We downgrade our recommendation on NII Holdings Inc. (NIHD) to Underperform based on our assessment that the company’s downslide will continue in the near future. NII Holdings reported dismal financial results for the fourth quarter of 2012 with both the top line and bottom line falling well short of the Zacks Consensus Estimates.
Why the Downgrade?
In the fourth-quarter 2012, NII Holdings added a mere 2,200 net subscribers compared with a net subscriber addition of 466,600 in the prior-year quarter and 152,500 in the previous quarter. Average revenue per user (ARPU) was $36 compared with $43 in the year-ago quarter.
Customer churn rate in the reported quarter moved to an all-time high of 3.4% compared with 1.78% in the prior-year quarter. Further, there was a huge drop in operating margin from 7.9% in the prior-year quarter to (25.9%) in the last quarter.
In synergy with the somber results, management provided tepid financial outlook for 2013. This was primarily driven by the volatile macro economic condition coupled with depreciation of several Latin American currencies with respect to the U.S. dollar. Moreover, stiff competitive scenarios in Latin American markets are other impediments for such a reduced outlook. NII Holdings currently has a Zacks Rank #5 (Strong Sell).
Other Causes of Concern
Key competitors of NII Holdings are aggressively deploying next-generation wireless technologies in major Latin American markets. For example, America Movil SAB (AMX - Analyst Report) has completed the roll out of 3G services in Mexico and the major cities of Brazil and has already deployed 4G LTE service in Mexico.
Telefonica S.A. (TEF - Analyst Report) rolled out 3G services in several Latin American markets and currently commands a major share of the Brazilian 3G market. NII Holdings plans to launch its 3G service in Brazil not before the middle of 2013.
NII Holdings is strapped to a single infrastructure supplier, Motorola Solutions Inc. (MSI - Analyst Report). Thecompany confirmed its extended relationship with Motorola Solutions for the supply of iDEN handsets and iDEN network infrastructure through Dec 31, 2014.
iDEN technology is not as widely used as other wireless networks and has fewer subscribers on a worldwide basis than other digital technology formats. As a result, the company’s competitors, which use GSM or CDMA technology, benefit from economies of scale and lower costs of handsets and infrastructure equipment.
Recently, Standard & Poor’s Rating Services downgraded the overall credit rating of NII Holdings from B to B-. This is six notched into the junk territory of the agency’s rating structure. S&P cited intensely competitive Latin American wireless industry conditions coupled with regulatory, economic and foreign exchange are the primary reasons for this rating downgrade.