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Latin American wireless operator NII Holdings Inc. (NIHD - Analyst Report) declared dismal financial results for the third quarter of 2012, on the back of higher churn, weaker exchange rate, lower average revenue per user (ARPU) and higher operating expenses arising from the roll out of 3G networks.

Adjusted loss per share of 48 cents was wider than the Zacks Consensus Estimate loss of 30 cents per share. On a GAAP basis, net loss in the reported quarter was $82.4 million or 48 cents per share compared with a net loss of $0.3 million or a break-even per share in the prior-year quarter.

Quarterly total revenue was $1,491.9 million, down 14.9% year over year but surpassed the Zacks Consensus Estimate of $1,485 million.

Quarterly operating expenses contracted 5.1% year over year to $1,459.4 million. Operating income in the third quarter of 2012, plunged 85% year over year to $32.5 million.

Operating margin in the reported quarter was 2.2% compared with 12.4% in the prior-year quarter. Quarterly consolidated OIBDA (Operating Income before Depreciation and Amortization) stood at $217.9 million, down by a significant 44% 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 third quarter of 2012, NII Holdings had $1,685.1 million in cash, cash equivalents and marketable securities compared with $2,666.3 million at the end of 2011. Total debt at the end of the reported quarter was $4,639.7 million compared with $4,818.2 million at the end of 2011. Debt-to-capitalization ratio for the reported period was 0.61 compared with 0.60 at the end of 2011.

Operating Metrics

At the end of the third quarter of 2012, total digital subscriber base at NII Holdings increased 10.8% year over year to 11,357,400. During the reported quarter, the company added 152,500 net new subscribers, down 64.8% year over year. Customer churn in the reported quarter was 2.65% against 1.78% in the prior-year quarter and was mainly impacted by the increased churn rate in Brazil, Peru and Argentina. Quarterly subscriber revenue ARPU was $37 compared with $49 in the year-ago quarter. Quarterly, service and other revenue ARPU was $42 as compared to $55 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 $281 compared with $332 in the year-ago quarter.

Outlook

NII Holdings provided reduced outlook for 2012. The company reduced OIBDA guidance to $1 billion from a prior guidance of $1.4 billion at the end of 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. Moreover, the company’s strategy in Brazil to concentrate on the high-end customers is expected to improve both ARPU and subscriber base going forward.  

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 , 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, the company retains a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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