fair Trade Authority, whereby granting various regulators the power to impose sanctions, including substantial financial sanctions for violations of relevant regulation. There is also a proposal to make a similar amendment to the Protection of Privacy Law, 5741-1981. The Israeli Ministry of Communications, the Competition Authority, and the Consumer Protection and Fair Trade Authority have been exercising these powers in recent years.

 

 

Below is a summary description of the main terms of material agreements the Group is party to, or that grant rights to the Group to the best of its knowledge, including agreements that were in effect in the period described in the Report or that affected the corporation’s activity at the time.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Sharing Agreement with Xfone sets the terms at which the 4G shared network shall operate, the terms for providing the hosting services for the 2G network and the 3G network, and the following terms, inter alia:

 

 

 

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In November 2020, Xfone stopped paying the Group under the Sharing Agreement. As of the Report date, Xfone has not paid the Group part of the monthly consideration for the months August - December 2020. Xfone raised several arguments regarding its unwillingness to pay the Company the consideration set forth in the Sharing Agreement. Xfone also argued that Golan’s acquisition by the Company and its conversion into an MVNO (while terminating the Cellular License and ending the Triple Agreement) constituted breach of the agreements with it and on January 31, 2021, it informed the Company of terminating the agreements for their alleged fundamental breach by the Company. The Company utterly rejects Xfone’s termination notice of the Sharing Agreement and arguments, which according to the estimates of the Company’s management were made in order to alter the terms of the Sharing Agreement. On February 8, 2021, the Company filed a claim for enforcement of the Sharing Agreement including payment of Xfone’s debts until the filing date of the claim (for 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 agreement or from engaging in an agreement that contradicts the Sharing Agreement with the Company 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 the Company’s 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, the Company would continue charging Xfone under the same commercial terms as it had until then, and Xfone would bear the payment for the services to be received in that period; during the 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. Xfone did not pay the monthly payment that was supposed to be paid during this period for the month of December 2020

 

 

 

The Golan Agreement was in an identical format to the Xfone Agreement (without the Settlement of Accounts Mechanism during the Penetration Period). The average annual consideration from Golan in the years 2017 - 2020 for the settlement of accounts components, as described above, were in the range of NIS 180-200 million per annum. As mentioned, the Group has been consolidating Golan’s results since September 2020, following completion of the transaction for acquiring all of its share capital in late August 2020. For additional details see Note 7 to the Financial Statements.

 

The Company’s estimates with respect to the Xfone Agreement, including payments thereunder, the possibility of its termination, and its potential impact on the Group, are deemed forward-looking information, as such term is defined in the Securities Law, and are uncertain, as they are influenced by multiple factors outside the Group’s control, including Xfone’s conduct, findings by courts of competent jurisdiction, and other factors, including the realization of all or some of the described risk factors in the Group’s area of activity, as described in Section 26 below.

 

 

With roaming agreements, the Group offers outgoing roaming services to its subscribers when they are outside Israel and incoming roaming services to customers of foreign operator when they are in Israel. As of the Report date, the Group collaborates with hundreds of operators in most countries in the world to provide roaming services, based on standard roaming agreements of the GSM Association.²⁶

 

 

The Group is party to legal proceedings filed against it from time to time. As of December 31, 2020, the Company had set aside an amount of NIS 59 million for all the claims against it.

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The past few years have been characterized by a large number of motions for approval of class certification filed and approved against the Group in Israel, some in substantial amounts.

 

As of the Report date, 43 motions for approval of class certification are pending against the Group, and the Group is party to seven class actions that have been approved against the Group.

 

 

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Chapter B   The Board of Directors’ Report on the State of the Corporation’s Affairs   December 31, 2020

1.	Brief description of the Company, its business, and its activity during the Report Period

1.1.

General

1.1.1.

The cellular communications area (cellular segment) - In the framework of this area of activity, the Group provides its customers with a wide range of cellular telecommunication services in Israel, under licenses it was granted by the Ministry of Communications. Similarly, the Group provides overseas roaming services to its customers and to customers of foreign operators who are visiting Israel. In addition, the Company sells related services and equipment and equipment repair services to its customers. The cellular segment also includes the Company’s revenues arising from the collaboration agreement with Marathon 018 Xfone Ltd. (“Xfone”). For details see Note 32 to the Financial Statements.

1.1.2.

The fixed-line communications area (fixed-line segment) - In the framework of this area of activity, the Group provides internet connectivity services, internet infrastructure (based on the fixed-line wholesale market and IBC’s fiber-optic infrastructure), internet based television services (“Cellcom tv”), international telephony services, fixed-line telephony services (“Domestic Operator Services”) for the business and private sectors, and transmission services for business customers and for telecommunication operators on the basis of the Group’s independent infrastructure. The communication services are provided under licenses it was granted by Ministry of Communications (except for the internet television services that do not require a license). Similarly, the Group provides additional services such as: Conferencing services, server hosting services, cloud information security services and IOT solutions. In addition, the Group offers equipment and equipment repair services to its customers.

1.2.

A review of the Company’s management regarding the results of the Group’s activity for 2020 and material processes that were conducted that year:

1.3.

Material events during the Report Period and thereafter

1.3.1.

On May 12, 2020, a public offering was completed of NIS 222,000,000 par value of debentures and 2,220,000 warrants (Series 4) of the Company, under the Company’s shelf offering report dated May 11, 2020, the immediate gross proceeds of which amounted to approximately NIS 201 million. For additional details about the results of such offering, see the Company’s notice on the offering results in the shelf offering report dated May 12, 2020 (reference no: 2020-02-046623) which is hereby included by way of reference, and Note 20 to the Financial Statements .

1.3.2.

In August 2020, the Company completed the acquisition of all the issued share capital of Golan Telecom Ltd. (“Golan”). For additional details see Note 7 to the Financial Statements.

1.3.3.

With respect to the Group and its partner in the joint cellular network, Xfone, winning a frequencies tender that includes 5G frequencies, which was published by the Ministry of Communications in July 2019, see Section 13.5 in Chapter A of this Periodic Report and Note 34 to the Financial Statements.

1.3.4.

With respect to the completion of an investment agreement with Hot - Telecommunication Systems Ltd. (“Hot”), whereby Hot would turn into an equal partner in the IBC Partnership, see Section 17.2 in Chapter A of this Periodic Report and Note 32 to the Financial Statements.

1.3.5.

With respect to the court’s decision, whereby it approved the offering of an investment group led by Mega Or Holdings Ltd. for the purchase of DIC’s Pledged Shares, subject to additional approvals insofar as required under law See Regulation 21A in Chapter D of this Periodic Report and Note 1 to the Financial Statements.

1.3.6.

On December 2, 2020, the Company completed a private placement by way of expanding a series of debentures (Series L) in scope of NIS 400 million par value, in consideration for approximately NIS 391 million. For additional details see the Company’s immediate report dated December 1, 2020 (reference no: 2020-02-122566), which is hereby included by way of reference.

1.3.7.

With respect to a dispute and legal proceedings that the Company initiated against Xfone, including due to partial payment of payments due to the Company under the collaboration agreement between the companies and the notice of termination of the cooperation agreement,  see Section 23.2 in Chapter A to this Periodic Report and Note 32 to the Financial Statements.

1.4.

Procedure for de-registration of the Company’s shares from trading on NYSE

1.5.

The Coronavirus spread

2.	Financial position

Section	As of December 31		Board of directors’ explanation
	2020	2019
Current assets	2,299	2,759	The decrease in the current assets as of December 31, 2020, compared to the current assets as of December 31, 2019, mainly derived from a decrease in the cash section as a result of completing the Golan acquisition transaction, and a decrease in the customers section that derived from a decrease in customers for selling equipment and terminating inter-company balances with Golan (in light of its initial consolidation).
Non-current assets	4,858	4,403	The increase in non-current assets as of December 31, 2020, compared to non-current assets as of December 31, 2019, mainly derived from an increase in intangible assets for allocating surplus costs deriving from the acquisition of Golan. This increase was partially offset against a decrease in the long-term balance of customers for selling equipment and terminating inter-company balances with Golan (in light of its initial consolidation).
Total assets	7,157	7,162
Current liabilities	1,929	1,826	The increase in current liabilities as of December 31, 2020, compared to the current liabilities as of December 31, 2019, mainly derived from an increase in the suppliers section and provisions section as a result of Golan’s consolidation, and an increase in the suppliers balance as a result of an increase in investments in the cellular network toward the end of 2020.
Non-current liabilities	3,348	3,449	The decrease in non-current liabilities as of December 31, 2020, compared to non-current liabilities as of December 31, 2019, mainly derived from a decrease in liabilities for leases and a decrease in long-term loans due to ongoing repayments. This decrease was partially offset against an increase in liabilities for debentures.
Total liabilities	5,277	5,275
Equity	1,880	1,887	The decrease mainly derived rom the Company’s net loss that was mostly offset against the proceeds of issuing capital.
Total liabilities and equity	7,157	7,162

3.	Analysis of the operating results

3.1.

Below is an analysis of the Company’s operating results for 2018, 2019 and 2020 (in NIS millions):

Section	As of December 31			Board of directors’ explanation
	2020	2019	2018
	In NIS millions

Revenues from services	2,798	2,776	2,784	The increase in 2020 compared to 2019 mainly derived from Golan’s revenue from four months of activity and from an increase in revenue from the fixed-line segment, which was partially offset by a decrease in revenue from roaming services as a result of the Coronavirus Crisis. The decrease in 2019 compared to 2018 mainly derived from a 2.9% decrease in revenue from services in the cellular segment, as a result of a decrease in revenues from cellular services, due to the ongoing erosion of the prices of these services, in light of intense competition in the cellular market. On the other hand, the fixed-line segment experienced growth of 3.5%, which mainly derived from an increase in revenues from the internet and television services that was partially offset by the decrease in revenues from international call services.
Revenues from equipment	878	932	904	The decrease in 2020 compared to 2019 mainly derived from a decrease in revenue from equipment in the fixed-line segment that was partially offset from an increase in equipment sales in the cellular segment as a result of an increase in sales on the Company’s website and sales to business customers. The increase in 2019 compared to 2018 mainly derived from an increase in the scope of equipment sales in the fixed-line segment.
Total revenues	3,676	3,708	3,688
Cost of revenues	(2,800)	(2,725)	(2,661)	The increase in 2020 compared to 2019 mainly derived from an increase in the cost of the equipment that was sold in the cellular segment, the first-time consolidation of Golan, and an increase in costs of connectivity fees as a result of an increase in call minutes. This increase was partially offset against a decrease in the wholesale market costs as a result of a retrospective update of Bezeq’s tariffs. The increase in 2019 compared to 2018 mainly derived from an increase in the costs of equipment sold in the fixed-line segment, an increase in the cost of content in the television services, and an increase in costs related to the internet services as a result of increased use.

Section	As of December 31			Board of directors’ explanation
	2020	2019	2018
	In NIS millions

Gross profit	876	983	1,027
Gross profit rate from total revenues	23.8%	26.5%	27.8%
General and administrative sale and marketing costs	(937)	(939)	(927)	The decrease in 2020 compared to 2019 mainly derived from a decrease in salary costs as a result of the temporary closure of the frontal sale points 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 in Q4 of 2019. This decrease was offset against an increase in the Company’s depreciation and devaluation costs and from Golan’s first-time consolidation. The increase in 2019 compared to 2018 mainly derived from an increase in depreciation costs from assets that were capitalized for the costs of acquiring customers, and it was partially offset against a decrease in salary costs and costs for bad debt.
Other (costs) revenues, net	38	(20)	1	In 2020 the other revenue was from revenue from interest for selling equipment at credit and other revenue from performing contracting work of deploying the fiber optics network vis-à-vis other costs in 2019, mainly for a voluntary retirement plan for employees. The increase in 2019 compared to 2018 mainly derived from costs for a voluntary retirement plan, which was partially offset against a recorded profit from selling fiber-optic infrastructure in residential areas to IBC.

Section	As of December 31			Board of directors’ explanation
	2020	2019	2018
	In NIS millions

Operating  (Loss)profit	(23)	24	101
Financing costs, net	(172)	(144)	(171)	The increase in 2020 compared to 2019 mainly derived from losses in the 2020 investments portfolio compared to profits in the previous year that was partially offset by a decrease in interest costs for 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.
Share in the losses of investee companies	(14)	(10)	-
Loss before taxes on revenue	(209)	(130)	(70)
Tax revenues (costs)	39	23	6	The increase in 2020 compared to 2019, and in 2019 compared to 2018 mainly derived from an increase in losses for tax purposes and a recognition of deferred taxes for expected tax benefits.
profit (loss) for the period	(170)	(107)	(64)

3.2.

Below is a summary of the reports on the total profit for each quarter of 2020 (in NIS millions):

Section	Q1	Q2	Q3	Q4	Annual
Revenue from services	682	683	695	738	2,798
Revenue from equipment	210	172	261	235	878
Total revenue	892	855	956	973	3,676
Cost of revenue	644	664	744	748	2,800
Gross profit	248	191	212	225	876
Rate of gross profit from total revenue	27.8%	22.3%	22.2%	23.1%	23.8%
Sale and marketing, administrative, and general costs	235	220	227	255	937
Other revenue (costs), net	5	7	9	17	38
Operating profit (loss)	18	(22)	(6)	(13)	(23)
Financing costs, net	64	34	32	42	172
Share of investee companies’ losses	(5)	(2)	(2)	(5)	(14)
Losses before taxes on revenue	(51)	(58)	(40)	(60)	(209)
Tax revenue	8	12	3	16	39
Total comprehensive loss for the period	(43)	(46)	(37)	(44)	(170)

3.3.

Below is analysis of operating results during quarters (in NIS millions):

	Q4 2020	Q4 2019	Explanation
Revenue from services	738	694	The increase in revenues mainly as aresult of  Golan's initial consolidation and an increase in Internet and tv revenues, which was partially offset by a decrease in revenues from the roaming services due to Corona crisis
Revenue from equipment	235	238	Decrease in sales of equipmemt in the  fixed segment that partially ofset from an increase in revenue from handsets in the cellular segment
Total revenue	973	932
Cost of revenue	748	692	The increase mainly resulted from Golan initial consolidation and an increase in the costs of connectivity fees as a result of an increase in usage.
Gross profit	225	240
Rate of gross profit from total revenue	23.1%	25.8%
Sale and marketing, administrative, and general costs	255	226	The increase was due to initial consolidation and an increase in advertising expenses.
Other revenue (costs), net	17	(41)	The fourth quarter of 2019 included a provision of the voluntary retirement program of employees.
Operating profit (loss)	(13)	(27)
Financing costs, net	42	34	The fourth quarter of 2019 included profit from the investment portfolio.
Share of investee companies’ losses	(5)	(6)
Losses before taxes on revenue	(60)	(67)
Tax revenue	16	13
Total loss for the period	(44)	(54)

3.4.

Below is central financial data according to segments of activity (in NIS millions):

	Cellular			Fixed-line			Inter-segment adjustments
	2020	2019	Change in %	2020	2019	Change in %	2020	2019
Revenue from services	1,660	1,679	(1.1)%	1,306	1,258	3.8%	(168)	(161)
Revenue from equipment	704	661	6.5%	174	271	(35.8)%	-	-
Total revenue	2,364	2,340	1.0%	1,480	1,529	(3.2)%	(168)	(161)
Adjusted EBITDA2	525	627	(16.2)%	393	313	16.4%	-	-
Adjusted EBITDA as a percentage of total revenue	22.2%	26.8%	(17.2)%	26.6%	20.5%	29.8%

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² See definition in Section 4 below.

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	Cellular			Fixed-line			Inter-segment adjustments
	2019	2018	Change in %	2019	2018	Change in %	2019	2018
Revenues from services	1,679	1,730	(2.9)%	1,258	1,215	3.5%	(161)	(161)
Revenues from equipment	661	655	0.9%	271	249	8.8%	-	-
Total revenue	2,340	2,385	(1.9)%	1,529	1,464	4.4%	(161)	(161)
Adjusted EBITDA2	627	418	50.0%	313	269	16.4%	-	-
Adjusted EBITDA as a percentage of total revenue	26.8%	17.5%	53.1%	20.5%	18.4%	11.4%

 

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4.	Operational and financial indicators (KPIs) –

 

4.1.

As of the Report date, the Company’s management is assisted by financial performance indicators that are not based on accepted accounting rules, for evaluating, tracking, and presenting the Company’s financial performance. These indicators do not constitute a substitute for the information included in the Company’s financial statements. Below are the details of the indicators:

 

Indicator	Calculation/components	Details of the indicator’s purposes	Data
Adjusted EBITDA	Represents the net profit before: Interest (net financing costs), taxes, other revenues (costs) that are not part of the Company’s current activity, depreciation and amortization, profits (losses) from affiliated companies and share-based payments.	The Company presents this indicator as an additional performance indicator, since it believes that it enables operational performance comparisons between periods and between companies, while neutralizing potential discrepancies arising from differences in the capital structure, taxes, age of fixed assets and amortization costs therefor. The adjusted EBITDA does not take into account the requirement of the debt service and additional obligations, including capital investments, and therefore it does not necessarily indicate the amounts to be available for the Company’s use. In addition, no comparison can be made between the adjusted EBITDA and the indicators that are similarly referred to and that are reported by other companies due to a change in the calculation of these indicators.	See Section 4.2 below.
Available cashflow	Net cash deriving from current activity plus the proceeds from selling fixed assets or investments, which are related to the day-to-day business, and less cash used for investment activity in fixed assets or other assets, less payments for leases. The free cash flow does not include investments in subsidiaries.	The Company presents this indicator as an additional performance indicator, since it believes that it enables comparisons between the cash production rate from the operational activity and periods, while neutralizing potential discrepancies arising from differences in the capital structure and debt. The free cash flow does not take into account the requirements of the debt service and additional financing activity, and therefore it does not necessarily indicate the amounts to be available for the Company’s use. In addition, no comparison can be made between the free cash flow and the indicators that are similarly referred to and that are reported by other companies due to a change in the calculation of these indicators.	See Section 4.3 below.

 

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4.2.

Below are details on the adjustments between the Company’s net profit and adjusted EBITDA in 2020, 2019 and 2018 (in NIS millions):

 

Indicator	For the one year period ended December 31
	2020	2019	2018
Net profit (loss)	(170)	(107)	(64)
Taxes on revenues (tax benefit)	(39)	(23)	(6)
Financing costs, net	172	144	171
Other revenues (costs), net	(3)	10	-
Depreciation and amortization	924	898	584
Losses from affiliated companies	14	10	-
Share-based payment	20	8	2
Adjusted EBITDA	918	940	687

 

4.3.

Below are details on the data regarding the Company’s free cash flow in the reporting periods (in NIS millions):

 

Section	2020	2019	2018
Net cash deriving from operating activities(*)	704	756	769
Cash used for investment activities	(454)	(546)	(588)
Sale of fiber-optic network (***)	-	181	-
Free cash flow	250	391	181

 

(*) Includes lease and interest payments that were included in the framework of the financial statements in the cash flow from financing activity, according to the provisions of IFRS 16.

 

(**) When neutralizing the Golan (Total of NIS 613 million ) acquisition and costs deriving from the transaction.

 

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4.4.

As of the Report date, the Company’s management is assisted by operational performance indicators that are not based on accepted accounting rules, for evaluating, tracking, and presenting each segments operational performance. Below are the details of the indicators for 2020, 2019 and 2018:

 

Central operational indicators - cellular segment:

Indicator	For the one year period ended December 31			Company’s explanations
	2020	2019	Change in %
No. of cellular subscribers at the end of the period (in thousands)3	3,204	2,744	16.8%	The increase in the list of subscribers in 2020 derives from the inclusion of Golan subscribers after the completion of its acquisition.
Churn rate of cellular subscribers (in %)4	40.2%	48.8%%	(17.6) %
Average monthly revenues per cellular subscriber (ARPU)5 (in NIS)	47.3	50.7	(6.7)%	The erosion of ARPU mainly derives as a result of the decrease in roaming revenues following the Coronavirus Crisis.

 

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³ The subscribers list data refers to “active” subscribers. For purpose of the subscriber list, one “subscriber” is one line. The Company adds a subscriber to the subscribers list when it joins the service. A subscriber that pays in advance is added to the subscribers list only on the date the charge card is charged. A subscriber that ceased being an “active” subscriber is a subscriber that does not generate revenue and activity on the Cellcom network for six consecutive months. Until Q3 of 2020 (including), the list also included data subscribers (data communications). Starting from the end of Q1 2019 and until such change, a data subscriber ceased being an “active” subscriber if it used at least 0.5 gigabytes or generated cumulative revenue of at least NIS 1, during a six month period. Ceasing to include data subscribers in the list of active subscribers led to the erasure of 460,000 active subscribers from the Company’s list of subscribers in Q4 of 2020. In addition, since the end of Q1 2019, the Company made changes to the definition, so that with respect to subscribers that pay in advance, ‘inactivity’ includes only receiving text messages (SMS) within the Cellcom network. The changes made at the end of Q1 2019 led to the erasure of 153,000 active subscribers from the Company’s subscribers list. To the best of the Company’s knowledge, the six months policy is consistent with the policies adopted by other cellular providers in Israel, but the policy of counting the subscribers is not identical between the various cellular providers (the main difference refers to the manner of counting the data subscribers).

⁴ The churn rate is calculated according to the ratio of cellular subscribers who disconnected from the Company’s services (whether as a result of the subscriber initiating the disconnection or the Group doing so) and of subscribers who became inactive during the period, and the remaining active subscribers at the beginning of the period. The churn rate does not include the subscriber erasure of 2020 and 2019 as aforementioned.

⁵ ARPU is calculated by dividing the total average monthly revenues from cellular services for the period, by the number of average active subscribers for the period. Revenues from cellular services inter alia include revenues from roaming services and from hosting and network sharing revenue, and monthly revenues from repair services, but they do not include revenues from occasional repair services and from the sale of equipment.

 

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Indicator	For the one year period ended December 31			Company’s explanations
	2019	2018	Change in %
No. of cellular subscribers at the end of the period (in thousands)	2,744	2,851	(3.8)%	The decrease in 2019 mainly derived from erasing 153,000 subscribers from the Company’s subscription list at the end of Q1 2019, due to a change in the counting method of the Company’s cellular subscribers list. The erased subscribers yielded negligible revenue for the Company. The Company’s subscription list, when neutralizing such erasure, increased by approximately 46,000 net subscribers.
Churn rate of cellular subscribers (in %)	48.8%	43.2%	13.0%
Average monthly revenues per cellular subscriber (ARPU) (in NIS)	50.7	51.3	(1.2)%	The decrease in ARPU, arises inter alia from the ongoing erosion of cellular services tariffs, as a result of intense competition in the cellular market.

 

Central operational indicators – Fixed-line segment:

 

Indicator	For the one year period ended December 31					Company’s explanations
	2020	2019	2018	Change in % 2019-2020	Change in % 2018-2019
Internet infrastructure - no. of subscribers (households) as of the end of the period (in thousands)6	293	278	269	5.4%	3.3%	The increase in the number of subscribers is a result of the Group’s continued growth in this area.
Television - no. of subscribers at the end of the period (in thousands)7	252	258	219	(2.3)%	17.8%	The decrease in the number of subscribers derived from a change to the way the subscribers list is counted and the erasure of 17,000 subscribers as a result thereof.

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⁶ The subscribers data refers to "active" subscribers. As of the date of this report, the subscribers base is approximately 297,000 subscribers.

⁷ The subscribers data refer to "active" subscribers. As from the first quarter of 2020, subscribers holding the Cellcom TV Light application will been included in the base only from activating the service. As a result, the company deleted approximately 14,000 active customers. In the second quarter of the year 2020, the Company changed the counting method in the way that subscribers with Cellcom tv light application will be counted only when they activate the service. The Company applied the change retroactively, and as a result, the company erased approximately 14 thousands subscribers from its active customer base.

 

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5.	First implementation of International Financial Reporting Standard No. 16 (IFRS 16)

 

In 2019, the Company for the first time implemented IFRS 16 that deals with recognizing, measuring, presenting and disclosing leases, which mainly has a significant effect on the balance sheet accounting treatment that is implemented by the leasing party in the lease transaction. For more information about the implementation of the standard and its effect on the results and balance sheet sections in the Company’s financial statements, see Note 1.F.2 to the Company’s Financial Statements.

 

6.

Liquidity

 

6.1.

Below are the board of directors’ explanations on the Company’s liquidity situation for 2018, 2019 and 2020 (in NIS millions):

 

Section	2020	2019	2018	Board of directors’ explanation
Cash flow from current activities	960	1,036	770	The decrease in 2020 compared to 2019 derived from an increase in the Company’s net loss for 2020, cash flow costs for the voluntary retirement plan, and an increase in payments for rights to use the fiber optics infrastructure. The increase in 2019 compared to 2018 derived from an increase in the depreciation and amortization costs as a result of implementing IFRS 16.
Cash flow from investment activities	(982)	(560)	(631)	The increase in 2020 compared to 2019 mainly derived from acquiring Golan. The decrease in 2019 compared to 2018 mainly derived from the sale of the Company’s fiber-optic infrastructure to an affiliated company, which was offset against an investment in an affiliated company.
Cash flow (used) derived from financing activities	(265)	(672)	537	The decrease in 2020 compared to 2019 mainly derived from receipts from exercising options from capital issues and as a result of a public issue and private placement of the Company’s debentures that were conducted in 2020, as set forth in Sections 1.3.1 and 1.3.6 above. The cash flow in 2019 derives from the repayment of debentures and loans, and from payments for a lease that are classified as cash flow from financing activity as a result of implementing IFRS 16, which were offset against the issue of capital that was made this year. The positive financing cash flow in 2018 is a result of the issue of debentures and capital that were made that year, which were offset against the repayment of debentures and loans.
Balance of cash and cash equivalents as of the end of the period	719	1,006	1,202