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Executives

Alice Ryder – Vice President of Investor Relations

Erik E. Prusch - Chief Executive Officer, President and Director

Hope F. Cochran - Chief Financial Officer and Senior Vice President

John C. B. Saw - Chief Technology Officer and Senior Vice President

Analysts

Richard Prentiss - Raymond James & Associates

Jonathan Chaplin – New Street Research

Michael Funk – Bank of America Merrill Lynch

Jason Kim – Goldman Sachs

Shing Yin - Guggenheim Partners

Richard Prentiss - Raymond James

Clearwire Corporation (CLWR) Q4 2012 Earnings Conference Call February 8, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Clearwire Corporation Fourth Quarter 2012 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would like to introduce our host for today, Ms. Alice Ryder, Vice President of Investor Relations. Ma'am, please go ahead.

Alice Ryder

Thank you, Karen. Good afternoon, and welcome to Clearwire's Fourth Quarter 2012 Financial Results Conference Call. With me today are Erik Prusch, Clearwire's President and Chief Executive Officer; and Hope Cochran, our Chief Financial Officer. John Saw, our Chief Technology Officer, is also available for the question-and-answer session.

Today's call is being webcast live on the Clearwire Investor Relations website and will be archived on that site and available for replay shortly after we conclude. Unless otherwise mentioned where applicable, all sequential comparisons in today's discussion reference third quarter 2012 financial measures. All quarterly year-over-year comparisons reference fourth quarter 2011 financial measures and all annual year-over-year comparisons reference full year 2011.

In addition, today's call may contain forward-looking statements reflecting management's beliefs and assumptions concerning future events, trends or expectations regarding financial results. Forward-looking statements include, among other things, our future financial and operating performance and financial condition, including projections and targets for 2013 and subsequent periods, subscriber growth, network deployment or development plans, strategic plans and objectives and future liquidity. These forward-looking statements are all based on currently available operating financial and competitive information and are subject to various risks and uncertainties. Listeners are cautioned not to put undue reliance on any forward-looking statements as they are not a guarantee of future performance. Please refer to our press release and our filings with the SEC for more information concerning risk factors that could cause actual results to differ materially from those in the forward-looking statements. The company assumes no obligation to update any of these statements.

Finally, all mentions of EBITDA on this call reference adjusted EBITDA as defined in our press release, where listeners may find definitions and reconciliations for all non-GAAP measures discussed today. And all mentions of retail cash contribution represent retail revenue, less cost of goods and services sold to retail customers. G&A expenses, such as customer care, bad debt and sales and marketing expenses, and CapEx related to CPE under our original retail model.

I will now turn the call over to Erik Prusch.

Erik Prusch

Thank you, Alice. Before we review our fourth quarter and year-end results, I would like to briefly touch on the company's position with respect to Sprint Nextel and DISH Network. As previously announced, Clearwire entered into a definitive agreement with Sprint for Sprint to acquire the stake of Clearwire it does not already own, and Clearwire has received an unsolicited preliminary indication of interest from DISH Network. Details of each can be found in our recent filings with the SEC. Given that the review process is ongoing and the purpose of today's call is to discuss our financial results, we will not comment further on this matter at this time.

Turning now to our results. At the outset of the year, we set four goals for the company to achieve in 2012. I’ll provide an update on the progress we’ve made on each of these objectives and then turn it over to Hope for a financial update.

Our first goal was to increase the cash contribution from our retail operations by a double digit percentage and I’m pleased to report that our fourth quarter retail cash contribution increased approximately 6% year-over-year, bringing our full year increase to 63%. This is a significant achievement which speaks to the success of our no-contract retail offering and continuing to transform the retail channel into a source of cash for the company.

We believe that our retail revenues of approximately $796 million for the full year 2012 reflect a robust demand for our no-contract, unlimited 4G offering. This strong topline retail performance in combination with our low CPGA of $201 for the full year 2012 were the primary drivers behind our strong, double digit growth in retail cash contribution in 2012.

I’d also note that we not only achieved our target of lowering CPGA below $200 range in 2012, we also reached a new quarterly low in the fourth quarter with $155 CPGA and realized year-over-year improvement of 31% and 40% in full year and fourth quarter CPGA respectively.

Against our second goal of making significant progress in our LTE advance ready network build, we begun to ramp our build activity in fourth quarter 2012 and exceeded our target of 800 fully commissioned sites with more than 1,000 LTE X sites awaiting connection to Sprint’s core network at yearend. We remain on track to meet the 4G MVNO agreement build milestones of 2,000 LTE sites on air by the end of June 2013, increasing to 5,000 LTE sites on air by the end of December 2013.

To that end, we currently have approximately 2,700 notice to proceeds in hand. Early test of our initial LTE advance-ready sites have produced peak downlink speeds of approximately 60 megabits per second. In addition, by leveraging an inherent benefit with TDD Systems, we will have the option to significantly improve on these downlink speeds by further optimizing the amount of spectrum resources we assign to the downlink if we see a customer need for that in the future. I would caution that these rates are based on a brand new, unloaded network so actual experiences when commercially available may differ materially, but we believe these fact speeds demonstrate the significant advantages our network will offer.

With our 2.5 gigahertz band already standardized for carrier aggregation, we are in a position to leverage the next release of LTE advance technology to create even better pipes and potentially offer the fastest speeds with the deepest capacity network in the nation. In delivering this experience, our LTE network will leverage our existing microwave back-haul network which offer significant capacity in a scalable, cost effective manner. Another advantage of microwave back-haul is its resiliency to severe weather events. We realized this benefit following the devastating hurricane Sandy in October which brought down more than 2200 of our sites along the northeast Atlantic coast.

Unlike the outages for traditional wireline back-haul networks, which require other significant repairs in addition to power restoration, ours were primarily power related. By deploying generators to our key sites, we were able to restore 75% of our outages within three days and had nearly all of our sites back up within a week. Many thanks go out to our network team for their considerable efforts to ensure our customers have access to essential communication services during a difficult time. We were also pleased to see our network withstand last week’s blizzard in the northeast with very minimal impact.

Turning now to our third goal of promoting development of the TTD-LTE ecosystem. Recently we initiated international data roaming tests with China Mobile and China Mobile Hong Kong on our trial network in Phoenix and have seen some early success. We believe this is the first step to achieving our vision of allowing mobile users to have broadband data access on a single device anywhere they travel around the world.

We were also pleased to see developments for many of our GTI founding partners during the fourth quarter. We believe that China mobile has continued to make significant progress on its TTD-LTE build and is now focusing on expanding it to 200,000 TDD-LTE site networks by the end of 2013. As mentioned on our third quarter call, China has announced plans to award TDD-LTE spectrum licenses that will use the same 3GPP Band class 41 as Clearwire and GTI members, including Softbank Mobile, across the entire 190 Megahertz of their 2.5 Gigahertz spectrum, which we believe will result in significant economies of scale and innovation for us and our partners.

Additional in India, Bharti Airtel launched TDD-LTE in its third city, Pune. And in Japan, Softbank Mobile introduced six new TDD-LTE smartphones and saw a doubling of their TDD-LTE subscriber since September to more than 700,000 customers. Lastly on the wholesale front, we were pleased to welcome Kajeet to our wholesale partner base and look forward to supporting the mobile communication needs of their of their target market.

In addition during the fourth quarter, social bandwidth MVNO Karma launched its mobile hotspot service representing the first Clearwire launch by our MVNE partner, Simplexity. With that, I would like to turn the call over to Hope to discuss our financial results in more detail. Hope?

Hope Cochran

Thank you, Erik. Our 2012 financial results underscore our laser like focus on three key themes for the year. First, we stabilized cash flows during the transition from WiMAX to LTE by renegotiating our agreement with Sprint at the end of 2011. Second, we revamped our retail model to accelerate cash generation, which we also successfully achieved. The low acquisition cost structure of our new no-contract retail model drove 63% more cash contribution in 2012 than in 2011, despite its lower ARPU and higher churn profile.

We were also able to drive 3% more growth additions in 2012 than in 2011 while decreasing full year CPGA by more than 31% to $201. Lastly, we continued to refined our cost structure our pacing our LTE build to align with devices coming to the market. The results of these efforts are highlighted by our 50% year-over-year improvement in full year 2012 EBITDA and the low CapEx spend throughout the year which extended cash run rate.

Fourth quarter revenues declined 14% year-over-year driven by lower wholesales revenue. As fourth quarter 2011 represented the peak and final quarter of usage based revenue from Sprint, before entering into our two-year flat rate WiMAX pricing agreement. Retail and other revenue of $195 million decreased 2% year-over-year on a 5% increase in subscribers and a 6% decrease in ARPU during the period.

As anticipated, fourth quarter retail ARPU of $44.10 declined both sequentially and year-over-year primarily due to lower equipment lease and activation revenue under the no-contract offering, which was fully launched in 2012. Total subscribers decreased as growth in our retail base was more than offset by subscriber losses in the wholesale business. Net subscriber losses were 906,000 in the fourth quarter, bringing total subscriber to $9.6 million at the end of the period.

The retail business delivered another solid quarter as gross additions increased 70% from the year ago period. Sales in the fourth quarter are typically slower than in the third quarter and accordingly we saw a 6% sequential decline in gross additions due to the seasonality. As expected, given the higher mix of no contract subscribers, retail churn increased on a year-over-year basis to 5% but was down slightly from third quarter churn of 5.1%. Net of these effects, the retail business added 9000 net new subscribers in the period bringing our ending retail base to nearly 1.4 million subscribers.

We continue to be pleased with the performance of our retail business and the cash generation from this channel. We ended 2012 with 8.2 million wholesale subscribers, down from third quarter by 915,000 on lower gross additions and higher churn. Fourth quarter wholesale churn of 7.3% was higher on both a sequential and year-over-year basis. We believe the subscriber interim performances in the period are primarily attributable to Sprint’s continued focus on non-WiMAX devices.

Over the last few years, we have experienced a shifting dynamic within our wholesale subscriber base as the older postpaid subscribers turn off the network and are replaced by new prepaid subscribers. These prepaid wholesale subscribers have displayed a dramatically higher usage profile than that of their postpaid counterparts. The shifting mix has created an environment where despite the recent decline in overall wholesale subscribers, wholesale WiMAX tonnage still grew sequentially in the fourth quarter.

However, as Sprint depletes its remaining postpaid and prepaid WiMAX device inventories, we expect gross add volume to decline and net subscriber losses to accelerate. As a result, despite the WiMAX tonnage growth we continued to experience, we expect that growth curve to flatten and eventually decline in 2013. As mentioned previously, due to the fixed nature of our current WiMAX agreement with Sprint, WiMAX wholesale subscriber and usage performance are irrelevant in 2012 and 2013, having no material impact on revenue until 2014 when WiMAX revenues revert back to usage base pricing and with time we expect to see a decline in WiMAX wholesale revenue. LTE however will be usage based from the start and will begin contributing to wholesale revenues when device compatibility with our network becomes commercially available later this year.

On the expense side of the business, fourth quarter cost of goods and services and network costs, excluding non-cash expenses of $25 million was $183 million, a 6% increase year-over-year. The increase was driven primarily by higher tower and network related expenses associated with our LTE build, as well as an increase in customer premise equipment sales associated with our no-contract retail model which required customer’s purchase rather than lease devices beginning in 2012. Cash COG decreased 2% sequentially, primarily due to lower CPE cost of goods sold, driven by seasonally slower retail gross adds.

Fourth quarter retail selling expenses decreased $6 million year-over-year, reflecting the revised commission structure of our low cost distribution strategy as well as lower marketing expense. This decrease was offset by $6 million increase in equipment subsidy in the same period, resulting in relatively flat total retail CPGA expense year over year.

While total retail CPGA expense remained relatively flat, retails costs per gross adds declined 40% from the year ago period to $155 in the fourth quarter on higher gross additions, highlighting the increased efficiency of our retail business over the past year. G&A expense increased in the fourth quarter as we incurred approximately $8 million in legal and advisory costs related to our pending transaction with Sprint.

Moving on to EBITDA performance, our fourth quarter’s EBITDA loss of $46 million is down $68 million from a positive $22 million EBITDA in the year ago period due to lower wholesale revenue, higher tax COGS and merger related advisory fees. Sequentially, we got $8 million decrease in EBITDA performance due primarily to deal related advisory fees.

Capital expenditures were $102 million in the fourth quarter and consisted primarily of LTE deployment spend in addition to WiMAX maintenance spend. The sequential year over year increase in capital expenditures were mainly driven by the ramp in LTE build activities. Our LTE build hit its stride in the fourth quarter and we expect LTE equipment purchases for the initial phase of the build to ramp even faster in the coming quarters as we build to 5,000 sites by the end of 2013.

As stated previously, the vast majority of our LTE equipment spend will be financed through classic equipment financing vehicles. After finalizing the vendor financing agreement, we have concluded that the facilities will be accounted for as capital leases, reflecting a change from last quarter's CapEx guidance which anticipated operating lease treatment. This change in accounting treatment has no impact on the cost of the LTE build or our estimate for the total cost of equipment construction and services for the larger LTE build of up to 8000 sites remains at approximately $600 million. We expect approximately $200 million to $250 million of our LTE equipment spend for the total 8000 site builds to be financed under the vendor financing vehicle.

Our 2013 operating sources of cash continue to include our retail and wholesale businesses with the bulk of wholesale contribution coming from Sprint. Based on our agreement with Sprint, we expect to receive $300 million for unlimited WiMAX services and subject to meeting our build milestones, three quarterly LTE payments totaling $131 million. Bringing total wholesale payments from Sprint to $431 million in 2013. These cash inflows will partially support our operating cost structure of approximately $1.5 billion as well as our CapEx and interest obligation.

In order to satisfy our operating, financing and capital spending for 2013, we would utilize the $869 million of available cash and short-term investments on hand at the beginning of the year. Additional vendor financing aligned with our current LTE build plans, and a portion of the remaining borrowing capacity available under the Sprint note purchase agreement.

The special committee has elected to forego the first two draws under the Sprint note purchase agreement to allow them time to review the DISH proposal. As a result, the remaining aggregate principal amount available to us under the Sprint note purchase agreement has been reduced to $640 million. Full availability of the $640 million remaining is contingent upon the Sprint merger agreement gaining approval from our non-Sprint class A stockholders, and reaching agreement with Sprint on an accelerated LTE build plan.

As the review of the DISH proposal by our special committee proceeds, they will continue to evaluate on a monthly basis whether to access these funds. Due to the pending Sprint transaction, we are not providing guidance at this time. Our operational focus, however, will remain consistent with the previous year as we look to maximize cash contribution from our retail business, manage expenses and build our LTE network.

In closing, our fourth quarter and 2012 full year results continued to demonstrate our focus on execution and we look forward to the LTE build in front of us. With that I will turn it back over to Alice to start our question-and-answer session. Alice?

Alice Ryder

Thank you, Hope. Before opening up the call to questions, I would like to remind everyone once again that the purpose of today's call is to discuss our financial result and I ask that you please limit your questions to our earnings announcement. I thank you all in advance for your understanding and cooperation. With that, we will open the call up to a few questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rick Prentiss from Raymond James.

Richard Prentiss - Raymond James & Associates

Couple of questions. First, Hope, on the CapEx. $102 million in the fourth quarter and I think I was writing down that you expect that pace to increase to higher levels in the next coming quarters. Would that be for all of '13 do you think or what's your ability to moderate and kind of control the CapEx as we look out in the next couple of quarters?

Hope Cochran

Yeah, absolutely. Thanks, Rick. You know as we think about our CapEx going forward, we have talked about the total LTE build and that’s up to the 8000 sites been in the range of about $600 million. For 2013, we are looking to build 5000 of those sites and you can see that that work began in the Q4 period. So as we look at CapEx in 2013, I anticipate that it will support the 5000 site build as well as maintenance for the WiMAX period, or the WiMAX network, and will be spread fairly consistently throughout the year to support that 2,000 sites and 5,000 sites milestone

Richard Prentiss – Raymond James & Associates

Okay, that makes sense. And I think you said John was there for some technical questions. John, wanted to just get a sense -- T-Mobile has been talking a lot about their plans to roll out LTE and how important contiguous spectrum blocks are. Can you talk a little bit about your spectrum position and what kind of band would you expect to put out there and how important is contiguous?

John Saw

We have an average of 160 megahertz of spectrum in in the top 100 markets and in our initial rollout for LTE, we're rolling out systems using 20 megahertz of channelization and then we'll see what happens when capacity grows from there. In terms of contiguous spectrum, I think 4G is all building better pipes and obviously you need access to contiguous spectrum in order to realize those set pipes.

Richard Prentiss – Raymond James & Associates

And maybe one quick on DISH. I know you can't speak much to it, but DISH's proposal about getting 40 megahertz of spectrum, should we assume that that is mixed of owned and leased like your overall spectrum position? Is there any way to get more color on what they were asking possibly to buy from you guys?

Erik Prusch

Rick, this is Erik. Again, we're not going to discuss the preliminary indication of interest at this time.

Richard Prentiss – Raymond James & Associates

And was there any details in the SEC filing talking about what spectrum they were wanting?

Erik Prusch

Again, we're not going to cover that on this call.

Operator

And our next question comes from the line of Jonathan Chaplin from New Street Research.

Jonathan Chaplin – New Street Research

So there was some interesting disclosure in the Sprint proxy on their earnings release last week that I'd love to get your thoughts on. The first was $2 billion in incremental free cash flow that they think they could get from their business if they incorporate Clearwire into their build. And the second is a clear sign that they've got much greater capacity needs much sooner than they thought internally and certainly than we thought and I'm wondering how that impacts your thought process around the price they've offered for Clearwire?

Erik Prusch

Jonathan, we're not going to speak on behalf of Sprint. That is a question that's appropriate for them in terms of not only what they have in their filings, what kind of the nature of it. We're going to stick our comments today to just the Q4 earnings release.

Jonathan Chaplin – New Street Research

Actually Erik, I was thinking more how that impacts your thought process about 297 is a price?

Erik Prusch

Again, we won't comment on the transaction itself or the deliberations around it.

Jonathan Chaplin – New Street Research

Okay. A more un-based question then, I noticed that Softbank has got six phones that all work on TDD-LTE that are available right now. Do those phones work on your network? And you've been saying that it’d be some time later in the year when there would be phones available. I'm wondering what's the difference is between those and what you need?

John Saw

John Saw here. I think I’ve mentioned in previous earnings call that we can treat those phones to work on our network, those Softbank phones. The difference between their phones and what we need here, it depends on our wholesale customer, in this case Sprint. As you know, one of the requirements for a smartphone is for it to fall back to voice and in the case of Sprint they have to fall back to CDMA voice. In Japan, I think those phones will fall back to GSM voice. So there is a difference in terms of where to fall back to once the voice call comes in.

Operator

And our next question comes from the line of Michael Funk from Bank of America.

Michael Funk – Bank of America Merrill Lynch

I have one. Do you have any visibility into maybe some of the porting trends that you’re seeing on the wholesale side? Obviously you saw an increase in the churn rate there. I’m just trying to get a sense where these customers are going when they’re porting off at a 7% rate per month?

Erik Prusch

Michael, thanks for the question. Again when we‘re talking about re-porting our wholesale subscriber base, we’re just reflecting our experience as far as the actual customer itself. Sprint owns that for the most part for our wholesale base. So I’d (inaudible)

Michael Funk – Bank of America Merrill Lynch

You have any kind of visibility then into – through your systems entering porting ratios then for those subs?

Erik Prusch

No. What we have is the information around our data and the usage on our network.

Operator

And our next question comes from the line of Shing Yin from Guggenheim Partners. All right, he seemed to have removed himself. We will move on. Our next question comes from the line of Jason Kim from Goldman Sachs.

Jason Kim – Goldman Sachs

Bonds are currently callable, which at least based on market trading level suggest that you can refinance those.

Erik Prusch

Can you repeat the question again, please?

Jason Kim - Goldman Sachs

Yeah, of course. Your first lien bonds are currently callable which at least based on current market trading levels, suggest that you can refinance those at much lower rates. Is there anything that prevents you from refinancing those bonds right now or is that fair to think that you are likely to wait until you get much more clarity in terms of your ultimate outcome of your ownership structure. And if the latter is the case, are there any specific events such as shareholder votes or other milestones you will be waiting for.

Hope Cochran

Yeah, thanks, Jason. As we look at the bonds and the trading levels, yes, we agree with you. They are nicely above par and there would be an opportunity to refinance them. Currently, we are contractually committed under the Sprint merger agreement and anything we did with our capital structure would require their approval to our cap structure. And in addition, currently they are callable and I think we would like them to remain that way. So we will continue to monitor the market but as we are bound by the Sprint merger agreement, we probably won't be acting on that at this time.

Operator

Thank you. And our next question comes from the line of Shing Yin from Guggenheim.

Shing Yin - Guggenheim Partners

Yes, I guess I want to follow up on the question about devices. At this point in time have you started working with some of the device manufacturers on future TD-LTE devices and if so, can you kind of give us the preview on the quality of devices that we should expect. You know are we going to kind of see like flagship devices that are going to be able to work with your network or we going to maybe start with lower-end devices and then work towards the higher end devices later on.

John Saw

We have been working closely with the ecosystem vendors in terms of the device OEMs as well as chipset vendors as well. As they are all making good progress on TD-LTE. My guess is that the proof of the pudding is you need to look at marketers that happen to launch with TD-LTE devices in Japan. And also the vast number of devices they are having in China for China Mobile's test. There is a mixed bag of devices. There are low-end data devices as well as phones. There are commercially available today with TDD-LTE or are being in test right now. And I think Sprint can probably comment further if you ask them on what their TDD-LTE device launch plans are for 2013.

Shing Yin - Guggenheim Partners

And maybe as a follow-up to that. Are there any plans, are you considering at all whether you might offer smartphones through your retail business?

John Saw

We do not have any plans at the moment.

Operator

And our next question is a follow up from the line of Rick Prentiss from Raymond James.

Richard Prentiss - Raymond James

Piggybacking on Jonathan's question earlier, Sprint mentioned in their proxy, I know you can't comment on it, possibility to put 4G LTE at 2.5 gigahertz at 25,000 cell sites. Can you remind us how many cell sites you guys have right now and also what height are you hanging your antennas at?

John Saw

We have about 15,000 cell sites to date and the heights vary. Vary by jurisdiction and by markets. Typically anywhere from 80 feet to 120 feet. It depends on morphology that is present in that location and we also have some building top sites as well.

Richard Prentiss - Raymond James

Okay. Is it safe to assume that if you went from 15,000 to 25,000 in your style of building, that the heights might come down as you densified the network?

John Saw

Potentially, yes. I think you can certainly assume that especially when you’re trying to act like you say add more sites in an area, you really want your capacity that you will be offering from 205 to be more surgical and target at a specific location and by definition then those sites could be placed on lower radiation centers.

Richard Prentiss – Raymond James & Associates

Makes sense. Trying to ask questions you guys can answer. How about John maybe also, voice-over-LTE, what’s the size as far as that moving forward. You mentioned the whole fallback on Sprint. It has the fallback to 3G CDMA, but when do we think Voice-over-LTE is really ready for prime time in the U.S.?

John Saw

So, we are the wholesaler of LTE bandwidth and the one thing that we make sure on our network is that we are able to support VoLTE and with key capabilities, especially with low latency and sufficient speed. And from the testing we have seen so far, we are confident that they would be capable of supporting Voice-over-LTE. In terms of launch brands of Voice-over-LTE I think Sprint might be in a better position to describe what their plans are, but on our LTE network we are certainly capable of supporting that once they are ready.

Richard Prentiss – Raymond James & Associates

I know you say pointing to the international side. What are the thoughts as far as the rest of the ecosystem coming together for Voice-over-LTE?

Erik Prusch

I think we have not looked into Voice-over-LTE as a product offering, just because we are just wholesaling capacity right now. So I may not be in a best position to comment on that.

Alice Ryder

Thank you all for your participation today. Please contact Clearwire's Investor Relations with any additional questions. This concludes our call.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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