Annual Report (10-k)

Date : 03/18/2019 @ 10:51AM
Source : Edgar (US Regulatory)
Stock : Nii Holdings, Inc. (NIHD)
Quote : 1.81  0.01 (0.56%) @ 11:00PM

Annual Report (10-k)

                                            


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF               
THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended December 31, 2018
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF          
THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from          to          
 
 
 
Commission file number 001-37488
NII HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
91-1671412
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
12110 Sunset Hills Road, Suite 600
Reston, Virginia
 (Address of principal executive offices)
 
20190
 (Zip Code)
(703) 390-5100
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
 
Nasdaq Global Select Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  þ      No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
 
Accelerated filer  þ
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2018 : $287,996,358
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  þ     No  o
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Number of Shares Outstanding
Title of Class
on March 11, 2019
Common Stock, $0.001 par value per share
101,377,968
Documents Incorporated By Reference
Portions of the registrant's proxy statement for the 2019 annual meeting of stockholders are incorporated by reference into Part III hereof.



                                            

NII HOLDINGS, INC.
TABLE OF CONTENTS
Item
Description
Page
 
 
 

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PART I

Item 1.
Business


Corporate History

We were originally organized in 1995 as a holding company for the operations of Nextel Communications, Inc., or Nextel Communications, in selected international markets. The corporation that is currently known as NII Holdings, Inc. was incorporated in Delaware in 2000 as Nextel International, Inc. In December 2001, we changed our name from Nextel International, Inc. to NII Holdings, Inc. Our principal executive office is located at 12110 Sunset Hills Road, Suite 600, Reston, Virginia 20190. Our telephone number at that location is (703) 390-5100. Unless the context requires otherwise, “NII Holdings, Inc.,” “NII Holdings,” “NII,” “we,” “our,” “us” and “the Company” refer to the combined businesses of NII Holdings, Inc. and its consolidated subsidiaries. We conduct substantially all of our business through our Brazilian operating company, Nextel Telecomunicações Ltda., which we refer to as Nextel Brazil. Nextel Brazil's operations are headquartered in São Paulo, with branch offices in Rio de Janeiro and various other cities in Brazil.
Except as otherwise indicated, all amounts are expressed in United States, or U.S., dollars and references to “dollars” and “$” are to U.S. dollars. All historical financial statements contained in this report are prepared in accordance with accounting principles generally accepted in the U.S., or GAAP.

 
Proposed Sale of Nextel Brazil

On March 18, 2019, NII Holdings, Inc. and NII International Holdings S.à r.l., or NIIH, a wholly-owned subsidiary of NII, entered into a purchase agreement with América Móvil, S.A.B. de C.V., or AMX, and AI Brazil Holdings B.V., or AI Brazil Holdings, pursuant to which NII and AI Brazil Holdings will sell their jointly-owned wireless operations in Brazil. Specifically, NIIH will sell all of the issued and outstanding shares of NII Brazil Holdings S.à r.l., or NIIBH, and such shares, together with any shares of NIIBH issued after the date of the purchase agreement, or the acquired equity interests, to AMX. We refer to this transaction as the Nextel Brazil transaction. Also pursuant to the purchase agreement, concurrent to, and as a condition of, the consummation of the Nextel Brazil transaction, AI Brazil Holdings will sell all of its interests in Nextel Holdings S.à r.l., or Nextel Holdings, to NIIBH. We refer to this transaction as the AI Brazil Holdings transaction. At the closing of the Nextel Brazil transaction and the AI Brazil Holdings transaction, AMX will indirectly own all of the issued and outstanding shares of Nextel Brazil.

Under the terms of the purchase agreement, AMX will acquire the acquired equity interests for an aggregate purchase price of $905.0 million on a debt free and cash free basis, subject to certain adjustments at closing, including reimbursement for capital expenditures and working capital investments made from March 1, 2019 to closing. AI Brazil Holdings will receive its pro rata share of the net purchase price plus the preferred return contemplated in the Amended and Restated Articles of Association of Nextel Holdings. AMX will place $30.0 million of the purchase price into an 18-month escrow account to secure NII’s indemnification obligations under the purchase agreement.

In addition, in connection with the Nextel Brazil transaction, NII and AI Brazil Holdings have entered into an agreement relating to the Nextel Brazil transaction that includes the resolution of a dispute regarding the investment of funds into Nextel Holdings from an escrow related to NII’s sale of its operations in Mexico, or the Mexico escrow, pursuant to which the parties have agreed that AI Brazil Holdings will receive, after the closing of the Nextel Brazil transaction, the first $10.0 million recovered from the Mexico escrow followed by 6% of the value of additional funds recovered from the Mexico escrow, in both cases, if and when funds are released. NII has also agreed to indemnify AI Brazil Holdings for damages that may arise from certain tax contingencies, transaction expenses, transaction-related litigation and other matters in connection with its participation in the Nextel Brazil transaction.

The closing of the transactions contemplated by the purchase agreement are subject to the satisfaction of customary conditions, including approval of the stockholders of NII, receipt of required regulatory and antitrust approvals, and either an amendment eliminating the obligations contemplated under, or an escrow agreement providing for a deposit in accordance with, NII’s indenture with respect to our 4.25% convertible senior notes due 2023.

The purchase agreement includes certain termination rights for each party and provides that, in specified circumstances, NII is required to pay a termination fee of $25.0 million. In the event that the purchase agreement is terminated because NII’s

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stockholders fail to approve the Nextel Brazil transaction, NII is obligated to reimburse AMX for its documented out-of-pocket expenses incurred in connection with the purchase agreement and the transactions contemplated thereby, up to $2.0 million.

The purchase agreement contains customary representations, warranties and covenants made by NII, NIIH, AMX and AI Brazil Holdings. Among other things, NIIH has agreed to conduct NIIBH’s, and each of its subsidiaries’, business in the ordinary course, use reasonable best efforts to operate its business in accordance with its budget for the year 2019 and use commercially reasonable efforts to maintain and preserve its business organization and preserve certain business relations.

In connection with the proposed sale of Nextel Brazil, NII’s Board of Directors has approved a plan to dissolve and wind up its headquarters upon the completion of this transaction, which is also subject to approval by NII’s stockholders.
Minority Investment

On June 5, 2017, the Company and AINMT Holdings AB, or ice group, an international telecommunications company operating primarily in Norway under the "ice.net" brand, along with certain affiliates of the Company and ice group, entered into an investment agreement and a shareholders agreement to partner in the ownership of Nextel Brazil. On July 20, 2017, ice group completed its initial investment of $50.0 million in Nextel Holdings S. à r.l., or Nextel Holdings, a newly formed subsidiary of the Company that indirectly owns Nextel Brazil, in exchange for 30% ownership in Nextel Holdings. In connection with the initial investment, ice group received 50.0 million shares of cumulative preferred voting stock in Nextel Holdings, and we received 116.6 million shares of common stock in this entity. The investment agreement also provided ice group with an option, exercisable on or before November 15, 2017, to invest an additional $150.0 million in Nextel Holdings for an additional 30% ownership. ice group did not exercise its option, and on February 27, 2018, we terminated the investment agreement. In September 2018, ice group completed the sale of its 30% ownership interest in Nextel Holdings by selling the shares of its intermediary holding company, AI Brazil Holdings, to AI Media Holdings (NMT) LLC (90%) and Bridford Music B.V. (10%). During 2018, AI Brazil Holdings made an additional $15.9 million investment in Nextel Holdings to maintain its current ownership level. Since we continue to have a controlling interest in Nextel Brazil, we have consolidated this entity and its subsidiaries.

The investment agreement provided for, after ice group’s initial investment, the Company's contribution of proceeds arising from the release of funds deposited in escrow in connection with the sale of our Mexican operations through a 115 account, which is a contribution without the issuance of additional equity. See Note 6 for more information regarding escrowed funds. Management does not believe that this requirement survives the termination of the investment agreement and intends for all future contributions by the Company to Nextel Holdings to be made through capital contributions with additional equity being issued to us. ice group and AI Brazil Holdings have notified the Company that they believe future escrow proceeds received by the Company from the escrow account must be contributed to Nextel Holdings through the 115 account without the issuance of equity, which would result in 30% of the disputed escrow being subject to AI Brazil Holdings' non-controlling interest. To the extent the Nextel Brazil transaction is not completed and the related settlement between us and AI Brazil Holdings is not consummated, AI Brazil Holdings’ non-controlling interest in future escrow proceeds received by the Company would remain in dispute.

Nextel Brazil Business Overview

We provide wireless communication services under the Nextel TM brand in Brazil with our principal operations located in major urban and suburban centers with high population densities and related transportation corridors where there is a concentration of Brazil’s population and economic activity, including primarily Rio de Janeiro and São Paulo. Nextel Brazil operates a wideband code division multiple access, or WCDMA, network, which has been upgraded to offer long-term evolution, or LTE, services in certain areas. We are also a party to a roaming agreement that allows us to offer our subscribers nationwide voice and data services outside of our network's footprint. Our target market is individual consumers who use our services to meet both professional and personal needs. Our target subscribers generally exhibit above average usage, revenue and loyalty characteristics. We believe our subscribers are attracted to the services and pricing plans we offer, the quality of and data speeds provided by our network and our dedicated customer service.
The services we currently offer include:
mobile telephone voice and wireless data services;
international voice and data roaming services; and
value-added services, including sports, music and entertainment streaming capabilities; online education; and access to national and international WiFi hotspot networks.
Our original network utilized integrated digital enhanced network, or iDEN, technology to provide mobile services on our 800 megahertz, or MHz, spectrum holdings. During the last several years, Nextel Brazil experienced iDEN subscriber losses and

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overall declines in its iDEN service revenue. In response to continued subscriber losses on its iDEN network, in September 2017, Nextel Brazil decided to wind down its iDEN operations. After migrating some subscribers to its WCDMA network, Nextel Brazil disconnected all of its remaining iDEN subscribers at the end of the second quarter of 2018.
The majority of our subscribers purchase services from us by acquiring subscriber identity module, or SIM, cards from us and using these SIM cards in handsets that they acquire separately from other sources. As of December 31, 2018 , Nextel Brazil had about 3.31 million total subscriber units in commercial service, which we estimate to be about 4% of total postpaid mobile handsets and other devices in commercial service in Brazil. We refer to these subscriber units in commercial service collectively as our subscriber base.

Operating Strategy

Pending the completion of the sale of Nextel Brazil, we expect to continue to operate our business in the ordinary course. Our goal is to grow our subscriber base and revenues by providing differentiated wireless communications services that are valued by our existing and potential subscribers. As discussed below, we have also been taking actions to reduce costs in our business to lower our spending and preserve our liquidity in the near term while improving our profitability and cash flow over the long term. Our strategy for achieving these goals is based on several core principles, including:
offering a unique and superior customer-centric experience, including a reliable and high quality wireless network and rate plan flexibility;
continuing to implement cost reduction strategies and reconfiguring our network architecture in order to lower cash costs per user, or CCPU, gain scale advantages, create an agile organization and improve overall profitability;
offering simple and valuable service plans that generate higher average revenue per user, or ARPU, and result in lower subscriber turnover; and
building on the strength of the unique positioning of the Nextel brand.
Our consolidated operating revenues declined by $250.0 million, or 29%, from 2017 to 2018, partially as a result of a $135.0 million decrease in iDEN-based operating revenues resulting from the wind down of Nextel Brazil's iDEN network in mid-2018. The remaining $115.0 million decrease in consolidated operating revenues was primarily the result of a 15% depreciation in the value of the Brazilian real relative to the U.S. dollar and an 11% decrease in WCDMA service ARPU in local currency driven by competitive pricing pressure, partially offset by higher operating revenues generated from a larger WCDMA subscriber base in 2018. While we were able to reduce our cost of revenues and selling, general and administrative expenses by 33% in 2018 to offset a portion of the decline in operating revenues, we generated a $41.9 million operating loss for the period, partially as a result of $18.9 million in net impairment, restructuring and other charges and $28.6 million in depreciation and amortization that we recognized in 2018. Due to improvements we made in our operations, our subscriber turnover levels were 96 basis points lower in 2018 than in 2017, resulting in 343,600 net WCDMA subscriber additions in 2018, which was a significant improvement from 3,600 net WCDMA subscriber additions in 2017.
In recent years, we have implemented changes in our business to better align our organization and costs with our operational and financial results and improve our customers' experience. These changes have included a transition to lower cost subscriber acquisition channels, initiatives to improve the rendering of services while reducing operating costs, including headcount reductions, and projects designed to gain operational and capital expenditure efficiencies in Brazil, all of which were intended to reduce costs while maintaining the support necessary to meet our subscribers' needs. We expect that, if we can continue to maintain customer turnover levels similar to those experienced in 2018 and grow our WCDMA subscriber base, we will be able to generate higher operating revenues in the future. We are also continuing to focus on opportunities to reduce operating expenses through operational improvements and cost reductions to preserve our liquidity.



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Economic Environment
Recently, Brazil experienced one of the worst economic recessions in its history, characterized by years of negative wage growth, a net loss of jobs, higher unemployment and lower consumer confidence. These economic conditions and trends resulted in a decline in the amount of consumer disposable income available to purchase telecommunications services and negatively impacted Nextel Brazil's results of operations for recent prior years. Recent data indicates that Brazil's economy is beginning to recover, but to date, the growth has been slow with gradual improvements. According to reports issued by the International Monetary Fund, Brazil's gross domestic product, or GDP, improved by about 1% in each of 2017 and 2018, but unemployment rates reached the highest in decades at approximately 12% at the end of 2018. Real wages in Brazil fluctuated but grew slightly from 2017 to 2018. The foreign currency exchange rate in Brazil depreciated in value by almost 15% relative to the U.S. dollar during 2018.


Competitive Environment
We believe that the wireless communications industry in Brazil has been and will continue to be characterized by intense competition on the basis of price, the types of services offered, speed of data access and quality of service. In recent years, the prices we have been able to charge for services in Brazil have declined as a result of intensified price competition, including the introduction by our competitors of aggressive pricing promotions, such as plans that allow shared minutes between groups of callers and plans that provide more services and in many cases, unlimited calling, for lower rates than some of the plans we offer. Since the second half of 2017, Nextel Brazil has been offering unlimited voice rate plans on its WCDMA network and making other targeted efforts to promote customer loyalty and improve collections in response to the increasingly competitive environment.
We compete with large, well-capitalized competitors in Brazil that have substantial financial and other resources. Nextel Brazil's largest competitors are Vivo, which is owned by Spain's Telefonica and has the largest market share in the São Paulo metropolitan area and Rio de Janeiro; Claro, which is controlled by Mexico's America Movil; Telecom Italia Mobile, or TIM, a subsidiary of Italy's Telecom Italia; and TNL PCS S.A., a subsidiary of Telemar Norte Leste, Brazil's largest wireline incumbent, that offers its services under the brand name “Oi.”
Many of our competitors have a larger spectrum position than ours, including more spectrum that can be used to support a wide range of wireless technologies, and have greater coverage areas and/or name recognition than we do, making it easier for them to expand into new markets and offer new products and services. Our competitors typically have more extensive distribution channels than ours or are able to use their scale advantages to acquire subscribers at a lower cost than we can, and they have implemented network technology upgrades, including both WCDMA and LTE, that support high speed data services. Some of these competitors also have the ability to offer bundled telecommunications services that include local, long distance, subscription television and data services, and can offer a larger variety of handsets and other devices with a wide range of prices, brands and features. In addition, the financial strength and operating scale of some of these competitors allows them to offer aggressive pricing plans, including those targeted at attracting our existing subscribers.
In recent years, our largest competitors have increasingly focused their marketing efforts on attracting postpaid subscribers within our target segments by, among other things, enhancing their network quality and their customer care functions, which may minimize the value of our network quality and speed and the quality of our customer service as points of differentiation.
We compete with other communications service providers based primarily on our simple and attractive pricing plans, high quality customer experience and wireless service offerings. We are continuing to pursue our target market with an expanded message that focuses on our transition to a full service wireless operator capable of providing high quality and high speed data services supported by our WCDMA and LTE network.
We believe that the users who primarily make up our targeted subscriber base are likely to base their purchase decisions on network quality and quality of customer support, as well as on the availability of differentiated features and services that make it easier for them to communicate quickly, efficiently and economically. However, because pricing is one of a number of important factors in potential customers' purchasing decisions, and in light of Brazil's recovering economy discussed above, increased price competition in the customer segments we target could require us to decrease prices or increase service and product offerings, which would lower our revenues, increase our costs or both.
In response to the aggressive nature of Brazil's competitive environment, as well as its recent economic climate, we have taken and are continuing to take the following actions:
offering flexible rate plans in order to meet our customers' individualized needs, including various unlimited voice rate plans at competitive prices;
taking advantage of our smaller company size and flexibility to aggressively market to certain customer segments;
providing a superior customer-centric experience that cultivates a long-term relationship with our customers;
continuing to implement cost reduction strategies and reconfiguring our network architecture to reduce CCPU;

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streamlining distribution channels, including closing unprofitable retail stores; and
reviewing commission and subsidy strategies.
As a result of these and other initiatives, in 2018, Nextel Brazil had 1.32 million gross WCDMA subscriber additions, 343,600 net WCDMA subscriber additions and WCDMA subscriber turnover of 2.61%.

Our Networks and Wireless Technologies

We currently offer services supported by a network that utilizes WCDMA and LTE technology. WCDMA is a standards-based technology being deployed by wireless carriers throughout the world that provides service capabilities such as high speed internet access, increased network capacity and reduced costs for voice and data services when compared to previous technologies. LTE is a standard for wireless data transmission on mobile devices that increases capacity and speed using a different radio interface together with core network improvements.
In late 2010, Nextel Brazil participated in a series of spectrum auctions and was the successful bidder for 20 MHz of spectrum in the 1.9/2.1 gigahertz, or GHz, spectrum bands in 11 of the 13 auction lots covering approximately 98% of the Brazilian population for $714.4 million based on foreign currency exchange rates at the time. Nextel Brazil also successfully bid on 20 MHz of spectrum in the 1.8 GHz band in Rio de Janeiro, Minas Gerais and some states in the north and northeast regions of Brazil for a total bid price of approximately $121.7 million. Nextel Brazil is utilizing this 1.9/2.1 GHz spectrum to support its WCDMA network and is utilizing the 1.8 GHz spectrum to support its LTE-based network. The licenses relating to the spectrum won by Nextel Brazil in the auction were granted in June 2011 and have a term of 15 years. These licenses are renewable once for an additional 15-year period and require Nextel Brazil to meet specified network coverage construction requirements within specified timeframes. In December 2015, Nextel Brazil participated in a spectrum auction and was the successful bidder for 30 MHz of spectrum in the 1.8 GHz band for 455.0 million Brazilian reais, or approximately $116.7 million based on foreign currency exchange rates at the time. Nextel Brazil currently offers LTE services in Rio de Janeiro and São Paulo. These services are automatically available to subscribers with an existing mobile plan and compatible smartphone at no additional cost.
We continue to evaluate ways in which we can use our 800 MHz spectrum to support existing or new services. Our current 800 MHz spectrum holdings are largely contiguous, making it possible to use that spectrum to support future technologies, including LTE-based technologies, if certain technical, operational and regulatory requirements are met, including, for example, the availability of compatible network and subscriber equipment. The availability of that equipment will likely depend upon a number of factors, including the technology decisions made by other wireless carriers and the willingness of infrastructure and device manufacturers to produce the required equipment.

Sales and Distribution

Our target customers include consumer market segments that value our attractive pricing plans, high quality network and our superior level of customer service, as well as the small, medium and large business markets that value our wireless services. We use a variety of distribution channels to reach our target customers, including direct sales representatives, indirect sales agents, retail stores and kiosks, and other subscriber-convenient sales channels such as online purchasing. Nextel Brazil is continuously optimizing its mix of sales channels to take into consideration the methods that best meet local subscriber preferences, most cost effectively sell and provide support to our different segments and facilitate our overall strategy of attracting and retaining subscribers in our targeted segments.
We employ sales representatives who market our services directly to potential and existing customers. The focus of our direct sales force is primarily on customers that value our industry expertise and services, as well as our ability to develop tailored custom communications capabilities that meet the specific needs of these customers. We also utilize indirect sales agents, which mainly consist of local and national non-affiliated dealers that solicit customers for our service and are generally paid through commissions. These dealers participate with Nextel Brazil's direct sales force in varying degrees when pursuing each of our targeted customer groups.
Our sales channels also include distribution through subscriber-convenient channels, including telesales and sales through our Nextel retail stores, shopping center kiosks and other locations. We have realigned these sales channels and locations and have also expanded our marketing through regional and national retailers with store kiosks and handset and prepaid card distribution offers. We also utilize our website as a marketing tool that allows subscribers to compare our various rate plans and research our suite of products and services, including handsets, accessories and special promotions. We use a digital platform and other online purchase tools as additional sales channels to allow subscribers to purchase our services directly without any interaction with a Nextel representative. Subscribers can purchase a SIM card at an accredited point of sale, install the SIM card on an Android or

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iOS smartphone, download the application, and activate and change rate plans. In 2018, we also began offering an express delivery option that delivers a SIM card to our subscribers within a 4-hour window in order to allow for immediate activation of service.


Marketing

Since 2002, we have offered services under the Nextel brand under a trademark license agreement with Nextel Communications. As a result of our efforts, the Nextel brand is recognized in Brazil as standing for both quality of service and the customer support we provide. Our marketing strategy is focused on the availability of the broad range of services and features offered by our WCDMA and LTE networks that we believe appeals to a wide range of consumers. The positioning of our brand continues to focus on customers who are attracted to our services and our reputation for providing a high quality customer experience.

Regulation of SMR and PCS Operations

In Brazil, the wireless communications regulations are based on a concept called calling party pays, which requires the mobile carrier of the subscriber initiating a call to pay the mobile carrier of the party receiving the call when mobile calls occur between subscribers of different carriers. These calling party pays charges are based on rates that we refer to as mobile termination rates. In 2012, ANATEL, Brazil's telecommunications regulatory agency, approved regulations to implement a transition to a cost-based model for determining mobile termination rates. Under the current regulations, the mobile termination rates are being gradually reduced over a transition period ending in 2019, when cost-based rates will take effect and we will likely pay the same rates as our competitors.


Foreign Currency Controls, Dividends and Tax Regulation

The purchase and sale of foreign currency in Brazil continues to be subject to regulation by the Central Bank of Brazil despite regulatory changes enacted in 2005 that were designed to reduce the level of government regulation of foreign currency transactions. The purchase of currency for repatriation of capital invested in Brazil and for payment of dividends to foreign stockholders of Brazilian companies may only be made if the original investment of foreign capital and capital increases were registered with the Brazilian Central Bank. Nextel Brazil has registered substantially all of its investments with the Brazilian Central Bank.
Brazilian law provides that the Brazilian government may, for a limited period of time, impose restrictions on the remittance by Brazilian companies to foreign investors of the proceeds of investments in Brazil whenever there is a material imbalance or a serious risk of a material imbalance in Brazil’s balance of payments. The Brazilian government may also impose restrictions on the conversion of Brazilian currency into foreign currency.

Employees

As of December 31, 2018 , we had 2,640 employees, of which 2,626 were employees of Nextel Brazil. Nextel Brazil is a party to a legally mandated collective bargaining agreement that covers most of its employees and expires on August 31, 2019. NII Holdings is not a party to any collective bargaining agreement. We believe that the relationship between us and our employees, and between Nextel Brazil and its employees, is good.



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Access to Public Filings and Board Committee Charters
We maintain an internet website at www.nii.com. Information contained on our website is not part of this annual report on Form 10-K. Our stockholders and the public may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed with or furnished to the Securities and Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, as amended, or the Exchange Act, through the “investor relations” section of our website. This information is provided by a third party link to the SEC’s online EDGAR database, is free of charge and may be reviewed, downloaded and printed from our website at any time. These reports may also be obtained directly from the SEC through its website at www.sec.gov.
We also provide public access to our code of ethics, entitled the NII Holdings, Inc. Code of Conduct and Business Ethics, and the charters of the following committees of our Board of Directors: the Audit Committee, the Compensation Committee, and the Corporate Governance and Nominating Committee. The committee charters may be viewed free of charge on the Investor Relations link of our website at the following address: www.nii.com. You may obtain copies of the committee charters and the Code of Conduct and Business Ethics free of charge by writing to: NII Holdings Investor Relations, 12110 Sunset Hills Road, Suite 600, Reston, Virginia 20190. If a provision of our Code of Conduct and Business Ethics required under the Nasdaq Global Select Market corporate governance standards is materially modified, or if a waiver of our Code of Conduct and Business Ethics is granted to a director or executive officer, we will post a notice of such action on the Investor Relations link of our website at the following address: www.nii.com. Only the Board of Directors or the Audit Committee may consider a waiver of the Code of Business Conduct and Ethics for an executive officer or director.


Item 1A.
Risk Factors

Investors should be aware that we and our business are subject to various risks, including the risks described below. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of any investment. Our actual results could differ materially from those anticipated in any forward-looking statements that we make as a result of a variety of factors, including the risks described below. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.

Proposed Sale of Nextel Brazil

1.
Completion of the sale of Nextel Brazil is subject to certain conditions and if these conditions are not satisfied or waived, the sale will not be completed, and our business will be materially and adversely impacted.    

The consummation of the sale of Nextel Brazil is subject to the satisfaction or waiver of various conditions, including the approval of our stockholders and Brazilian regulatory authorities. We cannot guarantee that the closing conditions set forth in the purchase agreement will be satisfied or that the sale of Nextel Brazil will be completed. If the sale of Nextel Brazil is not completed, our ongoing business may be adversely affected and, without realizing any of the benefits of the proposed sale, we would be subject to a number of risks, including the following:

we may experience negative reactions from the financial markets, including negative impacts on our stock price;

we may experience negative reactions from our customers, vendors and employees;

we have incurred and will continue to incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the stock purchase agreement, and we would have to recognize these expenses without realizing the expected benefits of the sale of Nextel Brazil;

the purchase agreement places certain restrictions on the conduct of our business prior to completion of the sale, which restrictions may prevent us from taking other potentially advantageous actions during the pendency of the transaction; and

matters relating to the proposed sale will require substantial commitments of time and resources by our management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company.


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In addition, our Board of Directors, in discharging its fiduciary obligations to our stockholders, may be required to evaluate other strategic alternatives that become available, which alternatives may not be as favorable to our stockholders as the currently proposed sale of Nextel Brazil. If the sale of Nextel Brazil is not completed, these risks may materialize and may adversely affect our business, financial condition, financial results and stock price.

2.
We are subject to business uncertainties and contractual restrictions while the sale of Nextel Brazil is pending.

Uncertainty about the effect of the sale of Nextel Brazil on our employees and customers may have an adverse effect on us. The uncertainties may impair our ability to attract, retain and motivate key personnel until the sale is completed, and could cause customers and others that deal with us to seek to change existing business relationships. Retention of certain employees by us may be challenging while the sale is pending, as certain employees may experience uncertainty about their future roles with America Movil. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, our business could be harmed. In addition, subject to certain exceptions, we have agreed to operate the Company's business in the ordinary course prior to closing.

3.
The proposed sale of Nextel Brazil may distract management of the Company from its other responsibilities.

The proposed sale of Nextel Brazil could cause our management to focus its time and energies on matters related to the proposed sale that otherwise would be directed to its business and operations. Any such distraction on the part of our management, if significant, could affect its ability to service existing business and develop new business and adversely affect our business and earnings.

4.
Our executive officers and directors have interests in the sale of Nextel Brazil that may be different from your interests as a stockholder of the Company.

Our stockholders should be aware that our directors and executive officers have certain interests in the sale of Nextel Brazil that may be different from or in addition to the interests of the Company’s stockholders generally. These interests, which arise from both contractual arrangements existing prior to the execution of the purchase agreement, include, among other things, acceleration of outstanding equity awards, potential severance benefits and other payments and rights to ongoing indemnification and insurance coverage for acts or omissions occurring prior to the sale. As a result of these interests, our directors and executive officers might be more likely to support and to vote in favor of the sale of Nextel Brazil and dissolution of the Company than if they did not have these interests. Our stockholders should consider whether these interests might have influenced these directors and executive officers to support or recommend adoption of the purchase agreement.

5.
We may be subject to litigation, which is costly and could divert our attention.

We may be subject to securities class action or other litigation in connection with the proposed sale of Nextel Brazil. Litigation against us related to the sale of Nextel Brazil could result in substantial costs and divert our management’s attention from closing the transaction or our day-to-day business and operations, which could harm our business, increase our expenses and decrease the amount available for distribution to our stockholders.

6.
We cannot assure you of the exact timing and amount of any distribution to our stockholders under a plan of liquidation and dissolution.

Following approval of our stockholders and the consummation of the sale of Nextel Brazil, we plan to begin the process of liquidation and dissolution of NII Holdings and its remaining subsidiaries. The liquidation and dissolution process is subject to numerous uncertainties, may fail to create value to our stockholders and may not result in any remaining capital for distribution to our stockholders.

If we proceed with a liquidation and dissolution of the Company, we would be required under Delaware law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. The precise nature and timing of any distribution to our stockholders will depend on and could be delayed by, among other things, sales of our non-cash assets, claim settlements with creditors, resolution of outstanding litigation matters and unanticipated or greater-than-expected expenses. Examples of uncertainties that could reduce the value of distributions to our stockholders include: unanticipated costs relating to the defense; satisfaction or settlement of existing or future lawsuits or other claims or threatened against us; delays in the release of escrowed proceeds from our sales of Nextel Mexico and Nextel Brazil and the ultimate amount released to us from such escrowed proceeds; and delays in the liquidation and dissolution of our subsidiaries, including our international subsidiaries due to our inability to settle claims or otherwise. In addition, as we wind down , we will continue to incur expenses from operations, such as operating costs, salaries, lease payments,

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directors’ and officers’ insurance, payroll and local taxes, legal, accounting and consulting fees and offices expenses, which will reduce any amounts available for distribution to our stockholders. As a result, we cannot determine with certainty the amount or timing of distributions to our stockholders.

Risks Relating to Our Business and Results

7.
Because our free cash flow was negative, and is expected to continue to be negative, we will likely need to meet our obligations and fund our working capital with cash on hand and through the recovery of amounts held in escrow.

Our free cash flow was negative in 2016, 2017 and 2018, and based on our current plans, we expect our free cash flow to remain negative through at least 2019. Our current plans are based on a number of key assumptions relating to, among other things, our ability to manage our capital and operating expenses and to attract and retain customers. If any of our assumptions are not borne out or are otherwise not correct, our free cash flow could continue to be negative for an extended period of time. There can be no assurance that we will succeed in executing on our plans or that we will generate positive free cash flow in the future.
Our current consolidated sources of funding include our cash and short-term investments and cash held in escrow to secure our indemnification obligations in connection with the sale of Comunicaciones Nextel de Mexico, S.A. de C.V., or Nextel Mexico. In addition, AI Brazil Holdings, our minority investor in Nextel Holdings, may fund up to 30% of the cash needs that arise at Nextel Holdings and its subsidiaries in order to maintain its current ownership in Nextel Holdings. Based on the challenging competitive environment in Brazil that we anticipate will continue, we expect that our cash flow from operations will continue to be negative in 2019. In addition, we expect that our capital expenditures for 2019 will be slightly higher than the levels experienced in 2018. As a result of the amendments to Nextel Brazil's bank loans and equipment financing that became effective in January 2018, as well as the issuance of our convertible senior notes in August 2018, our liquidity forecast has improved. However, our business plan is based on a number of assumptions, including assumptions regarding the recovery of the escrow, our ability to maintain subscriber turnover levels similar to those we experienced in 2018 and continued investments from AI Brazil Holdings. If the ultimate amount recovered from our cash held in escrow does not meet our current forecasted amount, or if we do not recover substantially all of our previously requested escrowed funds in 2019, we may need to alter our business plan or obtain additional funding. In addition, if our actual results of operations differ from our business plan or AI Brazil Holdings decides not to provide additional capital, our business may be negatively affected, which would require us to alter our business plan or obtain additional funding. If we are unable to obtain additional funding or successfully implement changes to our business plan as needed, we may be unable to settle our obligations as they come due.

8.
If we are not able to compete effectively in the highly competitive wireless communications industry, our future growth and operating results will suffer.

Our business involves selling wireless communications services to subscribers, and as a result, our economic success is based on our ability to attract new subscribers and retain current subscribers. Our success will depend on Nextel Brazil's ability to compete effectively with other telecommunications services providers, including other wireless telecommunications companies, internet and cable service providers and providers of fixed wireline services, in Brazil. Our ability to compete successfully will depend on our ability to anticipate and respond to various competitive factors affecting the telecommunications industry in Brazil, including the availability of new services, features and technologies; changes in consumer preferences, demographic trends and economic conditions; our ability to fund our operations; and our competitors' pricing strategies.

In 2016 and 2017, our results of operations, including our operating revenues and operating cash flows, were negatively affected by a number of factors, including increased competitive pressure, high levels of customer turnover, the decline of our iDEN business and weak economic conditions in Brazil. These and other factors resulted in a reduction in our subscriber growth and revenues and had a significant negative impact on our results and our ability to grow our revenue base to a level sufficient to reach the scale required to generate positive operating income.

While our operating results improved in 2018, we believe that the wireless communications industry in Brazil has been and will continue to be characterized by intense competition on the basis of price; the types of services offered; variety, features and pricing of handsets; speed of data access; and quality of service. In recent years, the prices we have been able to charge for services in Brazil have declined as a result of intensified price competition, including the introduction by our competitors of aggressive pricing promotions, such as plans that allow shared minutes between groups of callers and even more aggressive pricing plans that provide more services for lower rates than the plans we offer. In August 2017, Nextel Brazil began offering unlimited voice rate plans in response to the increasingly competitive environment, which succeeded in reducing subscriber turnover in 2018 compared to 2017. However, this increased competition may affect our ability to attract and retain subscribers in the future, which could impact our ability to execute on our business plan and negatively impact our operating results.


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a.
The wireless industry in Brazil is highly competitive, which could make it difficult for us to attract and retain customers. If we are unable to attract and retain customers, our financial performance will be impaired.

Competition among telecommunications service providers in Brazil is intense as multiple carriers seek to attract and retain customers. Some of the factors contributing to this competitive environment include the current economic environment in Brazil; a higher relative penetration of wireless services compared to historic levels, which drives more aggressive competition as competitors seek to attract and retain customers that support the growth of their businesses in a more saturated market; the development and availability of new products and services, including services supported by new technologies; and the entry of new competitors. We also expect the current trend of alliances, cost-sharing arrangements and consolidation in the wireless and communications industries to continue as companies respond to the need for cost reduction and additional spectrum. This trend may result in the creation of larger and more efficient competitors with greater financial, technical, promotional and other resources to compete with our businesses. In addition, as we continue to pursue our plans to expand our marketing and sales focus on consumers, we will be increasingly seeking to attract customers in segments that have historically been predominantly served by our competitors, many of which are larger companies with more extensive networks, financial resources and benefits of scale that allow them to spend more money on marketing and advertising than us and to exploit scale advantages that allow them to offer products and services at a lower cost.

In order to obtain a competitive advantage, our competitors have, among other things:

provided discounted or free airtime or other services;

provided increased handset subsidies;

offered higher commissions to distributors;

offered a broader range of handsets and, in some cases, offered those handsets through exclusivity periods;

expanded their networks to provide more extensive network coverage;

developed and deployed networks that use new technologies and support new or improved services;

offered incentives to larger customers to switch service providers, including reimbursement of cancellation fees; and

offered bundled telecommunications services that include local, long distance and data services.

In addition, number portability requirements, which enable customers to switch wireless providers without changing their wireless numbers, have been implemented in Brazil, making it easier for wireless providers to effectively target and attract their competitors' customers.

The competitive environment in Brazil and competitive strategies of our competitors, including recent price competition, will put pressure on the prices we can charge for our services and for handsets and other devices that we sell in connection with our service offerings. These developments and actions by our competitors could continue to negatively impact our ARPU, our operating results and our ability to attract and retain customers. If we are unable to respond to competition and compensate for declining prices by adding new customers, increasing usage and offering new services, our revenues and profitability could continue to decline.

b.
Competition and technological changes in the market for wireless services, including competition driven by our competitors' deployment of LTE or other advanced technologies, could negatively affect our average revenue per subscriber, customer turnover, operating costs and our ability to attract new subscribers, resulting in adverse effects on our revenues, future cash flows, growth and profitability. If we do not keep pace with rapid technological changes or if we fail to offer new services in a manner that delivers a quality customer experience, we may not be able to attract and retain customers.

The wireless telecommunications industry is experiencing significant technological change. Spending by our competitors on new wireless services and network improvements could enable them to obtain a competitive advantage with new technologies or enhancements that we do not offer. Rapid change in technology may lead to the development of wireless communications technologies that support products or services that consumers prefer over the products or services that we offer. If we are unable to keep pace with future advances in competing technologies on a timely basis, or at an acceptable cost, we may not be able to compete effectively and could lose subscribers to our competitors.


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While we have deployed and are offering services on our WCDMA network in Brazil and are continuing to expand and supplement that network, including by offering services utilizing LTE technologies in São Paulo and Rio de Janeiro, our competitors in Brazil have launched nationwide new or upgraded networks that use WCDMA and/or LTE technology and offer services that use high speed data transmission capabilities, including internet access and video telephony. In addition, certain of our competitors have stated that they intend to deploy 5G in Brazil as early as 2021. These and other future technological advancements may enable competitors to offer features or services we cannot provide or exceed the quality of services we offer, thereby making our services less competitive. In addition, we may not be able to accurately predict technological trends or the success of new services in the market. If our services fail to gain acceptance in the marketplace in the near term, or if costs associated with implementation and completion of the introduction of these services materially increase, our ability to retain and attract customers could continue to be adversely affected.

In Brazil, our current 800 MHz spectrum holdings are largely contiguous, making it possible to use that spectrum to support future technologies, if certain technical, operational and regulatory requirements are met, including, for example, the availability of compatible network and subscriber equipment. Although our spectrum holdings in Brazil are contiguous, they are not located in the same portion of the 800 MHz spectrum band that is currently being used to support LTE network deployments elsewhere in the world including in the United States. Accordingly, it may be necessary to seek regulatory changes and to reconfigure the spectrum band and our spectrum holdings for them to be used to efficiently support LTE technologies.

c.
Most of our competitors are financially stronger than we are, which limits our ability to compete based on price.

Because of their size, scale and resources, our competitors may be able to offer services to subscribers at prices that are below the prices that we can offer for comparable services. Many of our competitors are well-established companies that have:

substantially greater financial and marketing resources;

larger customer bases;

larger spectrum positions; 

higher profitability and positive free cash flow;

more access to funding, lower leverage and lower cost of financing; and

larger service coverage areas than those of our operating companies.

If we cannot compete effectively based on the price of our service offerings and related cost structure, our results of operations may be adversely affected.

d.
We are dependent on our competitors for support services that are critical to our operations.

We rely on our competitors for certain support services that are critical to our operations. For example, the services that we provide on our WCDMA network require significant data capacity, and this capacity demand has made it necessary for us to obtain wireline or other connecting circuits between elements of our network such as switches and transmitter and receiver sites that are capable of transporting a significantly higher volume of data traffic. In some instances, the availability of those higher capacity circuits is limited, and in many cases, our access to those circuits is controlled by entities that are affiliated with our competitors. Similarly, we have entered into roaming arrangements with one of our competitors that allow us to expand the coverage of our WCDMA network in Brazil by allowing our subscribers to roam on that competitor's network in areas outside our coverage area. Likewise, we have entered into a 10-year radio access network, or RAN, sharing agreement with the same competitor under which we are permitted to use its tower and equipment infrastructure to transmit telecommunications signals on Nextel Brazil's spectrum. As a result, we are dependent on entities that are or are affiliated with our competitors to provide us with the data transport services needed to support our networks and services, roaming services and infrastructure that enhance our coverage area. Our ability to offer services and our results of operations could be adversely affected if those entities were to allocate limited transport or network capacity to other customers including their wireless affiliates or otherwise make it more difficult for us to obtain the necessary transport and roaming capacity to support our networks and services.


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e.
If there is a substantial increase in our customer turnover rate, our business could be negatively affected.

Prior to 2018, we experienced higher customer turnover rates compared to earlier periods, which resulted primarily from the combined impact of a more intense competitive sales environment and our inability to meet competitive offers due to our size and the breadth and type of coverage we could offer, including, in particular, in connection with our iDEN-based services that had limited data capabilities, and a deterioration in economic conditions in Brazil. Nextel Brazil's subscriber turnover decreased in 2018 from the levels experienced in 2017 as a result of unlimited voice rate plan offerings and efforts to migrate existing customers to these types of unlimited rate plans, as well as other targeted efforts to promote customer loyalty and improve collections.

In addition, we have broadened our target market to include customers that have typically demonstrated a willingness to change service providers more frequently and began launching new types of portfolio plans in 2018 with additional data offerings for those customers who are changing service providers. These and other changes in our marketing strategies and the types of customers we target could have a negative impact on our customer turnover rate in the future. Subscriber losses adversely affect our business and results of operations because these losses result in lost revenues and cash flow, drive higher bad debt expenses and require us to attract replacement customers and incur the related sales commissions and other costs. Although attracting new subscribers and retaining existing subscribers are both important to the financial viability of our business, there is an added focus on retaining existing subscribers because the average cost of acquiring a new subscriber is higher. Accordingly, increased levels of subscriber deactivations have had and could continue to have a negative impact on our results, even if we are able to attract new subscribers at a rate sufficient to offset those deactivations. If we experience increases in our customer turnover rate, our results of operations could be adversely affected.

f.
If our networks do not perform in a manner that meets subscriber expectations, we will be unable to attract and retain customers.

Customer acceptance of the services we offer on our networks is and will continue to be affected by technology-based differences and by the operational performance and reliability of these networks. We may have difficulty attracting and retaining customers if: we are unable to satisfactorily address and resolve performance or other transmission quality issues as they arise; these issues limit our ability to deploy or expand our network capacity as currently planned; or these issues place us at a competitive disadvantage to other wireless providers.

g.
Customer concerns about our financial condition and ability to implement our business plan, including our network development and deployment efforts, may have an additional adverse effect on our ability to attract and retain customers.

When deciding whether to continue or begin service with us, our customers may take our medium- to long-term operating and financial outlook, particularly to the extent that it is perceived to impact our network deployment and development, into account. If customers or potential customers who are aware of our recent results of operations, or of current and future adjustments to our business in response to those results, become concerned that we will be unable to continue to provide service to them at a quality level that meets their needs, customer deactivations could increase and new subscribers could decrease. We assume that customers will find our services attractive and that we will be able to increase our subscriber base. However, given the factors that have negatively affected our business and the difficulties associated with predicting our ability to overcome these factors, there can be no assurance that these assumptions will prove to be correct. Increases in customer deactivations and decreases in new subscribers would adversely affect our revenues and our ability to generate the cash needed to fund our business and meet our other obligations.

9.
We operate exclusively in Brazil, and our assets, subscribers and cash flows are concentrated in Brazil, which presents risks to our operating plans.

As a holding company with operations solely in Brazil, our growth and operating results are dependent on the strength and stability of the economic, political and regulatory environments in that country. Changes in the economic, political and regulatory environment or foreign currency exchange rates in Brazil will have a more significant impact on our operating results than has been the case historically when we held operations in multiple Latin American markets. As a result, our business and operations will be subject to a higher degree of risk and volatility due to the impact of the risks described below.


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a.
A decline in the foreign exchange rate of the Brazilian real may adversely affect our growth and our operating results.

Historically, the value of the Brazilian real relative to the U.S. dollar has been volatile. Recent weakness in the economy in Brazil has led to increased volatility in the real compared to the U.S. dollar. Nearly all of our revenues are earned in Brazilian reais, but we report our results in U.S. dollars. As a result, fluctuations in foreign currency exchange rates have had and can have a significant impact on our reported results that may not reflect the operating trends in our business. In addition, all of our outstanding debt is owed by Nextel Brazil, and 50% of the principal amount of our total debt outstanding is denominated in U.S. dollars. A decline in the value of the Brazilian real makes it more costly for us to service our U.S. dollar-denominated debt obligations and affects our operating results because we generate nearly all of our revenues in Brazilian reais, but we pay for some of our operating expenses and capital expenditures in U.S. dollars. Further, because we report our results of operations in U.S. dollars, a decline in the value of the Brazilian real relative to the U.S. dollar result in reductions in our reported revenues, as well as a reduction in the carrying value of our assets, including the value of cash investments held in Brazilian reais. Depreciation of the Brazilian real also results in increased costs to us for imported equipment. Historically, we have entered into some limited hedging arrangements to mitigate short-term volatility in foreign exchange rates, but have not hedged against long-term movements in foreign exchange rates because the alternatives currently available for hedging against those movements are limited and costly. As a result, if the value of the Brazilian real continues to depreciate relative to the U.S. dollar, we would expect our reported operating results in future periods, and the value of our assets held in Brazilian reais, to be adversely affected.

b.
We face economic and political risks operating in Brazil, which may limit our ability to implement our strategy and could negatively impact our financial flexibility, including our ability to repatriate and redeploy profits, and may disrupt our operations or hurt our performance.

Our operations depend on the economy in Brazil, which is considered to be an emerging market and has historically been subject to volatile economic cycles. Recently, Brazil experienced one of the worst economic recessions in its history, characterized by years of negative wage growth, a net loss of jobs, higher unemployment and lower consumer confidence. These economic conditions and trends resulted in a decline in the amount of consumer disposable income available to purchase telecommunications services and negatively impacted Nextel Brazil's results of operations for recent prior years. Recent data indicates that Brazil's economy is beginning to recover, but to date, the growth has been slow with gradual improvements. It is estimated that Brazil's GDP improved by about 1% in each of 2017 and 2018, but unemployment rates reached the highest in decades at 12% at the end of 2018. Real wages in Brazil fell in the first half of 2017, but grew steadily in the second half of 2017. The foreign currency exchange rate in Brazil depreciated in value by almost 15% relative to the U.S. dollar during 2018. If the current economic conditions worsen, the economic environment in Brazil may negatively impact our ability to meet our business plan.

In addition, in some instances, the economy in Brazil has also been negatively affected by other factors, including volatile political conditions. We are unable to predict the impact that local or national elections and the associated transfer of power from incumbent officials or political parties to newly elected officials or parties may have on the local economy or the growth and development of the local telecommunications industry. Changes in leadership or in the ruling party in Brazil may affect the economic programs developed under the prior administration, which in turn, may adversely affect the economy there. Other risks associated with political instability could include the risk of expropriation or nationalization of our assets by the government. We expect political, economic and social conditions in Brazil to affect our business, including our access to capital markets to obtain funding needed for our business or to refinance our existing indebtedness.

c.
Our operating company is subject to local laws and government regulations, and we are subject to U.S. laws and regulations, which could limit our growth and strategic plans and negatively impact our financial results.

Our operations are subject to local laws and regulations in Brazil, which may differ substantially from those in the U.S., and we could become subject to penalties if we do not comply with those local laws and regulations. In addition, we are subject to U.S. laws and regulations, such as the Foreign Corrupt Practices Act, or the FCPA. The FCPA prohibits us from providing anything of value to foreign officials for the purpose of influencing official decisions or obtaining or retaining business. Our employees and agents interact with government officials on our behalf, including interactions necessary to obtain licenses and other regulatory approvals necessary to operate our business and through contracts to provide wireless service to government entities, creating a risk that actions may occur that could violate the FCPA. Although we have implemented policies and procedures designed to ensure compliance with local laws and regulations as well as U.S. laws and regulations, including the FCPA, there can be no assurance that all of our employees, consultants, contractors and agents will abide by our policies. The penalties for violating the FCPA can be severe. Any violations of law, even if prohibited by our policies, could have a material adverse effect on our business.


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In addition, in Brazil, government regulatory agencies regulate the licensing, construction, acquisition, ownership and operation of our wireless communications systems, as well as the granting, maintenance and renewal of licenses to use spectrum and radio frequencies. Adoption of new regulations, changes in the current telecommunications laws or regulations or changes in the manner in which they are interpreted or applied could adversely affect our operations by increasing our costs, reducing our revenues or making it more difficult for us to compete. In order to maintain our licenses, we are required to use the related spectrum in an efficient manner. In connection with the wind down of our iDEN network, we believe we have a plan to meet our spectrum use requirements for the 800 MHz spectrum underlying that network. If ANATEL does not agree that we are meeting our requirements, we could be required to return our 800 MHz spectrum before its expiration. In addition, ANATEL has provided pricing for a conversion of our 800 MHz spectrum from a trunking license for radio services as private systems to public systems. If we decide not to pay the conversion price set by ANATEL, we will be unable to renew the spectrum licenses for our 800 MHz spectrum, if a renewal becomes available, and could be subject to forfeiture of this spectrum. Our business may be negatively impacted if changes are implemented that:
affect the terms of interconnection arrangements that allow our subscribers to complete calls to our competitors’ subscribers, including the charges imposed for the completion of those calls;
establish restrictions that limit or otherwise affect the deployment of transmitter and receiver sites needed to support the coverage and capacity of our networks;
establish minimum network construction, coverage or quality of service obligations that can result in increased capital investments or require other changes to our business;
establish prices Nextel Brazil is required to charge for its services or impose other terms of service that can affect our revenues or costs; or
impose foreign ownership limitations on telecommunications providers that may affect our ability to own and operate our business.
There has also been an increased focus on service and quality standards in Brazil as the local government monitors telecommunications providers' voice quality, customer complaints, call failure rates, capacity to handle call traffic levels in peak calling periods and failed interconnection of calls, which could potentially increase our operating costs and affect rates charged to subscribers. In addition, regulations in Brazil permit third parties, including our competitors, to challenge our actions or decisions of the regulators that potentially benefit us, such as decisions regarding the allocation and licensing of spectrum. If our competitors are successful in pursuing claims such as these, or if the regulators in Brazil take actions against us in response to actions initiated by our competitors, our ability to grow our business and improve our results of operations could be adversely affected.

Finally, rules and regulations affecting placement and construction of our transmitter and receiver sites affect our ability to deploy and operate our networks, and therefore impact our business strategies. In some instances, local governments have adopted very stringent rules and regulations related to the placement and construction of wireless towers, which can significantly impede the planned expansion of our service coverage area or require us to remove or modify existing towers, which can result in unplanned costs, negatively impact network performance and impose new and onerous taxes and fees.

d.
We are subject to taxes, which may reduce the revenues of our operating subsidiary in Brazil, reduce the amounts we receive from Nextel Brazil, increase our tax costs and impact our cash flows.

The government in Brazil, including the local municipalities, has increasingly turned to new taxes, as well as aggressive interpretations of current tax law, as a method of increasing revenue. For example, Nextel Brazil is required to pay two types of income taxes, which include a corporate income tax and a social contribution tax, and is subject to various types of non-income based taxes, including value-added tax, excise tax, service tax, importation tax and property tax. In addition, the reduction in tax revenues resulting from the economic downturn that has occurred in the last several years has led to proposals and new laws that increase the taxes imposed on sales of handsets and on telecommunications services. The provisions of new tax laws may attempt to prohibit us from passing these taxes on to our customers or our ability to do so may be limited by competitive conditions. These taxes may reduce the amount of earnings that we can generate from our services or in some cases may result in operating losses.

In addition, Nextel Brazil has received various assessment notices from municipal, state and federal Brazilian authorities asserting deficiencies in payments related primarily to value-added taxes and other non-income based taxes. Nextel Brazil has filed various administrative and legal petitions disputing these assessments. In some cases, Nextel Brazil has received favorable decisions, which are currently being appealed by the respective governmental authority. In other cases, Nextel Brazil's petitions have been denied, and Nextel Brazil is currently appealing those decisions. In connection with these petitions, Nextel Brazil is regularly required to make a judicial guarantee through a deposit of cash to cover the amount in dispute in order to file and/or

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appeal claims. These judicial guarantees are not released until a pending matter is resolved. Future judicial guarantees could be material and could negatively impact our cash flows.

Distributions of earnings and other payments, including interest, received from Nextel Brazil may be subject to withholding taxes imposed by Brazil. Any of these taxes will reduce the amount of after-tax cash we can receive from our operations.

In general, a U.S. corporation may claim a foreign tax credit against its Federal income tax expense for foreign withholding taxes and, under certain circumstances, for its share of foreign income taxes paid directly by foreign corporate entities in which the company owns 10% or more of the voting stock. Our ability to claim foreign tax credits is, however, subject to numerous limitations, and we may incur incremental tax costs as a result of these limitations or because we do not have U.S. Federal taxable income.

We may also be required to include in our income for U.S. Federal income tax purposes our proportionate share of specified earnings of our foreign corporate subsidiaries that are classified as controlled foreign corporations, without regard to whether distributions have been actually received from these subsidiaries.

e.
We have entered into a number of agreements that are subject to enforcement in foreign countries, which may limit efficient dispute resolution.

A number of the agreements that we and our subsidiaries enter into with third parties are governed by the laws of, and are subject to dispute resolution in the courts of or through arbitration proceedings in, the countries or regions in which the operations are located. We cannot accurately predict whether these forums will provide effective and efficient means of resolving disputes that may arise. Even if we are able to obtain a satisfactory decision through arbitration or a court proceeding, we could have difficulty enforcing any award or judgment on a timely basis. Our ability to obtain or enforce relief in the U.S. is also uncertain.

f.
We are subject to significant import duties on our network equipment and handsets, and any increases could impact our financial results.

When needed in our operations, we import network equipment and handsets and other devices from locations outside Brazil. Network equipment and handsets may be subject to significant import duties and other taxes. Any significant increase in import duties in the future could significantly increase our costs. To the extent we cannot pass these costs on to our customers, our financial results could be negatively impacted.

10.
The costs we incur to connect our networks with those of other carriers are subject to local laws and may increase, which could adversely impact our financial results.

Nextel Brazil must connect its telecommunication networks with those of other carriers in order to provide the services we offer. We incur costs relating to these interconnection arrangements and for local, long distance and data transport services relating to the connection of our transmitter sites and other network equipment. These costs include interconnection charges and fees, charges for terminating calls on the other carriers’ networks and transport costs, most of which are measured based on the level of our use of the related services. We are able to recover a portion of these costs through revenues earned from charges we are entitled to bill other carriers for terminating calls on our network, but because users of mobile telecommunications services who purchase those services under contract generally, and our customers in particular, tend to make more calls that terminate on other carriers’ networks and because we have a smaller number of customers than most other carriers, we incur more charges than we are entitled to receive under these arrangements. The terms of the interconnection and transport arrangements, including the rates that we pay, are subject to varying degrees of local regulation, and often require us to negotiate agreements with the other carriers, most of which are our competitors, in order to provide our services. Our costs relating to these interconnection and transport arrangements are subject to fluctuation both as a result of changes in regulations and the negotiations with the other carriers. Changes in our customers’ calling patterns that result in more of our customers’ calls terminating on our competitors’ networks and changes in the interconnection arrangements either as a result of regulatory changes or negotiated terms that are less favorable to us could result in increased costs for the related services that we may not be able to recover through increased revenues, which could adversely impact our financial results.


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11.
We own Nextel Brazil through a joint venture, and our interests and the interests of our stockholders may not align with the interests of our joint venture partner.

On June 5, 2017, we and ice group entered into an investment agreement and a shareholders agreement to partner in the ownership of Nextel Brazil. On July 20, 2017, ice group completed its initial investment of $50.0 million in Nextel Holdings, which indirectly owns Nextel Brazil, in exchange for 30% ownership in Nextel Holdings. The investment agreement also provided ice group with an option, exercisable on or before November 15, 2017, to invest an additional $150.0 million in Nextel Holdings for an additional 30% ownership. ice group did not exercise its option, and on February 27, 2018, we terminated the investment agreement with ice group, which remains a minority investor in Nextel Brazil. The shareholders agreement remains in effect, and we intend to continue to meet all of our obligations in the shareholders agreement.

In September 2018, ice group completed the sale of its 30% ownership interest in Nextel Holdings by selling the shares of its intermediary holding company, AI Brazil Holdings B.V., to AI Media Holdings (NMT) LLC ( 90% ) and Bridford Music B.V. ( 10% ).

AI Brazil Holdings owns 30% of Nextel Holdings, which indirectly owns Nextel Brazil. Pursuant to our shareholders agreement with AI Brazil Holdings, the Board of Managers of Nextel Holdings is comprised of five members, with three members appointed by us and, after regulatory approval and as long as AI Brazil Holdings maintains at least a 30% stake in Nextel Holdings, two nominees and one observer from AI Brazil Holdings. In addition, the shareholders agreement with AI Brazil Holdings provides for certain minority protective rights relating to certain significant actions of Nextel Holdings and Nextel Brazil. Consequently, we and our stockholders have less influence on the management and policies of Nextel Brazil after AI Brazil Holdings' initial investment than we previously had. AI Brazil Holdings may at any time have economic or business interests or goals which are, or which become, inconsistent with the business interests or goals of us and our stockholders, and could attempt to influence or take actions that are contrary to our requests, policies or objectives.

In addition, our arrangement with AI Brazil Holdings carries additional risks, including the possibility that:

we may incur liabilities as a result of an action taken by AI Brazil Holdings;

disputes between us and AI Brazil Holdings, including those relating to the investment of funds currently held in escrow to secure our indemnification obligations in connection with the sale of Nextel Mexico, could arise which could distract management from focusing time and efforts on our business, result in an impasse or ultimately in litigation or arbitration or otherwise have a negative influence on our partnership and our ability to successfully operate Nextel Brazil; and

in the event the proposed sale of Nextel Brazil is not completed, the transfer restrictions, rights of first refusal, and “tag along” and “drag along” rights contained in our agreements with AI Brazil Holdings could restrict our or AI Brazil Holdings' ability to exit the joint venture if desired or discourage a third party transaction that might be in the best interests of stockholders.

AI Brazil Holdings has certain rights and obligations, including those described above, with respect to the management and governance of Nextel Holdings. AI Brazil Holdings may have different economic or business interests than ice group, which could exacerbate any of the foregoing risks.

Any of the foregoing could have a material adverse effect on our stock price, business and cash flows, financial condition and results of operations.

12.
Our failure to maintain effective internal controls over financial reporting may adversely affect the accuracy and timeliness of our financial reporting.

As described in “Part II. Item 9A. Controls and Procedures,” included in this annual report on Form 10-K, we disclosed a material weakness in internal control over financial reporting due to a material weakness that impacts the control environment, risk assessment, and information and communication components of internal control. Our internal control environment lacks automation, and we depend on personnel and manual processes to validate the completeness and accuracy of information used to support accounting analyses. We experienced a high rate of change in our business and regulatory environments, which, when combined with turnover among key resources, impacted our ability to respond to changing financial reporting risks, reach accounting conclusions in a timely manner, and design and carry out the appropriate business process controls. We also implemented certain process automation activities, however, our general information technology controls over these system changes did not operate effectively, which could have adversely impacted the related manual and automated business process controls. These matters, in combination, resulted in immaterial misstatements, some of which were corrected, across multiple accounts.

18


                                            


Our inability to maintain effective internal control over financial reporting, as described above, combined with issues or delays in implementing improvements, could result in a material misstatement to our financial statements or other disclosures, which could have an adverse effect on our business, financial condition or results of operations.

13.
Our business could be negatively impacted by our reliance on indirect distribution channels for a significant portion of our sales.

Our business depends upon third party distribution channels for securing a portion of the new customers to our services. In some instances, we rely on these third party dealers and retailers to serve as the primary contact between us and the customer and to interact with other third parties on our behalf. As a result, there may be risks associated with the actions taken by our distributors or the operators of our other retail channels, including potential risks associated with the failure of our distributors or other retail channels to follow regulatory requirements. The volume of our new customer additions, our ability to retain customers and our profitability could also be adversely affected if these third party dealers or retailers terminate their relationship with us, if there are adverse changes in our relationships with them, if we alter our compensation arrangements with these dealers or retailers or if the financial condition of these dealers or retailers deteriorates.

14.
If our licenses to provide mobile services are not renewed, or are modified or revoked, our business may be restricted.

Wireless communications licenses and spectrum allocations are subject to ongoing review and, in some cases, to modification or early termination for failure to comply with applicable regulations. If Nextel Brazil fails to comply with the terms of its licenses and other regulatory requirements, including installation deadlines and minimum loading or service availability requirements, they could be fined or their licenses could be revoked. We believe that Nextel Brazil is in compliance with the applicable operational requirements of its licenses in all material respects. Further, compliance with these requirements is a condition for eligibility for license renewal. Most of our wireless communications licenses have fixed terms and are not renewed automatically. Because governmental authorities have discretion to grant or renew licenses, our licenses may not be renewed or, if renewed, renewal may not be on acceptable economic terms. In addition, regulations in Brazil permit third parties, including our competitors, to challenge the award and use of our licenses. If our competitors are successful in pursuing claims such as these, or if regulators in Brazil take actions modifying or revoking our licenses in response to these claims, our ability to grow our business and improve our results of operations could be materially adversely affected.

15.
If we are not able to manage changes to our business, our operating results will suffer.

Our ability to achieve our long-range business goals and to grow profitably is dependent on our ability to manage changes to our business model and cost structure that are necessary to allow us to pursue our plans to expand both our service offerings and our targeted customer segments, including by implementing new and more efficient supporting business systems and processes. Our inability to complete these efforts in a timely fashion, or to manage the related costs, could have an adverse impact on our business.

a.
We may be limited in our ability to grow unless we successfully expand network capacity and launch competitive services.

To continue to successfully retain our existing customers, increase our customer base and grow our business, we must economically:

expand the capacity and coverage of our network in Brazil;

secure sufficient transmitter and receiver sites at appropriate locations to meet planned system coverage and capacity targets;

obtain adequate quantities of base radios and other system infrastructure equipment; and

obtain an adequate volume and mix of handsets to meet customer demand.

In particular, the deployment and expansion of the coverage and capacity of our WCDMA network and the deployment of LTE technology in Brazil has required us to deploy new transmitter and receiver sites in order to meet the expanded coverage and capacity requirements for those networks resulting from differences in our commercial strategies, differences in the propagation characteristics of the spectrum bands being used to support our network in Brazil and the coverage requirements associated with the spectrum licenses being utilized to support our services. In some areas that we serve, individuals and governments are opposing new tower construction and supporting laws restricting the construction of towers and other transmitter and receiver sites.

19


                                            

Compliance with such laws could increase the time and costs associated with our planned network deployments. The effort required to locate and build a significant number of additional transmitter sites to support our services in coming years will be substantial, and our failure to meet this demand could adversely affect our business.

In addition, as we launch a broader array of services on our network in Brazil, we must develop, test and deploy new supporting technologies, software applications and systems intended to enhance our competitiveness both by supporting existing and new services and features, and by reducing the costs associated with providing those services. Successful deployment and implementation of new services and technology depend, in part, on the willingness and ability of third parties to develop new handsets and applications that are attractive to our customers and that are available in a timely manner. We may not be able to successfully expand our new network in Brazil as needed or complete the development and deployment of competitive services. Failure to successfully expand our network coverage and capacity and the services we offer could also be expected to result in subscriber dissatisfaction that could affect our ability to retain subscribers and could have an adverse effect on our results of operations and growth prospects. If this occurs, we may be unable to recover the substantial investment we have made in our new networks and the related costs we have incurred and will continue to incur to offer these new services.

b.
Failure to successfully implement core information technology and operating systems may adversely affect our business operations.

Our business strategy envisions growing our business by successfully building and expanding our network in Brazil, expanding our product and service offerings and expanding our target customer base. Even if we do expand our business, if we fail to manage our growth effectively, our financial results could be adversely affected. Separately, growth may place a strain on our management systems and resources. We must continue to refine and expand our business development and sales capabilities; our network operations and information technology infrastructure; and the hardware, software, systems, processes and people to effectively support current and future sales, customer service and information requirements of our business in an efficient and cost-effective manner. In addition, failure to prioritize technology initiatives and effectively allocate resources in order to achieve our strategic goals could result in a failure to realize those goals, including the expected benefits of our growth, and could negatively affect our financial results.

Changes to our networks and business strategies require us to implement new operating and supporting systems to improve our ability to address the needs of our customers, as well as to create additional efficiencies and strengthen our internal controls over financial reporting. We may not be able to successfully implement these new systems in an effective or timely manner or we could fail to complete all necessary data reconciliation or other conversion controls when implementing the new systems. In addition, we may incur significant increases in costs and encounter extensive delays in the implementation and rollout of these new systems. Failure to effectively implement our new operating systems may adversely affect our results of operations, customer perceptions and internal controls over financial reporting.

As our business evolves, we must continue to hire, train, supervise and manage new employees. We cannot assure you that we will be able to allocate our human resources optimally or identify and hire qualified employees or retain valued employees. If we are unable to manage our operations, our results of operations could be adversely affected.

16.
Any modification or termination of our trademark license with Nextel Communications could increase our costs.

Nextel Communications has licensed to us the right to use “Nextel” and other of its trademarks on a perpetual basis in Latin America. However, Nextel Communications may terminate the license on 60 days’ notice if we commit one of several specified defaults (namely, unauthorized use, failure to maintain agreed quality controls or a change in control of NII Holdings). If there is a change in control of one of our subsidiaries, and we do not enter into a sublicense agreement with the new entity, upon 90 days’ notice, Nextel Communications may terminate the sublicense granted by us to the subsidiary with respect to the licensed marks. The loss of the use of the “Nextel” name and trademark could require us to incur significant costs to establish a new brand, which could have a material adverse effect on our operations.

17.
Our reputation and business could be negatively impacted by cyber security threats and other material disruptions of our wireless networks.

Our information technology and other systems, including those of our third party service providers, that maintain and transmit our proprietary information and our subscribers’ information, including credit card information, location data, or other personal information may be compromised by a malicious third party penetration of our network security or impacted by advertent or inadvertent actions or inactions by our employees and agents. As a result, our subscribers’ information may be lost, disclosed, accessed, used, corrupted, destroyed, or taken without the subscribers’ consent. Cyber attacks, such as the use of malware, computer viruses, denial of service attacks, or other means for disruption or unauthorized access, have increased in frequency, scope, and

20


                                            

potential harm in recent years. We also purchase equipment and software from third parties that could contain software defects, Trojan horses, malware, or other means by which third parties could access our network or the information stored or transmitted on such network or equipment.

While to date we have not been subject to cyber attacks or other cyber incidents that, individually or in the aggregate, have been material to our operations or financial condition, the preventive actions we take to reduce the risk of cyber incidents and protect our information technology and networks may not be sufficient to repel a cyber attack in the future that would result in material negative consequences to us. In addition, the costs of such preventative actions may be significant, which may adversely affect our results of operations. While we maintain information security policies and procedures designed to comply with relevant privacy and security laws and restrictions, any major compromise of our data or network security; failure to prevent or mitigate a loss of our services or network, our proprietary information, or our subscribers’ information; and delays in detecting any such compromise or loss, could disrupt our operations, impact our reputation and subscribers’ willingness to purchase our service, and subject us to significant additional expenses, including lost revenues from business interruption, ransom and litigation, which could be material.

In addition to cyber attacks, major equipment failures and the disruption of our wireless networks as a result of natural disasters, severe weather, terrorist attacks, acts of war, or other breaches of network or information technology security, even for a limited period of time, may result in significant expenses, result in a loss of subscribers or impair our ability to attract new subscribers, which in turn could have a material adverse effect on our business, results of operations and financial condition. In the past, more stringent network performance standards and reporting obligations have been adopted by the government in Brazil in order to ensure quality of service during unforeseen disturbances. We could be required to make significant investments in our existing networks in order to comply with these types of network performance standards. Any of these occurrences could damage our reputation, adversely impact subscriber and investor confidence and could negatively impact our results of operations and financial condition.

Risks Relating to Our Common Stock

18.
There may be circumstances in which the interests of our significant stockholders could be in conflict with the interests of other stockholders.

As of February 28, 2019, funds associated with 683 Capital Management, LLC, 683 Capital Partners, LP and Ari Zweiman owned approximately 13.0% of our outstanding common stock, and Joseph D. Samberg and The Joseph D. Samberg Revocable Trust owned approximately 12.2% and 10.0%, respectively, of our outstanding common stock. Circumstances may arise in which these stockholders may have an interest in pursuing or preventing acquisitions, divestitures or other transactions, including the issuance of additional shares or debt, that, in their judgment, could enhance their investment in us or another company in which they invest. Such transactions might adversely affect us or other holders of our common stock. In addition, our significant concentration of share ownership may adversely affect the trading price of our common shares because investors may perceive disadvantages in owning shares in companies with significant stockholders.

19.
The price of our common stock has historically been and may continue to be volatile.

The price of our common stock may fluctuate due to a variety of factors, including:

unpredictability surrounding the market's reaction to the announcement and/or completion of the proposed sale of Nextel Brazil;

concentration of our business operations in Brazil;

low trading volumes for our common stock and the inability to sustain an active trading marketing for our common stock;

actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;

industry cycles and trends;

mergers and strategic alliances in the telecommunications industry;

changes in government regulation;

potential or actual military conflicts or acts of terrorism;

21


                                            


the failure of securities analysts to publish research about us, or shortfalls in our operating results from levels forecast by securities analysts;

future sales of our common stock by our stockholders, including in particular, those stockholders whose shares were included in our Registration Statement on Form S-3;

announcements concerning us or our competitors; and

the general state of the securities market.

As a result of these factors, investors in our common stock may not be able to resell their stock at or above the price they paid or at all. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

20.
Certain provisions of our certificate of incorporation and our bylaws may make it difficult for stockholders to change the composition of our Board and may discourage, delay or prevent a merger or acquisition that some stockholders may consider beneficial.

Certain provisions of our Amended and Restated Certificate of Incorporation (the “Charter”) and our Fifth Amended and Restated Bylaws (the “Bylaws”) may have the effect of delaying or preventing changes in control if our Board determines that such changes in control are not in the best interests of the Company and our stockholders. The provisions in our Charter and Bylaws include, among other things, those that:

authorize our Board to issue preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;

establish advance notice procedures for nominating directors or presenting matters at stockholder meetings; and

limit the persons who may call special meetings of stockholders.

While these provisions have the effect of encouraging persons seeking to acquire control of our Company to negotiate with our Board, they could enable the Board to hinder or frustrate a transaction that some, or a majority, of the stockholders may believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board, which is responsible for appointing the members of our management.



22


                                            


Item 1B.
Unresolved Staff Comments
None.


Item 2.
Properties
Our principal executive and administrative offices are located in Reston, Virginia, where we rent temporary office space on a month-to-month basis. In addition, Nextel Brazil leases office space in São Paulo and Rio de Janeiro. Nextel Brazil also leases transmitter and receiver sites under various individual site leases. As of December 31, 2018 , Nextel Brazil had 6,201 constructed sites at leased and owned locations, including those constructed for its networks. In addition, Nextel Brazil also had 2,397 RAN sharing sites, 115 global system for mobile sites and 513 indoor sites as of December 31, 2018.

Item 3.
Legal Proceedings
We are subject to other claims and legal actions that may arise in the ordinary course of business. We do not believe that any of these pending claims or legal actions will have a material effect on our business, financial condition, results of operations or cash flows. See Note 9 to our consolidated financial statements at the end of this annual report on Form 10-K for more information.


Item 4.
Mine Safety Disclosures

Not applicable.

23


                                            


PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

1.
Market for Common Stock
Our common stock trades on the Nasdaq Global Select Market under the trading symbol “NIHD.”

2.
Number of Stockholders of Record
As of February 28, 2019, there was one holder of record of our common stock, Cede and Company. Cede and Company is the financial institution that processes transfers of stock certifications on behalf of the Depository Trust Corporation, which acts as a clearinghouse for multiple brokerage and custodial accounts.

3.
Dividends
We have not paid any dividends on our common stock and do not plan to pay dividends on our common stock for the foreseeable future. We anticipate that for the foreseeable future any cash flow generated from our operations will be used to invest in our business and operations and to make contractual payments under our financing facilities in accordance with our business plan.

4.
Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during the fourth quarter of 2018.


24


                                            

Performance Graph
The following graph presents the cumulative total stockholder return on our common stock as listed on the Nasdaq Global Select Market from July 6, 2015 through December 31, 2018. This graph also compares our common stock to the cumulative total stockholder return on the Nasdaq 100 Index and the common stock of Oi S.A. and Telefônica Brasil S.A. The graph assumes an initial investment of $100 in our common stock as of July 6, 2015 and in each of the comparative indices or peer issuers, and that all dividends were reinvested.
GRAPH2018.JPG
I ndex
7/6/2015
 
9/30/2015
 
12/31/2015
 
3/31/2016
 
6/30/2016
 
9/30/2016
 
12/31/2016
NII Holdings
$
100.00

 
$
38.57

 
$
29.92

 
$
32.76

 
$
18.84

 
$
19.73

 
$
12.74

Nasdaq 100
$
100.00

 
$
94.73

 
$
104.42

 
$
102.25

 
$
100.44

 
$
111.63

 
$
110.28

Oi S.A.
$
100.00

 
$
42.39

 
$
28.80

 
$
18.64

 
$
23.72

 
$
51.17

 
$
39.81

Telefônica Brasil S.A.
$
100.00

 
$
65.39

 
$
65.22

 
$
90.33

 
$
99.32

 
$
106.84

 
$
96.03

Index
3/31/2017
 
6/30/2017
 
9/30/2017
 
12/31/2017
 
3/31/2018
 
6/30/2018
 
9/30/2018
 
12/31/2018
NII Holdings
$
7.70

 
$
4.74

 
$
2.73

 
$
2.49

 
$
12.50

 
$
23.10

 
$
34.72

 
$
26.13

Nasdaq 100
$
124.56

 
$
129.80

 
$
137.35

 
$
146.92

 
$
151.23

 
$
162.28

 
$
175.72

 
$
146.83

Oi S.A.
$
71.35

 
$
59.62

 
$
65.17

 
$
60.50

 
$
46.67

 
$
33.06

 
$
22.18

 
$
18.75

Telefônica Brasil S.A.
$
111.43

 
$
104.93

 
$
121.73

 
$
114.98

 
$
118.74

 
$
96.41

 
$
84.63

 
$
101.76



25


                                            

Item 6.
Selected Financial Data

On September 15, 2014, we and eight of our U.S. and Luxembourg-domiciled subsidiaries, including NII Capital Corp. and Nextel International Telecom, or NIIT, filed voluntary petitions seeking relief under Chapter 11 of Title 11 of the United States Bankruptcy Code, which we refer to as Chapter 11, in the United States Bankruptcy Court for the Southern District of New York, which we refer to as the Bankruptcy Court. In addition, subsequent to September 15, 2014, five additional subsidiaries of NII Holdings, Inc. filed voluntary petitions seeking relief under Chapter 11 in the Bankruptcy Court. We refer to the companies that filed voluntary petitions seeking relief under Chapter 11 collectively as the Debtors. Nextel Brazil and our previous other operating subsidiaries in Latin America were not Debtors in these Chapter 11 cases.

On June 19, 2015, the Bankruptcy Court entered an order approving and confirming the First Amended Joint Plan of Reorganization Proposed by the Plan Debtors and the Official Committee of Unsecured Creditors, dated April 20, 2015. We refer to this plan, as amended, as the Plan of Reorganization. On June 26, 2015, the conditions of the Bankruptcy Court's order and the Plan of Reorganization were satisfied, the Plan of Reorganization became effective, and we and the other Debtors emerged from the Chapter 11 proceedings.

In connection with our emergence from Chapter 11, we were required to apply the provisions of fresh start accounting to our financial statements. Because our results of operations during the period from June 26, 2015 to June 30, 2015 were not material, we applied fresh start accounting to our consolidated financial statements as of the close of business on June 30, 2015. As a result of the application of fresh start accounting and other events related to our reorganization under Chapter 11, the Successor Company's financial results are prepared under a new basis of accounting and are not directly comparable to the Predecessor Company's financial results.
The tables below set forth selected consolidated financial data for the periods or as of the dates indicated and should be read in conjunction with the consolidated financial statements and notes thereto in Item 8 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report. The selected consolidated financial data presented below includes the results of Nextel Brazil and our corporate headquarters. In connection with the sale of Nextel Argentina, Nextel Mexico, Nextel Chile and Nextel Peru, we have included the results of these former operating companies for all periods presented as discontinued operations in the tables below. For more information regarding material uncertainties in our business, see Note 9 to our consolidated financial statements.
 
Successor Company
 
 
Predecessor Company
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
Six Months Ended December 31,
 
 
Six Months Ended June 30,
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
 
2015
 
2014
 
 
 
 
 
(in thousands, except per share data)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 

 
 

Operating revenues
$
620,697

 
$
870,694

 
$
985,046

 
$
529,434

 
 
$
683,711

 
$
1,848,954

Impairment, restructuring and other charges, net
$
18,949

 
$
175,358

 
$
1,384,811

 
$
32,308

 
 
$
36,792

 
$
105,664

Foreign currency transaction (losses) gains, net
$
(49,008
)
 
$
(1,271
)
 
$
76,615

 
$
(99,737
)
 
 
$
(63,948
)
 
$
(51,149
)
Net (loss) income from continuing operations
$
(186,246
)
 
$
(340,427
)
 
$
(1,533,879
)
 
$
(292,491
)
 
 
$
1,519,401

 
$
(1,224,671
)
Net (loss) income from continuing operations per common share, basic
$
(1.86
)
 
$
(3.40
)
 
$
(15.32
)
 
$
(2.93
)
 
 
$
8.73

 
$
(7.11
)
Net (loss) income from continuing operations per common share, diluted
$
(1.86
)
 
$
(3.40
)
 
$
(15.32
)
 
$
(2.93
)
 
 
$
8.71

 
$
(7.11
)


26


                                            

 
Successor Company
 
 
Predecessor Company
 
December 31,
 
 
December 31,
 
2018
 
2017
 
2016
 
2015
 
 
2014
 
 
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 

 
 

 
 
 

Total assets
$
1,059,830

 
$
1,113,522

 
$
1,418,509

 
$
2,729,908

 
 
$
5,374,034

Long-term debt, including current portion
$
654,207

 
$
655,707

 
$
756,316

 
$
665,067

 
 
$
925,271

Liabilities subject to compromise
$

 
$

 
$

 
$

 
 
$
4,593,493

Impairment, Restructuring and Other Charges, Net. During 2017, we reviewed our Nextel Brazil segment for potential impairment and determined that the carrying value of this segment was not fully recoverable. As a result, we recorded non-cash asset impairment charges of $57.9 million to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values. During 2016, we reviewed our Nextel Brazil segment for potential impairment and determined that the carrying value of our Nextel Brazil segment was not fully recoverable. As a result, we recorded a non-cash asset impairment charge of $1.34 billion to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values.
Foreign Currency Transaction (Losses) Gains, Net.   Consolidated foreign currency transaction losses during the year ended December 31, 2018 were primarily due to the depreciation in the value of the Brazilian real relative to the U.S. dollar during 2018 on Nextel Brazil's dollar-denominated equipment financing. Consolidated foreign currency transaction gains during the year ended December 31, 2016 were primarily due to the appreciation in the value of the Brazilian real relative to the U.S. dollar during 2016 on Nextel Brazil's U.S. dollar-denominated net liabilities. Consolidated foreign currency transaction losses for each of the remaining periods presented primarily relate to the impact of the depreciation in the value of the Brazilian real relative to the U.S. dollar on Nextel Brazil's assets and liabilities. See “Critical Accounting Policies and Estimates — Foreign Currency. ” for more information.
Net (Loss) Income From Continuing Operations. For the years ended December 31, 2017 and 2016, net loss from continuing operations included the $57.9 million and the $1.34 billion non-cash asset impairment charges, respectively, to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values discussed above. For the six months ended June 30, 2015, net income from continuing operations included $1,956.9 million in reorganization items, which represented a $1,775.8 million gain we recognized in connection with the settlement of our liabilities subject to compromise upon our emergence from Chapter 11 and a $261.8 million gain we recognized as a result of the implementation of fresh start accounting, partially offset by professional fees and other costs incurred in connection with our Chapter 11 filing.


27


                                            

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations



28


                                            

Forward-Looking and Cautionary Statements

This annual report on Form 10-K may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Statements regarding expectations, including forecasts regarding operating results, performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forward-looking statements. These forward-looking statements are generally identified by such words or phrases as “we expect,” “we believe,” “would be,” “will allow,” “expects to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions. These forward-looking statements involve risk and uncertainty, and a variety of facts could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. We do not have a policy of updating or revising forward-looking statements except as otherwise required by law.

While we provide forward-looking statements to assist in the understanding of our anticipated future financial performance, we caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date that we make them. Forward-looking statements are based on current expectations and assumptions that are subject to significant risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Except as otherwise required by law, we undertake no obligation to publicly release any updates to forward-looking statements to reflect events after the date of this annual report on Form 10-K, including unforeseen events.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our operations and results of our business include, but are not limited to:
our ability to attract and retain customers;
our ability to satisfy the requirements of our debt obligations;
our ability to access sufficient debt or equity capital to meet any future operating and financial needs;
our ability to meet established operating goals and generate cash flow;
the availability of other funding sources, including the timely resolution of claims and receipt of proceeds from the sale of Nextel Mexico held in escrow;
risks associated with our arrangement with AI Brazil Holdings;
general economic conditions in Brazil, including political instability, which may affect Brazil's economy and the regulatory environment there;
the impact of foreign currency exchange rate volatility in the local currency in Brazil when compared to the U.S. dollar and the impact of related currency depreciation in Brazil;
our having reasonable access to and the successful performance of the technology being deployed in our service areas, and improvements thereon;
the availability of adequate quantities of system infrastructure and subscriber equipment and components at reasonable pricing to meet our service deployment and marketing plans and customer demand;
risks related to the operation and expansion of our network in Brazil, including the potential need for additional funding to support enhanced coverage and capacity, and the risk that we will not attract enough subscribers to support the related costs of deploying or operating the network;
our ability to successfully scale our billing, collection, customer care and similar back-office operations to keep pace with customer growth as necessary, increased system usage rates and growth or to successfully deploy new systems that support those functions;
future legislation or regulatory actions relating to our services, other wireless communications services or telecommunications generally and the costs and/or potential customer impacts of compliance with regulatory mandates;
the ability to achieve and maintain market penetration and average subscriber revenue levels sufficient to provide financial viability to our business;
the quality and price of similar or comparable wireless communications services offered or to be offered by our competitors, including providers of cellular services and personal communications services;
market acceptance of our new service offerings;
potential cash outlays related to certain reasonably possible losses related to matters for which Nextel Brazil has not accrued liabilities, some of which would be covered by judicial deposits of cash;

29


                                            

a requirement to provide material judicial deposits of cash that will not be released until the pending matter is resolved in order for litigation involving tax and other matters to be heard by the courts in Brazil;
equipment failure, natural disasters, terrorist acts or other breaches of network or information technology security; 
the possibility that our significant indebtedness, or the incurrence of additional indebtedness, could affect our financial condition; and
other risks and uncertainties described in Part I, Item 1A. “Risk Factors,” in this annual report on Form 10-K, as well as in Part II, Item 1A. "Risk Factors," in our quarterly report on Form 10-Q for the three months ended June 30, 2018 and, from time to time, in our other reports filed with the SEC.

These forward looking statements also include assumptions about the proposed sale of Nextel Brazil and the expected completion, timing and effects of that transaction, as well as potential distributions to our stockholders upon our liquidation and dissolution. Risks and uncertainties related to the potential sale of Nextel Brazil include, among other things:

the satisfaction of the conditions to consummate the sale of Nextel Brazil, including regulatory approvals and approval by our stockholders;

the occurrence of any event, change or other circumstance that could give rise to the termination of the purchase agreement;

the amount of the costs, fees, expenses and charges related to the sale of Nextel Brazil may be higher than we expect;

the effect the pending sale of Nextel Brazil will have on our management team, customer relationships, operating results and business generally, including the ability to retain key employees;

the cost and outcome of any legal proceedings that may be initiated against us and others following the announcement of the sale of Nextel Brazil; and 

the timing and amount of cash and other assets available for distribution to our stockholders upon our ultimate windup and dissolution.




30


                                            

Introduction

The following is a discussion and analysis of:
our consolidated financial condition as of December 31, 2018 and 2017 and our consolidated results of operations for the years ended December 31, 2018, 2017 and 2016; and
significant factors which we believe could affect our prospective financial condition and results of operations.
Historical results may not indicate future performance. See “Item 1A. — Risk Factors” for risks and uncertainties that may impact our future performance.
We refer to our majority-owned Brazilian operating company, Nextel Telecomunicações Ltda., as Nextel Brazil.

A.
Executive Overview

Proposed Sale of Nextel Brazil. On March 18, 2019, NII Holdings, Inc. and NIIH, a wholly-owned subsidiary of NII, entered into a purchase agreement with AMX and AI Brazil Holdings, pursuant to which NII and AI Brazil Holdings will sell their jointly-owned wireless operations in Brazil for an aggregate purchase price of $905.0 million on a debt free and cash free basis, subject to certain adjustments at closing. AI Brazil Holdings will receive its pro rata share of the net purchase price plus the preferred return contemplated in the Amended and Restated Articles of Association of Nextel Holdings. Specifically, NIIH will sell all of the issued and outstanding shares of NIIBH, and such shares, together with any shares of NIIBH issued after the date of the purchase agreement, or the acquired equity interests, to AMX. Also pursuant to the purchase agreement, concurrent to, and as a condition of, the consummation of the Nextel Brazil transaction, AI Brazil Holdings will sell all of its interests in NIIBH. At the closing of the Nextel Brazil transaction and the AI Brazil Holdings transaction, AMX will indirectly own all of the issued and outstanding shares of Nextel Brazil. AMX will place $30.0 million of the purchase price into an 18-month escrow account to secure NII’s indemnification obligations under the purchase agreement.

In addition, in connection with the Nextel Brazil transaction, NII and AI Brazil Holdings have entered into an agreement relating to the Nextel Brazil transaction that includes the resolution of a dispute regarding the investment of funds into Nextel Holdings from an escrow related to NII’s sale of its operations in Mexico, or the Mexico escrow, pursuant to which the parties have agreed that AI Brazil Holdings will receive, after the closing of the Nextel Brazil transaction, the first $10.0 million recovered from the Mexico escrow followed by 6% of the value of additional funds recovered from the Mexico escrow, in both cases, if and when funds are released. NII has also agreed to indemnify AI Brazil Holdings for damages that may arise from certain tax contingencies, transaction expenses, transaction-related litigation and other matters in connection with its participation in the Nextel Brazil transaction.

The closing of the transactions contemplated by the purchase agreement are subject to the satisfaction of customary conditions. Among other things, NIIH has agreed to conduct NIIBH’s, and each of its subsidiaries’, business in the ordinary course, use reasonable best efforts to operate its business in accordance with its budget for the year 2019 and use commercially reasonable efforts to maintain and preserve its business organization and preserve certain business relations. In connection with the proposed sale of Nextel Brazil, NII’s Board of Directors has approved a plan to dissolve and wind up its headquarters upon the completion of this transaction, which is also subject to approval by NII’s stockholders.

Minority Investment. On June 5, 2017, the Company and ice group, an international telecommunications company operating primarily in Norway under the "ice.net" brand, along with certain affiliates of the Company and ice group, entered into an investment agreement and a shareholders agreement to partner in the ownership of Nextel Brazil. On July 20, 2017, ice group completed its initial investment of $50.0 million in Nextel Holdings, a newly formed subsidiary of the Company that indirectly owns Nextel Brazil, in exchange for 30% ownership in Nextel Holdings. In connection with the initial investment, ice group received 50.0 million shares of cumulative preferred voting stock in Nextel Holdings, and we received 116.6 million shares of common stock in this entity. The investment agreement also provided ice group with an option, exercisable on or before November 15, 2017, to invest an additional $150.0 million in Nextel Holdings for an additional 30% ownership. ice group did not exercise its option, and on February 27, 2018, we terminated the investment agreement. In September 2018, ice group completed the sale of its 30% ownership interest in Nextel Holdings by selling the shares of its intermediary holding company, AI Brazil Holdings B.V., to AI Media Holdings (NMT) LLC (90%) and Bridford Music B.V. (10%). During 2018, AI Brazil Holdings made an additional $15.9 million investment in Nextel Holdings to maintain its current ownership level. Since we continue to have a controlling interest in Nextel Brazil, we have consolidated this entity and its subsidiaries.

31


                                            

Nextel Brazil Business Overview. We provide wireless communication services under the Nextel TM brand in Brazil with our principal operations located in major urban and suburban centers with high population densities and related transportation corridors where there is a concentration of Brazil’s population and economic activity, including primarily Rio de Janeiro and São Paulo. Nextel Brazil operates a WCDMA network, which has been upgraded to offer LTE services in certain areas. We are also a party to a roaming agreement that allows us to offer our subscribers nationwide voice and data services outside of our network's footprint. Our target market is individual consumers who use our services to meet both professional and personal needs. Our target subscribers generally exhibit above average usage, revenue and loyalty characteristics. We believe our subscribers are attracted to the services and pricing plans we offer, the quality of and data speeds provided by our network and our dedicated customer service.
The services we currently offer include:
mobile telephone voice and wireless data services;
international voice and data roaming services; and
value-added services, including sports, music and entertainment streaming capabilities; online education; and access to national and international WiFi hotspot networks.
Our original network utilized iDEN technology to provide mobile services on our 800 MHz spectrum holdings. During the last several years, Nextel Brazil experienced iDEN subscriber losses and overall declines in its iDEN service revenue. In response to continued subscriber losses on its iDEN network, in September 2017, Nextel Brazil decided to wind down its iDEN operations. After migrating some subscribers to its WCDMA network, Nextel Brazil disconnected all of its remaining iDEN subscribers at the end of the second quarter of 2018.

The majority of our subscribers purchase services from us by acquiring SIM cards from us and using these SIM cards in handsets that they acquire separately from other sources. As of December 31, 2018 , Nextel Brazil had about 3.31 million total subscriber units in commercial service, which we estimate to be about 4% of total postpaid mobile handsets and other devices in commercial service in Brazil. We refer to these subscriber units in commercial service collectively as our subscriber base.
Our goal is to grow our subscriber base and revenues by providing differentiated wireless communications services that are valued by our existing and potential subscribers. We have also been taking actions to reduce costs in our business to lower our spending and preserve our liquidity in the near term while improving our profitability and cash flow over the long term. Our strategy for achieving these goals is based on several core principles, including:
offering a unique and superior customer-centric experience, including a reliable and high quality wireless network and rate plan flexibility;
continuing to implement cost reduction strategies and reconfiguring our network architecture in order to lower CCPU, gain scale advantages, create an agile organization and improve overall profitability;
offering simple and valuable service plans that generate higher ARPU and result in lower subscriber turnover; and
building on the strength of the unique positioning of the Nextel brand.
Recently, Brazil experienced one of the worst economic recessions in its history, characterized by years of negative wage growth, a net loss of jobs, higher unemployment and lower consumer confidence. These economic conditions and trends resulted in a decline in the amount of consumer disposable income that is available to purchase telecommunications services and negatively impacted Nextel Brazil's results of operations for recent prior years. Although recent data indicates that Brazil's economy is beginning to recover, the growth is slow with gradual improvements.
In recent years, we have implemented changes in our business to better align our organization and costs with our operational and financial results and improve our customers' experience. These changes have included a transition to lower cost subscriber acquisition channels, initiatives to reduce operating costs, including headcount reductions, and projects designed to gain operational and capital expenditure efficiencies in Brazil, all of which were intended to reduce costs while maintaining the support necessary to meet our subscribers' needs. We expect that, if we can continue to maintain customer turnover levels similar to those experienced in 2018 and grow our WCDMA subscriber base, we will be able to generate higher revenues in the future. See “ C. Liquidity and Capital Resources ” and “ D. Future Capital Needs and Resources ” for more information.


32


                                            

Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. We consider the accounting policies and estimates addressed below to be the most important to our financial position and results of operations, either because of the significance of the financial statement item or because they require the exercise of significant judgment and/or use of significant estimates. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
Revenue Recognition.   Operating revenues primarily consist of wireless service revenues and revenues generated from the sale of handsets and accessories. Wireless service revenues primarily consist of access charges for providing customers with voice, data or messaging services over the contract period. As a result of the implementation of Accounting Standards Update, or ASU, No. 2014-09, “Revenue from Contracts with Customers,” and several related amendments, which we refer to as Accounting Standards Codification, or ASC 606, beginning January 1, 2018, we allocate revenue between the handset and the service based on relative standalone selling price, or SSP. We recognize revenue when we satisfy a performance obligation by providing services or transferring control of promised handsets and accessories, which are distinct to a customer. We recognize revenue in an amount that reflects the consideration to which we expect to be entitled for those performance obligations.
We recognize revenue related to access charges ratably over the contract period and net of taxes collected from customers. We recognize handset and accessory revenue when a subscriber takes possession of the device. The transaction price of the handset sold, if any, is billed at the time of sale. Although more than 90% of our subscribers typically purchase services only and acquire a handset separately, the remainder of our subscriber base purchases a handset offered at a discounted price bundled with services. In these types of bundled sales, we allocate a portion of our future service billings to the handset and recognize revenue upon handset delivery at the inception of the contract.
Other revenues primarily include amounts generated from our handset maintenance programs, roaming revenues generated from other companies’ subscribers that roam on our networks and rental revenues from third party tenants that rent space on our transmitter and receiver sites. We recognize revenue generated from our handset maintenance programs on a monthly basis at fixed amounts over the service period. We recognize roaming revenues at contractual rates per minute as minutes are used. We recognize revenues from third party tenants on a monthly basis based on the terms set by the underlying agreements.
Allowance for Doubtful Accounts.   We establish an allowance for doubtful accounts receivable sufficient to cover probable and reasonably estimable losses. We estimate this allowance based on historical experience, aging of accounts receivable and collections trends. Actual write-offs in the future could be impacted by general economic and business conditions, as well as fluctuations in subscriber deactivations, that are difficult to predict and therefore may differ from our estimates. A 10% increase in our allowance for doubtful accounts as of December 31, 2018 would have resulted in $2.0 million of additional bad debt expense for the year ended December 31, 2018.
Depreciation of Property, Plant and Equipment.   We record our network assets and other improvements that extend the useful lives of the underlying assets at cost and depreciate those assets over their estimated useful lives with the exception of property, plant and equipment owned as of the date of our implementation of fresh start accounting. As a result of the application of fresh start accounting in connection with our emergence from Chapter 11 and the non-cash asset impairment charges we recorded in 2016 and 2017, we adjusted all existing property, plant and equipment to its estimated fair value and revised the associated depreciable lives. We calculate depreciation using the straight-line method based on estimated useful lives ranging from 3 to 30 years for network equipment, communication towers and network software and 3 to 10 years for software, office equipment, furniture and fixtures, and other, which includes non-network internal use software. We amortize leasehold improvements over the shorter of the lease terms or the useful lives of the improvements. Our network is highly complex and, due to constant innovation and enhancements, certain components of this network may lose its utility sooner than expected. We periodically reassess the economic life of these components and make adjustments to their useful lives after considering historical experience and capacity requirements, consulting with the vendor and assessing new product and market demands and other factors. When our assessment indicates that the economic life of a network component is shorter than originally anticipated, we depreciate its remaining book value over its revised useful life. Further, the deployment of any new technologies could adversely affect the estimated remaining useful lives of our network assets, which could significantly impact future results of operations.
Amortization of Intangible Assets.   Our intangible assets primarily consist of our telecommunications licenses and our customer relationships. We calculate amortization on our licenses using the straight-line method based on estimated useful lives of 26 to 30 years. We calculate amortization on our customer relationships using the straight-line method based on an estimated useful life of 4 years. While the terms of our licenses, including renewals, range from 15 to 30 years, the political and regulatory environment in Brazil is continuously changing and, as a result, the cost of renewing our licenses beyond that range could be significant. In addition, the wireless telecommunications industry is experiencing significant technological change, and the commercial life of any particular technology is difficult to predict. In light of these uncertainties, we classify our licenses as definite lived intangible assets. Many of our licenses are subject to renewal after the initial term, provided that we have complied with

33


                                            

applicable rules and policies in each of our markets. We intend to comply, and believe we have complied, with these rules and policies in all material respects as they relate to licenses that are material to our business. However, because governmental authorities have discretion as to the renewal of licenses, our licenses may not be renewed or we may be required to pay significant renewal fees, either of which could have a significant impact on the estimated useful lives of our licenses, which could significantly impact future results of operations. As a result of the implementation of fresh start accounting, we revised the remaining estimated useful lives of our licenses to include renewal periods in cases where it is probable that a renewal will occur.
Valuation of Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected undiscounted future cash flows is less than the carrying value of our assets, we recognize a loss for the difference between the estimated fair value and the carrying value of the assets. 
In 2017, we reviewed our Nextel Brazil segment for potential impairment and determined that the carrying value of this segment was not fully recoverable. As a result, in 2017, we recorded non-cash asset impairment charges of $57.9 million to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values. We allocated these impairment charges on a pro rata basis between property, plant and equipment and spectrum licenses.
During 2016, we reviewed our Nextel Brazil segment for potential impairment and determined that the carrying value of our Nextel Brazil segment was not fully recoverable. As a result, in 2016, we recorded a non-cash asset impairment charge of $1.34 billion to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values.
Foreign Currency.   We translate Nextel Brazil's results of operations from the Brazilian real to the U.S. dollar using average exchange rates for the relevant period. We translate assets and liabilities using the exchange rate in effect at the relevant reporting date. We report the resulting gains or losses from translating foreign currency financial statements as other comprehensive income or loss. Because we translate Nextel Brazil's operations using average exchange rates, its operating trends may be impacted by the translation.
We report the effect of changes in exchange rates on U.S. dollar-denominated assets and liabilities held by Nextel Brazil as foreign currency transaction gains or losses. We report the effect of changes in exchange rates on intercompany transactions of a long-term investment nature as part of the cumulative foreign currency translation adjustment in our consolidated financial statements. The intercompany transactions that, in our view, are of a long-term investment nature include certain intercompany loans and advances from our U.S. and Luxembourg subsidiaries to Nextel Brazil. In contrast, we report the effect of exchange rates on U.S. dollar-denominated intercompany loans and advances to our foreign subsidiaries that are due, or for which repayment is anticipated in the foreseeable future, as foreign currency transaction gains or losses in our consolidated statements of comprehensive loss. As a result, our determination of whether intercompany loans and advances are of a long-term investment nature can have a significant impact on how we report foreign currency transaction gains and losses in our consolidated financial statements.
Loss Contingencies.   We account for and disclose loss contingencies such as pending litigation and actual or possible claims and assessments in accordance with the Financial Accounting Standards Board’s, or the FASB's, authoritative guidance on accounting for contingencies. We accrue for loss contingencies if it is probable that a loss will occur and if the loss can be reasonably estimated. We disclose, but do not accrue for, material loss contingencies if it is reasonably possible that a loss will occur or if the loss cannot be reasonably estimated. We do not accrue for or disclose loss contingencies if there is only a remote possibility that the loss will occur. The FASB’s authoritative guidance requires us to make judgments regarding future events, including an assessment relating to the likelihood that a loss may occur and an estimate of the amount of such loss. In assessing loss contingencies, we often seek the assistance of our legal counsel and in some instances, of third party legal counsel. As a result of the significant judgment required in assessing and estimating loss contingencies, actual losses realized in future periods could differ significantly from our estimates. We currently estimate the reasonably possible losses related to matters for which we have not accrued liabilities, as they are not deemed probable, to be approximately $890.0 million as of December 31, 2018 .
Income Taxes.   We account for income taxes using the asset and liability method, under which we recognize deferred income taxes for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, as well as for tax loss carryforwards and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled. We recognize the effect on deferred taxes of a change in tax rates in income in the period that includes the enactment date. We provide a valuation allowance against deferred tax assets if, based upon the weight of available evidence, we do not believe it is “more-likely-than-not” that some or all of the deferred tax assets will be realized.

34


                                            

The realization of deferred tax assets is dependent on the generation of future taxable income sufficient to realize our tax loss carryforwards and other tax deductions. During 2018 w e continued to record full valuation allowances on the deferred tax assets of Nextel Brazil, our U.S. parent company and subsidiaries and our foreign holding companies due to  substantial negative evidence, including the recent history of cumulative losses and the projected losses for 2019 and subsequent years. During 2018, the valuation allowance on our deferred tax assets decreased by $334.7 million. We do not anticipate that we will recognize significant tax benefits with respect to our deferred tax assets.
We are subject to income taxes in both the U.S. and the non-U.S. jurisdictions in which we operate. We regularly assess the potential outcome of current and future examinations in each of the taxing jurisdictions when determining the adequacy of the provision for income taxes. We have only recorded financial statement benefits for tax positions that we believe reflect the “more-likely-than-not” criteria of the FASB’s authoritative guidance on accounting for uncertainty in income taxes, and we have established income tax accruals in accordance with this guidance where necessary. Once a financial statement benefit for a tax position is recorded or a tax accrual is established, we adjust it only when there is more information available or when an event occurs necessitating a change. While we believe that the amount of the recorded financial statement benefits and tax accruals reflect the more-likely-than-not criteria, it is possible that the ultimate outcome of current or future examinations may result in a reduction to the tax benefits previously recorded on our consolidated financial statements or may exceed the current income tax accruals in amounts that could be material.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code. In connection with this legislation, we recorded our U.S. deferred tax asset and corresponding valuation allowance as of December 31, 2017 at the 21% tax rate with no impact to our income tax expense. In addition, we have determined that no tax liability needs to be recorded for the one-time transition tax as our international subsidiaries have negative cumulative foreign earnings. We are electing to treat the tax on global intangible low-taxed income as an expense in the period in which we become liable for this tax and are not currently recording a deferred tax liability for this item. In accordance with Staff Accounting Bulletin, or SAB No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, our measurement period is now closed with respect to the above items and we have not adjusted our conclusions regarding the treatment of these items in our financial statements.



35


                                            

B.
Results of Operations
In accordance with GAAP, we translated the results of operations of our Brazilian operating segment using the average exchange rates for the years ended December 31, 2018, 2017 and 2016. The following table presents the average exchange rates we used to translate Nextel Brazil's results of operations, as well as changes from the average exchange rates utilized in prior periods.
 
Year Ended December 31, 2018
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
2017 to 2018
Percent Change
 
2016 to 2017
Percent Change
Brazilian real
3.66

 
3.19

 
3.49

 
(14.7
)%
 
8.6
%

The following table presents the currency exchange rates in effect at the end of each of the quarters in 2018 and 2017, as well as at the end of 2016. If the value of the exchange rate of the Brazilian real depreciates relative to the U.S. dollar, our future operating results and the values of our assets held in local currencies will be adversely affected.
 
2018
 
2017
 
2016
 
December
 
September
 
June
 
March
 
December
 
September
 
June
 
March
 
December
Brazilian real
3.87

 
4.00

 
3.86

 
3.32

 
3.31

 
3.17

 
3.31

 
3.13

 
3.26


The percentage amounts presented in the “Actual Change from Previous Year” and the “Constant Currency Change from Previous Year” columns in the tables below reflect the positive (better, or B,) or negative (worse, or W,) growth rates for each of the line items. In addition, to provide transparency into Nextel Brazil's results of operations, we present the year-over-year percentage change in each of the line items presented on a consolidated basis and for Nextel Brazil on a constant currency basis in the “Constant Currency Change from Previous Year” columns in the tables below. The comparison of results for these line items on a constant currency basis shows the impact of changes in foreign currency exchange rates (i) by adjusting the relevant measures for the year ended December 31, 2017 to amounts that would have resulted if the average foreign currency exchange rates for the year ended December 31, 2017 were the same as the average foreign currency exchange rates that were in effect for the year ended December 31, 2018; and (ii) by comparing the constant currency financial measures for the year ended December 31, 2017 to the actual financial measures for the year ended December 31, 2018. This constant currency comparison applies consistent exchange rates to the operating revenues earned in foreign currencies and to the other components of segment earnings for the year ended December 31, 2017. The constant currency information reflected in the tables below is not a measurement under GAAP and should be considered in addition to, but not as a substitute for, the information contained in our results of operations.


36


                                            

1.
Year Ended December 31, 2018 vs. Year Ended December 31, 2017

a.
Consolidated

 
 
 
Actual Change from
Previous Year
 
Constant Currency Change from Previous Year
 
 Year Ended December 31, 2018
 
 Year Ended December 31, 2017
 
Dollars
 
B(W) Change
 
B(W) Change
 
(dollars in thousands)
 
 
Brazil segment earnings (losses)
$
23,004

 
$
(25,942
)
 
$
48,946

 
189
 %
 
202
 %
Corporate segment losses and eliminations
(17,304
)
 
(24,174
)
 
6,870

 
28
 %
 
28
 %
Consolidated segment earnings (losses)
5,700

 
(50,116
)
 
55,816

 
111
 %
 
112
 %
Impairment, restructuring and other charges, net
(18,949
)
 
(175,358
)
 
156,409

 
89
 %
 
88
 %
Depreciation and amortization
(28,616
)
 
(35,446
)
 
6,830

 
19
 %
 
7
 %
Operating loss
(41,865
)
 
(260,920
)
 
219,055

 
84
 %
 
82
 %
Interest expense, net
(100,513
)
 
(118,605
)
 
18,092

 
15
 %
 
(7
)%
Interest income
12,357

 
41,507

 
(29,150
)
 
(70
)%
 
(62
)%
Foreign currency transaction losses, net
(49,008
)
 
(1,271
)
 
(47,737
)
 
NM

 
NM

Other expense, net
(7,217
)
 
(7,485
)
 
268

 
4
 %
 
(12
)%
Loss from continuing operations before income tax benefit
(186,246
)
 
(346,774
)
 
160,528

 
46
 %
 
39
 %
Income tax benefit

 
6,347

 
(6,347
)
 
(100
)%
 
(100
)%
Net loss from continuing operations
(186,246
)
 
(340,427
)
 
154,181

 
45
 %
 
38
 %
(Loss) income from discontinued operations, net of income taxes
(8,414
)
 
1,005

 
(9,419
)
 
NM

 
NM

Net loss
(194,660
)
 
(339,422
)
 
144,762

 
43
 %
 
35
 %
Net loss attributable to noncontrolling interest
(51,580
)
 
(46,275
)
 
(5,305
)
 
(11
)%
 
(11
)%
Net loss attributable to NII Holdings
$
(143,080
)

$
(293,147
)
 
$
150,067

 
51
 %
 
43
 %
_______________________________________
NM-Not Meaningful
We define segment earnings (losses) as operating loss before depreciation, amortization and impairment, restructuring and other charges, net. We recognized consolidated segment earnings of $5.7 million in 2018 compared to consolidated segment losses of $50.1 million in 2017, a $55.8 million, or 111%, improvement. Our consolidated results include the results of operations of our Brazil segment and our corporate operations, which are discussed in the subsequent sections.

1.
Impairment, restructuring and other charges, net

Consolidated impairment, restructuring and other charges, net recognized in 2018 included the following:

$40.0 million in restructuring charges, the majority of which related to future lease costs for certain transmitter and receiver sites that we ceased using; and

$2.7 million in non-cash asset impairment charges primarily related to certain transmitter and receiver sites that are no longer required in Nextel Brazil's business; partially offset by

the reversal of $15.6 million in previously accrued restructuring charges related to certain transmitter and receiver sites that Nextel Brazil now plans to exchange for other sites; and

the reversal of $9.4 million in previously accrued restructuring charges in connection with the determination that, based on revised plans in 2018, certain transmitter and receiver sites related to Nextel Brazil's RAN sharing project will continue to be utilized.


37


                                            

Consolidated impairment, restructuring and other charges, net recognized in 2017 included the following:

$70.5 million in restructuring charges, the majority of which related to future lease costs for certain transmitter and receiver sites that we ceased using;

a $57.9 million non-cash asset impairment charge to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values;

$29.9 million in restructuring charges related to a change in the scope of Nextel Brazil's RAN sharing implementation;

$9.3 million in other non-cash asset impairment charges primarily related to certain transmitter and receiver sites that are no longer required in Nextel Brazil's business; and

$6.5 million in severance and other related costs resulting from the separation of certain executive level employees in Brazil.

2.
Interest expense, net

The $18.1 million, or 15%, decrease in consolidated net interest expense from 2017 to 2018 primarily related to the depreciation in the value of the Brazilian real relative to the U.S. dollar over the same period.

3.
Interest income

The $29.2 million, or 70%, decrease in consolidated interest income from 2017 to 2018 was mostly the result of the recognition of inflation adjustments on certain tax credits in 2017.

4.
Foreign currency transaction losses, net

Consolidated foreign currency transaction losses of $49.0 million recognized in 2018 were primarily the result of the impact of the depreciation in the value of the Brazilian real relative to the U.S. dollar during the year ended December 31, 2018 on Nextel Brazil's U.S. dollar-denominated equipment financing.







38


                                            

b.
Nextel Brazil
 
 
 
Actual Change from
Previous Year
 
Constant Currency Change from Previous Year
 
 Year Ended December 31, 2018
 
% of
Nextel Brazil’s
Operating Revenues
 
 Year Ended December 31, 2017
 
% of
Nextel Brazil’s
Operating Revenues
 
Dollars
 
B(W) Change
 
B(W) Change
 
(dollars in thousands)
 
 
Service and other revenues
$
605,470

 
98
 %
 
$
848,700

 
97
 %
 
$
(243,230
)
 
(29
)%
 
(18
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Handset and accessory revenues
15,205

 
2
 %
 
21,888

 
3
 %
 
(6,683
)
 
(31
)
 
(20
)%
Cost of handsets and accessories
(18,571
)
 
(3
)%
 
(40,207
)
 
(5
)%
 
21,636

 
54
 %
 
47
 %
Handset and accessory net subsidy
(3,366
)
 
(1
)%
 
(18,319
)
 
(2
)%
 
14,953

 
82
 %
 
79
 %
Cost of service (exclusive of depreciation and amortization)
(287,598
)
 
(46
)%
 
(370,435
)
 
(43
)%
 
82,837

 
22
 %
 
11
 %
Selling and marketing expenses
(75,325
)
 
(12
)%
 
(108,490
)
 
(12
)%
 
33,165

 
31
 %
 
20
 %
General and administrative expenses
(216,177
)
 
(35
)%
 
(377,398
)
 
(43
)%
 
161,221

 
43
 %
 
34
 %
Segment earnings (losses)
$
23,004

 
4
 %
 
$
(25,942
)
 
(3
)%
 
$
48,946

 
189
 %
 
202
 %
The average value of the Brazilian real depreciated relative to the U.S. dollar during 2018 by 15% compared to the average value that prevailed during 2017. As a result, the components of Nextel Brazil's results of operations for 2018, after translation into U.S. dollars, reflect lower revenues and expenses in U.S. dollars than would have occurred if the Brazilian real had not depreciated relative to the U.S. dollar. To the extent the value of the Brazilian real depreciates further relative to the U.S. dollar, Nextel Brazil's future reported results of operations will be adversely affected.

We use the term “subscriber unit,” which we also refer to as a subscriber, to represent an active SIM card, which is the level at which we track subscribers. The table below provides an overview of Nextel Brazil's subscriber units in commercial service on both its iDEN and WCDMA networks, as well as Nextel Brazil's subscriber turnover rates for each of the quarters in 2017 and 2018. We calculate subscriber turnover by dividing subscriber deactivations for the period by the average number of subscriber units during that period.

39


                                            

 
Three Months Ended
 
Year Ended
 
Three Months Ended
 
Year Ended
 
March 31, 2017
 
June 30, 2017
 
September 30, 2017
 
December 31, 2017
 
December 31, 2017
 
March 31, 2018
 
June 30, 2018
 
September 30, 2018
 
December 31, 2018
 
December 31, 2018
 
(subscribers in thousands)
 
 
WCDMA subscriber units
2,815.2

 
2,874.6

 
2,864.8

 
2,845.8

 
2,815.2

 
2,896.1

 
3,023.8

 
3,121.0

 
3,206.7

 
2,896.1

iDEN subscriber units
822.7

 
686.3

 
563.3

 
449.7

 
822.7

 
349.6

 
230.4

 

 

 
349.6

Total subscriber units in commercial service — beginning of period
3,637.9

 
3,560.9

 
3,428.1

 
3,295.5

 
3,637.9

 
3,245.7

 
3,254.2

 
3,121.0

 
3,206.7

 
3,245.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WCDMA net subscriber additions (losses)
38.4

 
(29.3
)
 
(32.3
)
 
26.8

 
3.6

 
92.9

 
65.7

 
85.7

 
99.3

 
343.6

iDEN net subscriber losses
(115.4
)
 
(103.5
)
 
(100.3
)
 
(76.6
)
 
(395.8
)
 
(84.4
)
 
(198.9
)
 

 

 
(283.3
)
Total net subscriber (losses) additions
(77.0
)
 
(132.8
)
 
(132.6
)
 
(49.8
)
 
(392.2
)
 
8.5

 
(133.2
)
 
85.7

 
99.3

 
60.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Migrations from iDEN to WCDMA
21.0

 
19.5

 
13.3

 
23.5

 
77.3

 
34.8

 
31.5

 

 

 
66.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WCDMA subscriber units
2,874.6

 
2,864.8

 
2,845.8

 
2,896.1

 
2,896.1

 
3,023.8

 
3,121.0

 
3,206.7

 
3,306.0

 
3,306.0

iDEN subscriber units
686.3

 
563.3

 
449.7

 
349.6

 
349.6

 
230.4

 

 

 

 

Total subscriber units in commercial service — end of period
3,560.9

 
3,428.1

 
3,295.5

 
3,245.7

 
3,245.7

 
3,254.2

 
3,121.0

 
3,206.7

 
3,306.0

 
3,306.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WCDMA subscriber turnover
3.23
%
 
3.53
%
 
4.04
%
 
3.47
%
 
3.57
%
 
2.37
%
 
2.75
%
 
2.68
%
 
2.62
%
 
2.61
%
iDEN subscriber turnover
5.52
%
 
5.88
%
 
6.89
%
 
6.36
%
 
6.07
%
 
9.67
%
 
NM

 

 

 
NM

Total subscriber turnover
3.71
%
 
3.95
%
 
4.47
%
 
3.83
%
 
3.98
%
 
3.02
%
 
4.68
%
 
2.68
%
 
2.62
%
 
3.25
%
_______________________________________
NM-Not Meaningful
Over the last several years, Nextel Brazil experienced high subscriber turnover on its iDEN network, and in late 2017, Nextel Brazil decided to wind down its iDEN operations. After migrating some customers to its WCDMA network, Nextel Brazil disconnected all of its remaining iDEN subscribers at the end of the second quarter of 2018. Although Nextel Brazil did not have any significant non-recurring cash expenditures associated with its iDEN network shutdown, Nextel Brazil will continue to incur rent costs related to certain iDEN transmitter and receiver sites subsequent to their shutdown until these leases end.

In August 2017, Nextel Brazil began offering unlimited voice rate plans on its WCDMA network in response to the increasingly competitive environment. As a result of its efforts to migrate existing customers to these types of unlimited rate plans, as well as other targeted efforts to promote customer loyalty and improve collections, Nextel Brazil's WCDMA subscriber turnover began to decline in the fourth quarter of 2017 and decreased further in the first quarter of 2018 before stabilizing at a slightly higher level for the remainder of 2018. As a result, Nextel Brazil's WCDMA subscriber turnover levels were 96 basis points lower in 2018 than in 2017, resulting in 343,600 net WCDMA subscriber additions in 2018, which was a significant improvement from 3,600 net WCDMA subscriber additions in 2017.
The following table represents Nextel Brazil's ARPU for subscribers on both its iDEN and WCDMA networks for each of the quarters in 2017 and 2018, as well as for the years ended December 31, 2017 and 2018, in both U.S. dollars (US$) and in Brazilian reais (BRL). We calculate service ARPU by dividing service revenues per period by the weighted average number of subscriber units in commercial service during that period.

40


                                            

 
Three Months Ended
 
Year Ended
 
Three Months Ended
 
Year Ended
 
March 31, 2017
 
June 30, 2017
 
September 30, 2017
 
December 31, 2017
 
December 31, 2017
 
March 31, 2018
 
June 30, 2018
 
September 30, 2018
 
December 31, 2018
 
December 31, 2018
Total service ARPU (US$)
21

 
19

 
19

 
18

 
19

 
17

 
15

 
14

 
14

 
15

WCDMA service ARPU (US$)
22

 
20

 
19

 
18

 
20

 
18

 
15

 
14

 
14

 
15

iDEN service ARPU (US$)
17

 
15

 
15

 
14

 
16

 
12

 
8

 

 

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total service ARPU (BRL)
65

 
62

 
59

 
57

 
61

 
56

 
54

 
56

 
53

 
55

WCDMA service ARPU (BRL)
68

 
65

 
61

 
58

 
63

 
58

 
55

 
56

 
53

 
56

iDEN service ARPU (BRL)
54

 
49

 
47

 
47

 
50

 
38

 
26

 

 

 
34

During the first half of 2017, Nextel Brazil's WCDMA service ARPU in Brazilian reais decreased as a result of a higher volume of discounts to retain existing customers and slightly lower loading ARPU in an effort to attract new customers. Nextel Brazil's WCDMA service ARPU in Brazilian reais continued to decrease in the second half of 2017 due primarily to price deterioration in the overall wireless market and new types of unlimited rate plans that were introduced in response to the competitive environment. These types of plans exclude many of the usage-based fees that Nextel Brazil charged in previous quarters, which resulted in less revenue per customer.
Overall market pricing in Brazil has been declining over time and continued to put pressure on Nextel Brazil's WCDMA service ARPU in 2018. In addition, a higher proportion of new subscribers have selected entry level plans, resulting in a decrease in WCDMA service ARPU throughout 2018. Nextel Brazil's WCDMA service ARPU increased slightly in local currency in the third quarter of 2018 as a result of an annual inflationary-based price increase and dropped slightly in the fourth quarter of 2018. Although Nextel Brazil is promoting the migration of certain of its customers to upgraded rate plans in an effort to stabilize its WCDMA service ARPU, the competitive trends Nextel Brazil has recently experienced could continue to negatively impact WCDMA service ARPU in the future.
Results Overview
Nextel Brazil's WCDMA operating revenues were $606.0 million in 2018 compared to $721.0 million in 2017. In addition, Nextel Brazil's iDEN operating revenues were $14.7 million in 2018 compared to $149.7 million in 2017 as a result of the decline in its iDEN subscriber base over time, which culminated in the wind down of the iDEN network at the end of the second quarter of 2018. Nextel Brazil's segment earnings improved $48.9 million, or 189%, on a reported basis, and 202% on a constant currency basis, from 2017 to 2018 primarily as a result of significant cost reductions, which included a $298.9 million, or 33%, decrease in operating expenses, partially offset by lower operating revenues.

1.
Service and other revenues

Service and other revenues decreased $243.2 million, or 29%, on a reported basis, and 18% on a constant currency basis, in 2018 compared to 2017 primarily driven by the wind down of Nextel Brazil's iDEN network, which resulted in a $131.4 million, or 89%, decrease in iDEN-based service and other revenues. Nextel Brazil's WCDMA subscriber base grew 14% from 2.9 million subscribers at the end of 2017 to 3.3 million subscribers at the end of 2018. Despite the overall growth in its WCDMA subscriber base, Nextel Brazil's WCDMA-based service and other revenues decreased 16% on a reported basis from 2017 to 2018, and 4% on a constant currency basis, over the same period due to a decrease in local currency WCDMA service ARPU. Additionally, service and other revenues would have been $18.5 million higher in 2018 without the implementation of ASC 606.

2.
Handset and accessory net subsidy

During 2018, approximately 95% of Nextel Brazil's new WCDMA subscribers represented subscribers who utilized their existing handsets rather than purchasing a new handset from Nextel Brazil compared to approximately 90% in 2017, which resulted in relatively low levels of handset and accessory net subsidy. In addition, during 2018, Nextel Brazil recognized a non-recurring benefit of $4.5 million related to the utilization of certain non-income based tax credits that were expensed in prior periods because we did not expect to realize them.



41


                                            

3.
Cost of service

Cost of service decreased $82.8 million, or 22%, on a reported basis, and 11% on a constant currency basis, in 2018 compared to 2017 primarily due to a $54.2 million, or 23%, decrease in transmitter and receiver site and switch costs, the majority of which related to lower rent, maintenance and energy costs, which was partially a result of fewer transmitter and receiver sites in service in connection with the wind down of the iDEN network. The overall decrease in cost of service was also partially attributable to lower mobile termination rates and lower interconnect costs for Nextel Brazil's iDEN network related to the decline in its iDEN subscriber base. In addition, during the fourth quarter of 2018, Nextel Brazil was billed for a substantial amount of fraudulent international calls that resulted in additional interconnect expense of $7.5 million. Nextel Brazil is working with government authorities who are conducting an investigation to identify the responsible parties in an effort to mitigate the ultimate financial impact of these fraudulent calls.

4.
Selling and marketing expenses

Selling and marketing expenses decreased $33.2 million, or 31%, on a reported basis, and 20% on a constant currency basis, in 2018 compared to 2017 mainly due to lower commissions expenses that resulted from a shift to certain types of less costly sales channels that are also more efficient.

The adoption of ASC 606 resulted in the capitalization of both direct and indirect commissions beginning on January 1, 2018 compared to the expensing of these types of commissions in 2017. If we had not implemented ASC 606 on January 1, 2018, Nextel Brazil would have recognized an additional $2.5 million in selling and marketing expenses in 2018. In addition, during 2018, Nextel Brazil recognized a non-recurring benefit of $6.1 million related to the utilization of certain non-income based tax credits that were expensed in prior periods because we did not expect to realize them.

5.
General and administrative expenses

General and administrative expenses decreased $161.2 million, or 43%, on a reported basis, and 34% on a constant currency basis, in 2018 compared to 2017 primarily as a result of a $40.5 million, or 53%, decrease in bad debt expense resulting from lower overall levels of involuntary subscriber turnover and improvements in collections, significantly lower payroll-related and outside services expenses in connection with the insourcing of certain functions and other cost-cutting initiatives and a $37.3 million, or 33%, decrease in customer care-related expenses. Also, during 2018, Nextel Brazil recognized a non-recurring benefit of $4.9 million related to the utilization of certain non-income based tax credits that were expensed in prior periods because we did not expect to realize them. In addition, in connection with the implementation of ASC 606, we recognized revenue-based taxes on a net basis in 2018 rather than on a gross basis in 2017. If we had not implemented ASC 606 on January 1, 2018, Nextel Brazil would have recognized an additional $15.2 million in general and administrative expenses during 2018.


c.
Corporate
 
 
 
Actual Change from
Previous Year
 
 Year Ended December 31, 2018
 
 Year Ended December 31, 2017
 
Dollars
 
B(W) Change
 
(dollars in thousands)

Other revenues
$
22

 
$
106

 
$
(84
)
 
(79
)%
General and administrative expenses
(17,326
)
 
(24,280
)
 
6,954

 
29
 %
Segment losses
$
(17,304
)
 
$
(24,174
)
 
$
6,870

 
28
 %
Segment losses decreased $6.9 million, or 28%, in 2018 compared to 2017 primarily due to a reduction in payroll costs, as well as lower rent expense and a decrease in professional fees.


42


                                            

2.
Year Ended December 31, 2017 vs. Year Ended December 31, 2016

a.
Consolidated

 
 
 
Actual Change from
Previous Year
 
Constant Currency Change from Previous Year
 
 Year Ended December 31, 2017
 
 Year Ended December 31, 2016
 
Dollars
 
B(W) Change
 
B(W) Change
 
(dollars in thousands)
 
 
Brazil segment (losses) earnings
$
(25,942
)
 
$
67,186

 
$
(93,128
)
 
(139
)%
 
(135
)%
Corporate segment losses and eliminations
(24,174
)
 
(36,821
)
 
12,647

 
34
 %
 
34
 %
Consolidated segment (losses) earnings
(50,116
)
 
30,365

 
(80,481
)
 
(265
)%
 
(237
)%
Impairment, restructuring and other charges, net
(175,358
)
 
(1,384,811
)
 
1,209,453

 
87
 %
 
88
 %
Depreciation and amortization
(35,446
)
 
(172,383
)
 
136,937

 
79
 %
 
81
 %
Operating loss
(260,920
)
 
(1,526,829
)
 
1,265,909

 
83
 %
 
84
 %
Interest expense, net
(118,605
)
 
(113,732
)
 
(4,873
)
 
(4
)%
 
9
 %
Interest income
41,507

 
37,689

 
3,818

 
10
 %
 
1
 %
Foreign currency transaction (losses) gains, net
(1,271
)
 
76,615

 
(77,886
)
 
(102
)%
 
(102
)%
Other expense, net
(7,485
)
 
(10,514
)
 
3,029

 
29
 %
 
29
 %
Loss from continuing operations before reorganization items and income tax benefit
(346,774
)
 
(1,536,771
)
 
1,189,997

 
77
 %
 
79
 %
Income tax benefit
6,347

 
2,892

 
3,455

 
119
 %
 
119
 %
Net loss from continuing operations
(340,427
)
 
(1,533,879
)
 
1,193,452

 
78
 %
 
80
 %
Income (loss) from discontinued operations, net of income taxes
1,005

 
(19,994
)
 
20,999

 
105
 %
 
105
 %
Net loss
(339,422
)
 
(1,553,873
)
 
1,214,451

 
78
 %
 
80
 %
Net loss attributable to noncontrolling interest
(46,275
)
 

 
(46,275
)
 
NM

 
NM

Net loss attributable to NII Holdings
$
(293,147
)
 
$
(1,553,873
)
 
$
1,260,726

 
81
 %
 
83
 %
_______________________________________
NM-Not Meaningful
We define segment (losses) earnings as operating loss before depreciation, amortization and impairment, restructuring and other charges, net. We recognized consolidated segment losses of $50.1 million in 2017 compared to consolidated segment earnings of $30.4 million in 2016. Our consolidated results include the results of operations of our Brazil segment and our corporate operations, which are discussed in the subsequent sections.

1.
Impairment, restructuring and other charges, net

Consolidated impairment, restructuring and other charges, net recognized in 2017 included the following:

$70.5 million in restructuring charges, most of which related to future lease costs for certain transmitter and receiver sites that are no longer required in Nextel Brazil's business;

a $57.9 million non-cash asset impairment charge to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values;

$29.9 million in restructuring charges related to a change in the scope of Nextel Brazil's RAN sharing implementation;

$9.3 million in other non-cash asset impairment charges primarily related to certain transmitter and receiver sites that were no longer required in Nextel Brazil's business; and

$6.5 million in severance and other related costs resulting from the separation of certain executive level employees in Brazil.


43


                                            

In 2016, we determined that the carrying value of our Nextel Brazil segment was not fully recoverable. As a result of this determination, we recorded a $1.34 billion non-cash asset impairment charge to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values, as well as to impair our trademark intangible asset and other property, plant and equipment at the corporate level. Consolidated impairment, restructuring and other charges, net recognized in 2016 also included the following:

$21.4 million in restructuring charges related to the early termination of leases for approximately 600 transmitter and receiver sites in connection with the RAN sharing agreement Nextel Brazil entered into with Telefonica Brazil, S.A., or Telefonica, in May 2016;

$11.0 million in non-cash asset impairment charges primarily related to transmitter and receiver sites in Brazil;

$10.8 million in restructuring charges primarily related to future lease costs for certain transmitter and receiver sites that are no longer required in Nextel Brazil's business and office closures; and

$3.2 million in severance and other related costs at the corporate level as a result of the separation of employees in an effort to further streamline our organizational structure and reduce general and administrative expenses.

The restructuring charges related to future lease costs and Nextel Brazil's RAN sharing agreement discussed above had no impact on our current cash balances and are not expected to impact our projected future cash flows.

2.
Depreciation and amortization

The $136.9 million, or 79%, decrease in consolidated depreciation and amortization on a reported basis, and 81% decrease on a constant currency basis, in 2017 compared to 2016 resulted primarily from the $1.34 billion non-cash asset impairment charge we recognized in 2016.

3.
Interest expense, net

Consolidated net interest expense increased $4.9 million, or 4%, on a reported basis in 2017 compared to 2016 as a result of the impact of the appreciation in the Brazilian real on our reported results. Consolidated net interest expense decreased 9% on a constant currency basis over the same period primarily due to principal payments under Nextel Brazil's equipment financing and bank loans, partially offset by interest incurred under Nextel Brazil's spectrum financing arrangement.

4.
Foreign currency transaction (losses) gains, net

Consolidated foreign currency transaction gains of $76.6 million in 2016 were primarily due to the appreciation in the value of the Brazilian real relative to the U.S. dollar during the year ended December 31, 2016 on Nextel Brazil's U.S. dollar-denominated net liabilities.

44


                                            

b.    Nextel Brazil
 
 
 
Actual Change from
Previous Year
 
Constant Currency Change from Previous Year
 
 Year Ended December 31, 2017
 
% of
Nextel Brazil’s
Operating Revenues
 
Year Ended December 31, 2016
 
% of
Nextel Brazil’s
Operating Revenues
 
Dollars
 
B(W) Change
 
B(W) Change
 
(dollars in thousands)
 
 
Service and other revenues
$
848,700

 
97
 %
 
$
963,041

 
98
 %
 
$
(114,341
)
 
(12
)%
 
(19
)%