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NII Holdings, Inc. (NASDAQ:NIHD)

Q2 2012 Earnings Call

August 7, 2012 8:30 am ET

Executives

Tim Perrott - VP, IR & Corporate Communications

Steve Dussek - CEO

Gokul Hemmady - COO & CFO

Analysts

Chris King - Stifel Nicolaus

Ric Prentiss - Raymond James

Andres Coello - Scotia Bank

James Breen - William Blair

Kevin Roe - Roe Equity Research

Kevin Smithen - Macquarie

Vera Rossi – Barclays

Operator

Ladies and gentlemen, thank you for holding, and welcome to the NII Holdings Second Quarter 2012 Earnings Conference Call. At this time, all lines are in listen-only mode. There will be an opportunity to ask questions at the end of today's call.

Today's conference call will be available for rebroadcast through for the following two weeks beginning later today. Domestic callers may access the rebroadcast by dialing 1-888-286-8010 and entering pass code 17448640. International participants may access the rebroadcast by dialing 1-617-801-6888 and entering pass code 17448640.

(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, Tuanda, and good morning to everyone, and thank you for joining NII Holdings second quarter 2012 conference call. With me on the call today are Steve Dussek, our CEO; and Gokul Hemmady, our COO 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 and 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 23rd, 2012, as well as other documents we have filed with the SEC.

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

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

Steve Dussek

Thank you, Tim. Good morning and thank you for joining our call today. During the second quarter, we continued to move forward with the deployment of our 3G networks, while addressing a number of near-term operational challenges. Gokul will give you details of our operating performance in a moment. But before I hand it over to him, I want to give you my thoughts on our results for the quarter and more insight into our direction for the future.

First, looking at our 3G efforts, we successfully launched our first 3G push-to-talk service offering in Peru, and are pleased with the initial subscriber acceptance of the service. Since our launch in May, we've added 44,000 new 3G subscribers, bringing our total 3G subscribe base in Peru to 109,000 at quarter end.

Our first smartphone has been well received and represented a significant portion of our 3G gross adds in Peru during the quarter. We are also encouraged to see the average loading ARPU of our new 3G customers is higher than the ARPU of our traditional customers. We believe the stage is set for more growth on the 3G network over the balance of the year.

In Chile, we launched 3G voice and data services in May and began offering push-to-talk services on our network last week. We are pleased with our early results adding 34,000 3G customers in the quarter.

In Mexico, we remain on schedule for the launch of 3G services late next month and in Brazil, we remain on track to begin offering 3G services by year-end.

We have also continued to move forward on our plans to target a wider range of customers. We have completed the refresh of our brand that we started last year in anticipation of our launch of 3G services. Our brand has strong recognition among both our core business customers and the high-end consumer segments we plan to target.

We continue to expand our distribution network, adding 160 points of presence in the first half of the year, which will help us as we target a wider group of customers with our expanded services.

And finally, we are building our 3G device portfolio and launched our first smartphone with plans to have 12 3G handsets in our device portfolio by year-end. So, overall, we made good progress on our 3G and expansion efforts during the quarter.

From an operational perspective, our results for the quarter were impacted by the decline in foreign currency exchange rates, and from actions we are taking in Brazil to address customers we attracted last year that are not the right fit for our services. These actions have helped stabilize ARPU in Brazil in recent months but have also driven a higher level of churn. Gokul will give you more details in a moment but let me give you a brief overview of this situation.

As we discussed on previous calls, market conditions in Brazil intensified last year with more aggressive pricing campaigns and 3G device offers by our competitors. We responded with promotions of our own, which attracted a group of price sensitive customers who didn't assign significant value to our high quality service, which are the benefits of intrinsic communications that are our key points of differentiation. In working to retain customers we also began to experience a rise in retention cost and an increase in migrations to lower price plans, both of these negatively impacted ARPU.

As we stated last quarter, we are reducing our retention investment for these customers in Brazil, and are refocusing our rate plans, retention efforts, and service, towards more valuable customers. Although these actions are causing an increase in churn as we realign our customer base they are also contributing to more stable ARPU in Brazil. As a result, we are experiencing a temporary period of lower net add growth, but we believe that our actions will drive improvement in our customer base as we prepare for the transition to 3G.

Despite these recent challenges, we are encouraged about what the future will hold for NII from a number of perspectives. First, our direction is clear. We are investing in a technology platform that will enable us to provide additional high value products and services to more customers in our markets. We have enhanced our brand and are expanding our distribution presence in anticipation of our 3G offerings. And we expect to take advantage of future cost improvements to target an expanded addressable market and pursue additional revenue streams.

Second, we are achieving milestones in our 3G efforts, and beginning to see early signs of growth in our first 3G push-to-talk voice offering. The technology works well and delivers the high quality service that our customers have come to expect from us. We started offering full services on our 3G network in Chile last week, and we expect to begin offering 3G services in Mexico next month, and in Brazil by year-end.

And finally, we are taking actions to improve our operating results over the long-term. And while we are still feeling some pain in Brazil and Peru from the actions we are taking to better align our customer base with our value proposition, we believe these are the right decisions for the business over the long-term and see opportunities for improvement on the horizon.

As you know, we became one of the fastest growing wireless companies in the world with only a 2G network. And we see as terrific growth opportunity with our expanded 3G services.

Before I turnover the call over to Gokul, I want to share some comments about the changes that I made to better align the structure of our senior team for the future. As you know, Gokul has taken on the role of Chief Operating Officer for the company, with our market teams and IT now reporting to him. Gokul's experience and close involvement in the day-to-day operations of NII over the past five years position him well for this role. He also has a highly experience senior operations team to assist him in his new position. We are in the process of searching for a new Chief Financial Officer who will strengthen our senior team for the future. I believe that these changes will lead to a more streamlined and agile organization that will be better positioned to respond to changes in the marketplace.

I'll follow-up with additional comments later. Now, I'll turn the call over the Gokul.

Gokul Hemmady

Thank you, Steve, and good morning. Before I get into the results, I wanted to take a moment to express my excitement about my new role as COO. I'm looking forward to delivering on the tremendous opportunity available to our company as we evolve our business and deploy our next-generation platform. My top priority will be to improve the operational performance of our business, as we make the transaction to 3G. That effort will include streamlining our processes and increasing the speed of our decision making, so that our business becomes more agile in response to the dynamic market in which we operate. More broadly in my new role, I will lead our effort to create an operating model that is aligned with our long-range goals and position to help us grow profitably over the long run. I'm pleased to take on these additional responsibilities and challenges.

Looking at our operating results during the quarter, we experienced softer subscriber growth and weaker financial results compared to the same period last year. Net adds were lower in Brazil, and Peru, largely as a result of actions we took to better align our customer base with our value proposition. Our financial results are also affected by weaker local currency exchange rate; lower ARPU in Brazil, and cost we are incurring in connection with our deployments of our 3G network. In particular, the Brazilian Reais and Mexican Peso were down 23% and 15% respectively, compared to the same quarter last year.

Consolidated second quarter results include 235,000 net adds, bringing our subscribe base at quarter-end to more than 11.2 million subscribers, a 14% increase, compared to a year ago.

$1.5 billion in consolidated operating revenue, down from $1.8 billion during the same period last year, due in part to a $250 million decrease caused by weaker local market currencies.

$211 million in consolidated OIBDA, a reduction of $266 million when compared to the second quarter of last year, with about 40% of that reduction tied to weaker local currencies.

Let's take a look at the drivers behind these results in greater detail. On a consolidated basis, our gross adds for the quarter improved by 14% compared to the second quarter of 2011, highlighting our efforts to remain competitive and attract our share of new customers in the market. However on a consolidated basis our churn rate for the quarter increased by 60 basis points compared to the same period last year, driven primarily by increases in churn in Brazil where we scaled back our retention investments from first quarter level.

Consolidated ARPU of $38 was down more than $13 from the second quarter of last year due primarily due to weaker local currencies and lower local currency ARPU in Brazil.

CapEx for the period was $366 million with nearly 70% 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.

We remain on track to launch our 3G networks in Mexico and Brazil later this year, and we expect those efforts to drive higher quarterly CapEx investments over the remainder of the year.

At the market level, Mexico and Brazil continue to absorb the impact of some actions we are taking to improve our subscriber base. Brazil represents a very attractive growth opportunity leading to a highly competitive market for wireless services. While this isn't new for us, over the past year pricing has become even more aggressive and we are operating in market where 3G devices are gaining greater visibility.

Despite this situation we have continued to drive good subscriber loading and maintained a solid share of gross adds in the market with Mexico and Brazil generating gross adds in the second quarter at almost 80% of last year's levels, demonstrating that customers in Brazil have continued to recognize the value of our services.

Late last year, in response to offers in the market, we introduced certain promotions that attracted a group of customers that are not aligned with our value proposition. As Steve mentioned, we have concluded that the right long-term decision is to reduce retention spending on these customers. In the near-term, this decision has resulted in higher churn and is pressuring our subscriber growth. But we have also seen a trend of stabilizing ARPU, with ARPU at or near 92 Reais over the past four months and we are working to maintain ARPU at this level through the second half of the year. While churn will remain at an elevated level in the near-term as we go through our cleanup efforts, we expect some improvement by the end of the year.

In addition to limiting retention spending, we recently made some modifications to our commercial offers in order to simply our rate plan and we made adjustments to our commission structure sharpening our focus on the right customers.

We have also taken actions to tighten our credit policy. In the long run, we believe that these strategies will position Nextel Brazil to capture higher quality subscriber growth, and improved profitability, as a result of stability in ARPU.

Summing this up, conditions are tough in Brazil, and the recent acceleration of 3G device offers has put us at a temporary disadvantage. But we are focused on remaining competitive in the near-term and preparing the company for a successful future.

And while some other steps we've taken to ensure that we are targeting and retaining the right customers are having a near-term impact on our subscriber growth, we believe that these actions have put us in a better position as we make the transition to 3G in Brazil.

There are the details of our results in Brazil for the quarter. Nextel Brazil generated 3000 net adds in the period ending the quarter with 4.2 million subscribers, a 14% increase in it's ending subscriber base compared to a year ago. The lower net adds for the quarter were primarily due to the increase in churn to 2.3% as a result of the actions I just described.

Nextel Brazil's revenues were $730 million, a $196 million decline compared to the level reported in the second quarter of 2011. About 85% of this decrease was due to weaker local currency exchange rates.

Segment earnings in Brazil were $183 million, down $170 million from the same period last year, again due to weaker local currency exchange rate, which accounted for about two-thirds of this decline, as well as lower local currency ARPU, and costs associated with our 3G deployment.

Nextel Mexico's second quarter results reflect good customer demand and stable operational metrics. Nextel Mexico generated 60,000 net adds, ending the quarter with 3.8 million subscribers. Gross adds grew 21% compared to the same period last year. Churn of 2.02% reflect a 30 basis point increase compared to the same period last year, but is stable compared with the first quarter of 2012. Revenue of $521 million declined $67 million from the same period last year primarily as a result of weaker local currency exchange rate.

Nextel Mexico generated $128 million in segment earnings during the period, a decline of $95 million compared to the second quarter of 2011. OIBDA reported last year includes an adjustment of $18 million related to the cumulative effect from the implementation of lower interconnect rates in Mexico. Without this adjustment, OIBDA would have declined $77 million, with about 40% of that decline attributable to weaker local currency exchange rate.

Turning now to our other markets, during the quarter Nextel Argentina reported a 31% increase in its ending subscriber base compared to the second quarter of 2011. Our year-over-year subscriber growth was driven by continued success of the prepaid offering that Nextel Argentina launched during the fourth quarter of 2011. We have found that our gross add and churn results for this new service are less predictable than our postpaid service driving the significant quarter-over-quarter changes in net adds that we have seen over the last three quarters. We are excited about the strong growth of this segment and we continue to carefully monitor the matrix to ensure that we are growing profitably.

Segment earnings in Argentina of $35 million were $7 million lower than the same period last year, impacted by weaker currency exchange rates, and higher acquisition costs related to loading more than two times the gross adds from the prior year period.

While Nextel Peru reported a slight subscriber loss in the quarter, we saw strong early demand for the new 3G services. The 6,000 subscriber reduction was driven by higher churn in the iDEN customer segment, which offset gross adds productivity for our new 3G services. Higher iDEN churn was largely a result of effects of the timing of our 3G launch.

We are encouraged by the strong demand for our 3G products and services as we generated 44,000 gross adds since our launch of push-to-talk services in early May. Also, ARPU for these new 3G customers is above that of the average iDEN customer. Our smartphone has led the way generating the majority of our 3G gross adds in the quarter and we believe that the trend going into the third quarter looks good as we are increasing the 3G loading on our new network.

We reported segment losses of $4 million in Peru, down from segment earnings of $8 million in the prior year period, as a result of higher cost of service including customer care and engineering cost, and cost related to our 3G launch.

Turning to our expectations for 2012, while we believe that our efforts to strengthening our operating metrics are resulting in improvements, we expect that we will continue to face tough competitive conditions, and weaker local market currency exchange rates through the remainder of the year.

Taking those conditions into account we have modified our outlook for 2012 as follows. We now expect to generate about 1 million net adds. We expect to generate approximately $6.1 billion in consolidated revenues. We expect to generate about $1 billion in consolidated OIBDA, and we expect to invest up to $1.5 billion in capital expenditures for the year.

Weaker local market currencies are a key factor impacting our revenue and OIBDA guidance, with approximately 40% of the change in our OIBDA guidance attributable to the translation effect of the depreciation of currencies in our markets. In the second half of the year, we will be focusing on delivering subscriber growth on our 3G networks in Peru, Chile, and Mexico, and maintaining the success of our prepaid offering in Argentina, which together, we believe should offset some of the current weakness in subscriber growth in Brazil.

Our modified outlook for the year reflects our expectations that Brazil local currency ARPU will remain relatively stable at second quarter levels for the remainder of the year. The decline in our expected capital investment for the year is based on weakening local currency exchange rates, as a portion of CapEx is in local currency, and reducing the planned 3G investment in Argentina in 2012, due to delays in the spectrum option there.

Our modified outlook for the year also assumes an average exchange rate for the Mexican Peso to the U.S. Dollar of 13.4 pesos for the second half of the year, compared to the 13.25 exchange rate assumed in our prior guidance, and an average exchange rate for the Brazilian Reais to the Dollar of 2 for the remainder of the year compared to the 1.75 exchange rate assumed in our prior guidance.

Turning to our balance sheet, on a consolidated basis, we ended the quarter with $2 billion in cash and investments, with more than 80% 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 $2.7 billion at quarter end. Our updated OIBDA guidance implies a net debt to OIBDA ratio of 2.7.

Beyond our current cash resources we continue to have access to capital. With $630 million available under our vendor financing facilities in Brazil, Mexico, and Chile, and no material debt maturities schedule until 2016. We plan to continue to evaluate U.S. and local funding opportunities, and if considered necessary, may access capital to support our business plan, reduce our capital cost, optimize our capital structure, and maintain or enhance our liquidity position. We are also evaluating the economics of a sale of a portion of our TARP portfolio in order to unlock the value of these assets and to further strengthen our funding position.

As you've heard us say on prior calls and meetings with our investors, 2012 is a pivotal year in the transformation of our business. Our second quarter results illustrate the challenges that we expect to face throughout the year as we focus on the deployment of our 3G networks and supporting systems. We remain steadfast in our commitment to our 3G investments and I'm committed as COO to ensuring that we deliver strong results and generate a competitive return on the investments that we are currently making.

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

Steve Dussek

Thank you, Gokul. As noted throughout our comments, we continue to face a number of challenges in 2012. We have implemented plans to address these add-ons in order to improve our results over the long-term. We are confident that our plans and our companywide focus and determination will place us on the path to better results in the future.

We are achieving important milestones in our 3G strategy. We have seen good early traction on the launch of our 3G voice products in Peru. We have started offering 3G services in Chile, and are on track to offer 3G services in Mexico in the third quarter, and in Brazil by year-end. While we are not happy with our current results, we are still expecting to grow our subscriber base by 10% during our transition, and we look forward to our upcoming 3G launches and using our enhanced competitive position to pursue more profitable growth in the years to come.

The changes we made in our organization to transition Gokul to the role of Chief Operating Officer will bring even more detailed focus to our operations and the resulting performance of the company. With this change, I will focus my efforts on developing and executing the company's strategy, supporting and managing our vendor relationships, communicating more with investors, and creating value for our shareholders over the long haul.

We all remain excited about our strategy and the opportunities that we believe are before us. As we continue our execution of our 3G rollout, we believe we will be very well positioned to capture more profitable growth with the goal of creating value over the long-term for our shareholders.

Operator we will now take questions.

Question-and-Answer Session

Operator

Great, thank you. (Operator Instructions) Our first question comes from the line of Chris King with Stifel Nicolaus. Please proceed.

Chris King - Stifel Nicolaus

Brazil, in particular has been I guess at best a very highly competitive market at worse a disaster really for everybody. In the second quarter, I think America would be well something like 200,000 postpaid subs in the quarter. Could you may be talk a little bit about the current dynamics in the market there today and how you see the second half of the year playing out, and does the increased competition impact your thinking regarding your longer term 3G strategy in any way? And then the second quick question, looks like you guys had a relatively high amount of expenses in the quarter between Chile and corporate obviously not exactly where the size breakdown there. Looks like about $134 million in total. Could you give us may be an approximate breakdown of those costs release, how that should trend throughout the remainder of the year? Thanks.

Steve Dussek

Yeah Chris, it's Steve. Let me address the Brazil portion of the question, then I'll turn it over to Gokul for the -- your second question. So I think as really noted over the past few quarters and as you've noted the Brazil market dynamics have gotten tough, really since the tail end of the third quarter of last year. I think the combination of more aggressive pricing and promotion, coupled with a stronger 3G adoption rate, created a situation for us that as we've said made it more difficult to compete, primarily due to not having our 3G network available to us. And the responses that we made to those market conditions were to put in our own promotions and pricing plans, that as I said in my comments that led to us attracting customers that overall weren't really a good fit for us. They were price sensitive. They didn't value the differentiation that we opted. And the loading of these customers have contributed to the weaker metrics and operating results, as did the fact that we, we didn't have the 3G capabilities we have. So I guess in hindsight I would have certainly would have made different choices for our response if I had a chance to do it over again.

But to address the issues that this created, we've taken the action we've talked about in terms of tightening our credit policy, reducing the amount of dollars we're willing to spend in retention on those customers, focusing our efforts more on our high-value segment, and building out our 3G network, so we can takeaway that that the gap there of not having our 3G network available to us.

The impacts of those actions as I said have seen our ARPU has become relatively stable over the past few months, but conversely the churn rate has increased in large parts of these customers that were profitable in leaving. So, churn has been higher than normal, ARPU has become relatively stable. And now, as we move into the second half of the year, we're expecting that ARPU would continue to show further signs of stabilizing and that churn we would expect to come down by year-end as we work through these on probable customers and as we, at the end of the year we launch our, the first of our 3G markets.

So, as we head into 2013, we expect we're heading in with a much stronger customer base, a churn rate that will have come down by the end of the year, ARPU that will stabilize and we will have launched our first of our 3G markets. So, all of this, the period that we're going through currently, I think we're in the near-term challenges. As we exit the year, we'll see we will be much better positioned as we continue to build out 3G in 2013 and go in with those strong customer base with churn haven't come down, ARPU that's stabilizing, and that will get back to a good probable growth stream as we continue to build out 3G in 2013. It doesn't change our outlook on our 3G strategy whatsoever.

Gokul Hemmady

Good morning Chris, and to your question on H2 and Chile, the increase from Q1 to Q2 half of that is related to the investments we're making in Chile, the other half is the H2, as we think about in investment in Chile, it's about we launched the network there on a roaming capability and then transferred to our own push-to-talk service. So we're excited about the growth there.

On the H2 side, it's about global platforms we're in, developing CRM systems that benefit all our markets. We have value-added services that benefit all our markets that reside at H2 as also some portion of our HPPTT development. So, all those aside at H2's that benefit all our markets. We expect that by the end of the year, this bucket will come down to more what you've seen in the Q1 levels of about $105 million.

Operator

Our next question comes from the line of Ric Prentiss with Raymond James. Please proceed.

Ric Prentiss - Raymond James

Couple of questions. First on the guidance, obviously six months ago you guys gave guidance, I thought your visibility was good at that time, how would you update us on your thoughts on how visible the market is particularly given the competition in Brazil and also on the Brazil aspect we've been hearing comments that there has been an increase in the competitive push-to-talk offering from some of the others in the market place? May be you may address that?

Gokul Hemmady

Sure, Ric too. I think on the visibility it's fair to say that there has been conditions; market conditions have been tough as we pointed out. But I think we feel our visibility is pretty good, as you've seen our ARPU for the last four months has been stable. We've taken many actions as Steve pointed out to get there, and that has resulted in higher churn also. So in terms of visibility for the balance of the year we think we feel pretty good about stability in ARPU in Brazil. We think that -- we still have to work through some of the churn in the near-term and we feel pretty good about getting churn to lower levels by the end of the year. So I think we've gone through a period of market conditions kind of being competitive there, but feel good about all the actions we've taken and therefore the visibility for the rest of the year.

To your question on some competitors offering similar services, we've really not seen any impact of that action on our voluntary churn. We've not really seen us losing customers through that competitive offering. We still believe that what we have to offer in the market place from a push-to-talk side as well as our differentiated high touch customer service holds very good in terms of our value proposition in all our markets as also in Brazil.

Ric Prentiss - Raymond James

And then on the 3G as you're launching 3G you had mentioned in Chile you launched it on a roaming basis initially in May. That obviously would not have push-to-talk in the product that you would have launched in May. Now in July you've push-to-talk as well as 3G. So as we think about the next set of market launches, Mexico at September end, Brazil at year-end, is that a 3G launch, is that 3G with push-to-talk launch and how important is the push-to-talk offering in the 3G that you're seeing in Peru?

Gokul Hemmady

The push-to-talk offering in 3G is extremely important. It is our value proposition. We believe that we're getting attraction we've gotten in Peru in the first two months with our push-to-talk offering. We had that capability in Chile to launch on a roaming basis. We did it to kind of enter the marketplace. Now we've aggressively launched it with push-to-talk, and you will see much greater attraction on our gross adds for the balance of the year.

As far as Mexico and Brazil go, both those launches will be 3G with push-to-talk, that is our absolutely our expectation and that's how we're going to launch it in Mexico by the end of September and Brazil by the end of the year.

And one last thing Ric, I mean we launched 3G with handsets in Chile with the button. So, it's now, it's not that we've to swap out handsets, we've given handsets to our subscriber base, they visit on a roaming capability, now they have the ability to use the push-to-talk capability.

Ric Prentiss - Raymond James

Okay. You were receiving 3G only; you were receiving 3G with push-to-talk and then just turned it on?

Gokul Hemmady

That's right, exactly.

Ric Prentiss - Raymond James

Okay. And one quick one, Argentina you said the CapEx has flipped out, how much CapEx was flipped out and what is the current status in Argentina for the ARPU?

Gokul Hemmady

So current status in -- on the option is nearly difficult to say I don't think there is too much visibility. We keep sharing that expectations are that it will happen by the end of the year. But given all the delays I think we're being very cautious and therefore, we've taken out -- taken out that CapEx in the guidance. So I would say that from the $1.7 billion to $1.5 billion may be higher to 60% was a reduction in Argentina.

Operator

Our next question comes from the line of Andres Coello with Scotia Bank. Please proceed.

Andres Coello - Scotia Bank

Two quick questions. The Mexican Supreme Court could be discussing shortly whether to allow their regular corportile to change the historic mobile termination rate, which will allow companies to revise all interconnection payments in the 2006/2010 period? One of the smaller stateline operators says that they can save about a 1 billion pesos, another stateline operator say them they can save up to 800 billion, thanks to the Supreme Court ruling. Just wondering if you could remind us how much money you saved in 2011 thanks to the 61% termination you got in Mexico and whether you believe you took some benefit from the Supreme Court ruling?

Gokul Hemmady

Sure, so the first, answer to the first question in 2011, it was about 200 to 300 basis points increase in margins, which was about $70 million, $80 million in OIBDA increase. So that's what the benefit in '11, it's a continuing benefit for going forward.

To your second question, I think it's -- I don't think I want to speculate what that might do at all. So, we're not in any of our guidance or any such things incorporating that. We will of course be very happy. If there are other that we do benefits accrue, as you know we're a net fear of interconnect cost. So, any lower interconnect cost absolutely help us and that was what you saw in 2011. And so we look forward to any of the rulings benefiting us.

Andres Coello - Scotia Bank

Okay. And just another question, can you tell us how -- what do you expect of the LTE launches by your competitors. How those launches could affect your business? Did you know if the PTT applications you can download in the smartphones will have lower latency in an LTE network?

Gokul Hemmady

Sure. So, I think, as you know 3G penetration in Mexico or in any of our other markets is somewhere in the 20%, 25% range. So, there as we believe a long way to go on 3G and so, we don't believe that LTE is necessarily a big event in the marketplace that we operate in, in the short to medium term. Over the long-term, as you know, we have architected our network to be 4G ready in the sense that we just have to swap out some cards and that cost us as we said about $3 per swap in CapEx over a period of time. So, we're ready to launch 3G, I mean, 4G or LTE when we believe it is the right time to do that. So, we don't believe it's necessarily a factor or an event in the short-term for us. I don't -- what was your second question on that?

Andres Coello - Scotia Bank

Yeah, if you knew whether the latency on the applications you can download in the -- in an smartphone for free say in a Blackberry you can now load a PTT application for free whether in an LTE network, the latency of that application is lower so, especially lower than in the current 3G environment where latency of these applications you feel safe?

Gokul Hemmady

Sure got it. Sure, so I think all the technologies keep evolving and improving overtime. Our current thinking is that that doesn't necessarily change from 3G to LTE. But that said, we keep a careful watch on it to see, what -- how that evolves because as I said technologies keeps evolving.

Operator

Our next question comes from the line of James Breen with William Blair. Please proceed.

James Breen - William Blair

Thanks, just a couple of questions. One with respect to Peru, can you give us an idea, I think you said there were 44,000 net adds there in the 3G network. Can you give us some idea of how many of those came from existing iDEN customers versus new customers to the franchise? And then, overall in the build out, you're seeing any change in terms of time that you plan launching this 3G in Mexico and Brazil or any change in the costs there is that pretty much on plan? Thanks.

Gokul Hemmady

Sure. So Jim, we're feeling very good about the launch in Mexico as well as Brazil. As we speak, we're in the testing phase. We've pretty much have what we need from a network perspective in Mexico. We're in the testing phase as that goes and we feel very good about launching Mexico by the end of the third quarter as we've said. So those plans are going well. The cost side is going well from both the Brazil and Mexico perspective. So, I don't think there is any change to what we've said in the past in terms of $10 per swap in CapEx and the $2 per swap in OpEx launch.

Brazil, we're now going to launch by the end of the year and I think that's progressing well too both on the network side as well as integrating some of the back office systems like CRM and other things. So both those launches are really progressing well from our perspective.

So on the first question, most are new adds I would say that about 75% of the Peru launch are really new adds for us as we -- it's still early, it's been two months that we've had the launch. As we go into the third and fourth quarter, I would say that you would see that mix changing. We're going to sell more and more data cards to our existing subscribers, which we've been doing, which we've had the capability to do. But we're also going to up sell to our existing base to look at to get more ARPU. So, it's all new adds and if you're saying obvious those migrations, they're not migration from our existing iDEN, but they're new adds from that perspective, but it also includes may be 25% to 40% of those adds being to kind of our add-ons to our existing base of subscribers.

Steve Dussek

Yeah, Jim, it's Steve. As we talk about the yeah the 44,000 adds in -- on 3G and then we've a 109,000 in our base on 3G, the 109,000 includes the migrations. But really the 44,000 is new, mostly new adds, whether they were on the voice with push-to-talk or in the data card environment. But the migration has come as a result of that, they're included in the 109,000 base that we have. And there were some migrations but certainly the highlight for us was really the adoption rate of 3G in the marketplace in what amounted to less than two months.

James Breen - William Blair

Great thanks and then just on Chile, it seems it's becoming a little more significant part obviously of the overall market. Do you think you'll start to breakout the full financials there like you do in the other segment soon?

Gokul Hemmady

No, absolutely, I think we will because we would want to showcase the growth in Chile. And so, we'll think about what the right time to do and when it becomes more meaningful, which should, we're very encouraged and excited with the initial traction that we're seeing there and hope to gain much more traction as we launch PTT in the second half and so that's the time when we will evaluate whether it makes sense to take it out.

Operator

Our next question comes from the line of Kevin Roe with Roe Equity Research. Please proceed.

Kevin Roe - Roe Equity Research

Where are you in the process of examining tower sales? You mentioned that in your prepared remarks. What countries are you looking at and can you give us a sense of the number of towers being considered for sale?

Gokul Hemmady

Sure Kevin. So we're planning to pursue a tower deal if the economics are right and if it creates value if the terms are right. We certainly are, as we speak, planning to do that. We plan to do that; the objective is really to strengthen our funding position and to unlock value. We believe that there is tremendous value in these tower access. We -- across our five countries, we have probably slightly over 7000 towers, marketable towers. So these are the towers, we've examined the whole portfolio and said we probably will look at about 7000 towers and you can see based on resident transactions what that results in value, but it's certainly something that is top of mind for us.

Kevin Roe - Roe Equity Research

Okay is it -- would you characterize it as early days, early in the process or are you well into the process?

Gokul Hemmady

No, I would characterize it as early days, but it's something that we can, not early, early days that we cannot move quickly on. But it's still early days and that we've done enough work to gather information internally, but because as you know a lot of the work has to happen internally in terms of gathering information and things of that nature. I think we're well into that piece of the process, but it's still early days in terms of any external work in terms of creating bids and those kinds of things.

Kevin Roe - Roe Equity Research

Okay and just a quick follow-up. In addition to tower sales, can you talk about other potential strategic alternatives that could increase shareholder value that you may be examining?

Steve Dussek

Yeah Roe, it's Steve. As we have always said that we're always going to look at and we'll take a look at anything that we believe has the opportunity to create the long-term value for this company. So as Gokul outlined, as we outline in our comments that we believe that the tower environment for tower deal is pretty strong. We would like to do a deal and obviously if the economics are right.

Now, in terms of what else we might consider, I can't really make specific comments about anything that we're contemplating, but sufficed to say we would look at any and all alternatives that would be available to us to create our unlock additional value. So, we're stopping just the towers in the terms of our examination. But I'm really not prepared to make any specific comments at this time on what those things might be.

Operator

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

Kevin Smithen - Macquarie

If you can elaborate a little more on the liquidity, first of all, on the tower sale, have you engaged an outside advisor at this point, is that something you would consider to be contacted potential buyers directly, can you give us a little more color on that?

Gokul Hemmady

Sure. So, we -- as you can imagine we've talked to a lot of potential advisors and it's quite likely that we will retain an advisor and that process will happen quickly. But at the same time, we're not losing out any options. Here, I think what you should takeaway is that, we've done a lot of planning and we're going to move ahead with looking at this opportunity extremely seriously. And if we can get a good deal on excellent terms to unlock value done very quickly with speed, we will look at that alternative very seriously. So, I think all alternatives are on the table whether it's like engaging an advisor or any other mood by which we can unlock value at good rate good term.

Kevin Smithen - Macquarie

Just as a follow-up on cash flow. If you look at the results of Sprint and PCS, you saw as they're going through a transition. Sprint is about to launch LTE and PCS is about to launch LTE, it's obviously different generation but a technological shift. They have ratcheted back significantly on gross adds and improved cash flow. And one of the things I saw was that you added a lot of gross adds and iDEN this quarter. And I wonder what the rationale is for spending aggressively on adding iDEN subs at this point, I mean why not dial back you net adds, improve EBITDA, and focus on net adds only in 2013 when you got a competitive product?

Gokul Hemmady

No, absolutely Kevin I think that is what we're doing. We're spending really very little on the iDEN network. As we speak, about 20% of our total CapEx spent for the year is going to be on iDEN and is going to keep coming down, so that is really the strategy. In advance of a 3G launch, we're going to be very cautious about the growth on iDEN. So, I don't think you should take our strategy as let's grow very aggressively on iDEN in advance of us getting.

Kevin Smithen - Macquarie

Well, I'm not talking about CapEx I'm talking about gross adds, I mean why add any iDEN subs at all? I mean, it seems to me that your liquidity is what people are most concerned about potentially and the sustainability of iDEN to saw, so why -- why not dial back on marketing. You could probably add several hundred million dollars of EBITDA over the next -- on an annualized basis over the next couple of quarters by dialing back iDEN marketing, why won't you do that and just focus on marketing once you have your networks up and running in Mexico and Brazil?

Steve Dussek

Yeah, Kevin, it's Steve Dussek. First of all, we do have a base of iDEN customers, today, where we get a sizable percentage of our gross adds come from add-ons to those accounts. Those accounts over the long haul are valuable as important to us. So to not fulfill their requirements as they come through in terms of the add-ons and the additional units that they require, I think would be potentially damaging to us in the long run in terms of those quality customers that we expect. We're also investing in the distribution channels that prepare us to take advantage of 3G. So those costs come through as marketing costs as well.

So, we're not out pushing iDEN in now in Peru and Chile, when we've got a new market. But in terms of Brazil and Mexico where we have a sizable basis and we think it's important to continue to service those customers as we move into and get closer to 3G because a lot of those customers will be adding on to their accounts and will add-on in their 3G world. So, we're not looking at a sizable and we're obviously very focused as you're in terms of the near-term as we get closer and closer to 3G once the optimum level of investments that we needed to maintain in iDEN in terms of marketing. And now all those customers will be migrating day one to 3G. So it's important that we continue those relationships and continue the strong loyalty that we built up over the years with those customers.

Tim Perrott

Operator, I think we have time for one more question.

Operator

Our final question comes from the line of Vera Rossi with Barclays. Please proceed.

Vera Rossi – Barclays

Can you talk about the evolution of your management season corporate expenses? Where do we see this line going forward and if you will continue to grow as a percentage of revenues? Thank you.

Gokul Hemmady

Sure, Vera. So no I don't think, as I think I tried to say in one of our -- response to a prior question, the H2 expenses are not just G&A they are supporting our markets in terms of some global back office assistance. They're supporting our markets in terms of value added services projects as well as HPPTT development. And some of those are clearly one-time costs. So far that -- those costs going up from Q1 to Q2. But I believe that by the end of the year by Q4 we will see it come back to Q1 levels. So overtime I would expect that this line item of H2 as a percent of revenues should certainly start coming down.

Vera Rossi – Barclays

At what part in 2013?

Gokul Hemmady

No, I expect that to come down as I said from current Q2 levels it should come down by Q4, start coming down by Q4. And then as we scale up much more because there are some one-time expenses in Q2 that will go away like HPPTT and other things. But then what will remain is just pure support costs that are more G&A in nature that will start coming down in 2013 as we ramp up growth from the 2012 levels of 10% subscriber growth. We certainly will ramp that growth back up in '13 as well get more 3G capability and that's when you'll see those support costs coming down as a percent of revenue.

Tim Perrott

I think that's all we have in terms of Q&A today Steve. Final comments.

Steve Dussek

Thanks Tim. I just wanted to make a final few comments. First of all obviously we're going through on operational side some operational challenges as we readily pointed out. We tried to point out what we're doing about I mean how we exit this period heading into 2013. We believe the opportunity for long-term profitable growth is right in front of us. We're really excited about it. We're working through these near-term challenges. We are making, very important that we're making the progress on our future in terms of the 3G build outs, launches of Peru and Chile and those early results, and pending launch at the end of September in Mexico, and then the launch of some of our markets in Brazil by the end of the year. We're improving our competitive position with those launches. We're getting 2012 as a transition year for us. But as we head into 2013 we expect that we'll return and start to see many of our profitable growth as we get these networks built and operated.

So we very much believe our future is very bright. We remain very vigilant in terms of our efforts to resolve the near-term and build for the long-term and we appreciate your continued interest and we look forward to reporting back to you on the third quarter call. So thank you all very much. Have a good day.

Operator

This concludes the NII Holdings second quarter 2012 earnings conference call. Thank you for your participation. You may now disconnect. Good day.

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