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NII Holdings Inc. (NASDAQ:NIHD)

Q1 2014 Results Earnings Conference Call

May 12, 2014 8:30 AM ET

Executives

Tahmin Clarke, Senior Director, Investor Relations

Steve Shindler - Chief Executive Officer

Juan Figuereo - Chief Financial Officer

Gokul Hemmady - Chief Operating Officer and President, Nextel Brazil

Analysts

Ric Prentiss - Raymond James

Walter Piecyk - BTIG

Ron Consiglio - UBS

Jacob Steinfeld - J.P. Morgan

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the NII Holdings First Quarter 2014 Earnings Conference Call. At this time, all lines are in a listen-only mode. There will be an opportunity to ask questions at the end of today’s call. (Operator Instructions)

Today’s conference call will be available for rebroadcast for the following two weeks beginning later today. Domestic callers may access the rebroadcast by dialing 1 (800) 633-8284 and entering passcode 21715400, international participants’ 1 (402) 977-9140 and entering passcode 21715400.

I will now turn the conference over to our host for today, Tahmin Clarke, Senior Director, Investor Relations. Please go ahead, sir.

Tahmin Clarke

Thank you, Francis. Good morning, everyone. And thank you for joining NII Holdings first quarter results conference call. With me on the call today are Steve Shindler, our CEO; Juan Figuereo, our CFO; and Gokul Hemmady, our COO and President of Nextel Brazil.

As a preliminary matter, let me inform you that some of the issues discussed today that are not historical will be forward looking and as such should be taken in the context of the risks and uncertainties that are outlined in the SEC filings of NII Holdings, including our Form 10-K filed on February 20, 2014, 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 generally accounting accepted -- accepted accounting principles in the U.S. otherwise known as GAAP. For a reconciliation of these financial metrics to GAAP please access NII's Investor Relations link at nii.com.

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

Steve Shindler

Thank you, Tahmin. Good morning and thank you for joining our call today. As you know, following a disappointing year in 2013 our goal is to generate better operational and financial results for 2014. We are working to deliver on that goal and we are starting to see progress in some key areas, including positive trends in our 3G subscriber growth in Brazil.

Our results for the first quarter also reflect the impact of problems in other areas of the business, including continuing difficulty and attracting and retaining customers in Mexico, and the negative impact on our revenues of iDEN customers in Brazil switching to lower rate plans on our iDEN network. We are taking actions that we believe will address these challenges but it will take time for those actions to drive meaningful improvements in our results.

We believe that the launch of our 3G networks in Brazil and Mexico have positioned us to compete more effectively. In Brazil, we have seen how our new 3G capabilities are making a difference.

During the first quarter we saw significant improvement in customer loading on our 3G network, but we have also learned from our network deployment in Mexico that launching 3G services alone is not the answer if the overall user experience doesn’t meet our customers’ expectation.

As a result, we are faced with rebuilding customers’ confidence in our services in Mexico and convincing them that the Nextel brand continues to stand for quality service and a superior customer experience.

So our priorities for this year are straight forward. We must stabilize our operations in Mexico, invest widely in growth in Brazil and consistently execute across our operations. We continue to believe the best way to create long-term value for our business is to invest in initiatives to generate subscriber growth. However, given our need to preserve liquidity, we will strive to strike the right balance between driving growth and managing our use of cash.

Finally, as we announced on our last results call, we are continuing to evaluate strategic alternatives and other actions we can take to address our liquidity challenges that we discussed in our 10-K and in the 10-Q we filed this morning. We have not yet arrived in any decision and we will update you when it is appropriate to do so.

Now, I will turn the call over to Gokul Hemmady, our Chief Operating Officer.

Gokul Hemmady

Thanks, Steve, and good morning, everyone. As Steve mentioned, we are making some progress in certain areas of our business, but still have some challenges to overcome. We are continuing to make investments to support our growth strategy and we are starting to see some of the benefits of those investments as consolidated gross adds increased 6% from last quarter.

However, even with the better subscriber growth on our 3G networks, we are continuing to have difficulty retaining iDEN customer, evidenced by our year-over-year increase in consolidated churn to 3.42%.

We have not been able to stop the deterioration of our revenues, which has been impacted by declining customer base as we generated net subscriber losses of 52,000 for the quarter.

Consolidated ARPU decline 8% from last quarter due to lower local currency exchange rates and the continuing decline in lower local currency ARPU in Brazil as our iDEN customers who remained on iDEN moved to lower price rate plan.

The resulting smaller revenue base coupled with the investments we are making to grow the business continue to pressure consolidated adjusted OIBDA, which declined $28 million compared to the fourth quarter.

We are taking steps to stabilize our local currency ARPU, return to growth in Mexico and reverse the declining OIBDA trend, which I will discuss in greater detail later, but overall we are starting to feel about where the business is heading.

We believe that Brazil return to subscriber growth, shows that our business model can work and that we can replicate that trend in Mexico, making us more confident that we can take advantage of the significant opportunity there.

Now I would like to give you a brief update on the operations in our core markets starting with Brazil. Nextel Brazil generated 171,000 net adds for the quarter, a four-fold increase compared to the first quarter of last year and more than doubled the net adds in the fourth quarter, driven by the strength of 3G gross adds, but partially offset by higher churn in our iDEN base.

Overall, customer churn remained stable at 2.4%, which is comparable both year-over-year and sequentially. Demand for our 3G services drove 3G gross adds of 281,000 for the quarter, a sequential increase of 149,000.

During the first quarter, Nextel Brazil use its 3G capabilities to drive subscriber growth, while delivering better performance on other key metrics like CPGA and churn. We are continuing to invest in initiatives designed to drive growth and transform the image of our company, so that customers understand that we are a nationwide 3G operator.

We expect those initiatives including our marketing program, the launch of new distribution channel, the implementation of new back office systems and the deployment of LTE networks to drive subscriber growth during 2014. We also extended the reach of our 3G network in the State of Rio during the quarter and now provide 3G coverage to about 59 million POPs in Brazil.

We are using advantages available to us under the Mobile Termination Rates Settlement rules in Brazil to offer attractive plans to grow and retain customers. We are combining these plans with our high-quality service and unexpanded device portfolio that includes 13 3G smartphones to change the perception of our brand and services, and drive customer growth.

We are seeing some evidence of the success of this strategy. For example, 3G gross adds have increased each consecutive month from October 2013 to March 2014, resulting in two times the level of gross adds in the first quarter of 2014 compared to the fourth quarter of 2013.

Our customers in Brazil are also recognizing the value of what we offer as we receive the number one net promoter score for business customers and the number two net promoter score for consumers in the markets we serve.

We are also moving forward with the launch of LTE services in Rio during the summer as part of our effort to maintain the best customer experience in the market and to support our subscriber growth goals for this year and beyond. We are focused on 3G subscriber growth because we anticipate that an improved revenue and margin profile will come with that growth as we gain scale on our new networks.

To-date, despite a much stronger 3G subscriber growth trajectory in Brazil, we have not yet been able to stop the erosion of our revenue base due to the continued pressure on ARPU. This pressure gas resulted from a substantial number of iDEN customers switching to lower price rate plans on that platform, a trend toward larger bucket plans that are resulting in lower overage fees and to a lesser extent the deactivation of higher ARPU customers. We have been continuing to see improvements in loading ARPU from new 3G customers and we are planning to increase prices on our iDEN rate plans to help stabilize ARPU.

While we are pleased with the progress we have made in driving 3G gross adds in Brazil, our success in doing that has also resulted in some operational challenges in our business. We are working to improve our logistics and fulfillment processes to improve our ability to deliver handsets to customers at various points of presence.

We’re also experiencing a spike in calls to our customer service center, which is pressuring our response times and operating costs. We are closely monitoring our operations to make sure we identify these types of issues early and resolve them quickly.

Now turning to Mexico. Nextel Mexico’s operational results include net subscriber losses of 212,000 compared to 16,000 net adds during the first quarter of 2013, primarily as a result of a year-over-year increase in churn from 2.1% to 4.3%. We generated 172,000 3G gross adds in the first quarter which was comparable to what we reported in the fourth quarter of 2013.

We continue to face issues around customer retention in Mexico with net subscriber losses during the first quarter similar to the fourth quarter after removing the impact of prepaid subscriber adjustment we recognized late last year. It’s critical that we addressed the factor underlying this problem and improved the performance of our sales organization to stabilize our operations in Mexico so that we are in a better position to return to subscriber growth in the second half of the year.

Our market research in Mexico shows that our brand is still seen as aspirational but subscriber retention continues to be an issue because of the damage to our reputation that we experienced last year. In other words, we need to regain the confidence of our customers.

We believe that our decision to rush our 3G network in the service and aggressively migrate customers to the new network in response to Sprint’s shut down of its iDEN network last year was a significant driver of this loss of confidence. To address this event, we have invested to improve our 3G network quality and customer experience, building over 2000 additional sell sites in 2013 and over 300 more this quarter.

In addition, we launched an indoor coverage program to go along with the improvements we've made in our roaming and PTT capabilities last year. These investments have resulted in improvements in customer’s opinion of the quality of our service in Mexico with independent studies indicating that our network quality is number one or number two in most of the regions where we offer our service.

As in Brazil, we are using our 3G network in Mexico to offer significant value to customers and improve our competitive position. For example, our recently launched 600 rate plan provide 6x the amount of data available under comparably priced offers by our competitors.

During the first quarter, we also launched our iPhone in Mexico and we planned to launch LTE services in the number of cities in that market later this year. We are taking these actions to create a strong value proposition on our data platform, which we believe will differentiate our services and give customers another reason to choose us.

We are also making changes designed to improve the productivity of our distribution channel, enhance the capabilities of our IT systems and increase the efficiency of our handset fulfillment process. For example, we are improving our ability to run credit checks at our retail stores and improving inventory distribution to ensure we have the right handsets at the right locations to better meet our customers’ needs and improve their experience with us.

Looking more broadly at the situation in Mexico, I think we have addressed the number of the problems that created negative perception of our services last year. But it will take some time to regain the confidence of our customers and position our Mexican business to return to subscriber growth.

So as I look at our operations across our markets, I see progress in a number of important areas but there is still much work to do. We must drive better execution across a number of initiatives including stabilizing our operations in Mexico, halting the declining ARPU trend in Brazil and reversing the trend of declining consolidated revenue and adjusted OIBDA.

We must also make investments in LTE, find and capture CapEx efficiencies and take advantage of the improving regulatory landscape in Mexico. We must execute on all these fronts if we are to be successful.

Now I'll turn the call over to Juan Figuereo, our Chief Financial Officer to discuss our results.

Juan Figuereo

Thank you, Gokul. I’ll start by providing an overview of our financial results for the period. Then I would like to give you an update on our current liquidity position including a review of our unusually high cash burn during the quarter. Finally, I will share additional details on our capital investment program for 2014.

Now to the consolidated numbers for the first quarter. We generated consolidated operating revenues of $970 million, down 27% from $1.3 billion in the first quarter of last year due to the combined effect of weaker local currency ARPU and a smaller average subscriber base. ARPU was $29, down $10 from the first quarter of 2013 driven by lower ARPU levels in Brazil and Mexico and weaker foreign currency exchange rates.

Our consolidated adjusted OIBDA loss of $84 million compared to positive adjusted OIBDA of $228 million in the first quarter of 2013, reflects the combined impact of lower revenues, higher operating costs associated with our 3G network and increased customer acquisition and migration costs associated with growing our 3G customer base.

Excluding the impact of lower local market exchange rates, our operating revenues for the quarter would have been 60% lower than the first quarter of 2013 and adjusted OIBDA would have been higher by $68 million. We remain on track to capture estimated annual savings in excess of $59 million associated with Project Accelerate.

We have reduced the combined headcount in Mexico, Brazil and headquarters by approximately 12% since we started our headcount reduction initiatives in 2012. We invested $118 million in total capital expenditures during the period, with Nextel Mexico and Nextel Brazil accounting for almost all of the investment. We spent over 90% of our total capital expenditures on our 3G deployment efforts.

Turning to our markets. During the quarter, Nextel Brazil delivered improving 3G subscriber growth but revenues continue to decline as a result of declining ARPU and weaker foreign currency exchange rates. We generated operating revenues of $461 million in Brazil, down 27% from $636 million in the first quarter of 2013 due to lower ARPU which offset the impact of a larger average subscriber base.

ARPU of $31 was down $16 year-over-year due to the combined impact of iDEN customers switching to lower rate plan and weaker foreign currency exchange rates. However demand for our 3G services is growing and we expect that the 3G customers will generate a better ARPU profile.

Segment losses were $29 million compared to $158 million in segment earnings in the first quarter of 2013, resulting from the combined impact of lower revenues, incremental 3G investments and operating expenses and the impact of higher gross adds on customer acquisition costs.

Excluding the impact of lower local market exchange rates, our operating revenues in Brazil would have been 14% lower than the first quarter of 2013 and segment earnings would have been higher by $34 million. CapEx spend was $68 million and includes the launch of coverage of an additional 2 million POPs in real estate and relatively small investments related to our planned launch of LTE services later this year.

Turning to Mexico, Nextel Mexico's quarterly performance reflects the challenges that we continue to face in that market. As Gokul mentioned, we have taken a number of steps to improve our competitors, but we expect that Nextel Mexico will continue to report subscriber losses through the first half of the year with the goal of returning to subscriber growth later in the year.

Our first quarter operating revenues of $382 million in Mexico were down 26% from $514 million in the first quarter last year, as a result of a smaller average subscriber base and the reduction in ARPU. ARPU was $35, down $3 from the first quarter of 2013 due to the combined impact of lower local currency ARPU and weaker local currency exchange rates.

Excluding the impact of lower local market exchange rate, our operating revenues would have been lower by 22% compared to the first quarter of 2013. Segment losses for the quarter were $13 million, down from $101 million in segment earnings in the first quarter of 2013. Resulting from the combined impact of lower revenues, incremental 3G investments and higher migration costs as customers transitioned from iDEN to 3G services.

While CPGA improved during the quarter compared to the fourth quarter 2013, it is still short of our expectations. We are focused on lowering customer acquisition costs with a higher mix of gross adds being generated through our lower-cost retail channels as well as increased focus on lower-cost customer segments. CapEx spend was $39 million, down from $52 million in the first quarter of 2013.

Now briefly turning to our other markets, Nextel Argentina had subscriber losses for the first time in many years, reporting a net subscriber loss of $26,000 for the period, mainly due to higher prepaid churn related to deteriorating economic conditions.

Additionally, segment earnings dropped to $27 million from $52 million in the prior year period, primarily due to weakening local currency exchange rates and changes in the regulatory environment, including a change in billing rules from third minute to per second.

Despite limited investments through the period, Nextel Chile continued to grow its customer base. In Chile, we added 15,000 net subscribers, while using less cash. Segment losses minus CapEx decreased by about 33% compared to the first quarter of 2013.

Turning to our balance sheet, at quarter end, we had $1.7 billion in cash and investments Total debt including the current portion was $5.9 billion, resulting in net debt of $4.2 billion, an increase of $789 million compared to the year end 2013, reflecting a significant use of cash during the quarter, as well as non-cash borrowings under our equipment financing facility in Mexico.

There were a number of factors that contributed to the higher than normal use of cash. The primary use of cash during the quarter was for working capital of $320 million, driven by few significant items. We paid about $135 million in annual spectrum fees in Mexico, which have been paid historically during the second quarter.

We increased handset inventories by approximately $68 million, as we expanded the portfolio in Brazil and prepared for the iPhone launch in Mexico. And we paid $53 million more in net VAT taxes in Brazil due to CapEx and handset purchases. In addition, we paid $182 million in cash for capital expenditures and $162 million in interest.

Lastly, as you know, our adjusted OIBDA for the quarter was a negative $84 million, driven by customer acquisition costs, 3G network costs and other factors described earlier. Based on our current sources of liquidity, we believe we have enough cash to last through this year and continue into early 2015.

As Steve mentioned, we are continuing to evaluate incremental actions we can take to address our liquidity challenges. We continue to believe that investing to support subscriber and revenue growth is the best path to value creation for this business. And I would like to provide some insights into how we plan to invest the $607 million to $700 million in CapEx spend we projected for this year.

Of our network related investments, we plan to spend 10% on iDEN and 80% on our 3sG networks, which represents an estimated 1,400 new 3G sites to improve quality, add capacity and increased indoor coverage. We plan to spend the remaining 10% of our network CapEx to deploy LTE in both Mexico and Brazil later this year. We also expect to spend the portion of our CapEx on non-network based assets to increase our retail presence, improve productivity and lower customer acquisition costs.

As you know, we're still looking at strategic options, including opportunities relating sto our operations in Chile and Argentina. And while efforts are ongoing, we don’t have anything to report at this time. Also, during the quarter, we announced that we’ve hired strategic advisors to help us evaluate the best path forward to address our liquidity challenges.

We continued to work on parallel paths with UBS and Rothschild to look at strategic and capital structure options. Finally, I would like to note that we are in active discussions with the lenders of our local loans in Brazil and supplier financing facilities in Brazil and Mexico to address the covenant issues we noted last quarter. We will update you when we have further information to report.

Now, I'd like to turn the call back over to Steve.

Steve Shindler

Thank you, Juan. During the quarter, Nextel Brazil continued the trend of increasing gross adds on our 3G network, making further progress in our transformation to a 3G data company in the eyes of the marketplace.

Nextel Mexico took many important steps towards stabilizing operations and improving the perception of our service offering. The next important phase for us in Brazil is to turn subscriber momentum into revenue growth. And the next critical phase for us in Mexico is to see the operational and process improvements take hold to bring us back to positive net adds.

Really, our cash investments during the first quarter were significant. But necessary to get us back on a sustainable growth path. Going forward, we will balance our use of cash as we continue to step towards completing our operational turnaround, while finding a broader solution to our liquidity and capital structure challenges.

We appreciate your support and interest in our company and we will keep working to improve our results.

Tahmin Clarke

Operator, before we take questions, I want to confirm that we will not be able to respond to questions on the strategic and balancing alternatives that we are evaluating. We will update you on the developments in those areas when it’s appropriate to do so. But we will not provide additional information on these topics today.

Operator, we are now ready to take our first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Ric Prentiss with Raymond James. Please go ahead, sir.

Ric Prentiss - Raymond James

Thanks. Good morning.

Steve Shindler

Good morning.

Juan Figuereo

Good morning.

Ric Prentiss - Raymond James

Couple of questions. One, on the active discussions with the corporate financing in Brazilian banks, can you talk us through just structurally, how does it work? You have a June 30th measurement date, when do they actually do the measurement, when would you need the covenant relief, just try and help us understand the timeline of what's involved?

Juan Figuereo

Yes. Sure, Ric. This is Juan. The measurement date as you -- the next measurement date as we pointed out is in June and we have to report in 60-days after the measurement date, so we will be looking at 60 days after June 30. And so, typically, the way that would work is, we would wait until then, we report, and then we have to review the conversation. In this case, because we expect that we will not be in compliance at the next measurement date, we started the discussions with the banks fairly early, almost as soon as we informed you on the previous call.

And I would tell you that at least with regards to the Brazilian banks, we’ve had preliminary conversations. The story of Brazil, if you think about it, if you’re creditor in the local market, it’s not about story, it’s you’re looking for more room in your covenants because your business is growing and the growth in our industry is expensive. So we fully expect that the banks will work with us, but of course we will know that only when we are done in conversations with them.

Ric Prentiss - Raymond James

Okay. And second question is, the tower sale, I think you still have about ballpark $90 million worth of outstanding towers that haven’t sold to [Market] (ph). What are you thoughts as far as -- will there be the full sale, what kind of timeframe because every $90 million, $100 million counts?

Juan Figuereo

Yes, you are right, Rick. We still -- we closed, I should say, 3400 towers and we received proceeds of $720 million. So there is about $80 million to $90 million more to go based on our original estimate. We are working on the paperwork to complete and close those towers, and we expect to do it later this year. We will announce it when it happens. It’s just that the tail of any transaction is usually the ones that are more difficult to get you documentation ready. Incidentally, I don’t remember if we mention previously, but the tax leakage and the ones that we did close was only about 5% of the purchase price.

Ric Prentiss - Raymond James

Okay. And then my question is, on the LTE aspects, you mentioned launching in Rio in the summertime and then in Mexico I think later ’14. Are the handsets that you’re selling capable of using LTE, or do you need to have a whole another set of handsets deployed out there? And remind us again, you said iPhone in Mexico was in 1Q, where does it stand in Brazil?

Steve Shindler

Yes, so, Rick, this is Steve. We are deploying the LTE networks in select cities in Mexico and Rio, as you heard, from Gokul, and all of the handsets that we would deploy on that network are compatible. We would use the existing spectrum we have in Mexico on the AWS band and the 1.8 in Brazil. All of those bands are compatible with what’s already offered in the marketplace. So there will be an abundance of possible sales of SIM cards. We have that available to us in Brazil today on the 3G side but not in Mexico. So that will be a nice change for us once we get the LTE deployed.

Gokul Hemmady

And, Rick, we did launch iPhone in Brazil in late January, and we are seeing good traction not only with the sales of the iPhone but also the overall perception of rather 3G operations.

Ric Prentiss - Raymond James

So not expecting too much more handset inventory ramp up then as we look into 2Q given what we saw in 1Q?

Steve Shindler

I would say that is fair -- that’s fair. I think we did take position in Brazil as well as somewhat in Mexico, but certainly in Brazil where we front-loaded some of our purchase of handsets, not just the iPhone but across the board, and I would expect that that certainly is much lower as we along here.

Ric Prentiss - Raymond James

Okay. Thank you.

Operator

Our next question is from the line of Walter Piecyk with BTIG. Please go ahead, sir.

Walter Piecyk - BTIG

Thanks. Just want to follow up on the first question about the preliminary discussions. I think you used the similar kind of language three months ago on the preliminary discussion. So given that’s kind of coming up on June 30 pretty quickly here. I wonder if you could give a little bit more details about when we should expect something to happen there. And if nothing does happen, does that force you then to make a decision on whether you’re making the interest payments on June 30. And then just again this is all one question but finally on the June 30 payment, is it like a 30-day grace period before you are in default on making those payments? Thanks.

Juan Figuereo

So let me see how I would take that. First, the early discussions with the local banks were different from the discussions we’re having today. The initial discussions were kind of to inform and give them a hint that we could be having some challenges when it came -- the measurement date came around. The more recent discussions are about we’re not going to make it come the measurement date, but here is the story, here is the business plan.

And so based upon what they have seen in the business plan, I think it would be fair to say that the banks want to work us, they want to take their time to review the business plan. And they also, I think as would be expected, want to see how we’re going to address our overall liquidity issues, because addressing just one market doesn’t solve the bigger problem right since we fund from the parent company the markets. But generally, I would say we have been very open with the banks. We have shown them our business plan and the reception has been positive.

So we fully expect that we should have some kind of understanding, and I don’t want to use agreements because I don't know if we will have something signed, but we will have some kind of understanding with the banks way before the measurement date.

Walter Piecyk - BTIG

And the measurement date is June 30?

Juan Figuereo

It is June 30, yes.

Walter Piecyk - BTIG

Sorry to be particular about this, but it’s May 12, so this is kind of we are at way before June 30.

Juan Figuereo

Yes. So I know you understand right when you’re having conversations with the banks, it’s up to them, not up to you. So I can tell you that the conversations are ongoing. This is a process. They are receptive again because it’s a good story. If you are bank sitting in Brazil, it’s a story of growth, I see the business picking up momentum. We heard from Gokul that we are having number one, number two position in the markets from a Net Promoter Score, leading share of net adds in our markets for several months in a row now. So the banks like what they are hearing and they are working with us, but they will take their time.

Walter Piecyk - BTIG

And then just procedurally on your senior debt payments that are due, can you just walk us through what the obligations are and what leeway you have in and isn’t there like a 30-day period as far as making those exact payments? I am just trying to understand what the facts are and when you have to make payments and what timeline that gives you on evaluating your strategic possibilities, I guess, if they are any? Thanks.

Juan Figuereo

Yes. So first on the 30-day grace period, it is correct, there is a grace period. The next significant payment is in August, it’s August 15. And like our approach with the banks, we would like to have a definitive answer on which path we are going to take on the options in front of us before we have to face that big payment in August.

Walter Piecyk - BTIG

Can you comment today whether you are actually going to be making those June 30 payments, or are you just not commenting on that at this point?

Juan Figuereo

We are not commenting on that at this point.

Walter Piecyk - BTIG

Got it. Thank you.

Operator

Our next question is from the line of Ron Consiglio with UBS. Please go ahead.

Ron Consiglio - UBS

Could you give us some update on what you’re seeing in Brazil and Mexico through April?

Juan Figuereo

So I think I will -- we’ve had a very good first quarter in Brazil as part of Project Accelerate that we’ve talked about in the past. We’ve said that we’re introducing some great plans which offer great value to our consumers. We’ve been investing in distribution channels in media in range of devices. And all that, as you can see, has paid off in the first quarter. But in Brazil, sequentially, we’ve increased gross adds 30% and got significant traction on 3G, which is now about 60% of our overall loading, which we expect to increase as we move along here.

Now without giving you any exact numbers on April, I would say that that traction is continuing. But having said that, as part of Project Accelerate, I would also say that the kinds of plans that we started offering are kind of entry level plans and that over time we expect to make fine-tuning changes to kind of change the price value equation, so that we start increasing margins on those plans. So that is an ongoing process that we’ll continue. So I think we’re seeing good traction as we go into April.

Now with reference to Mexico, you’ve heard us say that we’ve introduced a similar kind of thought process with the 600 peso rate plan, which offers great value in the marketplace. Initial traction is very good in that plan. We feel very good about it. But again, the philosophy is similar. This is, as part of Accelerate, an entry level plan, which we will start making changes to as we move along and start increasing the margins.

Ron Consiglio - UBS

So when would you expect to get back to positive net adds in Mexico? And in Brazil, I guess, more specifically, you mentioned that you had increasing net adds from October forward. Would we see a continued growth in net adds in the subsequent months?

Gokul Hemmady

I think that a some amount of seasonality that’s going to happen with the world cup coming up in June here and then into July. But absent that, I would say that number one, the focus has been on subscriber growth. And as we move along here, as you heard both me, Steve, and Juan, say, the focus is now on really translating that subscriber growth into revenue growth and then profitability. And that is really the next area of focus for us in terms of making sure that the ARPU is expanded. We have much more stability in ARPU that we address things like stimulating usage, making sure that the migration from higher rate plans to lower rate plans are effectively addressed, and those kinds of things. So that’s really the focus while making sure that we have a good growth in subscribers.

Ron Consiglio - UBS

Okay. And then, can you give us some color…

Steve Shindler

This is Steve. I’m just going to add some color on the Mexico piece. As I mentioned in my closing remarks, we’ve done a lot to stabilize the processes and the operational components to get ourselves back into the growth mode and the next critical phase for us is to turn that into subscriber growth. We have the tools now in place that we didn’t have before the 3G network is complete. We’ve got the wider portfolio of devices, the nationwide coverage. The success that we’re seeing in Brazil gives us the confidence that we can do the same in Mexico.

We’ve taken the steps to address the issues that led to a loss in customer confidence. The most important, which is a significant improvement in network performance, where we’re ranked number one or number two in all of the independent studies. So combined that with the focus of the efforts we have on sales channel optimization and improving productivity, we’ve done all the thing necessary to get us back into growth mode.

Ron Consiglio - UBS

Excellent. And then if you wouldn't mind, could you give us a sense for the types of customers that you are now attracting primarily with iDEN, it seems you are very focused on the business customer. Have you been able to hold onto those types of customers and how far down market have you gone?

Gokul Hemmady

So I think this is a very important question in Brazil. A lot of our loading is really -- all of our gross adds are postpaid, that’s number one. Number two, even within postpaid, I would say that we -- our concentration is much more on the higher end portion of the postpaid. So our 99 real plan is getting significant traction and therefore substantial portion of our gross add loading is 99 real plan.

I would say about 35%, 40% of our loading is businesses and the balance is consumers and pretty well balanced between Rio and Sao Paulo. And I would say it’s similar in Mexico, although some of the introduction of those plans are a little bit early. We have little more history in Brazil but early indications are that it’s similar in Mexico.

Ron Consiglio - UBS

That’s great. Thank you.

Gokul Hemmady

Thank you.

Operator

Our next question is from the line of Jacob Steinfeld with J.P. Morgan. Please go ahead sir.

Jacob Steinfeld - J.P. Morgan

Hi, good morning.

Steve Shindler

Good morning.

Jacob Steinfeld - J.P. Morgan

I have a bit of a follow-up on the timing question in terms of your decision. So what’s the minimum amount of cash you feel you need to meet the needs at your foreign subsidiary level going forward?

Juan Figuereo

So we have said in the past and this is back, I think when we still own Peru that we would like to keep about $1 billion on the balance sheet. That was not an expression of the minimum cash required. It was what we thought we would like to have. If you look at strictly from a minimum cash standpoint, we have commitment both in Mexico and Brazil to keep about $100 million down in the local market in the operation. That’s not the minimum we need to operate the business but that’s the minimum that we need given the contractual commitments with lenders.

Jacob Steinfeld - J.P. Morgan

It is $100 million in each, Mexico and Brazil?

Juan Figuereo

Yes.

Jacob Steinfeld - J.P. Morgan

And then but on top of that, you have around $150 million in Argentina. So, I guess I'm just trying to understand pretty soon, you are running into a cash crunch and you mentioned you are looking at strategic options in Chile and Argentina. But in both of those countries to the extent you enter into a cell, I would presume you need regulatory approval and you will need to wait for that cash. So how are you thinking about the timing around those alternatives given the tight cash position?

Juan Figuereo

Okay. So let me tell you about the cash and Steve can talk a little bit about this strategic alternatives process. So the cash that we have in Argentina is essentially trapped cash. If we could move to cash freely out of Argentina, we would just keep the fraction of what is there now. But under the current environment in the country, we cannot repatriate the cash. We are unable to pay ourselves intercompany dividends and so our ability to move the cash is really limited. For all intents and purposes, we don’t have easy access to that cash. In Chile, we don’t keep any cash. We basically fund the business as required. And will let Steve comment on the process.

Steve Shindler

Yeah. So obviously, we understand certainly the pressure that we have on the liquidity product across the entire company. And in the markets that you pointed out, there is been discussions and then we’ve been in pursuit for quite sometime to find solutions to the liquidity issues, particularly related to the smaller markets of Argentina and Chile. There is nothing at this time that we have to report other than to confirm that. We continue to pursue aggressively in light of our understanding of the liquidity pressures that we face.

Jacob Steinfeld - J.P. Morgan

Okay. Great. Thank you. My last question was -- is the fact that you have negative equity now on the balance sheet a concern or does that have any implications?

Juan Figuereo

The concern is around the liquidity and I believe there are no triggers of anything on the negative equity. But of course, we are concerned about having enough liquidity, enough runway to complete the business plan, that's really is what striving our thinking right now.

Jacob Steinfeld - J.P. Morgan

Okay. Great. Thanks very much.

Tahmin Clarke

Operator, we’ve hit our 9:15 window.

Operator

Very good. Back to you, sir with your closing remarks.

Steve Shindler

Okay. Well, this is Steve and once again, we appreciate your interest and support of our company and thank you for joining us on the call this morning.

Operator

Thank you. Ladies and gentlemen, this does concludes the conference call for today. We thank you all for your participation. Have a great day everyone.

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