Executives
Tim Perrott, Vice President of Investor Relations & Corporate Communications
Steven P. Dussek, Chief Executive Officer
Gokul Hemmady, Vice President & Chief Financial Officer
Steven M. Shindler, Executive Chairman
Analysts
Christopher King – Stifel Nicolaus & Company, Inc.
James Breen – Thomas Weisel
Richard Prentiss – Raymond James
Brett Feldman – Barclay Capital
Andrew Campbell – Credit Suisse
Gray Powell – Wachovia
Rizwan Ali – Deutsche Bank
NII Holdings Inc. (NIHD) Q1 2009 Earnings Call April 23, 2009 8:30 AM ET
Operator
Ladies and gentlemen, thank you for holding and welcome to the NII Holdings First Quarter 2009 Earnings Conference Call. At this time all lines on a listen-only mode. There will be an opportunity to ask questions at the end of today’s call. Today’s conference call will be available for rebroadcast through March 12, 2009 later today. Domestic callers may access the rebroadcast by dialing 888-286-8010 and entering pass code 39873053. International participants may access the rebroadcast by dialing 617-801-6888 and entering passcode 39873053. (Operator Instructions).
I will now turn the conference over to our host, Tim Perrott, Vice President of Investor Relations and Corporate Communications. Please proceed sir.
Tim Perrott
Thank you and good morning to everyone and thank you for joining NII Holdings’ first quarter 2009 results conference call. With me on the call today are Steven Shindler, our Executive Chairman; Steve Dussek, our CEO; and Gokul Hemmady, our Vice President and CFO.
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 2008 annual report on Form 10-K, which we filed with the SEC on February 26, 2009, as well as 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 the Generally Accepted Accounting Principles in the U.S. or better known as GAAP, and also during this call, we will be comparing our results for the first quarter of 2009 with our results for the first quarter of 2008 on a constant currency basis. When comparing on a constant currency basis, we are adjusting our first quarter 2008 results to reflect the same average currency exchange rates used to determine our results for the first quarter of 2009. For a reconciliation of these financial metrics in constant currency amounts to GAAP, please access NII's Investor Relations link at nii.com.
Before I turn over the call to Steve Dussek, I would like to mention that this call is being webcast and will be available for replay on nii.com and streetevents.com. I would now like to introduce Steve Dussek, our CEO. Steve?
Steven P. Dussek
Thank you, Tim, and good morning. Welcome to all of our investors and industry analysts who have joined us today for our first quarter 2009 results conference call. We hope that you had a chance to review the press release issued earlier today that summarizes our results for the quarter. I would like to share with you a few observations regarding our recent performance. First, demand for our services remains solid in the quarter, with gross subscriber additions meeting our expectations. We also experienced healthy year-over-year increases in revenues, operating income before depreciation and amortization or OIBDA, and OIBDA margin on a constant currency basis.
However weaker than expected economic conditions in Mexico and Argentina particularly during the latter part of the first quarter resulted in higher customer churn rates as some businesses downsized their operations or took other actions to cut costs. These conditions offset our strong subscriber growth in Brazil resulting in 266,000 net adds for the first quarter, which was below our expectations. Second, as we execute our smart growth strategy, we are being selective in the customers we're pursuing in order to maintain the quality of our customer base.
Specifically, in light of the difficult economic conditions in Mexico and Argentina, we are not stepping on the accelerator to drive higher subscriber growth in these countries by reducing prices, relaxing our credit standards or adding significantly to our distribution channels. In contrast, in Brazil, we're investing aggressively, adding new coverage and generating significant subscriber growth while maintaining or improving our profitability consistent with our smart growth strategy. We believe that this approach will maximize the long-term profitability of our business, but in difficult economic environments like we're experiencing now, this approach can affect our subscriber growth.
Based on our first quarter net add results, and our assessment of subscriber growth trends as we announced previously, we have reduced our 2009 outlook for net adds to a range between 1.1 million and 1.2 million. It is important to keep in mind that achieving even the lower end of the range would equate to an 18% year-over-year growth in our subscriber base at year-end. With all of this as background we were still able to generate solid financial results for the first quarter. Briefly highlighting these results, we generated 961 million in total revenues and 245 million in OIBDA. As Gokul will review with you shortly, local market currencies depreciated significantly when compared to the first quarter of last year, impacting our reported U.S. dollar results.
However, adjusting our first quarter results on a constant currency basis, our revenues increased 23% and OIBDA increased 34% over the first quarter of 2008. Nextel Brazil’s outstanding performance continues to be a primary driver of these strong results and we believe this market is only in the early innings of the subscriber growth and profitability it can deliver in the future. We continue to make progress in positioning the company for future success. We expanded our network in Brazil launching coverage for an additional 6 million people in the northeast region of the country.
We are continuing to make progress on our expansion efforts in Brazil with plans to launch several more cities through the remainder of this year. We also launched additional products and services during the quarter. Including the new iDEN BlackBerry Curve and a new security feature in Mexico called iAlarm. We also made progress in the development of our third generation network in Peru. This is consistent with our strategy to complement our iDEN network with a 3G platform to provide a boarder set of customers with our differentiated products and services.
As we announced last quarter, and after careful consideration, we have decided to deploy a WCDMA platform for our 3G network in Peru. And we have selected our vendors for both the infrastructure and high performance Push-to-Talk platforms. We will announce these partnerships after we finalize the related agreements. We have decided to deploy the WCDMA platform for several reasons. First and perhaps most important, we have become comfortable with the development path for a high performance push-to-talk feature supported by the WCDMA platform.
This allows us to maintain and enhance our differentiation on 3G, recognizing the importance of delivering our unique push-to-talk service on any platform we deploy. Accordingly we are working with our vendors to develop a high performance push-to-talk solution for our customers on the new network, that will be fully integrated with our existing iDEN push-to-talk service.
Second, the WCDMA platform has a larger ecosystem with a broader selection of handsets, lower infrastructure costs, and a more robust roadmap for new product development. And finally, choosing a WCDMA solution offers us more flexibility, because it is being deployed on multiple spectrum bands globally, including the spectrum bands that are expected to be available in the upcoming auctions in our markets.
As I mentioned on our last call, our focus remains on capturing the long-term opportunities for profitable growth in the years ahead. This approach requires that we remain committed to our goals of adding valuable subscribers, generating strong operational cash flow, and expanding our business in markets where the opportunities for profitable growth justify the investments. We believe that we have taken the right steps to position NII for success, and we remain enthusiastic about the long-term outlook for our business.
As we look toward the remainder of the year, we will continue to take steps to improve our profitability and pursue long-term opportunities. First by concentrating our efforts and investments in markets that offer the best opportunity to generate high quality profitable subscriber growth. Second, by developing and implementing strategies to target, capture, and retain profitable customers. Third, by taking steps to improve our cost structure and fourth by allocating our capital in a way that balances the need to preserve our cash with the value realized from pursuing opportunities that will enhance our operations both now and in the future.
Of course, we will monitor economic and another conditions in our markets and make appropriate adjustments as needed to ensure that we are in the right position to seize opportunities and build long-term value in our business. Finally, I would like to give you our perspective on the remainder of 2009. While continued volatility in local currency exchange rates and economic conditions have the potential to affect our results over the rest of the year, at this time our outlook for revenues remains in a range of $4.1 billion to $4.3 billion, and our outlook for OIBDA remains the same at $1 billion to $1.1 billion.
Keep in mind that our OIBDA outlook includes $70 million of non-cash stock option compensation expense for the year. Because of our revised outlook for subscriber growth we are reducing our capital expenditures outlook for the year to a range of $750 million to $800 million.
I will followup with more comments later. However, now I would like to turn the call over to Gokul Hemmady, our Vice President and Chief Financial Officer.
Gokul Hemmady
Thank you Steve, and good morning everyone. As discussed on our year-end conference call the economic environment in some of our markets pose significant challenges for our business. As Steve mentioned earlier, the demand for our services remain strong, however the economic conditions primarily in Mexico weakened throughout the balance of the first quarter, which resulted in higher churn and fewer net adds than we expected.
Also although we generated solid financial results and improved margins on a constant currency basis, the lower average exchange rates for currencies in our markets had a negative impact on our reported U.S. dollar results. In my discussion, I will highlight some of our key operating metrics on a constant currency basis, in order to illustrate the operational trends of the business. Here are the major highlights for the first quarter. Growth in our subscriber base resulted in consolidated operating revenue of $961 million, a 3% decrease over the first quarter of 2008. However, on a constant currency basis revenue increased 23% over the same period.
We generated consolidated OIBDA of $245 million, which on a constant currency basis represents an increase of 34% compared to the first quarter of 2008. On a constant currency basis, our OIBDA margin improved nearly 200 basis points over the first quarter last year. This result is even more impressive considering that we incurred an incremental $10 million of operating costs related to our 3G efforts in this year’s first quarter. As previously announced, we added 266,000 net adds during the first quarter, bringing our subscriber base to 6.5 million subscribers, an increase of 28% compared to our subscriber base at the end of the first quarter of 2008.
Now let’s take a look at the operational results in greater detail. On a consolidated basis, we generated a 13% increase in gross adds over the same period last year, which was offset by an increase in churn to 2.1% due to the impact of weaker economic conditions primarily in Mexico. Because we expect these conditions to continue for the remainder of the year, we are focusing on churn reduction and customer loyalty programs throughout our markets particularly in Mexico.
While churn in our business has increased during this period we believe that our compelling value proposition and high levels of customer care still results in a churn rate among the best in our region. Consolidated service ARPU was $42 down $15 from the same period a year-ago due to the combined effect of weakening local currencies and lower usage levels. On a constant currency basis, ARPU declined $3 relative to the first quarter of 2008 as competitive pressures in Mexico that arose last year had an impact on pricing and drove lower minutes of use for interconnect services.
We are focused on improving our revenue stream through additional services such as Calling Party Pays rate plans and increased data usage through SMS and other applications. For first quarter 2009, consolidated CPGA was down more than $75 year-over-year to $254 fueled by a combination of lower handset subsidies and weaker local currency exchange rates. We’re focused on matching our customer acquisition costs with our level of ARPU to maintain the six-month CPGA payback that we’ve seen over recent quarters.
Reported OIBDA was $245 million and included $15 million of non-cash stock option compensation expense. Our reported first quarter OIBDA margin was 26% down from 29% in the same period a year-ago due to the weaker foreign currency exchange rates as well as costs associated with generating an incremental 75,000 in gross adds incurring 10 million in incremental operating costs related to 3G efforts and start-up costs relating to our expansion in Brazil. On the constant currency basis, our OIBDA margin was up 200 basis points as a result of continued efforts to improve our cost structure.
These efforts include first, lower handset subsidies related to strong demand for our recently launched handsets; second, improved interconnection costs as we continue to derive efficiencies in the network; third, more targeted spending on marketing and advertising, and finally improved workforce productivity as reflected in year-over-year improvement in the number of subscribers per employee. CapEx for the first quarter was $169 million. As expected the majority of our capital investment was allocated to Brazil as we invested $114 million or nearly 70% of our total CapEx in the period in this market.
We continue to add geographic coverage where appropriate and to improve capacity as needed to maintain the quality of our growing network in all of our markets. Now looking at operations on a market-by-market basis, the economic environment in Mexico continues to be challenging with continued weakness throughout the quarter resulting in higher than anticipated churn and bad debt levels. To combat this, we are intensifying our focus on customer retention and targeting high quality customers as part of our strategy to build and retain the strongest subscriber base in Mexico.
Nextel Mexico's reported financial results for the quarter were also negatively impacted by weakening local currency as the average peso to U.S. dollar exchange rate declined by an average of over 30% compared to the same period last year. Despite these conditions we continue to believe that we are well positioned to generate profitable subscriber growth and to further capitalize upon the opportunities in Mexico when economic conditions improve.
The results of our Mexican business for the first quarter include net adds of nearly 90,000 driven by a 7% increase in gross adds that was offset by an increase in churn. Churn for the quarter was 2.5% compared to 2.3% in the first quarter of 2008. We expect that churn in Mexico will continue to be a challenge during the remainder of the year, but we remain focused on strategies to improve churn levels.
These include continuing our investment in customer retention programs, focusing on the highest quality subscribers and maintaining strong credit standards. Revenue of $445 million was down 12% compared to the same period last year. On a constant currency basis, revenue was up 16% compared to the first quarter of 2008 driven by subscriber growth, which was partially offset by a decline in ARPU.
ARPU declined to $47 for the first quarter due to the combined impact of a weaker peso relative to the U.S. dollar, more competitive rate plans implemented in 2008 and a 5% decline in usage compared to last year. We remain focused on strategies that can enhance our overall revenue profile and offset the decline in ARPU in Mexico. These include adding customers on our Calling Party Pays rate plans and increasing our sales of data products such as SMS, Blackberry and security applications.
CPGA during the period declined to $306, an improvement of $119 compared to the first quarter of 2008. This improvement was driven by a reduction in handset subsidies and a weaker peso relative to the U.S. dollar. Nextel Mexico generated $154 million in segment earnings during the first quarter, which represented a 20% decline compared to the first quarter of 2008. However, on a constant currency basis, segment earnings improved by 24% over the same period. On a constant currency basis, Nextel Mexico segment earnings margins improved by 210 basis points compared to last year, as revenues increased by 16% and segment earnings grew by 24%.
This is significant when you also consider that Nextel Mexico generated more gross adds in this year’s first quarter compared to the same period last year, while operating in a weaker economy. Nextel Brazil continues to deliver very strong results. Nextel Brazil’s focus on customer retention remain impressive while continuing to deliver strong growth in gross adds and profitability.
Highlights for the first quarter in Brazil include net adds of 127,000, a 20% increase over the first quarter 2008 driven by nearly a 30% increase in gross adds and continued low churn rates. Nextel Brazil’s ending subscriber base is nearly 2 million customers, a 40% increase over the base at the end of the first quarter of 2008. Churn of 1.4% for the first quarter was again the lowest among our markets. This is the 10th consecutive quarter with Nextel Brazil’s churn at or below 1.4%.
Revenues grew to $316 million during the period, a 5% increase over the first quarter 2008. However, on a constant currency basis, revenues increased 40% compared to the same period. Segment earnings during the period grew to 88 million up 8% over the first quarter of 2008. On a constant currency basis, segment earnings grew 68% illustrating our continued focus on cost containment while producing strong subscriber growth. Nextel Brazil's results for the quarter reflect both outstanding growth and increasing levels of profitability.
The Brazil market now represents 30% of NIIs total subscriber base and generates more than 30% of NIIs consolidated OIBDA. It is notable that Nextel Brazil took more than six years to reach the critical milestone of 1 million subscribers, however with strong investment in the network and an increased market presence, Nextel Brazil has added 1 million subscribers within the last two years.
Even more importantly, we believe that our future investment plans to increase coverage and capacity in Brazil will be the catalyst for that market to continue to generate significant subscriber growth and segment earnings in the future. Nextel Argentina delivered a 5% increase in revenues. On an 18% increase on a constant currency basis, a 15% increase in its ending subscriber base and a 6% increase in segment earnings or a 30% increase on a constant currency basis over the first quarter of 2008.
The economic conditions in Argentina impacted our business during the first quarter, but we're confident that our experienced team in Argentina will be able to navigate the difficult economic environments as they have in the past and positioned Nextel Argentina for continued success over the long run. Nextel Peru, again drove very strong subscriber growth generating a [34%] increase in the ending subscriber base despite an increased churn. Churn increased during the quarter primarily as a result of our initial efforts to expand the distribution channels into more retail-based locations.
Historically, our efforts to expand distribution signals in new arenas have resulted in incremented churn in the initial stage of the process. We’re now beyond this phase and we understand the challenges that these channels are facing and have implemented action plans to counteract the higher churn levels. Nextel Peru’s revenue increased by 17% over the same period last year, but segment earnings were lower year-over-year due to the incremental start-up expenditures related to the deployment of the 3G network in Peru.
Looking at items below the operating income line, interest expense for the period totalled $45 million, $7 million lower than the same period last year as a result of reductions in our outstanding debt balances. Foreign currency transaction losses totalled $7 million compared to a $3 million gain in the same period a year-ago as a result of significantly weaker exchange rates in our local markets. We generated net income of $71 million for the quarter or $0.43 per basic shares compared to net income of $107 million or $0.63 per basic share in the same period last year. This decline was primarily due to the translation impact of weakening local currency exchange rates coupled with an increase in foreign currency transaction losses during the quarter.
We ended the quarter with $1.2 billion in cash and cash equivalents and $22 million in short-term investments. Long-term debt at quarter end was $2.2 billion, which consisted of $1.55 billion in face value of convertible notes, $396 million in syndicated loans and $220 million in local currency tower financing and other debt obligations. In the detailed financial statements in our 10-Q filing, the outstanding amount of our convertible notes will be reduced by $147 million as a result of the application of a new accounting rule, which allocates the premium associated with the convertibility feature of the notes as a separate instrument.
Subtracting our cash, cash equivalents and short-term investments from our total debt results in net debt of approximately $987 million or a net debt to 2009 consolidated OIBDA ratio of 0.9 as the midpoint of our OIBDA guidance for the year. We believe that our strong balance sheet gives us the flexibility to pursue additional financing to fund our long-term goals.
Overall, we generated solid financial results on a constant currency basis, notwithstanding the difficult economic climate. We are confident that we can successfully meet the challenges forced by the current economic conditions in our market by remaining focused on near-term execution and maintaining our commitment to long-term value creation.
Now, I’ll turn the call back over to Steve.
Steven P. Dussek
Thank you Gokul. We have spent a significant amount of time during the call today discussing the realities of the weaker economic environments in our markets. And while these economic conditions due impact our business, there are a number of reasons why I believe that we are well positioned for continued success and are taking the right steps for the long-term health of our company.
First, our local teams in all of our markets have significant experience operating in difficult environments. These are largely the same teams that have successfully navigated through tough economic and competitive periods in the past. Second, I believe that our focus on high quality profitable growth in all of our markets coupled with our efforts to reduce churn and generate cash flow will build a stronger platform for value in the long-term.
Third, demand for our services remains strong as our differentiated products and services continue to support our growth. This is demonstrated by our current estimate that our subscriber base at the end of this year will be at least 18% larger than it was at the end of 2008.
And finally we're investing to expand our coverage where the opportunities support the investment and pursuing 3G networks to position NII for success over the long-term. Our entire team remains focused on executing our profitable growth strategy and building long-term value through providing the highest quality network and the broadest range of differentiated products to our customers. All in support of our long-term goal of becoming the preferred provider of wireless services to high value subscribers in Latin America. And operator, now we’ll take questions.
Question-and-Answer Session
Operator
Great, thank you. (Operator Instructions). Our first question comes from the line of Christopher King with Stifel Nicolaus. Please proceed sir.
Christopher King – Stifel Nicolaus & Company, Inc.
Good morning and thank you. I just was wondering if you could give us a little bit of color on what happened specifically in Mexico and Argentina during the month of March, since you initially gave guidance late February, I believe, and what caused the shift during that last month of the quarter specifically regarding the tick-up in churn. And then along those lines, what are your assumptions and expectations I guess going forward for the year? Do they assume kind of a March activity level in terms of a churn and gross adds and those two markets remaining fairly confident throughout the year versus where they were in March. And last question on a constant currency basis it looks like your margins were up about 200 basis points year-over-year despite the fact that it looks like gross adds were actually up a little bit year-over-year. What were the primary drivers for that margin improvement? Thank you.
Steven P. Dussek
Thanks Chris. Three good questions. This is Steve by the way, and I’ll take the first two, and I’ll let Gokul address the last question. So, let’s start with what happened and giving you some color with respect to that. Let me backtrack for just a moment to say when we reported on February 26 our fourth quarter results, our insight on January and February, our expectations were largely being met. And as we went through the early part of March the same conditions. As regarding to the middle of March, the economic and business conditions did weaken, and the impact, as you pointed out, mostly in Mexico and Argentina. It resulted in a number of things, and first, many companies downsizing and the impact of that to our forecasted productivity was felt. Many of the small to medium companies and individuals made decisions in terms of where their disposable income comes and goes, and had challenges in, quite rightly in paying their bill. And so, we look at some of the large account downsizing that took place, and partial account losses. So you look at it, and there are a number of things that resulted from the worsening economic situation. And those were specifically to Mexico, but also some of the same things existed in Argentina. And the majority of the increase was felt on the involuntary side, so it is truly driven by the economic conditions that we were facing. Now, obviously, that resulted in higher churn, some higher bad debt, and as a result of that on April 6, we gave you an updated guidance with respect to our net adds for the balance of the year, and that factored in what we had learned through our process in the latter part of March. So, that addresses the first question. The second question, in terms of assumptions and confidence going forward, I want to address that in two ways. First, to just remind you and give you a perspective of the way that we operate our business, the way that we run the business, and the diligence that we put forth in that effort. It is a constant day-to-day contact with our market teams through the various staff members here in the headquarters facility. We also have mid-month videoconference with the full management teams in all of the markets with our management team here. We conduct quarterly operations reviews, which we did at the conclusion of the first quarter. And we use all of that data, really for the basis of our assessment of the business health, the conditions moving forward, and as we factor that in to our forecast, and that really serves as the foundations of providing you with our guidance, as we did today. The second part of that in addition to the way we run the business, let me address specifically how we are thinking and the assumptions we are making moving through the balance of the year. First, we do anticipate that the economic and business conditions will remain weak in Mexico and Argentina. Conversely, in Brazil, we see a stable environment and we see very strong results from our team and we expect that that should continue as we move through the course of the year as well. We do assume that the customer behavior that we saw in the latter part of March will be relatively the same as we go through the balance of the year, we assume that the currencies will remain volatile as we go through the balance of the year. So, as we look at those assumptions and we pair it up with our ability to diligence that we put forth in running our business, those in combination give us the ability to look at our business, forecast our business and revise as we did, our net add guidance downward on April 6. You also saw a revised CapEx number this morning, then we took our CapEx down to $750 million to $800 million range. And we also saw this morning that we maintained our revenue and our OIBDA guidance for the balance of the year. So, we believe that with those assumptions and our day-to-day, and weekly, and monthly, and quarterly reviews of our business operations that we are appropriately reflecting the weaker economic and business conditions in our markets and resulting in our guidance. So, obviously, we’re going to monitor all of this as we continue through the balance of the year and should things change, we will certainly act accordingly.
Gokul Hemmady
Chris, let me address the question on margins on a constant currency basis, yes, margins did improve on a consolidated basis about 200 basis points. And if you look at each of our markets they also had significant improvements. Brazil in fact had twice that amount, in terms of improvements on a constant currency basis. And that happened despite an increase in gross adds from a year ago as well as ARPUs on a constant currency basis coming down, which means we had very good control on the cost side. We did several things to improve margins there. First, as we’ve talked about in the past we feel very good about the handset lineup that we have from Motorola. We’ve had a good roadmap over the last 12 months, as well as, that continues going into 2009, because of which we are able to charge higher in terms of revenue per handset. On the other hand our cost per handset also has come down and so that has had some good impact as you’ve seen over the last several quarters on our CPGA. Second, we’ve had improved interconnection costs as some of the rates have come down in Peru, but more importantly in a market like Mexico we have devised rate plans that are more [direct connect-centric] and therefore that leads to much better profitability for us. Third, on a headcount basis, payroll is a big item of cost for us. We’ve generated significant headcount leverage and efficiencies and our subscribers per employee has gone up quite consistently over the last several quarters. And I would say finally we continue to work on optimizing how the relationships with our channels and therefore aligning what we want out of our channels with our own internal needs of improving ARPUs and reducing churn and that has also led to more efficiency in our commission structure. And then we finally continue to work on general efficiencies as it relates to G&A and so all of these things are things that we worked on over the last several quarters, and will continue to very aggressively focus on over the next several quarters.
Christopher King – Stifel Nicolaus & Company, Inc.
Thank you.
Operator
Your next question comes from the line of James Breen with Thomas Weisel. Please proceed.
James Breen – Thomas Weisel
Thank you very much. Just had some questions a little bit on the spending and then some comments you made in Brazil. From the CapEx perspective, with the new range of $750 million to $800 million, does that change at all what you’re going to spend improving 3G and then where did that come out of versus your previous guidance? And then secondly with respect to the build out in Brazil, I think you said you added 6 million POPs through this quarter. Where does that leave you for the rest of the year in terms of that build out? Thanks.
Gokul Hemmady
So, I'll take the first question, Jim. So, the reduction in CapEx really has, we expect to launch Peru this, have the regulatory launch shortly and then launch commercially by the end of this year. So, we're not reducing our CapEx on 3G in Peru. Second, we’ve talked to you about our smart growth strategy, we are allocating capital to Brazil. We feel good about what we are doing in that market and so we really have no intentions of reducing our CapEx there. With some of the things that Steve talked about in terms of the economic uncertainty in Mexico and Argentina and therefore our reduced guidance on net adds. Most of our CapEx is coming out of those markets related to the reduction in our net add guidance.
Steven P. Dussek
And Jim with respect to the POPs, where that leaves us on a total basis are roughly 10 million POPs remaining for the balance of the year through the company.
James Breen – Thomas Weisel
So, will you have those probably built up by the end of the third quarter?
Steven P. Dussek
They will stagger through the course of the balance of the year, so some will come in the second, third, fourth, but we are launching and continuing to build, and launching and continuing to build, so they’re spread through the course of the year.
James Breen – Thomas Weisel
Great. Then I just have one follow-up, Gokul talked about the churn in Mexico continue to be a challenge for the year. Are you implying that potentially it goes up from here? Do you think you’ve got it under control enough where it stays in that 2.5 range.
Steven P. Dussek
Well as I said earlier I think the economic business conditions continue to pose challenges there. We are very focussed on our customer retention efforts and very specific initiatives within those efforts, and we are doing all that we cannot to improve that situation. So, where we will continue to work on that, monitor that and we would hope that overtime that we’d see improvement come from our efforts.
James Breen – Thomas Weisel
Great. Thank you.
Steven P. Dussek
Welcome.
Operator
Your next question comes from the line of Rick Prentiss with Raymond James. Please proceed.
Richard Prentiss – Raymond James
Thanks. Good morning guys.
Gokul Hemmady
Good morning
Richard Prentiss – Raymond James
Hey, couple of questions. On Peru, the 3G build out, I think Gokul you mentioned that there has been no change in the CapEX for that. Can you just update us on, are you still seeing that the cost to build out 3G overlay, is it still less than $10 per POP and then of the $10 million, I think you mentioned that you had 3G development cost on the operating line, can you tell us how much of that was in Peru versus maybe headquarters as you’re developing that? And how much of your ’09 EBITDA budget includes what level of 3G development costs?
Gokul Hemmady
Sure. So, I would say of the $10 million incremental costs, Rick, I would say about 30% to 40% was headquarters, the balance was in Peru. As we get more closer to launching commercially by the end of this year that run rate of 10 million you could expect it to go up in second quarter and then ramp up in the third and fourth quarter. So, I would say in terms of a range you would probably by the end of the fourth quarter you might see our range being closer to kind of 15 to 20 million in terms of our 3G OpEx. In terms of your first part of your question on CapEx. Yes, we're still expecting our CapEx to be less than $10 per POP, and we've not changed our guidance there in terms of how much we plan to spend in '09, it’s in around that $125 million range.
Richard Prentiss – Raymond James
And even though you have not announced the vendors, you have selected the vendors. You still feel comfortable on a yearend commercial launch that they can provide the equipment in a timely manner.
Gokul Hemmady
Yes, we do.
Richard Prentiss – Raymond James
Okay. And then on Mexico competitive environment, can you talk a little bit about what you're seeing down there? You talked about the economy, but what about the competition, where is AMX and Telefonica as far as competing for postpaid. What are you seeing as far as promotions in the marketplace. Steve, I think you mentioned that you guys weren’t going to chase aggressively in that market on pricing, promotions, et cetera. But just update us on where the competitive environment was in the quarter, and may be what you've seen so far in April?
Steven P. Dussek
Yeah, I have said in the past since last year when we saw the aggressiveness really ramp up in the latter part of '07 early '08. Things didn’t change dramatically, incrementally as we've gone through the course of '08 and into early '09. Both AMX and Telefonica have got some pretty aggressive price plans out there that, as I said we choose not to match or go down that path. So, it's not gotten horribly worse, but they do have some fairly aggressive price points in the marketplace. And so, we constantly monitor that and we are making sure that we’re doing the best effort we can to meet our customer’s needs and also balancing that against our profitability factors and making sure that we are holding true to our strategy of building profitable growth.
Richard Prentiss – Raymond James
And you mentioned bad debt had spiked up, I think in Mexico, can you give us a number and remind us what line item it gets booked to?
Gokul Hemmady
It gets booked to G&A. Bad debt in Mexico from a year ago is up about 100 basis points.
Richard Prentiss – Raymond James
Great. Thanks guys.
Gokul Hemmady
Thank you.
Operator
Your next question comes from the line of Brett Feldman with Barclay Capital. Please proceed.
Brett Feldman – Barclay Capital
Yeah, thanks. Just two quick questions here. First, just to followup on the comments about pricing, you’ve talked a bit during this call about how you are not lowering pricing in Mexico, you specifically said you’re not going to match some of the aggressive offers you’ve seen from America Movil and Telefonica. But you are seeing year-over-year declines in your ARPU even in local currencies. Could you maybe just give a little color around what's behind that? Is this a residual of some of the pricing actions we saw previously, or is there something happening with the mix of the current customer base that we need to understand?
Gokul Hemmady
Sure, Brett. So, yes, we have seen ARPUs in Mexico and local currency come down, but if you compare this quarter’s decline to some of the declines we’ve seen in the prior quarters, we’ve seen that that rate of decline coming down if you will. So, I think it is getting to a place where there is more stability as Steve pointed out. Although there are competitive pressures and there are some aggressive rate plans from both our competitors there. The competitive pressure is not getting incrementally bigger or larger. In terms of how we think about ARPU, yes we continue to see some of those declines caused by lower rate plans being out there, which was a function of what happened a year-ago or so. But as I said in my response to the cost structure question or a margin improvement question, we’re proactively coming out with some rate plans that are more direct connect-centric in Mexico, and therefore those kinds of rate plans have lowered ARPUs, but come with a much better cost structure and therefore much better margins and profitability. And that finally is our goal.
Brett Feldman – Barclay Capital
Got it. Okay. And then one more, Gokul you were earlier referring to in the company’s longer-term financing needs. Obviously, you are in a very good liquidity position right now, but if we just look out a few years, you do have some big outlays. You’ll probably be purchasing some spectrum at auction, and then going and building out 3G networks in Mexico and Brazil and maybe in the middle of that process you're going to have some debt maturities you’re going to have to address. Could you maybe just give us a better sense of how you think about? What your financing requirements are over the next few years, and whether you think you could be going to markets relatively soon, because we’ve seen some loosening up in high yield and in the convertible markets.
Gokul Hemmady
Sure, Brett. So, you're right, we have a good cash balance on our balance sheet, we have good loan leverage, good flexibility. Our goal in that context is really to maximize value in the long-term. That's how we've run our business up to now and that’s what we plan to do as we think about either our core business and continuing our expansion in Brazil building out 3G in Peru, as well as looking at auctions in Mexico and Brazil. What we do is maintain as much flexibility as we can to maximize long-term value, that will be our goal as we think about the spectrum auctions in Mexico and Brazil. The timing is uncertain, the build out requirements are not known at this stage. So, our goal will be to maximize and maintain as much flexibility. So, as we think about that and think about our external environment, external capital markets. We stay very close to what is happening in capital markets either in the U.S. or in the markets we operate in. We believe that we have the ability to raise some funds in some of our markets, mainly Peru and Brazil. And we’ll stay close to whether we can do that at attractive rates. On the other hand, we'll also stay very close to what's happening in the U.S. capital markets, but I think the more important point is that we’ll stay very disciplined. We’ll think about raising money funds in the context of what our business needs are and maintain as much flexibility as we can to maximize our long-term value. In '09, we don’t have any big maturities coming up, in 2010 we have some and then we have the convert that comes due in 2012. But at this stage, given our current investments in our core business in Brazil and in Peru, we are very comfortable with what we have.
Brett Feldman Barclay Capital
Okay, great. Thank you for taking the question.
Operator
Your next question comes from the line of Andrew Campbell with Credit Suisse. Please proceed.
Andrew Campbell – Credit Suisse
Yes, good morning. My question was on the spectrum auctions and I know that the timing is out of your guys’ hands to a certain extent, but have you had any indications from the regulators in Mexico and Brazil as to when, perhaps, these next auctions may come along?
Steven M. Shindler
This is Steve Shindler. Obviously that’s something that we monitor very closely and as we’ve talked about in the past with our regulatory teams in each of those respective countries, we're constantly looking for updates. There has been some fluctuation of membership in various governing bodies in both Mexico and Brazil in recent months, but everything that we are hearing from our regulatory teams is that there is still a strong intention on the part of both countries to move to auction as quickly as possible. Having said that there is really no more clarity on the timing of that when we spoke to you last. We're hopeful that we'll have some rules issued in both countries by the middle part of this year and still think there is a possibility that auctions could take place before the end of the calendar year. We’ll continue to update you as we hear more and as Gokul mentioned, we continue to believe that if those opportunities present themselves to us and they're in an attractive price point and all the other factors line up that that would be the right step for us to take to maximize the long-term value of the business.
Andrew Campbell – Credit Suisse
Okay, great. Thank you very much.
Operator
Your next question comes from the line of Gray Powell with Wachovia. Please proceed.
Gray Powell – Wachovia
Good morning everyone. Thanks for taking my questions. I have just a few here. To start off, a followup question on Q1 monthly trends. Is it safe to say that March net adds were below the level of February?
Tim Perrott
Excuse me, Gray. Gray, this is Tim. And operator, I think we are having a hard time hearing Gray.
Steven P. Dussek
Very hard.
Tim Perrott
Gray, you might want to try to call back in?
Gray Powell – Wachovia
Got it. Yeah, I'll call back in shortly. Thanks.
Tim Perrott
So, operator. Let’s go to the next question.
Operator
Okay. Your next question comes from the line of Rizwan Ali with Deutsche Bank. Please proceed.
Rizwan Ali – Deutsche Bank
Good morning. I just wanted to get more information out of your strategy in Chile. I know it’s a small market, but there will be 3G auctions there as well later this year, and as some of your other markets slow down, do you think you can afford to be a bit more aggressive in Chile? And also just a quick question on depreciation, it ended up being quite a bit lower than what we expected. Any change in policy?
Tim Perrott
Rizwan and operator, I think we are having some trouble hearing the questions, it sounds like there is a communication link trouble, it’s breaking up. So, I think what we’re going to do is go ahead and we’re going to end the call, and then if you have followup questions please feel free to give us a call and we’ll continue from that point, unless we can clear up the communication problem. Operator, are you there?
Operator
Yes, I am here. And all questioners sound clear my end, sir.
Tim Perrott
Okay, we can hear you better now. So, you might want to try to put Gray Powell back in the question, and see if we can hear him a little better.
Operator
Okay, just a moment as I see if Gray is back in the call, just a moment please.
Tim Perrott
And if he is not, let’s just go to Rizwan, who I think was asking the question after Gray.
Operator
And I’m showing Gray has joined back in the call. Gray? I’m putting you back into the queue.
Tim Perrott
Okay. Great. Thank you.
Gray Powell – Wachovia
Hey guys, sorry about that. Can you hear me okay now?
Gokul Hemmady
Yes, seems better, Gray.
Tim Perrott
Yeah. It’s better.
Gray Powell – Wachovia
Okay. Thanks. So, just a follow on question on Q1 monthly trends. Is it safe to say that March net adds were below the level of February.
Steven P. Dussek
Like I say, I think in March the economic and business conditions got more challenging and while January and February were inline with our expectations, March was in the range, but in terms of higher versus other months. Again it was in the range of our expectations. So, March is usually a very big month for us from a seasonality perspective and what not.
Gray Powell – Wachovia
Okay. Fair enough. And then just a bigger picture question on Brazil. If I just look at your expansion plans like that you did in Mexico that started back in 2004, when you increased your GDP coverage from about 60% to 80%. Your market share of postpaid net adds increased from call it 25% to over 40% last year. How should we think about the acceleration in growth in Brazil, and if you had to ballpark it, what percentage share of postpaid net adds do you think is achievable there once you complete your expansion plans?
Steven P. Dussek
Well, I think you’re looking at things correctly. When you go back you look at where Mexico was and what happened when GDP coverage expanded and as we look at the opportunities that exist in Brazil and the penetration levels and general market and we look at where we are today and where we can go, our expectation and hope is that we would see kind of a similar track for kind of the same trend that we would see in Mexico. So, in terms of a number, I just would say we would expect to see kind of a similar path in Brazil as we saw in Mexico.
Gray Powell – Wachovia
Okay. And then just last question on Calling Party Pays. Can you just talk about the uptake of Calling Party Pays plans in Mexico, roughly speaking what percentage of gross adds are taking CPP and how do you expect that to help ARPU trends?
Steven P. Dussek
Yeah, it's still early in the game there, Gray. We've got a base of users now on the Calling Party Pay plans. We’ve got the capability for roughly 65% of our base that can have CPP, but it's an effort to get those seated in there and so we're still in the early stages and it's a lower percentage, but there is momentum and there's other cities that will be coming on as we progress through the year. So, kind of where we expected to be with CPP and as we progress further, we'll have more insights for you.
Tim Perrott
Operator, we’ll take just one more question. I think we're beginning to run out of time.
Gokul Hemmady
I think Rizwan
Tim Perrott
Rizwan, yes.
Operator
Your next question comes from Rizwan Ali with Deutsche Bank.
Rizwan Ali – Deutsche Bank
Okay, good morning. My question is regarding 3G potentially in Chile. You've talked about Brazil and Mexico, but there will be 3G auctions later on this year in Chile. So, is there any interest in buying the licenses there? And also a question about Brazil 3G license. Are you interested in nationwide license, or do you think you’d just go for the areas where you want to expand or where you have expanded with iDEN only?
Steven M. Shindler
Rizwan it’s Steve Shindler. With regard to Chile, like any other country where we operate, we will look very carefully at rules and our expectations of what spectrum might be available and what we might be able to do with it, and use the same disciplined approach that we’ve in all the other markets. If we think that there is a spectrum band available to us at a reasonable price, that could provide us with incremental value down the road, and all the other factors that have been raised appropriately on this call line up in terms of availability of funding, et cetera, then clearly we would be interested to take a look and we’ll evaluate the build out requirements and see whether we can generate a substantial incremental return. And if so we would look to participate or certainly at least put our name in initially and see where that auction might go. With regard to Brazil, we’re looking to get again same approach, the discipline will be there. We know that they tend to auction things often in regions. But we would intend to sign up in all the available regions and evaluate each one as they proceed through that auction process with a goal of having a nationwide footprint or something that would enable us to mirror the footprint that we’ve decided to build out in our core iDEN network.
Rizwan Ali – Deutsche Bank
Thank you.
Tim Perrott
Thank you. Operator I think that’s all the time we’ve for call today. Steve do you have any final comments?
Steven P. Dussek
I just like to thank everybody for joining us this morning and for your questions and your interest in the Company. And we’re busy working, we’re getting back to work, we’re excited about our business, and we look forward to reporting back to you after our second quarter. Thank you very much.
Steven M. Shindler
Thank you.
Operator
This concludes the NII Holdings first quarter 2009 earnings conference call. Thank you for your participation.
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