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Edited Transcript of NIHD earnings conference call or presentation 8-Nov-18 1:30pm GMT

Q3 2018 NII Holdings Inc Earnings Call

RESTON Nov 8, 2018 (Thomson StreetEvents) -- Edited Transcript of NII Holdings Inc earnings conference call or presentation Thursday, November 8, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel E. Freiman

NII Holdings, Inc. - VP & CFO

* Roberto Rittes

NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil

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Conference Call Participants

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* Kevin Michael Roe

Roe Equity Research, LLC - Senior Analyst of Telecommunications Services, Cable and Satellite & President

* Lance William Vitanza

Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst

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Presentation

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Operator [1]

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Welcome to the NII Holdings' Third Quarter 2018 Results Conference Call. (Operator Instructions)

The conference will be available for playback in the U.S. through November 15 by calling 1 (800) 633-8625. Callers outside the U.S. will need to dial 1 (402) 977-9141. The passcode for both is 21897530.

I would now like to turn the conference over to Dan Freiman, Chief Financial Officer of NII Holdings.

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Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [2]

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Thank you.

Good morning, everyone, and thank you for joining NII Holdings' Third Quarter 2018 Results Conference Call. With me on the call today is Roberto Rittes, Chief Executive Officer of Nextel Brazil.

As a preliminary matter, let me inform you that some of the issues discussed today that are not historical will be forward looking and, as such, should be taken in the context of the risks and uncertainties that are outlined in the SEC filings of NII Holdings, including our 2017 Form 10-K and other documents we have filed with the SEC.

In addition, during this call, we will be discussing certain financial metrics that do not conform to generally accepted accounting principles in the U.S., otherwise known as GAAP. For a reconciliation of these financial metrics to GAAP, please access NII's Investor Relations link at nii.com.

In addition, we have posted a presentation on our website summarizing our results for the third quarter. Please refer to this presentation for additional details on our progress for the year.

I would now like to turn the call over to Roberto.

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Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [3]

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Thank you, Dan. Good morning, and thank you for joining us today.

We are extremely pleased with our results this quarter as we continue to grow our subscriber base while improving profitability. We achieved our fourth straight quarter of solid subscriber growth and returned to positive consolidated adjusted OIBDA for the first time since the first quarter of 2017. Our results reflect our belief that our business has turned the corner, allowing us to continue generating positive adjusted OIBDA each quarter going forward.

In terms of subscribers, we reported 340,000 gross adds in Q3, up 20,000 from last quarter due to the success of our lead generation performance marketing strategy, the ramp-up of 50 kiosk lounge in high-traffic hypermarkets early in the year and expansion of our national retail channel. At the same time, we managed to decrease churn to 2.68% despite the significant weight of contract renewals that occurred during the quarter. As a result, we posted 86,000 3G net subscriber additions in Q3 and 244,000 in the year-to-date, growing our 3G subscriber base to over 3.2 million, a 13% increase from a year ago and a 3% increase from last quarter. We are proud to share that we are now the mobile operator with the highest postpaid growth rate in Brazil in 2018.

Most of our other KPIs also improved this quarter. Our port-in ratio increased to 3.4:1, allowing us to continue gaining market share in both São Paulo and Rio. Complaints from our clients to Anatel decreased another 9% compared to last quarter and 54% compared to Q3 '17. As of September, our rating at the (inaudible) the Brazilian equivalent of the Better Business Bureau, improved 5% compared to June. And as of early October, our 12-month average performance placed us in their highest reputation category for the first time. Our Net Promoter Score, or NPS, increased to 33 points in September, the highest level among all our competitors. In fact, in October, we won 5 awards from 2 different organizations for the quality of our customer service. In addition, we were particularly proud to be the first company in our segment to be recognized by the São Paulo court system with a Company Friendly to the Justice certification. This certification recognizes Nextel's launch of alternative conflict resolution methods and the reduction in volume of new consumer cases, which were down 50% compared to last year.

The deployments of our national retail chain channel evolved well in the quarter. And as of September, we were present in 357 points of sale with higher-than-expected gross add results. However, delays in our IT integration of 3 chains will result in falling short of our 1,000 points of sales targets for the end of the year.

On the logistic front, our same-day SIM card delivery project accounted for nearly half of our telesales shipments during the quarter. More importantly, this new logistic model reduced the percentage of clients unhappy with SIM card delivery by over 60% and increased the percentage of active users after 30 days of purchasing by 5 percentage points. These are encouraging results. In Q4, we'll implement a state-of-the-art delivery management platform, which will allow our clients to track and interact directly with delivery agents and enable us to schedule deliveries with 30-minute windows. This service is expected to reach 80% of all deliveries in December.

Finally, impressive results, such as our performance in Q3, can only be achieved by highly engaged teams. Over 2018, we made a tech-inspired overhaul of our operating mode and culture aimed at improving communication across the company, reducing bureaucracy and hierarchy and providing employees with more flexibility. Actions to deliver such goals included company-wide implementation of objectives and key results, or OKRs; migration of certain business goals to squad and/or interdisciplinary, objective-based teams; elimination of all office and dress codes; and allowing employees to choose their working hours. Furthermore, in order to give credibility to our goal of decentralizing decision-making and execution, the performance bonus of executives and managers was reduced to finance increase for the rest of the company.

All of those measures allowed us to grow our employee NPS as of September to 60 points, a 17-point improvement from May when the survey was first run. These initiatives demonstrate our commitment to continuous improvement. I'm really proud of the progress we have made, and I'm excited about the opportunities ahead of us. Going forward, we'll continue to stay focused improving customer experience to keep churn at 2.75% or better. Based on our results to date, we believe we'll exceed our 300,000 net add goal for the year. At the same time, we have a relentless focus on manager costs and liquidity. We're constantly seeking to strike the right balance between short-term liquidity management and long-term value creation.

Now I would like to turn the call back to Dan to discuss our financial results.

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Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [4]

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Thank you, Roberto.

Our financial results and metrics that drive our business improved this quarter as we reported lower costs, lower CCPU and higher adjusted OIBDA. All of these led to a significant reduction in cash burn.

Compared to last quarter, our total revenue in local currency increased BRL 4 million as we more than made up for the loss of iDEN revenue. Our higher 3G/4G revenue was driven by subscriber growth and an increase of BRL 1 in 3G/4G ARPU resulting from an annual price increase. In U.S. dollars terms, the weaker foreign currency offset this increase, resulting in a $14 million decrease in reported revenue.

Compared to the third quarter last year, our total revenue this quarter was down $64 million or 31% mainly because of a $30 million or 100% decrease in iDEN revenue and the impact from a 25% currency depreciation. In local currency, our 3G/4G revenue increased by 1% over the same time period.

On the cost front, we achieved significant reductions compared to prior periods as a result of our continued proactive approach to cost management. Our total operating expenses decreased by $24 million or 15% from last quarter and $105 million or 44% from third quarter last year. In terms of the key drivers for our lower reported expenses, our cost of revenue decreased by $16 million or 20% from last quarter and $35 million or 35% from the third quarter of last year mainly due to a reduction in interconnect expenses related to less iDEN traffic, lower mobile termination rates and lower site rent and maintenance costs as well as the impact of the weaker foreign currency.

Our general and administrative expenses dropped by $11 million or 18% from last quarter and $61 million or 55% from the third quarter of last year mainly due to a significant decline in bad debt expense related to an improvement in collections and the impact of the weaker currency. In addition, compared to the third quarter last year, our payroll and related expenses decreased as a result of headcount reductions we executed last year, and our customer care costs were down $10 million related to the drop in our customer contact rate and efficiencies we have implemented in our customer care operations.

As a result of these decreases, our CCPU declined another $2 this quarter from $14 last quarter and $8 from $20 in the third quarter of last year to $12 this quarter.

Our selling and marketing costs increased by $3 million or 22% from last quarter but decreased $9 million or 33% from third quarter last year related to a shift to lower-cost channels that Roberto described earlier. As a result, our CPGA increased slightly from last quarter but decreased from $100 in the third quarter of last year to $55 this quarter.

Due mainly to the impact of expense reductions, we generated $8 million of consolidated adjusted OIBDA for the third quarter. The trends we are seeing in our results give us confidence that we are back on the path to consistently generating positive consolidated adjusted OIBDA.

We invested $18 million in CapEx this quarter, bringing total CapEx year-to-date to $41 million. To capitalize on our positive operational momentum and prepare for continued growth next year, we decided to accelerate some CapEx planned for the first quarter of 2019, which will increase the amount of CapEx we will invest this year compared to plan.

In terms of cash burn before debt service, for the quarter we spent $15 million, a $29 million decrease from last quarter mainly due to significant tax credits we realized during the quarter. We also spent $15 million on debt service primarily for interest payments. We still expect total cash burn, including debt service, will be $100 million or less in the second half of the year.

In terms of liquidity, in August, we successfully executed a convertible note offering that was oversubscribed, allowing us to raise $110 million in net proceeds. As a result, we ended the third quarter with $201 million of cash and short-term investments as well as $106 million of cash held in escrow.

As we mentioned last quarter, we recently filed amended tax returns for the 2010 and 2011 tax years and requested the release of $68 million from the escrow. We are continuing to work with the escrow counterparty to resolve an ongoing difference in interpretation of the claims release requirements and the escrow and purchase agreement that is delaying the recovery of this amount.

In September 2018, Access Industries, through its affiliate, Al Media Holdings, bought ice group's 30% equity interest in Nextel Holdings, which owns Nextel Brazil. We and AI Media are working together to review and agree on continued investments to support Nextel Brazil's growth plans. Assuming we are successful in recovering most of the cash held in escrow and that Access Industries funds their pro rata share of capital into Nextel Holdings, we believe we have sufficient liquidity to fund our business for the next several years.

In addition, recently, there have been favorable court rulings in Brazil related to the historical calculation of PIS/COFINS taxes that have benefited certain of our competitors. We have a similar case awaiting resolution that, if decided in our favor, would unlock a significant amount of tax credits that we could use to offset future cash taxes.

On the regulatory front, last week, Anatel voted to increase regulatory caps on spectrum. The change in regulations that went into effect this week may open up new opportunities for us to unlock the value of our assets. We are continuing to explore these opportunities, including potential strategic alternatives. There is no guarantee that any of these opportunities will come to fruition. As such, we remain focused on creating value through the continued improvement in our operations, profitably growing our subscriber base and managing our liquidity.

Now I would like to turn the call back to Roberto for a few closing remarks.

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Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [5]

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Thanks, Dan.

I'm proud of the progress we have achieved. Just a year ago, we're struggling to grow our business. Despite the challenge we faced, we were able to put ourselves back on the growth path through a relentless focus on driving down churn and shifting to more efficient channels. Now we are not only growing our subscriber base, but the key metrics that drive our results are improving mostly through the continued cost reduction, helping us to generate positive adjusted OIBDA.

As we wrap up the year, the strong foundation we have built gives us confidence about the future. We're excited and committed to creating even more value in our business.

We are now ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And now our first question comes from the line of Lance Vitanza with Cowen.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [2]

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Maybe if you'll allow me 3, the first being, obviously great momentum into the back half of the year. It sounds like that's continuing. I'm wondering how much of that -- I mean, not to take anything away from the hard work, but how much of that is related to just the at least relatively improved state of the economy? And do you see much impact from the recent election results? I'll start there.

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Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [3]

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Okay. I'll hand that one to Roberto.

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Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [4]

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I'll say that the vast majority is us against our competitors. Yes indeed, '18 was a better year than the few years before but still below what people expected. I think there is a lot of expectation about the future. And particularly, the Brazilian Stock Exchange felt that even though I think we need to be seeing what's going to trickle down to the real economy. But I think the improvement is the hard work and the changes that we have done to the business. If indeed both Anatel delivers and the environment gets better, I think that's additional factor to this business going forward.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [5]

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Great. And then on CapEx, the acceleration from the first quarter into the fourth quarter, can you talk in a little bit more detail about what that spending is actually to be used for? And what drove the decision to accelerate?

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Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [6]

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So it's about $5 million to $10 million that we are bringing up. We did the -- we're in the final rounds of implementing the 2018 CapEx, and we had third part teams on the ground finishing that. We're able to have attractive commercial negotiation with our vendor, and we thought it was a good idea, I mean, now to take advantage of these 2 factors and for the first quarter planned CapEx into our network. Most of it is data capacity expansion. We've been doing that -- and I guess the twist that's worth mentioning, in some of our markets that we were 3G only, the countryside and the coast of São Paulo, we are doing reforming in which we're using our 2.1 spectrum half for 3G and half for 4G. So I think that the added element of this is that with this CapEx, we have -- we become a 4G player in markets that until recently we are only 3G. We started that in the third quarter, and we -- in the fourth quarter, a piece of that CapEx is going to be focused on this 3G/4G reforming.

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Operator [7]

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Our next question comes from the line of Kevin Roe with Roe Equity Research.

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Kevin Michael Roe, Roe Equity Research, LLC - Senior Analyst of Telecommunications Services, Cable and Satellite & President [8]

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A couple of questions. First, Roberto, what is your outlook for legislative telecom reform after the new Brazilian government takes power in January? And on the operational side, one of your competitors yesterday called out a material jump in prepay competition over the last 45 days. Have you seen a change in trends through September at all on your sub growth?

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Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [9]

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So yesterday, the PL 079 (sic) [PLC 79], the change to the telecom law, was approved in the subcommittee and was sent to the Senate with an urgency request. So looks like -- and we've been here before, but it looks like this time the thing is actually moving. And maybe in the next few weeks, the PLC 79 change. I think this is the main event for the broader sector in general.

Indeed, we don't play in the prepaid market, but we monitor very closely, and we -- has been extremely competitive for a while. And in recent months, there is actually a worsening of the competition in that segment. In the post paids, we haven't seen major changes. I think last year, there was a lot of changes. This year, it's the same thing, a little bit more data for the same price, the same competitive dynamics. And actually, the business has a very good momentum the last few months.

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Kevin Michael Roe, Roe Equity Research, LLC - Senior Analyst of Telecommunications Services, Cable and Satellite & President [10]

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And on your porting ratio, which continues to improve, and you mentioned you're taking share in 2 major markets, how is that porting trend relative to the big 4 competitors? Are there certain folks that -- certain operators that you're taking greater share from others? Or is it equally split? Any color there would be great.

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Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [11]

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There are 2 -- first, we look both São Paulo and Rio, and there are difference between the 2 markets not only because of different offers from operators in one market versus the other but also our relative market shares. We're doing extremely well against Oi. That's the one that we take extremely high porting ratio, more than double of our average. We -- the one that we have the hardest time is Claro, but we still win from them with a good margin. One thing to highlight is that the porting improved also because we increased the percentage of number portability in our gross adds. So when we see the bump we had from last quarter, most of it came from us being a bigger chunk of our gross adds being number portability, which is great because when somebody brings the number with them to the new operator, it's a much higher commencement. So we are really focusing on incentivizing customer to bring the numbers, and we expect that to have a positive impact in churn next year.

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Operator [12]

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(Operator Instructions) Our next question comes from the line of [David Borne], private investor.

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Unidentified Shareholder, [13]

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Dan and Roberto, I have one questions today. If Nextel decided to proceed with the 800 megahertz conversion SMP, is there an expectation that Anatel would allow an additional rebanding so that Nextel could consolidate its licenses potentially along with Sunbird and then just have single contiguous blocks?

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Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [14]

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So we have the option today to convert the iDEN frequencies into normal mobile services. There is a price tag that was attached to that, BRL 99 million. As of now, we haven't decided whether or not we're going to exercise that option. We have some time flexibility in that. And I guess the main issue is that as of today, even though from the telecom equipment side, that frequency is -- works well, from the handset perspective, there are extremely few models that work in that frequency. So using that frequency for mobile services would imply importing handsets from somewhere, something that's very complicated. To answer your questions, swaps are not feasible. So if we exercise, we have to use the spectrum that we had originally in ice -- in iDEN.

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Unidentified Shareholder, [15]

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Okay. And do you have any requirement or usage restrictions on that between now and when the license will start expiring? Or are you able to just hold off on deciding whether you want to pay the conversion fees until late 2022?

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Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [16]

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Well, we don't have any requirements. We just -- we can just decide and then convert.

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Operator [17]

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And our next question is a follow-up question from the line of Lance Vitanza with Cowen.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [18]

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Just I want to confirm. And so it sounds like the proceeds from the convert at this point, they've not yet been contributed into either holdings or the JV?

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Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [19]

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That's right, Lance. We have not yet contributed. Most likely, we'll do that either this month or next month.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [20]

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Okay. And so is the timing of that related to your -- the pace of the conversations with Access? Or is it, A, we need to get the money down there at a certain point at time and he's either in alongside of us or he's not? Or -- can -- any detail that you can provide on any process items that need to occur between now and then would be helpful, if there are.

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Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [21]

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Sure, yes. Yes, no, it's really just based on when the timing when Nextel Holdings needs capital to continue to fund Nextel Brazil. And we're -- at the end of the quarter, Nextel Holdings had about $20 million of cash left. So as it continues to fund Nextel Brazil, we're going to want to fill up. With Nextel Holdings, we'll probably send a portion of the proceeds, like I said, either this month or next month as soon as we need to send money into Brazil. And then I think there's -- we're fairly confident that Access is going to put in their pro rata share to maintain the 70-30 split. They have not formally confirmed it, but we feel pretty good that's where we're going to end up.

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Operator [22]

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And Mr. Freiman, there are no further questions at this time. I'll turn the call back to you. Please continue with your closing remarks.

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Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [23]

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Great. Well, I just want to say thanks, everyone, for joining the call today, and happy to take questions later today or tomorrow. Just give us a call.

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Operator [24]

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Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.