Tim Perrott - VP, IR and Corporate Communications
Steve Dussek - CEO
Gokul Hemmady - EVP and CFO
Chris King - Stifel Nicolaus
Ric Prentiss - Raymond James
Kevin Roe - Roe Equity Research
Vera Rossi - Barclays Capital
NII Holdings, Inc. (NIHD) Q4 2011 Earnings Conference Call February 23, 2012 8:30 AM ET
Ladies and gentlemen, thank you for holding and welcome to the NII Holdings Fourth Quarter and Year-End 2011 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. Today's conference call will be available for rebroadcast through for the following two weeks beginning later today. Domestic callers may access the rebroadcast by dialing 888-286-8010 and entering passcode 84195799. International participants may access the rebroadcast by dialing 617-801-6888 and entering passcode 84195799. (Operator Instructions)
I will now turn the conference over to our host, Tim Perrott, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.
Thank you and good morning to everyone and thank you for joining NII Holdings’ fourth quarter and year-end 2011 results conference call. With me on the call today are Steve Dussek, our CEO and Gokul Hemmady, our Executive Vice President and CFO.
As a preliminary matter, let me inform you that some of the issues discussed today that are not historical will be forward-looking and as such should be taken in the context of the risks and uncertainties that are outlined in the SEC filings of NII Holdings, including our 2010 Form 10-K filed with the SEC on February 24, 2011 and when filed our 2011 Form 10-K as well as other documents we have filed with the SEC. In addition, during this call, we'll be discussing certain financial measures that do not conform to Generally Accepted Accounting Principles in the U.S. or better known as GAAP. For a reconciliation of these financial metrics to GAAP, please access NII’s Investor Relations link at nii.com.
I’d now like to introduce Steve Dussek, our CEO. Steve?
Thank you, Tim. And good morning to everyone joining the call today. I hope all of you had a chance to review our press release announcing our results for 2011 and our outlook for 2012. We’ll cover all the relevant highlights of our recent financial results latter on the call. However, I wanted to start by giving you some insight into the direction that we are taking NII in 2012 and our key priorities for the coming year. 2012 will be a transformative year for NII.
As we execute our plan to expand our business and to deliver long-term profitable growth. This means that in 2012 we will be investing in many areas of our business to provide a broader portfolio of products and services to extend our reach into more customer segments and to pursue additional revenue streams. The deployment of our advanced 3G networks and the investment in new systems and distribution channels are the backbone of this effort.
Our work in 2012 will build on the significant progress we have made to-date. We’ve acquired the spectrum to support our planned 3G networks in four of our five markets. We have created a groundbreaking push to talk service supported by our W-CDMA platform that will meet our customer’s expectations for high quality instant communication. We have build and launch services on our new 3G network in Peru and made significant strides toward the construction of our 3G networks in Chile, Mexico and Brazil that will allow us to expand our service offerings and become even more competitive. We have upgraded our IT and back-office systems, so that we can continue to provide the best customer experience in the region and we have launched our new brand image and expanded our distribution channels to reach a wider range of customers. As you will hear in more detail from Gokul, our pursuit of our long-term vision did not distract us from executing in our business where we continued to deliver significant subscriber, revenue and OIBDA growth.
The work we accomplished in 2011 is the foundation for our vision of NII’s future. In 2012 we will continue to build our capabilities by focusing on four key priorities; first, we will make services available on our 3G networks in Chile, Mexico and Brazil. Second, we will implement enhancements to our new push to talk services to ensure the best customer experience. When that work is completed and we are confident that the service will meet customer expectations, we will launch those services more broadly in Peru and in our other markets when we begin offering services on our new 3G networks. Third, we will build on the strength of our brand, adding more retail locations and expanding our distribution channels. And finally, we will make the investments necessary to create common world-class back-office and IT systems in our markets that better serve our customers and enhance our productivity and efficiency.
Now I want to update you on our progress in each of these areas and provide more details regarding our plans for this year. We are making good progress on our 3G deployment plans and we have set very aggressive goals in each of our markets to build these new networks to deliver the highest quality experience to our customers. Although progress has been made, we have experienced some construction related delays that have caused us to adjust the timing of when we will make these services available. I want to be clear that these changes in our schedule are related to non-technical areas such as the [pace of site] acquisition, and not to any problems with the technology. As you would expect, our goal is to deploy our new networks and supporting systems as soon as possible given their importance to our future. And while we recognize the importance of launching on schedule, our first priority is making sure that we provide the highest quality experience for our customers from the moment we begin to make services available. This relentless focus on quality is what has made NII one of the fastest growing wireless companies in the world and it continues to drive us as we build our new networks.
Taking this into consideration, our current thoughts on when we will begin to offer services on our new networks are as follows. In Chile, we believe we will be in a position to make 3G voice and data services available in mid-2012. In Mexico and Brazil, our plan is to begin offering services on our new networks in the second half of the year. 3G services are expected to be available on a wider commercial basis in some key markets in Mexico, late in the third quarter and in Brazil by the end of the year.
Our outlook for the year, which Gokul will review for you later, reflects this updated schedule. Now, let me spend a few moments discussing our progress on push-to-talk services on 3G.
With the combined effort of our team and partners over the past three years we have completed the development of the technology that will support our high-quality push-to-talk service on our W-CDMA networks. This was a major milestone that we reached in 2011. As you know, we began offering service using this new platform in Peru late last year through our direct channels and we have been collecting customer feedback and making adjustments to ensure that our customers’ expectations for a high-quality push-to-talk experience are met. That customer feedback has shown that the service has performed very well in most call scenarios and as expected with the launch of any new technology, this feedback has also helped us identify a few areas where improvements are needed. Our engineering teams, working closely with our technology partners, have implemented solutions in these areas and we are seeing some early positive results. When that work is completed and we are confident that the service will meet customer expectations, we will begin marketing the service more broadly across our distribution channels in Peru.
Another key area of focus in 2012 will be to build on our brand and distribution channels, to pursue an addressable base that is more than double what it is today. We believe the new brand identity and logo we launched in 2011 better aligns our message with both our traditional customer base and our new target customer segments. We will continue to make investments to expand our brand visibility in 2012. We will also continue to expand our distribution channels in the coming year, continuing the momentum created by the 30% increase in retail and recharge location in 2011.
Finally in 2012, we will continue to enhance our back-office and IT systems to support our expansion strategy. These system improvements will enable the flexibility and efficiency necessary to provide the quality experience our customers have come to expect, while supporting the growth and scale of our business in ways we could not have achieved in the past. I hope this give you more insight on what we have accomplished and our priorities for 2012. Boiling it down, I think we have much to be proud of as we look back on 2011, with significant progress in our business evolution and 3G plans.
We realize that we have more progress to show you in 2012. And our entire team is working hard to execute our plans consistent with our vision of NII’s future, and we are not losing sight of what is most important in our business today and tomorrow and that is providing the highest quality experience to our customers. We believe that meeting that goal combined with everything we are doing to support where we are taking NII in the future, keeps us on-track to meet our long-term goal of growing our subscriber base by 2.5 times while doubling our revenue and OIBDA.
I will follow-up with some additional comments later on the call, but I’d now like to turn the call over to Gokul for a more detailed review of our 2011 results and our outlook for this year.
Thank you, Steve, and good morning, everyone. As you just heard, 2011 was a year in which we continue to generate good growth while completing a number of important milestones in our efforts to evolve and expand our business. Although, we faced intensifying competition and weaker local market currency exchange rate than we expected in the second half of the year, we remained among the fastest growing wireless operators in the world delivering strong subscribers and revenue growth.
Highlights of our consolidated results for the year are as follows; we added 1.68 million net subscribers which resulted in a year-end subscriber base of over 10.7 million, a 19% year-over-year increase. We generated $6.7 billion in consolidated operating revenue, a 20% improvement over 2010. We reported over $1.56 billion in OIBDA, up 9% over 2010 and we invested $1.45 billion in total capital expenditure. Our fourth quarter results included the addition of 467,000 net subscribers, consolidated revenue of $1.6 billion and OIBDA of $277 million.
Now let’s take a look at the operational results in greater detail. Continued strong demand for our services and our expanded distribution networks drove a 15% increase in gross adds during the year. All markets contributed to our subscriber growth. However, we did see a significant increase in demand in Argentina as we opened up new channels, rate plans and payment mechanisms late in the year including a prepaid test plans that I will discuss in more detail in a moment.
Customer satisfaction and our continued focus on customer retention efforts yielded solid results as churn was relatively stable increasing 8 basis points on a consolidated basis for the year to 1.74%, the lowest reported in the region. While we saw some pressures on our ARPU and margins particularly late in the year we believe that we were successful in balancing our goals, delivering good profitability and growth despite the more intensive competitive conditions.
Consolidated service ARPU was $48 for the year, consistent with 2010 as improved currency exchange rate for the full-year offset modest declines in local currency ARPU across our market. Consolidated CPGA for 2011 increased by $24 year-over-year to $310. This increase was largely a result of cost related to the launch of our new brand identity. Consolidated OIBDA margin for the year as a percentage of our consolidated operating revenues was down above 200 basis points to 23% compared to 2010.
As expected, our investment in our 3G deployments including the construction of over 3,200 new sites during the year as well as our investment in our marketing expansion and back-office and IT systems all impacted our OIBDA results for the year. We also expanded our distribution channels consistent with our strategy of broadening our target market segment. In 2011, we increased our distribution presence by a third, revamped over 100 stores and rebranded over 1,200 point-of-sale with plans for further expansion in 2012. While these investments create a negative near-term impact to our margins, we believe they are a critical part of our long range vision for NII as we expand our target market.
Capital expenditures were $1.45 billion below our expected CapEx targets for the year. We invested about 50% of our total capital expenditures in our 3G deployment efforts. Also included in our CapEx were investments in non-system and IT support and investments in our iDEN networks to support our subscriber growth.
Turning to our markets, Nextel Brazil continues to set the standard driving significant growth in subscribers, revenues and OIBDA. Nextel Brazil surpassed the 4 million customer mark in 2011 and generated $1 billion in segment earnings for the year. Highlights for 2011 include, net adds of 796,000, driven by a 15% increase in gross adds compared to last year with a resulting ending subscriber base of over 4.1 million a 24% increase over the subscriber base at the end of 2010. Churn of 1.58% remains the best customer retention metric in the region.
Revenues of $3.4 billion a 33% increase over 2010 due to our growing subscriber base and the effect of improved local currency exchange rates for the full-year. Although revenue growth was very strong for the year, ARPU did decline sequentially in the fourth quarter. On a reported basis, ARPU declined about $11; more than half of this drop about $6 was related to weaker local currency exchange rate in the fourth quarter. A one-time adjustment that reduced revenues also had a negative impact on ARPU of about $1 in the fourth quarter. The remaining sequential decline in ARPU for the fourth quarter related to a full quarter impact of changes to our pricing and plan that we implemented to be more competitive.
We anticipate that ARPU could continue to come down slightly in the near-term but expect the average ARPU for the full-year to be near where we are today. Segment earnings of $1 billion up 28% over last year. Nextel Brazil’s strong results positioned it as the leading wireless carrier in revenue and OIBDA growth in Brazil.
Nextel Mexico’s 2011 results reflected stable operational metric and profitable growth in our core business, while we made significant progress deploying our 3G network. Full-year results for our Mexican operations include net ads of nearly 334,000 a 10% increase in its ending subscriber base. Churn of 1.79% an improvement of 5 basis points compared to 2010 still well below reported churn levels of other operators in Mexico. Revenue of $2.2 billion, up 6% compared to last year resulting from growth in the subscriber base partially offset by a slight decline in ARPU to $45. And segment earnings of $747 million consistent with the level reported in 2010. In all Nextel Mexico delivered a strong year particularly when compared to other wireless operators in the country. Nextel Mexico’s year-over-year subscriber and OIBDA growth rate was the highest reported by a wireless operator in Mexico.
Nextel Argentina reported a 15% increase in revenues, a 20% increase in its subscriber base and a 13% increase in segment earnings compared to 2010. The overall Argentine economic environment improved in 2011 which had a positive impact on churn and ARPU. Subscriber growth for the year was also aided by our launch of new service plans during the fourth quarter that included a lower cost prepaid service plan. We launched this plan in our effort to gain insight into the demand drivers and characteristics of customers who would be attracted to this type of offering. We experienced very strong demand for this offering which accounted for approximately 100,000 of our net adds during the quarter. We are continuing to evaluate the terms and performance of this and similar plans, but you should expect that the pace of growth on these plans will moderate over the coming years.
Nextel Peru, again drove strong subscriber growth resulting in a 27% increase in its subscriber base compared to the end of 2010. Despite the incremental cost associated with this growth, segment earnings were up 59% reflecting improved profitability. We believe that as we expand the offering of our services on our 3G network, including a broader launch of our push-to-talk services, Nextel Peru will be able to drive more growth and profitability in 2012.
Turning to our balance sheet. In 2011, we raised about $1.45 billion in the high yield market and completed a number of financings at the market level including some local currency based financing as we accessed attractive funding from multiple sources. We also completed vendor financing arrangements in Chile and Mexico and expect to complete a similar agreement in Brazil in the near future.
Late in the year, we also implemented new financing arrangements with two Brazilian banks that replace the financing provided by the Brazilian government for our recent spectrum purchase. This new financing is in local currency and significantly reduces our annual interest cost. Under the terms of the government financing, our payment of the full purchase price for the spectrum in early December allowed us to avoid the interest accrued during the year.
We ended the year with $2.6 billion in cash, cash equivalents and short-term investments. Long-term debt including the current portion at year-end was $4.8 billion. Subtracting our cash, cash equivalent and short-term investment from our total debt, it results in net debt of approximately $2.2 billion or a ratio of net debt to our consolidated 2011 OIBDA of 1.4.
During 2011, we made significant investments in building our 3G networks and supporting systems and in our brand and distribution channels to position NII to achieve its goals over the long-term. We believe the investments that we made in 2011 and will continue to make this year are integral to our future success as we continue to evolve our business. With this in mind and taking into account our current views on the timing of the deployment of our new network, our outlook for 2012 is as follows: we expect to add about 1.4 million net subscribers. We expect to generate about $7.1 billion in consolidated revenue. We expect to generate about $1.4 billion in consolidated OIBDA; and we expect to invest about $1.7 billion in capital expenditures for the year.
Our outlook for net subscriber additions for 2012 reflects our expectations that churn will be somewhat higher early in the year and that we will take a more selective approach to subscriber growth on our iDEN networks as we prepare to offer our 3G services in Brazil and Mexico. Our outlook for the year also assumes an average exchange rate for the Mexican peso to the U.S. dollar of 13.25 pesos and an average exchange rate for the Brazilian reis to the dollar of 1.75 reis. 2012 will be a transformative year for NII as we begin to launch services on our 3G networks across most of our markets.
Consistent with what we saw late in 2011, we expect to continue to face weaker local market currencies and experience tough competition. However, we have successfully competed in these environments before and we expect to do so again. While we recognize that there are challenges to overcome, we believe that the actions we plan to take this year will position us to meet our goal of becoming the preferred provider of high-quality, innovative wireless products and services in our markets.
Now, I’d like to turn it back over to Steve.
Thank you, Gokul. As you just heard 2011 was a year in which we have made great progress and continue to drive positive results. Over the past three years, we have put in place some major components to create a profitable future. We acquired the spectrum necessary to launch W-CDMA base networks in four of our markets. We developed a high quality push-to-talk Services on 3G and created the technology path for supporting that differentiated service in the future. We made significant progress toward our deployment of our 3G networks and supporting systems, and we launched our new brand image and expanded our distribution channels to reach a wider range of customers. And we did all of this while continuing to drive profitable growth and build one of the most valuable customer bases in the industry. While we have many accomplishments that we are proud of we recognize again that we have much work to do in 2012.
To reiterate our priorities for 2012, we will make 3G services available in Chile, Mexico and Brazil. We will implement the solutions to improve the performance or our new push-to-talk services and will launch those services more broadly across our distribution channels in Peru and in our other markets when we begin offering services on our new 3G networks. We will continue to invest in the expansion of our brand and our distribution channels and we will work toward the completion of our 3G networks and supporting systems. We are investing in our business today to create growth, probability and scale in the future. And the entire team at NII is working to ensure that we execute on our vision and deliver value for the long-term.
Thank you operator, we will now take questions.
Thank you. (Operator Instructions) Our question comes from Mr. Chris King with Stifel Nicolaus. Go ahead please.
Chris King - Stifel Nicolaus
I wanted to dive in a little bit deeper with respect to your 2012 guidance, specifically on the net adds side of things. Surely from where we said rather conservative guidance, particularly coming off of not only fourth quarter’s run rate, but also your net add number over the course of the last couple years. Just was wondering if you could dive in a little bit deeper in terms of how you see the year playing out particularly in markets like Mexico and Brazil and how we should think about the downward trajectory of your net adds figure kind of year-over-year.
And then secondly kind of an ancillary question to that at your Analyst Day last May in Peru kind of gave figures suggesting something in the 22 million subscriber total number by the end of 2015. That would imply obviously some significant growth in net adds in the 2013 to 2015 timeframe kind of well over 3 million a year kind of net add pace. Just was wondering if you remain comfortable with those levels in terms of how you see the long range business plan of the company playing out over the next couple of years?
This is Steve and I certainly appreciate your view and your insightful comments. I think before we explain the detail you requested behind the guidance which we will do. I just wanted to go back and reiterate some of the opening comments that I made on the call and that is that we have a very, very clear vision of where we’re taking this company and I think we’ve made what, of course, we believe are tremendous strides over the past few years in building this foundation for our future. And we enter this year knowing well that this will be the most significant year in terms of us transforming our business. And as I said we are making investments in many areas of this company to help us to bring these new products and services to our customers, both the current customers we have and the target customers that we’ve spoken about over the course of the last couple of years with all of you.
I think it's safe to say we are taking this company to new heights and that this is the year, the true year of beginning of that transformation for us. And I really want to stress that backdrop as, before we start to give you the detail and our logic behind our guidance which Gokul will do here momentarily. But it is certainly important for us as we enter 2012 knowing that this year is really a very important year in terms of the way that we continue to transform the business and position it for the future and that is really our top priority as we enter 2012. So, I just want you to get that backdrop and keep that in mind, but I will now turn it over to Gokul to really answer the specific detail of your questions.
Absolutely, I think Chris that’s the right perspective to put as we think about the guidance. I'll start talk about net adds first and then I’ll address OIBDA. As Steve said 2012 is going to be an important year for us for many reasons and we are excited to have all the tools that the new network gives us as we think about the growth over the next several years, and I will get to that question of your a little later.
As we said in our remarks for various reasons, our plans for the launch of 3G have changed, whether it is in Chile, Mexico and Brazil that Steve went through some of those reasons for that. So dates have certainly moved out and our guidance reflects those changes in the dates. We will continue to grow on iDEN at very healthy rates and plan to recover some of this gap if you will, but in a market like Chile because we don't have an iDEN business, recovering that gap is not possible. In the case of Mexico and Brazil, we will do the right things with discipline to recover some of those gaps and our guidance does reflect that.
But we will be careful about the level of investments that we make this year for all the reasons that Steve pointed out, it’s being a very important transformative year as we launch our 3G networks in three of our five markets. We are going to be very disciplined about the level of investments that we make and we are going to be very focused on things like return on capital and our OIBDA margins, combined with and what we believe is going to be an attractive growth rate. And 1.4 million as you know is a growth rate of 13% in the ending subscriber base from 11 to 12.
So, I think what we believe is that 1.4 million reflects some of the delays. It reflects our thinking on being very disciplined about our return on capital and OIBDA margins in advance of building of our new networks that we are all excited about. So, that’s kind of the first set of reasons or analysis or thinking behind the 1.4 million in net adds. In addition to that our guidance reflects balancing growth and profitability in a market like Brazil for example. Where, as you know the competitive environment certainly changed in the latter half of the third quarter. We talked about it on our earnings call last time where we said there is much more activity from a competitive perspective. We responded with some changes to our rate plan. 2011 was a very good year for us in Brazil where we grew at 24%, when the market grew at 19%, so we continue to get stronger in the marketplace. ARPUs came down in Q4. In my remarks I told you why those came down. We believe that we have discontinued some of the plans that resulted in those declines in ARPUs and so we will see more relatively stable ARPU going forward.
But as we think about 2012 and that competitive environment in Brazil, we are going to get very focused on managing the right balance between growth ARPU, our cost margins and return on capital. So what does that really mean? First, gross adds in 2012 are going to be relatively flat compared to ‘11. So from 2010 to ‘11 we grew our gross adds by 15%. We are saying from 11 to 12 in advance of building of our 3G networks. We are going to remain flat in gross adds. So we are not going to like in past year necessarily increase our gross adds in advance of the 3G networks being deployed as well as a change in the competitive environment.
When I say a change in the competitive environment, I mean, some customer segments in the past may have been profitable given a certain level of pricing in the marketplace, but with what we’re seeing today certain segments may not be as profitable and so we are going to be very careful about spending retention dollars on those kinds of unprofitable segments. And so as a result as we go into 2012, we will grow Brazil in kind of the low to mid teens. We believe that our churn rate will be up as we make the decisions around the right to retention decision and we believe that all of this can result in an OIBDA margin that goes up about 4 to 500 basis points for full-year 2012 in Brazil from the Q4 levels.
So I think that’s a pretty long answer to your question, but both Steve and I felt it was very important that this is our thinking and philosophy on how we are approaching 2012 and the discipline that we’re going to have and our focus on making the right investments are going to be very important for us.
Now as it relates to OIBDA, we have about 125 to 150 million in terms of headwinds. We are assuming weaker currency rates from ‘11 to ‘12 and that's going to create about 125 to $150 million FX impact for us. We continue to invest in everything that we talked about and that's in our mind about 200 basis points or so margin dilution. So that gives you a perspective of how we are thinking on OIBDA. Our OIBDA margins reflect on a constant currency basis about 200 basis points dilution and all of that really can be more than explained by the investment in 3G and related systems.
Now as far as your question on the long-term goals, I’d say that we are very excited as Steve said, very excited to have 3G in four of our five markets and hopefully shortly in Argentina too, and we believe that we’re going to have many more tools as we deploy those networks and because of various reasons that we have talked about in the past whether it's our cost structure or the cost structure on the new technology platform, or our ability to offer more product breadth, we believe that we can get to those long-term goals. Having said that, clearly slightly moderated growth in 2012 is going to mean that we do catch up in the next two years and we certainly believe that we have a path to doing that.
Thank you. Our next question comes from Mr. Ric Prentiss, Raymond James. Please go ahead.
Ric Prentiss - Raymond James
I want to piggyback on that a little bit, Gokul, obviously the launch timeframes are very critical one from providing your customers with the experience they need, but it has a lot of effect on net adds and EBITDA also. When you think about I think rightly so not trying to push iDEN adds when 3G is coming, but what I want to get at is with the dates slipping out a little bit into broad coverage being in the third quarter for Mexico and year-end for Brazil. How do you get comfortable that those dates will be met versus slipped again because then that could create even more pressure on saying well, do we sell iDEN customers or not. So, just trying to get a comfort of how do you guys manage the launch process? How do you get comfortable that you will hit these dates, so that you don't feel any more pressure and that you can enjoy the 3G surgence that we think is going to be happening in Latin America with handset prices dropping.
Ric, this is Steve. Let me start here and provide some color behind some of the reasons for the push-out. Okay. I think as I said we have made a lot of progress on these builds and quite frankly what we were undertaking as a company is really a significant build if you think about building Brazil and Mexico, two very large countries simultaneously. And we are very confident that we will hit these ranges and these dates.
But let me talk about the primary reasons for the push because it does have some of the remedy behind it and what gives us the belief and the confidence that we will hit that, that really one of the primary reasons for the push is it relates to all three of the expected market launches, is really in the construction phase and the construction phase being from some impact from site acquisitions and some impact from the actual construction delivery of the equipment and construction of the site. They are not technical in nature. It's going to be really solely and squarely in that construction phase.
And we’ve had some challenges in that phase of the build and what we have done to remedy that is that we have taken the direct management of that phase in-house with our teams and managing the subs that provide that service and we have taken that from our supplier and we’re doing that work. And we know what we have done in the past in building our networks. We know that the diligence that we can put into that, so we have a belief and a higher degree of confidence that we will meet this given that shift of that one phase of our construction. So, that's what gives us the confidence.
I'll tell you one other slight impact as it relates only to Chile, the construction piece was compounded by the introduction of legislation on the regulatory side around a new antenna law. It's been in the works for a while, but it hasn't become policy yet, but they are governing as though it is. The impact of that it has a greater impact to us, because of the impact you are going out building greenfield sites, you are not adding to an existing tower structure. And so therefore, the scrutiny around new sites is a greater impact to us and that's adding some level of challenge, but it's not. It's certainly not the sole reason for a push out of Chile, it's more a combination of the two. So we have to manage through that process and we are doing that. We understand the laws, we know what we have to do in that regard. But really on the other, the construction phase we have taken that again internally, we’re leading that effort and managing directly that effort. And so that’s what gives us the confidence.
So again, and I’d want to reiterate that just a side note to this, that this is not in any way shape or form related to any of the technology piece of this that's going on in Peru. We will again say that the understanding that we have of hitting importance of the timing from our customers perspective, from our perspective and from our investors perspective, it's important that we do that, important that we hit our milestones and it's our top priority to commit to this and get this done. But that gives you a little bit of backdrop to some of the reasons for a little bit more in detail around the root cause of the push and then the remedy that we believe gets us back on-track and towards the days that we talked about in the context of the call.
Ric Prentiss - Raymond James
Make sense and obviously a very important thing to be focused on. Second question is when you look at your guidance, what would it take to beat the guidance or what would it take to cause the guidance to come under pressure? Trying to get at how have you factored in the competitive landscape in Brazil, the churn in Mexico that we saw spike up and also maybe exclusively what is happening in Brazil with mobile termination rates and what's your assumption in the model. I’m just trying to gauge, given where the stock is at, given where your multiple is at, but still the thought that there are significant growth opportunities, just trying to gauge a little bit on your guidance side.
Sure. So, Ric, I think one obvious downside if you will is things that are beyond our control, i.e., further weakening of the FX from the levels that we have assumed in the guidance. Now, we’ve come up with those levels of FX by a method of triangulation. We’ve looked at various sources; we’ve added some of our own judgment and various things and so we feel pretty good about that piece, but that is the more obvious downside, can't think of many other things.
Now having said that, we have worked, this has happened to us in the past, the macroeconomic environment as well as FX. And as we speak, we’ve put contingency plans in place to say if X, Y and Z happens we will do A, B and C to further recover from any downside. So that planning is going on. It's something that I think the company does well given its history over the past 10 years in markets such as Argentina. From there I think we feel that there can be upside as it relates to many areas.
So, let’s say Brazil as an example, Ric. So, in the third quarter, we saw competition. It was intense. You’ve seen the results of our peers. As a result of the competition and at that time we responded with certain things whether it's promotion on the handset side with investments that we make in CPGA or introducing new rate plans that has had an effect on ARPU. We’ve discontinued those plans now and so the kind of migrations we saw to those lower plans is now behind us. We now have almost six plus weeks in the first quarter and we feel quite comfortable that the decline in ARPUs and a period of stability is more ahead of us in terms of ARPU. We feel that Brazil is still a very attractive market for us. That team has done really well in terms of growth rate and execution, whether it's on the cost side or on the customer experience side. And we believe that stability to ARPUs and even slight increases could be a measure of upside.
Now, I'm not suggesting that that is the most likely scenario, but in the context of your question of what could be upside I think Brazil ARPU and that whole combination of balancing growth and profitability there is going to be an upside in a market like Brazil. As we think about the whole year, we certainly are not saying that 1.4 million in net adds is something that we are good and 13% growth rate is, even though it's in our minds is right, as we sit here today, it’s the right balance between growth and profitability. There are scenarios in past where we could certainly generate profitable growth that’s above 1.4 million. So I think there are growth scenarios that could be ARPU related and we will continue to push on costs so that we make sure that our margin dilution on a constant currency basis is not just 200 basis points as our guidance implies, but we try to minimize that as much as possible.
Ric Prentiss - Raymond James
And mobile termination rate in Brazil.
Yes. Mobile termination rates certainly is going to happen. I think we are saying that given all the moving parts in Brazil between competition and several other things. Yes, they will have a positive impact on us, but we really are assuming that that positive impact is pretty small on us in 2012 given everything. Over the long term we believe that it can be very meaningful, but given everything that we have seen in the third quarter with intense competition, revenue per minute coming down driven by some of our competitors. We are assuming a much smaller benefit in 2012.
Thank you. Our next question comes from Mr. James Breen with William Blair. Please go ahead.
This is (inaudible) in for Jim Breen. I was wondering if you could discuss the handset pipeline for push-to-talk over 3G phones and perhaps provide some commentary surrounding the types of operating systems that you expect to have it launch.
Currently if you go back to when we began making service commercially available in Peru. We started with one handset. And we were up to four handsets, but obviously (inaudible) also with our data cards that we have in the marketplace. So we expect that we will add another three or four handsets when we get to the Mexico and Brazil launches. So we'll have a 6 to 7, 8 total handsets. Two or three of those will be smartphones they will be on an android platform. So we expect that we have an improved position today relative to when we made the service initially available. And that continues to come over the course of the next couple of quarters so that when we reach mid-year and backend of ‘12, we will have about a total in the 8 to 9 range and up to three of those being smartphones and primarily android based.
On a related note to this question and Ric Prentiss question regarding the addition of iDEN subs in 2012. How soon will Nextel be distributing dual-mode iDEN push-to-talk over 3G handsets and will you have those phones in late 2012 which would allow you to eventually shutdown your iDEN network sooner?
Our strategy is not based on having dual mode handsets. We have talked about the fact that there is going to be a gateway in our network that allows seamless communication between iDEN and 3G. And so our strategy doesn’t call for the deployment of a dual-mode handset. For various reasons we believe that it's the better strategy for us to not go down that path. Now in the future if required, we could consider something like that. We’ve looked at and planned for what it means to have and deploy a dual-mode handset, but as we sit here today, we believe that the needs of our customers are really extremely well met without dual-mode handsets because as you know dual-mode handsets comes at a different cost structure and different kinds of things that we have to consider.
As we think about, I think your question on dual-mode handset was also related to kind of iDEN and as we’ve said in the past, really our primary focus is on customers. We have 10.7 million customers who pay us $50 plus in ARPU and our focus is on really meeting their needs. And we believe that over time as we deploy our 3G network this year, we’ll see a constant evolution of our customer base to 3G. Typically we have 12 to 24 month contracts in most of our markets and as our subscribers come near those expiration of those contract, we believe that they will probably choose rate plans in the marketplace and handsets that are 3G based and so over time that natural evolution will happen and so that’s really the strategy. It's a strategy that focuses on customers and which over time transition to 3G.
Thank you. Our next question comes from Mr. Kevin Roe with Roe Equity Research. Please go ahead.
Kevin Roe - Roe Equity Research
Two quick questions I think for Gokul. Gokul, on CapEx guidance, in the past you’ve talked about 2011 through 2013 total CapEx spend of I think 4 to 4.5 billion, is that something you’re still comfortable with? And for your 2012 guidance, what are your assumptions for 4G competition in Mexico and Brazil? Thank you.
So, yes, I'm still comfortable. We are still comfortable with that CapEx. I think I’ve also said in the past between ‘11 and ‘12 that we'll spend somewhere in the low 3 billion and that's where we are coming out. We spent little under 1.5 in ‘11 and 1.7 is our guidance for ‘12. So, I think that comfort is still, we’re still in the right ballpark as far as that is concerned.
As far as 4G is concerned, I think Kevin, we’ve talked to you in the past about how we’ve architected our 3G networks to be 4G friendly if you will in the sense that we don't have to rip out base stations. We have to add cards and we’ve said at our Analyst Day as well as various other events that that's going to cost us about 2 to $5 per pop in CapEx.
So, if I put that into context in Mexico, our plan is really not to lead as far as 4G is concerned. We don't really feel the need to 3G percentage, as a percent of the market is still pretty low. This is still a reasonably voice-centric market going to 3G and so we believe that getting to 4G, even though some regulators as well as some of our competitors have announced certain things in the marketplace, we believe that it is still an event that is not in the near-term, number one. Number two, we don't necessarily feel the need to be a leader there because given our differentiated value proposition, our need for handsets with push-to-talk and other things. We will not hurry into that. So, long answer to saying that, we’re not considering any 4G CapEx in our guidance as far as 2012 is concerned.
Having said all of that, we look at the situation all the time and look at what the environment is doing, what our competition is doing. And if we need to change course and accelerate and go into 4G sooner than is expected we certainly will do that.
Kevin Roe - Roe Equity Research
So, just to clarify, I was trying to get at your 2012 guidance, when you were putting together your guidance and looking at the competitive landscape what you anticipate for 2012. Do you anticipate coming up against 4G LTE competition in Mexico and Brazil is that in your crystal ball, is that something you are expecting to fight?
No, so we are expecting that our competition will probably in the marketplace try to move the ball forward on 4G, but 4G from a customer perspective is not going to have an impact on the marketplace in general because of some of the reasons I mentioned, which is that 3G, it's a reasonably voice-centric market. 3G as a percent of the total base in the marketplace is relatively small, so a lot of that evolution has to occur for the marketplace to evolve to 4G. So, our assumption is that that evolution will not have any meaningful impact in 2012.
We also have to kind of step back and look at what’s required for anyone to really successfully launch a 4G system and I think in most cases, it's probably going to require some additional spectrum. And I think in terms of when you might see an auction there or with elections and what not, I think it's outside of the ‘12 window event. That as we think about as Gokul said, we created a pretty I think elegant path to that if we need to, but it would be kind of in a similar time frame in my view based more from our ability from a reaction not necessarily a proactive measure on our part.
Operator, we have I know we’re running long, but we will take just one more question.
Thank you. Our next question comes from Vera Rossi with Barclays Capital. Please go ahead.
Vera Rossi - Barclays Capital
Thank you. Could you elaborate a little bit more on your ARPUs in local currency and the decline we saw in the quarter and the reasons behind and specifically in Brazil and Mexico? Thank you.
Sure, Vera. So, I think in Brazil our ARPUs came down from about 108 reis to about 101, so about 7 reis decline, so about a 6% or so decline sequentially in ARPU. Now a large portion of that really Vera, was related to the fact that in the third quarter we saw intense competition in the latter half of the third quarter. This was top price competition driven by revenue per minute coming down. It was some of the big players in the marketplace that drove that and as a result of that competition we responded with some rate plans and those rate plans resulted in migration of our base to those lower rate plans. We saw that migration in the latter half of the third quarter, but much more so in the fourth quarter.
So, I’d say a predominant portion of the decline in ARPUs in Brazil is really related to the migration of a certain amount of subscribers to those lower rate plan. We have since then discontinued those plans and as we sit here in the first six weeks of the first quarter, we’ve seen relative stability from those Q4 ARPU levels in local currency, so we believe that that decline is really behind us and as we look at all of 2012, we believe that we will see relative stability in Brazil in local currency.
So, that’s Brazil. Mexico sequentially in local currency was about a 2% decline. That I’d say relatively consistent with what we’ve seen over the last several quarters. I think in general, it's been related to competition. We’ve seen two years ago where revenue per minutes came down by 40 to 50% in the marketplace. ARPUs at that stage were declining more like 10, 12, 11%, but over the last four quarters or so we have seen sequential declines that are in the really low single-digit anywhere from 0.5% to 1.5%. So I think that’s really the color for ARPUs from Mexico and Brazil.
Vera Rossi - Barclays Capital
And in Mexico the ARPU decline is because of reduction in prices or because you are adding customers with lower ARPUs than the current average you have?
So, loading ARPU is certainly slightly lower, no question of that, but I’d say of the 2% decline I wouldn’t say that more than a third is because of loading ARPU. I think the balance is really because, finally, you cannot really separate out the two really easily, but I’d say that a third is because of loading ARPUs, other is really price related.
Vera Rossi - Barclays Capital
So just a follow-up on Brazil, so you launched plans to match with your competitors which lower your ARPUs and then did you discontinue this plans, is that right?
Yes. That’s what I’m saying, exactly. We discontinued those plans, so the migrations are no longer happening to lower rate plans and that's the whole philosophy we were trying to explain in 2012 era, where we are not going to do, we are going to get focused on return on capital and margins in advance of launching 3G. I mean after we launch 3G of course, we’re going to refocus on that, but we’re going to be very disciplined about that and we’re going to have the right combination of growth, ARPU and margin. And in that context, discontinuing some of those rate plans along with the amount we spend on retention will mean lower growth rate in Brazil in 2012 in advance of the launch of 3G; combined with thought process with the gross adds that are going to be relatively flat, our churn is going to be higher, particularly in the first half and that's going to mean a sub growth rate that's more in the low teens to mid teens there. But margins that are close to 2011 levels, so despite the investments we’re making in 3G and everything else we believe that our margins in Brazil can be pretty attractive because of our focus on profitable growth.
Vera Rossi - Barclays Capital
Just another follow-up on this, when you discontinue these plans, so giving up growth because of that, so you prefer not to get the subscribers with that goal after this plans, that's what you prefer, so you prefer to have a lower growth?
Lower net add growth or subscriber growth; one because of the plan but second also because we are going to make the right choices on our retention dollars. So, in the past with a certain revenue per minute; if there were certain segments of subscribers that were profitable to retain with a certain investment of retention dollars, now they may not be as profitable. And so we won't spend as much of our retention dollars to retain some of those subscribers. So, to answer your question, it was somewhere in the latter half of Q4 that we discontinued those plans.
Fabiola, I think we have been going for more than an hour. I think we want to cut it there. Steve, any final comments?
I just want to just say that here within the company we are critically focused on achieving our objectives that we have laid out our priorities. We understand the importance of them probably better than anyone. And so you can look to us to provide you some color on these as we move forward throughout the course of the year. We appreciate as always your participation, your interest and your insightful questions. So with that we will say goodbye and thank you for your attendance today. Thank you.
This concludes the NII Holdings fourth quarter and year-end 2011 earnings conference call. Thank you for your participation.