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NII HOLDINGS INC (NIHD) Q1 2019 Earnings Call Transcript

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NII HOLDINGS INC (NASDAQ: NIHD)
Q1 2019 Earnings Call
May 13, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Dan Freiman

Thank you. Good morning, everyone. And thank you for joining NII Holdings' first-quarter 2019 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 2018 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. We have also posted a presentation on our website summarizing our results for the first quarter.

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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.

Roberto Rittes -- Chief Executive Officer

Thank you, Dan. Good morning, and thank you for joining us today. Before we review our results for the quarter, I would like to begin with an update on the proposed sale of Nextel Brazil to America Movil. As the first path in the approval process, we filed our definitive proxy statement on May 6th.

Our board recommends voting in favor of the sale proposal, the plan of dissolution, and wind down of NII, and the other related proposals in the proxy. After reviewing our Q1 results, we will provide an update of the approval process in more detail. In spite of the pending sale, we are running our business in the ordinary course, in line with our strategies. That strategy, focused on growing our subscriber base by catering to value-minded customers in Sao Paulo and Rio who appreciate our promise on price, network performance and customer service.

At the same time, we are remaining disciplined about spending, increasing further efforts to reduce cost. Turning to our results. The combination of higher growth adds and lower churn led to a healthy 4% increase in our subscriber base in Q1. We also generated profit consolidated adjusted OIBDA for the third straight quarter.

In terms of subscribers, we reported 371,000 gross adds in Q1, up 60,000 from Q4 due to the continued expansion of our national retail sales channel. In addition, compared to Q4, churn for Q1 decreased by 27 basis points to 2.35%. As a result, we gained 132,000 net adds in Q1, growing our subscriber base to 3.4 million. Most of our other KPIs were similar compared to Q4.

Our port-in rates in Q1 was steady at 3.5 to one, allowing us to continue gaining market share in both Sao Paulo and Rio. Customer complaints to Anatel were flat compared to Q4 despite the 4% increase in our subscriber base. Our net promoter score, or NPS, was 30 points in March, down three points from year-end, due to a drop in network experience caused by weather-related outage and capacity-related issues in both Sao Paulo and Rio. On the sales and marketing fronts, in April, we launched an innovative new offer aimed at solidifying our packet and customer-centric positioning.

Under this offer, new or existing Nextel clients pay 10 reais extra per month in exchange for one additional gigabytes of data every six months, with a fixed price guaranteed for two years. We chose Arnaldo Cezar Coelho, a high-profile soccer commentator and former world cup final referee to present this offer. We name it, a regra e clara, which translates to, the rule is clear, an extremely popular term coined by Arnaldo. We believe this offer will help us to defend our ARPU and churn, particularly beyond the 12-month loyalty contracts.

While we are pleased with our performance thus far, as a result of the highly competitive wireless market, translating subscriber growth to revenue growth has been difficult. We are working hard to protect our ARPU and gain revenue share. We're also maintaining our relentless focus from cost containment to improve our OIBDA and preserve our liquidity. Now I would like to turn the call back to Dan to discuss our financial results.

Dan Freiman

Thanks, Roberto. We started off 2019 with solid first-quarter financial results as we generated positive consolidated adjusted OIBDA for the third straight quarter. On the top line, our total revenue was $147 million for the quarter, up $5 million in Q4. Our ARPU for the first quarter reached $14, consistent with last quarter.

Our total operating expenses were $12 million lower than last quarter, primarily due to a drop in general, administrative and selling and marketing expenses. The decrease in G&A was mainly due to an $11 million onetime net benefit related to the recovery of PIS/COFINS tax credit that we recognized in the first quarter. Our CCPU was $11 for the first quarter, a $1 decrease from the level we reported last quarter. Our selling and marketing expenses were down slightly this quarter due to seasonality.

Our CPGA was $56, the same as last quarter. Our consolidated adjusted OIBDA for the first quarter was $90 million, a $17 million increase from last quarter. Our adjusted OIBDA results include a $2 million benefit from the adoption of the new lease accounting standard. In addition, on January 1, 2019, we recognized $436 million of operating lease liabilities on our balance sheet related to the implementation of the new lease accounting rules.

We invested $7 million in capex this quarter, significantly less than last quarter, but in line with the first quarter of last year. We expect capex will be higher this year because of subscriber growth and increased data consumption. In terms of cash burn before debt service, for the first quarter we spent $40 million, which was a $14 million increase from last quarter, primarily due to annual payment for license fees and employee bonuses. Factoring in $15 million we spent on debt service, primarily for interest payment, our total cash burn for the quarter was $56 million.

We expect cash burn to be lower in future quarters, except in Q3, when we are required to pay about $28 million for the first installment of principal and interest to the Anatel for our license financing. In terms of liquidity, we ended Q1 with $120 million of cash and short-term investments as well as $106 million of cash held in escrow. Recovering the cash in escrow continues to be one of our top priorities. In February, we initiated the proceeding with the U.S.

bankruptcy court to adjudicate the disagreement we have with the escrow counterparty. This issue relates to the release of $60 million in the escrow that we've previously requested in connection with prior-period's amended tax returns we filed in escrow. We have also been making progress facilitating the audit process with the Mexican tax authorities for the remaining open audit. In April, we wrapped up the 2013 audit with one entity without having to make any tax payments.

Separately, we were notified by the Mexican tax authorities that they deny the administrative appeals we filed for two previously issued tax assessments totaling about $12 million. As a result, we plan to initiate the judicial process and pursue a favorable decision and protect our interests. Turning to Brazil. As we've previously stated, we have been waiting for a decision on the lawsuit we filed related to the overpayment of certain taxes in prior years.

Nextel Brazil was recently notified by court order, that it was awarded credit for past overpayments of PIS/COFINS taxes, plus interest, totaling an estimated 783 million Brazilian reais or about $200 million. Nextel Brazil has five years to utilize this credit. We currently expect that Nextel Brazil will generate enough tax liabilities in the ordinary course of business until we utilize these credits before their expiration. It's important to note that under the terms of the purchase agreement with America Movil, Nextel Brazil may not use these credits prior to the closing of the transaction, except for specific purposes at America Movil's request.

To fund our business plan in 2019, we expect to use a significant portion of our remaining cash and receive additional investments from AI Media to maintain their 30% minority ownership. While we believe the sale of Nextel Brazil will close this year, if we were to fund our business plan in 2020, we would need to start using the PIS/COFINS credits and recover proceeds from the Mexico escrow, while also relying on additional investments from AI Media. In that scenario, we would still need to raise at least $50 million in capital to fund our business plan through 2022. Finally, I wanted to provide a brief update on the status of the proposed sale of Nextel Brazil.

In our definitive proxy statement, we set the record date of May 23, 2019, and the date for the special stockholders meeting on June 27th. Separately, America Movil has initiated request for authorization of the transaction with both the antitrust authority, the CADE, and the telecom regulator, the Anatel, which are both necessary to close the transaction. We expect closing to occur in the third quarter, and no later than the fourth quarter of this year. Now I would like to turn the call back to Roberto for a few closing remarks.

Roberto Rittes -- Chief Executive Officer

Thanks, Dan. We are pleased with our results this quarter. We are continuing to grow our business and keep churn at healthy levels. However, staying on this course will require additional funding for the next several years.

Hence, while we have been building a strong track record of improving results, the industry remains competitive and the economy remains weak. After careful review and consideration, we and our board believe that the sale of Nextel Brazil provides the best opportunity to monetize the assets and avoid significant unnecessary additional investments to fund the business. We'll keep you posted as we move forward in this process. We are now ready to take your questions.

Questions & Answers:


Operator

[Operator instructions] And we do have a question from the line of Tom Hill with PlusTick. Please go ahead.

Tom Hill -- PlusTick Partners -- Analyst

Yeah. Hi. Am I to understand that you expect it would cost $50 million -- that you need to raise $50 million to carry the business through '21, '22? So that's the amount of capital that's required if you were a stand-alone?

Dan Freiman

Yeah. Hey, Tom, this is Dan. I mean, first of all, we have to assume we'd get back the entire escrow. We'd be able to use all the PIS/COFINS credits, and AI Media would continue to fund.

So if you assume all those three things, then yeah, we estimate we need at least $50 million to fund the plan through 2022.

Tom Hill -- PlusTick Partners -- Analyst

OK. Thank you.

Dan Freiman

Sure.

Operator

[Operator instructions] And there are no further questions at this time.

Dan Freiman

OK. Great. Well, appreciate everyone's time. Thanks for joining the call, and we're happy to take additional questions offline.

Just let us now. Give us a call. Thank you.

Operator

[Operator signoff]

Duration: -24 minutes

Call participants:

Dan Freiman

Roberto Rittes -- Chief Executive Officer

Tom Hill -- PlusTick Partners -- Analyst


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