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NII Holdings, Inc. (NIHD)

Q2 2007 Earnings Call

July 26, 2007, 8:30 AM ET

Executives

Tim Perrott - VP of IR

Steven M. Shindler - Chairman and CEO

Lo van Gemert - President and COO

Gokul Hemmedy - VP and Chief Finance Officer

Analysts

Christopher King - Stifel Nicolaus

Gray Powell - Wachovia

James Breen - Thomas Weisel Partners

Ric Prentiss - Raymond James

Walt Piecyk - Pali Research

Brett Feldman - Lehman Brothers

Andrew Campbell - Credit Suisse

Presentation

Operator

Ladies and gentlemen, thank you for holding and welcome to NII Holdings Second Quarter 2007 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 re-broadcast through May 10, 2007. Domestic callers may access the re-broadcast by dialing 888-203-112 and entering the passcode 9809784. Again for the domestic callers, 888-203-112, entering passcode 9809784, for international participants, you may access the re-broadcast by dialing 719-457-0820 and entering the same passcode 9809784. Again international, 719-457-0820 same pas code 9809784.

I will turn the conference over to our host, Mr. Tim Perrott, Vice President of Investor Relations. Please go ahead sir.

Tim Perrott - Vice President of Investor Relations

Thank you and good morning to everyone and thank you for joining NII Holdings Second Quarter 2007 Earnings Conference Call. With me on the call today are Steve Shindler, our Chairman and CEO; Lo van Gemert, President and COO and Gokul Hemmedy, our Vice President and CFO.

As a preliminary matter, let me inform you that some of the issues discussed today are not historical, and 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 2006 10-K which we filed on February 27th, 2007 and other documents we have filed with the SEC.

In addition, during this call we will be discussing some financial metrics which do not conform to generally accepted accounting principles or better known as GAAP. For reconciliation of these numbers to GAAP, please access NII's Investor Relation link at nii.com.

Before I turn the call over to Steve, I'd like to mention that this call is being webcast. It will be available for replay on nii.com and streetevents.com. I'd now like to introduce Steve Shindler, our Chairman and CEO. Steve?

Steven M. Shindler - Chairman and Chief Executive Officer

Thank you, Tim and good morning. I would like to welcome all of our investors and analysts who have joined us for the call today. As you can see from our second quarter results that we announced this morning, NII delivered another solid quarter, generating strong subscriber growth while remaining true to our focus on profitability. We again delivered new record highs for subscriber additions and revenues while continuing to execute on our promise of profitable growth by generating healthy levels of operating income before depreciation and amortization or OIBDA.

Our results show that we are capturing the benefits of our recent network expansion and we are positioning NII to become a more significant force in the Latin American telecom market. During the quarter, we continued our network expansion plan in Mexico and launched 20 new cities throughout our markets. Additionally, we are developing plans to further expand our coverage in Brazil over the next two to three years and we are moving forward with our plans to expand and enhance our network in Chile, allowing us to better serve that attractive market. We believe that the foundation we've put in place positions NII to capture the numerous opportunities for long-term growth in the Latin American regions.

Looking at the highlights for the quarter, we again delivered record levels of subscriber additions, adding over a 331,000 net subscriber additions for the quarter, an increase of 51% over the same period last year, surpassing the 4 million total ending subscriber mark equating to a 39% increase in our ending subscriber base over the last year. We also generated $786 million in total revenues in the second quarter, a 41% increase over the same period last year. Despite customer acquisition cost associated with our robust subscriber growth and the startup cost relating to our launch of new markets in Mexico and Brazil, we produced a healthy 33% year-over-year increase in OIBDA to $207 million. This amount includes non-cash stock compensation expense of $13 million resulting in OIBDA before non-cash stock option compensation expense of $220 million for the quarter.

Our metrics first approach again generated what we believe are some of the industry's best operating results in our region. Average monthly churn for the quarter remained low at 1.6%, equating to subscribers staying on our network an average of over 5 years. Consolidated monthly ARPU remained healthy at $58, up $1 compared to last year. The combination of low churn and healthy ARPU resulted in life time revenue per subscriber of over 3600 and expected lifetime OIBDA per subscriber of 1700, again an industry best for our region.

The strong performance of our 2 largest markets continue to drive our results; Nextel Mexico posted very strong subscriber growth generating 71% more net subscriber additions than the same period a year ago, while generating a healthy increase in segment earnings. Nextel Brazil's performance was simply outstanding, as our team in Brazil maintained churn at 1.4%, increased ARPU and delivered the highest level of subscriber growth to-date enabling Nextel Brazil to surpass the 1 million subscriber milestone.

Based on these strong first half results, we believe that we have an excellent opportunity to become an even more significant force in the Latin American wireless market and realize the benefits of that enhanced position. Given Nextel Brazil's strong performance and solid outlook, we have decided to increase our investment in that market over the next few years in order to expand our network to a level of GDP coverage that is on par with the coverage in our other markets. We are planning to expand our Brazilian network to cover areas in which over 70% of the country's GDP is generated. This requires additional investment.

And based on our current assessment, we estimate that the incremental capital investment to expand our Brazilian network will be approximately $300 million over the next 2 to 3 years. We expect this initiative to extend our network coverage to over 30 million additional people in Brazil.

We are also planning to expand and enhance our capital... our network in Chile, positioning us to serve more customers in more areas of this important and growing market. We are excited about what we see in Chile, a strong business market with over 16 million pops. We estimate that we will invest approximately $80 million in capital expenditures and startup costs to implement these plans which should take place over the next 12 to 18 months. We are thrilled with these additional opportunities to expand our foundation and we expect that both of these incremental investments will deliver profitable growth and cement NII's position as a major pan regional operator in Latin America.

In support of our expansion efforts and other opportunities, during the quarter we raised about $1.2 billion in a 5-year 3.125% convertible note offering. We also instituted a $500 million share repurchase program and purchased about 330 million of our common stock under that program during the quarter. The proceeds from the notes offering provides NII with funding to pursue the numerous opportunities for profitable growth in Latin America.

This takes me to our revised guidance for the year. Given our strong performance for the first half of the year and the improving opportunities in our markets, we are raising our guidance as follows. We are increasing our net subscriber guidance by 75,000, resulting in full year 2007 guidance for net subscribers of 1,275,000. This translates to a year-over-year net subscriber growth rate of 36%, resulting in a 37% increase in our ending subscriber base. Accordingly, we are raising our revenue guidance by $100 million for the year, resulting in 2007 full year revenue guidance of $3.2 billion. Despite the increase in subscriber growth, we are also raising our OIBDA guidance to $915 million for the full year 2007. This includes the impact of more than $50 million in non-cash stock option compensation expense for the year.

Finally, we are also raising our capital expenditure guidance primarily related to additional capacity required for our additional subscriber growth for 2007 and the incremental investment required as we embark on our planned coverage expansion, and enhancement opportunities in Brazil and Chile. We are raising our 2007 capital expenditure guidance to $650 million. This CapEx level equates to roughly 20% of revenues for the year, down substantially from 26% last year. I will follow up with additional comments at the end of the call. However, I would now like to turn call over to Lo van Gemert, NII's President and Chief Operating Officer.

Lo van Gemert - President and Chief Operating Officer

Thank you, Steve and good morning to everyone joining the call today. We are glad to report another strong quarter as we continue to build upon the momentum that we generated earlier in the year. We delivered exceptional subscriber growth during the quarter, again setting new record highs for gross loading and net subscriber additions. We delivered this robust growth while staying true to our key philosophy of focusing not just on growth, but on profitable growth.

In the quarter, we generated nearly 60,000 more gross additions than the first quarter of 2007, while generating nearly the same level of OIBDA. Looking at our performance versus last year, we added 51% more net subscribers to our network while driving OIBDA 33% higher, which was accomplished while we incurred a startup cost related to several new markets launched over the last year.

The Mexican and Brazilian markets remain the primary contributors to these solid results. Mexico delivered over 71% more net subscribers to its network over the same period last year, while driving a 25% improvement in the segment earnings relative to last year. Brazil delivered impressive results, posting a 60% increase in net subscribers while almost doubling segment earnings over the same period last year.

We have delivered strong results for the first half of the year and our view of the current business trends in our markets enables us to be increasing bullish on our outlook for the remainder of the year. As you heard, we are increasing our guidance for net subscriber additions by 75,000 to 1.275 million, increasing our revenue guidance to $3.2 billion and raising our OIBDA guidance to $915 million. These new targets reflect over 340,000 more net adds than we generated in 2006, a 37% increase in the ending subscriber base at year-end, a 35% lift in revenue and a 38% year-over-year improvement in our OIBDA.

Now turning to some of the specifics for the quarter; subscriber growth during the quarter was outstanding, a 49% lift in gross additions coupled with steady churn rates resulted in 331,000 net subscriber additions, a new quarterly record representing over 112,000 or 51% more net additions than in the same period a year ago. Enhanced visibility of our products and services coupled with the opportunity to target more high value customers as well as also for network expansion in Mexico and Brazil helped drive the additional growth.

Churn at 1.6%, was up slightly over the same period last year, but still remains as what we believe to be industry best levels in our markets. All of our markets are contributing to our strong subscriber growth, highlighted by Mexico and Brazil. In addition to Mexico's strong growth, Nextel Brazil's performance was also spectacular. During the quarter, Nextel Brazil cost a run rate of more than 100,000 net subscriber additions per quarter for the first time, driving its ending subscriber base over 1million subscribers, which we believe is an inflection point in gaining the scale necessary to capture the benefits of operational leverage. And we believe that the Brazilian market is just at the beginning stages of its longer term growth potential.

Looking at the revenue drivers, a more than 39% increase in the ending subscriber base coupled with healthy level of consolidated ARPU resulted in record total operating revenues of $786 million for the quarter, a 41% increase over the same period a year ago. Consolidated service ARPU of $58 remain solid, and was slightly up both sequentially and on year-over-year basis, aided largely by strong currency trends. We expect ARPUs to remain at similar levels for the remainder of the year. Additionally, as we further penetrate the recently launched markets, we expect the usage characteristic of subscribers in those markets to rise, as the basal subscribers grows and the new users in those markets better understand the services we offer.

Looking at the cost component of our subscriber loading, we continue to make progress in reducing CPGA year-over-year, even with the impact of the substantial startup costs associated with our new markets. Increased advertising costs related to the ramp up of our new markets resulted in a sequential increase in CPGA to $323 from $313 in the first quarter. But on a year-over-year basis, CPGA is down almost $10 from $332. Measuring that level of CPGA relative to our current output levels, we are still maintaining a 6 month or less acquisition cost payback, which is similar to the level we reported last year.

Subscriber acquisition costs for the quarter were lower than last year, due to lowering handset subsidies and improved productivity in our distribution channels. Strong revenue growth and improving level of CPGA enables us to lift consolidated OIBDA to $207million, a 33% increase over the prior year period, despite generating more than 170,000 incremental gross additions and incurring a substantial amount of upfront cost relating to new markets launch in recent quarters.

Now let's take a quick look at operations on a market-by-market basis. Nextel Mexico continues to be a driving force behind our results, generating very strong subscriber growth and solid operational results. The company continues to gain traction from its expansion plan as evidenced by strong subscriber growth, net ads were up 71% year-over-year adding 65,000 more net customers than the prior year's period bringing Mexico's ending subscriber base to over 1.8 million. The strong growth in subscribers and the $74 ARPU, which was down about $1 relative to first quarter of the year, drove a year-over-year increase in revenue of 38% to $433 million.

Cash conversion continue to be healthy as Nextel Mexico increased segment earnings 25% year-over-year to $157million, despite adding almost 100,000 incremental gross subscriber additions and incurring the startup cost for new markets built under our aggressive expansion plan. We are proud of these results, particularly given that they were generated in the midst of a more competitive market in Mexico. As we have seen in other markets in the past, our competitors are more actively engaged in competing for subscriber market share in Mexico. Nevertheless, we generated our highest level of gross and net adds in the history of Nextel Mexico while retaining one of the highest ARPU levels in the world.

Nextel Brazil continues to knock the cover off the ball. Nextel Brazil's customer retention efforts improved churn by 10 basis points over the same period last year, resulting in churn of 1.4%, among the lowest in our markets. Low turn coupled with improving level of gross additions helped Nextel Brazil subscriber trajectories accelerate, as that market added over 100,000 new subscribers in the quarter, representing a 60% increase over last year. We congratulate our Nextel Brazil team for breaking through the 1 million ending subscriber level during the quarter, an important mile stone.

Improvements in the network coupled with more visibility and a highly competitive in-demand service is contributing to Nextel Brazil's success. Brazil's ARPU, it is highest level in history, primarily related to strong currency and is now over $53, up $7 compared to last year. Strong improvements in ARPU coupled with growth in the subscriber base drove revenue of $201 million, a 59% of increase over the same period last year with segment earnings nearly doubling during the same time frame, despite incurring substantial incremental network and advertising costs associated with new market launches.

We believe that our plans to expand the coverage of our networks in Brazil positions us to generate additional subscriber growth in the future, consistent with success that Nextel Mexico has experience since embarking on its own expansion plan. Next our Argentina continues to show solid year-over-year performance, driving a 28% increase in the subscriber base, a 28% increase in revenues and a solid 32% increase in segment earnings.

Nextel Peru drove very strong subscriber growth, generating a 34% lift in the ending subscriber base over last year. The focus on profitability remains strong as segment earnings in that market grew 42% year-over-year.

During the quarter, we substantially completed the network expansion plan in Mexico that was launched in 2005. Total CapEx spending for all markets was $174 million with nearly 80% related to Mexico and Brazil. Roughly 25% of our capital investment during the period was allocated to network coverage expansion and we added 362 sell sites, more than double the number added during the first quarter.

I echo Steve's sentiments as we are excited about the opportunity to become an even more significant player in the Latin American wireless market. We believe the opportunity in Brazil remains compelling and we are poised to extend our coverage and reach in that market through both capacity upgrades and expansion of our network to new regions. Over the next two to three years, we plan to invest in the incremental $300 million in Brazil to expand our reach to over 30 million additional people resulting in GDP coverage in line with that of our other markets. We believe in the long term potential of Brazil and we will provide more detailed information as our expansion plans become more defined.

We are also pursuing plans to expand and enhance our network in Chile, to allow us to serve more customers in more areas of this important and growing market. Chile with perhaps the strongest economy in Latin America has the potential to be a solid market for NII. When this expansion plan is completed, we intend to cover approximately 7 million people in the major business centers in Chile, with the capacity to serve a much larger customer base that is possible with our current network. Our plan to enhance and expand our network in Chile is expected to require about $80 million in total CapEx and startup costs. Given the strong enterprise environment in Chile, we believe that our business focus services will be very well received.

We are also increasing our CapEx guidance for the year, due to stronger growth and additional investment as we pursue the opportunities that Steve and I mentioned earlier. I believe all of these initiatives will put us in a position to add significant value to our Company. Let me conclude by saying that we are excited about the business and the numerous opportunities lying in front of us.

Now I would like to turn the call over to Gokul Hemmedy, NII's Vice President and CFO.

Gokul Hemmedy - Vice President and Chief Finance Officer

Thank you, Lo and good morning. As you've just heard, our performance for the first half of 2007 has been very strong as we posted substantial year-over-year increases in our subscriber base, revenues and OIBDA. Profitable subscriber growth continues to be the primary focus of our management team.

Our strong subscriber growth in the quarter and the startup costs associated with our new markets resulted in a decline in our consolidated OIBDA margin for the quarter to 26% compared to about 28% for the same period last year. While margin did decline, we added over a 170,000 incremental gross subscribers over the same period last year while absorbing the additional network and marketing costs of launching 20 new service throughout our markets in the quarter and continuing to incur the startup cost related to prior market launches. While we expect to continue to see significant subscriber growth during throughout the year as evidenced by our raised guidance, we do expect that reductions in the rate of new market launches in Mexico will have a positive effect on our cost structure by year-end.

Now looking at the major components of our cost structure, as a percent of total revenue, cost of revenues at 40% was up slightly as compared to 39% last year, driven primarily by growth in interconnect minutes and related costs and investments in handset upgrades, all offset by slight reductions in site and switch costs.

Selling and marketing expenses as a percent of revenue were relatively flat year-over-year, however, up about 140 basis points when compared to the first quarter of 2007. This sequential increase was driven primarily by advertising costs associated with the timing of new market launches in Mexico and Brazil.

G&A expense as a percent of revenue at just under 20% was in line when compared to the same period last year, despite an incremental $5 million of non-cash stock compensation expense. The relevant trends in G&A included an increase in customer care and billing operations expense related to additional headcount to support our growing subscriber base, which was slightly offset by a small decline in IT payroll and maintenance expenses.

Moving on to operating income, we generated $134 million in operating income during the quarter, a 20% increase over the second quarter last year. This lift was driven by strong revenue growth, which was offset by higher depreciation expense due to the rapid expansion of our network. Items below operating income included net interest expense for the quarter, which totaled approximately $16 million, $8 million higher than the amount reported last year, driven primarily by increased interest expense related to additional financing activity. Foreign currency transaction gains totaled approximately $9 million compared to a $2 million loss reported in second quarter of 2006 due to strong local currencies during the quarter.

Our book income tax provision of $42 million was roughly flat with the amount recorded last year. With regard to taxes, our focus continues to be on reducing cash taxes, and as we've said in the past, we will continue to evaluate prudent strategy to minimize our cash tax exposure. We generated net income of $84 million for the quarter, or $0.52 per basic shares compared to net income of $56 million or $0.36 per basic share in the same period last year.

We continue to have a healthy balance sheet and liquidity position, which was further enhanced by our capital raising efforts during the quarter. We raised approximately $1.2 billion from a convertible debt offering completed during the period. We also launched a share repurchase program under which we are authorized to purchase up to $500 million in value of our common stock. As of the end of the quarter, we had purchased $330 million in common stock or approximately 4 million shares at an average price of $82 under this program.

We ended the quarter with $1.5 billion in cash and cash equivalent. Long-term debt at the end of the quarter was $2.3 billion, which consists of $1.8 billion in low coupon convertible notes with a blended coupon of around 3%, a $249 million Mexican credit facility and $226 million in local currency tower financing and other debt obligations. With net debt of approximately $843 million, our net debt to 2007 OIBDA guidance is less than a full churn.

Additionally, our credit profile remains strong with a pre-tax cost of debt of 4.5%. Also subsequent to the quarter, we successively completed the tender offers for our 2.875% convertible notes due 2034 with a principal amount of $300 million. This eliminated $300 million of our long-term debt and approximately $8.6 million in annual interest expense for the cash payment of nearly $29 million, which included an inducement premium and accrued interest.

In summary, we are out of the gates with record setting results both operationally and financially for the second quarter. Our team is committed to executing on our profitable growth strategy which puts us in a position of strength to make the most out of the growing opportunities available to us in our Latin American markets. It is this consistent and disciplined focus that has enabled us to deliver superior operating results to all of our stake holders. We are firmly committed to rewarding your continued interest, trust in us by striving to generate results that meet or exceed your expectations in the future.

Now I will turn this call back to Steve for his closing remarks.

Steven M. Shindler - Chairman and Chief Executive Officer

Thank you, Gokul. As you heard this morning, we had a fantastic first half of 2007 and just completed the best quarter of high quality subscriber growth in our history, with over a 331,000 net subscriber adds. This momentum has allowed us to once again push for more growth and more profitability for the full year as evidenced by the revised guidance we provided.

One indicator of the continued strengthening of our business is to take a closer look at what the revised guidance implies about our performance in the second half of 2007 compared to what we just completed in the first half. If we hit our newly revised targets, we will add approximately 35,000 more subscribers in the second half of 2007 versus the first half, while generating $85 million more in OIBDA.

We are excited about our first half results and remain determined to execute on delivering these implied results for the balance of the year. We are also excited about the long-term opportunities that are ahead for NII as we continue to expand our presence in the Latin American wireless market, a market that arguably has more opportunity for profitable growth in wireless communications than any other region in the world.

Looking back at what we accomplished during the first phase of our expansion plan that we began only 24 months ago, during this period we doubled our subscriber base adding over 2 million net subscribers based on our current lifetime OIBDA for a subscriber of nearly $1700. This equated to over $3.3 billion in incremental lifetime OIBDA. We have doubled our quarterly run rate in OIBDA, while absorbing the impact of new market launches and more than doubling our gross additions. We improved or maintained the operating metrics that drive our business and we improved our presence by building essentially nationwide coverage in three of our four markets adding coverage for an additional 60 million people for a total covered population of 170 million. This expansion plan solidifies NII on the map as a significant operator in the Latin American region and we believe we are only at the beginning stages of deriving value from this effort.

Using the same disciplined approach that we have employed in the past, we are now planning to build upon this foundation by further investing in what we expect will be a more prosperous future for NII as we continue to increase our presence throughout Latin America. We are now planning to significantly increase our network coverage in Brazil, a market that has shown solid results and a very promising future. And we are moving forward with a full scale launch in Chile.

While we still hold true to our approach of not having to be the biggest company in terms of total subscribers, but striving to be the best and most profitable company, we believe that each element of this plan further defines NII Holdings as a major Pan regional operator in the Latin American wireless marketplace.

Operator, we will now take questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. We'll first hear from Christopher King, Stifel Nicolaus.

Christopher King - Stifel Nicolaus

Good morning and congratulations. Two quick questions on Mexico; first of all, with respect to the push-to-talk competition, obviously you may have made some noise on that. Earlier in the quarter, although yesterday they seemed to admit that they weren't having much progress at all in Mexico and it looks like you guys actually had more postpaid net adds in the quarter in Mexico than Avaida [ph]. Just was wondering if you could talk about the general state of competition in Mexico, specifically on the push-to-talk products that are available out there. And secondly, I wanted to get a little bit of additional color regarding your expectation for margin trends in Mexico over the course of the next couple of quarters presumably you guys have a couple of more market launches that kind of work through in Mexico in addition to what is historical been a bit of seasonal slow down and that's in the fourth quarter. Just is wondering how we should think about that going out of the course of the second half year. Thank you.

Steven M. Shindler - Chairman and Chief Executive Officer

Thanks for your questions Chris. We forgot to push to park competition. We haven't really seen or felt anything in the marketplace related to that. Obviously we are aware that they have launched more phones and more products, but not something that we're seeing or coming up again. Overall, with regard to competition in the marketplace, it's always been a competitive market. I would say that in recent quarters, there's been a little bit more of a push by some of the larger carriers there but, as you can from our results we were able to drive the highest level of growth in that additions that we ever have in the past and we are maintaining the highest level of ARPU, I think anywhere in the world in that Mexico market at $74. So when you look at the overall nature of that competitor and specifically to your question on push-to-talk, we certainly haven't seen any impact from that. And regarding margins, yes in terms of Mexico we just added another 10 cities in Mexico, a few million pops were launched in this last quarter. The biggest amount of subscriber gross additions that we have ever brought on, so all of those things has a temporary pressure on the margin. But we are essentially done now with all the market launches. So that element of cross work will go away and we are moving towards the back end of the year where we should start to see some of the benefits related to interconnect. So I would expect as we move to the rest of the year, there should be some room for upside in margin in Mexico.

Christopher King - Stifel Nicolaus

Thank you.

Operator

[Operator Instructions]. We will now hear from Gray Powell, Wachovia.

Gray Powell - Wachovia

Good morning everybody.

Unidentified Company Representative

Good morning.

Gray Powell - Wachovia

I just had a couple of quick questions on your market expansion efforts. So now that you officially announced the full scale launch of Chile, how long do you think it will take to get a fully trained sales force in place and the distribution channels up and running at 100% capacity? And then along those same lines, in terms of operating dilutions, is there any dilution associated with the additional expansion in Brazil and Chile that is included in your 2007 EBITDA guidance? Thanks.

Steven M. Shindler - Chairman and Chief Executive Officer

With regard to the guidance, as we move through the balance of the year there will be some incremental effort on getting more build out in Brazil and Chile, very modest impact on EBITDA. I'll let Lo answer the question on distribution.

Lo van Gemert - President and Chief Operating Officer

Yes, obviously pertaining to distribution, Jose Phillipe, he basically runs both Brazil, Argentina and Chile and we have very qualified people in these markets that are help training people within Chile. We've also have a general manager in Chile that has been with us for the last five years. And one way or another we will take advantage of the expertise, make sure that people are trained and also our biggest goal obviously is to tell the Chilean community what we can actually do to increase the overall productivity in terms of the services we offer. So once we have the network built the force will be in place, the headquarters will be in place, we will take full advantage of that opportunity.

Gray Powell - Wachovia

Okay, so probably it sounds like its more like maybe earlier mid 2008 before you start to see net additions really ramp in Chile. Is that fair to say?

Lo van Gemert - President and Chief Operating Officer

Yes I would say that it is going to be very minimal this year.

Gray Powell - Wachovia

Okay, thank you very much.

Operator

We will now hear from James Breen, Thomas Wiser Partners.

James Breen - Thomas Weisel Partners

Thanks guys. I just wanted to drill down a little bit on the CapEx and the increase for this year. As we look at the guidance, it increase from 575 to 650, can you give us little color on how much of that was is potentially for Chile and Brazil and as you look out into the out years, you talked about I think this quarter being a peaking CapEx on a quarterly basis, that's still seen the cases we with remove out of the next 2 to 3 years? Thanks.

Lo van Gemert - President and Chief Operating Officer

Well, I think in terms of specific detail, we are trying to share with you as we are putting the plan together what we want to achieve in both of those markets and we said this morning about $80 million in CapEx and startup losses for Chile over the next 12, 18 months, an incremental $300 million for coverage in Brazil over the next 2 to 3 years and we are at the beginning stages of finalizing the exact plans, how longer it will take us to get each one of those cities where we want to begin, how we are going to structure that entire program. So, we've allocated some dollars this year out of the incremental CapEx but we are not at a point where we are prepared to breakout the detail of exactly where we dollar that increment is going?

Gray Powell - Wachovia

Okay. And just a follow up to that, you talk about your target market being about $43 million subs in the existing markets including I think the 50% GDP coverage in Brazil. How does that number change if you go to 70% Brazil when you add Chile into the next, 43 got to 53?

Lo van Gemert - President and Chief Operating Officer

Yeah, we are... and you know the process that we gone through and calculating that $43 million number very deliberate exercise where we count out every business that exist in the incremental territory, the number of potential units we can sell to those businesses, I think order at magnitude when we get done with both Chile and Brazil the number that you are suggesting is reasonable, but we are not finalized that details account at this point.

Gray Powell - Wachovia

Great, thank you very much.

Operator

[Operator Instructions]. We'll now hear from Ric Prentiss, Raymond James.

Ric Prentiss - Raymond James

Good morning guys.

Steven M. Shindler - Chairman and Chief Executive Officer

Good morning.

Ric Prentiss - Raymond James

Hey, couple of questions for you. One, can you just update us on the economics in the different countries out there. I think you all said Chile is doing very well, we've been hearing anecdotally Brazil is just on fire also, just update a little bit on the business environment you are seeing in the different countries you are operating in the region?

Steven M. Shindler - Chairman and Chief Executive Officer

Yes and obviously one that where we spend a lot of time talking to our teams about and understanding, we do feel very good right now the Mexico economy is very strong, I think it's a great indicator as to why we been able to produce the kind of growth and metrics to go along with that and as we look out over the course of next several years, we expect that those trends in the underlying economy will continue. Brazil perhaps even more so, there is a tremendous tailwind in the economy there in Brazil and we think that that bodes very well for what we want to do now over the course of the next few years with an incremental investment and expansion plan in Brazil. And as Lo mentioned certainly Chile has been one of the most stable and strongest economy in the region for several decades now and as we look closer and closer at that market as we got respect from the head previously been tied up in the courts, we are very exited to finally be able to pull the trigger and get on to our growth program in the Chilean market.

Ric Prentiss - Raymond James

Speaking of spectrum in your press release, you talked about potential use of the balance sheet also looking at the Spectrum. Can you update as far as what spectrum might be coming on the blocks and what your thoughts as far as by market?

Steven M. Shindler - Chairman and Chief Executive Officer

Yes, as you know we are always mindful of spectrum that might be out there and available, whether that be in the 800 MHz SMR band that we operate in when we get more spectrum there is a good trade off on future capital expenditures, So we are always on the look for that, but our overall approach is to be opportunistic to maintain discipline and to seek out opportunity that they might exist in other bands for things that we might be able to take advantage of in the future. There are some options upcoming I believe in Peru and possibly in Mexico that I think there will be one in Brazil and you should expect that any options that are upcoming and we are certainly thinking about, we may or may not choose to participate and if we do, we will be disciplined in our approach as to what we think is reasonable amount to pay, where we might be able to build some of business case in the future.

Ric Prentiss - Raymond James

Stock buyback, I think it was mentioned you spent $330 million in the quarter, have you done anything since the quarter ended?

Steven M. Shindler - Chairman and Chief Executive Officer

We are announcing what we have done in the quarter. At this point with regard to the rest of program, we are authorized up to the $500 million level and our plan will be to keep you posted when we provide quarterly update as to how much stock we've repurchased.

Ric Prentiss - Raymond James

Great,good luck guys.

Steven M. Shindler - Chairman and Chief Executive Officer

Thank you.

Operator

We will take our next question from Walt Piecyk, Pali Capital.

Walt Piecyk - Pali Research

Thanks. Three questions; the CPGA in Mexico, is the reduction there a result of leveraging fixed expenses like advertising and things like that or it's really seeing this change in the commissions structure in the market. The tax rate I think I might have access last quarter but now you... you have two quarters here in the low 30, I think your guidance on that was more for the 36%, 37% range, so you can just give us an update I mean, is it going to be this low 30s for the year and I think Gokul had mentioned you are trying to minimize cash tax rate, how much of that do you expect to flow in through from a cash tax stand point? And then the last question, I don't know if Alan is available, but I mean, do you... can you just give us a sense of what the base CapEx is, I know it's hard to think about now with the subscriber growth and the new network expansion, but lets just assume you stop adding any new subscribers or building markets, what is that capital spending level that exist just to maintain the existing customer base, thanks.

Lo van Gemert - President and Chief Operating Officer

Well tried on, this is Lo. Pertaining to the CPGA versus last quarter, there was a slight increase and that increase is 100% attributable to advertising. There was lot of advertising in the market and typically in the second quarter we increase our overall advertising and that's where it went. All the other stuff pertaining to equip the subsidy, direct connections, indirect commissions they were down on a per gross add basis.

Walt Piecyk - Pali Research

I understand that, but why that? I mean what did you... did you lower your commission because your CPGA Mexico was down?

Steven M. Shindler - Chairman and Chief Executive Officer

It's basically a higher gross, higher gross and we do have a plan where we typically use multiplier effects and we try and be as competitive as possible when it comes to acquiring customers and we have a great workforce that is taking higher commissions overall, but on net basis they are lower and that's part of our margin program.

Gokul Hemmedy - Vice President and Chief Finance Officer

Hi Walt, this is Gokul, let me answer the... your question in taxes. As we said on the last earnings call, our book tax rate will be somewhere in the 33% to 35% range, which is where we have come in and in our second quarter too. And our cash taxes will be somewhere in the low to mid 20s and as I said in my prepared remarks, we will continue to look at business-driven tax planning strategies to reduce those cash taxes overtime.

Walt Piecyk - Pali Research

Great. And what are you targeting to get to on the cash tax rate there?

Gokul Hemmedy - Vice President and Chief Finance Officer

I think you'd put all of 2007 it's in the low to mid 20.

Walt Piecyk - Pali Research

I understand... I am saying like what is your long term target from a cash tax standpoint?

Gokul Hemmedy - Vice President and Chief Finance Officer

The long term target is somewhere in that range. We've not sooner finished our full analysis on the several alternatives that are in front of us. We'll continue to do that over a period of time and as we complete that analysis as I said, we look at all prudent tax planning strategies to minimize that rate. And all those strategies will obviously be very business driven strategies.

Steven M. Shindler - Chairman and Chief Executive Officer

And now well, your last question regarding the percentage of capital that's fixed our for maintenance mode if we were to discontinue our growth objectives. First just to clarify, we have no intention of going down that path or really studying that too carefully because of the amount of growth that we think we can capture here over the course of the next several years. But essentially, if you break down our CapEx, we are in the 10% to 12% range of money spent that goes towards the fixed overhead or the ongoing maintenance requirements to support the network, so we would have --

Walt Piecyk - Pali Research

10% of the CapEx or 10% of revenue?

Steven M. Shindler - Chairman and Chief Executive Officer

10% of the CapEx. Our... we are on a trend as we've told you this year we're going to be about 20% of revenue will be our total CapEx, which is down 6% from last year and as we... even though we're going to be embarking on building out some additional coverage in Brazil and going into Chile, we fully expect that the CapEx as a percent of revenue will continue to decline year-over-year.

Walt Piecyk - Pali Research

So I just, I mean if we go back 5 to 10 years from here... if you look at the economics in wireless and I think the thing that's interesting on that is... if that's the case then your CapEx as a percentage of service revenue for maintenance is substantially below 10% of service revenue and now you are talking about CapEx, incremental CapEx for probably $10 which is a fraction of what it used to be. The return on that capital invested is obviously significantly higher, when you look at some of the mature free cash flow generation of the company, am I looking at that correctly?

Steven M. Shindler - Chairman and Chief Executive Officer

I think you are right. I think one of the things that we like to focus on is and while we keep using this term, put a solid foundation in place as we made so much of the important initial investment and now what we are trying to do is build upon that and increase the ability to earn a return on that capital. But the one thing I would point out is ongoing in the CapEx is going to be more than maintenance mode, it is going to be continued investment and additional subscribers and additional capacity that we are going to want to add to the network each year. So it will be that element that's going to continue to be part of some percentage of the revenue because of informal growth that we would like to capture.

Walt Piecyk - Pali Research

Okay, Thank you.

Steven M. Shindler - Chairman and Chief Executive Officer

Thanks Walt.

Operator

We'll now hear from Brett Feldman, Lehman Brothers.

Brett Feldman - Lehman Brothers

Thanks for taking the question. Actually if you just stay on CapEx, you mentioned when you responded to last question that about 10% of your capital spend is maintenance-related and you previously that about 25% of your CapEx in the quarter was on coverage. So how is the rest of your capital budget breaking out this year?

Lo van Gemert - President and Chief Operating Officer

Well, this is Lo Van, how're you doing? Typically when you look our CapEx, you can divide it up in system and non-system. You have maintenance, but you also have coverage of expansion. You also have network upgrades and that's never network upgrades within the sites within your proven foot print, you have MSL components, you have site modifications, you also have in terms of in the area of customer support an IT billing and provisioning customer tale sales and marketing projects that actually hitting on system. So it's very, very hard to kind of decide for exactly what goes where. But I can tell you that we are spending the amount of money that supports the future growth that we anticipate and we make sure that we maintain the level of customer service that our customers are used to and that turns into low return and higher productivity and a very good sales force that hits new highs on a quarterly basis. And that is our aim.

Brett Feldman - Lehman Brothers

Okay. Then could you maybe just break out that other 65% of big chunks. I mean roughly what percentage is that just because your business is getting bigger and maybe what percentage of it is on system upgrades?

Steven M. Shindler - Chairman and Chief Executive Officer

Again we've tried to give you some detailed numbers in the past. I think when we started the year, we were talking about a few hundred million, $275 million or so of our total CapEx then was for additional coverage. We are obviously increasing that slightly here because of the launch of some new markets. We are not breaking out exactly where that increment is going, but the balance is capacity and all the items that Lo just went through in terms of what we do to have the right level of support and quality embedded in our network to be able to maintain the level of service that our customers are used to as well as have the capacity and quality in the network to enable us to achieve the growth we're getting this year and the growth that we want to achieve in future years.

Brett Feldman - Lehman Brothers

Okay. And then just two more quick questions, one is a clarification. The $300 million of CapEx was spent in Brazil that you talked about. I just wanted to clarify, is that a 100% CapEx or is that like the Chile number that's CapEx and others spending as well?

Lo van Gemert - President and Chief Operating Officer

That's a 100% CapEx and it is specifically targeted to adding incremental pops over the next 2 to 3 years and as we move towards the end of this year and into early next year when that plan is fully detailed out we'll give you a better idea of the exact time frame in which we can complete that.

Brett Feldman - Lehman Brothers

Thanks. One more last question on ARPU, you mentioned that as you launch new markets, the usage in these new markets tend to be a bit low as customers as customers get acquainted with your product and then goes up overtime and I think we saw little bit of that in Mexico this quarter. Now that the Mexico build is substantially complete, is it reasonable to think that over the next couple of quarters, usage in Mexico could go up, and we may see ARPU move back up a few dollars than where it was a few quarters ago?

Lo van Gemert - President and Chief Operating Officer

Yeah, I mean we are of about a $10 compared to last year second quarter, anytime we will try when usage overall goes up, we may moved into a rate plan where access ARPU goes up. So I don't necessary want to say that usage will always go up. But we do believe that when the new cities which represents about 20% of our gross adds in Mexico represent a larger point of our base that overall those new cities should contribute to ARPU improvement.

Brett Feldman - Lehman Brothers

Okay, thanks guys.

Lo van Gemert - President and Chief Operating Officer

Thank you.

Operator

And we'll now hear from Andrew Campbell, CSFB.

Andrew Campbell - Credit Suisse

Yes, thank you. My question was actually specifically about the Mexican ARPU and the factors that were causing that weakness, because you mentioned that was down about $1 sequentially but the pace we had appreciated in the quarter. So, I was wondering if could just describe a little more about the weakness and that we saw on ARPU in Mexico?

Lo van Gemert - President and Chief Operating Officer

Well, typically when you go after a super high growth, there are lot of users that we move over from our competition and they are 200, 253, 300 minute users, overall and we move them up. The average postpaid usage which joins represents 10% of the market of Mexico is running at around 550 minutes and the average prepaid is around 100 minutes. There is a big bucket in prepaid whether it's actually shifts of minutes moving to 200 and above, we are attracting these customers and targeting them and ensuring that we can actually offer the 550 minutes, of which roughly 50% is dispatched and the 50% is in connect for huge savings. So typically, you wind up with customers that are on the 200, 300, 400 minute bucket that we will move up and on top of that the new city introductions also have initially lower ARPU and that will go up. The important thing is that no matter how you look at these metrics that the CPGA, the cost of attracting these customers is inline with the output that we generate and at the same time you are looking at huge growth. Our ARPU has gone down about 3% and that's coupled with in excess of 60% growth in gross ads and net ads. So in that sense, that's a good payback.

Andrew Campbell - Credit Suisse

Makes sense. Just on Brazil, just to clarify one point, you are starting from... I know you are going to go over 70% GDP coverage aft 30 million people. Just to make sure I know the starting point. You are close to 50% of GDP, is that right now, and what's your current coverage in terms of population?

Steven M. Shindler - Chairman and Chief Executive Officer

Yeah we're about 55% GDP coverage and about 65 million parts today. So we're looking again into the mid 90 million range perhaps overtime up over 100 million cover pops in Brazil.

Andrew Campbell - Credit Suisse

Okay. Thanks for taking my question.

Tim Perrott - Vice President of Investor Relations

Operator, I think we are out of time, so we wanted to go ahead and end the call. Thanks to everybody for joining us for call today and if there's any follow-up please just give us a call. Thank you.

Operator

Thank you. That does conclude today's conference. We do appreciate your participation and joining the NII Holdings second quarter 2007 earnings conference. Once again, thank you for participating, have a great day.

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