NII Holdings net debt hits $3B, 44% OIBDA dip in Q3

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NII Holdings, which recently announced plans to cut 20% of its workforce at its Reston, Va., headquarters, posted a 44% decrease in its consolidated operating income before depreciation and amortization to $218 million for the third quarter of 2012. The company, which operates under the Nextel brand across a handful of Latin American countries, also posted a 15% year-over-year increase in operating revenues to $1.49 billion.

The carrier generated a consolidated operating income of $33 million for the quarter and a consolidated net loss of $82 million, or 48 cents per basic share. NII Holdings’ consolidated average revenue per user was $37, down almost $12 compared to the same period last year.

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NII Holdings ended the third quarter with U.S$4.7 billion in total debt and $1.7 billion in consolidated cash and investments, resulting in net debt of $3.0 billion. Also in October, it closed on a local currency financing in Brazil of approximately $200 million, enhancing its liquidity position.

The company pointed to the weaker average foreign currency exchange rates, lower average revenue per subscriber (ARPU) on a local currency basis and incremental expenses related to the deployment of its planned third generation (3G) networks.

However, during the third quarter, Nextel added 152,000 net subscribers to its network, bringing its ending subscriber base to 11.3 million, an 11% increase compared to the size of its subscriber base at the end of the third quarter last year.

During the analyst conference call, NII said it has hired financial advisers and is looking at selling towers across some of its markets, starting with Brazil and Mexico. “Management indicated the first part of 2013 is the right time frame for something to happen,” said Jennifer Fritzsche, a senior analyst at Wells Fargo.

3G launches

NII’s investment in 3G networks, as well as the ongoing investments in iDEN network capacity, resulted in consolidated capital expenditures of $389 million for the quarter.

Under the Nextel brand, NII launched 3G products and services in 34 cities in Mexico, covering 45 million people in September. The company launched 3G services in Chile in July.

Steve Dussek, NII’s CEO, said in a statement that the company made progress on the deployment of its 3G networks, but was disappointed with its operating results. The company is experiencing good demand for its 3G services, he said, adding 3G voice and data customers in each of the markets where its new networks have been launched.

According to Dussek, the company is continuing to experience problems deploying 3G in Brazil, putting it behind schedule. During the conference call, NII said it is delaying its 3G deployment in Brazil because of complications arising from labor scarcity and integration issues. The first wave of Nextel 3G services in Brazil is expected to launch in select cities later this year, initially focusing on data services and adding new services and features more broadly in 2013.

Brazilian operation

NII announced it has decided to execute a strategy in the fourth quarter of this year to eliminate customers on its network “who do not align with Nextel’s value proposition and have proven to be expensive and difficult to retain.” Dussek said that Brazilian operations continued to be adversely impacted by company’s efforts to improve the quality of its customer base.

Dussek noted that “while this plan will mean that churn will rise substantially for the fourth quarter of 2012, causing us to fall well below our consolidated net addition goals for the year, it will position Nextel Brazil to return to positive net add growth in the first quarter of 2013, with a higher quality subscriber base. Executing this strategy is the right decision for the business in the long-term.”

NII plans on eliminating all unprofitable customers (approximately 350,000 customers) in the fourth quarter and tighten its credit policy, according to Wells Fargo Securities’ Fritzsche. “The company expects positive net adds in 2013 and higher quality customers. The overall impact is expected to be approximately $10 million to the bottom line,” she said.

During the third quarter, NII Holdings reported a churn rate of 2.65%, up almost 90 basis points from the level reported for the same period last year. The carrier said the increase was due primarily to actions taken in Brazil to focus its retention efforts only on customers who are more likely to benefit from the value of its services as well as the increased churn for customers purchasing service under prepaid plans in Peru and Argentina.

Fritzsche said that it was a difficult quarter for NII Holdings with an especially challenging near term outlook. “[NII Holdings] is clearly a ‘show me’ story right now. That said, we do believe 2013 could be the time frame when some of the long talked about catalysts (i.e., the tower sale and Brazil 3G launch) finally materialize. Additionally, comps should be fairly easy for the company as we turn the page into 2013. However, we’ll maintain our market perform rating until we see tangible steps toward these improving fundamentals,” she said.

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