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February 27, 2007

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.

Posted by Steve Birenberg at February 27, 2007 03:28 PM in NIHD