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NII Holdings (NASDAQ:NIHD)

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

Tim Perrott

Steven M. Shindler - Executive Chairman, Chief Executive Officer, Member of Finance Committee and Member of Risk Committee

Gokul V. Hemmady - Chief Operating Officer

Juan R. Figuereo - Chief Financial Officer and Executive Vice President

Analysts

Christopher C. King - Stifel, Nicolaus & Co., Inc., Research Division

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Kevin Smithen - Macquarie Research

James D. Breen - William Blair & Company L.L.C., Research Division

Walter Piecyk - BTIG, LLC, Research Division

Kevin M. Roe - Roe Equity Research, LLC

Michel Morin - Morgan Stanley, Research Division

Andre Baggio - JP Morgan Chase & Co, Research Division

Rodrigo Villanueva - BofA Merrill Lynch, Research Division

Operator

Ladies and gentlemen, thank you for holding, and welcome to the NII Holdings First Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's conference call will be available for rebroadcast through for the following 2 weeks beginning later today. Domestic callers may access the rebroadcast by dialing 1 (888) 286-8010 and entering passcode 21339350. International participants may access the rebroadcast by dialing 1 (617) 801-6888 and entering passcode 21339350. [Operator Instructions] I will now turn the conference over to our host, Tim Perrott, Vice President of Investor Relations. Please go ahead, sir.

Tim Perrott

Thank you, Frances, and good morning to everyone and thank you for joining NII Holdings' first quarter 2013 results conference call. With me on the call today are Steve Shindler, our CEO; Juan Figuereo, our CFO; and Gokul Hemmady, our COO.

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 Form 10-K filed with the SEC on February 28, as well as other documents we have filed with the SEC.

In addition, during this call, we'll be discussing certain financial metrics that do not conform to Generally Accepted Accounting Principles in the U.S., or otherwise known as GAAP. For a reconciliation of these financial metrics to GAAP, please access NII's Investor Relations link at nii.com.

I would now like to introduce Steve Shindler, our CEO. Steve?

Steven M. Shindler

Thank you, Tim. Good morning, and thank you for joining our call today. We hope that you've had a chance to review our press release detailing our first quarter results that we issued this morning. On our last conference call, I provided my assessment of the state of our business and summarized the key areas that we're focusing on to improve our results and position NII to generate profitable growth in the future. I also identified our goals for 2013, which include completing the planned coverage of our new networks in Brazil and Mexico, improving our operational performance and realigning our business to provide the greatest returns over the long-term.

During the first quarter, we made progress towards these goals while staying on track to achieve our financial goals for the year. Before we discuss our financial and operating results, I want to update you on the actions we've taken in these key areas in the quarter.

First, we're on track with our network deployment plans in both Brazil and Mexico, driven by the process changes and improvements that we've implemented. For example, in Brazil, we tripled the number of crews working on site acquisition and optimization, increasing the pace and quality of our construction and integration of new sites for the W-CDMA network. The engineering team in Brazil has created war rooms in São Paulo and Rio, where we and our key vendors monitor the progress of our network construction on a daily basis. This process is designed to provide early warnings of potential delays and other critical issues so that corrective actions can be taken immediately to keep us on track. I recently spent time with our team in the São Paulo war room and I was impressed with their enthusiasm and attention to detail. These and other actions have helped keep us on track to begin offering 3G services in São Paulo in the second quarter and in Rio by year-end.

In Mexico, we have continued to expand the coverage of our new network, adding over 9 million POPs to our coverage in the first quarter. We're on track to reach 3G coverage parity with our existing iDEN network by the end of the third quarter. To put the magnitude of this effort in perspective, during the quarter, we added about 1,320 sites on our 3G networks across our markets and we expect to add a total of 4,400 3G sites in 2013, representing nearly an 80% increase in our 3G sites from 2012.

Next, on the operational front. Our efforts to improve the quality of our customer base in Brazil has led to better subscriber metrics, such as lower churn and bad debt expense. We're pleased with the progress that we've seen in Brazil. However, until we deploy our new network, we continue to compete with one arm tied behind our back. We expect this will continue for most of 2013 as we make the transition to 3G. In the meantime, we'll continue to take a measured and disciplined approach, focusing our efforts on retaining customers rather than pushing hard for higher growth on our current network. After we have deployed our new network and have sufficient coverage, our focus will shift to driving higher subscriber growth.

In Mexico, we began to see increased demand for our new services as customers experienced our superior network speeds and growing coverage. However, this demand was somewhat offset by higher churn levels for our iDEN services as we continue to be impacted by Sprint's planned shutdown of its iDEN network in the U.S. Gokul will provide more details about actions we're taking to address that in a moment. But based on the trends we've seen and our assessment of the market, we're convinced that there's a significant growth opportunity which we'll pursue more aggressively after we reach coverage parity with our iDEN network. For now, I'm happy to report that our 3G network in Mexico is performing well, with network speeds significantly higher than the competition, and that customer feedback has been excellent.

We recognize that our 3G results for the quarter in Mexico have been modest and that we need to deliver improved growth throughout the remainder of the year. And when we complete our coverage expansion, we're planning to do just that. But our past experience shows that it only makes sense to more aggressively drive growth when we're confident that the coverage and quality of our network will meet our customers' expectations.

In Mexico, we expect to be in a position to push subscriber growth starting in the third quarter of this year. Similarly in Brazil, we expect to be in a position to drive 3G subscriber growth beginning in early 2014. In the meantime, we'll take a very measured approach, with moderate growth, as our focus is on customer retention.

As we make the transition to 3G services, we're also working to ensure that the handsets and devices we offer will meet the needs and preferences of our customers. We've developed an attractive 3G device portfolio with devices that are optimized for the very best push-to-talk experience in the market. Looking more broadly, we recently launched our first smartphone with the latest Android operating system and our new push-to-talk service we call PRIP. This new service allows us to offer push-to-talk on a wider variety of smartphones, giving our customers more choice while still allowing them to communicate to the Nextel PTT community. We expect to make the PRIP service available on more devices later this year. Also, related to devices, we recently extended our iDEN handset agreement with Motorola through 2016.

We've also made significant progress in our efforts to improve our cost structure by taking steps to reduce costs and enhance efficiency in our markets and at our corporate headquarters. We remain on track to reduce our corporate headquarters' cost by approximately 1/3 this year. As we realized these cost reductions, we've begun to redeploy some of the savings to further improve our execution and to support future growth.

We're also taking actions to improve the performance of our back-office operations to enhance our ability to respond to competitive conditions. For example, beginning this quarter, we're restructuring the nature of our relationships with Nokia Siemens Networks and Hewlett-Packard by taking over many of the functions they had performed for us under our existing outsourcing arrangements. We believe that this change will provide us with a greater control over the performance and quality of these key functions and provide a more agile back-office as we make our transition to 3G. Although we will incur additional costs as we make the transition to in-source these processes, we do not expect this change to impact our adjusted OIBDA guidance for the year.

Finally, we've taken steps to ensure we have the liquidity to make the investment necessary to drive strong growth over the long-term and to realign our resources to focus in the areas that will generate the greatest returns. Since the beginning of the year, we raised over $900 million in gross proceeds from 2 high-yield offerings, significantly improving our liquidity position. And consistent with our strategy to realign our businesses and resources, earlier this month, we agreed to sell Nextel Peru to Entel for about $400 million. The sale of Nextel Peru is an important step in the evolution of our business as we focus on our new network deployments in our largest markets that offer the best opportunity for value creation. So overall, I'm excited about the progress we've made to date and there's a lot more to come.

I'll follow up with more comments later. However, now, I'll turn the call over to Gokul Hemmady, our Chief Operating Officer.

Gokul V. Hemmady

Thank you, Steve, and good morning, everyone. As we continue to deploy our next generation networks in our major markets, we believe that the actions we've taken to improve our operations will strengthen our business for the future.

Let me start with highlights of our operating results for the first quarter. We added 1 million gross subscribers, 11% increase from the first quarter of 2012, driven primarily by growth in our prepaid base in Argentina and continued traction of our 3G services in Peru and Chile. Consolidated churn was 2.59%, about 50 basis points higher than the first quarter of 2012, primarily driven by higher churn in Argentina and Peru as a result of a larger prepaid base as well as higher churn in Brazil. On a sequential basis, as expected, consolidated churn was much lower in the quarter after we completed our efforts to clean the base in Brazil.

We generated 152,000 net adds, down from 260,000 net adds in the first quarter of 2012. This was primarily driven by the year-over-year increase in churn, particularly for our iDEN services, and slower growth in Brazil and Mexico. Consolidated ARPU was $35, down $7 from the first quarter of 2012, primarily due to the combined effects in Brazil of lower local currency ARPU and weaker foreign currency exchange rates, which represented about 40% of the decrease.

Now I'd like to provide you with details at the market level starting with Brazil. After a very challenging period last year for Nextel Brazil, the changes we've made are beginning to show signs of improvement. During the 5 months that I have been on the ground in Brazil, my focus has been to get the operation back on the path to growth, and I think we are making good strides and moving in the right direction. We started by putting the right leaders in place in several key areas to run and grow the business.

As you know, 5 months ago, we appointed Claudio Hidalgo as COO. And since then, Claudio and I have made several changes, assembling a very strong supporting team, including key leaders in the areas of customer operations, engineering and IT. In customer operations, after cleaning up our base last quarter, we've improved our processes to return to being best-in-class customer care organization. Our enhanced customer care approach is having a positive impact to our metrics, resulting in improved voluntary and involuntary churn, bad debt and care costs. At the same time, we positively influenced the culture at our call center operations. At recent visits to the call center, I spent time with our care reps and I came away impressed with their energy and motivation.

In engineering, as Steve mentioned, we've righted the ship on our 3G network deployment. We met and, in some instances, beat our goals on network optimization in the last 2 months and we are seeing improved quality in our 2G network. During the first quarter, we added about 750 sites to our new network and now have a total of about 2,400 3G sites, giving us more confidence than ever that we will complete our planned network coverage for the year in São Paulo and Rio. We've already launched data services in several cities in São Paulo. We expect to begin providing services in and around São Paulo in the second quarter, covering initially about 25 million POPs, with that number growing throughout the year. We are also planning to begin offering services in Rio by year-end.

Operationally, we generated 38,000 net adds during the quarter driven by our promotional data card offer in São Paulo designed to retain customers while creating an opportunity for them to experience the capabilities of our new 3G services. That offer drove about 60,000 data cards during the quarter. We've also begun seeding the base with our new IronRock handset, a dual-sim 3G and iDEN device. Early demand for this device resulted in about 16,000 handset sales in Q1.

Underlying our results for the quarter, we reduced churn and bad debt expense and spent less on retention costs on a sequential basis. Churn dropped to 2.34%, down from 4.69% in the fourth quarter, while our bad debt expense dropped to 1.2%, which is 11.7% in the fourth quarter. I should note that the more aggressive actions we took to clean the customer base in Q4 drove higher bad debt expense during that quarter and lowered the normal bad debt expense in Q1. So for the remainder of the year, we do expect bad debt expense in Brazil to return to a more normal level, which is higher on average than the level we experienced in the first quarter.

With our new team in place, we are creating a disciplined operating rhythm, focusing on key metrics, reports and meetings where we talk openly about what's working and what isn't. There's still much work to do in each area. But we've built the right foundation for value creation in Brazil and we are seeing early returns. I am very enthusiastic about what we'll accomplish going forward.

Turning to Mexico. Our first quarter results reflect the beginning of the ramp-up of services on our new network, offset by the negative impact on our growth and churn as the result of Sprint's planned shutdown of its iDEN network in the U.S. During the quarter, we added 45,000 3G gross adds and migrated 85,000 of our existing iDEN customers to our new network. In total, we now have 189,000 3G subscribers as of the end of the first quarter which is about 5% of our subscriber base. ARPU for 3G subscribers in Mexico, with a combined voice and data package, was 15% to 20% higher than the ARPU for subscribers under comparable iDEN service packages. As we continue to expand our coverage, we believe that we'll be in a position to take a greater share of gross adds in the markets we serve in Mexico and expect that by year-end, about 1/3 of our subscriber base will be using services on our new network.

Total net adds for Mexico were 16,000 during the period, reflecting the impact of slightly higher churn on iDEN and lower gross add loading compared to the same period last year. We continue to expect that our subscriber growth and churn in 2013 will be negatively impacted by Sprint's decision to shut down its iDEN network in the U.S., especially in markets near the border. However, we expect this impact to be mitigated and that we will generate higher net adds in the second half of the year as our 3G network expands and we more fully implement our cross-border PTT roaming solutions.

Local currency ARPU in Mexico was down 4% compared to the fourth quarter despite the positive uplift from the increasing number of 3G customers in our base. This is related to the strong competitive environment and our continued dependence on offering 2G services until we extend the coverage of our 3G network. We believe that our planned coverage expansion will make our services much more competitive, helping us to drive growth and stability in ARPU. Consistent with those plans, we added over 500 new sites with coverage in 14 new cities during the first quarter. Our new network covers a total of 48 cities at quarter-end, and we are on track to extend our coverage to reach parity with our iDEN network by the end of the third quarter of this year.

Now turning to our other markets. Nextel Peru generated 40,000 net adds during the period, which is up when compared to the first quarter of 2012, but down significantly from the 145,000 net adds generated during the fourth quarter of 2012. Our decision to pull back on aggressive growth in this market, combined with elevated churn of iDEN prepaid subscribers and lower data card sales, drove this result. In terms of gross adds, Nextel Peru loaded about 35,000 3G handsets and 90,000 3G data cards during the first quarter.

Nextel Argentina continued to drive strong growth in the prepaid segment, adding 64,000 net adds this quarter, up 5,000 compared to the same period last year. Additionally, Nextel Argentina continues to generate significant levels of segment earnings, which was up $6 million to $52 million compared to the same period last year.

In Chile, we continue to explore strategic opportunity for our business while managing our additional investments in support of our operations. As a result, we have chosen not to pursue aggressive growth as we focus on limiting our investments.

In summary, we continue to improve our execution and we remain on track to deploy our new networks in Mexico and Brazil, in line with our schedule. This will remain the top priority of our operating teams. After we have sufficient coverage, our focus will shift to more aggressively adding profitable subscribers.

Now I'd like to turn the call over to Juan for an update of our financial results.

Juan R. Figuereo

Thank you, Gokul, and good morning, everyone. On our last call, I shared with you some of our financial priorities for the year. This morning, I'd like to give you an update on the progress that we made so far on those priorities.

I'll start by providing an overview of our financial results for the quarter in greater detail. We generated $1.4 billion in consolidated operating revenue, down 13% from $1.6 billion in the first quarter of 2012. This decrease was mainly driven by the combined impact of lower local currency ARPU in Brazil and weaker local currency exchange rates. Without the impact of exchange rates, consolidated revenue would have decreased by about 8%.

We reported $230 million in adjusted OIBDA, down from $355 million during the same period last year. This resulted from the combined impact of incremental expenses related to our 3G networks and the lower operating revenues. Lower local currency exchange rates adversely impacted our adjusted OIBDA results by about $41 million compared to the same period last year.

We invested $156 million in total capital expenditures for the period. Mexico and Brazil accounted for about 90% of our CapEx spend, in line with our strategy to focus our investment in our 2 largest markets. Over 80% of our total CapEx went to support our 3G deployment efforts.

Consolidated adjusted OIBDA margin for the quarter was 16% as we incurred expenses related to our 3G deployment efforts, including the investment in nearly 5,000 new sites built over the past 12 months. During the quarter, we recorded $42 million in noncash charges to write-off certain prepaid expenses related to our decision to restructure our services with NSN, as Steve described earlier. We also recorded $85 million in noncash charges related to our decision to discontinue the use of certain customer relationship management software. All of these noncash charges are excluded from adjusted OIBDA.

In terms of our outlook, as Steve previously indicated, we remain on target to meet our full year adjusted OIBDA guidance. With that being said, it's important to note that we expect our adjusted OIBDA in the remaining quarters of the year to be significantly lower than the amounts we reported in this first quarter, as we expect to recognize additional expenses related to our continuing investments in the deployment of our 3G networks, incurred costs associated with the in-sourcing of engineering activities from NSN and spend more to accelerate migrations of iDEN customers to our new network in Mexico. These initiatives, which are consistent with our plans for the year, will result in over $100 million in additional costs in the second quarter, making it our lowest quarter of adjusted OIBDA for the year.

Turning to our markets. Nextel Brazil results for the quarter reflect better financial performance. Our financial results in U.S. dollars for the quarter compared to 2012 were adversely impacted by weaker local currency exchange rates, which depreciated, on average, about 13% compared to the same period last year.

First quarter revenues of $636 million in Brazil reflect a decline of 23% compared to the prior year period or a 13% decline in local currency, mainly driven by decrease in ARPU related to promotional pricing plans and retention credits offered in 2012. However, the actions we took in the second half of last year to improve the credit quality of our customer base have helped to stabilize local currency ARPU over the last 4 quarters.

Nextel Brazil segment earnings of $158 million for the first quarter were down 34% from the first quarter of last year due to lower revenues, incremental 3G expenses and weaker local currency exchange rates. The impact of lower currency change rates reduced segment earnings by approximately $34 million.

Finally, we invested about $93 million in CapEx in Brazil during the quarter as we continue to deploy our next generation network. Our CapEx investment in Brazil will continue to increase as we extend the coverage of our networks in São Paulo and Rio over the remainder of the year.

Nextel Mexico's financial performance reflects lower segment earnings as a result of incremental costs associated with the deployment of our new network. First quarter revenues of $514 million in Mexico were down 6% compared to the first quarter of last year as a result of a decline in local currency ARPU from increased competitive pressures, partially offset by an improvement in local market exchange rates and growth in Nextel Mexico's subscriber base. Nextel Mexico segment earnings of $101 million for the first quarter were down 40% from the same period last year as a result of higher expenses associated with the significant increase in 3G cell site and incremental spectrum costs. We invested about $52 million in CapEx in Mexico during the quarter, down from $94 million in the same period last year, but we expect CapEx in Mexico to increase over the next several quarters as we continue to expand our 3G network.

Turning to our balance sheet. During the first quarter, we issued $750 million in high-yield notes, consistent with our goal of improving our liquidity position. We had good demand for the offering, which ended up being oversubscribed. As a result, we were able to complete a follow-on transaction, subsequent to the end of the quarter, and we issued an additional $150 million of the same class of notes. This transaction generated $163 million in additional proceeds at a lower cost than the original offering, as the bonds were sold at a premium.

Also, as you know, subsequent to the quarter, we announced that we reached an agreement to sell our business in Peru to Entel for about $400 million. We expect this transaction to close later this year and to provide us with additional liquidity as we focus our investments on the deployment of our new networks in Mexico and Brazil. Please note that starting next quarter, we'll begin accounting for Nextel Peru as discontinued operations. We're also moving forward with our plans to execute a tower sale leaseback transaction relating to select sites in Brazil and Mexico. We're currently negotiating with several parties and are targeting to reach agreement by the end of the second quarter.

The recent high-yield financing, the sale of the Peru and the planned tower transaction, combined with the continued availability of about $480 million under our existing equipment financing arrangements, underpins our strong liquidity position. We ended the quarter with over $1.9 billion in cash, cash equivalents and short-term investments. Long-term debt, including the current portion, was $5.7 billion, which net of cash, cash equivalents and short-term investments, results in net debt of approximately $3.8 billion.

So from a funding perspective, our liquidity position has strengthened considerably since the beginning of the year. Going forward, we'll continue to focus our capital investments on the markets that we believe can generate the best returns. After completing the planned expansion of our 3G networks this year, we expect to be in a position to return to more aggressive growth adding more profitable subscribers to our base, generating positive free cash flow and executing on opportunities to efficiently reduce our leverage. Now I'll turn the call back over to Steve.

Steven M. Shindler

Thanks, Juan. Summarizing my perspective for the quarter, I am pleased with the progress that we've made. We are following through on our promises. We are on track to complete the construction of our new networks. We are gaining traction on 3G subscriber growth in Mexico and we are confident that the combination of our high-quality networks; our superior customer service; our high-performance push-to-talk service, instantly connecting our community of subscribers; our attractive new portfolio of handsets; and our high-speed data services all will enable us to successfully capture a significant number of new profitable subscribers from our expanding target market. Through hard work and discipline, we're putting all the pieces in place to achieve our long-term profitable growth objectives. We're not out of the woods yet. However, we're back on the right path and we know the way. Operator, we'll now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris King from Stifel, Nicolaus.

Christopher C. King - Stifel, Nicolaus & Co., Inc., Research Division

2 main questions for you. First of all, just was wondering if you could give us a little bit more color on the OIBDA dynamics as we roll throughout the remainder of the year. I know, Juan, you talked about a kind of $100 million incremental step-down in 2Q related to some of the 3G launches. Just was wondering if you could talk about kind of how that trends, particularly in the second half, whether you guys are expecting kind of a flattish third quarter and fourth quarter off of that or whether we should expect to see a little bit of a ramp as we approach year-end? And then second question about gross add trends in Mexico, just was wondering, I know you guys talked about some of the dynamics there related to the Sprint shutdown of iDEN and some of your border markets, but just was wondering how you see that trending throughout the remainder of the year as well, as you guys launch what appears to be a significant number of markets there going forward over the next 6 months?

Juan R. Figuereo

Chris, this is Juan. I'll start with the question on the OIBDA. So first, there are basically 3 drivers, as you heard from Steve, we are increasing investment in the deployment of 3G sites. We're adding a lot of sites. We're in-sourcing the engineering of NSN, this is improving the quality of our network play. And there should be a more normal level of bad debt, total company but mostly driven by Brazil, in the remaining quarters of the year. In terms of orders of magnitude, we talked about $100 million on a -- impacting second quarter. But there's also an item that's unique to the second quarter, which is we are making a concerted effort in Mexico to drive migration from iDEN to 3G in the second quarter. That continues in the balance of the year but the biggest effort is in the second quarter. That could be as much as $40 million of impact on OIBDA. And then the bad debt is formulaic. We cleaned up the base in Brazil in the fourth quarter, so that had a benefit in the first quarter when we reported total company, 1.3% as a percentage of revenue. When you look back last year, we were in the 2.8%, 2.9% range on the first 3 quarters before the cleanup of the base. So we should be in that range for the balance of the year.

Gokul V. Hemmady

Chris, it's Gokul. So on your question on Mexico, as you know, we did 45,000 gross adds this quarter on 3G. We expect that as we expand our coverage, we will begin to see even more momentum. Even in the first quarter, as I think about the month-to-month traction, I find that it is increasing month-to-month. As I think I've said in my remarks, we are currently at about 5% of our base on 3G and by year-end, we expect that about 33% of our subscribers will be on 3G. So as you can see from that metric, we are forecasting that we continue to see some really good traction. Now included in that, Chris, on -- in addition to gross adds, we got good traction on migrations in the first quarter. And those migrations, also on a month-to-month basis, are increasing in a big way. Not only are the migrations increasing, we are also finding that we are able to get very good uplift in ARPU, about 15% to 20% on a like-to-like basis, comparing 3G packages with the iDEN packages. So as we expand coverage -- and finally, customer feedback is also extremely good. We feel that network performance is good, what we are hearing from customers is good. So I think we are -- we've laid the foundation as we expand coverage into the borders of these. We've really laid the foundation for increasing traction on growth throughout the remainder of the year.

Operator

Your next question comes from the line of Rick Prentiss from Raymond James.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

First, continuing on the Mexico theme. The 45,000 gross adds that were 3G in the quarter, can you talk a little bit about what the ARPU you're seeing from those new to Nextel customers are? And what kind of customer are they? What kind of segmentation is it?

Gokul V. Hemmady

So Rick, I think, we are seeing that similar kind of ARPU uplift on the new gross adds also. So all around, whether it's migrations or new gross adds, we are seeing very good uplift in ARPU. So I think, we feel good about that. As we move on and start getting more traction, we feel that our strategy and our pricing, our rate plans and offers, are pretty much in line and is -- and consistent with getting that premium on ARPU. And it's no different from what we saw, also, when we launched some of these rate plans in Peru, also.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

So the -- and what type of customer is this that you're getting now that you weren't getting previously then?

Gokul V. Hemmady

So I think it's a -- we are getting -- first of all, we are getting the similar kinds of customers, so we are targeting that initially. As we move along through the balance of the year, we will be looking at expansion of our addressable market as we -- maybe these are slightly lower usage customers with maybe slightly lower ARPUs, but also at a cost structure that is attractive, which is why we'll either maintain or increase our margins as well as have an attractive return on capital. But as we look at it right now, it's customers that are really high usage that also are getting higher premiums on ARPU. So right now, it is a similar to our existing base, I would say, but as we move along, we'll be expanding that addressable market.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Makes sense. And then on Chile, you made a nice sale coming up with Peru to close by the end of year. Can you update us as far as how much of the burn in headquarters' Other was from Chile in the quarter?

Juan R. Figuereo

Yes. In the -- both in the case of headquarters and in the case of Chile, where we announced in the previous call, we indicated that we had made significant cost reductions, they are coming through in the quarter. So they -- in the case of Chile, our burn is just a little north of $20 million lower in the first quarter. And in the case of the headquarters, we're tracking to reduce about $100 million for the year.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

And if we think of Chile, what gets Chile from a value perspective, Wall Street perspective, from being almost a negative -- if there was negative EBITDA to a neutral to a positive? You've kind of hinted that there are some strategic options out there. But is there a possibility of taking Chile from being negative EBITDA, in essence, negative value on the Street to being neutral to positive?

Steven M. Shindler

Rick, this is Steve. We were approaching that as you would expect us to. We are considering various strategic alternatives that can help us enhance that, whether it be partnerships, commercial arrangements. As Juan mentioned, we're on track to bring down the cash impact related to that market. So we're balancing the growth and additional investment accordingly given the order of magnitude of investment that was made 1 year ago compared to where we would continue to see that market go on its own going forward. So it's a balance for us and we're doing all the right things operationally in how we're focused on the market. It is unique in that it's a very strong network, with about 1,000 cell sites that we've deployed on 3G. We have a 60 megahertz of contiguous spectrum. Very, very strong spectrum position in that market. And we've got a nice core group of subscribers, relatively small compared to the other markets, but it is a valuable asset. So as you correctly say, we have to balance bringing down the level of investment while we continue our efforts to find the right strategic alternative. And we are very focused on that.

Operator

Your next question comes from the line of Kevin Smithen with Macquarie.

Kevin Smithen - Macquarie Research

We appreciate the additional disclosure on towers. I wondered if you could give us a summary of your total iDEN towers by market? And then you've given us 3G towers, but total iDEN towers by market would be very helpful.

Juan R. Figuereo

So I think we’re looking for the number right now. I'm not sure that -- okay. So total iDEN towers, hang on a second. We've got 9,300 towers total as of Q1. Most of those towers, of course, are...

Kevin Smithen - Macquarie Research

Those are operational towers or -- how many -- I mean, what percentage of those were owned?

Steven M. Shindler

This will be operational tower. All except about just a little north of 1,000 towers are owned. And about 4,500 of those are in Brazil; 3,000 in Mexico; the next largest is Argentina; the rest is between -- in the rest of the pack markets.

Kevin Smithen - Macquarie Research

Why -- you've indicated that you're looking to sell only 4,500 towers. It sounds like you've excluded 1,000 in Chile from that number. Why wouldn't you try to bundle in Chile or sell all 8,000-plus towers? Is there any reason that you're excluding, say, 3,500 towers from this sale?

Steven M. Shindler

Well as far as the Chile is concerned, we obviously, can look at that, that's one of the items that would be on our strategic list. But we -- we're thinking about that market more holistically at the moment. And I don't want to move forward with a single step if there's something broader that would make more sense for us. With regard to the other towers, we think it's a healthy portion. We've kind of gone through the portfolio of what we think is salable. It's a lengthy process, as you know, and we've been working hard to get all the paperwork in place to be able to sell the 4,500 towers and do it in as expeditiously a manner as we can. We're not interested at this point in expanding beyond Mexico and Brazil with the tower sale and we're picking what we think is a reasonable number of towers that we could move forward with quickly and get an attractive deal.

Kevin Smithen - Macquarie Research

But would you be open long-term if tower valuations continue to climb to sell the remaining towers? Or do you think they're not salable?

Steven M. Shindler

No. We would be open to it. We've done tower transactions in the past and we're, obviously, always looking at the makeup of the assets that we have and we'll look to structure it in the most efficient manner we can, from a capital allocation point of view.

Operator

Your next question comes from the line of James Breen from William Blair.

James D. Breen - William Blair & Company L.L.C., Research Division

Just a couple of questions. One, have you seen -- competitively, where do you think you guys fit in terms of the launched 3G now relative to some of the competition in Mexico and Brazil? Do you feel like you're sort of on track with other parts of the competition? And is there any sense of feedback that you've gotten as to how your 3G data products are working relative to competition? And then secondly, just any color on CapEx as we look throughout the rest of the year, specifically as we look between Mexico and Brazil split.

Gokul V. Hemmady

So on the -- first on the data card, James, as you know, we sold 60,000 data cards in Brazil. We sold it because the great retention tool, it's working well. We are finding that usage is quite healthy and it is proving out to be what it was intended to do, which is we sold it to our existing base of iDEN customers as a retention tool. It's -- we find that the network is good, we are getting good feedback. It's early stages still, but we are getting good feedback. It enables our customers to start experiencing our network, which we feel is good. Of course, it's an empty network right now. But that's the intention, to start that way. So compared to what we are finding as feedback relative to our competitors, early feedback is extremely good and we feel very encouraged by that. In terms of your first question on just the general -- I think your question was more a general "How are you thinking about competition on 3G relative to your competition?" I'll start and then maybe Steve can add a few things also. Right now, as you know, both -- in Brazil, especially, we've just launched data services in many of our markets in and around São Paulo. But as you've heard us say, we are competing there right now with one hand tied behind our back. Of course, network deployment is going really well. We plan and expect to deploy in São Paulo in the second quarter. And once we deploy that market, we'll start with growth and then deploy Rio by the end of the year. And going into 2014, with both of those markets deployed, we feel very good about the traction. And if I then think about those 2 markets relative to the kind of traction we are seeing in Mexico, with 3G deployed in about 50 million POPs and with expanding coverage and the traction we are getting month-over-month on the gross adds as well as significant migration and uplift in ARPU, with all those factors put together, we feel good about the customer feedback, our network performance, quality, et cetera.

Steven M. Shindler

And this is Steve. I'll -- thank you for that question because this is the area that -- one of the key areas that's got me so excited to be back here, and here for the long-term with the company. The more we look at what everything that we're doing and how we're building the networks and the way we're positioning for our ability to compete and win in the market over the long-term and the assessments that we've made of what our competitors have done, yes, they're certainly further along in their deployment, but the penetration rate of 3G across-the-board is still probably in the 30%, maybe up to 40% range. So there's a significant opportunity for us to get into the market and aggressively look to grow. And we're going to continue to leverage off all of the pillars of differentiation that we have utilized in the past, moving forward to make sure we've got the highest quality network everywhere where we built out coverage, backing it up with tremendously high levels of customer service, customer care. Of course, the PTT differentiation will still be part of our offerings. We have the aspirational brand and we'll continue to leverage that. And now we get to move into the marketplace with a very broad portfolio of smartphones and bring high-quality data services with tremendous speeds into the marketplace. So everything is lining up for us to be able to get in there and compete and go after a much more significant target market than we've had in the past. And we are very much on target. We're where we wanted to be at this point in the year, but ask you all to have a little bit more patience with us as we complete these build-outs. We have another quarter's worth -- a little more than a quarter's worth of investment to make in Mexico to get to parity with our iDEN network and we're going to be working hard through the balance of this year to do the same on the construction in Brazil. As I mentioned in my comments, the growth that you should expect from us in Mexico will be ramping up nicely through the second half of this year and we're going to be ready to do exactly the same thing in Brazil as we move towards the end of this year and wrap into the first quarter of next year. So we're on track. We like the competitive landscape that -- as it sits and we think we've put all the tools in place to go take advantage of it.

Operator

Your next question comes from the line of Walter Piecyk from BTIG.

Walter Piecyk - BTIG, LLC, Research Division

Just 2 questions. Is there -- the cross-border stuff, when this stuff

[Technical Difficulty ]

Walter Piecyk - BTIG, LLC, Research Division

The cross-border stuff was -- I thought it was a complication, the fact that Sprint's shutting down that network and you guys are doing 3G, is there any extra complications there? And can you also just characterize your -- the backhaul that you guys are using for these cell sites? And is there an opportunity to, perhaps, set some agreement with GVT in Brazil to help with that?

Steven M. Shindler

So on the Sprint shutdown, as we've mentioned a couple of times on the call, we do expect it will be disruptive. It is having an impact as expected. It's causing a slight increase in the churn. It will have an overall financial impact to us this year because we'll lose some of the International Direct Connect traffic that we have. So the impacts are less growth on the border, a little bit less roaming revenue and through fewer Sprint customers coming to Mexico and less International Direct Connect. But we're...

Walter Piecyk - BTIG, LLC, Research Division

Do you -- I mean more on the -- I meant more like in the technical side. I understand all the revenue issue, but is there any technical issues with running different networks along the border where, before, you guys were both doing iDEN?

Steven M. Shindler

Not -- well, technical from the standpoint of still working to make the W-CDMA push-to-talk that we offer and Sprint CDMA push-to-talk over QChat compatible with one another. And we're trying to make that aligned at the midyear point when the iDEN network shuts down. That is not completed yet, but all the other efforts that we have underway to mitigate against the impacts that we've highlighted, we're moving forward with putting the roaming arrangements in place with other carriers. We're accelerating -- as Juan mentioned, we are accelerating the migrations along the border. This second quarter will be a very big investment on the part of our company to convert a lot of those long-time, loyal customers that we've had in Mexico over to a new handset and become part of our 3G network. So they'll remain with us for the long-term. We think that's an appropriate investment on our part and a great way to mitigate against the impact. Once we hit the midyear point, we'll pass through that and we'll be in a very good position to take advantage of the technical elements that you've highlighted, we'll have those completed. And then we'll be able to continue to grow on a more normal basis.

Gokul V. Hemmady

Walter, it's Gokul. On your question on backhaul, almost 90%-plus of our backhaul requirements are met with the IP microwave strategy. We feel that that's a strategy that's reliable. It's cheap, gives it a lot of flexibility. Now as we move forward over the next several years, if we have to use fiber in certain areas, we feel that we do have a wide range of options based on the particular geography that we are talking about. And in Brazil, those options could include GVT.

Walter Piecyk - BTIG, LLC, Research Division

At what point -- do you get to a point where you kind of have to move to fiber or is microwave -- I mean how far does microwave get you [indiscernible]?

Steven M. Shindler

Walt, we are having a hard time hearing you with the question. Is there a point where we have to use more fiber, is that what the question was?

Walter Piecyk - BTIG, LLC, Research Division

Sorry. Yes. At what point do you have to get to fiber? How far does microwave take you? Because, obviously, that would be some incremental OpEx if you start -- having to start leasing some fiber lines.

Gokul V. Hemmady

Yes. There's a -- over the next several years, 3 to 5 years, we feel that over 90%-plus of our requirements can come through an IP microwave strategy. So I -- we don't feel that there's any significant CapEx related to fiber that we are contemplating.

Operator

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

Kevin M. Roe - Roe Equity Research, LLC

A couple of questions. First, Steve, on Chile, when do you hope to conclude the strategic review? And generally, can you talk about the interest level for that asset? And secondly, on Mexico, you mentioned 3G network parity coverage by end of Q3. But how should we think about the subscriber ramp? Are you not going to put the pedal down until after you reached parity so that we don't see an acceleration until 4Q or could that happen earlier?

Steven M. Shindler

I think it's a continuous process in Mexico. We're -- as Gokul mentioned, we're gaining traction each month. So we -- we're adding our distribution, we're continuing to add more sites in more cities and we're gradually accelerating the growth. And as we get to parity, we will get the pedal all the way to the floor and go for as great a ramp as we can possibly achieve. So you should look for steady improvements from us throughout the year. But at the back half of the year, it will increase in terms of growth. As far as Chile, there's no specific timetable. As I mentioned, we're doing everything possible to keep the market strong but with a reduced level of investment while we explore a number of discussions and a number of potential paths. And the most important thing for us to do there is to get it right rather than have a specific time frame that we have to hit.

Kevin M. Roe - Roe Equity Research, LLC

And can you generally talk about interest level for that asset?

Steven M. Shindler

As I've said, there's a lot of different types of things that we're going to explore from the strategic standpoint, so we're in the midst of those discussions now.

Operator

Your next question comes from the line of Michel Morin from Morgan Stanley.

Michel Morin - Morgan Stanley, Research Division

Steve, I was wondering if you could give us a little bit more color around the strategy for migrating to 3G. I think you said that you were going to be intensifying the efforts in the second quarter. Maybe explain a little bit better what you've done so far? And in terms of how you've actually approached that, what kind of offers you're providing your subscribers? And what will change in the second quarter?

Steven M. Shindler

Well, the offers that we provide to customers are consistent with our overall pricing plans. So it really depends on what kind of customer we have, are they a high usage customer? How much do they utilize PTT? We're trying to introduce them now to the opportunity to be able to use data services and, clearly, there's a handset upgrade involved in the process because that's what the primary effort is, to migrate someone over. We get them to extend their contract with us and doing that, so we provide them with -- we're offering a subsidy to encourage them to move to that level. And as Gokul highlighted, we're getting a bump-up, a nice bump-up in the ARPU as we go through that process. What the Mexico team has done is very aggressively gone through all of their distribution channels and their care centers to train everyone to be able to really understand the needs of each type of customer and what it is that is most important to them. Are they a consistent roamer to the U.S.? Are they more reliant on International Direct Connect? What are the usage patterns? So that when we approach them and have the discussion about what kind of plan to upgrade to or what kind of a handset, are they a candidate for our IronRock, which keeps them on iDEN for push-to-talk but allows them the benefits of the high-speed data? Our teams know exactly where to steer the customer based on the type of user that they are and where they tend to use the phones. Or are they more a candidate for one of our newer feature phones that we've also brought into the market based on those usage patterns? So a lot of work went into this, anticipating where we're going to be as we move into the May, June time frame, trying to alleviate any confusion that might have otherwise gone into the minds of our customers as they hear more and more about the shutdown of iDEN in the U.S. So I think we've done a good job preparing for it. I think we've done everything we possibly can to mitigate against the impacts that we've anticipated for some time. And I think we're in the best position we can be to weather that storm, albeit, as we've shared, it will have some impact on our results this year. I think we'll use that momentum as we move into the second half, to have a broader experience and a lot more customers that are now on our 3G networks and enjoying the new services.

Michel Morin - Morgan Stanley, Research Division

So in Q2, it's really just doing a little bit more of what you've started to do in Q1?

Steven M. Shindler

Yes. I think you'll see a big lift in the effort on the migration front in the second quarter. And that is one of the primary reasons that we point into the fact that there's a big increase in investment in Q2 on a number of operational elements. The 2 biggest ones being that migration effort and, obviously, the large number of incremental cell sites that are coming online.

Michel Morin - Morgan Stanley, Research Division

And are you expecting that we're going to see your 3G net adds start to offset the iDEN losses? So in other words, should we see net adds improve in Mexico?

Steven M. Shindler

Yes. I think you'll -- yes, we'll see net adds improve, we'll see -- we will see a gradual shift throughout the year and a much bigger shift in the second half of the growth coming on the 3G side versus the iDEN side.

Michel Morin - Morgan Stanley, Research Division

Great. And if I may, just on the cost side, you gave some additional disclosure around the provisions for bad debt, thank you for that. I was wondering, given -- in Brazil in particular, your total expenses were down pretty significantly sequentially. Would you be able to share with us what the bad debt provisioning was in Q4 -- sorry if I missed it -- just so we can look at the sequential change.

Juan R. Figuereo

Yes. So in Brazil, the -- we had the cleanup of the customer base in Q4. So the bad debt was almost 12% in Q4. And in this quarter, it was just 1.2%, so there's a big difference there. In addition to that, Brazil has a cost reduction effort, we said cost redeployment and reduction because they're basically cutting fixed cost and putting it into the network field. But there is a significant effort going on over there on cost, which is going well.

Operator

Your next question comes from the line of Andre Baggio from JPMorgan.

Andre Baggio - JP Morgan Chase & Co, Research Division

2 -- I have 2 questions. One of them is like can you compare the cost -- which are more regulatory cost in Brazil when you move from iDEN to 3G? I know that there are some, in Brazil, some cost related to additions in -- that may apply to 3G and so on. But interconnection, I remember, is different. Can you maybe elaborate a little bit on that?

Gokul V. Hemmady

Sure, Andre. As you know, we have a significant advantage when it comes to mobile termination rates in Brazil on 3G compared to iDEN. And that comes from really 2 areas. Number one, over the next 2, 3 years, as you know, mobile termination rates are going down from the BRL 0.33 currently to almost, I think, BRL 0.15 to BRL 0.16 over the next 2, 3 years. So that's one advantage. I think, it will level the playing field, that will give us good competitive advantage, all to benefit the marketplace and the customers. That's one benefit. Second for a short period of time, i.e., over the next 2 to 3 years, there is an element of asymmetry that Anatel has announced, which is -- starts off with an 80-20 rule. And it's a relatively complex calculation from a mathematical standpoint. It starts with an 80-20 rule. This year goes into next year and then the following year goes to 60-40. And then in 2016, from April 2016 onwards, it is -- it all moves to a cost basis, which, we believe, at that time will be very competitive rates compared to some of the global rates or what we see elsewhere in the region. And as you know in Mexico, mobile termination rates are at around $0.03 also, in terms of U.S. cents. So all this is -- in summary, all this means is that there is a significant advantage that we have in the next 2, 3 years. And as rates move to a cost basis, those -- that advantage, we believe, will continue help us get to a much more leveled playing field. So we are excited about that as we build out our 3G networks, which is all on track, and we hope to take advantage of all of this in the second half of the year as we launch São Paulo and then, by the end of the year, as we launch Rio.

Andre Baggio - JP Morgan Chase & Co, Research Division

Okay. And a second question if I may. Can you explain a little bit why net debt increased by almost $500 million in the quarter from first quarter levels? I mean just trying to -- I'm struggling to understand from your statement how that large increase happened?

Steven M. Shindler

Andre, it was hard to hear you, are you saying why did the -- you're talking about the net debt?

Andre Baggio - JP Morgan Chase & Co, Research Division

Sorry. Yes. Why net debt will increase by $500 million from the fourth to first quarter?

Juan R. Figuereo

Well, that's because we issued $750 million in new bonds during the quarter, Andre.

Andre Baggio - JP Morgan Chase & Co, Research Division

Yes. But that's -- that does not affect net debt, I guess.

Juan R. Figuereo

Yes. Well, there's -- that increases debt and then we spend money, which reduces cash.

Andre Baggio - JP Morgan Chase & Co, Research Division

Okay. I'll try to go over it afterwards. Don't worry.

Juan R. Figuereo

Okay.

Operator

Your next question comes from the line of Rodrigo Villanueva from Merrill Lynch.

Rodrigo Villanueva - BofA Merrill Lynch, Research Division

Actually my question was similar, regarding the increase in net debt. I was wondering if this is due to investments in working capital?

Juan R. Figuereo

Look, there's investment in capital and working capital is also up a little bit. If you were to look at it in detail, our DSOs in Brazil are up and so there's an investment in working capital there in the case of Brazil. But generally, just to be clear, you are going to see net debt increasing as we continue to spend CapEx in the balance of the year.

Tim Perrott

Great. Operator, I think -- I know we've gone well beyond our hour, I think we're going to cut the call now. Steve, any wrap-up comments before we turn over?

Steven M. Shindler

Well, I'd like to, once again, thank everyone for joining the call this morning and all of the support, the feedback that you've provided us throughout the year. And we know what we need to do as a team and we're very focused on getting that done. So we look forward to sharing results with you again at the end of the next quarter. Thank you.

Tim Perrott

Thank you.

Operator

Ladies and gentlemen, this concludes the NII Holdings' first quarter 2013 earnings conference call. Thank you for your participation. You may now disconnect.

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