NII's (NIHD) CEO Roberto Rittes on Q4 2017 Results - Earnings Call Transcript

NII Holdings, Inc. (NASDAQ:NIHD) Q4 2017 Earnings Conference Call March 8, 2018 9:00 AM ET

Executives

Dan Freiman - Chief Financial Officer

Roberto Rittes - Chief Executive Officer, Nextel Brazil

Analysts

Lance Vitanza - Cowen

Dave Gallagher - FBR

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the NII Holdings Fourth Quarter and Full Year 2017 Results Conference Call. At this time, all lines are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded, Thursday, March 8, 2018. The conference call will be available for playback in the U.S. through March 15 by calling 1800-633-8625. Callers outside the U.S. will need to dial the 1402-977-9141. The passcode for both is 21885340.

I would now like to turn the conference over to Dan Freiman, Chief Financial Officer of NII Holdings. Please go ahead sir.

Dan Freiman

Thank you, Alex. Good morning, everyone and thank you for joining NII Holdings’ fourth quarter 2017 results conference call. With me on the call today is Roberto Rittes, Chief Executive Officer of Nextel Brazil.

As a preliminary matter, let me inform you that some of the issues discussed today that are not historical will be forward-looking and as such should be taken in the context of the risks and uncertainties that are outlined in the SEC filings of NII Holdings, including our 2016 Form 10-K and Form 10-Qs we filed in 2017, our 2017 Form 10-K that we expect will be filed in the next few days well as other documents we have filed with the SEC.

In addition, during this call, we will be discussing certain financial metrics that do not conform to generally accounting accepted accounting principles in the U.S. otherwise known as GAAP. For a reconciliation of these financial metrics to GAAP, please access NII’s Investor Relations link at nii.com.

Also before I turn the call over to Roberto, I would like to mention that we have posted a presentation on our website summarizing our results for the fourth quarter. Please refer to this presentation for additional details on our progress for the year. I would now like to introduce Roberto?

Roberto Rittes

Thank you, Dan. Good morning and thanks to all of you for joining us today. Over the last year, we work hard to address the challenges facing our business. We implemented initiatives to eliminate unproductive sales, improve commission structures, reduce headcount and rationalize spending.

I am extremely pleased with progress we have made. We have now linear and more agile organization that operates with fewer costs. In addition, let’s hear we amended our bank index improving our capital structure and increasing our liquidity runway. As we look ahead to 2018, we believe they are now poised to return to meaningful subscriber growth. We have guided on this topic later, but it will first highlight the traction we achieved in Q4.

After many months implementing initiatives to enhance customer experience, we are now starting to harvest the benefits. For most in Q4, it reduced our 3G churn to 3.47, a 57 basis points drop from the quarter before. Moreover, we are seeing continued improvement in the beginning of this year and expect 3G churn to being the middle 2% range for the first half of 2018. This improvement in our customer satisfaction was also captured by many other KPIs for our business. For example, in December our net promoter score, NPS, a well-established customer satisfaction index reached 29 points, a more than twofold increase from our media lows.

According to our market research, we are now within striking distance of NPS leadership in Brazil. Furthermore, calls into our customer service center dropped by 24% in Q4 when compared to the quarter before. Complaints from our clients to ANATEL also decreased by 32% in the same period. [indiscernible] the leader of Customer Complaints Portal in the country are rating December was almost 3 times better than the average of our competitors. In line with our customer-centric model, we have also been migrating current 3G subscribers to the new and simpler unlimited voice rate plans that released in August. While price cuts by all operators forces to forgo some ARPU in these migrations, the attractiveness of the new plans enables us to sign up subscribers to 12-month contracts. By December, we had 76% of our subscribers and their loyalty and 68% in the new plans further supporting our churn improvement.

The popularity of our new plans coupled with sales channel improvements also delivered the highest quarterly results in 2017 for both new clients acquisition as well as migrations of iDEN subscribers to our 3G service. In Q4, we posted 325,000 3G gross adds, resulting 27,000 net adds and migrated 24,000 iDEN clients, therefore increasing our 3G subscriber base by over 50,000 clients. Finally, our porting ratio, which is an indicator of our attractiveness in the market increased in Q4 to 2.421. This means that for every Nextel subscriber that ported out its mobile number to a competitor we port in 2.4 new subscribers. Based on these encouraging results, we expect that subscriber growth will gain momentum and we expect to generate 300,000 or more net adds this year compared to just 4,000 in 2017. Even though, we are pleased with our progress, we are not yet to the point where we can translate subscriber growth into higher revenue and positive adjusted OIBDA. We remain focused on rationalizing our cost structure preserving our valuable liquidity and growing to keep all of our options open. We will constantly reassess the path and if necessary make adjustments to ensure that we are achieving the right balance of growth and spending.

Now, I would like to turn the call back to Dan to discuss our financial results and share our thoughts on strategic options.

Dan Freiman

Thank you, Roberto. In terms of our financial results for the quarter, our revenue was impacted by the continued decline of our iDEN subscriber base, which was down 100,000 subscribers from the end of the third quarter resulting in a $16 million decrease in iDEN revenue accounting for about half of the revenue decline. For the year 2017, iDEN revenue dropped by $129 million or 47%.

On the 3G side, our revenue decreased by $10 million from the third quarter to the fourth quarter due to a $1 decrease in 3G ARPU, which has been under pressure because of market forces and the lower usage revenue associated with our unlimited voice plans. However, because of the significantly lower churn, the lifetime value for subscribers on these plans is higher. We are taking actions to stabilize 3G ARPU in 2018 while we continue to migrate subscribers to our new rate plans.

Despite the decline in revenue, in the fourth quarter, we managed to reduce our adjusted OIBDA loss by about 50% from the third quarter due to cost reductions and one-time charges we reported last quarter. For the full year, our adjusted OIBDA declined by $77 million from 2016 primarily because of the decrease in revenues related to the wind down of our iDEN business. We expect to end our iDEN operations by midyear and the loss of that business will create a continued headwind on our financial results for the first half of 2018.

We have been pursuing several cost savings opportunities to partially offset the loss of our iDEN platform and right-size our business. Total cost of service and selling, general and administrative expenses in local currency decreased by 11% from 2016 to 2017. CCPU with $18 in 2017, up $1 from 2016 due to the impact of foreign currency and was flat year-over-year on the local currency basis. CCPU dropped to $17 in the fourth quarter, a $3 improvement compared to the third quarter. In 2018, we expect further reductions in certain costs such as customer care and bad debt. If we can grow our subscriber base as planned, it should allow us to build scale to reduce CCPU in the future. For 2018, we expect adjusted OIBDA to be moderately better than 2017, but still negative.

In terms of liquidity, we ended the year with $211 million of cash, $110 million of cash out on escrow and $50 million of cash securing performance bonds in Brazil, substantially all of which we recovered in January. We are working proactively to recover as much of the cash held in escrow as possible. We have recently reached an agreement with the Mexican tax authorities on $73 million of claims that we believe we can settle for minimal cash leakage and we expect to recover some of that amount from the $110 million escrow in the next few months. In terms of cash burn before debt service, for the quarter, we spent $28 million and for the full year, we spent $82 million significantly better than our revised guidance.

Looking ahead to 2018, we will continue our efforts to protect our liquidity. We expect similar level of capital expenditures as the amount we reported in 2017. In terms of debt service, as you know in January, the amendments to our bank loans covering about $450 million of debt became effective. As a result, we are deferring over $380 million of principal repayments that were scheduled to come due in the next 4 years until after 2021, which will take some pressure off our liquidity. With the amendments now effective, the average life of our bank debt has increased from about 2 years to 6 years.

On the strategic front, late last month we announced that we terminated our investment agreement with ICE. ICE remains a 30% minority partner in our joint ownership of Nextel Brazil and we intend to continue to work collaboratively with them on maximizing the potential of the business. Based on our cash flow projections and assuming the return of most of our cash held in escrow as of the end of 2017, we believe we have about 2 years of liquidity runway without considering any new capital funding. In addition, the telecommunications regulator in Brazil recently announced proposed changes to regulatory caps on spectrum, which are subject to a 45-day public comment period. When enacted, these changes and our better operational performance may open up new opportunities for us to unlock the value of our assets. We will proactively explore alternatives as the process evolves.

Now, I would like to turn the call back to Roberto for a few closing remarks.

Roberto Rittes

Thanks, Dan. With less pressure on liquidity and the recent operational traction, this year will focus on subscriber growth and innovative strategies. Our distinct approach to the markets with strong customer care, high quality 4G network, attractive rate plans and a well-known brand should allow us to capture increased market share and grow our business. We plan to complete hard, while evaluating the best ways to maximize the value of our business. After 2 years on survival mode, I am happy to report that we have turned the corner and enter a phase that will lead us to profitable growth. I want to thank all of our employees for their efforts. We have excellent team that’s energized to meet our goals. We are all excited to grow our subscriber base and improve our adjusted OIBDA. We are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Lance Vitanza with Cowen. Please proceed with your question.

Lance Vitanza

Hi, guys. Thanks. Congratulations. I guess I wanted to ask you about the guidance for both the continued negative EBITDA though improving and the 300,000 net sub add, could you talk a little bit about the interplay between those two numbers. I mean, is it the case that if you, I mean presumably if you wanted to take breakeven on EBITDA, you can accomplish that at the cost of fewer subs added, but maybe that’s not correct. Could you comment on that and talk about how you think about that in the context of the 2-year cash runway that you have now? Thanks.

Dan Freiman

Sure. Good morning, Lance. Yes, I know you are right, I mean, obviously, we could toggle that growth if we felt like it was necessary and get back to closer to breakeven in EBITDA. But at this point, we feel like there is – we have a good opportunity, we have got very good platform for us to grow by taking downturn. We are not significantly investing a lot more necessarily in gross adds and things like that. A lot of the growth is going to come from the churn side. Obviously, we are going to monitor this carefully and if we feel like the cash burn is higher than what we would like, we can we can pullback on some of the growth and save some of that money and do little better on the EBITDA side.

Lance Vitanza

Well, my understanding is that while it’s – I guess it’s sort of off the bottom that the any kind of recovery if you can even call out that in the economy in Brazil remains tenuous at best, maybe if you could just sort of comment what kind of improvement or status quo is kind of baked into your sort of 300K net adds equals still negative, but less negative EBITDA?

Roberto Rittes

We see, as you mentioned, marginal improvement in economy in Brazil. So unemployment is decreasing, GDP should be on the positive side as well. All those things held particularly as being as of now we are a postpaid player. That said, I think that 300 net adds comes more from our own operating performance and particularly as Dan mentioned are decreasing churn. So, I think we, as a company, we are more impacted by the telecom competitive landscape and our positioning in the market.

Lance Vitanza

Is there, I mean, does that suggest that if the economy were to sort of take a inflection point positive that there could be some upside to those numbers or might you come back midyear and say hey, we are going to do 500,000, but we are going to burn a little bit more?

Roberto Rittes

Additional sales and additional gross adds consume cash. Of course, when we think about up in gross adds, we focus on short paybacks, low cash cost channels. If economy picks up, we for sure going to have some improvement in our business. As of today, we have levers to manage growth. And as we have said, I mean, we have a balancing act of growing and preserving cash and we are going to manage this throughout the year.

Lance Vitanza

Okay. Thanks very much, guys. Appreciate it.

Roberto Rittes

Thanks, Lance.

Operator

Yes. The next question comes from Kevin [indiscernible]. Please go ahead.

Unidentified Analyst

Thank you. Dan, you mentioned the ANATEL reviewing the spectrum cap rules, how is Nextel Brazil weighing into this issue and can you help us understand that the timeline here, there is this 45-day public consultation period? When does that end? What happens after that? So basically, when if this all goes as planned, when do you think you could be in a position to start looking at your spectrum portfolio and potentially monetizing some regions and some bands?

Dan Freiman

Good morning. So basically, the 45-day common period starts when ANATEL puts out their suggestion of regulation for spectrum cap. We have seen the very high level element of that proposal, but the full proposal should come out shortly. So after that, there is the 45-day period and after that they evaluate what comments are incorporated into the regulation and then they take the final regulation for approval. We expect that this could take up to 6 months. So, we expect this to be third quarter event.

Unidentified Analyst

Got it. And when you look at your spectrum portfolio, you have got 4 different bands, you have got the 1,800, 1,900, 2.1 and your 800 band, which you are using originally on iDEN. My understanding is that the 1.9 and the 2.1 gig spectrum is only used in São Paulo and Rio by Nextel Brazil. So is that the case and is that sort of the low hanging fruit if all goes as planned that you could monetize that band outside of Rio and São Paulo?

Roberto Rittes

We used some of our spectrum outside Rio and São Paulo as part of our RAN sharing agreement with Telefonica. That said that’s an asset that underutilizes us today.

Unidentified Analyst

Got it. And switching gears, Dan, you mentioned decommissioning the iDEN network that you are getting closer to that, I think your iDEN subs are now around 10% of your total sub base and at the current rate of decline, it could be close to 0 by year end. What’s the timeline there and the initial – the synergies or cost to decommission the iDEN network? And then once that’s all done, what are your expectations for the long-term run-rate cost benefits of that decommissioning?

Dan Freiman

We have announced late last year that we are shutting down iDEN in the first half of this year. The regional date was March, but we have actually postponed by 2 months, so now the date for shutdown were iDEN network in both São Paulo and Rio is May 2018. Unfortunately, as we shutdown iDEN, we incur in few cost reductions. As of today, we have a lot of iDEN towers and iDEN infrastructure that share with our 3G business. So, our gain is on the marginal variable cost associated with iDEN, then unfortunately I am not that significant.

Unidentified Analyst

And what about the costs to shut it down for – I am sure they were going to be some subscribers that don’t voluntarily migrate that will – you will have to deactivate and there will be lost revenue there just sort of a general idea of what the hit could be?

Roberto Rittes

As of June, so we have your revenues associated with iDEN business. We are working hard to migrate customers to our 3G services. As we reported, we had 24,000 migrations in Q4 and expect this to pickup in Q1 and Q2. As of now, I mean the iDEN business in 2018 has a marginal positive EBITDA. So as we approach, I mean this EBITDA tends to zero. So, we shouldn’t see that much impact from the EBITDA perspective. We will incur some cost to shutdown the network, but again, even then a lot of the infrastructure remains as it’s shared with our 3G network they are also not that significant.

Dan Freiman

I’ll just add Kevin, in Q4 our iDEN revenue was $81 million. So, we are going to lose some of that revenue. It’s very high margin business for us. So, we will fill some impact following that, but we do expect that if we can grow our 3G base that by the second half of the year we will be able to overcome that iDEN revenue loss and start to grow revenues again. So, there will be some cost to shut it down not a lot, there will be some cost savings, which we are already taking along the way as we are turning sites off, pairing back the network saving energy, saving maintenance. So, we have been capturing this cost throughout the wind down process. Post wind down, there will be some cost savings, but not a whole lot. So, there will be impact around that time and then we expect to recover.

Unidentified Analyst

Great. That’s helpful, Dan and Roberto. One last question on the parent cost, the rest in cash burn run-rate for ‘18 any guidance there?

Dan Freiman

Yes. I mean, I think Q4 was a little bit better as we have continued to cut some costs, we actually did some allocations at the end of year allocations. I would say our run-rate is about $4 million a quarter at this point, obviously looking to continue to reduce that. So we will see another probably 30% reduction in head quarter spend going from 2017 to 2018 somewhere in that range.

Unidentified Analyst

Terrific. Thank you.

Dan Freiman

Thanks, Kevin.

Operator

We do have a follow-up question by the line of Lance Vitanza with Cowen. Please proceed with your question.

Lance Vitanza

Hi, thanks. I was wondering if you could comment on how you expect the Oi restructuring process to turn out and what impact if any that may have on just the overall competitive landscape. If it’s clear to those in Brazil, what was strategic objectives would be coming out of that restructuring process for those of us here, it’s obviously much more opaque and love to hear your thoughts on that?

Roberto Rittes

Well, Lance, first our view is that Oi has a few steps to actually implement the restructuring process and those could take a few months up to the end of third quarter, beginning of the fourth quarter. We are not in a position to make estimates on what’s going to be the outcome of Oi. As you know, there a bunch of hypotheses and theories and scenarios in the market, some are positive from the competitive standpoint, some are potentially negative from the competitive standpoint. We are monitoring closely what happened. We don’t expect a big impact in 2018. We are eventually depending on the scenario that can change for 2019 we expect the postpaid market to continue to grow. So, I think we are not that much impacted by the Oi situation at least for 2018.

Lance Vitanza

Thank you.

Dan Freiman

Thanks, Lance.

Operator

[Operator Instructions] Our next question comes from the line of Dave Gallagher with FBR. Please proceed with your question.

Dave Gallagher

Yes. Just really quickly you guys floating around a lot of numbers and I was just wondering if you can give out a total cash free and available net cash figure and also a total cash burn amount for 2018 and if you have any visibility on that into 2019 as well? Thank you.

Dan Freiman

Sure. So, as of the end of the year, we had $211 million of cash, we had $110 million of cash held in escrow and we had $50 million of cash pledged as collateral to secure performance bonds, substantially all of which we recovered in January, so came liquid in January for us. So, in total, that’s $371 million of liquidity. We have not given specific guidance on cash burn for 2018 given some guidance on our adjusted OIBDA and cash CapEx, we said adjusted OIBDA will be moderately better than 2017, but still negative and on CapEx side we expect CapEx to be at a similar level in 2018 as 2017.

Dave Gallagher

So, basically just same as they were in ‘17 give or take a little bit?

Dan Freiman

On the CapEx side it should be similar.

Dave Gallagher

Okay, thank you.

Operator

We have no further questions coming from this line. We will now turn the call back to you.

Dan Freiman

Okay, great. Thanks. We just wanted to thank everyone for joining our call today and look forward to taking any further questions if you have them just let us know. Thanks, everybody.

Roberto Rittes

Thank you everybody.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.