NII Holdings: Finally In The Clear?

NII Holdings (NIHD) reported better than expected 4Q07 financial results yesterday but the shares sold off sharply anyhow. I can see three potential issues. First, EBITDA guidance is a bit low even after adding back the $30 million in unexpected expenses related to upgrading the company's network in Peru to 3Q. Revenue guidance is in line so there is some evidence of margin pressure. Second, the Peru 3G build out is again raising fears of a big spike in capex for the rebuild in Mexico and Brazil. Third, 1Q08 net adds will be down sequentially. They were up sequentially in 2007 and flat in 2005. This serves to undermine the fragile confidence that guidance is good and the Mexico situation is stable.

By way of background, NIHD shares have been cut in half since last summer when competitive activity in the company's largest market, Mexico, picked up. Sub growth in Mexico slowed, ARPU trends deteriorated, margin expansion stopped, and talk of the need for massive network upgrade moved front and center. Analysts lowered subscriber and financial estimates in response.

I think the shares are way oversold and that as time passes, maybe one or two quarters, the shares will move up considerably. Ultimately, 4Q07 sub and financial results beat the lowered estimates. These results show that management can handle the more competitive environment in Mexico and still “EXCEED” numbers. This makes me believe that the 2008 EBITDA guidance is likely low, especially given momentum in Brazil, which no represents 30% of subscribers and 25% of EBITDA....

....In addition, the per pop build out costs for 3G in Peru suggest that the entire build out can be done for a few billion, far less than some people are assuming and something the company can easily finance given their balance sheet rapidly rising free cash flow that should explode starting in 2009.

Finally, even on the conservative guidance we are looking at 29% revenue growth and 27% EBITDA growth in 2008 for a stock that is trading at 7 times EBITDA and 15 times EPS with a Board that is willing to buyback meaningful amounts of stock. Helping matters more, NIHD just beefed up the management team adding the very successful CEO from Dobson Communications (just purchased by AT&T). The stock lacks a catalyst until 1Q numbers are out but I think it should be held or slowly accumulated. Longs will just have to tough it out for another few months.

P.S. I am no technician but does the fact that the huge volume decline yesterday held in the recent trading range indicate that sentiment is washed out to the downside? [UPDATE 2/29 11:45: Maybe so seeing as the shares are up tow days in a row even with a terrible market]

NII Holdings Gets Back On Track

Yesterday, NII Holdings (NIHD) announced better than expected 4Q07 subscriber growth, completion of a large buyback, initiation of another buyback, and an impressive new CEO. The shares were up 9.5%. I added NIHD to a new account, the only one I have that didn’t already own a full position, just after the open yesterday and now think the shares could head quickly back to the $60s in a cooperative market.

The key element that drove the gains in NIHD shares was the announcement that 4Q subscriber growth was good enough to beat full year guidance. Significantly, subscriber growth in Mexico reaccelerated following a surprising sequential dip in 3Q07 due to increased competition. Following 3Q07 results, most analysts reduced their total company and Mexico subscriber estimates to below where 2007 ultimately came in. This sets up a round of estimate increases. If analysts don't increase estimates, look for positive surprises later this year. Also contributing to the stock price gains was the surprising announcement that NIHD completed its $500 million share buyback and initiated a new buyback of the same size. One thing that contributed to the stock getting cut in half in 2H07 was the fact that on the 3Q07 conference call management said it would not get aggressive with its share buyback. Analysts and investors took this as a sign that management was not confident in the future. Kudos to Pali Research which noted in mid-November after a meeting with NIHD management that they sensed the company was looking at much larger share buybacks....

....NIHD produced 36% subscriber growth in 2007 across its footprint of Mexico, Brazil, Argentina, Peru, and Chile. Sub growth at NIHD translates to similar revenue growth and faster EBITDA growth as stepped network investment in Mexico and Brazil gets spread over a rapidly growing customer base. EBITDA growth in 2008 should be around 30%, possibly slightly higher now that 4Q sub growth looks OK. In 2009, EBITDA could grow by 25%. I think the shares are a bargain at just under 8 times 2008 EBITDA and just over 6 times 2009 EBITDA. Growth is hard to come by in the current market and economic environment. NIHD offers it at a cheap price and management proved again in 4Q that its stellar reputation is well deserved.

NII Holdings Gets Abused

NII Holdings, (NIHD) had a rough day yesterday. Following its 3Q earnings report and conference call before the open, the shares fell 20%. The loss was on top of a decline of 15% already this month. Heading into the report the shares had been under pressure due to worries about growth in Mexico, the company's largest market. Fears about competition and the back-to-back-to-back hurricanes that hit in August had investors anticipating a miss. Mexico is critically important to NIHD shares because it accounts for 55% of revenue and 63% of EBITDA so far in 2007. Furthermore, the company just completed the build out of its network in Mexico and estimates for 2H07 and 2008 contain a big benefit from accelerated growth in revenue and subscribers and expanding margins.

NIHD reported fine headline numbers. Revenues of $853 million and EBITDA of $235 million both slightly beat estimates. Adjusted EPS of 61 cents beat consensus. Subscribers grew 38%, revenue grew 39%, EBITDA, grew 49%, and net income grew 58%.

So what the hell happened? First, net subscriber additions in Mexico were just 140,000, about 20,000 under consensus. Competition and weather were said to be equal culprits. Analysts delved deeply into the competition angle and are clearly worried about its intensity. Second, cost per gross subscriber addition in Brazil rose year-over-year. Brazil is NIHD's second largest market and is on the same path as Mexico with a plan to build out the network over the next few years currently in place. Subscriber, revenue, and operating income results in Brazil were at least as expected but that did not contain worries that Brazil is also becoming more competitive.

While the stock got murdered, management was firmly upbeat about its prospects in Mexico and Brazil....

....They admitted that recently raised subscriber guidance for 2007 might be a stretch but there was no concern expressed about long-term growth. Management also noted several other instances over the past five years where competitive intensity picked up in its markets only to settle down in several quarters.

So why did the stock get killed? Clearly, NIHD has been a huge winner and a momentum stock. No slip allowed in this type of stock. Add in a well earned significant premium valuation and there was lots of room to fall. I think the poor stock action earlier in October compounded by the miss also led to momentum selling. "Surely something horrible must be going on at NIHD" had to be the reaction of aggressive traders. Finally, when pressed about its share buyback program, management said it would not commit to an acceleration in activity after the recent stock price decline. Given that the company has $1.5 billion in cash and just a little over $2 billion in debt, this is not exactly a vote of confidence.

I am still working on my spreadsheet but if I shave next year's numbers by 5%, you still get 32% revenue growth and 34% EBITDA growth. I have the stock trading at under 9 times the reduced 2008 EBITDA. Still a premium to other emerging markets wireless stocks but find me a comparable that has all postpaid customers, average ARPU of $58, and as good a track record of meeting and exceeding quarterly estimates for the last five years.

The stock is in the penalty box until competitive trends in Mexico and Brazil get sorted out favorably. However, the decline yesterday was way overdone. For now, pending further review, I think $65 is an easy rebound once everyone settles down. Once it gets there, I'll reevaluate whether to hold the position. A good fourth quarter would get the stock back to the mid-$70s so there is reason to show patience.

NII Holdings Falls Sharply on Brazil News

Yesterday NII Holdings (NIHD), one of Northlake's long positions, fell by more than 5% on huge volume. At one point in the morning the shares were off over 10%. NIHD operates Nextel service in Mexico, Brazil, Argentina, Peru, and Chile. I heard of several reasons for the sharp sell-off. Most of the concern centers on Brazil, NIHD's second largest market, accounting for a little less than 25% of EBITDA of 2Q07 EBITDA and an important high growth market for the company's future. First, Brazil completed new spectrum auctions this week and indicated more auctions are coming. Once the spectrum is built out, Brazil will have four or five nationwide carriers raising fears of increased competition. Second, on Monday, Brazil's telecom minister indicated that pricing of prepaid wireless services was way too high, above other emerging markets on an absolute basis and in relation to Brazilian post paid pricing. Independent of Brazil, I heard that Merrill cut numbers for NIHD slightly for 3Q but I was unable to confirm it.

I can see why there would be selling in NIHD on this stuff but the huge volume decline at the peak yesterday just shows how stupid Wall Street can be sometimes. Just a bunch of lemmings that see something down big and either sell without asking or short without asking. After all most of this news was out earlier this week and the spectrum auctions have been in the works for months.....

....As noted, in 2Q Brazil was less than 25% of EBITDA. Granted it is a high growth country and worth more than that in the valuation. Let’s say it is worth 40% of the valuation. Should that have been marked down by 25%? Given the fact NIHD does not do prepaid, is a small player presently and a clear market share gainer, and offers a differentiated product, it seems fears are way overdone. Furthermore, observers are saying that the likely outcome of the telecom minister's comments is a reduction in telecom taxes in return for guarantees of lower pricing from operators. The tax reduction would benefit NIHD as would the increased minutes of use as wireless becomes cheaper. It's not a sure thing positive by any means but it certainly presents a more balanced view than yesterday's trading would indicate.

The stock ain’t cheap. It has one of the highest multiples in all of wireless. It has emerging markets risk. All that makes it unusually sensitive to any issue that crops up. This new stuff may be an issue but assuming you thought so and that the market holds in there, you would get a much better chance to sell than current prices. I, on the other hand, added to the stock for new accounts and where positions too small into yesterday's decline.

Bullish News For NII Holdings

NII Holdings (NIHD) shares rose over 3% yesterday following an announcement that the company would be issuing $1 billion in new convertible notes and buying back $500 million shares. Four million shares will be purchased contemporaneously with the closing of the convertible offering. Full use of the authority will retire about 3% of the outstanding shares. Essentially, NIHD is buying back shares at current prices and selling an option to buy shares near $115. The message is quite positive.

The convertible will have attractive pricing from the NIHD perpsective with around a 3% coupon and a conversion premium of 45-50%. NIHD stated that proceeds of the convertible and the green shoe if exercised would be used for the possible purchase of spectrum or other telecom assets, accelerated build out of the networks in Brazil and Chile, the balance of the share repurchase authority, the refinancing of other debt, and general corporate purposes.

Analysts applauded the move and reiterated their mostly bullish recommendations. NIHD is about to finish the build out of its Mexican network leading to a surge in operating margins and free cash flow. By authorizing and executing a share repurchase at current prices, management is showing great confidence in the business outlook and strongly indicating what the use of free cash flow will be in the future. Not to be overlooked is the fact that share repurchase is being completed following a doubling of the share price in the last 18 months and with the shares near all-time highs....

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NIHD is also financing its future growth at an attractive price. The suggested use of funds to expand networks in Brazil and Chile and possibly add spectrum and hard assets in existing or new markets is exactly as the street has expected.

I think the market got it exactly right by bidding NIHD shares up sharply on this news. My spreadsheet calculates a target price of $97 on what I believe will prove to be conservative estimates for 2007 revenues and EBITDA. Management's announcement and the Board's action appear to confirm my bullish outlook for NIHD shares.

Excellent Results From NII Holdings - $100 Stock Price Within Reach

NII Holdings (NIHD) 1Q07 numbers were virtually on top of my estimates across the board. Every financial and subscriber number on a corporate and country-by-country basis was right on target. Since my expectations were at the high end of the street estimates, this sets the stage for upside to current estimates later in the year. Despite the strong results, NIHD did not increase its won guidance but this is not anything to be concerned about as the company has typically waited until the second quarter conference call to update guidance.

NIHD has a history of beating estimates and its own guidance and momentum coming out of 1Q is excellent. Subscriber growth, revenue, margins, EBITDA, and free cash flow are all poised to accelerate as the build out of its network in Mexico and Brazil winds down later this year. Subscriber growth in 1Q in both markets was a little ahead of expectations setting up really strong operating leverage later this year and in 2008. Even more encouraging, the cost to acquire customers in 1Q was lower than expected. Normally, when a cellular company acquires more customers than expected operating income is below expectations because of the cost of acquiring the extra customers. If NIHD can sustain the lower cost per gross subscriber addition, operating leverage will be even better than expected....

In other news, NIHD announced that its long-time CFO would be moving to a newly created business development position and new CFO has been hired. Both the individuals are highly regarded so there is nothing negative to read into the news. It is possible that the beefing up the management could mean that expansion beyond the current five markets into other Latin American countries is possible. Depending on the timing and financing of such a move it could be positive as it would exnted the growth profile on NIHD into the future. Personally, I'd like to see it be a late 2008/2009 event so that the company can bank the operating leverage and prove to the street that entering significant markets is well worth the investment.

Barring a general setback in emerging market equities (NIHD offers iDEN service in Mexico, Brazil, Argentina, Peru, and Chile), I think investors will begin to look ahead to what should be extremely good 2008 results. The shares can comfortable trade at $90-100 on current 2008 estimates which if history is a guide are probably too low. Were the company to meet the top end of current analyst estimates for 2008, upside would over $100. I think that is a realistic target for late in2 007 if 2Q follows a similar pattern to 1Q and estimates and guidance are increased.

NII Holdings Reports Solid Results and Offers Upbeat Guidance

NII Holdings (NIHD) reported very good 4Q06 results that were inline to slightly ahead of analyst estimates and guidance. Headline numbers, country level results, and subscriber metrics were remarkably close to estimates across the board. This is a consistent pattern for NIHD which I think is a significant positive in the investment story given the perceived volatility of the emerging Latin American markets the company serves.

NIHD also issued 2007 guidance that was very close to current analyst estimates. Another year of mid-30% growth is in the cards. If there is any near-term issue coming out of the 4Q results it would be the forecast for only a 130 basis point increase in EBITDA margins in 2007. Some but not all analysts were looking for more significant margin expansion as the company reaches the end of a big investment cycle to expand its geographic reach in Mexico and Brazil. The margin forecast was accompanied by a higher than expected subscriber growth forecast of 1.2 million. Therefore, the incremental 100,000 subscribers compared to expectations may be the cause of the lesser margin expansion. New customers come on at very low or even negative margins in the initial year. I don’t want to make too big a deal out of this but the margin expansion story ultimately determines the level of free cash flow which will drive long-term shareholder value.

A very important point is that NIHD has a history of beating guidance....

One year ago, the company forecast 800,000 net adds and $654 million in EBITDA in 2006. Guidiance was then raised mid year to 885,000 subscribers and EBITDA of $657 million. Final figures were 934,000 and $671 million. I'd expect a similar results in 2007 with the big upside existing in EBITDA.

In 4Q06, NIHD reported EPS, revenue, and EBITDA of 60 cents, $671 million, and $196 million, respectively. EPS was aided by a one-time benefit to the tax rate. Adjusted EPS would have been right around the 43 cent consensus. Revenues came in $7 million ahead of consensus and EBITDA matched consensus.

At the country and subscriber level, NIHD results also closely mirrored expectations. Net adds of 252,000 were exactly as expected as was the industry leading churn level of 1.5%. ARPU was $59, in line with year ago levels and cost per gross add fell slightly from 2005. Results in NIHD's served markets of Mexico, Brazil, Argentina, and Brazil each came in within a few million dollars of expectations with no variation that creates any concern.

The conference call had a lot of discussion about free cash flow and NIHD's underleveraged balance sheet. NIHD will become a significant free cash flow generator in 2007 to the tune of $375 million. With net debt at just $425 million and free cash flow poised to accelerate sharply again in 2008, analysts were anxious to hear what NIHD's plan were for the balance sheet. This is a very good problem to have, especially for a company serving emerging markets. Management indicated that further investment in current markets, acquisitions of new markets, and return of cash to shareholders would be uses of cash, in that order. Analysts pressed the company as to return of cash given that build out plans won’t come close to consuming free cash flow. I expect to hear more on this topic later this year.

Overall, I think 4Q results, 2007 guidance, and the tone of the conference call were all favorable. On another day, the shares would be responding favorably but the slaughter in emerging markets today is pressuring the stock. I am still relatively new to the NIHD story but I want to stress how competent, careful, and detailed the management team was on the call. NIHD is a great way to play emerging markets growth with reduced risk due to rock solid execution. 2007 and 2008 offer another few years of 30% or greater growth. If the numbers are hit and the market cooperates, NIHD shares can head much higher, possibly to $100 or more by the end of 2007.

Bullish Indiactor For NII Holdings?

One of the comparables I used in my thus far successful purchase of NII Holdings (NIHD) was Millicom International (MICC). NIHD offers wireless telephone service in Mexico, Brazil, Argentina, Peru, and Chile using Nextel's iDEN technology. MICC uses traditional GSM technology in markets it serves in Central and South America, Africa, and Southeast Asia.

What both companies have in common is a focus on emerging markets and very fast growth. Both also have very high margins although NIHD's focus on business customers vs. MICC's focus on prepaid consumers means that ARPU is much higher at NIHD.

The reason I mention this is that MICC rose over $7, up 10%, yesterday after it reported blow out 4Q06 results. NIHD doesn’t report until February 27th but there are enough similarities that MICC's results should be a good sign. Obviously, investors were thinking the same thing yesterday as NIHD tacked on $3, or 4%, yesterday.

NIHD and MICC do not overlap in any country in Central or South America but NIHD's results coming from Guatemala, Honduras, El Salvador, Bolivia, Columbia, and Paraguay indicate that mobile phone markets in these geographies are very healthy. In Central America, MICC reported subscriber growth of 89% and EBITDA growth of 62%, while in South America, MICC saw 65% subscriber growth and EBITDA more than doubled.

NIHD is a compelling story in its own right as I outlined in my initial Long/Short Investor recommendation. MICC's results make me more confident that my investment thesis will be validated on February 27th so despite a 16% jump in NIHD since my initial purchase at the very beginning of January, I am remaining long with growing confidence that my reach target of $100 in 2008 is in the cards.

Why We Got A Buying Opportunity in NII Holdings

NII Holdings (NIHD) rebounded nicely yesterday (and even more today) but I want to expand on some of the reasons the stock sold off since its December peak providing the buying opportunity I had been waiting for since the big move up following the company's presentation at the UBS Conference.

Lehman Brothers was out with a report yesterday addressing some of the recent issues and recommending investors use the weakness to buy the shares. The company also was able to address some of the issues when it presented yesterday afternoon at another Wall Street conference, Citigroup's Entertainment, Media, and Telecom Conference. I listened in on the presentation which was pretty much a repeat of what they said in December. Here is a link to a pdf file including the slides they used at Citigroup. It is an excellent overview if you want to learn more about NIHD:

Download NIHD Presentation

Among the issues troubling the shares and cited by Lehman are the shortfalls at Motorola (MOT) and Sprint Nextel (S) and weakness in emerging markets, especially concerns related to Latin America following Hugo Chavez's moves to nationalize certain industries in Venezuela. As a reminder, NIHD is a major wireless carrier in Mexico, Brazil, Argentina, and Peru using the Nextel iDEN push-to-talk technology.

Lehman argues, and I agree, that the linkage between MOT, S, Chavez, and NIHD is weak....

MOT's shortfall was partially iDEN related but MOT's problem wasn't handset sales to emerging markets. In fact, those sales are part of the problems as unit volumes are surprising to the upside in these countries but margins are getting squeezed by lower ASPs. Problems at S seem numerous but loss of higher ARPU, higher margin Nextel customers are definitely part of the problem. But problems with brand equity in Sprint and Nextel and complications of their merger don’t translate to Latin America. S once was a major shareholder in NIHD but even that is no longer true as ownership is now under 10%. Regarding Chavez, NIHD had been very clear for the past year that it isn’t interested in expanding into Latin American countries with new left-leaning governments. Over 70% of NIHD's EBITDA comes from Mexico and Brazil where recent election left the trend toward Western-style capitalism firmly in place.

2007 should be a big year for NIHD as expansion of its addressable market in Mexico and Brazil through network expansion winds down. This should lead to accelerating subscriber growth with margin expansion resulting in a continuation of the company's 30-50% growth. Given the growth rate, the potential for sustainable growth, and the high quality customer base, management team, and balance sheet, NIHD shares look cheap on any measure that considers both absolute valuation and growth rates. Furthermore, given analyst expectations for 2008, the cash flow multiple looks cheap even if relative growth rates are ignored.

NII Holdings: New Buy Provides Unique Exposure To Emerging Markets Wireless

One of my favorite presentations at December's UBS Media & Communications Conference was from NII Holdings (NIHD). NIHD offers wireless telephone service using Nextel's iDEN standard in Mexico, Brazil, Argentina, and Peru. NIHD has approximately 3.2 million subscribers, primarily serving the business market.

I was interested in buying NIHD as soon as I returned from the conference in early December but the shares spiked higher following the company's well received presentation. The stock finally pulled back to an attractive point the first week of 2007 so I initiated a position across the entire Northlake client base.

Upside Potential Is Significant

NIHD shares trade at a well-deserved premium to other emerging markets wireless service providers due to the company's rapid growth and superior operating metrics in ARPU and churn. Margins are set to expand sharply after a multi-year period of investment to expand the reach of the network wraps up in 2007. At the UBS conference management was very confident that operating results were set to accelerate from already high growth levels. I think this can drive the shares to the high end of their historical valuation range, producing a stock price near $90 on 2007 estimates and $110 on 2008 estimates, or upside of 32% to 62%. I think that kind of upside provides plenty of compensation for the above average risk of operating in emerging markets (the risk is much greater to the stock price than the operating results as a review of the chart during last May's emerging market meltdown indicates)…

Company Overview and Stock Drivers

Almost half of NIHD's 3.2 million subs are in Mexico as is almost 70% of EBITDA. Brazil and Argentina are the next two biggest markets, with Brazil poised to grow more rapidly and move firmly into the #2 position. Peru is a smaller market offering solid growth prospects and good operating statistics. The company has recently announced expansion into Chile.

NIHD is much smaller than other wireless service providers operating in its markets because the company does not target the consumer market. NIHD should be viewed as a niche player due to its focus on business customers attracted by Nextel's proven push-to-talk technology. Wireless penetration rates in NIHD's markets still have plenty of room to grow providing a nice tailwind for the company's growth profile. Furthermore, as the company expands the geographic reach of its network, its target market outgrows the wireless market in each country in which it operates.

Rapid potential growth in NIHD's subscriber base is accompanied by the likelihood of sharply increasing margins. NIHD's margins have remained stable for the last several years as the company has incurred substantial expenses to expand its networks. This process is winding down in the first half of 2007. In addition to less investment spending, the company should begin to see the operating leverage normally associated with network based businesses. Finally, analysts are expecting lower interconnection rates to drive margins and traffic.

NIHD has a very strong financial profile. Consensus EBITDA for 2007 is around $1.1 billion, while 3Q06 net debt was just $550 million. The financial condition is going to grow even stronger as starting in 2007, NIHD should begin to produce significant free cash flow of over $100 million. If long-term growth estimates are reached, free cash flow could approach $1 billion annually within 5 years.

Growth Profile and Stock Valuation

NIHD expects to sustain its 30%+ 3 year CAGR of subscriber growth, revenue, and EBITDA over the next couple of years. Very rapid growth and financial strength has not been lost on investors with NIHD shares up over 50% in 2006. The shares trade at almost twice the EBITDA multiple of other emerging market wireless operators but this has been the case for many years. Investors are rightly paying up for the combination of rapid growth, U.S. style ARPU, and low churn.

With operating results poised to accelerate in 2007 off already high levels, I think the shares can sustain their valuation premium relative to comparable wireless stocks and trade at recent levels of 12-13 times current year EBITDA. Based on 2007 and 2008 estimates, this provides upside to $90-110.

Risks

As with any company focused on emerging markets, risks are high. NIHD faces additional risks because it uses a unique technology that is currently without a path to next generation technology. In September, NIHD signed a supply agreement with Motorola (MOT) extending through 2011, so access to iDEN technology is not a near-term risk. Nevertheless, this is a risk worth monitoring, especially as other operators perfect better push-to-talk technologies on industry standard technology.

Another risk for NIHD is that the company will use its financial strength to expand its footprint to new markets or new wireless technologies. These investments could be dilutive to current shareholder value.

Finally, Sprint Nextel (S) still owns almost 8% of NHID shares. The ownership has dropped sharply since 2002 when it was about 36%. Recent appreciation in the shares could lead Sprint to sell their remaining holdings creating added supply that might depress the NIHD shares.

I think the extremely high visibility of growth for 2007 and 2008 and the substantial upside that comes with it more than compensates for these risks.