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012 Smile.Communications Reports Financial Results for Q4 and Full Year 2007

For 2007: Record Revenues of NIS 1.1 Billion With a 14% Rise in Core

Broadband Business

Merger Paying Off: Q4 Gross Margin of 33% & Record 23% EBITDA Margin


PETACH TIKVA, Israel, February 26 /PRNewswire-FirstCall/ -- 012 Smile.Communications (NASDAQ Global Market and TASE: SMLC), a growth-oriented provider of communication services in Israel, today reported its financial results for the fourth quarter and full year ended December 31, 2007.

2007 Highlights

- Record revenues of NIS 1.1 billion ($287.1 million) in line with merger projections - core broadband revenues grew by 14% for the 12 month period

- Significant margin improvement reflecting synergies of merger and reduced proportion of hubbing revenues- Gross margin reached 31% for 2007 compared with 27% (pro-forma) for 2006; and 33% for the fourth quarter compared to 25% (pro-forma) for Q4 2006. Adjusted EBITDA margin rose to 22% for the year and 23% for Q4, compared to 18% (pro-forma) for the full year of 2006 and 17% for the Q4 2006.

- VOB-based domestic telephony business growing in line with plans - expected to become a major growth engine

- Significant improvement in capital structure due to IPO: Cash and equivalents increased from NIS 38.0 million at the end of 2006 to NIS 229.9 million at the end of 2007 and bank debt decreased from NIS 331.6 million to NIS 4.8 million.

Results for the Twelve Month Period

Revenues for the full year ended December 31, 2007 were NIS 1,102.9 million ($286.7 million), an increase of 221% compared with NIS 343.1 million recorded in 2006. On a pro-forma basis, this represented an increase of 6.2%. Excluding hubbing (low margin wholesale traffic) revenues, which declined significantly in 2007 compared to 2006 according to Management decision to de-emphasize this low margin business, revenues for the year increased by 13%, reflecting a /p>

Current maturities of long-term

obligations 3,558 11,497 925

Payables in respect of 012

acquisition - 584,621 -

Account payables 156,332 149,020 40,648

Loan from the Parent Company 105,733 - 27,492

Other payables and accrued

expenses 102,096 66,322 26,546

Total current liabilities 372,469 1,143,099 96,846

Long-term liabilities

Debentures 437,460 - 113,744

Long-term obligations 2,836 2,871 737

Long-term trade and other payables 20,458 1,365 5,320

Deferred taxes 41,526 49,855 10,797

Liability for employee severance

benefits 32,318 29,823 8,403

Total long-term liabilities 534,598 83,914 139,001

Total liabilities 907,067 1,227,013 235,847

Shareholders' equity and parent

company investment 655,108 144,549 170,335

Total liabilities shareholders'

equity and parent company

investment 1,562,175 1,371,562 406,182

012 Smile.Communications Ltd.

Consolidated Statements of Operations




U.S. dollars

$1 = NIS


Year ended

Year ended December 31 December 31

2007 2006 2005 2007

(Unaudited) (Audited) (Audited) (Unaudited)

NIS thousands $ thousands

Revenues 1,102,888 343,086 244,376 286,762

Costs and expenses

Cost of revenues 760,705 224,565 136,856 197,791

Selling and marketing

expenses 157,304 59,864 60,595 40,901

General and administrative

expenses 57,984 22,921 22,859 15,076

Impairment and other

charges 10,433 10,187 - 2,713

Total costs and expenses 986,426 317,537 220,310 256,481

Income from operations 116,462 25,549 24,066 30,281

Financial expenses, net 52,043 17,266 5,342 13,532

Income before tax expenses 64,419 8,283 18,724 16,749

Tax expenses 23,462 10,315 6,972 6,100

Net income 40,957 (2,032) 11,752 10,649

Income (loss) per share

Basic and diluted earnings

per share (in NIS) 2.1 (0.11) 0.64 0.55

Weighted average number

of ordinary shares used

in calculation of basic

and diluted earnings

per share 19,493,329 18,370,000 18,370,000 19,493,329

012 Smile.Communications Ltd.

Reconciliation Table of Non-GAAP Measures

Year ended December 31

2007 2006


NIS thousands

GAAP operating income 116,462 25,549


Amortization of acquired intangible assets 31,938 -

Non-recurring expenses 10,433 10,187

Non-GAAP adjusted operating income 158,833 35,736

GAAP tax expenses (benefit), net 23,462 10,315


Amortization of acquired intangible assets

included in tax expenses, net 9,262 -

Non-GAAP tax expenses (benefit), net 32,724 10,315

Net income (loss) as reported 40,957 (2,032)

Taxes on income 23,462 10,315

Non-recurring expenses 10,433 10,187

Financial expenses 52,043 17,266

Depreciation and amortization 110,243 11,297

Adjusted EBITDA 237,138 47,033

For further information, please contact:

Ms. Idit Azulay

012 Smile.Communications Ltd


14% increase in core broadband activities.

Note: pro-forma results are provided to assist the reader in comparing the Company's 2007 results, which include the full contribution of its merger with 012 Golden Lines, with 2006 results, which were before the merger. Pro-forma results combine 012 Golden Lines' results for 2006 with Smile.Communications' results for the same period, together with certain adjustments made according to U.S. GAAP (Generally Accepted Accounting Principles) to give effect to the Company's acquisition of 012 Golden Lines, including amortization and financial expenses resulting from the acquisition, as if it occurred on January 1, 2006.

Adjusted EBITDA(A) for 2007 increased by 24% to NIS 237.1 million ($61.6) million compared with NIS 191.7 million in 2006 on a pro-forma basis. Adjusted EBITDA margin for the year was 22% compared with 18% in 2006 on a pro-forma basis.

Net income for the full year December 31, 2007 was NIS 41.0 million ($10.7 million), or NIS 2.10 ($0.55) per share, compared with a net loss of NIS 2.0 million, or NIS 0.11 per share, for 2006. On a pro-forma basis, the Company recorded a net loss of NIS 12.1 million, or NIS 0.55 per share, for 2006, reflecting adjustments made in accordance to U.S. GAAP to give effect to amortization and financial expenses resulting from the Company's acquisition of 012 Golden Lines.

For a detailed reconciliation of GAAP to non-GAAP financial information and for more information regarding the use of non-GAAP financial measures, please see the table titled "Reconciliation Table of Non-GAAP Measures" as well as the notes contained in this press release.

Results for the Fourth Quarter

Revenues for the fourth quarter of 2007 were NIS 271.3 million ($70.5 million) a 179% increase compared with NIS 97.1 million for the fourth quarter of 2006, and a 3% decrease compared with pro-forma revenues for the fourth quarter of 2006. Excluding revenues from hubbing traffic, which declined significantly in the second half of 2007 compared to 2006 as explained above, revenues for the quarter increased by 11%, reflecting a 14% increase in core broadband activities.

Adjusted EBITDA(A) for the fourth quarter increased by 30% to NIS 61.3 million ($15.9) million compared with NIS 47.1 million in the fourth quarter of 2006 on a pro-forma basis. Adjusted EBITDA margin for the quarter was 23% compared with 17% in the fourth quarter of 2006 on a pro-forma basis.

Net income for the fourth quarter of 2007 was NIS 7.5 million ($1.9 million), or NIS 0.33 ($0.09) per share, compared to a net loss of NIS (12.1) million, or NIS (0.66) per share, recorded in the fourth quarter of 2006. On a pro-forma basis, the Company recorded a net loss of NIS (17.0) million, or NIS (0.77) per share, for the fourth quarter of 2006.

Segment Overview

Broadband: fourth quarter revenues from core broadband activities were NIS 131.3 million ($34.1 million), an increase of 169% compared with NIS 48.9 million for the fourth quarter of 2006. On a pro-forma basis, this represented an increase of 14%.

The Company has ramped up the marketing of its domestic VOB-based telephony services, connecting new subscribers at a rate in line with a plan aimed at achieving 5% market share by the end of 2009. These efforts are benefiting from the number portability program launched by Israel's Ministry of Communications on December 2, 2007, an initiative designed to make it easier for customers to switch service providers.

The Company continues to build its reputation as one of the market's most technologically advanced IT integrators. During the quarter, it won a major contract to deploy an extensive Wi-Fi Internet Access system for Tel Aviv's Sheba Medical Center, and after the quarter a major competitive tender from Israel's Airport Authority to become its exclusive provider of international telephony services. In addition, after the quarter the Company was granted a five-year license to provide endpoint network services at its customers' premises, enabling it to provide complete, end-to-end communications solutions.

- Traditional telephony: fourth quarter revenues from traditional telephony services were NIS 140.0 million ($36.4 million), an increase of 190% compared with NIS 48.3 million for the fourth quarter of 2006. On a pro-forma basis, this represented a decrease of 14%.

In general, the Company's incoming and outgoing international long-distance telephony activities continue to be a strong and steady cash generator for the Company. In contrast, its revenues from hubbing activities are subject to market fluctuations and contract opportunities available to the Company at any specific point in time. Although Management intends to continue pursuing hubbing contracts as an avenue for profiting from its existing network capacity, it does not view hubbing as a core activity, and expects hubbing revenues to continue to vary from quarter to quarter.

Comments of Management

Commenting on the results, Ms. Stella Handler, CEO of 012 Smile.Communications, said, "2007 was an exciting year during which we completed the merger of our two companies, launched domestic telephony services, listed our shares on the Nasdaq and TASE exchanges, and carried out an optimization process on our operating structure - all while achieving strong, continuous growth of our core broadband services. The success of these efforts has established our company as one of Israel's major communications providers, and 012 Smile as one of the market's strongest brands. Our goal in the year ahead is to take full advantage of our brand, technological leadership and lean cost structure as we expand the market share of our existing businesses, establish a strong presence in the domestic telephony market, and continue to examine WiMAX feasibility."

Reconciliation Between Results on a GAAP and Non-GAAP Basis

Reconciliation between the Company's results on a GAAP and non-GAAP basis is provided in a table immediately following the Consolidated Statement of Operations (Non-GAAP Basis). Non-GAAP financial measures consist of GAAP financial measures adjusted to exclude amortization of acquired intangible assets, as well as certain business combination accounting entries. The purpose of such adjustments is to give an indication of our performance exclusive of non-cash charges and other items that are considered by management to be outside of our core operating results. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. We believe these non-GAAP financial measures provide consistent and comparable measures to help investors understand our current and future operating cash flow performance. These non-GAAP financial measures may differ materially from the non-GAAP financial measures used by other companies. Reconciliation between results on a GAAP and non-GAAP basis is provided in a table immediately following the Consolidated Statement of Operations.



EBITDA is a non-GAAP financial measure generally defined as earnings before interest, taxes, depreciation and amortization. We define adjusted EBITDA as net income before financial income (expenses), net, impairment and other charges, income tax expenses, depreciation and amortization. On a pro forma basis, we define adjusted EBITDA as net income before financial income (expenses), net, impairment and other charges, income tax expenses, depreciation and amortization and income from discontinued operations.

We present adjusted EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structure (most particularly affecting our interest expense given our recently incurred significant debt), tax positions (such as the impact of changes in effective tax rates or net operating losses) and the age of, and depreciation expenses associated with, fixed assets (affecting relative depreciation expense). Adjusted EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations or cash flow data prepared in accordance with GAAP as a measure of our profitability or liquidity. Adjusted EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. In addition, adjusted EBITDA, as presented in this press release, may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated.

B: Convenience Translation to Dollars

For the convenience of the reader, the reported NIS figures of December 31, 2007 have been presented in thousands of U.S. dollars, translated at the representative rate of exchange as of December 31, 2007 (NIS 3.8460 = U.S. Dollar 1.00). The U.S. Dollar ($) amounts presented should not be construed as representing amounts receivable or payable in U.S. Dollars or convertible into U.S. Dollars, unless otherwise indicated

About 012 Smile.Communications

012 Smile.Communications is a growth-oriented communication services provider in Israel with a leading market position, offering a wide range of broadband and traditional voice services. Its broadband services include broadband Internet access with a suite of value-added services, specialized data services and server hosting, as well as new innovative services such as local telephony via voice over broadband and a WiFi network of hotspots across Israel. Traditional voice services include outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. 012 Smile.Communications services residential and business customers, as well as Israeli cellular operators and international communication services providers through its integrated multipurpose network, which allows it to provide services to almost all of the homes and businesses in Israel.

012 Smile is a 72.4 % owned subsidiary of Internet Gold Golden Lines Ltd. (NASDAQ: IGLD) one of Israel's leading communications groups with a major presence across all Internet-related sectors. In addition to 012 Smile, its 100% owned Smile.Media subsidiary manages a growing portfolio of Internet portals and e-Commerce sites. Internet Gold and 012 Smile are part of the Eurocom Communications Group. 012 Smile's shares trade on the NASDAQ Global Market and on the Tel Aviv Stock Exchange.

For additional information about 012 Smile.Communications Ltd., please visit the Company's investors' site at

Forward-Looking Statements

This press release contains forward-looking statements that are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, general business conditions in the industry, changes in the regulatory and legal compliance environments, the failure to manage growth and other risks detailed from time to time in 012 Smile.Communications' filings with the Securities Exchange Commission. These documents contain and identify other important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Stockholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statement.

012 Smile.Communications Ltd.

Consolidated Balance Sheets




U.S. dollars

$1 = NIS


December 31 December 31

2007 2006 2007

(Unaudited) (Audited) (Unaudited)

NIS thousands $ thousands

Current assets

Cash and cash equivalents 229,895 37,987 59,775

Short-term investments - 883 -

Trade receivables, net 190,604 193,852 49,559

Parent company receivable 6,553 325 1,704

Related parties receivables 2,161 2,012 562

Prepaid expenses and other

current assets 19,804 21,920 5,149

Deferred taxes 7,247 3,445 1,884

Total current assets 456,264 260,424 118,633


Long-term trade receivables 3,460 2,951 900

Deferred taxes 14,648 15,650 3,809

Assets held for employee

severance benefits 18,453 15,924 4,798

Total Investments 36,561 34,525 9,507

Property and equipment, net 160,211 155,367 41,656

Other assets, net 295,592 276,219 76,857

Other intangible assets, net 202,376 234,871 52,620

Goodwill 411,171 410,156 106,909

Total assets 1,562,175 1,371,562 406,182

012 Smile.Communications Ltd.

Consolidated Balance Sheets (cont'd)




U.S. dollars

$1 = NIS


December 31 December 31

2007 2006 2007

(Unaudited) (Audited) (Unaudited)

NIS thousands $ thousands

Current liabilities

Short-term bank credit 4,750 331,639 1,235<

SOURCE 012 Smile.communications Ltd.
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