Steven Shindler of NII Holdings: Nextel’s overseas connection

Bankrupt a year ago, the telecommunications giant’s international spin-off has pared debt, narrowed its focus and begun to ring up impressive sales gains.

Mobile phone behemoth Nextel Communications recovered from the global telecommunications disaster of 2000'01 faster than most of its peers. By the first quarter of 2002, Nextel was reporting that its U.S. revenues had risen 22 percent year over year, its operating cash flow had jumped 66 percent, and its subscriber base had surged 27 percent. Demand for wireless services rebounded much more quickly than the broader U.S. economy.

But none of that applied to Latin America -- where Nextel had done most of its foreign expansion in the late 1990s. In fact, the company’s subsidiary, Nextel International, was headed for bankruptcy. It had amassed 1 million customers, but, like many cellular companies, it had taken on too much debt in a bid to meet ambitious growth objectives. International revenues had doubled in 2001, to $662 million, but the unit had negative cash flow of $100 million that year. By the spring of 2002, the operation was nearly $3 billion in debt.

That May the separately capitalized international unit, still controlled by Nextel but renamed NII Holdings, filed for Chapter 11 protection. Its CEO, Steven Shindler -- the parent’s former CFO -- had been cutting costs and prepping for a restructuring since he started running the unit full time in late 2000.

The bankruptcy allowed NII, which is based in Reston, Virginia, to reduce its debt load -- owed to creditors led by Motorola Credit Corp. -- from $2.8 billion to $430 million. Creditors agreed to convert $2.3 billion into 3.9 million shares of NII stock, about 19 percent of those outstanding.

By slashing debt and other costs while adding more premium-service customers, Shindler boasts, “we went from negative [earnings before interest, taxes, depreciation and amortization] in 2001 to $169 million positive last year, almost a $250 million swing.”

NII emerged from Chapter 11 on November 12, 2002. Ten days later it went public at $7.50 a share, raising $140 million and reducing Nextel Communications’ stake to about a third. By mid-October the stock had risen more than ninefold, to $70, giving NII a market cap of $1.4 billion.

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Although just 40, Shindler is a veteran of the frenetic telecommunications sector. A University of Michigan graduate with an MBA from Cornell University, he spent nine years as a prominent telecom deal maker in the late 1980s and early ‘90s with Toronto-Dominion Bank in New York. He joined Nextel Communications in 1996. One of his banking clients, McCaw Cellular Communications, had “made a big investment in Nextel and was looking for a CFO,” he explains. “I was in the right place at the right time.”

Shindler led Nextel’s international spin-off through the bankruptcy and a 9 percent workforce reduction to 3,500 last year. In the end, NII retained its position as a leading provider of high-end wireless services to businesses and consumers in Argentina, Brazil, Mexico and Peru. Next stop: Chile.

From here on, vows Shindler, the company will proceed with all due deliberation. Last year NII sold off a Philippines wireless venture, which it had acquired in 1996 as a foothold for Asian expansion before deciding to focus exclusively on Latin America. “Our strategy is not one of trying to put the pedal to the floor,” Shindler says. “The key for us is profitable growth.”

By that measure, Shindler is delivering. In the second quarter, as revenues climbed 19 percent to $226 million, NII earned $42 million, reversing a year-earlier loss of $237 million.

Shindler recently discussed NII’s progress with Institutional Investor Assistant Managing Editor Jeffrey Kutler.

What’s the nature of the NII-Nextel connection?

While we were building out the nationwide digital network in 1997 and 1998, an opportunity came up to invest in spectrum in Brazil. We formed a subsidiary, Nextel International, to build a position in Latin America. The restructuring that began in fall 2001 and led to the bankruptcy filing the following May resulted in the formation of NII Holdings. Nextel’s CEO, Timothy Donahue, sits on our board, and we have a very healthy working relationship.

Are the two companies technologically compatible?

The other, ongoing link between us is that our strategy is virtually identical to Nextel’s in the U.S. We work with the same spectrum and the same IDEN [integrated digital enhanced network] technology, and we both target business customers. Our offerings revolve around the digital cellular service, the Direct Connect walkie-talkie capability and packet data, or Internet access. Customers from Latin American countries can take advantage of roaming to use Nextel services in the U.S., and vice versa. A difference that sets NII apart from other players in Latin America is that we are exclusively on a postpaid [billing] basis with contract subscribers, whereas 85 to 90 percent of our competitors’ customers are prepaid.

Does being exclusively postpaid limit your growth potential?

Yes, to the extent that there are a number of customers who are more interested in prepaying. But we have done extensive research on businesses and high-net-worth individuals -- the segments we have concentrated on as we focus on profitable growth. By our count, there are 28 million business customers alone in our geographic footprint, and we had only 1.3 million subscribers at midyear.

How saturated are the Latin American markets?

Across Latin America, cellular penetration is about 25 percent; it may go as high as 30 percent in Mexico and Brazil. The U.S., by contrast, is about 55 percent.

Who are you competing against?

There are three big companies that we tend to go head-to-head with in all the markets: América Móvil, based in Mexico City; Telefónica of Spain; and Telecom Italia. BellSouth has operations in Argentina and Peru, and there are single-country players we go up against.

Aren’t all of you benefiting from a general improvement in the climate for wireless?

I think the negativity was a normal occurrence for a growth industry such as this. In the mid- to late 1990s, wireless companies were very aggressive about raising capital, investing in and building out their nationwide networks and growing their subscriber bases as rapidly as possible. They weren’t necessarily focused on bottom-line returns, and the markets rewarded them for subscriber and revenue growth. With the downturn in markets and the return to a more normal and appropriate basis of looking at free cash flow and earnings, rationality has taken hold. We’re saying we’ll continue to invest appropriate amounts in high-quality networks and in getting customers who value the services and who will tend to stay with us for longer periods. That has resulted in much healthier growth for U.S. and international players alike. There is certainly price competition, but it’s at much more reasonable levels than it was two or three years ago.

What are your price points?

Our pricing is competitive -- but we’re not the right choice if you’re a 50-minute-a-month user. Ours is the most attractive option when people use 200 minutes or more a month. And we differentiate ourselves further with customer service; for example, we call customers immediately after they sign up to make sure they understand the service and how to use the various features. Most plans range between $49 and $59 a month, before incremental charges for things like stock quotes or remote e-mail access. In Mexico, our healthiest market, an access plan would cost around $60, but average revenue per user is about $78, which indicates that customers are going well beyond the basic plan.

Because you deemphasize subscriber growth, what indicators do you prefer?

There are a few, and all are going in the right direction. Average revenue per user between the second quarters of 2002 and 2003 rose $3, to $53 -- despite the fact that foreign exchange rates had moved against us. Customer turnover, or churn, which is a significant cost factor, fell from above 3 percent per month to 2.5 percent. The operating margin doubled, to 28 percent. And the customer acquisition cost fell $40, to $315.

What needs to be done in terms of infrastructure improvements?

We have a good, high-quality network that we’re always looking to improve on, but we don’t need to make significant incremental investments to be a viable competitor. We were fortunate, coming out of the restructuring, that $4 billion was already invested in infrastructure. We have to be prepared to add capacity as needed, but we are covering our capital expenditure requirements out of current ebitda.

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