Company Quick10K Filing
Cellcom Israel
20-F 2019-12-31 Filed 2020-03-23
20-F 2018-12-31 Filed 2019-03-18
20-F 2017-12-31 Filed 2018-03-26
20-F 2016-12-31 Filed 2017-03-20
20-F 2015-12-31 Filed 2016-03-21
20-F 2014-12-31 Filed 2015-03-16
20-F 2013-12-31 Filed 2014-03-06
20-F 2012-12-31 Filed 2013-03-04
20-F 2011-12-31 Filed 2012-03-07
20-F 2010-12-31 Filed 2011-03-15
20-F 2009-12-31 Filed 2010-03-02

CEL 20F Annual Report

Item 17 ☐
Item 18 ☐
Part I
Item 1. Identity of Directors, Senior Management and Advisors
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part II
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1 - Reporting Entity
Note 2 - Basis of Preparation of The Financial Statements
Note 2 - Basis of Preparation of The Financial Statements (Cont'D)
Note 3 - Significant Accounting Policies
Note 3 - Significant Accounting Policies (Cont'D)
Note 4 - Fair Value
Note 5 - Financial Risk Management
Note 5 - Financial Risk Management (Cont'D)
Note 6 - Operating Segments
Note 6 - Operating Segments (Cont'D)
Note 7 - Subsidiaries
Note 8 - Equity Accounted Investees and Joint Operations
Note 9 - Cash and Cash Equivalents
Note 10 - Trade and Other Receivables
Note 11 - Inventory
Note 12 - Property, Plant and Equipment, Net
Note 13 - Intangible Assets and Others, Net
Note 13 - Intangible Assets and Others, Net (Cont'D)
Note 14 - Leases
Note 14 - Leases (Cont'D)
Note 15 - Trade Payables and Accrued Expenses
Note 16 - Provisions
Note 17 - Other Payables, Including Derivatives
Note 18 - Other Long-Term Liabilities
Note 19 - Debentures and Long-Term Loans From Financial Institutions
Note 19 - Debentures and Long-Term Loans From Financial Institutions (Cont'D)
Note 20 - Liability for Employee Rights Upon Retirement, Net
Note 21 - Capital and Reserves
Note 22 - Share-Based Payments
Note 22 - Share-Based Payments (Cont'D)
Note 23 - Financial Instruments
Note 23 - Financial Instruments (Cont'D)
Note 24 - Revenues
Note 25 - Cost of Revenues
Note 26 - Selling and Marketing Expenses
Note 27 - General and Administrative Expenses
Note 28 - Other Income (Expenses), Net
Note 29 - Financing Income and Expenses
Note 30 - Income Tax
Note 30 - Income Tax (Cont'D)
Note 31 - Commitments
Note 31 - Commitments (Cont'D)
Note 32 - Contingent Liabilities
Note 32 - Contingent Liabilities (Cont'D)
Note 33 - Regulation and Legislation
Note 33 - Regulation and Legislation (Cont'D)
Note 34 - Related Parties
Note 34 - Related Parties (Cont'D)
Note 35 - Operating Leases
Note 36 - Subsequent Events
Note 36 - Subsequent Events (Cont'D)
EX-2.1.1 exhibit2_1-1.htm
EX-4.13 exhibit_4-13.htm
EX-4.16 exhibit_4-16.htm
EX-8.1 exhibit_8-1.htm
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-13.1 exhibit_13-1.htm
EX-15.1 exhibit_15-1.htm
EX-15.1 exhibit_15-2.htm

Cellcom Israel Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 zk2024169.htm 20-F
 
UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C.  20549
 
FORM 20–F
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to __________________        
 
OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Commission file number 001-33271
 
CELLCOM ISRAEL LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)
 
ISRAEL

(Jurisdiction of incorporation or organization)
 
10 Hagavish Street, Netanya  4250708, Israel

Address of principal executive offices)
 
Liat Menahemi Stadler, 972-52-9989595 (phone), 972-98607986 (fax), LIATME@cellcom.co.il, 10 Hagavish Street, Netanya 4250708, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
Trading Symbol
Name of each exchange on which registered
Ordinary Shares, par value NIS 0.01 per share
(CEL)
New York Stock Exchange (NYSE)

Securities registered or to be registered pursuant to Section 12(g) of the Act.
 
None

(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 
None

(Title of Class)
 

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

As of December 31, 2019, the Registrant had outstanding 147,288,446 Ordinary Shares, par value NIS 0.01 per share.

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

☐ Yes     ☒ No

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

☐ Yes     ☒ No

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

☒ Yes    ☐ No

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

☒ Yes    ☐ No

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

Large accelerated filer  ☐
Accelerated filer ☒
Non-accelerated filer ☐
Emerging growth company ☐

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

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

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

U.S. GAAP ☐

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

Other ☐

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

Item 17 ☐

Item 18 ☐

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

☐ Yes     ☒ No
 
 (Applicable only to Issuers involved in bankruptcy proceedings during the past five years).
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 

☐ Yes      ☐ No

2

TABLE OF CONTENTS
   
Page
 
PART I
 
5
5
5
31
72
73
103
132
135
The Offer and Listing          
138
139
152
153
PART II
153
153
153
155
155
155
156
156
156
157
PART III
157
157
158
Financial Statements          
F-1

3


INTRODUCTION
 
In this annual report, “Cellcom,” the “Company,” “we,” “us” and “our” refer to Cellcom Israel Ltd. and its subsidiaries.  The terms “NIS” refers to new Israeli shekel, and “dollar,” “USD” or “$” refers to U.S. dollars. The term "Companies Law" shall mean the Israeli Companies Law of 1999.
 
Presentation of Financial and Share Information
 
We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board ("IASB").

Unless we indicate otherwise, U.S. dollar translations of the NIS amounts presented in this annual report are translated for the convenience of the reader using the rate of NIS 3.456 to $1.00, the representative rate of exchange as of December 31, 2019 as published by the Bank of Israel. The translation is for the convenience of the reader only, and it does not represent the fair value of the translated assets and liabilities.
 
Trademarks
 
We have proprietary rights to trademarks used in this annual report which are important to our business. We have omitted the “®” and “™” designations for certain trademarks, but nonetheless reserve all rights to them.  Each trademark, trade name or service mark of any other company appearing in this annual report belongs to its respective holder.
 
Industry and Market Data
 
This annual report contains information about our market share, market position and industry data. Unless otherwise indicated, this statistical and other market information is based on statistics prepared by the Ministry of Communications of Israel, Brandman Marketing Research and Consultancy Institute, Sapio Research & Development, Pyramid Research, and Meida Shivuki C.I. (survey institute). Industry publications generally state that the information they contain has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. We have not independently verified the accuracy of market data and industry forecasts contained in this annual report that were taken or derived from these industry publications.
 
Special Note Regarding Forward-Looking Statements
 
We have made statements under the captions “Item 3. Key Information - D - Risk Factors,” “Item 4 – Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” and in other sections of this annual report that are forward-looking statements.  In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other comparable terminology.  These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business.  These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Item 3. Key Information - D. Risk Factors.”  You should specifically consider the numerous risks outlined under “Item 3. Key Information - D. Risk Factors.”
 
Although we believe the expectations reflected in the forward-looking statements contained in this annual report are reasonable, we cannot guarantee future results, level of activity, performance or achievements.  Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements.  We assume no duty to update any of these forward-looking statements after the date of this annual report to conform our prior statements to actual results or revised expectations, except as otherwise required by law.
 
4

 
PART I
 
ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 
Not applicable.
 
ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3.          KEY INFORMATION
 
A.            SELECTED FINANCIAL DATA
 
You should read the following selected consolidated financial data in conjunction with the section of this annual report entitled “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements, the notes thereto, the independent registered public accounting firms’ report and the convenience translation of the consolidated financial statements as of and for the year ended December 31, 2019 into U.S. dollars solely for the convenience of the reader, included elsewhere in this annual report.
 
The selected data presented below under the captions “Income Statement Data” and “Statement of Financial Position Data” for, and as of the end of, each of the years in the five-year period ended December 31, 2019, are derived from the consolidated financial statements of Cellcom Israel Ltd. and subsidiaries. The consolidated financial statements as of December 31, 2018 and 2019, and for each of the years in the three-year period ended December 31, 2019, and the report thereon, are included elsewhere in this annual report. Data for 2016 and 2015, and the selected consolidated balance sheet data as of December 31, 2017, 2016 and 2015, have been derived from our previously reported audited consolidated financial statements, which are not included in this annual report. The selected financial data should be read in conjunction with our consolidated financial statements and accompanying notes and “Operating and Financial Review and Prospects” appearing in Item 5 of this annual report, and are qualified entirely by reference to such consolidated financial statements.
 
5

The information presented below under the caption “Other Data” contains information that partly is not derived from the financial statements.
 
For your convenience, the following tables also contain U.S. dollar translations of the NIS amounts presented at December 31, 2019, translated using the rate of NIS 3.456 to $1.00, the representative rate of exchange on December 31, 2019 as published by the Bank of Israel.
 
   
Year Ended December 31,
 
   
2015
   
2016
     
2017*

   
2018*

   
2019
     
2019
 
   
(In NIS millions, except where indicated otherwise)
   
(In US$ millions)
 
Income Statement Data:
                                           
Revenues          
   
4,180
     
4,027
     
3,871
     
3,688
     
3,708
     
1,073
 
Cost of revenues          
   
2,763
     
2,702
     
2,680
     
2,661
     
2,725
     
788
 
Selling and marketing expenses
   
620
     
574
     
479
     
567
     
610
     
177
 
General and administrative expenses
   
465
     
420
     
426
     
360
     
329
     
95
 
Other income (expenses), net
   
22
     
21
     
*42
     
*1
     
(20
)
   
(6
)
Operating profit          
   
310
     
310
     
*328
     
*101
     
24
     
7
 
Financing expense, net          
   
177
     
150
     
*175
     
*171
     
144
     
42
 
 Tax benefit(tax on Income)
   
(36
)
   
(10
)
   
(40
)
   
6
     
23
     
7
 
Losses of equity
   
-
     
-
     
-
     
-
     
(10
)
   
(3
)
Net income (loss)          
   
97
     
150
     
113
     
(64
)
   
(107
)
   
(31
)
Basic earnings (loss) per share (in NIS)
   
0.95
     
1.47
     
1.11
     
(0.58
)
   
(0.90
)
   
(0.26
)
Diluted earnings(loss) per share (in NIS)
   
0.95
     
1.47
     
1.10
     
(0.58
)
   
(0.90
)
   
(0.26
)
Weighted average ordinary shares used in calculation of basic earnings per share (in shares)
   
100,589,458
     
100,604,578
     
100,654,935
     
107,499,543
     
118,376,455
         
Weighted average ordinary shares used in calculation of diluted earnings per share (in shares)          
   
100,589,530
     
100,698,306
     
100,889,661
     
107,499,543
     
118,376,455
         

(*)The results at and for the years 2017, 2018 have been reclassified regarding a change in accounting policy regarding long term credit transactions
 

Statement of Financial Position Data:
                                               
Cash and cash equivalents
   
761
     
1,240
     
527
     
1,202
     
1,006
     
291
 
Working capital          
   
625
     
1,074
     
692
     
1,269
     
933
     
270
 
Total assets          
   
6,278
     
6,662
     
6,087
     
6,749
     
7,162
     
2,072
 
Total equity          
   
1,185
     
1,340
     
1,441
     
1,677
     
1,887
     
547
 
                                                 
Other Data:
                                               
Adjusted EBITDA(1)          
   
872
     
858
     
*884
     
*687
     
940
     
272
 
Capital expenditures          
   
396
     
382
     
550
     
647
     
562
     
163
 
Dividends declared per share
   
-
     
-
     
-
     
-
                 
Net cash from operating activities
   
836
     
781
     
774
     
770
     
1,036
     
300
 
Net cash used in investing activities
   
(96
)
   
(364
)
   
(644
)
   
(631
)
   
(560
)
   
(162
)
Net cash from (used in) financing activities
   
(1,136
)
   
62
     
(843
)
   
537
     
(672
)
   
(194
)
Cellular Subscribers (in thousands)(2)
   
2,835
     
2,801
     
2,817
     
2,851
     
2,744
     
-
 
Churn rate of cellular subscribers(4)
   
42.0
%
   
42.4
%
   
45.8
%
   
43.2
%
   
48.8
%
       
Cellular ARPU (in NIS)(5)
   
65
     
63
     
57
     
51
     
51
     
14
 
Internet customers  (households) (end of period)  (in thousands)(3)
   
95
     
156
     
222
     
269
     
278
     
-
 
TV customers  (households) (end of period)  (in thousands) (3)
   
63
     
111
     
170
     
219
     
258
         

6



 (1)
Adjusted EBITDA is a non-IFRS measure and is defined as income before financing income (expenses), net; other income (expenses), net (excluding gain from the sale of a subsidiary and expense related to employee retirement plans); income tax; depreciation and amortization and share based payments.  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 significant debt), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age of, and depreciation expenses associated with property, plant and equipment. Adjusted EBITDA should not be considered in isolation or as a substitute for operating income or other statement of operations or cash flow data prepared in accordance with IFRS 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 annual report, may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated.
 
The following is a reconciliation of net income to adjusted EBITDA:
 
   
Year Ended December 31,
 
   
2015
   
2016
   
2017
   
2018
   
2019
   
2019
 
   
(In NIS millions)
   
(In US$ millions)
 
                                     
Net income (loss)          
   
97
     
150
     
113
     
(64
)
   
(107
)
   
(31
)
Financing expense, net          
   
177
     
150
     
175
     
171
     
144
     
42
 
Other expenses (income),net (excluding expense related to employee retirement plans and gain from the sale of a subsidiary );
   
(3
)
   
8
     
(1
)
   
-
     
10
     
3
 
Losses of equity
                                   
10
     
3
 
Tax benefit (tax on income) income
   
36
     
10
     
40
     
(6
)
   
(23
)
   
(7
)
Depreciation and amortization          
   
562
     
534
     
555
     
584
     
898
     
260
 
Share based payments
   
3
     
6
     
2
     
2
     
8
     
2
 
Adjusted EBITDA          
   
872
     
858
     
884
     
687
     
940
     
272
 

As from January 1, 2019 we apply International Financial Reporting Standard 16, Leases (hereinafter: “IFRS 16” or “the standard”), see note 2-F-1-A to our financial statements.
 
 (2)
Cellular subscriber data refers to active subscribers. We use a six-month method of calculating our cellular subscriber base, which means that we add post-paid subscribers to our subscriber base upon their joining our services and prepaid subscribers upon charging a prepaid card and we deduct subscribers from our subscriber base after six months of no revenue generation and activity on our network (for prepaid subscribers, as of the first quarter of 2019, 'no activity' includes only incoming SMS within our network) and no data usage (as of the first quarter of 2019, 'no data usage' means less than 0.5 Gigabyte over a period of 6 months) or less than NIS 1 of accumulated revenues for M2M (machine to machine) subscribers. The six-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel. The 2017 cellular subscriber base includes subscribers added as part of our purchase of the operations of an Israeli Mobile Virtual Network Operator, or MVNO, during the third quarter of 2017. As of the third quarter of 2018, we add M2M subscribers to the cellular subscriber base only upon first use instead of at the time of joining our service as was done until the change. This change did not have a material effect on M2M prior subscriber data. The changes executed at the end of the first quarter 2019, resulted in the deletion of 153,000 subscribers from our cellular subscriber base.
 
 (3)
Internet and TV customers refer to active subscribers. Internet households receive end-to-end internet service, including infrastructure (based on the wholesale landline market) and connectivity services.
 
 (4)
Churn rate is defined as the total number of voluntary and involuntary permanent deactivations of cellular subscribers in a given period expressed as a percentage of the number of cellular subscribers at the beginning of the period.  Involuntary permanent deactivations relate to cellular subscribers who have failed to pay their arrears for the period of six consecutive months.  Voluntary permanent deactivations relate to cellular subscribers who terminated their use of our cellular services. Churn rate data is excluding the above mentioned removals of subscribers.
 
7

(5)
Average monthly revenue per cellular subscriber (ARPU) is calculated by dividing revenues from cellular services for the period by the average number of cellular subscribers during the period and by dividing the result by the number of months in the period.  Revenues from inbound roaming services and hosting and network sharing services are included even though the number of cellular subscribers in the equation does not include the users of those roaming, hosting and network sharing services.  Inbound roaming services, hosting and network sharing services are included because ARPU is meant to capture all service revenues generated by a cellular network. Revenues from repair services pursuant to a monthly subscription, or Subscription Repair Services, are included because they represent recurring revenues generated by cellular subscribers, but revenues from sales of handsets (which for purposes of this report may include other types of cellular end user equipment, such as tablets), non-subscription repair services carried out on a random basis, or Random Repair Service, and other services are not included.  We and industry analysts treat ARPU as a key performance indicator of a cellular operator because it is the closest meaningful measure of the contribution to service revenues made by an average subscriber. The 2019 ARPU was positively affected by the elimination of subscribers during 2019.
 
We have set out below the calculation of cellular ARPU for each of the periods presented:
 

 
Year Ended December 31,
 
   
2015
   
2016
   
2017
   
2018
   
2019
   
2019
 
   
(In NIS millions, except number of subscribers and months)
   
(In US$ millions)
 
Revenues          
   
4,180
     
4,027
     
3,871
     
3,688
     
3,708
     
1,073
 
less revenues from equipment sales
   
1,048
     
994
     
952
     
904
     
932
     
270
 
less other revenues*          
   
869
     
881
     
949
     
1,061
     
1,102
     
319
 
Revenues used in cellular ARPU calculation
   
2,263
     
2,152
     
1,971
     
1,723
     
1,674
     
484
 
Average number of cellular subscribers
   
2,898,987
     
2,832,407
     
2,797,341
     
2,826,013
     
2,752,871
     
2,752,871
 
Months during period          
   
12
     
12
     
12
     
12
     
12
     
12
 
Cellular ARPU (in NIS, per month)          
   
65
     
63
     
57
     
51
     
51
     
15
 


*
Other revenues include revenues from other communications services mainly fixed-line revenues and repair services.
 
B.           CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
C.           REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
D.           RISK FACTORS
 
We believe that the occurrence of any one or some combination of the following factors could have a material adverse effect on our business, financial condition or results of operations.
 
Risks Related to our Business
 
We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results.
 
A substantial part of our operations is subject to the Israeli communications laws and the licenses for the provision of different telecommunications services that we received from the Ministry of Communications in accordance with the Communications Law.  The interpretation and implementation thereof are not certain and subject to change and disagreements have arisen and may arise in the future between the Ministry of Communications, or MOC, and us. The Communications Law and regulations thereunder grant the Ministry of Communications extensive regulatory and supervisory authority with regard to our activities. The MOC may modify our licenses without our consent and in a manner that could limit our freedom to conduct our business and harm our results of operations. Frequent changes, or changes made on a timetable we cannot meet, to our licenses and legislation can increase the risk of noncompliance with our licenses or violation of such legislation and our exposure to lawsuits and regulatory sanctions. The MOC has the authority to impose substantial sanctions in the event of a breach of our licenses or the applicable laws and regulations and the authority to revoke them, in case we materially violate their terms.
 
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Our licenses are limited in time and may be extended upon our request to the Ministry of Communications and its confirmation that we have complied with the provisions of our license and the applicable law, have continuously invested in the improvement of our service and network and have demonstrated the ability to do so in the future.
 
Our operations are also subject to the regulatory and supervisory authority of other Israeli regulators which have the authority to impose criminal and substantial administrative sanctions against us.
 
Further, our business and results of operations could be materially and adversely affected by new legislation and decisions by regulators or the courts that:
 

refuse to approve our acquisition of Golan Telecom Ltd., or Golan, or set unfavorable conditions for such acquisition (see "Item 4. A. History and development of the Company – our history" below), or approve other  mergers or acquisitions in the Israeli communications market, to which the Company is not a party, such as the recently published acquisition proposal of Partner Communications Company Ltd ("Partner") by Hot Telecommunication Systems Ltd ("Hot"), as it may prevent the approval of our acquisition of Golan or other acquisitions or mergers  to which the Company may become a party, or result in the weakening of the Company's competitive standing, including loss of its leading position in the cellular market and related benefits of scale;
 

approve the annulment or further relaxation of the structural separation requirements imposed on the Bezeq communications group, given its monopolistic or duopolistic powers in most areas in which we compete, and also on the Hot communications group (though to a lesser degree, given that Hot already has substantial leniencies despite its monopolistic and duopolistic powers), especially if carried out before an effective landline wholesale market, which includes both telephony and infrastructure, is effected on both Bezeq's and Hot's infrastructure. See also "– We face intense competition in all aspects of our business" below and "Item 4. Information on The Company – B. Business Overview "-Competition";
 

set unfavorable regulation regarding tariffs or influencing tariffs, including high tariffs for wholesale services, increasingly so in light of the rapidly growing demand for data capacity for both internet and television services; or fail to install sufficient mechanisms to prevent Bezeq and Hot from reducing their retail tariffs and thereby reducing the difference between the wholesale and retail tariffs ("margin squeeze"), or fail to enforce regulation with respect to the landline wholesale market adversely affecting our competitive capabilities; See also "Item 4. Information on The Company – B. Business Overview "-Competition" and "– Government Regulations – Fixed-line Segment – Landline";
 
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award our competitors certain benefits and leniencies not available to us, including through waiving, easing or not enforcing requirements set in their  licenses, or not making similar demands or not imposing similar restrictions or any regulation, for example, on foreign participants in the TV market. See also "Item 4. Information on the Company – B. Business Overview – Competition", "– Government Regulations – Cellular Segment” and thereunder: – Mobile Virtual Network Operators" and "Government Regulations – Fixed-line Segment";
 

setting different regulation for similar licenses in the various fields of the communications market, such as annulling Bezeq's obligation of a nationwide deployment while such obligation remains in the cellular market, due to the material economic burden such an obligation imposes. See also "– We face intense competition in all aspects of our business" below and "Item 4. Information on The Company – B. Business Overview "-Competition";
 

do not renew our licenses (or renew them on terms that are not favorable to us);
 

do not renew the allocation of our frequencies (where applicable) or limit our usage thereof or demand that we return frequencies allocated to us or use less frequencies than previously allocated to us, or not allow us to obtain additional frequencies, as such become necessary, or do so under unfavorable terms, or demand that we change frequencies on an unreasonable timetable or bear the costs of such an exchange;
 

de facto prevent us from participating in frequencies tenders by setting prerequisites which we cannot meet; conduct frequencies tenders before we are in need of additional frequencies or before we have the means to participate in such  tenders; set unreasonable terms and conditions which may result in us having to pay sums which will further adversely affect our financial condition, or sums substantially higher than those paid by other contenders in the tender or in us not winning frequencies or winning a smaller quantity of frequencies than the quantity we require; or set deployment requirements for our network, using such new frequencies,  requiring us to make substantial investments, without regard to their economic viability nor to our financial situation; see "As a result of substantial and continuing changes in our regulatory and business environment, our operating results, profitability and cash flow have decreased significantly in the past several years, with a loss for 2018. See "Further decline may adversely affect our financial condition" and "We may be adversely affected by the significant technological and other changes in the telecommunications industry "below and "Item 4. Information on the Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Spectrum allocation;"
 

lower entry barriers and  encourage additional competitors to enter the communications market , such as allowing new contenders to participate in the new frequencies tender and provide 5G services and reducing requirements for obtaining an internet infrastructure service provider license (as proposed in a public hearing), which may further increase the competition in the market; substantially widen the current ability to self-provide communications services;
 
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providing certain communications services currently purchased from licensed operators by the state or entities operating on its behalf;
 

impose new safety or health-related requirements;
 

impose additional restrictions or requirements with respect to the construction and operation of cell sites or the networks (see "We may not be able to obtain permits to construct and operate cell sites" below);
 

refuse to approve other operators' investment in our subsidiary IBC Israel Broadband Company (2013) Ltd.'s, or IBC. See also "Item 4. Information on the Company – B. Business Overview – Network and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure – Investment in IBC";
 

impose restrictions or demand we meet additional requirements on the provision of services or products we provide or regulate or otherwise intervene with the terms under which we advertise, market, price (including changes thereof) or provide them to our subscribers, credit terms, including in respect of existing agreements;
 

allow other operators or  other parties to provide services previously provided only by us to our subscribers;
 

set higher service standards or costly requirements relating to the service we provide our customers, both in relation to our network quality and coverage and our customer service, including response times at our call centers;
 

set a timetable for the implementation of new requirements in our license or other legislation which we cannot meet;
 

impose a stricter policy or set stricter regulation with respect to privacy protection, such as with regard to data protection, collection, amelioration, segmentation or usage of data, including for commercial activities by us or for the benefit of third parties;
 

impose regulation on our "over-the-top", or OTT, TV services, including the requirement to finance original productions, or applying such regulation to us and not to other OTT TV providers. See "– Item 4. Information on the Company – B. Business Overview – Government Regulations ― Fixed-line Segment – OTT TV"; and
 

limit or prohibit the renewal of our licenses and allocation of additional frequencies to us, as we are included in the list of concentrated entities (being a subsidiary of Discount Investment Corporation Ltd., or DIC) published annually according to the Law for the Promotion of Competition and the Mitigation of Concentration, or the Concentration Law;
 

impose unfavorable regulation on IBC's operations or competitive standing, in as much as same shall have an adverse effect on us as indirect shareholder or customer of IBC.
 
If we fail to compensate for lost revenues, increased expenses (objectively or in comparison to our competitors) or additional investments resulting from past or future legislative or regulatory changes with alternative sources of income or otherwise, our results of operations may be materially adversely affected.
 
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We face intense competition in all aspects of our business.
 
The Israeli telecommunications market is highly competitive in many of its elements. The competition level has increased substantially in recent years, following the entry of additional competitors and regulatory changes alleviating entry barriers and transfer barriers.  Specifically in the cellular market, price competition and erosion, high churn rate and high subscriber acquisition costs continue to materially affect our and other mobile network operators', or MNOs', revenues and profitability. The current level of competition in all the markets in which we operate and aggressive price plan offerings by our competitors may continue. See also the "Competition" section under “Item 4. Information on the Company - B. Business Overview","—Competition – Fixed-line Segment– Internet infrastructure and Connectivity Business" and "– Telephony Business". Should the current level of competition continue, it will continue to adversely affect our results of operations. Any of the following developments materializing in our market, may result in increased competition and further materially adversely affect our profitability:
 

tariffs maintained at their current level or decreasing even further, including as part of a bundle;
 

failure to complete our acquisition of Golan (see "Item 4. A. History and development of the Company – our history" below), or other mergers or acquisitions in the communications market, to which the Company is not a party, such as the recently published acquisition proposal of Partner by Hot, as it may prevent the approval of our acquisition of Golan or other acquisitions or mergers  to which the Company may become a party, or result in weakening of the Company's competitive standing, including loss of its leading position in the cellular market and related benefits of scale;
 

an ineffective landline wholesale market, including the de facto exclusion of telephony wholesale services, services provided not in line with the wholesale market criteria and not enforced by the MOC; unfavorable pricing harming our ability to provide competitive bundles and compete with the Hot and Bezeq groups, or change of current regulation to a less favorable one, given our dependence on the landline wholesale market in supplying our landline infrastructure services; or further escalation of the competition by Bezeq and Hot, such as Hot continuing to decrease its retail services and lack of 'margin squeeze' prevention regulation and Bezeq commencing the sale of fiber-optic infrastructure service, given their dominance in the landline market, especially if the structural limitations on these groups are alleviated before an effective landline wholesale market is in effect; unfavorable regulation to IBC's competitive capabilities, in as much as same shall have an adverse effect on us as an indirect shareholder of IBC or as a customer of IBC, given our 15 year undertaking to purchase indefeasible right of use, or IRU to IBC's network at the agreed price, regardless of the fact that more favorable proposals may be available to us in the future. See also "Item 4. Information on The Company –B. Business Overview – Government Regulations – Fixed-line Segment – Landline";
 
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annulment or further relaxation of the structural separation imposed on each of the Bezeq and Hot groups or further consolidation of  Bezeq's subsidiaries and their operations as it will provide the Bezeq and Hot groups a competitive advantage, given their dominance in the landline telephony and infrastructure markets and TV market. More so, in respect of our triple and quatro offering, given the de facto creation of a unified company by Bezeq's subsidiaries with the strong financial support of Bezeq. See also "Item 4. Information on The Company –B. Business Overview – Competition - Communications groups and structural separation"; "-Government Regulations – Fixed-line Segment – Landline";
 

entrance of new competitors, including major global and local companies, to any of the markets we operate in, such as in the new frequencies tender allowing the entry of new 5G operators and as proposed in a public hearings proposing the lowering or regulatory requirements for the provision of internet infrastructure service,  or such as Netflix, Amazon and other OTT participants entering the TV market, or complementary services becoming competitive to our services, or the entry of existing competitors to additional markets or segments where they are currently not or less active, or as a result of regulatory changes, allowing other operators to provide services currently provided only by us to our subscribers. See "Item 4. Information on The Company –B. Business Overview – Network and Infrastructure – Cellular Segment – Spectrum allocation" and "– Competition"; or if certain communications services currently purchased from licensed operators are provided by the state or by entities operating on its behalf;
 

IBC's failure to deploy widespread landline infrastructure which we can procure, given the growth of our TV and internet services and the substantially more expensive wholesale alternative. Further, this may limit our broadband bandwidth offering in comparison to our competitors who have their own infrastructure, since currently our offering of such service is mainly dependent on the landline wholesale market services. See "Item 4. Information on the Company –B. Business Overview –– Competition – Fixed-Line Segment";
 

our inability or failure to purchase additional frequencies or to purchase frequencies in an amount equal to our competitors or in a sufficient amount, or to make the necessary investments in our networks or in our business in general, in order to maintain our competitive standing, given our financial situation or otherwise. See "- As a result of substantial and continuing changes in our regulatory and business environment, our operating results, profitability and cash flow have decreased significantly in the past several years, with a loss for 2018. Further decline may adversely affect our financial condition" and "We may be adversely affected by the significant technological and other changes in the telecommunications industry" below;
 

regulatory or technological changes, such as implementation of an electronic SIM (e-SIM) in cellular end-user equipment, facilitating even further transfer of customers among operators;
 

the continued increased competition in the handsets market may result in decreased handset sales. See also "-We may not be able to maintain current handsets sales revenues and profitability." below and "Item 4. Information on The Company –B. Business Overview – Competition – Cellular Segment";
 
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some of our competitors may be able to obtain better access and terms of engagement with international suppliers or foreign carriers, than we do, due to their affiliation with international groups; or
 

if our services are adversely affected by, or we are required to bear the costs of, a frequencies change or frequencies reduction, which do not affect our competitors, or if neighboring countries block or interfere with our services while our competitors' services remain uninterrupted. See "We may be adversely affected by the significant technological and other changes in the telecommunications industry" below;
 

an adverse change to IBC's competitive standing, in as much as same shall have an adverse effect on us as an indirect shareholder of IBC or a customer of IBC.
 
As a result of substantial and continuing changes in our regulatory and business environment, our operating results, profitability and cash flow have decreased significantly in the past several years, with a loss for 2018 and 2019. Further decline may adversely affect our financial condition.

Our operating profit in 2019 was NIS 24 million ($7 million), a decrease of 76.2% from NIS 101 million ($29 million) in 2018 and a decrease of 69% from NIS 328 million in 2017. We recorded a net loss in 2019 of NIS 107 million ($ 31 million), compared to a net loss in 2018 of NIS 64 million ($19 million) and net income of NIS 113 million in 2017. The Company's net cash from operating activities in 2019 increased in comparison with 2018 due to the adoption of IFRS 16 standard (for details see "Item 5. Operating and financial review and prospects – A.  Operating results – Overview" below. The principal factor leading to the continued decline in our operating results over the past several years has been the intense competition resulting largely from regulatory developments intended to enhance competition in the Israeli telecommunications market. These developments have caused, over the past several years, significant erosion in the prices charged for the provision of cellular services.  In August 2019 our rating in relation to our debentures traded on the Tel Aviv Stock Exchange, or TASE, was downgraded to ilA and our rating outlook was maintained at “negative”. Our and another cellular operator's controlling shareholder recognized a substantial impairment of goodwill expense associated with us and the other cellular operator, in their respective financial reports for the second quarter of 2019 and the already intense competition in the cellular market further heightened with campaigns announcing tariffs as low as US$ 3-4 per month for a cellular package. These developments had an adverse effect on our financial condition and the perception of the Israeli telecommunications market in general and of us more specifically – given our substantial debt, resulting in the substantial decrease of our shares' price, hardening requirements to access additional credit from banks and increase of our debentures yield, signifying increased cost of future debt raised from the capital market.
 
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Although we have announced and put in motion a comprehensive restructuring plan, or the Restructuring Plan, in September 2019 (see "Item 5. Operating and Financial Review and prospects – A. Operating Results" below), following which our debentures' yield decreased and we completed a successful capital raise in December 2019 (see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – Issuances of equity securities" below) and entered a new collective employment agreement (see Item 6. Directors, senior management and employees - D. Employees" below),  we cannot guarantee the Restructuring Plan will be fully executed or the effects it will have on our results of operations and financial condition,  as our business environment continues to be characterized by increased competition in the various markets in which we operate. The factors which affected the Israeli communications market may continue to negatively impact our business, which may further adversely affect our results of operations and financial condition – that being more volatile than our competitors, due to our substantially larger amount of debt. The completion of the transaction to purchase Golan's share capital, if completed, and the need to finance such purchase would impose additional financial burden on our results of operations (see Item 4. A. History and development of the Company – our history" below). Other impacts may include the need to reduce investments, in absolute terms and in comparison to our competitors, which may harm our competitive standing and potential future growth, adversely affect our ability to raise additional debt and refinance our existing debt or adversely affect the terms and price of such debt raising, which in turn may further adversely affect our financial condition and may require equity capital raising, if possible; or on the contrary -  require us to make substantial investments in order to maintain our competitive standing and potential future growth, such as pay large sums for additional frequencies and invest large sums in the deployment of a corresponding network, despite our substantial debt and reduced profitability, which in turn may lead to additional downgrade of our debentures rating, may adversely affect our financial condition and our ability to raise additional debt and refinance our existing debt or adversely affect the terms and price of such debt raising and may require equity capital raising, if possible.  See also " - We may be adversely affected by the significant technological and other changes in the telecommunications industry", "Our handsets revenues and profitability have decreased and are expected to decrease further and "- Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability" below.
 
In 2020, as part of the global effects of the Corona virus, our roaming revenues have been adversely effected. If such effects continue for a long duration, they would further adversely affect our handset sales and all aspects of our operations, resulting in a material adverse effects on our results of operations. Furthermore, as part of the global effects of the Corona virus on the capital markets, our debentures yield have increased substantially. If such effects continue and for the duration they so continue, it would adversely affect our access to additional debt and capital. See "The Corona virus may adversely affect our results of operations" below.
 
We may not be able to obtain permits to construct and operate cell sites
 
We depend on our network of cell sites to maintain and enhance network coverage for our cellular subscribers. We also deploy and operate microwave sites as part of our transmission network. The construction and operation of these various facilities are highly regulated and require us to obtain various consents and permits.
 
We have experienced difficulties in obtaining some of these consents and permits, particularly in obtaining building permits for cell sites from local planning and building authorities. As of December 31, 2019, we operated a small portion of our cell sites without building permits or applicable exemptions and approximately 33% of our cell sites without building permits in reliance on an exemption from the requirement to obtain a building permit, mainly for radio access devices. Such reliance had been challenged and under an interim order issued by the Supreme Court in September 2010, was reduced to replacing or relocating existing radio access devices under certain conditions. In October 2018, regulations setting procedures for the construction, changes and replacement of radio access devices exempt from building permits were enacted (and the interim order was annulled). Although these regulations reflect previous judicial limitations placed upon our ability to make changes and replace radio access devices, they also introduce a new licensing procedure that further reduces our ability to construct new radio access devices based on such exemption. This may adversely affect our existing networks and our networks' build out, more so in light of the necessity to support new frequencies if we win them in the frequencies tender (see "Item 4. Information on The Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Spectrum allocation").  In addition, the Ministry of Justice expressed an opinion that such regulations and the exemption do not relate to the radio access devices' ancillary equipment. The Ministry of Justice is expected to publish further instructions in the matter. The exclusion of the ancillary equipment from the exemption, if adopted, could adversely affect our existing networks and our networks' build out. For additional details see "-“Item 4.B – Business Overview – Government Regulations – Cellular Segment – Permits for Cell Site Construction”.
 
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 Additionally, District Court rulings adopted a narrower interpretation of 'rooftops' to which the exemption may be applied.
 
We also rely on the exemption for our rooftop microwave sites and signal amplifiers (known as 'repeaters'). It is unclear whether other types of repeaters require a building permit.
 
In addition, we may be operating a significant number of our cell sites in a manner that is not fully compatible with the building permits issued for these cell sites, which may, in some cases, also constitute grounds for termination of our lease agreements for those sites or claims for breach of such agreements.
 
Pursuant to the Israeli Non-Ionizing Radiation Law, 2006, the granting or renewal of an operating permit by the Commissioner of Environmental Radiation at the Ministry of Environmental Protection of Israel, or the Commissioner, for a cell site or other facility is subject to the receipt of a building permit or an exemption from such a permit.
 
Several local planning and building authorities are claiming that Israeli cellular operators may not receive building permits, in reliance on the Israeli National Zoning Plan 36, or the Plan, which regulates cell site construction and operation, for cell sites operating in frequencies not specifically detailed in the frequencies charts attached to the Plan and have refused to provide a building permit in a number of cases. Following conflicting district court decisions regarding this claim, the Ministry of Justice expressed an opinion negating such claims and the matter is expected to be decided by the Supreme Court. Some of the frequencies to which we are required to transfer according to the MOC's instruction  and all the frequencies included in the new frequencies tender (see "We may be adversely affected by the significant technological and other changes in the telecommunications industry" below) are not specifically detailed in the Plan. Most of our cell sites and many cell sites operated by other operators also operate in frequencies not specifically detailed in the Plan.
 
Operation of a cell site or other facility without a building permit or operating permit or not in accordance with the permits or other legal requirements may subject us and our officers and directors to criminal, administrative and civil liability, to eviction orders in respect of the cell sites in breach, revocation or suspension of the operating permit, as well as to withholding the grant of operating permits to additional cell sites or demolition orders. As a result, we may be required to relocate cell sites to less favorable locations or stop operation of cell sites.
 
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If we are unable to obtain or rely on exemptions from obtaining or to renew building or other consents and permits for our existing cell sites or other facilities, or if the Plan is changed to include additional restrictions and requirements on the construction and operation of cell sites or should the Supreme Court rule against the Company regarding the claim in relation to frequencies not specifically detailed in the Plan, it could adversely affect our existing network and its build-out, delay the deployment of our 4G network using additional frequencies and future generations, negatively affect the extent, quality and capacity of our network coverage and our ability to continue to market our products and services effectively, all of which may have a material adverse effect on our results of operations and financial condition.
 
For additional details see “Item 4.B – Business Overview – Government Regulations – Cellular Segment – Permits for Cell Site Construction”.
 
We may be required to indemnify certain local planning and building committees in respect of claims against them.
 
Under the Israeli Planning and Building Law, 1965, by approving a building plan, local planning and building committees may be required to compensate for depreciation of properties included in or neighboring the approved plan.
 
As a precondition to obtaining a cell site construction permit from a planning and building committee, we are required to provide a letter to the committee indemnifying it for possible depreciation claims and have provided hundreds of such indemnification letters to local planning and building committees. Calls upon our indemnification letters may have a material adverse effect on our financial condition and results of operations. We may also decide to demolish or relocate existing cell sites to less favorable locations or not at all, due to the obligation to provide indemnification. As a result, our existing service may be impaired or the expansion of our network coverage could be limited.
 
Alleged health risks relating to non-ionizing radiation generated from cell sites and cellular devices may harm our prospects.
 
Handsets, accessories and various types of cell sites are known to be sources of non-ionizing radiation emissions and are the subject of an ongoing public debate and concern in Israel. Radio frequency electromagnetic fields were classified by the International Agency for Research on Cancer (an agency of the World Health Organization) as possibly carcinogenic to humans (Group 2B), based on an increased risk for glioma, a malignant type of brain cancer associated with wireless phone use, and research is being conducted in regards to cellular handsets use and cancer and other health risks. The Israeli Ministry of Health published recommendations to take precautionary measures when using cellular handsets, and increasing awareness of the possible risks of cellular phones usage, reducing usage thereof and introducing precautionary measures were the subject of several bills in recent years. While, to the best of our knowledge, the handsets that we market comply with the applicable legislation that relate to acceptable “specific absorption rate,” or SAR, levels, we rely on the SAR levels published by the manufacturers of these handsets and do not perform independent inspections of the SAR levels of these handsets. As the manufacturers’ approvals refer to a prototype handset, we have no information as to the actual level of SAR of the handsets throughout the lifecycle of the handsets, including in the case of handset repair. See also “Item 4. Information on the Company – B. Business Overview – Government Regulations – Cellular Segment – Handsets”.
 
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Health concerns regarding cell sites have caused us difficulties in obtaining permits for cell site construction and obtaining or renewing leases for cell sites and even resulted in unlawful sabotage of a small number of cell sites and prompted proposed legislation aimed at increasing the minimum distance permitted between cell sites and certain institutions. Formal positions adopted by various Israeli government ministries with respect to radiation safety, include the 2009 position that cell sites constructed pursuant to a building permit are preferable to radio access devices, and that utilizing a cellular network to provide advanced services that can be provided through a landline network is not justified in light of the preventive care principle set forth in the Israeli Non-Ionizing Radiation Law.
 
If health concerns regarding non-ionizing radiation increase further, or if adverse findings in studies of non-ionizing radiation are published, non-ionizing radiation levels are found to be higher than the standards set for handsets and cell sites, we may be subject to health-related claims for substantial sums. Consumers may also be discouraged from using cellular handsets and regulators may impose additional restrictions on the construction and operation of cell sites or handset and accessories marketing and usage. As a result, we may experience increased difficulty in constructing and operating cell sites and obtaining leases for new cell site locations or renewing leases for existing locations, or be exposed to property depreciation claims; and we may lose revenues due to decreasing usage of our services and be subject to increased regulatory costs. We have not obtained insurance for these potential claims. An adverse outcome or settlement of any health-related litigation against us or any other provider of cellular services could have a material adverse effect on our results of operations, financial condition or prospects.
 
The unionizing of our employees may impede necessary organizational and personnel changes, result in increased costs or disruption to our operation.
 
In 2015, we entered into the first collective employment agreement with our employees' representatives and the Histadrut, an Israeli labor union, for a term of 3 years. In 2018 we entered into a new collective employment agreement for another term of 3 years (2018-2020) and in May 2019 and February 2020 we entered into new collective employment agreements which amended the 2018 agreement. The 2015 and 2018 agreements have consistently increased our employment costs. The agreement defines employment policy and terms in various aspects, including payments to the employees, procedures relating to manning a position, change of place of employment and dismissal, including management's and the employees' representative's respective authority with regards to each. As a result, our day-to-day operations and our ability to execute organizational and personnel changes is more limited, cumbersome, costly and lengthy, as reflected in the voluntary retirement plans carried out in 2014 – 2016, 2018 and 2020, and requires more management attention that would otherwise be available for our ongoing business. Both in January and September 2019, the Histadrut announced a labor dispute at the Company, following the Company's announcement of its intention to execute a substantial reduction in the number of employees, pursuant to which the employees would be entitled to take organizational steps (including a strike). Simultaneously with the September 2019 declaration of a labor dispute, the employees' representatives commenced a sudden and unlawful strike which ended the following day, following an understanding as to negotiations on the matter. The January 2019 declaration of labor dispute ended with the execution of the 2019 agreement and the September 2019 declaration ended with the execution of the 2020 agreement.
 
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Further disagreements with the employees' representatives, may trigger work stoppages or other disruptions to our operation and an adverse impact on our services or customer service, changes may fail to be executed or be executed in a materially different way than planned, resulting in substantially lower savings than expected or requiring materially increased employment costs. Increased costs, inability or limited ability to make organizational and personnel changes, as well as work stoppages or other disruption to our operations and limitations on management's discretion, may damage the efficiency and quality of our operations, and may lead to damage to our reputation, increased customer churn, loss of market share and reduced profitability.
 
We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits.
 
We provide services to millions of subscribers on a daily basis. As a result of the scope and magnitude of our operations, as well as the multitude of pricing plans for stand-alone and bundles of services, the large amount of usage data our information systems need to process and record with relation to our subscribers according to their respective pricing plans, the frequent and multiple changes to our operation and pricing plans due to regulatory changes or in response to the changing market conditions, and the involvement of thousands of sales and customer service representatives in the sale process and after sale contacts with our existing or prospective customers - all increasing the risk of discrepancies occurring between a pricing plan and the information processed by our internal information systems or inadequate information provided, despite our continued efforts to the contrary - we are subject to the risk of a large number of lawsuits, including class action suits by consumers and consumer organizations. These actions are costly to defend and could result in significant judgments against us, which may materially and adversely affect our financial results. Recent years were characterized by a substantial number of purported class actions filed and approved in Israel, the greater involvement of consumer organizations and the Attorney General. In addition to eight class actions approved against us to date, we have entered into several settlement agreements, mostly for immaterial sums, and are currently engaged in dozens of purported class action suits as a defendant, many of which are for substantial amounts. For a summary of certain material legal proceedings against us, see “Item 8 – Financial Information - A. Consolidated Statements and Other Financial Information –Legal Proceedings”.
 
Further, predefined damages (set forth in the Consumer Protection Law) for a discrepancy from a customer's pricing plan, remedied after the customer complained, may aggregate to substantial amounts if paid to numerous customers on multiple occasions.
 
We employ thousands of employees and are therefore subject to the risk of employee lawsuits, including class action suits by employees.
 
We are subject to the risk of intellectual property rights claims against us, in relation to our products and services including TV service and other content related services, including video, photographs, music, music-related or other content we purchase from third party content providers. These claims may require us to initiate or defend protracted and costly litigation, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages or may be required to obtain licenses for the infringing product or service, which, if in substantial sums, could harm our results of operations. If we cannot obtain all necessary licenses on commercially reasonable terms, we may be forced to stop using or selling the products and services. We may not have insurance coverage for these types of claims.
 
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Our operations are dependent on complex technology and information systems.
 
Our operations are dependent on a number of complex technological and information systems, including billing systems. The occurrence of malfunctions in such complex and ever changing and expanding systems is inevitable. In addition, we are in the process of implementing a unified customer relation management, or CRM, system for both our cellular and fixed-line operations, which may result in larger expenditures than anticipated, require significant management attention that would otherwise be available for our ongoing business, or lead to unforeseen operating difficulties and malfunctions. A malfunction in any of our systems which severely impacts our ability to provide products and services to our customers or adequately bill them, may result in loss of revenues to us, may adversely impact our brand and service perception, and expose us to legal claims and regulatory sanctions, all of which may adversely affect our results of operations.
 
Cyber attacks impacting our networks or systems could have an adverse effect on our business.
 
Cyber attacks, including through the use of malware or ransomware, computer viruses, dedicated denial of services attacks, credential harvesting and other means for obtaining unauthorized access to or disrupting the operation of our networks and systems and those of our suppliers, vendors and other service providers, could have an adverse effect on our business. Cyber attacks against companies, including Cellcom Israel, have increased in frequency, scope and potential harm in recent years and have harmed our operations. Cyber attacks may cause equipment failures, loss, disclosure, access, usage, corruption, destruction or the appropriation of information, including sensitive personal information of customers or employees, or valuable content and technical and marketing information, as well as disruptions to our or our customers’ operations. Further, the perpetrators of cyber attacks are not restricted to particular groups or persons. These attacks may be committed by company employees and agents, advertently or inadvertently, or by external actors operating in any geography, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective, and may even be launched by or at the behest of nation states. The preventive actions we take to reduce the risks associated with cyber attacks, including protection of our systems and networks, may be insufficient to repel or mitigate the effects of a major cyber attack in the future, as they become more sophisticated and harder to repel.
 
The inability to operate our networks and systems or those of our suppliers, vendors and other service providers as a result of cyber attacks, even for a limited period of time, may result in significant expenses to us and/or a loss of market share to other communications providers. The costs associated with a major cyber attack on us could include expensive incentives offered to existing customers and business partners to retain their business, increased expenditures on cybersecurity measures and the use of alternate resources, lost revenues from business interruption and litigation. The potential costs associated with these attacks could exceed the insurance coverage we maintain. Further, certain of our businesses, such as those offering security solutions and infrastructure and cloud services to business customers, could be negatively affected if our ability to protect our own networks and systems is called into question as a result of a cyber attack. In addition, a compromise of security or a theft or other compromise of valuable information, such as financial data and sensitive or private personal information, could result in lawsuits and government claims, investigations or proceedings. Any of these occurrences could damage our reputation and could further result in material adverse effect on our results of operation or financial condition.
 
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There are certain restrictions in our licenses relating to the ownership of our shares.
 
Our cellular license restricts ownership of our ordinary shares and who can serve as our directors, as follows:
 

our founding shareholder, Koor Industries Ltd. (wholly owned by DIC), or Koor (or its transferee or transferees, if approved in advance by the Ministry of Communications as “founding shareholders”), must own at least 26% of each of our means of control;
 

Israeli citizens and residents among our founding shareholders (or their approved transferees) must own at least 5% of our outstanding share capital and each of our other means of control;
 

a majority of our directors must be Israeli citizens and residents;
 

at least 10% of our directors must be appointed by Israeli citizens and residents among our founding shareholders; and
 

we are required to have a security committee of our Board of Directors that deals with matters relating to state security.
 
If these requirements are not complied with, we could be found to be in breach of our license and our license could be changed, suspended or revoked.
 
 In addition, our license provides that, without the approval of the Ministry of Communications, no person may acquire or dispose of shares representing 10% or more of our outstanding share capital.  Further, our directors and officers and any holder of ordinary shares representing 5% or more of our outstanding share capital may not own 5% or more of Bezeq or any of our competitors or serve as a director or officer of such a company, subject to certain exceptions, which require the prior approval of the Ministry of Communications.
 
To ensure that an unauthorized acquisition of our shares would not jeopardize our license, our articles of association provide that any shares acquired without approval required under our license will not be entitled to voting rights.
 
We may be adversely affected by the significant technological and other changes in the telecommunications industry.
 
The telecommunications market is known for rapid and significant technological changes and requires ongoing investments in advanced technologies in order to remain competitive. In recent years we have witnessed an immense growth of data traffic on both cellular and fixed-line networks which required us to upgrade our cellular and fixed-line networks and purchase increasingly large capacity for our fixed-line internet connectivity and infrastructure services to accommodate such demand. We estimate that data traffic will continue to rapidly grow in the future, among other things, due to high definition and 4K content and TV services provided over the internet (both cellular and landline). Corona virus containment restrictions imposed by the Israeli government have substantially increased demand and such elevated demand is expected to continue during the containment period. To meet the growing demand for cellular data traffic, we are required, among other things, to continue our investment in our 4G network and to continue the upgrade of our transmission network to allow larger capacity and higher data speed rates. Winning additional frequencies in the new frequencies tender shall further allow us to maintain a quality 4G service over time and provide 5G service at a later date. To meet the growing demand for landline data traffic and find more cost effective alternatives for the capacity we purchase from Bezeq who owns a widespread landline broadband infrastructure, we have invested in deploying our own infrastructure, invested in IBC, and sold our independent fiber-optic infrastructure in residential areas to IBC and entered an indefeasible right of use agreement with IBC for its network (see also "Item 4. Information on the Company – B. Business Overview – Network and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure – Investment in IBC"). Such endeavors are both costly and require management attention which could have been directed elsewhere.
 
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Further, in March 2020, the Ministry of Communications determined that the replacement of our and another operator's 850 MHz frequencies with frequencies compatible with international standardization for our region will be effected as follows:   phase 1 - our current 2x10 850MHZ frequencies will be reduced and replaced with other 2x5 MHz 850MHZ frequencies on June 1, 2020; phase 2 - at a later date to be determined, we will be awarded 2x5 MHz in the 800 frequencies; phase 3 - at a later date to be determined, the aforesaid 850MHz and 800MHz frequencies will be replaced with other 2x10 MHz in the 800 frequencies; additional frequencies may be allocated to us for limited periods during the transition period.  Such replacement, will involve material investments in our networks, including the replacement of radio equipment in all of our cellular sites and may, during such project, adversely affect our products and services or quality thereof and our ability to comply with quality standards set in our license and impose a material hardship on the Company, both financially and operationally, which may have an adverse effect on our results of operations. Further, some of the frequencies to which we are required to transfer are not specifically detailed in the Plan, which may impose additional hardship on such replacement. See "We may not be able to obtain permits to construct and operate cell sites". In addition, as our usage of the 850MHz causes certain interferences to neighboring countries services,  if such neighboring countries block or interfere with our 850 MHz based services, more so while our competitors' services remain uninterrupted, this would have a material adverse effect on our service and subsequently on our financial results.
 
In addition, in July 2019 the MOC published a frequencies   tender the MOC expects to conduct during 2020. The tender is to include 30MHz in the 700Mhz frequencies band, 60MHz in the 2600 MHz frequencies band and 300 MHz in the 3500-3,800Mhz frequencies band with maximum allocation of 15MHz per network in the 700MHz frequencies band. As the 700MHz would serve as the main coverage enhancement frequency for both 4G and 5G services , the limited amount of 700MHz frequencies included in the tender and the maximum allocation per network, as well as due to other tender principles and draft license requirements, the tender may result in us not winning such frequencies or winning less frequencies than our competitors or less than our needs which may harm our ability to provide our services and our competitive standing; lead to a bidding war and may result in us having to pay sums substantially higher than those paid by other contenders in the tender. A frequencies tender will require us to make substantial investments in purchasing the frequencies and thereafter to make additional substantial investments in our networks, regardless their economic viability, in order to maintain our competitive standing in the cellular market, thereby imposing additional financial burden on us while we aim to decrease our expenses and investments. Further, under the principles of the tender we may only participate in the tender through a joined proposal with our network sharing partners which requires the prior approval of the tender committee to the joint proposal agreement. Such agreement has not yet been reached nor approved. Failure to agree on a joint proposal agreement (or other solution, if possible), may prevent the Company from participating in the frequency tender and thereby materially adversely affect its competitive abilities. Furthermore, the frequencies won, if won by our sharing partners, shall be available for usage by us subject to conditions to be agreed with the sharing partners, including with regards to their usage period (as are the frequencies our sharing partners won prior to entering the sharing agreements), and after such frequencies are no longer available to us, we may not have sufficient frequencies to maintain prior quality. See "Item 4. Information on the Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Network sharing agreements". Participating in a frequencies tender and the said additional investments, more so if a bidding war will result in higher consideration for the frequencies, may have a substantial adverse effect on our results of operations. Further, failing to win frequencies all or in a smaller amount than our competitors, may have an adverse effect on our competitive standing and as a result, on our results of operations. See "Item 4. Information on the Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Frequencies". Further, additional frequencies, should we win them, would require the construction or change of hundreds of cell sites. The difficulties in obtaining the required consents and permits, may prevent us from meeting the deployment requirements to be set in our license with relation to the frequencies proposed in the tender (should we win them) and from meeting the deployment requirements which may entitle us to performance based incentives, as well as expose us to additional litigation and such litigation's consequences. See also "We may not be able to obtain permits to construct and operate cell sites".
 
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On the other hand, given the current low profitability of our business, we may be forced to decrease investments in our business and specifically in our networks, such as in relation to future generations and technologies, and the aforementioned frequencies tender which may adversely affect our future services, competitiveness and future results of operations. See also "As a result of substantial and continuing changes in our regulatory and business environment, our operating results, profitability and cash flow have decreased significantly in the past several years, with a loss for 2018. Further declines may adversely affect our financial condition".
 
If we fail to compensate for increased expenses or investments (especially in comparison to our competitors, not all of which will be required to make similar investments or pay increased expenses), due to, among other things, the competitive environment, our results of operations may be materially adversely affected.
 
Transferring to new technologies and using new equipment, such as our planned transfer to a new OTT Tv services platform, exposes our systems and services to malfunctions, whether due to malfunctions not discovered and resolved in the new technology or equipment or whether due to the transfer process itself. Our TV service is OTT based. As is the case with new technologies, it is more prone to malfunctions, than would be a service based on robust seasoned infrastructure.
 
Our handsets revenues and profitability have decreased and are expected to decrease further.
 
Handsets sales account for a substantial portion of our revenues and profitability. In recent years additional competitors have entered the handset market and increased the competition in this market and less successful launches of handset models and increased sales of handsets in the Israeli VAT free city (Eilat) have contributed to the decrease in our revenues from handsets. We expect our end-user equipment revenues and profitability to decrease further in 2020. Our end user equipment revenues in 2019 were NIS 661 million ($191 million), similar to 2018 and a decrease of 14.2% from NIS 770 million ($223 million) in 2017.  Additional changes to this market, including the entry of additional competitors, including online retailers, both domestic and international, changes of distribution channels or customers purchasing habits, lack of successful launches of new less attractive handset models, inability to continue to market certain suppliers' products, more so as Samsung handsets  currently account for the majority of our sales,   or any other reasons resulting in decreased sales by us or in general, new legislation and decisions by regulators or the courts effecting our ability to market handsets or our profitability therefrom, may materially adversely affect our handset sales and profitability. See also "We face intense competition in all aspects of our business." Further, if the Corona virus effects and regulatory restrictions on our operations continue for a long duration, they would adversely affect our handset sales and profitability therefrom. See "The Corona virus may adversely affect our results of operations.
 
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Our network sharing agreements consideration constitute a significant portion of our revenues
 
Under our network sharing agreement with Golan, we are entitled to an average annual consideration of over NIS 200 million over the agreement term and under our network sharing agreement with Marathon 018 Xfone Ltd., or Xfone, we are entitled to the higher of a minimum annual consideration increasing over time or per user consideration (see "Item 4. Information on the Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Network sharing agreements"(. Should Golan or Xfone fail to make full and timely payments to us, due to financial difficulties, disagreements with us, or otherwise, this could materially adversely affect our results of operation. .
 
Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability
 
As of December 31, 2019, our total indebtedness and long-term loans were approximately NIS 3,375 million ($977 million), with our net debt at approximately NIS 1,897 million ($549 million). For additional details see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – General". The terms of our debentures and other credit facilities currently permit us to incur additional indebtedness (subject in some cases to certain limitations). Our substantial debt could adversely affect our financial condition by, among other things:
 

increasing our vulnerability to adverse economic, industry or business conditions, including increases in the Israeli Consumer Prices Index, or CPI, as  approximately NIS 1,009 million ($292 million) is CPI linked;
 

limiting our flexibility in planning for, or reacting to, changes in our industry and the economy in general;
 

requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, thus reducing the funds available for operations and future business development, such as purchasing additional frequencies and investing in the upgrade of our networks, as well as for dividend distribution; and
 

limiting our ability to obtain, or resulting in less favorable terms and pricing for, additional financing to operate, develop and expand our business or for refinancing existing debt;
 

weakening our competitive position
 
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Israeli institutional investors must follow certain procedures and requirements before investing in non-governmental debentures. As a result, our series H through L indentures include certain limitations and covenants, including a covenant not to issue additional debentures if it involves a rating downgrade, certain financial covenants, negative pledge, cross default, limitation on the distribution of dividends, obligation to pay additional interest in case of certain rating downgrades (which occurred under our series F and G debentures in June 2013). For details regarding such limitations and covenants see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – Debt Service". These limitations are expected to apply to any additional debt incurred by us. These procedures, limitations and covenants limit our freedom to conduct our business, may impose additional costs on us and may limit our ability to borrow additional debt from Israeli institutional investors as well as adversely affect the terms and price of such debt raising. Further, future increases of the interest rates may increase costs for future debt raising.
 
In August 2019 our rating in relation to our debentures traded on the Tel Aviv Stock Exchange, or TASE was downgraded to ilA and our rating outlook was maintained at “negative”. Any further downgrade in our rating, and any adverse change in our financial results, including any increase in our Net Leverage (defined in our series H through L indentures and other credit facilities as the ratio of net debt to EBITDA during a period of 12 consecutive months, excluding one-time events), may adversely affect the terms and price of debt raised, particularly through the issuance of debentures to institutional investors in the near future. In 2020, as part of the global effects of the Corona virus on the capital markets, our debentures yield have increased substantially and general capital markets activities have significantly slowed or halted. If such effects continue and for the duration they so continue, it would adversely affect our access to additional debt and/or capital.
 
Under the Concentration Law, the Israeli Minister of Treasury must set limitations regarding the aggregate credit that may be provided by Israeli financial institutions to a corporation or a business group (defined as a controlling shareholder and the corporations under its control), which may adversely affect our ability to raise debt from Israeli financial institutions.
 
Under the “Guidelines for Sound Bank Administration” issued by the Israeli Supervisor of Banks, Israeli banks are subject to limitations on lending money to a single borrower and one group of borrowers and on the aggregate credit that may be provided to large borrowers and groups of borrowers. Under the relevant regulations, Israeli institutional investors are also subject to certain limitations on their total investments (including debt investments) in a single corporation and a group of corporations. This may limit our ability to obtain additional financing to operate, develop and expand our business or to refinance existing debt because, for such purposes, we are deemed to be included in the same group as DIC.
 
 Our business results may be affected by currency fluctuations, by our currency hedging positions and by changes in the Israeli Consumer Price Index
 
A portion of our cash payments are incurred in, or linked to, foreign currencies, mainly U.S. dollars.  In particular, in 2017, 2018 and 2019, payments denominated in, or linked to, foreign currencies, mainly U.S. dollars, represented approximately 16%, 17% and 14%, respectively, of our total cash outflow (including payments of principal and interest on our debentures). As almost all of our cash receipts are in NIS, any devaluation of the NIS against the foreign currencies in which we make payments, will increase the NIS cost of our foreign currency denominated or linked expenses and capital expenditures.
 
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Furthermore, since the principal amount of and interest that we pay on our Series H and J debentures, are linked to the Israeli CPI, any increase in the Israeli CPI will increase our financing expenses and could adversely affect our results of operations.
 
We purchase derivative financial instruments in order to hedge part of the foreign currency risks and CPI risks deriving from our operations and indebtedness. Derivatives are initially recognized at fair value. Changes in the fair value of such derivatives are recognized through our income statement upon occurrence. These differences in the derivative instruments' designation could result in fluctuations in our reported net income on a quarterly basis.
 
We may not be able to fulfill our dividend policy in the future; implementation of our dividend policy will significantly reduce our future cash reserves.
 
Our dividend policy targets a payout ratio of at least 75% of our net income in each calendar year, subject to any applicable law, our license and contractual obligations and provided that such distribution would not be detrimental to our cash needs or to any plans approved by our Board of Directors. Our series H through L indentures and other credit facilities contain a covenant not to distribute more than 95% of the profits available for distribution according to the Israeli Companies Law, or Profits. Moreover, under such indentures and other credit facilities, if our Net Leverage exceeds 3.5:1, we may not distribute more than 85% of our Profits and if our net leverage exceeds 4.0:1, we may not distribute more than 70% of our Profits. For additional details see "Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Debt Service". In addition, our license requires that we and our 10% or more shareholders maintain at least $200 million of combined shareholders’ equity. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends or to pay dividends at a ratio to net income that is less than that set in the policy. Since the fourth quarter of 2013, our board of directors chose not to declare dividends, given the intensified competition and its adverse effect on our results of operations and in order to strengthen our balance sheet. See “Item 8. Financial Information - A. Consolidated Statements and Other Financial Information - Dividend Policy”.
 
Our dividend policy, to the extent implemented, will significantly reduce our future cash reserves and may adversely affect our ability to fund unexpected capital expenditures.  As a result, we may be required to borrow additional money or raise capital by issuing equity securities, which may not be possible on attractive terms or at all.
 
If we are unable to fulfill our dividend policy, or pay dividends at levels anticipated by investors in our shares, the market price of our shares may be negatively affected and the value of our investors’ investment may be reduced.
 
We rely on certain suppliers for key equipment and services. We do not own a widespread infrastructure in the landline market and are dependent on infrastructure providers.
 
We depend upon a small number of suppliers to provide us with key equipment and services. For example, Nokia Networks Israel, or NSN, provides our GSM/GPRS/EDGE/UMTS/HSPA/LTE core system, radio access network and related products and services and Carrier Ethernet network; LM Ericsson Israel, or LM Ericsson, supplies part of our radio access network and related products and services based on UMTS/HSPA technology;  MediaKind provides our OTT TV services platform; Cisco Systems, Inc., or Cisco, provides our SDH equipment for our transmission and ISP network;  and Be’eri Printers provides our printing supplies and invoices as well as the distribution, packaging and delivery of invoices and other mail to the postal service distribution centers. In addition, we lease a small portion of our cellular related transmission capacity from Bezeq, the incumbent landline operator.
 
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We are further dependent on infrastructure providers for our internet connectivity, broadband infrastructure (using the landline wholesale market and our IRU agreement with IBC), International Long Distance calls, or ILD, landline telephony (using Voice over Broadband, or VOB, technology), and OTT TV services. Those providers include Bezeq and Hot, which provide broadband infrastructure in Israel, TI Sparkle Ireland Telecommunications Ltd. and TI Sparkle (Israel) Ltd., or collectively TI Sparkle, which connects the Israeli internet network to the global internet network, as well as Israeli telephony, via an underwater communications cable. We are dependent on Bezeq for the provision of our wholesale broadband infrastructure services (as IBC's infrastructure is more limited in scope and Hot's tariffs are high). Should an effective telephony service be provided under the wholesale market and the wholesale market effectively apply to Hot as well, we would be dependent on them for such services as well (the wholesale market over Hot's infrastructure is in its early stages). Bezeq has  breached certain regulatory obligations in the equal provision of wholesale services to its retail customers or refused to provide them at all, and has prevented and delayed the deployment of our independent infrastructure (now owned by IBC), including through labor disruptions by its employees, and such occurrences may adversely affect us in the future as well. We are further dependent on IBC with regards to the infrastructure service we have committed to purchase from IBC in the next 15 years (10-15% of IBC's 'home pass'), which in turn is dependent on Bezeq for the deployment of its infrastructure using Bezeq's infrastructure. See also "Item 4. Information on The Company – B. Business Overview – Fixed-line Segment".
 
In addition, our cellular end-user equipment sales have been dominated in recent years by Apple and Samsung products, representing over half of our handset sales. See "Item 4. Information on the Company – B. Business Overview – Cellular Segment – Handsets" for additional details.
 
Vubiquity Management Ltd., or VU, provides us international content and content operation services for our OTT TV services. RGE Group Ltd., or RGE, ONE Sport TV services Ltd., or ONE, and Charlton Ltd., or Charlton, each provides us with unique sports content. Keshet Broadcasting Ltd. and Reshet Media Ltd. provide us each with a linear channel and the right to include certain of such content in our VOD catalogue Netflix International B.V., or Netflix, and Amazon Europe Core S.a.r.l., or Amazon_provide our TV customers with access to their variable content, including direct access to the Netflix and Amazon services from our set-top box.  Salesforce.com EMEA Limited, or Salesforce, provides us with a CRM SAAS platform and Vlocity UK Ltd., or Vlocity, provides us with its telecom-CRM SAAS solution, based on Salesforce platform and development and customization for Salesforce's and Vlocity's CRM solution.
 
We rely on agreements with foreign carriers to provide cellular roaming capabilities to our cellular subscribers, ILD services to our cellular and landline subscribers, as well as international voice hubbing (providing ILD services to foreign operators) services. We cannot control or compel the improvement of the quality of the service that they provide and it may be inferior or less advanced than the service that we provide.
 
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In general, if these suppliers fail or refuse to provide equipment, content or services to us that meet requisite quality standards or on a timely basis, at unfavorable terms to us or provide our competitors more favorable terms and conditions, or if these suppliers fail to produce successful and desirable products or content when no equivalent alternatives are available, or if such suppliers raise the pricing of their products or content (for example, TV sports content prices in Israel have substantially increased with the entry of additional competitors), we may be unable to provide services or products to our subscribers in an optimal manner until an alternative source, if one is available, can be found or the situation is rectified, which may harm our ability to compete and result in loss of customers and revenues or place our licenses at risk of revocation for failure to satisfy the required service standards and subject us to customers' lawsuits.
 
Further, the Corona virus may result in shortage of equipment and suppliers failing to supply us with handsets, set-top boxes, network elements, spare parts or other equipment required for our networks operation and upgrade or sale and repair of handsets, as well as with suppliers failing to supply us with certain services required for our continued operation, such as maintenance and construction of our network, due to absence of personnel, all of which may have an adverse effect on our results of operations.
 
     Our investment in new businesses involves many risks.
 
We have invested and expect to continue to invest in exploration and development of new business opportunities in order to extend and complete our capabilities and offerings, such as the investment in IBC, the purchase of Golan, if completed, and our offering the Internet of things (IOT) field. As presently we are IBC's sole IRU customer, IBC's revenues and financial position depend largely on us and therefore adverse effects to our financial position may adversely affect IBC's ability to raise debt to finance its operations. Should IBC require additional investments in order to fund its operations, we, as indirect shareholder of IBC, are expected to invest additional funds in IBC for the continued deployment of its network, thereby adding further burden on us. Further, any adverse changes to IBC's competitive standing and increase of the competition level which IBC faces, such as Bezeq commencing to operate its fiber-optic network (Bezeq has already executed a substantial part of the investments thereof), may adversely affect us as IBC's indirect shareholder.
 
Such endeavors may involve significant risks and uncertainties, including shift of management attention from our ongoing business, loss of focus of our sales and marketing efforts on our main businesses due to attention given to new businesses, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, adversely affecting our cash flow, inadequate return of capital on our investments, regulatory changes which may impose additional burdens than planned, inability to effectively compete with incumbent providers or new competitors entering the market,  and unidentified issues not discovered in our due diligence of such strategies and offerings, such as unforeseen implementation obstacles and large expenditures. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not materially adversely affect our reputation, financial condition, and operating results. Moreover, entry into such new ventures may trigger increased competitive pressure by the incumbent providers of competing services on our core business, aiming at preventing our efforts to compete with them at the relevant market
 
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The Corona virus may adversely affect our results of operations

There has been a substantial decrease in international travel due to the Corona virus, which has had an adverse effect on our roaming services (inbound and outbound) and if such decrease continues for a long duration, will result in a material adverse effect on our roaming revenues and results of operations.
 
In addition, the Israeli government published various regulatory requirements for Corona virus containment in Israel, including, as of mid-March 2020, the prohibition on public gathering and any unnecessary outing from one's home, including the closure of malls and other non-essential leisure establishments and a substantial reduction of presence in the workplace. Following such instructions, we closed our points of sale and walk-in centers and substantially reduced our calling center personnel (excluding technical support) and other personnel not essential for the continued operation of our networks and provision of our services. Such measures, if continued for a long duration, will have a material adverse effect on our sales of services and handsets and results of operations.
 
Further regulatory requirements for potential and confirmed Corona virus patients to enter quarantine may result in material adverse effects to our operations, including customer service, sales, installation of our landline services, deployment, operation and maintenance of our networks, if multiple employees and outsource personnel shall be prohibited from attending their positions.
 
The effects of the Corona virus if continued for a long duration, may also result in shortage of equipment and suppliers failing to supply us with handsets, set-top boxes, network elements, spare parts or other equipment required for our networks operation and upgrade or sale and repair of handsets, all of which may have an adverse effect on our results of operations.
 
As part of the global effects of the Corona virus on the capital markets, our debentures yield have increased substantially, our investment portfolio is expected to record losses during the first quarter of 2020 and general capital markets activities have significantly slowed or halted. If such effects continue and for the duration they so continue, it will adversely affect our access to additional debt and/or capital.
 
The Corona virus situation continues to evolve and it is difficult to predict the duration it will affect our operations and therefore the effect on our operations.
 
We are controlled by a single shareholder who can significantly influence matters requiring shareholders’ approval.
 
As of January 31, 2020, Koor held, approximately 45.7% of our outstanding share capital (including 5% of our share capital held through a lending transaction by Koor to two Israeli shareholders, which are considered joint controlling shareholders with Koor and who undertook, among others, to vote with Koor in all shareholders resolutions) and the voting rights in respect of an additional approximately 2.3% of our share capital, pursuant to shareholders agreements among Koor and certain of our minority shareholders. Accordingly, subject to legal limitations, Koor has control (as the term "control" is defined in the Israeli Securities Law, 1968, or the Israeli Securities Law, namely the ability to direct a company's activities) over all matters requiring shareholder approval, including the election and removal of our directors (other than external directors) and the approval of significant corporate transactions. This concentration of ownership could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares.
 
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Risks Relating to Operating in Israel
 
We conduct our operations in Israel and therefore our results may be adversely affected by political, economic and military instability in Israel.
 
Our operations, our network, our customers and some of our suppliers are located in Israel.  Accordingly, political, economic and military conditions in Israel may directly affect our business.  Any armed conflicts, terrorist activities or political instability in the region or hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our operations, including due to a decrease in the number of tourists visiting Israel and increasing criticism of Israel in the international community (such as the increasing international pressure to boycott Israeli companies, including through the United Nations' Human Rights Council "name and shame list", especially when such companies operate in territories held by Israel in Judea and Samaria, as we and other Israeli operators are required to do under our license), and could make it more difficult for us to raise capital. Further, a substantial part of our network and information systems is located within range of missile strikes from the Gaza Strip and Lebanon. Any damage to our network or information systems may damage our ability to provide service, in whole or in part or otherwise damage our operation and could have an adverse effect on our business, financial condition or results of operations.
 
In addition, in the event that the State of Israel relinquishes control over certain territories currently held by it to the Palestinian Authority, we will not be able to provide service from our cell sites located in Israeli populated areas and on connecting roads in these territories. This may result in the loss of subscribers and revenues and in a decrease in our market share.
 
Our freedom and ability to conduct our operations may be limited during periods of national emergency.
 
Israeli law permits the Prime Minister of Israel, for reasons of state security or public welfare, to order a telecommunications license holder to provide services to or to establish a telecommunications facility for the security forces, and entitles the Israel Defense Forces to register or take engineering equipment and facilities as may be required for the security forces to carry out their duties. Israeli law also permits the Israeli Government, during national emergencies or for reasons of national security, to take all necessary actions in order to ensure state security, including taking control of our network. If national emergency situations arise in the future and if we are to be subject during such time to any of the foregoing actions, this could adversely affect our ability to operate our business and provide services during such national emergencies and adversely affect our business operations. Our other licenses contain similar restrictions.
 
Provisions of Israeli law and our license may delay, prevent or impede an acquisition of us, which could prevent a change of control.
 
The Companies Law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Further, the provisions of our licenses require the prior approval of the Ministry of Communications for changes of control in our Company.
 
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Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when the time expires, tax then becomes payable even if no actual disposition of the shares has occurred.
 
These provisions could delay, prevent or impede an acquisition of us, even if such an acquisition would be considered beneficial by some of our shareholders.
 
Risks Relating to Our Ordinary Shares
 
A substantial number of our ordinary shares could be sold into the public market, which could depress our share price.
 
Our largest shareholder, Koor, holds approximately 45.7% of our outstanding ordinary shares, as of January 31, 2020 (of which 5% are held (through a lending transaction) by two Israeli shareholders, which are considered joint controlling shareholders with Koor).  The market price of our ordinary shares could decline as a result of future sales by Koor or other existing shareholders or the perception that these sales could occur. Sales may be made pursuant to a registration statement, filed with the U.S. Securities and Exchange Commission, or the SEC, pursuant to the terms of a registration rights agreement or otherwise, or in reliance on an exemption from or transaction not subject to the registration requirements of the Securities Act, including the exemptions provided by Rule 144. Any decline in our share price could also make it difficult for us to raise additional capital by selling shares.
 
In addition, pursuant to our capital offering effected in December 2019, we have issued 7,038,000 Series 3 options (of which 2,009,807 have already been exercised, as at February 29, 2020) which may be exercised until April 1, 2020 and 6,426,000 Series 4 options which may be exercised until September 30, 2020 (of which 359,676 have already been exercised, as at February 29, 2020). See "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – General".

In addition, under our 2015 option plan, options and Restricted Stock Units, or RSU, are subject to vesting schedules but vesting will be accelerated upon certain events including any sale or other disposition of all, or substantially all, of our outstanding shares. As of December 31, 2019 we had 4,550,541 shares reserved for issuance upon the exercise of options and RSUs. See "Item 6. Directors, Senior Management and Employment – E. Share Ownership –Share Incentive Plans".

ITEM 4.          INFORMATION ON THE COMPANY
 
A.           HISTORY AND DEVELOPMENT OF THE COMPANY
 
Our History
 
Cellcom Israel Ltd. was incorporated in 1994 in Israel. Our principal executive offices are located at 10 Hagavish Street, Netanya 4250708, Israel and our telephone number is (972)-52-999-0052. Our authorized U.S. representative, Puglisi & Associates, is located at 850 Library Avenue, Suite 204 Newark, Delaware 19711 and our agent for service of process in the United States, CT Corporation System, is located at 111 Eighth Avenue, New York, NY 10011.
 
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In February 2007 we listed our shares on the NYSE and in July 2007 we dual listed our shares on the Tel Aviv Stock Exchange and began applying the reporting leniencies afforded under the Israeli Securities Law to companies whose securities are listed both on the NYSE and the TASE.
 
As of January 31, 2019, Koor, wholly owned by DIC, held approximately 45.7% of our share capital (including through being joint controlling shareholder together with two Israeli shareholders of 5% of our outstanding share capital held by them through a lending transaction as of January 2018) and the voting rights in respect of an additional approximately 2.3% of our share capital.

As of the date of this Annual Report on Form 20-F, there has been no indication of any public takeover offer by any third party, in respect to our ordinary shares, or by us, with respect to another company’s shares.
 
In December 2014 and May 2015 we entered the TV and internet infrastructure markets, respectively, which completed our communications offering to include all communications services in Israel.
 
In 2017 we completed a reorganization of our subsidiaries, following which all our landline operations are unified under our wholly owned subsidiary Cellcom Fixed Line Communications, Limited Partnership.
 
In 2017, our network sharing and hosting agreements with Golan and Xfone, and a third agreement combining the 4G network arrangements in the previous two agreements into a three-way agreement (the Xfone agreement, Golan agreement and the three-way agreement shall be referred to as the Sharing Agreements) came into force. For details of our network sharing and hosting agreements with Golan and Xfone, see "B. Business Overview – Network and Infrastructure – Cellular Segment – Network sharing agreements" below.
 
In 2019, we completed an investment transaction in IBC and sold our fiber-optic infrastructure in residential areas to IBC. "Item 4. Information on the Company – B. Business Overview – Network and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure – Investment in IBC and sale of fiber-optic infrastructure to IBC".
 
In February 2020 we, Golan's shareholders and Golan entered a binding memorandum of understanding, or MOU, for the purchase of Golan's entire share capital, for the sum of NIS 590 million, to be paid in cash in two installments: the sum of NIS 413 million upon completion of the transaction and the sum of NIS 177 million within 3 years from completion thereof. The Company will issue and deposit 8.2 million shares of the Company with a trustee (the "Escrowed Shares"). The Escrowed Shares may be sold in order to finance the deferred payment including upon an acceleration event (as set out in the MOU). In addition, on the closing date, the Company shall pay Golan's shareholders: (a) an amount equal to the cash and cash equivalents of Golan Telecom as of the closing date minus any financial indebtedness; (b) NIS 7.58 million per month for the period between the closing date and December 31, 2020; and (c) return on investments made by Golan Telecom in the 5G shared network from the date the MOU was signed and until the transaction is completed.
 
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The transaction includes standard and customary conditions and representations and is subject to the completion of due diligence by the Company without negative findings having an adverse material effect over the value of the Company in comparison to the information provided prior to signing of the MOU, receipt of regulatory approvals (including the MOC and competition authority's approvals) and material third parties' approval and absence of material adverse change to Golan's condition (as defined in the MOU). The parties shall negotiate a detailed agreement but are bound by the MOU whether such agreement is entered or not. In case the conditions for the completion of the transaction are not met until December 31, 2020, the MOU or detailed agreement, as the case may be, shall expire.
 
We cannot guarantee that the conditions for the completion of the transaction shall be met, including receipt of the required approvals.
 
We hold a general license for the provision of cellular telephone services in Israel, granted by the Ministry of Communications in 1994 and valid until 2022. We also hold a unified general license for the provision of fixed-line services, granted by the MOC in 2015 and valid until 2026.
 
The SEC maintains an internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. The Company's website address is www.cellcom.co.il. The information contained on, or that can be accessed through, the Company's website is not part of, and is not incorporated into, this Annual Report.
 
   Principal Capital Expenditures
 
Our accrual capital expenditure in 2017, 2018 and 2019 amounted to NIS 55 million, NIS 648 million and NIS 562 million, respectively. Accrual capital expenditure is defined as investment in fixed assets and intangible assets, such as investments in our communications networks, information systems, software and TV set-top boxes and capitalization of part of the customer acquisition costs as a result of the adoption of IFRS15.
 
B.           BUSINESS OVERVIEW
 
General
 
We operate in two main segments, “Cellular” and “Fixed-line”. The cellular segment includes the cellular communications services, end user cellular equipment and supplemental services. The fixed-line segment includes landline and long distance telephony services, internet infrastructure and connectivity services, television services, transmission services end user fixed-line equipment and supplemental services.
 
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Services and Products
 
Cellular Segment
 
General
 
We are the largest provider of cellular communications services in Israel based upon number of subscribers and estimated market share as of December 31, 2019. As of December 31, 2019, we provided cellular communications services to approximately 2.744 million subscribers in Israel with an estimated market share of 26%. We offer a broad range of cellular services through our 2G, 3G and 4G network. These services include basic cellular telephony services, text and multimedia messaging, advanced cellular content and data services and other value-added services. We also offer international roaming services, a wide selection of handsets from various leading global manufacturers and repair services on most handsets we offer. Not all services are supported by all handsets or by all of our networks.
 
We offer our cellular subscribers a variety of usage and sector pricing plans and bundles combining cellular services with other communications services our group offers, including quatro bundles (internet infrastructure service and connectivity, landline telephony, TV service and cellular services). We offer two methods of payment: post-paid and pre-paid. Post-paid services are offered to subscribers who are willing to pay for our services through banking and credit arrangements, such as credit cards and direct debits. Pre-paid services are offered to cellular subscribers who pay for our services prior to obtaining them, usually by purchasing our “Talkman” pre-paid cards or “virtual” Talkman cards. The majority of our sales are post-paid.  Price erosion and the marketing of packages have resulted in a constant decline in our pre-paid subscriber base. In line with regulation, our pricing plans do not include a commitment to purchase our services for a predefined period, other than in large business agreements.
 
We provide Golan and Xfone national roaming services under our Sharing Agreements and we provide the Joint Corporations services as a subcontractor. See "-Networks and Infrastructure - Network sharing agreements" below.
 
Basic cellular services
 
Our principal cellular service is basic cellular telephony and data transfer, upload and download (in supporting handsets). Both are included in our packages price plans. In addition, we offer many other services with enhancements and additional features to our basic cellular telephony service, including voice mail, cellular fax, call waiting, call forwarding, caller identification and conference calling.
 
Data services can be used with handsets (in supporting models), cellular modems and tablets. We provide our customers with a variety of "internet data packages" for that purpose.
 
We also offer both an outbound roaming service to our subscribers when traveling outside of Israel and an inbound roaming service to visitors to Israel who can “roam” on our network. As of December 31, 2019, we had commercial roaming relationships with 553 operators in 180 countries based on the standard agreements of the GSM organization (an umbrella organization in which all the cellular operators operating with GSM technology are members).  In addition, as of December 31, 2019, we had data roaming arrangements with 383 of these operators in 135 countries, in the majority of which 4G roaming as well, enabling our data roamers to use data services in the respective countries and visiting roamers in Israel of these operators to use our 3G and 4G services.
 
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Value-added services
 
In addition to basic cellular telephony and data services, we offer many value-added services, such as Short Message Services, or SMS, and Multimedia Messaging Services, or MMS, cloud backup, content services such as "Cellcom Volume" our music application and "Cellcom tv" application and other applications such as a cyber security application and a parents' application against bullying on the Internet. We offer those services that we believe are likely to be popular with subscribers and benefit our business. Some of the value-added services that we offer are available only to subscribers who have supporting handset models and some are offered only to business subscribers.
 
To our business subscribers we also offer multi SMS, M2M, "Double Net" services allowing combined usage of cellular and landline networks in order to ensure continuous service, work force management, vehicles management applications and IOT (internet of things) solutions such as "smart city" end-to-end cellular and fixed line solutions. We are constantly considering and evaluating the possibility of introducing additional products and services to our customers.
 
Handsets
 
We sell a wide selection of handsets (which for purposes of this report may include other types of communications end-user equipment, such as tablets) designed to meet individual preferences. Prices of handsets vary based on handset features and special promotions. We offer a variety of installment plans for handsets. In most cases, handsets are to be paid for in 36 monthly installments. We offer a variety of handsets from world-leading brands such as Samsung, Apple, Xiaomi, LG, Sony and Nokia. The vast majority of our handset sales in 2019 have been by Samsung and Apple. The handset models we sell offer Hebrew language displays in addition to English, Arabic and Russian (in most of the models). We are also required to provide cellular services to subscribers who did not purchase their handsets from us, provided that the handset model complies with the standards set by the Ministry of Communications. For details regarding end user equipment repair services see "Customer Care" below.
 
We also sell tablets, streamers and added value products to our customers, such as smart watches and home security cameras.
 
Fixed line Segment
 
Our main fixed line services include our internet infrastructure (for private customers based mostly on the landline wholesale market and IBC's fiber-optic infrastructure and for business customers based on our landline infrastructure) and connectivity services, OTT TV services, ILD services, landline telephony services and transmission services (for business customers). We also offer bundles of these services, including a triple offering (internet service including infrastructure and connectivity, landline telephony, TV service) and quatro offering (internet services, landline telephony, TV service and cellular services). We also offer landline transmission and data services to selected business customers and telecommunications operators (including transmission revenues from Golan and Xfone according to the network sharing agreement), using our fiber-optic infrastructure and complementary microwave links, IP switchboard services and operation and management of business telecommunications systems. Additional services include cloud services and data protection products solutions based on products and services offered by us and by third party vendors and IOT solutions such as "smart city" end-to-end cellular and fixed line solutions.
 
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 Internet infrastructure and Connectivity
 
We are a major provider of internet connectivity services. Prior to the formation of the landline wholesale market, the Israeli internet market was characterized by a separation between the internet infrastructure providers (mainly Bezeq and Hot) and the internet connectivity service providers. Consequently, the internet customer was required to enter into a contractual arrangement with both types of these providers. The infrastructure provider is responsible for the connection of the customer from his computer or other device to the infrastructure provider's operator. The internet service provider is responsible for providing access to the customer from the infrastructure provider's operator, through its own network, to the local and global internet network. As of May 2015, we provide end-to-end internet service (infrastructure and connectivity) using Bezeq's infrastructure and more recently, over IBC's fiber-optic infrastructure (previously our independent fiber-optic internet infrastructure). We sell internet infrastructure services bundled with internet connectivity, as well as with our other services. For details regarding the landline wholesale market see "Business Overview – Competition – Fixed-line Segment – Landline" and "Government Regulation – Fixed-line Segment – Landline".
 
As of December 31, 2019, we provide end-to-end internet service, to approximately 278,000 households.
 
In addition, we offer our internet subscribers value added services, such as data protection services to our private subscribers and connectivity integration solutions and global communications solutions to our business customers, including firewalls, anti-virus and anti-spam software, overseas internet connectivity services and server hosting services. In addition, we provide internet connectivity services that offer the ability to filter the content viewed by the internet users. We are constantly considering and evaluating the possibility of introducing additional products and services to our customers.
 
OTT TV services
 
 As of December 2014, we offer OTT-TV services, branded 'Cellcom tv' mostly to private customers. Cellcom tv is an hybrid OTT-DTT TV service provided to the Israeli market. The service includes a set-top box that enables linear channels, including based on the Israeli digital terrestrial television (DTT) broadcasting, other commercial channels and Video on Demand library subscription (SVoD), music streaming service and additional advanced features such as cloud recording and VoD playlist channels, for a highly competitive price. Cellcom tv service can generally also be accessed by smartphones, tablets, Smart TV and additional TV services' equipment like Apple TV and Android TV devices (TV anywhere). Our VoD catalogue and linear channels offer international and local content from top content suppliers. As of December 31, 2019, we provide OTT TV services to approximately 258,000 households.
 
ILD services
 
We are one of the major players in the Israeli ILD market. Our principal service in the ILD market is the provision of outgoing and incoming telephone calls with substantially worldwide coverage. We provide these services mostly to post-paid customers, but also to pre-paid customers mainly through the sale of calling cards. Most of the customers of the pre-paid services are foreign workers who reside in Israel.
 
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In addition, we provide "Hubbing" services to non-Israeli international operators. Hubbing services are bridging services between two non-Israeli international operators. Such services are provided by us where there is no direct connection between two non-Israeli international operators or where pricing differences in different locations make such bridging service desirable.
 
Landline telephony services
 
We offer advanced, voice and data landline services to selected business customers. We also offer basic landline telephony services to private customers by VOB technology. Landline telephony service enables an end user to conduct a telephone conversation with another end user who uses either another landline or a cellular telephone or computer, either in Israel or overseas.
 
We estimate that our current market share in the Israeli landline telephony market is not material.
 
Internet of Things
 
IOT solutions provide the ability to connect various devices to the internet. We, together with strategic partners, offer IOT solutions based on a variety of communications solutions, including landline (WiFi) and cellular. We offer smart city solutions which include a central management and control system to manage the various solutions, water and electricity meter readout from a-far, smart parking, smart and efficient street lighting, smart cameras which include analytic capabilities for security solutions, smart sensors for efficient waste disposal, various environmental factors and flood alert, stress buttons for educational institutions as well as WiFi and broadband communication capabilities in public areas.

 Networks and Infrastructure
 
Cellular Segment
 
General
 
We have built an extensive, durable and advanced cellular network system, enabling us to offer high-quality services to substantially the entire Israeli populated territory, while using a cost-effective design, utilizing shared components for our networks, where applicable. We seek to satisfy quality standards that are important to our subscribers, such as high voice quality, high data throughput rate, low “blocked call” rate (average rate of call attempts that fail due to insufficient network resources), low “dropped call” rate (average rate of calls that are terminated not in the ordinary course) and deep indoor coverage. Therefore, we have made substantial capital expenditures and expect to continue to be required to make substantial capital expenditures on our network system, including in relation to the frequencies change and the new frequencies included in the tender published by the MOC in July 2019 (see below).
 
Cellular Infrastructure
 
Our cellular network has developed over the years since we commenced our operations in 1994.
 
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Our “fourth generation” LTE, or Long Term Evolution technology, was launched in August 2014, offers data throughput of up to 150 Mbps on the downlink path and up to 50 Mbps on the uplink path (voice services are provided through our 3G network). Our LTE network covers most of the population of Israel and in 2019 we intend to continue the deployment of this network and subject to us winning frequencies in the new frequencies tender – deployment compatible with new additional 4G frequencies, in order to enable higher data throughput rate. The average throughput indicator is not set in our license. Our 4G network is shared with Golan and Xfone and operates in Multi Operation Core Network, or MOCN, mode.
 
Our “third generation” UMTS/HSPA+, or high-speed packet data access, technology, offers full interactive multimedia capabilities with current data rates of up to 42 Mbps on the downlink path and up to 5 Mbps on the uplink path. In 2020 we intend to make the necessary investments in order to allow continued operation of our network using the new frequencies as required under the MOC frequencies change instruction (see below) with the objective to continue to support the demand for data traffic, while maintaining its quality of services. This network, considered to be a “3.9” technology, uses the same core as our GSM/GPRS/EDGE network and covers substantially all of the populated territory in Israel. Moreover, our UMTS/HSPA+ network supports types of services that require higher throughput and lower delay, such as video conferencing, and provides an adequate fallback for our LTE network by means of smart features and network load sharing. Our 3G network is shared with Golan and operates in MOCN mode.
 
Our “second generation” GSM/GPRS/EDGE 1800MHz network allows for voice calls, data transmission and multimedia services, although at slower speeds than our LTE and UMTS/HSPA+ networks, and covers substantially all of the populated territory in Israel. Our GSM/GPRS/EDGE technology is an advanced second-generation technology and considered to be a “2.75G” technology.  It enables us to deliver multimedia and services at speed rates that are higher than the rates offered through regular “second generation” digital cellular technology.  Packet data rates vary from 50 Kbps to 200 Kbps, depending mainly on handset capabilities. In addition, in the case of coverage gaps and for voice services supported by our GSM/GPRS/EDGE technology, the network provides a partial voice fallback for our LTE and UMTS networks.
 
Most of our traffic uses the UMTS/HSPA+ network with a continuous growth of data using our LTE network.
 
Our primary objective going forward is to continue to support the demand for data traffic on our UMTS/HSPA+, while maintaining its quality of services, using the new frequencies as required under the MOC frequencies change instruction (see below) and to  continue deploying our LTE network and subject to us winning frequencies in the new frequencies tender – deployment compatible with new additional 4G frequencies and deployment of 5G network in selected areas, and to continue to support the demand for data traffic of our high speed UMTS/HSPA+ network and to continue to perform extensive optimization work to provide our subscribers with maximum capability to support video and other broad-bandwidth content. See "Item 3. Risk Factors – We may be adversely affected by significant technological and other changes in the telecommunications industry".
 
We provide connectivity for our cellular network mainly through our independent transmission network (based on our fiber-optic network and complementary microwave infrastructure), in substantially all of the populated territory of Israel. We lease complementary capacity from Bezeq, Hot and IBC. For additional details regarding our transmission network see "- Fixed-line segment – Fixed-line Infrastructure" below.
 
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Pursuant to the requirements of all telephony service providers in Israel, our cellular network is interconnected, either directly or indirectly, to the networks of all other telephony service providers in Israel. Our network monitoring system provides around-the-clock surveillance of our entire network. The network operations center is equipped with sophisticated systems that constantly monitor the status of all switches and cell sites, identify failures and dispatch technicians to resolve problems. Operations support systems are utilized to monitor system quality and identify devices that fail to meet performance thresholds.  These same platforms generate statistics on system performance such as dropped calls, blocked calls and handoff failures. Our network operations center is located in our Netanya headquarters. In addition, we have a duplicate back-up center in a separate location and a disaster recovery plan, or DRP, for all our engineering systems. The DRP also provides our network with additional advantages, including increased capacity in some cases and also provides us better durability and resilience. We also adopted a business continuity plan and a disaster recovery plan to ensure our ability to continue our operation in emergency situations in accordance with our license.
 
Spectrum allocation
 
Spectrum availability in Israel is limited and is allocated by the Ministry of Communications through a licensing process. We have been allocated 2 X 10 MHz in the 850 MHz frequency band previously used by our TDMA network and currently by our UMTS/HSPA base stations, 2 X 20 MHz in the 1800 MHz frequency band, 5 - 15 MHz (varying dependent on usage required in different areas),  which are used by our LTE network and our GSM/GPRS/EDGE network (varying dependent on usage required in different areas) and 2 X10 MHz  in the 2100 MHz frequency band used by our UMTS/HSPA network.  We believe that our available spectrum is sufficient for our current needs.
 
Out of the 20 1800 MHz, 3MHz were allocated to us in August 2015 by the Ministry of Communications for 4G technologies (such as LTE, LTE Advanced). Unlike our other frequencies allocated to us for the duration of our license, these frequencies were awarded to us for a period of 10 years only.
 
The shared networks further use additional 2X10 MHz in the 1800 MHz frequency band. See "– Network sharing agreements" for additional details.
 
We pay frequency fees to the State of Israel.
 
Following an instruction from the International Telecommunications Union to commence a process to accord the frequencies used by Israeli cellular operators with European standards, we and another cellular operator that use some frequencies according to American standards, were required by the MOC to migrate to frequencies compatible with international standardization for our region. In March 2020 the MOC determined such replacement shall be effected as follows: phase 1 - our current 2x10 850MHZ frequencies will be reduced and replaced with other 2x5 MHz 850MHZ frequencies on June 1, 2020; phase 2 - at a later date to be determined and as soon as possible, we will be awarded 2x5 MHz in the 800 frequencies; phase 3 - at a later date to be determined, the aforesaid 850MHz and 800MHz frequencies will be replaced with other 2x10 MHz in the 800 frequencies; additional frequencies may be allocated to us for limited periods during the transition period. The MOC noted that we may use an interim leniency (currently until March 2021) to the Planning and Building Law, allowing, under certain conditions, replacement of cell sites without obtaining a building permit. The MOC will further consider allocating partial 800MHz or 900 MHz frequencies tender revenues, if such tenders are executed, to expedite such frequencies replacement.  Such replacement will involve material investments and replacement of radio equipment in all our cellular sites and may, during such project, adversely affect our products and services or quality thereof and our ability to comply with quality standards set in our license (unless modified). See "Item 3. Key Information – D. Risk Factors – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results", "-We may not be able to obtain permits to construct and operate cell sites" and "- We may be adversely affected by significant technological and other changes in the telecommunications industry".
 
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In addition, in July 2019 the MOC published a frequencies tender, which the MOC expects to conduct during 2020 The tender is to include 30MHz in the 700Mhz frequencies band, 60MHz in the 2600MHz frequencies band and 300 MHz in the 3500-3800Mhz frequencies band. The frequencies shall be allocated for a period of 10-15 years. The tender will be open for MNOs only, other than 100Mhz in the 3500MHz frequencies band which will be open for any contender. New contenders may only provide specific 5G services. MNO which shall not win 3500-3800 frequencies shall not be able to provide 5G services. MNOs sharing a network shall provide a joint bid (subject to the tender committee's prior approval) and maximum allocation of frequencies will be as follows: in the 700MHz frequencies band - 15MHz per network; in the 2600MHz frequencies band - 40MHZ per network; in the 3500-3800MHz frequencies band - 80MHZ per MNO and 120MHZ per network. The result being that at present the 700MHz would be the main coverage enhancement frequency, but given the amount available and maximum amount per network as well as due to other tender principles and draft license requirements, not all MNOs may win frequencies or may win less frequencies than their needs or less than their competitors.  See "Item 3. Key Information – D. Risk Factors – - We may be adversely affected by significant technological and other changes in the telecommunications industry". The tender further sets coverage, timeline and quality requirements for winning certain frequencies and includes certain leniencies and performance based incentives which are subject to additional approvals not yet awarded. The petition we, Golan and Xfone filed in December 2019 against the mechanism the tender sets for the license fee was dismissed in February 2020.
 
Cell site construction and licensing
 
We construct cell sites based on our strategy to expand the geographical coverage and improve the quality of our network and as necessary to replace cell sites that need to be removed. Our acquisition teams survey the area in order to identify the optimal location for the construction of a cell site.  In urban areas, this would normally be building rooftops.  In rural areas, masts are usually constructed. Our transmission teams also identify the best means of connecting the base station to our network, based on our independent transmission network, either by physical optical fiber, microwave link or Bezeq, Hot or IBC landlines. Once a preferred site has been identified and the exact equipment configuration for that site decided, we begin the process of obtaining all necessary consents and permits. The construction of cell sites requires building permits from local or regional authorities, or an applicable exemption, as well as a number of additional permits from governmental and regulatory authorities, such as construction and operating permits from the Ministry of Environmental Protection in all cases, permits from the Civil Aviation Authority in most cases and permits from the Israeli Defense Forces in some cases. In special circumstances, additional licenses are required. See “Item 4. Information on the Company – B. Business Overview – Government Regulations – Cellular Segment – Permits for Cell Site Construction.”
 
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Network sharing agreements
 
In March and April 2017 our Sharing Agreements came into effect – (1) the 4G network sharing and 2G and 3G hosting services agreement with Xfone (which commenced operating in the cellular market in April 2018), (2) the 3G and 4G network sharing and 2G hosting services agreement with Golan (originally entered into with Electra and adopted by Golan, after being acquired by Electra) and (3) an agreement combining the 4G network sharing arrangements of the Xfone agreement and the Golan agreement into one three-way agreement.
  
The Sharing Agreements set the terms under which the sharing networks operate, including:
 
o
Usage of the parties' relevant frequencies, management and operation by separate entities, or the Joint Corporations,  possession of equal parts of the shared network active elements, investment in equal parts in future active elements and IRU of each sharing party to the other sharing parties and IRU by us to  the other sharing parties and the Joint Corporations to our passive elements of the shared networks, services provided by us to the Joint Corporations, as a subcontractor and certain arrangements for separation of the parities and adding another sharing party.
  
o
The agreements are for a term of ten years, and will be extended for additional periods, unless either party notifies otherwise. The termination of the Golan Agreement prior to the lapse of the first 10 years due to a breach by Golan will entitle us to liquidated damages of NIS 600 million plus VAT. In addition to standard termination causes, Xfone may terminate its agreement by prior written notice if it decides to cease operating in the cellular market in Israel.
 
o
The average annual consideration to be received by us under the Golan agreement (starting with lower annual payments and increasing over the term) is expected to be in a range of approximately NIS 210-220 million plus VAT (and a lower sum due to Xfone's participation in the Sharing Agreements and division of investments and expenses among the three operators), depending on Golan's number of subscribers and their usage of the shared network and our 2G network.
  
The consideration for us under the Xfone agreement includes substantially similar arrangements (mutatis mutandis to its sharing and hosting agreement), but during a period of up to five years beginning April 2018, Xfone will be entitled to replace its payments for IRU to the passive network and operating costs with a monthly payment per subscriber, but in any case not less than certain minimum annual amounts (ranging between approximately NIS 20 million in the first year and approximately NIS 110 million in the fifth year).
 
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Under the Golan Agreement (which replaces the former national roaming services agreement), in April 2017, we provided a loan to Golan in the sum of NIS 130 million for a period of 10 years.
 
See "A. History and development of the Company – our history" above for details of our binding MOU to purchase Golan's share capital.
 
Fixed-line Segment
 
Fixed-line infrastructure
 
We launched our SDH transmission network in 1999 and our Carrier Ethernet network in 2010. In 2015 we launched an MBH network intended to support all our cellular traffic. These networks cover the central populated areas in Israel and business parks. These networks enable us to provide our business customers with telephony and high speed and high quality transmission and data services and provides us with our own wireline connectivity / backhaul services for our cellular networks while reducing our need to lease capacity from Bezeq, the incumbent landline operator in Israel.
 
Our optical transmission network is strategically deployed in order to cover the major portion of Israel’s business parks from Nahariya in the north to Beer Sheva in the south and Afula and Jerusalem in the east, consisting of approximately 1,990 kilometers. The fiber-optic network is monitored by a fault-management system that performs real-time monitoring in order to enable us to provide high quality service. In order to efficiently complete our transmission network’s coverage to the majority of our cell sites and business landline and transmission subscribers, we use a microwave network as a complementary solution in those areas that are not served by our fiber-optic network. As of December 31, 2019, we had approximately 2,617 microwave links to both our cell sites and our landline and transmission subscribers.
 
Additional transmission capacity required for our fixed line services to business customers is leased from Bezeq and Hot.
 
We pay frequency fees for frequencies used by our microwave network to the State of Israel.
 
In 2017, in light of the growing demand for data capacity by our fixed-line subscribers, mainly in the private sector, which we purchased from Bezeq, we commenced expanding our fiber-optic network into residential areas, using certain physical infrastructure of Bezeq and in 2018 we continued deploying our independent fiber-optic infrastructure in residential areas. In addition, in 2019, we completed an investment transaction in IBC, the purchase of an indefeasible right of use in IBC's fiber-optic network and the sale of our independent fiber-optic infrastructure in residential areas to IBC. Our investment in IBC, may require material investments in order for IBC to continue to deploy its network but it allows us to reduce investments in independent fiber-optic infrastructure and reduces our costs and our dependency on Bezeq. Such positive effects are expected to become more pronounced as, and subject to – IBC's infrastructure being further deployed. See "- Investment in IBC" below.
 
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In 2019, we continued to expand our Carrier Ethernet network and our ISP network backbone in Israel and abroad in order to support growing demand for capacity, upgraded the capabilities and capacity of our customer Quality of Experience systems and upgraded and improved the capabilities of our central system for the protection of our network against cyber attacks.
 
Our internet infrastructure is currently comprised of connectivity sites in two locations in Israel (Haifa and Petah-Tikvah), which provide our customers, through overseas connectivity points in London and Frankfurt, with connectivity to the global internet network. This internet infrastructure contains backup capability in order to ensure continuity of service.
 
Investment in IBC and sale of fiber-optic infrastructure to IBC
 
In July 2019 we completed an investment transaction in IBC, composed of several agreements, or the Transaction, which in addition to standard and customary conditions, include the following:
 
Purchaser Agreements - We and the Israel Infrastructure Fund, or IIF, entered into partnership agreements for the purchase of 70% of IBC's share capital by a jointly and equally owned limited partnership, or the Purchaser. The Purchaser Agreements contain an undertaking for an additional investment of up to NIS 200 million by both the Company and IIF, pro rata to their holdings in the Purchaser, over a period of 3 years (we have already provided IBC with the full additional investment obligation) and certain arrangements regarding a party's failure to make its share of the committed investment and regarding dead lock situations.

Share Purchase Agreement, or SPA - The Purchaser, IBC, the Israeli Electric Company, or IEC and the other shareholders and main creditors of IBC entered an agreement for the purchase of 70% of IBC's share capital, through investment of the Purchaser in IBC, for a total amount of approximately NIS 110million (of which the Company paid half) (the "Consideration"), the majority of which was in the form of a shareholders' loan. The other 30% of IBC's issued and outstanding share capital are owned by IEC. The Consideration was used to settle generally all of IBC's debts (other than a certain amount to IEC).

Shareholders Agreement - The Purchaser and IEC (holding 70% and 30% of IBC's share capital, respectively) entered into a shareholders agreement. The agreement regulates the management of IBC, including certain arrangements regarding funding of IBC and dilution (and anti-dilution in certain circumstances) of non-participating shareholders.

IRU Agreement – We and IBC entered into an agreement granting us an indefeasible right of Use, or IRU to a 10-15% percentage of IBC's fiber optics 'home pass' (i.e. fiber-optic actually reaching / connected to the building; current undertaking of 15% and may be decreased to 10% under certain conditions), as shall be deployed by IBC in the next 15 years (and may be extended to additional periods with no additional consideration other than annual maintenance payments). The IRU consideration is subject to actual IBC's 'home pass' deployment (annual consideration for 2019 amounted to approximately NIS 18 million ), is expected to increase each quarter based on the actual addition of 'home passes' deployed during such quarter and shall be paid in 36 quarterly installations (9 years), in addition to annual maintenance payments.

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IEC Services Agreement - IBC and IEC entered into an agreement updating IBC's previous right of use and services agreement for IBC's fiber-optic network when deployed over IEC's infrastructure. The IEC Services Agreement includes improved pricing and arrangements for IBC's exclusive right to deploy its fiber-optics over the IEC's electricity network and other services provided by IEC to IBC in relation thereof.

The sale of Residential fiber-optic
 
Further in July 2019, we and IBC entered an agreement and completed the transaction for the sale of our independent fiber-optic infrastructure in residential areas to IBC, for the sum of approximately NIS180 million (with additional consideration to be paid for services provided by the Company to IBC). The consideration for the sale was financed entirely through shareholders' loans, provided to IBC by IIF and the Company. Once the sale was completed, the IRU Agreement, including our obligation to purchase percentage of IBC's fiber optics 'home pass' (as detailed above), applies to the infrastructure purchased from us (the combined amount of 'home pass', surpassed 300,000 potential customers, at the end of 2019).
 
For additional details see "Item 3. Key Information – D. Risk factors – Risks related to our business - We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results", " - We face intense competition in all aspects of our business", "- Our investment in new businesses involves many risks" and "Item 4. Information on the Company –B. Business Overview – Competition – Fixed-Line Segment- Fixed-Line Infrastructure".

In March 2020, IBC entered into an agreement with an Israeli financial institution, under which IBC shall be extended with a credit line of up to NIS 350 million, to be repaid until December 31, 2032, to further its business operation, including deployment of fiber-optic infrastructure in Israel. The agreement includes customary commercial terms and conditions. In addition, the partnership jointly held by the Company and Israel Infrastructure Fund undertook to provide IBC with an additional investment of NIS 50 million before 2021 year end.
 
Suppliers
 
In April 2014, we entered into a framework agreement with NSN Israel, of Nokia Networks group, a worldwide leading network manufacturer, for the purchase of an LTE network, which also supports LTE Advanced technology (4.5 generation) and related services. This agreement also governs the purchase and services provided under our previous agreement with NSN, in relation to our GSM/GPRS/EDGE /UMTS /HSPA core system, radio access network and related products and services. We have an option to purchase maintenance services on an annual basis until March 2030.
 
In September 2005, we entered into an agreement with LM Ericsson for the purchase of UMTS radio access network and ancillary products and services and in December 2011 for the purchase of upgraded UMTS /HSPA products and related services. We have an option to purchase additional maintenance services on an annual basis until 2026.
 
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We use Telcordia’s (which was acquired by Ericsson) intelligent platform, or IN, which provides services to our networks and allows us, at minimal cost, to internally develop sophisticated services with a short time-to-market that are customized to local market requirements.
 
In addition, we have agreements with several Israeli engineering companies for the construction of our cell sites. We also purchase certain network components from other suppliers.
 
Samsung International Co. Ltd. provides us Samsung handsets and spare parts for such products, under terms, including price of products, agreed between us and Samsung from time to time.
 
In October 2016, we entered into an agreement with Apple Sales International for the purchase and distribution of iPhone handsets in Israel. The agreement is in force until May 2020. Under the terms of the agreement, we have committed to purchase a minimum quantity of iPhone products over the agreement's period, which represents a significant portion of our total cellular handsets purchase amounts over that period.
 
We have entered into a number of agreements with TI Sparkle between 2003 and 2019 for the purchase of rights of use of certain telecommunications capacities on TI Sparkle's underwater communications cables, which connect the Israeli internet network to the "entry points" of the global internet, as well as maintenance and operation services relating to these cables. Over the last few years we have increased the capacity purchased for significantly lower prices, as well as reduced maintenance costs. The term of the agreement with respect to capacity purchased from TI Sparkle is in effect until May 2027. We have the option to extend the agreements until May 2032.
 
We have entered into agreements with Bezeq and Hot, the primary internet infrastructure providers in the Israeli market, for the provision of our connectivity services. Due to the increase in customer demand for broadband width in recent years, we are required from time to time to increase the capacity we purchase from Bezeq and Hot, although at a lower pace than before, due to advanced efficient technologies and the fiber-optic alternative. In November 2009, we entered into an agreement with Alcatel Lucent for the purchase of our Carrier Ethernet network. We have an option to purchase maintenance services until 2022.
 
Under our agreement with Alcatel Lucent, we purchased an SDH transmission network. We purchase maintenance services for the network on an annual basis.
 
In February 2015, we entered into an agreement with Bynat Communications Computers Ltd., or Bynat, for the purchase and maintenance of an MBH transmission network by Cisco. We purchase maintenance services from Cisco.
 
In June 2004, we entered into an agreement with Nortel Networks Israel (Sales and Marketing) Ltd., or Nortel, , for the provision of our international communications switch, on which we base our ability to provide international calling service, as well as related equipment and services. From 2010, Geneband Inc. (which acquired Nortel's relevant business) provides us with support and maintenance services for the equipment provided under this agreement.
 
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We have entered into an agreement with ECI Telecom Ltd. for the provision of transmission switches by ECI Telecom among our various location sites in Israel and overseas, used for our internet connectivity and ILD operations.
 
Our system for the provision of advanced centrex services based on cloud solutions to our business landline customers, is supplied by Broadsoft Ltd.
 
Our principal suppliers in the ILD market are Bezeq, Hot and the Israeli cellular operators. We have entered into interconnect agreements with them for facilitating inbound and outbound international traffic to and from their networks, as well as for billing and collection services for our services, for certain customers. We have also entered into agreements with approximately 100 foreign carriers. These agreements regulate and facilitate our ILD services, as well as our international voice hubbing services.
 
In 2011, we entered into an agreement with LM Ericsson, for the purchase of our OTT TV services system and ancillary products and services. In 2018, LM Ericsson's media operations were purchased by MK Systems USA Inc., and MK Systems' Israeli subsidiary which continue to provide us with maintenance services for our system. We are currently negotiating a new maintenance agreement. Our OTT TV service also uses the Israeli DTT infrastructure. The DTT infrastructure may be used freely by our customers. In 2019, we entered into an agreement with Kaltura Europe Ltd  for the provision of a new cloud-based content management platform for our OTT TV service, allowing, among others functionalities, the ingestion, management, distribution, analysis and protection of the OTT TV content.
 
In 2013, we entered into an agreement with VU (recently purchased by Amdocs (Israel) Limited), a leading international supplier of multiplatform video services and solutions, for the supply of international video content and content operation and management services for our OTT TV service. Under our agreement with VU, we have committed to pay certain fixed amounts for such content and services. The Agreement is valid until the end of 2020; thereafter, it is renewable for additional periods of one year each, unless terminated by either party, subject to prior notice.
 
In October 2014, January 2016 and December 2016, we entered into agreements with RGE, ONE and Charlton, respectively, for the provision of sport channels, in which each of these suppliers holds exclusive broadcasting privileges. Each of the agreements is for a period of 5 to 6 years, during which time we are committed to pay each supplier certain minimum amounts.
 
We maintain a variety of information systems that enable us to deliver superior customer service while enhancing our internal processes.
 
Our billing and CRM systems are supported mostly internally. We also use a customer care system provided by PeopleSoft and supported mostly internally, inventory and suppliers management systems by Priority/Eshbel and SAP, a financial system by Coda and infrastructure integrations systems by Microsoft BizTalk and Oracle OSB.
 
In May 2016, we entered into several agreements aiming to provide us with a comprehensive CRM SAAS solution, on a cloud 'software as a service', or SAAS, basis, which, when completed, will gradually replace all our current CRM systems with one CRM solution. These agreements include the following main agreements:
 
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An agreement with Salesforce, for the provision of Salesfoce's CRM SAAS platform, including various products and services and support for the agreement term.  The agreement is valid until June2020.  We also have an option to renew the agreement for two additional periods of 5 years each under certain terms.

Two agreements with Vlocity, as follows: (i) an agreement for the provision of Vlocity's telecom-CRM SAAS solution, based on Salesforce platform, including support for such services for the agreement term. This agreement is valid until November 2024 and thereafter will be automatically renewed for additional periods of 5 years each (unless we decide not to renew the agreement and (ii) an agreement for the development and customization for Salesforce's and Vlocity's CRM solution. This agreement will be valid until the project is completed, and may be terminated by us subject to prior written notice.
 
We use Nortel’s CTI system for the management of incoming calls to our telephonic call centers.
 
We also use a knowledge management system relating to our various services and products by Aman, branded "Cellcopedia".
 
We use ERP solutions provided by SAP. We use a data warehouse based on an Oracle database system and various data mining tools, ETL by Informatica and reports generated by Cognos. The data warehouse contains data on our subscribers’ usage and allows for various analytical segmentation of the data.
 
Cisco provides us maintenance proactive malfunction detection and consultant services for our IP networks equipment.
 
We entered into an agreement with Be’eri Printers for our printing supplies and invoices as well as the distribution, packaging and delivery of invoices and other mail to the postal service distribution centers in 2003. The agreement is effective until the end of 2022.
 
Sales and Customer Care and Marketing
 
Sales and customer care
 
As part of our strategy to fully penetrate every part of the Israeli market, we combine our sales and customer care efforts in order to maximize sales opportunities and achieve cost efficiency alongside accessible and quality customer service. Our customer service unit is our main channel for preserving the long-term relationship with our subscribers and we focus on customer retention through the provision of quality service and customer care. In addition, subscribers are encouraged to subscribe to additional value-added and content services as well other communications services, in order to enhance customer satisfaction and increase revenues, with a specific focus on bundles of services. We offer pricing plans, value-added services, handsets, accessories and related services through a broad network of direct and indirect sales personnel. We design pricing plans and promotional campaigns aimed at attracting new subscribers and enhancing our ability to retain our existing subscribers. In order to achieve this goal, we systematically monitor and analyze our subscribers’ preferences, characteristics and trends.
 
We pay our independent dealers commissions on sales, while our direct, employee sales personnel receive base salaries plus performance-based incentives. All of our, and our dealers', sales, customer care representatives and other customer-facing staff go through extensive training prior to commencing their work and thereafter regularly undergo training, and review of their performance in order to assure the quality of our services and to identify areas where we can improve.
 
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We provide our customer facing representatives with a continually updated database, thus shortening the interaction time required to satisfy the customer’s needs and preventing human errors. We constantly review our performance by reviewing customers applications and conducting surveys among our subscribers in order to ensure their satisfaction with our services and to improve them as necessary. In addition, we constantly apply preventive and preemptive measures aimed at reducing churn.
 
In our efforts to adjust our costs to market conditions, we have closed or unified points of sale and service in neighboring locations and reduced or relocated call centers, operating them in a more cost effective fashion, while placing greater focus on self-service channels and proactive malfunction resolution, identifying and solving problems ahead of customer complaint.
 
Our sales and customer care operation is conducted primarily through the following channels:
 
 Points of sale/Walk-in centers.  We distribute our products and services through a broad network of physical points of sale providing us with nationwide coverage of our existing and potential subscriber base.
 
As of December 31, 2019, we independently operated approximately 23 service and sales centers, with approximately 150 additional sale and service points operated by our dealers (including our wholly owned dealer, Dynamica), covering almost all the populated areas of Israel. These centers generally offer the entire spectrum of products and services that we provide to our subscribers and potential subscribers. These stores are mostly located in central and other frequently visited locations to provide our subscribers with easy and convenient access to our products and services. In our efforts to penetrate certain sectors of our potential subscriber base, we select dealers with proven expertise in marketing to such sectors. Our walk-in centers also offer handset repair service or serve as a contact point for depositing the handsets for repair and receiving the repaired handset (in the same center or at a location of their choice by a courier), with the repair services conducted in a central lab.
 
In 2019, we continued reducing the space of several additional points of sale, and we expect to continue to do so in 2020.
 
Telephonic sales/Call centers.  Telephonic sales efforts target existing and potential subscribers. Our sales representatives (both in-house and outsourced) offer our customers a variety of products and services, both in proactive and reactive interactions. Our call-center services are divided into several sub-centers: general services; technical services; billing; sales; international roaming; and data, internet and TV. We are constantly reviewing the effectiveness of our service and also operate a multi-function call center providing all our services. We currently operate call centers in seven locations throughout Israel, three of which are outsourced. In 2019, we witnessed an increase in calls to our calls centers.  During peak hours our call centers have the capability to respond to 600 customer calls simultaneously. We are making efforts to reduce the number of calls to our call centers by using our new CRM system to provide a more complete service and promoting our self-service channels.
 
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Account managers.  Our direct sales force for our business customers maintains regular contact with our mid-sized and large accounts. We provide small and mid-sized business customers one focal point to both sales and services by phone. Our account managers are aided by our various back office experts in determining customers' needs and making suitable offers, including tailor-made solutions, when required. We offer our business customers handsets repair services by a dispatch service. Sales to larger business customers or governmental and local authorities sometimes involve participation in the customer's tender process.
 
Online sales/Self service. We offer our customers the ability to purchase our products and services and receive various information through our internet site (and our OTT TV service dedicated internet site) and our smartphone application. We provide our subscribers and potential subscribers with various self-service channels, such as interactive voice response, or IVR, internet site, automatic and live chat and live sms chat, facebook chat and our mobile phone application which enables our customers to monitor data usage, obtain digital monthly invoices, includes self-service tutorials, online assistance with internet service problems and chat with a service representative. We invest efforts in directing our customers toward self-service channels.
 
Customer service for our OTT TV and internet infrastructure market services are provided also through technicians providing services at the customers' homes.
 
We constantly invest time and efforts making our services compatible to persons with disabilities, including as required by law. We provide customers with disabilities convenient accessibility to our premises and adapted services, including free dispatch services, text to speech services as well as support services through chat. We also train our representatives to provide accessible service to all our customers.
 
Marketing
 
Our marketing strategy emphasizes our position as a communications group and cellular market leader, our value for money and our provision of a comprehensive solution for our customers' communication needs, by offering bundles of services. We believe the provision of bundles, including triple and quatro play packages of our services strengthen loyalty and increase customer satisfaction. We aim to provide our customers with a comprehensive quality experience through the various means of communications that they use, including their mobile handset, tablet, laptop and television.
 
 From surveys that we conduct from time to time, we learn that subscribers base their choice of communications provider primarily on the following parameters: the services included in the bundle; perceived price of services and handsets; level of customer service; perceived quality of the network; general brand perception; with regards to the cellular provider - selection of handsets and their compatibility with their needs and with regards to the TV service provider – the quality and variety of content. Our marketing activities take into consideration these parameters and we invest efforts to preserve our subscriber base and attract new subscribers.
 
We leverage our extensive interactions with our customers to provide the requested services and also to cross- and up-sell cellular and fixed line products and services according to customer needs, usage trends and profitability, mostly by using advanced CRM system models, to increase customer satisfaction, loyalty and revenues.
 
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We regularly advertise in all forms of media, specifically in digital media and television, using our familiar and loved advertising language which contributes to our brand's strength and popularity. 
 
We believe that our strong brand recognition gives us the high level of market exposure required to help us achieve our business objectives.

Competition
 
Competition – General
 
The principal competitive factors in the telecommunications market include the services included in the bundle, perceived price, general brand perception and customer service.
 
In response to the enhanced competition in the Israeli telecommunications market, we have implemented various steps and strategies, including:
 

identifying new opportunities to maximize our advantages as a communications group, such as our successfully launched OTT TV services, internet infrastructure services through the landline wholesale services and our investment in fiber-optic through IBC and in IOT;
 

focusing on the offering of bundles of services such as our successfully launched triple and quatro play offerings, as it strengthens customer retention and on enlarging customer purchases from us;
 

entering network sharing and hosting agreements with Golan and Xfone, facilitating a more efficient cost structure in relation to our networks and operations thereof and investments therein;
 

investing in IBC, selling our independent fiber-optic infrastructure in residential areas to IBC and entering an IRU agreement with IBC, in order to reduce our costs and dependency on Bezeq ;
 

investing in our network to ensure our ability to offer quality and advanced cellular and fixed line services, and providing our customers with advanced services;
 

taking aggressive efficiency measures through adjustments to our head count, reducing overhead expenses and improving work processes, in order to reduce costs and improve our agility; and
 

actively pursuing mergers, acquisitions and similar opportunities.
 
Our ability to compete successfully will depend, in part, on our ability to anticipate and respond to trends and events affecting the industry, including the introduction of new services and technologies, changes in consumer preferences, demographic trends, economic conditions, pricing strategies of competitors and changes to the legal and regulatory environment.
 
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Competition may intensify further as a result of the occurrence of any of the events described under “Item 3. Key Information – D. Risk Factors – Risks Related to our Business – We face intense competition in all aspects of our business.”
 
In March 2020 the MOC published a public hearing proposing to substantially reduce the guarantees all general license holders are required to provide the MOC.
 
Communications groups and structural separation
 
The Israeli telecommunications market is currently dominated by four communications groups: Bezeq, Hot, Partner and Cellcom. Each of the Bezeq and Hot groups are subject to certain structural separation requirements in relation to sale of bundles of services by each of them and their respective subsidiaries, as a result of being the incumbent and monopoly in their respective core business – landline and multichannel television services. Those requirements include Bezeq's obligation to offer some of the services in its bundle separately under the same terms as in the bundle, and the requirement that Bezeq allow its competitors to participate in a similar bundle (if it includes internet connectivity, VOB or ILD services) under the same terms and equally markets such bundles as its own bundle (though the second requirement does not apply to the sale of the bundle by a subsidiary of Bezeq). The same requirements apply to Hot in the case of bundles that include internet connectivity services, with respect to the internet connectivity service component of the bundle.
 
Following a certain relaxation of the structural separation imposed on the Bezeq group, Bezeq is allowed to offer bundles of services with its subsidiaries under certain conditions, and in 2015 Bezeq merged with Yes (a company providing multichannel pay-TV)  (see "-Fixed line Segment – Television services" below). Bezeq's subsidiaries are allowed to sell and market each other's services, including through bundles of their services. Although the Hot group is also subject to structural separation limitations between its multi-channel television, connectivity, cellular and landline services, it was allowed to offer a bundle of landline telephony, multichannel television and internet infrastructure services and under certain conditions connectivity services as well, and Hot and Hot Mobile are also allowed to sell and market each other's services and exchange information. In January 2016 the Ministry of Communications announced its intention to annul Bezeq and Hot's structural separation as part of its plan to ensure massive investment in fiber optics infrastructure in Israel and in December 2016 the Ministry of Communication informed Bezeq that it intends to hold a public hearing regarding a possible annulment of the corporate separation and thereafter the structural separation in the Bezeq group and Bezeq has announced the commencement of a full merger process with Yes, including full integration of Yes into Bezeq. In 2018 Bezeq partially merged the operation of its subsidiaries – Pelephone, Yes and Bezeq International - thereby reinforcing their ability to compete with our  triple offering. Bezeq's subsidiaries' applications for their re-organization under limited partnerships wholly owned by Bezeq, was denied by the MOC in January 2020. In February 2019, Bezeq filed a petition with the Supreme Court of Justice, against the MOC, requesting the immediate cancellation of the structural separation imposed on Bezeq. In January 2020 the MOC notified the court that recommendations by an inter-ministries team nominated with the task of reviewing the structural separation in Bezeq and Hot will be submitted within a four month period and a resolution may be given by the MOC at a later date.
 
In April 2019, the MOC resolved to further relax Hot's structural separation allowing marketing of Hot and its subsidiaries' services to medium – large business customers without any limitations.
 
The current regulation may change. See also "Item 3. Risk Factors - We face intense competition in all aspects of our business".
 
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Cellular Segment
 
There is intense competition in all aspects of the cellular communications market in Israel, with a penetration rate (the ratio of cellular subscribers to the Israeli population) of approximately 130%, representing approximately 10.6 million cellular subscribers at December 31, 2019, and the average annual churn rate in Israel in 2019 is estimated to be 38%, higher than the churn rates in other developed economies. We expect this intensified competition to continue in the future. We currently compete for market and revenue share with nine other cellular communications operators: five MNOs (Partner, Pelephone, Hot Mobile, Golan and Xfone) and four MVNOs (Rami Levy Hashikma Communications Marketing Ltd., or Rami Levy, Azi Communications Ltd., or Azi, Free Telecom Ltd., or Free Telecom and Cellact Communications Ltd., or Cellact). The competition in the cellular market further increased after the entry of Xfone into the market in April 2018. Under the 4G tender terms, Xfone, Golan and Hot Mobile are eligible for up to a 50% discount on the license fees paid for the 4G frequencies, 10% for each 1% addition to their market share, obtained over a period of 5 years. For details of our network sharing and hosting agreements with Golan and Xfone, see "– Network and Infrastructure – Cellular Segment – Network sharing agreements" above.
 
Our estimated market share based on number of subscribers was approximately 26% as of December 31, 2019. The market shares at such time of Partner, Pelephone, Hot Mobile, Golan and Xfone were estimated to be approximately 25%, 21.7%, 15%, 8.7% and 2%, respectively, and the MVNOs' collective market share was estimated to be 2.0% . These estimates are based on the public reports of other operators and our estimate of the market share of the operators who do not publish reports.
 
Hot Mobile and Golan commenced their UMTS operations in 2012. Rami Levy, Azi, Free Telecom and Cellact, all MVNOs, commenced operations in 2011 - 2013. Xfone commenced its operations in 2018.
 
Partner started operations in 1998. As of November 2019, Partner's previous controlling shareholder  - S.B. Israel Telecom Ltd. (indirectly controlled by the media entrepreneur Haim Saban)'s shares are held by Adv. Ehud Sol as a permanent receiver and in January 2020, Partner announced the receipt of a binding offer for 100% of its issued  share capital from Hot and Hot's controlling shareholder – Altice Europe N.V. A merger of Partner with Hot Mobile, if effected, would turn the merged entity into the largest cellular operator in Israel. In March 2011, Partner purchased the outstanding shares of 012 Smile Telecom Ltd., or Smile Telelcom, an ISP and ILD operator, now also serving as Partner's cellular low cost brand dealer, and in 2015, its network sharing agreement with Hot Mobile was approved and the two companies began joint operation through a joint subsidiary.
 
Pelephone is a wholly-owned subsidiary of Bezeq, and started operations in 1986. As of January 2015, its low cost brand services are sold by another subsidiary of Bezeq – Walla Communications Ltd., an internet portal. Bezeq is controlled by B Communications Ltd., or B Communications,. B Communications is an Israeli company traded on the NASDAQ and the TASE and as of December 2019, is controlled by Searchlight II BZQ L.P and T.N.R Investments Ltd.. Hot Mobile operated in the cellular market as of 2001. In 2012 it began its UMTS operation. Hot Mobile is owned by Hot, which is indirectly controlled by the French businessman Patrick Derhy. In 2015, its network sharing agreement with Partner was approved and the two companies began joint operation through a joint subsidiary.
 
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Golan is owned by Electra, a public Israeli company that distributes and retails consumer products and is part of a large Israeli business group. Golan began to operate in 2012. For details of our binding MOU to purchase Golan's share capital see "A. History and development of the Company – our history" above and for details of our network sharing and hosting agreements with Golan and Xfone, see "-Network and Infrastructure – Cellular Segment – Network sharing agreements" above.
 
Xfone is controlled by Xfone Communications Ltd., an Israeli ISP, which is owned by the Israeli businessman Hezi Bezalel.
 
Rami Levy is a subsidiary of a major Israeli discount supermarket chain. Azi is owned by Telzar, an ILD operator. Cellact is owned by Cellact Ltd., a content provider.  Free Telecom is owned by an Israeli business man.
 
Israel is a small country (approximately 8.7 million residents) with 10 cellular operators and aggressive competition and regulation which led to some of the lowest cellular prices worldwide. Competition may remain in its current heightened condition or even increase and prices shall remain low, unless the market undergoes substantial changes.
 
Handsets
 
In the handsets market, we compete with numerous vendors, chain stores and importers' stores, while international platforms like Ali Express gain substantial market share mainly with low cost handsets manufactured in China.  We expect this trend to continue and include more global companies. Competition in this market has increased significantly in recent years and decreased sales for us. See "Item 3.Risk Factors - Our handsets revenues and profitability have decreased and are expected to decrease further" for additional details. Competition in this market may increase further.
 
Fixed-line Segment
 
The only groups obligated to and having their own nation-wide (or substantially so) landline infrastructure in Israel are Bezeq and Hot. Bezeq's infrastructure is copper cable based and Hot's infrastructure is cable based. For proposed changes to Bezeq's nationwide deployment obligation in regards to its future fiber optic network see below " - Government Regulations  - Fixed-line segment –  Fiber-optic network".
 
We are dependent on Bezeq and Hot's broadband services for the supply of our internet services. The growing demand for data capacity increased our dependency on Bezeq's wholesale services. In 2014, IBC, whose deployment requirement under its license was reduced in 2019 to reach 40% of the households in Israel within ten years from July 2019 - commenced deployment of its infrastructure on the IEC's fiber optic infrastructure in selected areas. In 2016 and 2017, respectively, Partner and we began extending our existing independent fiber optic infrastructures into residential areas and in 2019 we completed our investment in IBC, the sale of our independent fiber-optic infrastructure in residential areas to IBC and entered an IRU agreement with IBC. Bezeq has executed a substantial part of the investments required for the operation of a fiber optic network as well, but has not commenced operating it. Bezeq operating its fiber-optic infrastructure may substantially increase competition in the field but will also increase public awareness to the service. IBC becoming a widespread alternative to Bezeq would improve our competitiveness in the fixed-line services market as it would reduce our dependency on Bezeq and reduce our costs. For more details, see " – Networks and Infrastructure – Fixed-line Segment – Fixed-line Infrastructure " and thereunder "- Investment in IBC" above.
 
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A landline wholesale market was formally launched in Israel in 2015 and to date, includes internet infrastructure (BSA) and physical infrastructure services on Bezeq's infrastructure (wholesale telephony is not provided) and also available on Hot's infrastructure since 2019. See "-Government Regulations – Fixed-line Segment – Wholesale Landline Market" below.
 
An effective wholesale landline market, specifically one providing both telephony and infrastructure services, would enhance our ability to compete and extend our service offering. However, an annulment or substantial alleviation of corporate or structural separation and Bezeq's tariffs supervision, or further consolidation of Bezeq's subsidiaries, may have a material adverse effect on our competitive capabilities and results of operation, especially if effected before an effective wholesale market is in place. The consolidation of Bezeq's subsidiaries may have an adverse effect on our ability to grow in our triple and quatro offering. Further, the entry of new competitors to the fixed-line market, through the wholesale market, has increased competition in the fixed-line market and may trigger further escalation in the competition in other markets in which we operate. The possible acquisition of Partner by Hot would increase Hot's duopolistic powers and competitive standing.
 
Internet Infrastructure and Connectivity Business
 
The two main internet infrastructure providers for the private sector in Israel and offering internet infrastructure services to both ISPs and end-users are Bezeq and Hot. Bezeq, and as of 2018 Hot as well, are also providing internet infrastructure services to operators that do not own their own infrastructure under the landline wholesale market, who, in turn, provide this service to the end customer. Partner and IBC's infrastructure are deployed in selected areas.  IBC's infrastructure includes as of July 2019, the independent fiber optic infrastructure we deployed in residential areas and sold to IBC.  IBC's licenses allow the provision of broadband infrastructure services to other licenses holders as well as directly to large business customers, though a public hearing published in January 2020, proposes to allow IBC to provide its services to other end-users, both private (under certain conditions) and to medium - large business customers. IBC provides broadband infrastructure services through agreements entered into with some of the smaller ISPs and as of 2019, is also providing us with such services under an IRU agreement. Bezeq, Hot, we and Partner provide transmission services to business customers over each operator's respective independent transmission network.
 
As of September 30, 2019, internet infrastructure services were provided by Bezeq and Hot to approximately 988,000 and 705,000 households in Israel, respectively. As of the first half of 2015, internet infrastructure services were provided by other operators, including us, through the landline wholesale market, using Bezeq's infrastructure and as of 2018 also using Hot's infrastructure. Partner started offering fiber optic internet infrastructure services over its independent infrastructure to the private sector in 2017. In 2018, we started offering fiber optic internet infrastructure services in residential areas in which we deployed our independent fiber optic infrastructure as a stand alone service or as part of our triple and quatro offerings and currently are offering those services over IBC's network.
 
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Based on Bezeq and Hot reports, at the end of September 2019, the internet infrastructure services household penetration rate was approximately 94%. We bundle this service with our internet connectivity service and also as part of our triple and quatro play offering. As of December 31, 2019, we had approximately 278,000 households subscribed to our end-to-end internet services. In 2018, Hot commenced providing wholesale landline services with maximum tariffs (set by the MOC) higher than those set for Bezeq's wholesale services and higher than the retail price Hot currently offers its own customers. Given Hot's high tariffs, our usage of its wholesale infrastructure is negligible. In December 2019 the MOC published a public hearing proposing to set fix tariffs (rather than the current traffic volume dependent tariffs) for Hot's internet infrastructure wholesale services, which are lower than Hot's current retail tariffs. A reduction of Hot's wholesale tariffs and effective inclusion of Hot's infrastructure in the wholesale market may increase the amount of potential subscribers to our triple and quatro play and bundle offerings.  In July 2019, the MOC published a public hearing proposing to set maximum fix tariffs for infrastructure internet service over Bezeq's fiber optic infrastructure, higher than those set for Bezeq's current maximum tariffs over its copper cables infrastructure. In March 2020, the MOC published a public hearing proposing a reduced regulatory requirements temporary license for the provision of internet infrastructure services.
 
Internet connectivity access is currently provided by three major ISPs: us, Bezeq International, Partner, and some other smaller players including Hotnet (a subsidiary of Hot) and Xfone Communications Ltd. (Xfone's controlling shareholder).
 
The Israeli internet connectivity market is highly competitive and saturated. As of the date of this report, there are a few dozen ISPs in Israel, though most of them do not hold significant market shares. Competition among the various players concentrates mainly on pricing.
 
The offering of bundles of services and the aggressive campaigns of both Bezeq and Hot offering substantially higher bandwidth for lower tariffs to end-users, resulted in a substantial decrease in internet connectivity service prices and led to increased demand for greater bandwidth, which required us to increase the capacity we purchase from Bezeq and Hot, but tariffs remained high. We demanded the reduction of such tariffs and continue to await the MOC decision in a public hearing published in 2012 and 2015, in regards to such payments. /  Further, the offering of bundles of internet infrastructure and connectivity using the wholesale market increased the competition in this field, resulted in loss of some of our internet connectivity customers. Bezeq's breach of its obligation to market our connectivity services when proposing an internet infrastructure and connectivity bundle until April 2018 also resulted in a substantial loss of connectivity business. If competition remains at current levels and the regulatory environment remains unchanged, this trend is expected to continue to have a material adverse effect on our results of operations.
 
Global internet connectivity is provided by three underwater cables. The main provider, which also provides us with the majority of our global internet connectivity, is TI Sparkle, and two additional underwater cables are owned by each of Tamares Telecom and the Bezeq group.
 
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Television services
 
Multichannel pay-TV services are dominated by Hot (the incumbent cable based TV provider and monopoly in this field) and YES (a satellite based TV provider and a subsidiary of Bezeq) with approximately 777,000 and 558,000 households, respectively, as of September 30, 2019. The multichannel pay-TV market is also highly penetrated. We successfully entered this market in December 2014, using an hybrid OTT-DTT television service and have approximately 258,000 households subscribed to our Cellcom tv services as of December 31, 2019. Our service includes Netflix's and Amazon Prime's (internet based VOD content providers) applications integration, which enable us to distribute Netflix's services and Amazon Prime's services in Israel, including through direct access from our tv platform.  In June 2017 Partner launched its OTT TV solution and has approximately 176,000 households subscribers as of September 30, 2019. In August and October 2017, respectively, Hot and Yes each launched an OTT TV low cost brand solution – branded Hot Next and Sting, respectively (Hot's OTT TV solution is also marketed by Rami Levy) and in March 2019 Yes announced its intention to gradually transfer from satellite broadcasting to OTT. Yes has further launched another Apple TV OTT solution branded Yes+. Partner's OTT TV solution includes Netflix and Amazon's applications integration. Hot's offer also includes Netflix's application integration. Also, Netflix and Amazon Prime provide their services to viewers in Israel, as complementary service to the existing competitors' content. We expect this trend to continue and include additional global players and also local participants.
 
Under the Israeli Antitrust Commissioner's 2014 instructions, aiming to facilitate the entry of new competitors to the TV market by reducing entry barriers, preconditions for the approval of any merger in the Bezeq group were published, including the requirements that Bezeq is to generally not bill ISPs for TV related internet infrastructure services and annul and not engage in any non-original production exclusivity arrangements.
 
ILD services
 
We are one of the major service providers in the Israeli ILD market. As of the date of this report, there are several ILD operators in the Israeli market. Our main competitors in this market are Bezeq (through its wholly-owned subsidiary Bezeq International) and Partner (through a wholly-owned subsidiary). Additional competitors include Xfone, Telzar International Communications Services Ltd., Rami Levy, Golan and Hot, through wholly-owned subsidiaries or affiliates. At the end of September 2019, our market share in the ILD market is estimated to be approximately 20%.
 
The Israeli ILD market is highly competitive, and the competition in the market is based mainly on the operator's ability to offer attractive pricing and to bundle this service with additional services such as cellular services.
 
In recent years the use of free of charge alternative technologies such as voice-over-IP has resulted in downsizing of the telephony market, especially the ILD services revenues. This trend is expected to continue in the future.
 
Landline telephony
 
The Israeli landline telephony market has been dominated for many years by Bezeq, the incumbent landline monopoly, which held as of December 31, 2019 (according to the Ministry of Communications report) approximately 2/3 of the landline telephony market (and an even larger revenues market share in the business landline telephony sector(. Hot, the incumbent TV monopoly, was the second entrant to this market. Other players include us, Partner's subsidiary and Bezeq International.
 
We offer landline telephony to selected business customers and landline telephony using VOB technology to private customers. We estimate that our current market share in the Israeli landline telephony market is not material. In case landline telephony is effectively included in the landline wholesale market, we may also offer landline home telephony services to private customers based on the wholesale market.
 
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The landline wholesale market was to allow wholesale landline telephony service as of May 2015. In June 2017 the Ministry of Communications allowed Bezeq not to offer wholesale landline services until July 2018 and to provide a resale telephony service (at substantially higher tariffs) as a temporary substitute. In June 2018, the MOC resolved not to prolong Bezeq's temporary resale telephony as an alternative for its obligation to provide wholesale landline telephony services after the lapse of the temporary alternative period and to obligate Bezeq to provide wholesale landline telephony services as of August 1, 2018. To date, no such service has been provided. For details, see "– Government Regulation – Fixed-line Segment – Wholesale landline market".
 
Other fixed-line services
 
Transmission and landline data services are provided by Bezeq, Hot, Partner and us and as of 2019, IBC as well. These services are provided to business customers and to telecommunications operators. During 2019, the competition in these fields of operation intensified following HOT's and Partner's offerings and Bezeq lowering its prices, and the usage of bandwidth of transmission increased.
 
IOT services are provided by Bezeq, Pelephone, Partner and other software integration companies and additional participants are entering this field. We offer a wide range of advanced IOT services and solutions, through cooperation with leading IOT technology and services vendors. The IOT market is characterized by intense competition and includes the offerings of communications providers which offer both connectivity solutions and end-to-end solutions and large software integration companies.
 
Intellectual Property
 
We are a member of the GSM Association, together with other worldwide operators that use GSM technology. As a member of the association, we are entitled to use its intellectual property rights, including the GSM logo and trademark.
 
We are the proprietor of over 160 domain names and approximately 100 trademarks and trademarks applications, the most important of which are the star design, “Cellcom”, “Talkman”, “Cellcom Volume,” "Cellcom tv," "Netvision" and "013 Netvision".  We are also the proprietor of a few registered patents.
 
Government Regulations
 
The following is a description of various regulatory matters that are material to our operations, including certain future legislative initiatives that are in the process of being enacted.  There can be no certainty that the future legislation described here will be enacted or that it will not be subject to further change before its final enactment.
 
General
 
A significant part of our operations is regulated by the Israeli Communications Law, 1982, the regulations promulgated under the Communications Law and the provisions of our licenses, which were granted by the Ministry of Communications pursuant to the Communications Law. We are required by the Communications Law and the Wireless Telegraph Ordinance (New Version), 1972, to have a license in order to provide certain communications services in Israel and be allocated the spectrum to do so.
 
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See also “Item 3. Key Information – D. Risk Factors – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results. ”
 
Cellular Segment
 
Our Cellular license
 
We provide our cellular services under a non-exclusive general license granted to us by the Ministry of Communications in June 1994, which requires us to provide cellular services in the State of Israel to anyone wishing to subscribe. The license expires on January 31, 2022, but may be extended by the Ministry of Communications for successive periods of six years, provided that we have complied with the license and applicable law, have continuously invested in the improvement of our service and network and have demonstrated the ability to continue to do so in the future. The main provisions of the license are as follows:
 

the license may be modified, cancelled, conditioned or restricted by the Ministry of Communications in certain instances, including: if required to ensure the level of services we provide; if a breach of a material term of the license occurs; if any of our managers or directors is convicted of a crime of moral turpitude and continues to serve; or if we and our 10% or greater shareholders fail to maintain combined shareholders’ equity of at least $200 million; it is prohibited for any of our office holders or anyone holding more than 5% of our means of control, to hold, directly or indirectly, more than 5% of the means of control in Bezeq or another cellular operator in Israel, or to serve as an office holder of one of our competitors, subject to certain exceptions requiring the prior approval of the Ministry of Communications;
 

the direct and indirect holdings of DIC and Koor (or a transferee or transferees approved by the Ministry of Communications), in the capacity as our founding shareholders, may not fall below 26% of our means of control (with “means of control” defined for these purposes as voting rights, the right to appoint a director or general manager, the right to participate in distributions, or the right to participate in distributions upon liquidation); the direct and indirect holdings of our founding shareholders who are Israeli citizens and residents may not fall below 5% of our means of control (in March 2020, the MOC published a public hearing proposing to replace such requirement with other national security based requirements); at least 10% of our directors must be appointed by Israeli citizens and residents from among our founding shareholders and the majority of our directors must be Israeli citizens and residents;
 

we or our office holders or a 5% or greater holder of any of our means of control may not commit an act or omission that adversely affects or limits competition in the cellular communications market;
 

it is prohibited to acquire (alone or together with relatives or with other parties who collaborate on a regular basis) or transfer our shares, directly or indirectly (including by way of creating a pledge which if foreclosed, will result in the transfer of shares), in one transaction or a series of transactions, if such acquisition or transfer will result in a holding or transfer of 10% or more of any of our means of control, or the transfer of control over our company , without the prior approval of the Ministry of Communications.  For the purpose of the license, “control” is defined as the direct or indirect ability to direct our operations whether this ability arises from our articles of association, from written or oral agreement or from holding any means of control or otherwise, other than from holding the position of director or officer;
 
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we are subject to the guidelines of Israel’s General Security Services, which may include requirements that certain office holders and holders of certain other positions be Israeli citizens and residents with security clearance and the Minister of Communications is entitled under our license to appoint a state employee with security clearance to act as an observer in all meetings of our Board of Directors and its committees. If our service is to be determined by the Israeli Government to be an “essential service”, the Prime Minister and the Ministry of Communications could impose additional limitations, including a heightened requirement of Israeli ownership of our ordinary shares;
 

we are required to have agreements with a manufacturer of cellular network equipment for the duration of its intended operating period, which must include, among other things, a know-how agreement and an agreement guaranteeing the supply of spare parts for our network equipment for a period of at least seven years; we are required to interconnect our network to other public telecommunications networks in Israel, on equal terms and without discrimination and to provide national roaming services to Golan, Hot Mobile and Xfone; we generally may not give preference in providing infrastructure services to a license holder that is an affiliated company over other license holders;
 

there are certain general types of payments that we may collect from our subscribers, certain procedures and requirements for charging and collecting payments, general mechanisms for setting and raising tariffs, including the basic airtime charging units and prior notifications we must provide the MOC and our customers prior to increasing tariffs and the Ministry of Communications is authorized to intervene in setting tariffs in certain instances;
 

we must maintain a minimum standard of customer service, including, among other things, operation of call centers, maintenance of a certain service level (both coverage and performance) of our network, protection of the privacy of subscribers; and certain limitations and requirements regarding the process and documentation of our marketing and sale interaction with our customers;
 

we may not transfer, pledge or encumber the license or any assets used for implementing the license without the prior approval of the Ministry of Communications;
 

we are required to obtain insurance coverage for our cellular activities. In addition, the license imposes statutory liability for any loss or damage caused to a third party as a result of establishing, sustaining, maintaining or operating our cellular network. We have further undertaken to indemnify the State of Israel for any monetary obligation imposed on the State of Israel in the event of such loss or damage.  For the purpose of guaranteeing our obligations under the license, we have deposited a bank guarantee in the amount of NIS80 million with the Ministry of Communications, which may be forfeited in the event that we violate the terms of our license;
 
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we must maintain and follow additional requirements as to: business continuity plan and a disaster recovery plan and network sharing implementation, under which we may be accountable for violations attributed to the other sharing partners; and
 

we are required to provide the Ministry of Communications information and reports upon its request, as well as detailed annual reports regarding various aspects of our operations.
 
In the event that we violate the terms of our license, we may be subject to substantial penalties, including monetary sanctions under the Communications Law, the sum of which shall be calculated as a percentage of our income and based on the gravity of the breach. The maximum amount per violation that may be imposed is approximately NIS 1.6 million plus 0.225% of our annual revenue for the preceding year, subject to criteria published by the Ministry of Communications. In recent years the MOC has substantially increased its supervision activities and imposed monetary sanctions, including on us (in immaterial amounts). Substantial sanctions will harm our results of operations.  In the event that we materially violate the terms of our licenses, the Ministry of Communications has the authority to revoke them.
 
In July 2019, amendments to our licenses and to the Israeli Consumer Protection Law regulating the manner of response of call centers, including measurable parameters for response times, came into effect. These amendments had and are expected to continue to have an adverse effect on our results of operations.
 
Services in Judea and Samaria
 
The Israeli Civil Administration in Judea and Samaria granted us a non-exclusive license for the provision of cellular services to the Israeli-populated areas in Judea and Samaria.  This license is effective until 2022. The provisions of the cellular license described above, including as to its extension, generally apply to this license.
 
Tariff supervision
 
Interconnect tariffs among landline operators, international call operators and cellular operators are subject to regulation.
 
 In case of a disagreement as to the terms of a hosting service (including the consideration), whether for national roaming of a new MNO (currently Golan, Hot Mobile and Xfone) or hosting of an MVNO, the regulators may intervene in the terms of the agreement, including by setting the price of the service. Unfavorable terms and consideration for the hosting service, may result in material adverse effect on our results of operations. For additional details, see "– Mobile Virtual Network Operators" below.
 
The MOC is authorized to give instructions and to set interconnect tariffs and usage of another operator's network rates and supervised services prices, based not only on cost  plus reasonable profit, but also on the basis of comparison to other licensees, comparable services or such services or interconnect tariffs in other countries. In addition, the MOC was authorized to give instructions in relation to structural separation for the provision of different services, including between services provided to a licensee and services provided to a subscriber.
 
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Mobile virtual network operators
 
A mobile virtual network operator, or MVNO, is a cellular operator that does not own its own spectrum and usually does not have its own radio network infrastructure.  Instead, MVNOs have business arrangements with existing cellular operators to use their infrastructure and network for the MVNO’s own customers. See also "– Tariff Supervision" above.
 
To date, the Ministry of Communications has granted approximately 20 MVNO or unified licenses (which also allow the provision of cellular services as MVNO). Four MVNOs are currently active.
 
Network Sharing
 
Network sharing is conditioned upon certain conditions, including: (i) other operators may be allowed to join on terms similar to the terms granted to the sharing operator with the smallest market share; (ii) each sharing operator may host a MVNO without the other sharing operators' consent; (iii) the shared radio network must be operated through a joint entity held equally by the sharing operators, which entity will be required to obtain a license from the MOC and will use the frequencies allocated to sharing operators; and (iv) the radio elements of the shared network will be held in equal parts by the sharing operators, and each of the sharing operators will have the right to use other sharing operators' passive infrastructure including following termination of the agreement.
 
For details regarding our network Sharing Agreements, see "– Network and Infrastructure – Cellular Segment – Network sharing agreements".
 
Under the new frequencies tender, sharing operators must submit a joined offer. For details see "Network and Infrastructure – Cellular Segment – Spectrum allocation".
 
Permits for cell site construction
 
General
 
In order to provide and improve network coverage to our subscribers, we depend on cell sites located throughout Israel.  The regulation of cell site construction and operation are primarily set forth in the Israeli National Zoning Plan 36 for Communications, or the Plan, and in the Communications Law.
 
The construction and operation of cell sites are subject to permits from various government entities and related bodies, including:
 

building permits from the local planning and building committee or the local licensing authority (if no exemption is available);
 

approvals for construction and operation from the Commissioner of Environmental Radiation of the Ministry of Environmental Protection;
 
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permits from the Civil Aviation Authority (in most cases);
 

permits from the Israel Defense Forces (in certain cases); and
 

other specific permits necessary where applicable, such as for cell sites on water towers or agricultural land.
 
National Zoning Plan 36
 
The Plan includes guidelines for constructing cell sites in order to provide cellular broadcasting and reception communications coverage throughout Israel, while preventing radiation hazards and minimizing damage to the environment and landscape and sets forth the considerations that the planning and building authorities should take into account when issuing building permits for cell sites. The Plan also determines instances in which the public must be informed of requests for building permits prior to their issuance, so that they may submit objections to the construction of a site. Following contradicting decisions by appeal and national zoning committees, in November 2018 the Supreme Court resolved that amelioration charges may be charged in relation to building permits issued in reliance on a national zoning plan. Such decision limits our ability to oppose the charges of amelioration charge in connection to our cell sites and may substantially increase the costs of constructing a site.
 
If the Plan is amended so as to include additional restrictions and requirements on the construction and operation of cell sites, this will harm our ability to construct new cell sites, make the process of obtaining building permits for the construction and operation of cell sites more cumbersome and costly, and could adversely affect our existing network and delay the future deployment of our network.
 
Site licensing
 
We have experienced difficulties in obtaining some of the permits and consents required for the construction of cell sites, especially from local planning and building authorities. The construction of a cell site without a building permit (or applicable exemption) constitutes a violation of the Planning and Building Law, which is criminal in nature.  The Planning and Building Law contains enforcement provisions to ensure the removal of unlawful sites. As of December 31, 2019, we were subject to three criminal and administrative legal proceedings alleging that some of our cell sites were built and have been used without the relevant permits or not in accordance with the permits. As of the same date, a small portion of our cell sites operated without building permits or applicable exemptions. Although we are continually seeking to obtain building permits for these sites, we may not be able to obtain them and in several instances we may be required to relocate these sites to alternative locations or to demolish them without any suitable alternative. In addition, we may be operating a significant number of our cell sites, in a manner which is not fully compatible with the building permits issued for them, although they are covered by permits from the Ministry of Environmental Protection in respect of their radiation level.  In some cases we will be required to relocate these cell sites to alternative locations, to reduce capacity coverage or to demolish them without any suitable alternative.
 
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Based on advice received from our legal advisors and consistent with most court rulings on the matter and the Israeli Attorney General's opinion on the matter that the exemption from obtaining a building permit applies to cellular radio access devices, we have not requested building permits under the Planning and Building Law for rooftop radio access devices. In the course of petitions against the Attorney General's opinion and our and other operators' appeals against certain contrary decisions of the District Court against us and other operators, the Attorney General concluded that the application of the exemption does not balance properly the different interests involved and therefore cannot continue forward. At the Attorney General's request, the Israeli Supreme Court issued in 2010 an interim order which prevents cellular operators from constructing further radio access devices in cellular networks in reliance on the exemption until the enactment of regulations setting conditions for the application of such an exemption or other decision by the court, other than the replacement of existing radio access devices under certain conditions. In October 2018, regulations setting procedures for the construction, changes to and replacement of radio access devices exempt from building permits, or the 2018 Regulations, were enacted. Although these regulations reflect previous judicial limitations placed upon our ability to make changes and replace radio access devices in 2010, they also introduce a new licensing procedure that further reduces our ability to construct new radio access devices based on such exemption, more so in light of the necessity to support new frequencies if we win them in the frequencies tender (see "Item 4. Information on The Company – B. Business Overview –– Network and Infrastructure – Cellular Segment – Spectrum allocation"). This may adversely affect our existing networks and our networks' build-out. In December 2018, following the enactment of the 2018 Regulations, petitions against the Attorney General's opinion were dismissed,  the interim order was annulled and our and other operators' appeals against certain contrary decisions of the District Court were accepted.
 
Other legal proceedings relating to the exemption, including as to its application to rooftops located at the same level as a place of residence or otherwise regularly frequented, were decided against our position, and others, including as to the requirement to obtain an extraordinary usage permit in certain circumstances, including as to the radio access devices' ancillary equipment, are still under consideration. While the Company is of the opinion that the exemption relates to such ancillary equipment and the 2018 Regulations supports its position, the Ministry of Justice expressed an opinion that such regulations and the exemption do not relate to the radio access devices' ancillary equipment. The Ministry of Justice is expected to publish further instructions in the matter. Other claims asserting that those cell sites and other facilities do not meet other legal requirements, continue.
 
Inability to rely on, or substantial limitation of, the exemption,  the dismantling of radio access devices and cell sites due to reasons out of our control and the objection of some local planning and building authorities to grant due permits where required, or the exclusion of the ancillary equipment from the exemption, if adopted, could have a negative impact on our ability to obtain environmental permits for these sites, could negatively affect the extent, quality, capacity and coverage of our network (specifically in urban areas), and our ability to continue to market our products and services effectively and may have a material adverse effect on our results of operations and financial condition.
 
Radio access devices do receive the required permits from the Ministry of Environmental Protection.
 
Several local planning and building authorities argue that Israeli cellular operators may not receive building permits in reliance on the current Plan, for cell sites operating in frequencies not specifically detailed in the frequencies charts attached to the Plan, although most of our and other operators' cell sites (including all 4G cell sites) operate in frequencies not specifically detailed in the Plan. In a number of cases, these authorities have refused to issue a building permit for such new cell sites, arguing that building permits for such cell sites should be sought through other processes (which are longer and cumbersome), such as an application for an extraordinary usage or under existing local specific zoning plans. Following conflicting district decisions regarding this claim, the Ministry of Justice expressed an opinion negating such claims and the matter is expected to be decided by the Supreme Court. Some of the frequencies to which we are required to transfer and all the frequencies included in the new frequencies tender (see " – Networks and Infrastructure – Cellular Segment – Spectrum Allocation") are not specifically detailed in the Plan. We believe that the Plan applies to all cell sites, whether or not they operate in specific frequencies.
 
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If this approach escalates or should the Supreme Court rule against the Company, it would have a negative impact on our ability to deploy additional cell sites, which could negatively affect the extent, quality and capacity of our network coverage and our ability to continue to market our products and services effectively.
 
In addition to cell sites, we provide repeaters (also known as bi-directional amplifiers) and femto-cells to subscribers seeking a solution to weak signal reception within specific indoor locations. Based on advice received from our legal advisors, we have not requested building permits under the Planning and Building Law for outdoor rooftop repeaters, which are a small part of the repeaters that have been installed. It is unclear whether other types of repeaters and femto-cells require building permits. Some repeaters and femto-cells require specific permits and we receive such permits, and others require a general permit from the Ministry of Environmental Protection in respect of their radiation level, and we ensure that each repeater functions within the parameters of the applicable general permit. Should it be established that the installation of repeaters and femto-cells requires a building permit, we will perform cost-benefit analyses to determine whether to apply for permits for new and existing repeaters and femto-cells or to remove them.
 
In addition, we construct and operate microwave sites as part of our transmission network. The majority of microwave sites are exempted from receiving permits from the Ministry of Environmental Protection (due to their low output) or require a general permit in respect of their radiation level. Based on advice received from our legal advisors, we have not requested building permits for such microwave facilities on rooftops. If the courts determine that building permits are necessary for the installation of these sites, it could have a negative impact on our ability to obtain environmental permits for these sites and to deploy additional microwave sites and could hinder the extent, quality and capacity of our transmission network coverage and our ability to continue to market our landline services to our business customers (based on our own infrastructure) effectively.
 
Operating a cell site or a facility without the requisite permits or not in accordance with permits granted could subject us and our officers and directors to criminal, administrative and civil liability. Should any of our officers or directors be found guilty of an offence, although this has not occurred to date, they may face monetary penalties and a term of imprisonment. In addition, our sites or other facilities may be the subject of demolition orders and claims of breach of contract and we may be required to relocate cell sites to less favorable locations or stop operation of cell sites. This could negatively affect the extent, quality and capacity of our network coverage and adversely affect our results of operations.
 
Indemnification obligations
 
Under the Planning and Building Law, local building and planning committees require letters of indemnification from cellular operators indemnifying the committees for possible depreciation claims against the committees, as a condition for issuing a building permit for a cell site. The limitation period within which depreciation claims may be brought under the Planning and Building Law is the later of one year from receiving a building permit under the Plan and six months from the construction of a cell site. The Minister of Interior Affairs retains the general authority to extend such period further.

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To date we have provided approximately 425 indemnification letters in order to receive building permits. Local planning and building committees have sought to join cellular operators, including us, as defendants in depreciation claims made against them even though indemnification letters were not provided. We were joined as defendants in a small number of cases. We expect that we will be required to continue to provide indemnification letters as the process of deploying our cell sites continues. As a result of the requirement to provide indemnification letters, we may decide to construct new cell sites in alternative, less suitable locations, to reduce capacity coverage or not to construct them at all, which could impair the quality of our service in the affected areas.
 
Environmental radiation issues
 
Under the Non-Ionizing Radiation Law, it is prohibited to construct and operate cell sites without construction and operating permits from the Ministry of Environmental Protection. Receiving a construction permit is a precondition to receiving a building permit from the planning and building committee and receiving a building permit or an exemption therefrom is a precondition for the receipt of an operating permit.  For both permits, the applicant must present the means taken (including technological means) to limit exposure levels from each cell site or facility.
 
The validity of a construction permit is for a period not exceeding three months, unless otherwise extended by the Commissioner, and the validity of an operating permit is for a period of five years, subject to the submission of annual reports regarding radiation surveys of our cell sites and other facilities by third parties that were authorized to conduct such surveys by the Commissioner. These permits contain various conditions that regulate the construction and/or operating of cell sites, as the case may be.  Our cell sites routinely receive both construction and operating permits from the Commissioner within the applicable time frames. In addition, Cellular operators are required to provide the Commissioner with online, ongoing data regarding the radiation level on each of their cell sites and other facilities. We provide the Commissioner with the requested data. See "– Site licensing" above for additional details in regards to obtaining a building permit or relying on an exemption.
 
The Non-Ionizing Radiation Law also regulates permitted exposure levels and provisions for supervision of cell site and other facility operation and grants the Commissioner authority to issue eviction orders if a cell site or other facility operates in conflict with its permit, and it imposes criminal sanctions on a company and its directors and officers for violations of the law. Failure to comply with the Non-Ionizing Radiation Law or the terms of a permit can lead to revocation or suspension of the permit, as well as to withholding the grant of permits to additional cell sites of that operator.
 
Positions of the Ministries of Communications, Health and Environmental Protection published in 2012 in relation to the various aspects of the provision of 4G services in Israel, include proposed limitations on usage and deployment in order to reduce exposure to non-ionizing radiation. Such limitations were not included in later documents issued by the MOC,   allowing the provision of 4G services and awarding 4G frequencies to the cellular operators.
 
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Any amendment to the Non-Ionizing Radiation Law and the Planning and Building Law  that will prohibit or substantially limit the grant of permits under such laws, will, among other things, limit our ability to construct new sites (and if applied to existing cell sites, it will also limit our ability to renew operating permits for many of our existing sites), will adversely affect our existing networks and networks build out, specifically in urban areas, and could adversely affect our results of operations.
 
Handsets
 
The Israeli consumer protection regulations regulate the maximum permitted level of non-ionizing radiation from handsets, according to the European and the American standards. They also require cellular operators to attach an information leaflet to each handset package that includes explanations regarding non-ionizing radiation, the maximum permitted level of non-ionizing radiation and the level of radiation of that specific model of equipment. The Radiation Regulations further require that such information also be displayed at points-of-sale, service centers and on the Internet sites of cellular operators.
 
SAR levels are a measurement of non-ionizing radiation that is emitted by a hand-held cellular handset at its specific rate of absorption by living tissue. SAR tests are performed by the manufacturers on prototypes of each model of handset, not for each and every item. We include the information published by the manufacturer regarding SAR levels as we do not perform independent SAR tests for equipment and rely for this purpose on information provided by the manufacturers. As the manufacturers’ approvals refer to a prototype handset, we have no information as to the actual SAR level of each specific item and throughout its lifecycle, including in the case of equipment repair. We inform our customers that there may be changes in the SAR levels in the event of equipment repair.
 
We obtain certain approvals from the Ministry of Communications and the Office of Standards in connection with the importation of handsets.
 
We are required to provide a warranty during the first year and maintain spare parts for certain end user equipment purchased from us, for certain malfunctions for certain periods. We are also required to annul equipment sales in certain circumstances, at the request of the customer.
 
Fixed-line Segment
 
Our Fixed-line Licenses
 
Our Unified license
 
The establishment and operation of fixed-line communications networks, and allocation of spectrum if relevant, requires a license.
 
We provide landline telephone, ILD, internet connectivity and infrastructure services as well as a "network end point" services, under a non-exclusive general unified license granted to our wholly owned subsidiary - Cellcom Fixed Line Communications Limited Partnership - in 2015. The license expires in 2026 but may be extended by the MOC for successive periods of 10 years.  The license requires a bank guarantee in the amount of NIS 5 million deposited with the Ministry of Communications. The provisions of our cellular license, including as to its extension, generally apply to the unified license, subject to certain modifications, including a 20% minimum Israeli holding requirement which can be waived by the Minister of Communications when the unified license operator is controlled by a general license holder (as was done in our case). IBC holds a general unified infrastructure license, with similar provisions. For its deployment obligations see "Competition – Fixed line segment" and " – Internet infrastructure and connectivity business"_ above.
 
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Services in Judea and Samaria
 
The Israeli Civil Administration in Judea and Samaria granted us a non-exclusive unified license for the provision of internet connectivity and infrastructure, ILD, landline and 'network end point' services to the Israeli-populated areas in Judea and Samaria. This license is effective until 2026. The provisions of the cellular license described above, including as to its extension, generally apply to this license, subject to certain modifications.
 
Data and transmission services
 
We hold a non-exclusive special license for the provision of local data communications services and high-speed transmission services only to Cellcom Fixed Line Communications Limited Partnership, effective until April 2021. Data and transmission services are being provided to our customers by Cellcom Fixed Line Communications Limited Partnership. The provisions of our cellular and unified licenses described above, including as to their extension, generally apply to this license, subject to certain modifications.
 
Fiber-optic network
 
The Communication Law provides operators certain privileges in the deployment of fiber-optic cables and exempts them (including auxiliary facilities) from the requirement to obtain building permits. The deployment in a public domain is subject to advanced notification to the occupier of the land and coordination with other infrastructure owners, and on private land, the consent of the owner of the land.
 
In addition, operators that do not own their own nation-wide landline infrastructure may use certain physical infrastructure of Bezeq and Hot, based on the wholesale landline market, and certain wholesale obligations are applied on all landline operators, including us. See "- Wholesale landline market" below.
 
In November 2019, a joint team of the Israeli Communications and Treasury Offices and the Competition Authority, tasked with examining the need for updating fiber-optic deployment and service obligations of landline operators who own their own infrastructure (and under current regulation are required to universally deploy each network they deploy) and the need for deployment incentives in areas where no deployment obligations be determined, after economic viability tests, published its recommendations for public hearing. These recommendations include the following:
 

Under reasonable scenarios, no economic viability exists for one company's universal deployment.
 

Bezeq will not be subject to universal deployment requirement in regards to deploying fiber-optics but would rather select the areas in which to deploy its fiber-optics and in those areas Bezeq will be obligated to provide service to all homes within 5 years.
 
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A trust established by the State of Israel for that purpose (the "Trust") will conduct tenders to subsidize deployment of fiber-optic by Bezeq's competitors in areas where Bezeq chooses not to deploy fiber-optic ("Non-Bezeq Areas"), based on economic viability and efficiency. The winner would be obligated to provide wholesale services to other competitors at wholesale rates. Bezeq may not participate in the tenders nor acquire wholesale service in those areas (though its subsidiaries may do so). The winner of the subsidy tender may use Bezeq's infrastructure in the Non-Bezeq Areas for rates significantly lower than the current wholesale rates. Only the winner will be entitled to the subsidy.
 

Subsidy will be funded through additional 0.5% tax levied on all Israeli communications license holders revenues for the previous year (including Bezeq), whose annual revenues exceed NIS 10 million, as of 2022 and until all household in Israel are connected to fiber-optic. The funds will be managed by the Trust.
 

Bezeq may not deploy fiber-optic in Non-Bezeq Areas for three years from the date of each respective subsidy tender for that area. Nonetheless, Bezeq may update its original deployment obligation by up to 10% and so long as such Non-Bezeq Area was not being chosen as an area to receive subsidy by the Fund.
 
Bezeq's obligations regarding its already existing infrastructure shall remain unchanged.
 
Adoption of the recommendations requires, among others, changes to applicable legislation and licenses.
 
Hot Telecom L.P.'s universal deployment obligations are still under examination of the joint team.
 
See "Item 3. Key Information – D. Risk Factors – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results","-We face intense competition in all aspects of our business", and "Item 4. Information on The Company –B. Business Overview – Competition – Fixed-line Segment" and "- Government Regulations – Fixed-line Segment – Wholesale land-line market".
 
See also "- Cellular Segment – Permits for cell site construction - Site Licensing" above for a discussion regarding microwave sites forming a part of our transmission network.
 
Wholesale landline market
 
A policy document regarding landline wholesale services published by the MOC in 2012 provided for the creation of an effective wholesale telecommunications access market in Israel and the gradual annulment of the structural separation in the Bezeq and Hot groups and its replacement with an accounting separation and change of the supervision on Bezeq retail tariffs to maximum tariffs rather than the current setting of fixed tariffs. The latter generally depends on the development of a wholesale market and the state of competition in the market, and with relation to television services, if there is a reasonable possibility of providing a basic package of OTT services providers without a national landline infrastructure.
 
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In 2015, a wholesale landline market was formally launched in Israel in regards to internet infrastructure services and use of certain physical infrastructure by operators who do not own such infrastructure, following amendments to Bezeq's and Hot's licenses so as to include certain wholesale landline services, such as internet infrastructure services and wholesale landline telephony services and use of certain of their physical infrastructure by operators who do not own such infrastructure and promulgation of regulations setting the maximum tariffs of the wholesale landline services to be provided by Bezeq.
 
Under the Communications Law, certain wholesale obligations apply to all landline operators, including us, and requiring all landline operators to grant all other landline operators access to their passive infrastructure (except IBC's passive infrastructure over the Israeli Electricity Company infrastructure), the terms of which (with the exclusion of Bezeq and Hot, whose terms are set by the regulator) will be negotiated by the parties. For details of the Minister of Communications' authority to give instructions and set usage of another operator's network rates, see "–Government Regulation – Cellular Segment - Tariff supervision" above.
 
Although the wholesale market was formally applicable to Hot's infrastructure as well, Hot's infrastructure had been effectively excluded from the wholesale market, initially as the maximum tariffs for Hot's wholesale infrastructure service were not published by the MOC until June 2017 (and are higher than those set for Bezeq's service) and thereafter, due to disagreements with Hot as to the implementation of the service, which were resolved by the MOC. The Ministry of Communications resolved not to interfere with the tariffs Hot has set for its wholesale telephony service. In December 2019 the MOC published a public hearing proposing to set fix tariffs (rather than the current volume-dependent tariffs) for Hot's internet infrastructure wholesale services, which are lower than Hot's current retail tariffs.  Effective inclusion of Hot's infrastructure in the wholesale market may increase the potential subscribers to our triple play and bundle offerings.
 
In June 2017, the Ministry of Communications published regulations setting Bezeq's resale telephony service to be provided by Bezeq as of July 2017, as a temporary 14 month alternative for wholesale landline telephony service, and postponed Bezeq's obligation to offer wholesale telephony service until the lapse of said resale telephony service period. In June 2018, the MOC resolved not to prolong Bezeq's temporary alternative further and to obligate Bezeq to provide wholesale landline telephony services as of August 1, 2018. As of the date of this report, Bezeq does not provide wholesale landline telephony services.
 
In July 2019, the MOC published a public hearing proposing to set maximum fix tariffs for infrastructure internet service over Bezeq's fiber optic infrastructure, higher than those set for Bezeq's current maximum tariffs over its copper cables infrastructure.
 
In February 2020, the MOC announced the retrospect reduction of wholesale services tariffs previously set by the MOC for usage of Bezeq's current copper cable based infrastructure and an update mechanism for 2019-2020 tariffs. Such reduction shall result in the return of sums previously paid by us to Bezeq and set off of additional sums against future payments to Bezeq for such services, during 2020, in an amount of approximately NIS 29 millions.
 
A hearing published by the MOC in 2014, which was further elaborated in 2017, proposing a method of inspecting whether Bezeq and Hot reduce their retail tariffs and thereby reduce the difference between the wholesale and retail tariffs ("margin squeeze") for certain landline services, aiming at reducing the profit of operators who do not own landline infrastructure and preventing their operation in the market, has not been concluded yet by the MOC.
 
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OTT TV
 
Television services over the Internet are currently not subject to specific regulation in Israel.
 
Pursuant to the 2016 recommendations of a committee for the regulation of broadcasting nominated by the Ministry of Communications, in July 2018, a new bill for the regulation of broadcasting was published and includes classification of audio visual providers into four categories and determination of the regulation applied to each category as follows: (i) a provider with annual revenues of up to NIS 350 million from subscription fees – no license is required and no specific regulation applied; (ii) license of a medium size operator - a provider with annual revenues over NIS 350 million from subscription fees, but under NIS 700 million, requires a license, which includes a gradual mandatory investment in original Israeli content in an amount of up to 8 percent of the provider's annual revenues from subscription fees, as well as regulation, inter alia,  in regards to minor and minorities protection, forbidden broadcasts and cross ownership limitations and prohibition on the provision of advertisement;  (iii) license of a large size operator - a provider with annual revenues over NIS 700 million from subscription fees, requires a license, which includes a mandatory investment in original Israeli content in an amount not less than 8% of its annual revenues from subscription fees, prohibition on the provision of advertisements as well as regulation, inter alia,  in regards to minor and minorities protection, forbidden broadcasts, regulation relating to consumer protection, cross ownership limitations, limitation regarding owning and producing channels and providing basic channel package; and (iv) license of a significant operator - a provider that owns a managed network for the provision of contents will be bound, inter alia, in regards to broadcasting open channels and specific channels of audio–visual license holders. The bill includes limited regulation regarding sports broadcasting and is focused on audio-visual providers, where the content provided is mainly aimed at the audience in Israel and therefore is expected not to apply to foreign TV content providers operating in Israel, such as Netflix and Amazon prime video. The Company does not expect the bill, if enacted, to materially change the regulation that applies to the Company. The bill requires legislative proceedings in the Israeli parliament, which may include material changes to the bill. If the legislation adopted requires us to make additional investments or impose unfavorable regulation on our OTT TV service, or apply such regulation to us and not to other OTT TV providers, or usage of the DTT infrastructure, it may adversely affect our OTT TV business.
 
Contributing to the Community and Protecting the Environment
 
We and our employees have been contributing to the community since our inception. We consider contribution to the community in Israel an important component of our business vision and believe we have a responsibility toward the Israeli community, as we acknowledge that business leadership goes hand in hand with social leadership.
 
During 2019, 23% of our employees participated in volunteering activities in the community.
 
We are aware of the importance of environmental protection. We seek to operate responsibly to continuously reduce negative impacts on the environment and the landscape, aiming at a better environmental performance than required by local law. We dedicate personnel, funds and technologies to reduce our ecological footprint , through activities such as efficient deployment of infrastructure subject to the applicable standards, recycling of electronic components and packages, reduction of paper usage by managed printing, reduction of pollutants' emissions and energy usage, collection of used batteries, provision of a monthly bill and other correspondence  to our subscribers via e-mail or SMS, transfer to usage of environment friendly raw materials and separation between different types of waste in our repair services and purchasing of electricity produced by a private natural gas based power station.
 
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C.           ORGANIZATIONAL STRUCTURE
 
Our largest shareholder, Koor, is a wholly-owned subsidiary of DIC.  DIC is a public Israeli company traded on the Tel-Aviv Stock Exchange, and is one of Israel's largest business groups. See footnote no. 1 to the table under “Item 7.A – Major Shareholders” for information on the holdings of DIC.
 
We and Cellcom Fixed Line Communications Limited Partnership (see "- Government Regulations - Fixed-line Segment - Our Fixed-line Licenses - Our Unified Licenses"), are incorporated in Israel. Cellcom Fixed Line Communications Limited Partnership and Dynamica Communications Chain Stores Ltd., our wholly owned dealer, are our significant subsidiaries.
 
D.           PROPERTY, PLANT AND EQUIPMENT
 
Headquarters
 
In 2003, we entered into an agreement for the lease of our headquarters in Netanya, Israel. The leased property covers approximately 57,800 square meters, of which approximately 26,000 square meters consist of underground parking lots.  The lease is in effect until December, 2022 and is renewable for two additional periods of five years each, upon our notice. As of 2015, we started subleasing part of the property, which currently amounts to a quarter of our headquarters to several sub-lessees for a period of up to three years, following the reduction in headcount in our headquarters. The sub-lessees have options to renew the lease for additional periods.
 
Netanya Property
 
In 2010, we entered into a lease agreement for our techno-logistic center, in Netanya, Israel.  The leased property covers approximately 11,000 square meters. The lease expires in December 2022 and is renewable for an additional period of 4 years and 7 months, at our option. In case we do not exercise the option we shall be required to pay approximately NIS 8 million. As of 2015, we started subleasing part of the property, which currently amounts to approximately 6,100 square meters of the leased property, for periods of five to six years. The sub-lessees have an option to renew the leases for an additional period subject to certain conditions.
 
Haifa and Rosh-Ha’ayin Properties
 
We lease a property in Haifa and a property in Rosh-Ha'ayin. We use these properties for offices, for call centers, for network servers and for equipment storage. The Haifa lease covers approximately 8,900 square meters, is in effect until December 2021, and is renewable for two additional periods of two years each, upon our notice. The Rosh-Ha'ayin lease covers approximately 3,300 square meters, is in effect until December 2021 and is renewable for three additional periods of two years each, upon our notice. We sublease part of the property in Haifa to third parties and part of the property in Rosh-Ha'ayin to our wholly-owned dealer and another subsidiary.
 
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Electricity
 
In December 2010, we entered into an agreement with Ramat Negev Energy Ltd., which constructed a private power plant fueled by natural gas in Israel, and we commenced purchasing a portion of our electricity from it in 2014. Under the agreement, we committed to purchase electricity for the earlier of a period of 15 years from commencement of operations of the power plant or until January 2028, subject to our right to terminate the agreement after six years from the commencement of operations of the power plant under certain conditions.
 
Service Centers, Points of Sale and Cell Sites
 
As of December 31, 2019, we leased 71 service centers, points of sale and other facilities (including those operated by our wholly-owned dealer), which are used for sales and customer service. Such lease agreements are generally for periods of two to three years, with extension options that vary by location.
 
In addition, we lease from various parties, including the Israeli Land Authority, or ILA, municipalities and private entities sites for the establishment, maintenance and operation of cell sites for our cellular network. The duration of these lease agreements are generally for two to five years, with an option to extend the lease for successive similar periods and exit windows that enable us to terminate the agreement prior to its scheduled expiration under certain circumstances. In some of the agreements, the lessor is entitled to terminate the agreement at any time without cause, subject to prior notice. Based on our past experience, we encounter difficulties in extending the term of approximately 5% of the lease agreements for cell sites, which at times results in our having to pay higher rent in order to remain in the same locations or to find alternative sites. This may aggravate given our network sharing agreements.
 
In addition, we lease a number of points of presence in Israel that are used for equipment and servers storage  and other communications equipment for the provision of landline services, and storage space for our servers and equipment in London and Frankfurt.
 
Authorization Agreement with Land Regulatory Authorities
 
In June 2013, we renewed an authorization agreement with the ILA that authorizes us to use lands managed by the ILA for the establishment and operation of cell sites. The authorization agreement was effective until December 2019 and we are negotiating the terms of a new agreement. The authorization agreement provides that subject to the receipt of approval from the ILA, we will be entitled to establish and operate cell sites on the lands leased to third parties throughout the agreement’s term. We undertook to vacate at the end of the agreement’s term all facilities installed in the authorized area unless the authorization period is extended. Under the authorization agreement, the ILA is entitled to revoke authorizations granted to us in certain circumstances.
 
ITEM 4A.       UNRESOLVED STAFF COMMENTS
 
None.
 
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ITEM 5.          OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
The following operating and financial review and prospects should be read in conjunction with “Item 3. Key Information – A. Selected Financial Data” and our consolidated financial statements and accompanying notes appearing elsewhere in this annual report. Our financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the IASB which differ in certain respects from U.S. Generally Accepted Accounting Principles, or U.S. GAAP.
 
This discussion contains forward-looking statements.  We have based these forward-looking statements on our current expectations and projections about future events.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Item 3. Key Information – D. Risk Factors” and elsewhere in this annual report.
 
A.           OPERATING RESULTS
 
Overview
 
General
 
We are one of the four major communications groups in Israel and the largest provider of cellular communications services in Israel with approximately 2.744 million cellular subscribers as of December 31, 2019, with an estimated market share of 26%. In recent years we have increased our presence in the fixed line market, adding TV and internet infrastructure services (the latter through the landline wholesale market and, as of 2018, also over our independent fiber-optic infrastructure, which we sold to IBC in 2019), to our veteran ISP and landline telephony (both inland and long distance).
 
 We earn revenues and generate our primary sources of cash by offering a broad range of communications services, including cellular, Internet services (connectivity and infrastructure), TV services and fixed-line telephony services (inland and international), as well as by selling handsets and other end-user equipment.
 
As of 2016, as a result of business and regulatory changes, as well as the Group’s entry into new fields of operation in the fixed-line market, the Group’s management attention in general and its chief operating decision maker's attention in particular, have shifted to focus on two main fields of operations, “Cellular” and “Fixed-line.”
 
Our cellular segment’s services include basic cellular communications services and data transfer, download and upload, as well as text and multimedia messaging services and advanced cellular content services, which we provide through our 2G and 3G networks, covering substantially all of the populated territory of Israel, and our 4G network covering most of the population  of Israel. We also provide international roaming services to our subscribers in 180 countries as of December 31, 2019 as well as to subscribers of foreign networks visiting Israel. We offer our subscribers a wide selection of handsets of various leading global manufacturers as well as extended warranty services on most handsets we offer. A significant portion of our revenues is derived from our network sharing agreements with Golan and Xfone.
 
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Our fixed-line segment’s services include landline telephony services, internet infrastructure (since May 2015, through the landline wholesale market and, as of 2018, also over our own fiber-optic infrastructure which we sold to IBC in 2019) , connectivity services (ISP), television services (since December 2014) (OTT TV), transmission services, international calling services (ILD) , end user fixed-line equipment and IOT services.
 
We sell our various services on a stand-alone basis or bundled with certain other services offered by us, including a triple play bundle of end-to-end internet service, landline telephony and TV services and a quatro bundle which includes the triple offering plus cellular services.
 
Our management evaluates our performance through focusing on our key performance indicators, which include among others: cellular subscribers and average revenue per user of cellular, or ARPU, internet and TV subscribers (households) – both stand alone and as a part of a bundle,  adjusted EBITDA (as defined in “Results of Operations”), adjusted EBITDA as percentage of revenues, operating income, net income, cash flow from operating activities, Free Cash Flow*,subscriber churn rate and handset sales and profitability. These key performance indicators are primarily affected by the competitive and regulatory landscape in which we operate and our ability to adapt to the challenges posed.
 
*Free cash flow is a non-IFRS measure and is defined as the net cash provided by operating activities (including the effect of exchange rate fluctuations on cash and cash equivalents) excluding a loan to Golan Telecom, minus the net cash used in investing activities excluding short-term investment in tradable debentures and deposits and proceeds from sales of such debentures (including interest received in relation to such debentures) and deposits.

Our operating results, profitability and cash flow have decreased significantly in the past several years, with a loss for 2018 and 2019, mainly due to the intense competition resulting largely from regulatory developments intended to enhance competition in the Israeli telecommunications market, which caused significant price erosion in the prices charged for the provision of cellular services and a decrease from equipment sales.  Our operating income in 2019 was NIS 24 million ($7 million), a decrease of 76.2% from NIS 101 million ($29 million) in 2018 and a decrease of 69.2% from NIS 328 million ($95 million) in 2017. We recorded a net loss in 2019 of NIS 107 million ($ 31 million), compared to a loss of NIS 64 million ($ 19 million) in 2018, compared to net income of NIS 113 million ($33 million) in 2017. The Company's net cash from operating activities in 2019 increased in comparison with 2018 due to the adoption of IFRS 16 standard (for details see below)
 
In August 2019 our rating in relation to our debentures traded on the Tel Aviv Stock Exchange, or TASE was downgraded to ilA and our rating outlook was maintained at “negative”. Our and another cellular operator's controlling shareholder recognized a substantial impairment of goodwill expense associated with us and the other cellular operator, in their respective financial reports for the second quarter of 2019 and the already intense competition in the cellular market further heightened with campaigns announcing tariffs as low as US$ 3-4 per month for a cellular package. These developments had an adverse effect on our financial condition and the perception of the Israeli telecommunications market in general and more specifically of us – given our substantial debt, resulting in the substantial decrease of our shares' price, hardening requirements to access additional credit from banks and increase of our debentures yield, signifying increased cost of future debt raised from the capital market.
 
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In September 2019 we announced and put in motion a comprehensive restructuring plan, or the Restructuring Plan, which includes the following goals, with a target to achieve them by the end of 2020:
 

(1)
return to positive net income (excluding special and unusual items).
 

(2)
reduce the Company’s net debt to EBITDA (excluding IFRS16 ramifications and special and unusual items) ratio to below 3 .
 

(3)
prepare the Company to better cope with market conditions, the intense competition and future investments.
 
The Plan includes the following major components and target timetable:
  
Cutting expenses - annual reduction of appx. NIS 150 million from third quarter 2019 OPEX level (to be executed by the end of 2020), including through substantial reduction of expenses and payments to suppliers, substantial reduction in manpower and reduction of landline wholesale access fees.
 
Cost cutting initiatives have begun immediately following the publication of the Restructuring Plan, are in line with the target, and include reduction of consideration to suppliers for a certain period, sale of internet services using IBC 's infrastructure under the IRU Agreement, instead of the more costly landline wholesale arrangement, and entering a new collective employment agreement which includes a voluntary retirement program (see Item  6. Directors, senior management and employees - D. Employees" below).
 
Cutting investments – reduction of the company CAPEX level to appx. NIS 450 – 500 million per annum, (to be fully executed by the end of 2020), excluding new frequencies related CAPEX which may require added investments. For additional details regarding such CAPEX see "Frequencies Tender" below.
  
Capital raising of appx. NIS 400 million – completed in December 2019 (see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital Resources – Issuances of equity securities" below).
 
Factoring of customers' end-user equipment of appx. NIS 100 – 150 million.
 
Presently under review due to operational complexity and related costs.
 
Debt reduction – Open market repurchases of the Company's debentures up to NIS 150 million.
 
To be carried out by management, at its discretion, at such timing, amounts and structure, according to market conditions. As at the date of this report, the Company repurchased approximately 11 NIS million par value of debt.
 
Execution of the Restructuring Plan may entail one-time expenses. Those are not included in the Restructuring Plan components above.
 
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We cannot guarantee the Restructuring Plan will be fully executed nor the effects it would have on our results of operations and financial condition. Our business environment continues to be characterized by increased competition in the various markets in which we operate. These factors which affected the Israeli communications market may continue to negatively impact our business, which may further adversely affect our results of operations and financial condition. Moreover, our financial condition is more volatile than our competitors, due to our substantially larger amount of debt. Other impacts may include the need to reduce investments, in absolute terms and in comparison to our competitors, which may harm our competitive standing and potential future growth, adversely affect our ability to raise additional debt and refinance our existing debt or adversely affect the terms and price of such debt raising, which in turn may further adversely affect our financial condition and may require equity capital raising, if possible; or on the contrary -  require us to make substantial investments in order to maintain our competitive standing and potential future growth, such as pay large sums for additional frequencies and invest large sums in the deployment of a corresponding network, despite our substantial debt and reduced profitability, which in turn may lead to additional downgrade of our debentures rating, may adversely affect our financial condition and our ability to raise additional debt and refinance our existing debt or adversely affect the terms and price of such debt raising and may require equity capital raising, if possible.  See also "Item 3. Risk factors – Risks related to our business - We may be adversely affected by the significant technological and other changes in the telecommunications industry" and"- Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability".
 
In 2020, as part of the global effects of the Corona virus, our roaming revenues have been adversely effected. If such effects and Israeli government restrictions on the general population, including our operations, continue for a long duration, they will adversely affect our handsets and services sales and all aspects of our operations, resulting in a material adverse effects on our results of operations. We have taken steps to mitigate such effects, by reducing our expenses and investments during the Corona virus pandemic, including by reducing our sales operations and by sending a large quantity of employees on unpaid leave. Furthermore, as part of the global effects of the Corona virus on the capital markets, our debentures yield have increased substantially, our investment portfolio is expected to record losses during the first quarter of 2020 and general capital markets activities have significantly slowed or halted. If such effects continue and for the duration they so continue, it will adversely affect our access to additional debt and/or capital. See "The Corona virus may adversely affect our results of operations" below.
 
In February 2020 we, Golan's shareholders and Golan have entered into a binding memorandum of understanding, or MOU, for the purchase of Golan's entire share capital, for the sum of NIS 590 million as well as (a) an amount equal to the cash and cash equivalents of Golan Telecom as of the closing date minus any financial indebtedness; (b) NIS 7.58 million per month for the period between the closing date and December 31, 2020; and (c) return on investments made by Golan Telecom in the 5G shared network from the date the MOU was signed and until the transaction is completed. The parties shall negotiate a detailed agreement but are bound by the MOU whether such agreement is entered or not. In case the conditions for the completion of the transaction are not met until December 31, 2020, the MOU or detailed agreement, as the case may be, shall expire. We cannot guarantee that the conditions for the completion of the transaction shall be met, including receipt of the required approvals.  For additional details see "Item 4. A. History and development of the Company – our history" above.
 
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We intend to drive revenue primarily by: maximizing the benefits of our position as a leading Israeli telecommunications group; offering our customers full and comprehensive mobile and wireline solutions and bundles of services (including triple/quatro play) and enhancing our competitive capabilities; retaining our existing subscribers and attracting new subscribers; offering new services that are synergetic to our core businesses like IOT and growing wireline service revenues. Entering a new and penetrated market may require substantial investment and additional expenses. We intend to continue our efforts to optimize our costs by implementing further efficiency measures and reducing our expenses and to adjust our operations to the changing market conditions. We cannot guarantee the success of these measures. For details of our Sharing Agreements, see "Item 4. Information on the Company –B. Business Overview – Network and Infrastructure – Cellular Segment – Network sharing agreements". For details of our fiber-optic activity see" Item 4. Information on the Company – B. Business Overview – Networks and Infrastructure – Fixed-line Segment – Fixed-line infrastructure" and  "– Investment in IBC" thereunder.
 
In 2018, we entered into a collective employment agreement with the Company's employees' representatives and the Histadrut for a term of three years (2018-2020) and in 2019 and 2020 we entered additional agreements amending the 2018 agreement. See also "Item 3. Key Information – D. Risk Factors – Risks Related to our Business – The unionizing of our employees may impede necessary organizational and personnel changes, result in increased costs or disruption to our operation."

The Israeli telecommunications market is currently dominated by four communications groups: Bezeq, Hot, Partner and Cellcom, with the first two having a full (or substantially full) landline infrastructure.
 
The communications market is primarily regulated by the Ministry of Communications. Regulatory changes have had material adverse effects on our results of operations in recent years, including by facilitating the entry of additional competitors into the cellular market which dramatically increased competition. Recent consumer related amendments to our licenses had a material adverse effect on our results of operations. Such and other future amendments, if implemented, may continue to materially adversely affect our results of operations, should we not succeed to mitigate such effects. See “Item 4. Information on the Company – B. Business Overview – Government Regulations".
 
Competition may increase further or our competitive standing may suffer if: current trends continue, an acquisition or merger to which we are not a party is completed, the landline wholesale market, launched in 2015, is ineffective; the structural separation imposed on the Bezeq and Hot groups or Bezeq's tariffs supervision is annulled or further relaxed or other unfavorable regulatory changes relating to the Bezeq and Hot groups are effected or each of these groups further escalates competition; new competitors enter the communications markets; our new subsidiary IBC, fails to deploy a widespread landline infrastructure; handset increased competition continues or we do not purchase additional frequencies or purchase frequencies in an amount equal to our competitors or make the necessary investments in our networks or in our business in general. We have continually implemented aggressive efficiency measures in order to mitigate those adverse effects, which included voluntary retirement plans for employees. We intend to continue to implement changes in order to continue our efforts to mitigate the adverse effects of the increased competition in many areas in which we operate. We cannot guarantee the success of these measures. Moreover, unionization of our employees may impede the execution of such measures. See "Item 3. Key Information – D. Risk Factors – Risks Related to our Business - We face intense competition in all aspects of our business" and "-The unionizing of our employees may impede necessary organizational and personnel changes, result in increased costs or disruption to our operation", and "Item 4. Information on the Company - B. Business Overview – Competition" for additional details.
 
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The construction and operation of our cell sites and other transmission facilities are highly regulated and require us to obtain various consents and permits. See “Item 4. Information on the Company – B. Business Overview - Government Regulations – Cellular segment – Permits for Cell Site Construction.” We have experienced difficulties in obtaining some of these consents and permits and our ability to rely on an exemption from obtaining a building permit was severely limited. Also, we may be operating a significant number of our cell sites in a manner not fully compatible with the building permits issued for them. Additional restrictions on the construction and operation of cell sites and other facilities have been enacted recently and may be enacted in the future or we may be required to demolish or relocate these cell sites and facilities, which may adversely affect our existing networks and networks build out, specifically in urban areas, may prevent us from meeting our license requirements and could adversely affect our results of operations.
 
Participation in the new frequencies tender and execution of frequencies transfer, as per the MOC's instruction, would involve material investments and operational risks to the Company. See "Item 3. Risk factors – Risks related to our business - We may be adversely affected by the significant technological and other changes in the telecommunications industry" and "Item 4. Information on the Company – B. Business Overview - Network and Infrastructure – Cellular Segment – Spectrum allocation".
 
Our profitability is also affected by other factors, including changes in our cost of revenues and selling, marketing, general and administrative expenses, including depreciation and financing expenses.
 
Our results are also impacted by currency fluctuations.  While substantially all of our revenues are denominated in NIS, for 2019, approximately14 % of cash outflow was denominated in, or linked to, other currencies, mainly U.S. dollars. Changes to the Israeli CPI, may also impact our results as part of our debentures (Series H and J) and some of our expenses are linked to the Israeli CPI.  Any devaluation of the NIS against the U.S. dollar or other foreign currencies will therefore increase the NIS cost of our expenses that are not denominated in NIS or are linked to those currencies and any increase in the Israeli CPI will increase the financial expenses associated with our debentures. We enter into derivative instruments to mitigate the effect of the various market risks associated with these expenses.  See “Item 11 – Quantitative and Qualitative Disclosures About Market Risk.”
 
Further, we have incurred significant debt by issuing debentures and receiving loans, the aggregate outstanding principal amount of which as of December 31, 2019 was NIS 3,411 million. See “ – Liquidity and Capital Resources– Debt Service” and "-Other Credit Facilities”.
 
Our dividend policy targets a distribution of at least 75% of our annual net income on a quarterly basis. In respect of 2017, 2018 and 2019, our board of directors chose not to declare dividends given the intensified competition and its adverse effect on our results of operations and in order to strengthen our balance sheet. We undertook limitations on our dividend distributions in connection to the issuance of our debentures and other credit facilities. See “Item 8. Financial Information – A. Statements and Other Financial Information - Dividend Policy” and “- B. Liquidity and Capital Resources- Dividend payments” and "– Debt Service" and "– Other Credit Facilities".
 
78

As of January 1, 2017, we apply International Financial Reporting Standard (IFRS) 15 following early adoption thereof, and capitalize part of the salaries expenses and commissions related to customer acquisition costs. The application of this standard had a material positive effect on the Company's financial results for the years 2017 and 2018. The standard was applied using the cumulative effect approach as from the initial date of application.
 
As from January 1, 2018 we apply IFRS 9 regarding financial instruments, which replaced IAS 39. The standard was applied using the cumulative effect approach as from the initial date of application without amendment of the comparative data, other than with respect to certain hedging items, with an adjustment to the balance of retained earnings and other components of equity as of the initial date of application. For additional details see note 2-F-1-B to our financial statements.
 
As from January 1, 2019 we apply International Financial Reporting Standard 16, Leases (hereinafter: “IFRS 16” or “the standard”), which replaced International Accounting Standard IAS 17, Leases .The main effect of the standard’s application is reflected in annulment of the existing requirement from lessees to classify leases as operating (off-balance sheet) or finance leases and the presentation of a unified model for lessees to account for all leases similarly to the accounting treatment of finance leases in the previous standard. Until the date of application, the Group classified most of the leases in which it is the lessee as operating leases, since it did not substantially bear all the risks and rewards from the assets. see note 2-F-1-A to our financial statements
 
Revenues
 
We derive our revenues in the cellular segment primarily from the sale of cellular network services (such as airtime and data surfing), including content and value added services, roaming services as well as revenues derived from network sharing and hosting services, handset sale and handset repair services. Roaming services include roaming charges that we bill to our subscribers for the use of the networks of our roaming partners outside Israel, to which we refer as outbound roaming, and charges that we bill to our roaming partners whose subscribers use our network, to which we refer as inbound roaming.  Originating calls on our network and from interconnect revenues from other operators for calls terminating on our network.
 
Our revenues in the fixed-line segment are derived from the sale of fixed-line communications services which include: internet infrastructure (through the landline wholesale market, since February 2015 and, as of 2018, also based on our independent fiber-optic infrastructure which we sold in 2019 to IBC) and connectivity services, OTT TV services, transmission services, provided to other operators and to Golan and Xfone according to our network sharing agreement, international calling services (ILD), landline telephony services, operator services and teleconferencing services and equipment sales that are related to this segment.
 
Our revenues from cellular services are usually affected by seasonality with the third quarter of the year characterized by higher roaming revenues due to increased incoming and outgoing tourism. Equipment sales of the fixed-line segment are usually higher in the fourth quarter.
 
79

Cost of revenues
 
The principal components of our cost of revenues are the purchase of equipment, interconnect fees, content cost, cell site leasing costs, salaries, transmission services cost, internet connectivity services cost, purchase of call minutes related mainly to international calling services, outbound roaming services fees and cost of Internet infrastructure. Our cost of revenues also includes depreciation of the cost of our network equipment, tv set-top boxes, amortization of our spectrum licenses and rights of use of communications lines.
 
Selling and marketing expenses
 
Selling and marketing expenses consist primarily of sales force salaries and dealers' commissions, advertising, public relations and promotional expenses. We compensate our sales force through salaries and incentives. Since January 1, 2017 part of our customer acquisition costs (salaries and dealers commissions) are capitalized as a result of the early adoption of a new International Financial Reporting Standard (IFRS 15). Our selling and marketing expenses also include depreciation, mainly of leasehold improvements and equipment in our service centers and points of sales, and amortization of intangible assets related to the acquisition of subsidiaries.
 
General and administrative expenses
 
General and administrative expenses consist primarily of salaries and compensation, professional and consultancy fees, leases and maintenance of our offices, bad debt and doubtful accounts allowance, and other administrative expenses. Our general and administrative expenses also include depreciation and maintenance fees, mainly for our billing and information systems.
 
Other income and expenses
 
Other income and expenses consist primarily of expenses related to employee retirement plans in 2019 and 2018 and gain from the sale of a subsidiary in 2017. Revenues from long-term credit arrangements (more than 12 monthly payments) are recognized on the basis of the present value of future cash flows, discounted according to market interest rates at the time of the transaction. The difference between the original credit and its present value is recorded as other income over the credit period.
 
Financing income and expenses
 
Financing income and expenses consist primarily of interest expense on long-term loans and interest on our debentures and other credit facilities, the effects of fluctuations in currency exchange rates, Israeli CPI adjustments related to the Israeli CPI-linked debentures, and income or losses relating to financial derivative instruments that do not qualify for hedge accounting according to IFRS. Financing income and expenses also include interest income on deposits, discount amortization associated with our debentures, and gains and losses from our current investment in tradable securities.
 
Income Tax
 
Generally, Israeli companies were subject to corporate tax on their taxable income at the rate of 24% for the 2017 tax year and 23% for the 2018 tax year and onward.
 
80

Israeli companies are subject to capital gains tax at the corporate tax rate. A deferred tax asset or liability is created for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
 
Results of Operations - Comparison of 2017, 2018 and 2019
 
The following table sets forth key performance indicators for the periods indicated:
 
   
Year Ended December 31,
   
Change*
 
   
2017
   
2018
   
2019
   
2018 vs. 2017
   
2019 vs. 2018
 
 Cellular subscribers at end of period(1) (in thousands)
   
2,817
     
2,851
     
2,744
     
1.2
%
   
(3.8
)%
Internet-customers  (households) (end of period)  (in thousands) (2)
   
222
     
269
     
278
     
21.2
%
   
3.3
%
TV  -  households (end of period)  (in thousands) (2)
   
170
     
219
     
258
     
28.8
%
   
17.8
%
Churn rate of cellular subscribers(1)(3)
   
46
%
   
43
%
   
49
%
   
-
     
-
 
Average monthly revenue per  cellular subscriber (ARPU) (1)(4) (in NIS)
   
57
     
51
     
51
     
(10.5
)%
   
(1.9
)%
Operating income (in NIS millions)
   
328
     
101
     
24
     
(69.2
)%
   
(76.2
)%
Net income(loss) (in NIS millions)
   
113
     
(64
)
   
(107
)
 
na
   
na
 
Adjusted EBITDA(5) (in NIS millions)
   
884
     
687
     
940
     
(22.6
)%
   
34.6
%
Operating income margin(6)          
   
8.4
%
   
2.7
%
   
0.6
%
 
(5.6PP
)
 
(2.1PP
)
Adjusted EBITDA margin(7)          
   
22.8
%
   
18.6
%
   
24.9
%
 
(4.2pp
)
 
6.3pp
 


*
pp denotes percentage points and this measure of change is calculated by subtracting the 2017 measure from the 2018 measure and the 2019 measure from the 2018 measure, respectively.
 
 (1)
Cellular subscriber data refers to active subscribers. We use a six-month method of calculating our cellular subscriber base, which means that we add post-paid subscribers to our subscriber base upon their joining our services and prepaid subscribers upon charging a prepaid card and we deduct subscribers from our subscriber base after six months of no revenue generation and activity on our network (for prepaid subscribers, as of the first quarter of 2019, 'no activity' includes only incoming SMS within our network) and no data usage (as of the first quarter of 2019, 'no data usage' means less than 0.5 Gigabyte over a period of 6 months) or less than NIS 1 of accumulated revenues for M2M (machine to machine) subscribers. The six-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel.  The 2017 cellular subscriber base includes subscribers added as part of our purchase of the operations of an Israeli Mobile Virtual Network Operator, or MVNO, during the third quarter of 2017. As of the third quarter of 2018, we add M2M subscribers to the cellular subscriber base only upon first use instead of at the time of joining our service as was done until the change. This change did not have a material effect on M2M prior subscriber data. The changes executed at the end of the first quarter 2019, resulted in the deletion of 153,000 subscribers from our cellular subscriber base.
 
 (2)
TV and Internet customers (households) refer to active subscribers. Internet households receive end-to-end internet service, including infrastructure (based on the wholesale landline market) and connectivity services.
 
(3)
Churn rate is defined as the total number of voluntary and involuntary permanent deactivations of cellular subscribers in a given period expressed as a percentage of the number of cellular subscribers at the beginning of such period.  Involuntary permanent deactivations relate to cellular subscribers who have failed to pay their arrears for the period of six consecutive months.  Voluntary permanent  deactivations relate to cellular subscribers who terminated their use of our services. Churn rate data is excluding the above mentioned removals of subscribers.
 
 (4)
Average monthly revenue per cellular subscriber (ARPU) is calculated by dividing revenues from cellular services for the period by the average number of cellular subscribers during the period and by dividing the result by the number of months in the period.  Revenues from inbound roaming services and hosting and network sharing services are included even though the number of subscribers in the equation does not include the users of those roaming, hosting and network sharing services. Inbound roaming services, hosting and network sharing services are included because ARPU is meant to capture all service revenues generated by a cellular network. Revenues from sales of Subscription Repair Services are included because they represent recurring revenues generated by subscribers, but revenues from sales of handsets (which for purposes of this report may include other types of cellular end user equipment, such as tablets), Random Repair Services, and other services are not. We and industry analysts, treat ARPU as a key performance indicator of a cellular operator because it is the closest meaningful measure of the contribution to service revenues made by an average subscriber. The 2019 ARPU was positively affected by the elimination of subscribers during 2019.
 
81

 
We have set out below the calculation of cellular ARPU for each of the periods presented:
 
   
Year Ended December 31,
 
   
2017
   
2018
   
2019
 
   
(In NIS millions, except number of subscribers and months)
 
       
Revenues          
   
3,871
     
3,688
     
3,708
 
less revenues from equipment sales
   
952
     
904
     
932
 
less other revenues not in ARPU*          
   
949
     
1,061
     
1,102
 
                         
Revenues used in ARPU calculation  (in NIS millions)
   
1,971
     
1,723
     
1,674
 
Average number of subscribers          
   
2,797,341
     
2,826,013
     
2,752,871
 
Months during period          
   
12
     
12
     
12
 
ARPU (in NIS, per month)          
   
57
     
51
     
51
 


*
Other revenues include revenues from other communications services, mainly fixed-line revenues and repair services.
 
 (5)
Adjusted EBITDA is a non-IFRS measure and is defined as income before financing income (expenses), net; other income (expenses), net (excluding gain from the sale of a subsidiary and expense related to employee retirement plans); income tax; depreciation and amortization; and share based payments. 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 significant debt), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age of, and depreciation expenses associated with fixed assets. Adjusted EBITDA should not be considered in isolation or as a substitute for operating income or other statement of operations or cash flow data prepared in accordance with IFRS 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 annual report, may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated.
 
The following is a reconciliation of adjusted EBITDA with net income and operating income:
 
   
Year Ended December 31,
 
   
2017
   
2018
   
2019
 
   
(In NIS millions)
 
Net income(loss)          
   
113
     
(64
)
   
(107
)
Financing expenses, net          
   
175
     
171
     
144
 
Taxes on income (tax benefit)          
   
40
     
(6
)
   
(23
)
Equity of investee
   
-
     
-
     
10
 
Operating income          
   
328
     
101
     
24
 
Other expenses (income), net (excluding gain from the sale of a subsidiary and expense related to employee retirement plans)
   
(1
)
   
-
     
10
 
Depreciation and amortization          
   
555
     
584
     
898
 
Share based payments          
   
2
     
2
     
8
 
Adjusted EBITDA          
   
884
     
687
     
940
 


(6)
Operating income margin is defined as operating income as a percentage of total revenues for each of the applicable periods.
 
(7)
Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of total revenues for each of the applicable periods.
 
82


The following table sets forth our consolidated statements of income as a percentage of total revenues from operations for the periods indicated:
 
   
Year Ended December 31,
 
   
2017
   
2018
   
2019
 
Revenues          
   
100.0
%
   
100.0
%
   
100.0
%
Cost of revenues          
   
69.2
%
   
72.2
%
   
73.5
%
Gross profit          
   
30.8
%
   
27.8
%
   
26.5
%
Selling and marketing expenses          
   
12.4
%
   
15.3
%
   
16.5
%
General and administrative expenses          
   
11.0
%
   
9.8
%
   
8.9
%
Other (income) expenses, net          
   
0.2
%
   
0.7
%
   
(0.5
)%
Operating income          
   
7.6
%
   
2.0
%
   
0.6
%
Financing expenses, net          
   
3.7
%
   
3.9
%
   
3.9
%
Income(loss) before income tax          
   
3.9
%
   
1.9
%
   
(3.5
)%
Income tax         
   
1.0
%
   
0.2
%
   
0.6
%
Net income(loss)          
   
2.9
%
   
1.7
%
   
(2.9
)%

Revenues
 
   
Year Ended December 31,
   
Change
 
   
2017
   
2018
   
2019
   
2018 vs. 2017
   
2019 vs. 2018
 
   
(In NIS millions)
             
Revenues          
   
3,871
     
3,688
     
3,708
     
(4.7
)%
   
0.5
%

The increase in revenues in 2019 compared with 2018 is attributable to a 3.1% increase in equipment revenues and an increase of 4% in recuring revenues from the fixed-line segment in the Internet and TV fields offset by 2.5% decrease in service revenues in the cellular segment,
 
The decrease in revenues in 2018 compared with 2017 is attributable to a 10.3% decrease in service revenues in the cellular segment, and a 5% decrease in equipment revenues. The decrease in service revenues was partially offset by an increase in revenues from the fixed-line segment in the Internet and TV fields.
 
The following table sets forth the breakdown of our revenues for the periods indicated based on the various sources thereof:
 
   
2017
   
2018
   
2019
 
   
Revenues
   
% of Total Revenues
   
Revenues
   
% of Total Revenues
   
Revenues
   
% of Total Revenues
 
   
(in NIS millions)
         
(in NIS millions)
         
(in NIS millions)
       
Service revenues:
                                   
Cellular services          
   
1,777
     
45.9
%
   
1,581
     
42.9
%
   
1,541
     
41.5
%
Land-line communications services*          
   
1,004
     
25.9
%
   
1,068
     
29.0
%
   
1,111
     
30.0
%
Other services**          
   
138
     
3.6
%
   
135
     
3.7
%
   
124
     
3.3
%
Total service revenues
   
2,919