NIHD Beats Street But Net Dips

Latin American wireless operator NII Holdings Inc (NIHD - Analyst Report) announced results for the second quarter of 2009 on July 23, 2009. Consolidated revenues of $1.06 billion came below our expectation, declining 3% year over year, impacted by unfavorable currency exchange rate movements. Net income of $134.3 million or $0.79 per diluted share, dipped 9.6% year over year, but was ahead of consensus and our estimates. 

The company added 242,000 net subscribers (down sequentially) during the quarter expanding its customer base to 6.7 million, up 23% from year over year. Operating results at Nextel Mexico exhibited signs of slowdown with just 18,900 net customer additions, significantly lower than the previous quarter, largely due to deteriorating economic conditions and the recent swine flu outbreak. 

On a positive note, Nextel Brazil remains the primary growth engine with 167,200 new subscribers added in the quarter, up sequentially and year over year basis. Net subscriber growth at Nextel Argentina declined sequentially while growing at Nextel Peru. 

Weak local currencies have hurt ARPU (average revenue per user) across all the operating segments. The company remains challenged with higher than expected customer churn (customer switch) levels due to aggressive deployments of next generation wireless services by competitors such as America Movile (AMX - Analyst Report) and Telefonica (TEF - Analyst Report). 

The company has reaffirmed its 2009 guidance with total net subscriber additions of 1.1-1.2 million customers for the year. However, depressed economic conditions across Mexico and Argentina may prevent it from achieveing this target. Consolidated revenue and EBITDA forecasts remain in the range of $4.1-$4.3 billion and $1.0-$1.1 billion, respectively, while capital expenditure is projected between $750 million and $800 million. 

Expansion of network coverage continued in the quarter with an additional 6 million people covered in the northeast region of Brazil, representing a key area for future growth. The company spent $231 million in capital expenditures in the second quarter and devoted 58% of the spending for expansion in Brazil. Initiatives are also underway for the deployment of 3G network in Peru with a target to address more than 10 million propsects in this market. 

We believe the company’s respectable growth prospects (driven by the 3G service and expansion in Brazil) are partially offset by the risk of doing business in Latin America along with near-term concerns of subscriber retention and currency exchange rate fluctuations. 

Consequently, we maintain our Hold rating on NIHD.