Latin American wireless operator NII Holdings Inc. ( NIHD - Analyst Report ) declared dismal financial results for the second quarter of 2012, on the back of a slowdown in subscriber addition, higher churn and higher operating expenses, arising from the roll out of 3G networks.

Net loss in the reported quarter was $103.5 million or 60 cents per share compared with a net income of $122.7 million or 71 cents per share in the prior-year quarter. Reported loss per share of 60 cents was much below the Zacks Consensus Estimate of 6 cents earnings per share.

Quarterly total revenue was $1,495.8 million, down 14.7% year over year and also below the Zacks Consensus Estimate of $1,535 million.

Quarterly operating expenses increased 0.9% year over year to $1,456.9 million. Operating income in the second quarter of 2012 declined by a whopping 87.4% year over year to $38.9 million.

Operating margin in the reported quarter was 2.6% compared with 17.7% in the prior-year quarter. Quarterly consolidated OIBDA (Operating Income Before Depreciation and Amortization) stood at $211.2 million, down 55.7% year over year, hammered by foreign exchange fluctuation rate, reduced ARPU and higher cost associated with the roll out of 3G networks.

At the end of the second quarter of 2012, NII Holdings had $1,962.2 million in cash, cash equivalents, and marketable securities compared with $2,666.3 million at the end of fiscal 2011. Total debt at the end of the reported quarter was $4,619.4 million compared with $4,818.2 million at the end of fiscal 2011. Debt-to-capitalization ratio for the reported period was 0.61 compared with 0.60 at the end of fiscal 2011.

Operating Metrics

At the end of the second quarter of 2012, total digital subscriber base at NII Holdings increased 14.2% year over year to 11,206,900. During the reported quarter, the company added 234,800 net new subscribers, down 38.6% year over year. Customer churn in the reported quarter was 2.30% against 1.71% in the prior-year quarter, and was mainly impacted by the increased churn rate in Brazil and Mexico. Quarterly ARPU was $38 compared with $51 in the year-ago quarter. Such reduction in ARPU was mainly fueled by fluctuation in foreign currency-exchange rate. However, quarterly costs per gross subscriber added was $282 compared with $298 in the year-ago quarter.

Outlook

NII Holdings provided reduced outlook for full fiscal 2012. The company expects to gain 1 million subscribers for the full year. The company expects operating revenue and OIBDA to reach $6.1 billion and $1 billion respectively at the end of fiscal 2012. The company also expects its capital expenditure to slowdown to $1.5 billion for 2012.

Recommendation

Completion of 3G Push-to-Talk (PTT) services in Peru coupled with the launch of 3G handsets will act as near-term catalysts for the company’s growth.

However, delay in the launch of 3G services across the major markets of Brazil and Mexico has not only resulted in a slowdown in customer addition but also increased its churn rate. Moreover, increased promotional expenses and stiff competition from America Movil ( AMX - Analyst Report ) and Telefonica ( TEF - Analyst Report ) , who are aggressively deploying next-generation wireless technologies in major Latin American markets, may hinder its growth prospect going forward. We, thus, maintain our long-term Neutral recommendation on NII Holdings.

Currently, NII Holdings has a Zacks #4 Rank, implying a short-term ‘Sell” rating on the stock.