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NII Holdings (NASDAQ:NIHD)

Q1 2012 Earnings Call

April 26, 2012 8:30 am ET

Executives

Tim Perrott -

Steven P. Dussek - Chief Executive Officer and Director

Gokul V. Hemmady - Chief Financial Officer, Chief Transformation Officer and Executive Vice President

Analysts

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

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

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

Kevin M. Roe - Roe Equity Research, LLC

Rizwan S. Ali - Deutsche Bank AG, Research Division

Operator

Ladies and gentlemen, thank you for holding, and welcome to the NII Holdings First Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's conference call will be available for rebroadcast for the following 2 weeks beginning later today. Domestic callers may access the rebroadcast by dialing (888) 286-8010 and entering passcode 49825668. International participants may access the rebroadcast by dialing 617-801-6888 and entering passcode 49825668. [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.

Tim Perrott

Thank you, Frances. And good morning to everyone, and thank you for joining NII Holdings' First Quarter 2012 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 2011 Form 10-K filed with the SEC on February 23, 2012, as well as other documents we have filed with the SEC.

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

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

Steven P. Dussek

Thank you, Tim. Good morning, and thank you for joining our call today.

Our results in the first quarter reflect both successes and challenges. We made progress on our key initiatives for the year, but our operating performance in some of our markets fell below our expectations. I want to give you my insight into both of these areas.

First, looking at our operating results, our net add performance was below what we wanted to accomplish in the first quarter. The factors contributing to the net add results varied somewhat from market to market, but strong competition was a common contributor across our markets. Also, the decisions we made last quarter to scale back our prepaid offering in Argentina and to delay the launch of 3G Push-to-Talk services in Peru contributed to the shortfall.

In Brazil, strong competition continues to create a difficult environment as pricing remains aggressive and the adoption of 3G devices has accelerated. This situation has made it more challenging for us to generate quality growth in the near term as we develop a broader set of services on 3G that are necessary for our long-term success.

We are changing certain policies and rate plans in order to improve our performance in Brazil. While we believe that these actions are the best approach to achieve our long-term objectives, we anticipate that the general competitive environment will continue to weigh on our results for the next several quarters.

Having said that, I would like to emphasize that we see tremendous opportunity for NII in Brazil for the long run. The investments that we are making today to deploy our advanced platform will allow us to greatly expand our product set, service capabilities and coverage in an expanding market. All of this will position us to capture higher levels of profitable growth in the future.

In Peru, as you are aware, last quarter we made the decision to delay a broader rollout of our 3G Push-to-Talk product while we made adjustments to improve the quality of the service. This was the right decision, as quality will be one of the most important ingredients to drive profitable growth in the future. This delay, combined with higher customer churn, resulted in lower net adds for the quarter. I will provide more information in a few moments, but we are happy to report that we have completed improvements to our 3G Push-to-Talk service and we are making this service available on a broader scale in Peru beginning in May. We expect this service to contribute to our growth beginning in the third quarter.

In Argentina, as we discussed in our last call, after experiencing positive initial customer acceptance of our prepaid trial service, we made the decision to take a more deliberate approach to growing our prepaid base so that we can better understand the characteristics of the customers who prefer this service and how best to serve them. We will use that learning to find the right balance between prepaid subscriber growth and profitability. As a result, we reported a fairly significant sequential decline in our prepaid gross subscribers during the first quarter. Going forward, we expect prepaid plans to be a component of our strategy in Argentina and may contribute more growth in the coming quarters.

We expect that we will continue to face challenges through the balance of this year, but we believe that the actions we've taken and planned to date will create a path to reach our 2012 net add goals. These actions include our more aggressive offering of voice services on our 3G network in Peru and our launch of services on our 3G networks in Chile and Mexico later this year.

While we are focused on addressing the issues that affected our growth, we made good progress on the key priorities that we believe will drive our business in 2012 and beyond. As discussed on our last quarterly call, these priorities are: first, completing enhancements to our new 3G Push-to-Talk service to ensure the best customer experience; second, making progress in our 3G network deployment so that we can offer 3G services in Chile, Mexico and Brazil in 2012; and finally, strengthening our brand, expanding our distribution channels and creating common back office and IT systems to position us to target and efficiently serve a wider range of customers.

You may recall that our initial feedback with the 3G Push-to-Talk service showed that the service worked well in most call scenarios, but we were experiencing some issues in voice quality for Push-to-Talk calls between the iDEN and 3G networks. To address this, we developed solutions that have significantly improved the voice quality of calls between the 2 networks. We have completed the implementation of these solutions, resulting in a service quality that provides a superior experience to our customers. And we are moving forward with plans for a broader launch of our 3G services in Peru beginning in May. These plans include a ramp-up in our advertising and the expansion of our distribution channels. Currently, we have 4 3G feature phones available through our retail channels. And as announced yesterday, we will be offering our first 3G smartphone that incorporates a touchscreen and a wide range of features, including our Push-to-Talk service. The progress that we have made will allow us to offer our customers the differentiated and superior Push-to-Talk experience that they expect from us.

We remain on track with our 3G deployments in Chile, Mexico and Brazil. We continue to work toward our goals of making 3G services available in Chile by midyear and in select markets in Mexico and Brazil by late third quarter and end of the year, respectively. Over the past several months, we have implemented a number of changes in how we manage the logistics and buildout of our 3G networks that are helping to keep our 3G deployments on track with our goals.

Finally, we are continuing to make progress in our efforts to strengthen the visibility and recognition of our brand and to expand our retail presence to target and serve an addressable market that is double what it is today. The new brand identity and logo that we launched in 2011 has increased customer's awareness that we and our brand stand for the highest-quality customer experience and better aligns our message with both our traditional customer base and the new customer segments we plan to target in the future.

So overall, we made progress during the quarter on each of our key priorities for the year, but we realized that we have more progress to show you throughout 2012, including working to improve our operating results during our transition and in a more difficult environment. Although we face these challenges today, we believe our investments in 3G and related efforts will significantly improve our competitiveness and will position us to expand our service offerings and coverage and capture more growth in the future.

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

Gokul V. Hemmady

Thank you, Steve, and good morning.

Our results for the first quarter reflect growth in our subscriber base against a challenging, competitive backdrop, as well as the impact of the incremental investments we are making to deploy 3G across our markets.

Here are some highlights for the first quarter. We generated 260,000 net adds, bringing our subscriber base at quarter end to 11 million subscribers, a 16% increase compared to a year ago. We generated $1.63 billion in consolidated operating revenue, in line with the level reported during the same period last year. And we generated $358 million in consolidated OIBDA.

Let's take a look at some of the operational results in greater detail. On a consolidated basis, gross adds improved by 10% compared to the first quarter of 2011. Consolidated churn was up 46 basis points relative to the same period last year driven by increases in both voluntary and involuntary churn but continues to remain the lowest in the region.

Consolidated service ARPU of $42 was down more than $7 from the first quarter of last year. The primary drivers were related to lower ARPU in Brazil driven by lower loading ARPU, migrations to lower-cost plans and increased retention activity and weaker year-over-year average local exchange rates.

Our OIBDA results for the first quarter reflect the impact of lower ARPU and an increased level of operational costs relating to our investments in additional cell sites, expansion of our distribution channels and implementation of new IT systems as we continue to make progress towards the launch of our 3G services in Chile, Mexico and Brazil.

Our first quarter OIBDA margin was 22%, down compared to the first quarter of last year. Our OIBDA margin improved sequentially due to a reduction in costs associated with the launch of our brand refresh, seasonally lower investments in marketing and advertising and lower gross add loading.

Turning to CapEx for the period. We invested $234 million, with more than 75% of that amount invested in Brazil and Mexico. Our investments in our 3G networks and supporting systems comprised 70% of our total CapEx investment for the quarter.

In addition to our 3G investments, we are also continuing to invest in capacity and coverage across all of our markets to maintain the quality of our iDEN networks during our evolution to 3G. We are on track with our network development plans and expect our quarterly CapEx investments to increase as we make further progress toward the planned launch of our 3G networks.

At the market level, Nextel Brazil generated subscriber growth in a challenging competitive environment. During the quarter, Nextel Brazil generated 112,000 net adds, ending the quarter with 4.2 million subscribers, a 20% increase in its end subscriber base compared to a year ago. This performance was driven by an 8% year-over-year increase in gross adds, partially offset by a higher churn rate of 2.02%.

Nextel Brazil revenues were $821 million, in line with the level reported in the first quarter of 2011, with the increase in the ending subscriber base offset by lower loading ARPU and weaker local currency exchange rates.

Segment earnings in Brazil were $241 million, down $42 million from the same period last year due to the combined impact of lower ARPU and increase in site and switch costs associated with our 3G network buildout and weaker local currency exchange rates.

We are focusing our efforts on stabilizing our operating results and improving the quality of our customer base by changing policies related to customer retention and simplifying our rate plans. We believe these efforts, while potentially having further impact to our near-term subscriber growth, will put us on a path to generate profitable growth in the long run. We remain very excited about the Brazilian market and our long-term position in it as we deploy 3G and bring more services to a broader range of customers.

Nextel Mexico delivered solid results, highlighted by good customer demand and stable operational metrics. Nextel Mexico generated 64,000 net adds for the quarter, ending the quarter with 3.8 million subscribers, a 9% increase compared to the ending subscriber base a year ago. Gross adds grew 15% compared to the same period last year, with a more modest gain in net adds resulting from an increase in customer churn. Churn of 2.02% reflects a 37 basis point increase compared to the same period last year but is stable when compared with the fourth quarter of 2011.

Revenue of $544 million declined $23 million from the same period last year as a result of weaker local currency exchange rates and a modest decline in local currency ARPU. Nextel Mexico ARPU of $42 was down $5 from the same period a year ago primarily due to weaker local currency rates. Compared to the fourth quarter of 2011, reported ARPU improved as the Mexican peso strengthened against the dollar. More importantly, in local currency terms, ARPU only declined slightly compared to last quarter, reflecting a relatively stable operating environment.

Nextel Mexico generated $169 million in segment earnings during the period, a $12 million decline compared to the first quarter of 2011. Segment earnings were impacted by weaker local currency exchange rates and incremental costs relating to our progress in the deployment of our 3G network and related system.

Our Mexico team delivered solid results both operationally and financially as we continue to make progress toward our goal of offering 3G services later this year. We believe that the wider range of products and services supported by our 3G networks will enable Nextel Mexico to improve its operational metrics and drive increased profitability in the future.

Turning now to other markets. During the quarter, Nextel Argentina reported a 22% increase in its ending subscriber base, a 12% increase in revenue and a 6% increase in segment earnings compared to the first quarter of 2011.

Our year-over-year subscriber growth was driven by continued successes of prepaid offering that Nextel Argentina launched during the fourth quarter of 2011. Churn of 1.46% was down 12 basis points compared to last year, reflecting improved customer retention efforts.

Nextel Peru generated 15,000 net adds, ending the quarter with 1.4 million subscribers, an 18% increase compared to the subscribers at the end of the fourth quarter of 2011.

Net adds slowed because of higher churn in our customer base and the effect of the delay in the rollout of our 3G Push-to-Talk voice product. In the second quarter, we plan to proceed with the broader launch of our 3G services, with the full benefit of these efforts expected to impact subscriber growth beginning in the third quarter. Segment earnings of $8 million in Peru increased 17% compared to the same period last year.

Turning to our balance sheet. On a consolidated basis, we ended the quarter with $2.3 billion in cash and investments, with more than 85% of our cash held in U.S. dollars. Total debt at quarter end was $4.7 billion. Subtracting our cash and investments from our total debt results in net debt of $2.4 billion at quarter end.

Last week, we signed an agreement securing flexible, low-cost equipment financing in Brazil to help fund our 3G deployment plans in this market. This $500 million facility has a 3-year drawdown and 7-year repayment window, which aligns closely with the terms we secured in similar deals in Chile and Mexico last year. This transaction will offer increased flexibility in our approach to capital deployment at an attractive cost and enhance our strong liquidity position.

As you've heard us say on prior calls and in meetings with our investors, we believe that 2012 will be a pivotal year in the transformation of our business.

The first quarter illustrated some of the opportunities and challenges that we expect to face throughout the year as we focus on the deployment of our 3G networks and supporting systems. The investments we are making in our business will have some impact on our near-term operational and financial results as we incur the costs relating to our new networks before they generate revenues. We are confident that these are the right investments for our business. Recognize that, during this transition phase, it is even more important for us as a management team to evaluate the trade-off between growth and profitability consistent with our goal of generating value over the long term.

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

Steven P. Dussek

Thank you, Gokul.

As you heard, we are making progress on our plans for the year, and our team is working hard to deliver positive results as we prepare for the opportunities that will be created from our transition to 3G. We are excited about the quality of our new 3G Push-to-Talk service that will continue to differentiate us from our competition as we add smartphones and other devices with this unique feature.

We look forward to showing our customers in Peru and our other markets how the combination of this service and the other features supported by our 3G networks will provide the best solutions for their communications needs. This focus on meeting our customers' needs is and will always be at the heart of what we do.

But this year isn't only about the strategic priorities we've been discussing. We also must remain focused on generating operational results in our existing business in a very competitive environment. While we are feeling the effects of this environment in our results today, we are taking actions to remain competitive during our transition period, and we are investing to improve our capabilities and toolset in order to significantly improve our competitiveness for tomorrow. And we remain very encouraged about what our business will deliver in the long run.

As you heard us say on our last call and since, we believe that 2012 will be a transformative year for NII as we deploy our 3G networks, expand our brand and retail presence and bring exciting new products and services to the market. We are investing in our business today to create growth, profitability and scale in the future. And our entire team at NII is working to ensure that we execute on our vision and deliver value for the long term.

Operator, we'll now take questions.

Question-and-Answer Session

Operator

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

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

Steve, I was just wondering if you can tell me about the factors that led to the lower net adds than anticipated in the quarter? And just as a quick follow-up for that, given that, do you guys -- where is your comfort level with respect to your current net add guidance for the full year of 1.4 million?

Steven P. Dussek

Okay, thanks, Chris. Let me give you the perspective on the net add results. I think, first of all, there were really 3 primary drivers that led to the less-than-expected net add performance. I think, first, relative to Argentina, our decision to moderate the prepaid approach that we had taken there and take a more deliberate approach, pull back on our marketing effort and monitor and make adjustments to that program to balance the growth with profitability. So that first deliberate pullback in Argentina had a pretty strong impact in, overall, in the net add performance. Second, our decision to delay 3G Push-to-Talk in Peru. I think that it was absolutely the right decision from a quality perspective, but it did add some pressure point to us on the delivery of gross adds in Peru. Now on top of that, our iDEN marketing spend in Peru was not at the same level as it had been in the past leading up to our anticipated launch, so we did not put a lot of marketing dollars into iDEN in the first quarter. And then third, in Brazil. Brazil is really -- the competitive environment there remains very strong both from a pricing perspective that we deal with on a regular basis but also on the proliferation in -- of 3G handsets into the marketplace and that the seeding of those handsets, even though our customers don't always take a data plan attached it, the -- really, more the awareness of 3G really tends to highlight our lack of 3G tools to be able to combat that. So that creates pressure at the point-of-sale and also on the retention front in terms of decisions that we make on our customers in terms of profitability of those customers and what it takes to keep them in this period. So those were really the 3 primary factors and drivers to the net add performance. In terms of our outlook for the year, and relative to your second part of your question, what we talked about in the comments we made in the script that we have our upcoming launches for 3G in Peru, which obviously we're very excited about given that the -- we have fixed the quality issues -- on the voice quality on the network side. So we're very excited about that launch in early May. When -- Chile is on track to launch in midyear, as planned. And our launch of Mexico is on track to launch by the end of the third quarter. And we fully expect that, that will give us a lot of momentum heading into the balance of the year. And we also expect that Argentina, as we balance this out, will come out and will have stronger results than we had in the first quarter. It may not be as strong as they were in the fourth quarter, but we balance that and the outcome of that balancing should give us additional opportunity in Argentina. And I would tell you that the Brazil situation, we believe, is going to continue and remain challenging. And we'll -- we're going to look at everything there in terms of how we approach the short term and balance that against our long-term vision for that market and make the right decisions relative to doing things for the long term, not necessarily for the short-term gains. And we will -- we're addressing the short term. We're looking at different rate plans or different approaches there, but we always going to balance that against the long term.

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

So as you guys see subscriber growth kind of at least somewhat ramping back up as we move toward the back half of the year, given the continued investments in the 3G networks, where do you guys view your current thought process with respect to your EBITDA guidance of 1.4 for the year?

Gokul V. Hemmady

Chris, this is Gokul. So I think, as you saw from an OIBDA perspective, we had a good first quarter. Sequentially, we improved our OIBDA from $277 million to $357 million. And we did that with some seasonal decline in gross adds. Gross adds went down by about 6% or so sequentially from Q4 to Q1. But as you're likely saying, as we think about the next 9 months, we, as Steve just pointed out, with the launches of 3G in Chile, we're pushing forward with our technology now that we have one in Peru as well as launching Mexico. Gross adds are going to improve and so our net for the balance of the 9 months. And so that will come certainly at a cost with CPGA. We will continue to accelerate as we launch 3G, continue to accelerate the investment in both CapEx as well as OpEx in 3G for the balance of the year, and so that has also to be factored in. So all this is -- I think we are looking forward to it as we think about getting more tools. As we position ourselves for 2013, we've said that 2012 is a pivotal year, it is a transition year. But if I think about all that, and then in the context of 2 things, really. One is the [indiscernible] is weaker than what we saw in the kind of the first 2, 3 months of this year. And so that is certainly going to have an impact. And then finally, I think it is fair to say, given everything that we are seeing a Brazil, it is a highly competitive marketplace. We had to constantly make decisions around retention, what is the right level of retention dollars to spend versus what -- the kinds of profitable, high-quality subscribers that we want to retain. And I think, as Steve mentioned, in 2012 we are going to continue to be cautious, even more cautious than we have been. And that, I think, is going to have an impact. You've seen ARPUs come down in Brazil. And that certainly is a factor we are considering as we think about the next 9 months. So I think bottom line to all of that is, I think, we are working hard to make sure that we make all the right decisions for the business in the long term. And in that context, I think $1.4 billion continues to be a goal for us. We see we have a path to it, but given all the factors that I have cited, along with the fact that we are making the investments in 3G, gross adds are going to be higher for the next 9 months. But we have this headwind in terms of effects as well as we have to consider the right decisions from an ARPU perspective in Brazil. I think it's fair to say that the guidance will be somewhat challenging.

Operator

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

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

Well, I like hearing that the Peru launch for broader deployment is on track for May here, early May. As we think about that, can you help us understand how you're getting the distribution channels opened up, how many there might be? Just to kind of scale what the opportunity is there as we think through what that might mean for your net adds.

Steven P. Dussek

Yes, Rick, this is Steve. We've been making those investments all along so that when we have reached this arrival point, we have our -- a lot of our distribution in place. And if you recall, we -- when we started this with one handset last year, we limited it to our direct and our indirect channel. So now we're broadening it out to add into the retail locations our customer centers, our kiosks. So there's a number of those. And we can get you the current and the expected numbers at the point of launch. But we have done a lot of that work heading into this, so we feel that we're pretty well prepared on the distribution front as we sit here. Now we also announced -- I think you may have seen it yesterday, we announced the first 3G smartphone into the Peru market. So we'll now -- we'll launch that in May with 5 total handsets, 1 of which is a smartphone and the 4 feature phones. So we have the handsets ready. We have the new -- first smartphone ready. We have most of our distribution already in place and ready to go and having expanded to retail, to the customer centers and to the kiosks. So we feel very good that we have the large share of our distribution in place.

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

And as you think through the pricing plans for that. So it's coming up pretty soon, but can you share with us at least a little bit -- I don't want you to give away too much competitive information, but just share a little bit of how you're trying to position that product and where it might be priced roughly compared to what your existing base is versus the prepaid base that's in Peru?

Gokul V. Hemmady

Sure, I think, Rick, what we are trying to do -- and we will continue to modify and fine-tune these plans. But as we enter the market, given what we have to offer with 3G, we are certainly looking at pricing our plans at somewhat of a premium to what we do today. So we feel that we are offering more with 3G, as you know, and so our starting point is going to be that it's going to be somewhat of a premium to what we have today. And then I talked about that premium, that premium can be somewhere in that 10% to 20% range compared to our existing plan.

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

Okay. And does that presume that Push-to-Talk is an important feature for the new sales?

Gokul V. Hemmady

I mean, yes, absolutely. That absolutely is the case, and nothing in the marketplace tells us that the market has moved away from that. I think whatever you saw in the first quarter with the net adds in Peru, as Steve mentioned, is all due to the fact that, I think, we've had some delays in our 3G rollout. I think I'll -- it's fair to say that, our potential customer base segment as well as our existing customer base, all of them are "anxious" to get that 3G product.

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

Great. And so from a net add perspective, do you feel that ramping up Peru, ramping up then Chile and Mexico can get to where your iDEN adds were and then some already in 2012?

Gokul V. Hemmady

I think it's we want to take an aggressive approach. But I think, as we said, we expect that, that ramp-up will start beginning in the third quarter. And certainly, as we look at fourth quarter, I think that statement that you said should come true. That absolutely is our goal. That's the path we are on and we feel pretty good about it.

Operator

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

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

Can you just talk a little bit about the CapEx. It seemed lower this quarter than we had anticipated and sort of building up to the $1.7 billion for the full year guidance. Will we see it ramp significantly in the second and third quarters? And do you still anticipate that 2012 will be the peak CapEx here, with CapEx dropping off in 2013 after the 3G launches in Mexico and Brazil?

Gokul V. Hemmady

James, so yes, I think we are on a path to spending $1.7 billion for the full year, as our guidance says. As you've heard us say on the last call, we made some changes internally in our process. We brought some things more in-house. And as we think about, for example, the month of March, we are on pace as we you think about the launches in Chile in July; Mexico, end of third quarter; and Brazil by the end of the year. So expect that our CapEx to ramp up quite significantly as we go into our second and third quarters. So I think $1.7 billion is still a good number for us. And I think you had a second part of that question.

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

Yes, just wondering: So if $1.7 billion is this year, do you still think that that's going to drop off?

Gokul V. Hemmady

Yes, so as we -- this is the year in which we are going to have 3G in 4 of the 5 markets. So as we go into 2013, we are going to have a much more substantial portion of our gross adds coming from 3G. And this is a year we continue to invest for some capacity as quite a bit of our gross adds are still coming from iDEN. And so that CapEx in 2013, the iDen CapEx, will start coming down. That's number one. Number two, some of our -- we will have completed our 3G launch in Chile, for example. We are spending, between last year and this year, we spent about -- we will have spent about $15 or so per pop in CapEx. And so that will coming -- start coming down substantially, so -- and we are spending. As Steve said, in Peru, we've already spent on the distribution channels. We'll continue to spend on some of the distribution channels this year as well as our back office IT systems. All of that will start coming down slightly as we think about 2013, so we do expect CapEx in 2013 to be a little bit lower. Now what we've said, as you remember, James, at the Analyst Day, that between 3 years, we roughly would have spent $4 billion to $4.5 billion. We feel that '13 can be -- let's say, it can be somewhat lower than the $1.7 billion in '12.

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

Great. And then just on the OpEx side associated with the launches. I think you mentioned that re-branding costs stepped down this quarter in Brazil but then are likely to come back again in the second quarter, ahead of the Mexico launch. Is that still something that you feel like you think that's still a clear path in terms of the OpEx build-up as well?

Gokul V. Hemmady

Yes, I think that, that is the clear path, so let me make that clearer as to what -- a substantial portion of our re-brand spending. I want to make a distinction between re-brand spending, which is the foundation for how we think about the long-term and repositioning ourselves to go into new customer segment versus, when we go into specific markets, there'll be marketing spending to launch those markets. So I think the re-branding spending, a substantial portion really happened in Q3 and Q4. And we've brought it down per plan into our first quarter, and it will start coming down much more so as we go into Q2. But what will start coming up, as we look at the PTT launch in Chile in July, we start spending, having some marketing spend. When we launch Mexico by the end of the third quarter, we'll start spending, having some marketing spend related to the specific cities or regions that we plan to launch. So that's really the philosophy.

Operator

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

Kevin M. Roe - Roe Equity Research, LLC

Two questions. First on Brazil ARPU. In your prepared remarks, you said that you're going to make some rate plan changes and policy changes to improve your competitive position in Brazil. Should we expect that to drive another step-down in ARPU from the current level? So what's your outlook in general for Brazil ARPU? And my second question is on 3G handsets. We've got the smartphone out there, that's great. Can you update us on the 3G handset roadmap? And specifically, when do you expect non-Huawei 3G phones and a non-Huawei smartphone?

Gokul V. Hemmady

Yes, Kevin, so on Brazil ARPU, I think all the decisions that we are making in Brazil are all related to -- let's look at 2012, let's continue to focus on high quality. Let's make the decision to position ourselves very attractively and aggressively when we get the tools on 3G while having this simply attractive growth rate. So we are making decisions that will position us for the long term, that's the first thing I want to say. So as we think about making changes to somewhat modifying our policies, making some changes to the rate plans, it is in the context of, say, ahead of getting all those tools. We are going to position ourselves right for the long term. That said, it is fair to say that, because of the competitive activity and, in general, the 3G competition, Brazil ARPU has been lower than what we expected it to be in the first quarter and more so in the month of March. But we believe that some of the actions that we are taking will start having some good effects. I think it's really, in my -- our opinion, a little too early for us to say that, that is going to have any kind of further degradation in ARPU in Brazil. We feel that the actions that we are taking will cause Brazil ARPU to be relatively stable from where we are seeing each year. But I think the focus really is on making sure that we are positioned for the long term. I think there are scenarios that could take Brazil ARPU a little bit higher than where we are, where we've seen as an average in the first quarter. And that would mean, by definition, it would have to go up from where we are seeing it in March. And then there are some scenarios where we continue to have to make some retention decisions and offering retention dollars to make sure that we keep the right quality of subscribers, and that could take our ARPU down. Now so I'm telling you that there are scenarios that could result in some stability. There are some scenarios that could result in us seeing some degradation. But I think the focus, as you've seen in the first quarter -- despite ARPU coming down, I mean, Brazil's margins expanded quite nicely from Q4 to Q1. So in addition to ARPU, in addition to making sure we have the right positioning for the long term, we are focused on making sure that, in 2012, that we continue with a healthy margin in Brazil.

Steven P. Dussek

And Kevin, this is Steve. Let me address your question on the handsets. So as I said, we -- with Peru, currently we have about 5 handsets in place: 4 feature phones and the new smartphone that we announced yesterday. By year end, we should have approximately a dozen in terms of total phones on 3G and 5 of those will be of the smartphone variety, and we have a couple of those coming from non-Huawei sources. So we will have, by year end, a couple of handsets I believe in the smartphone range that come from non-Huawei sources.

Operator

Your next question is from the line of Rizwan Ali with Deutsche Bank.

Rizwan S. Ali - Deutsche Bank AG, Research Division

I wanted to -- my question is about the prepaid. So you're saying you'll launch or you'll launch prepaid later on in Argentina. What about other markets? And second thing is, what made you pull back on the prepaid services in Argentina? Was it taking up too much margin? Or what was the reason?

Gokul V. Hemmady

So, no, I think -- yes, so we have -- as you saw on our fourth quarter call, we did launch prepaid in Argentina. We had a pretty big growth in Argentina in the fourth quarter. And at that time, we said we are expected to come down. And we have been more cautious about prepaid in Argentina not because we believe that it is not a good business, I think it is -- we believe that it is. We will take it slower. We are going to learn from it as we go. And that's how we are going to approach prepaid in Argentina. We believe that we are going to do things that will make that business quite attractive from a margin as well as return on capital perspective. So I don't think we are saying it's not a good business. We are -- you will see us in the second quarter have prepaid in that country to be sequentially higher than what we had in our first quarter. So I think the message you should take away is that we are going to be cautious. We are going to go after it, but we are going to go after it not in a manner that creates lots of growth in a very short period of time. Over time, we want to make sure that we attract the right customers there. As far as the other markets would -- are concerned, I think there are some -- there is a prepaid offering both from a control rate plan perspective as well as from a full rate plan perspective. In a market like Mexico, it's a very small percentage today of what we do, but over time as we get the right tools and we attract the high -- we are focused on the right ARPU and the right mix of margin and return on capital, so we will have offerings in potentially all our markets in 2 to 3 years. We potentially have offerings on high-end prepaid in all of our markets, but we don't expect, from a revenue perspective, for prepaid to be a big portion of our base of revenue.

Rizwan S. Ali - Deutsche Bank AG, Research Division

And the other -- one other question about the operating expenses. I mean, you had forecasted operating expenses at the time of the launch of 3G to be around $2 a pop.

Gokul V. Hemmady

Yes.

Rizwan S. Ali - Deutsche Bank AG, Research Division

Are you coming in, in that range in Peru?

Gokul V. Hemmady

Oh, absolutely, in Peru we have been in that range. And we feel that, in Mexico and Brazil, we'll -- we certainly are as we think about it today and the launch of Mexico and Brazil. For Chile, I think we will be higher because we don't have an existing iDEN network there. But for Mexico and Brazil, we are around that range of $2.

Operator

At this time, I'd like to turn the call back over to Mr. Tim Perrott.

Tim Perrott

Thank you, Frances. I think we've gone a little past the time. I just would like to turn it back over to Steve for any final thoughts.

Steven P. Dussek

Thanks, Tim. And just, appreciate your time today and your questions and your interest. Let me just close by reiterating that we are in a challenging environment today and expect that we will be through the balance of the year. It's a competitive market. We have mentioned time and time again that this proliferation of 3G and our -- and of our lack of our 3G networks are creating some challenges around growth in the near term and that 2012 is truly a transformative year for us as we invest in our future.

On top of that, we're making very good progress on laying that foundation for the future. We've -- with the launch of the high-performance Push-to-Talk in Peru in early May, the development of our channel and brand and a lot of the work that we've done, we feel very good that we've laid a significant portion of the foundation for our future. We have some work to do in terms of getting our networks built and built out as quickly as we can and we are on track on that. And despite all that, we're still growing in this environment, and expect that we will continue to do so.

But overall, I think we're committed to certainly improving our competitive position for the long run by getting these advanced networks deployed so we'll be able, over the long haul, to deliver more services, more channels, better cost structure, be more competitive and offer our products and services to a much larger addressable base.

So while we have some challenges today, we are very committed to our future. We think that future is very bright and we've got working through this year in laying the foundation. And we expect real good things to come in the future.

So thank you, all, very much for your time today, your interest, and we look forward to updating you on our next call. Thank you.

Operator

And ladies and gentlemen, this concludes the NII Holdings First Quarter 2012 Earnings Conference Call. Thank you for your participation, and you may now disconnect.

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