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Executives

Mary Ekman - Investor Relations

William T. Morrow - Chief Executive Officer

David J. Sach - Chief Financial Officer

Perry S. Satterlee - Chief Operating Officer

Dr. John Saw - Vice President, Chief Technology Officer

Scott Richardson - Chief Strategy Officer

Hope F. Cochran - Vice President - Finance, Treasurer

Analysts

Rick Prentiss - Raymond James

John Hodulik - UBS

Simon Flannery - Morgan Stanley

Walter Piecyk - Pali Capital

Kevin Rowe - Rowe Equity Research

Clearwire Corporation (CLWR) Q1 2009 Earnings Call May 13, 2009 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Clearwire Corporation quarter one 2009 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Mary Ekman with Clearwire. Please proceed.

Hope F. Cochran

Thank you, Michelle. Good afternoon, ladies and gentlemen. I’m Mary Ekman, Vice President Investor Relations with Clearwire, and I would like to welcome you to our first quarter 2009 financial results conference call. With me today are Bill Morrow, Chief Executive Officer; David Sach, Chief Financial Officer; Perry Satterlee, Chief Operating Officer; John Saw, Chief Technology Officer; Scott Richardson, Chief Strategy Officer; and Hope Cochran, Senior Vice President, Finance and Treasurer.

During today’s call, Bill will share his initial views on the business and review Clearwire's key results and accomplishments. David will highlight Q1 operating metrics and financial results and discuss Clearwire's business outlook. Following our prepared remarks, we will open the lines for your questions.

This afternoon’s call is scheduled to last approximately 45 minutes, including Q&A.

As a reminder to all listeners, 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.

Hopefully you’ve all had an opportunity to read the earnings release we issued earlier this afternoon which provides detailed financial information on Clearwire Corporation’s 2009 first quarter results. A reconciliation of pro forma financial information and any non-GAAP financial measures discussed on this call can also be found in our press release.

Today’s call may contain forward-looking statements reflecting management’s beliefs and assumptions concerning future events and trends in or expectations regarding financial results. Forward-looking statements include, among other things, our future financial and operating performance and financial conditions, including projections and targets for 2009 and subsequent periods, subscriber growth, network development and market launch plans, strategic plans and objectives, and the need for additional financing. 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 forward-looking statements.

At this time, I would like to turn the call over to Bill Morrow.

William T. Morrow

Thank you, Mary and good afternoon, everyone. As many of you know, it’s been two months since I’ve joined Clearwire and I must say it feels really good to be back in telecom and especially so to be with a company that has a differentiated set of assets matched with an emerging demand.

Now, the focus of this call naturally is about our first quarter results but as Mary said, I would like to start with an early perspective on how I see the opportunity in front of us and what it’s going to take for us to monetize our position. I will tie this into some of the operational highlights and then turn it over to David.

We are beginning to see an intersection of trends observed on applications over fixed broadband, 3G mobile data, and consumer electronics. The high capacity, high data rates, and IT characteristics of fixed broadband have led to an increased demand for online shopping, banking, and research. We’ve observed social networking applications such as MySpace, Facebook, and Twitter create this viral marketing effect for people to stay connected to others in a richer context than just email.

We’ve also seen more and more online video intensive games being taken up by a broader age segment, and we now have popular applications that stream audio and video links, such as Pandora, [Slingbox], and Hulu.

The second trend of interest is related to the wireless 2G and 3G networks. The industry has observed that with the right interface and applications, consumers will purchase Internet connectivity with mobility but there is much evidence that indicates that there is not enough capacity, the bandwidth is too narrow, and the latency performance associated with packet switched architectures are insufficient.

So in short, the demand is there but 3G can only offer a subset of the full Internet experience observed on the fixed broadband connection.

The third trend is around the proliferation of more and more consumer electronics with lower cost and higher functionality. As such, we can envision a broader base of devices that will be connected with a wireless medium. Sony has reported that nearly 90% of the electronics produced by 2011 will have some form of radio communication capabilities.

The point of intersection associated with these trends suggests the need to connect more devices to maintain mobility and to offer a depth of capacity and bandwidth that has yet to be seen by any existing wireless solution, and it must be delivered at a much lower cost than what we see in the marketplace today.

And here’s where Clearwire is the first to market with a solution. We will leverage the emerging business opportunity by delivering our customers super fast mobile broadband and providing them simple, open, and ever-present access to the full Internet experience. To be able to do what a consumer can do at home yet be on the go and to be able to connect the ever-increasing number of electronic devices to the Internet puts Clearwire in the sweet spot of this intersection.

Today we face no direct competition in this mobile broadband ISP space but we are obviously not the only company to recognize the trends that I just described. We will face competition from the incumbent wireless carriers, a number of which have stated their interest in joining the 4G world. They too see the opportunity and no first hand the current strain on their existing networks. This is a form of competition but we start with a different heritage. The incumbents are mobile voice companies adding a narrow pipe for data. We are a mobile broadband data company and are adding applications, including voice.

Our WiMAX network is adding mobility to the kind of Internet experience only fixed users have enjoyed to date, so it’s important to remember we are not aiming to unseat the incumbent wireless carriers in order to build a successful business. We do not have the same business model as we can achieve good returns, even at a relatively low level of market penetration.

Now, I understand the tendency to put us in the same category but our business differs in a number of respects. We are fulfilling a need that we believe has yet to be served. Our greenfield opportunity to build an open, all IP network designed specifically for mobile broadband, together with our unparalleled depth of available spectrum positions us at the forefront of meeting this emerging demand for mobile broadband access.

We do not have a legacy network, nor the need to defend past investments. We will have multiple channels to reach our customers and as you know, we are also a wholesale supplier to some of the largest communication companies in the country who collectively serve over 100 million U.S. customers.

I have heard some mention that the MVNO model is not something of value if you look at the history here in the United States, but this is not the same thing. These are not traditional MVNO agreements with virtual business partners.

Sprint and our cable partners will be bolting on, forging mobile broadband offerings to an already significant existing business. And speaking of bolting on other networks, we offer a WiFi bolt-on with our Clearspot device. With this device, that is no bigger than a deck of cards, we enable all those existing WiFi enabled devices to come to life with a true mobile broadband connection. And by the way, there’s no device subsidy associated with this.

But this, coupled with the wholesale demand, provides us with the opportunity to become the network of networks. We offer existing 3G network providers the ability to step up to 4G. We offer the fixed cable network providers the ability to follow their customers out of the home and we offer all those devices which have enjoyed the advent of the stationary WiFi to immediately be on the go with true mobility.

As a result of all of this, we are confident and excited about the prospects for Clearwire and firmly believe that the company is better positioned than ever to compete and to succeed. As we extend our network to many more cities during the next few years, we believe Clear will be the first truly pervasive mobile broadband service, unlocking the potential of the Internet for our customers and providing tremendous opportunities for our long-term growth.

It’s been two months, as I said, since I joined the company and during this time, I have been diving into various aspects of our business. With each passing week, I am able to see more evidence of the dedication, the drive, and the focus on the customer that are such important parts of our culture.

We need to build on this culture and continue to quickly scale our organization and capabilities so we can execute on this ambitious growth plan. At a time when many companies around the nation are paring down their operation, Clearwire has plans to increase our workforce by more than 50% over the balance of this year. We are building our team while enhancing the processes, the systems, and the infrastructure necessary to achieve our goals.

As outlined in the press release which accompanied our earnings announcement, we have just implemented a new management structure. This leverages the talents and institutional knowledge of existing Clearwire leaders and also adds several notable veterans who bring expertise from a range of great companies in the tech industry.

Mike Seaver joins us to run our marketing, sales, and customer care as our Chief Commercial Officer. Mike has a background that covers Internet-based commerce while at E-Trade, wireless telecom while at AT&T Wireless, software applications while at Microsoft, and computing devices while at Lenovo.

Kevin Hart joins us to run our IT platforms as our Chief Information Officer. Kevin has experience that covers entrepreneurial telecom while at Level Three, and IT solutions while at Cap Gemini.

[Laurent Bentatu] joins us to run our human resource department as our Chief People Officer. Laurent has wireless carrier experience from T-Mobile, retail experience from Home Depot, and IT services while at IBM.

We also promoted and expanded the role of our Chief Technical Officer, Dr. John Saw. He will oversee the architecture, network engineering, and site deployment functions. These changes add to an already strong lineup of executives. With a keen focus on execution, on customers, and on continuous innovation, this team will take full advantage of the business opportunity ahead.

Evidence of the strength we already have is the key operational performance highlights for Q1 of 2009, and when we compare these to the pro forma results for Q1 2008, we saw a 24% increase in the covered pots, a 21% increase in consolidated revenue, a 13% increase in subscriber growth, even with a slight up-tick in churn, which led to us achieving the 500,000 subscriber milestone, and we did this with a 4% reduction in CPGA and increased our domestic ARPU by more than $3.80.

Now last but not least, we had a 12% decrease in our operating loss adjusted for non-cash expenses through initial merger related G&A synergies.

Further accomplishments during the first quarter included the launch of our Portland Market in January, and I am pleased to report that we are experiencing tremendous early success with excellent network performance and gross add penetration exceeding our initial expectations.

As usual, we do not report individual market operational metrics but we can say that the rapid subscriber uptake in Portland in the first three months has been more than 2.5 times the gross adds of any of our prior 51 market launches. We have generated excellent productivity across all of our sales channels, including national retail, company owned retail, and local dealers. Notably, our customer uptake through the telesales and web channels has been the strongest of that in any of our prior markets. Given the low cost nature of these channels, this start bodes well for a lower average market CPGA than what we had anticipated.

Average monthly customer usage of our WiMAX services in Portland, as measured by data traffic, is significantly higher than in our pre-WiMAX markets. This indicates that better network speed and performance does in fact lead to a richer customer experience and again gives evidence that there is more demand for mobile bandwidth than we are seeing delivered today by other mobile networks.

Spectrum depth is a key differentiator for Clearwire in Portland and averages 150 megahertz across the top 100 U.S. markets. This depth enables us to easily scale our network over time, unlocking the capacity necessary to meet the increasing usage demands of a growing subscriber base.

With our Portland network encompassing over 650 square miles and 1.7 million people, we believe customers across a broad demographic are responding to our value proposition, which is simply a super-fast wireless Internet service at a great price.

We believe that’s a proposition particularly well-suited to the current economic times and again, fits squarely in the intersection of those compelling industry trends.

And as you know, from the goals we laid out in March, our early success in Portland is just the beginning of our ambitious plans to broadly extend our network across the country. As stated last quarter, our goal is to cover up to 120 million people in 80 markets by the end of 2010, but this may be adjusted depending on the availability of additional capital and our experience in the early market launches.

Our market launch plans have not changed and a number of the prominent markets we are targeting for 2009 and 2010 are again outlined in our earnings release. We remain on track to launch our next two markets this summer. In June, we’ll be expanding to Atlanta, adding nearly 3 million people to the Clear coverage footprint in a city that will be our largest market to date. With the network covering upwards of 1,200 square miles, we have validated that we can design and deliver large scale markets with our low cost network architecture, another key differentiator for Clearwire. And as with all of our pre-WiMAX markets, we are utilizing a hybrid approach of microwave rings and dark fiber across approximately 90% of our sites. We believe that this is the lowest cost, most scalable back haul approach to transport the immense 4G data payload from our sales side.

We have been readying Atlanta distribution channels, building up six retail outlets, hiring and training sales teams and engaging national players, including Best Buy and Radioshack.

We also have many local indirect dealers on board and this month we are wrapping up our final operational readiness testing in advance of some store openings. Advertising and other promotional activities which are planned for our full commercial launch in June. Network construction and preparation of our sales channels is also progressing in Las Vegas, where we are planning a late summer launch.

For each market we launch, we will conduct improvement reviews so each successive market launch will benefit from the prior experience. So as you can see, our coverage, our distribution, and our systems are all making progress. We are also collaborating with others to deliver devices, applications, and other services that will meet the needs of the customer.

We have a tremendous group of WiMAX partners in the PC industry introducing new laptops, netbooks, and mobile Internet devices at a rapid pace. Together with Intel, we now have a long list of planned, embedded WiMAX capability, including products from Acer, Asus, Dell, Fujitsu, Lenovo, Panasonic, Samsung, and Toshiba. Last week, Dell announced two new SKUs, the Studio 17 and Studio XPS 16 that are configurable with WiMAX.

Looking ahead, Samsung has already announced a summer launch of [The Mondi], and they expect to announce the launch date of two WiMAX ready notebooks this summer.

In April, we launched Clear Spot. As I mentioned earlier, this allows customers to create their own personal mobile hotspot, opening up the WiMAX ecosystem to the tremendous range of standard, WiFi enabled products. Now these range from digital cameras to the Apple iPod Touch, and from GPS navigational devices to the Sony PSP.

InStat has stated nearly 300 million WiFi equipped consumer electronics were shipped in 2007 and they project that the number will grow to $1 billion by 2012. So think about that -- think about how many devices are in our homes today that are already WiFi enabled. Even digital cameras without WiFi can add an SD memory card equipped with WiFi capability. By linking these devices to our high speed, high capacity mobile network via Clear Spot, we are adding mobility and igniting the true potential of today’s embedded WiFi gadgets. The Internet cloud will no doubt grow as a result of this advancement.

As you may have read this morning, Cisco has announced plans to build new mobile WiMAX devices targeting key consumer and small business segments and aims to introduce the first device later this year. In addition, we selected Cisco as our national core IP infrastructure supplier.

Regarding dual mode devices, we are making good progress in testing 4G/3G modems which will enable customers to benefit from the local Clear 4G networks but also have access to the Sprint 3G network virtually everywhere else. We expect to launch the first EVDO WiMAX modem this summer.

We’ve also learned that applications that take advantage of the capacity depth, fixed broadband speeds, low latency and mobility will be a strong driver of growth for our company and as such, we’ve partnered with Google, Cisco, and Intel with plans for a WiMAX innovation network. The network will initially cover more than 20 square miles in Silicon Valley, offering access to campuses at some of the world’s leading technology innovators. Service is expected to be available to developers by later summer.

So in summary, the demand for a high capacity, high speed mobile network exists. Clearwire is currently the only solution to meet this demand with the necessary characteristics. Coverage expansion, device availability, and applications are showing good progress and we are observing strong results in Portland.

So with that, I would like to turn the call over to David for more detail on our operating highlights and financial results for the first quarter.

David J. Sach

Thank you, Bill. Overall, the results were solid and our network build-out is starting to gain momentum. As Bill mentioned, Clearwire's subscriber base increased to approximately 500,000 at the end of March, up from approximately 443,000 for the same period last year. The subscriber growth was broad based and resulted in the approximately 25,000 net adds during the first quarter. These additions were higher than expected, which has been very encouraging in this period of economic uncertainty. We believe it speaks to the continuing strong consumer demand for wireless connectivity.

A strong customer response to our sales and marketing efforts in Portland since the January launch produced a steady pace of new mobile WiMAX subscribers. In our pre-WiMAX markets, we were particularly satisfied with the strength of the additions, since we have reduced our sales and marketing activities in these markets, ahead of the planned upgrades to mobile WiMAX later this year and into 2010.

While these results are certainly encouraging, it is important to remember that we are heading into the seasonally slower period and we expect net adds will be lower in Q2 than we just saw in Q1, due to the upswing in voluntary churn and a reduction in gross adds that typically occur at the end of the school year.

We expect to see continued strong subscriber growth in our new mobile WiMAX markets throughout the year but please keep in mind our business today remains overwhelmingly weighted towards the impact of the results from our 46 U.S. pre-WiMAX markets.

My comments on our operational metrics and financial results which follow are directed at a comparison of the actual Q1 2009 results relative to pro forma Q1 2008 quarterly trends, since we believe these represent the most meaningful comparative information.

Consolidated average revenue per user, or ARPU, for the first quarter 2009 was $39.52, an increase of $2.66 from the prior year first quarter. A decreased impact from promotional pricing year over year boosted ARPU, as well as increased bundle sales of new services, including our voice-over-Internet protocol, or VOIP, PC card, and other ancillary services. VOIP sales as a percentage of new broadband sales were maintained at 20% of residential broadband sales in the first quarter just ended.

Consolidated churn in Q1 was 2.6%, compared to 2.2% in Q1 2008, and sequentially down from 2.8% last quarter. Despite the continued recessionary environment, our non-pay related churn was actually lower in Q1 than we experienced in Q4. Looking forward, we continue to expect higher churn in pre-WiMAX markets to increase consolidated churn from current levels as we transition those markets to mobile WiMAX by the end of 2010.

First quarter consolidated CPGA was $466, which is down from $487 in the same period last year. The reduction in CPGA reflected greater efficiency in our sales channels year over year. While we remain focused on gaining such efficiencies through leveraging web and tele sales, we continue to expect CPGA to trend higher from current levels as we launch new markets throughout 2009.

Turning now to the P&L results, you can see that the consolidated company grew its revenues by 21% in the first quarter of 2009 compared to 2008. The increase in revenues was driven by the higher subscriber base and higher ARPU, which I discussed earlier.

Cost of services and network costs grew 13% in the first quarter due to increases in the number of tower leases and related low cost back-haul in preparation for future market launches. We have started to realize some benefits from the lower site rents associated with leveraging Sprint sales sites where suitable for our network expansion.

We were incurring lease payments on approximately 9900 cell sites at the end of March 2009, compared to approximately 5200 sites at March 2008.

Depreciation and amortization increased 82% in the first quarter of 2009 to $48.5 million, compared to $26.6 million in the same period in 2008. This increase was primarily a result of two factors. First, higher amortization related to the intangible assets recorded as part of the merger; and second, higher depreciation from assets placed in service since Q1 2008, including the market launches in Portland and Baltimore.

Adjusted OIBDA, or operating loss adjusted for non-cash expenses, was $144 million in the first quarter compared to a pro forma adjusted OIBDA loss of $163 million for the same period last year. The adjusted OIBDA loss narrowed by 12% quarter over quarter and decreased sequentially by 9% compared to Q4 2008.

During Q1, we captured cost synergies, primarily in G&A, from our strategic transaction with Sprint, while at the same time began to meaningfully scale our sales, marketing and network deployment organizations in anticipation of our market rollout plans in 2009 and 2010.

Capital expenditures for the first quarter were $112 million, compared to a pro forma total of $312 million in the same period last year, and compared to $83 million in Q4 2008.

As you look at the year-over-year comparison for total CapEx, over 80% of the Q1 2008 pro forma CapEx was incurred by the Sprint WiMAX business on network development. Much of the first 90 days following the merger was spent developing our network build-out plan, which our board approved in early March 2009. As such, aggressive implementation of the build-out plan only started late in the quarter. This resulted in the relatively low CapEx figure for Q1 2009 compared to Q1 2008, but resulted in a sequentially higher CapEx figure compared to Q4 2008.

Based on the current network build activity levels, we expect to have a much higher CapEx figure for Q2. Furthermore, we expect to see our quarterly CapEx rise steadily throughout the remainder of this year as we enter the construction phase on more new markets.

The net cash spend for the first quarter was $272 million, and we ended March with over $2.8 billion of cash and short-term investments on our balance sheet. As we have shared previously, our strong cash position gives us the flexibility to advance our network expansion plans as we continue to appropriately assess our future funding options.

Our outlook remains the same -- Clearwire's focus in 2009 and 2010 will be on development and expansion of its wireless 4G network. We expect ARPU to be sustained during this period but as I reminded earlier, due to the expected pace of our network build-out, we anticipate churn to trend higher as we convert the pre-WiMAX operations and expect CPGA to trend higher as we launch the new markets.

We are currently engaged in the development and construction of mobile WiMAX networks, including the long lead time, low cost site acquisition, zoning, and permitting work necessary to enable us to cover as many as 120 million people by the end of 2010.

The ultimate scope and timing of our network build-out will largely be driven by the company’s market-by-market success and the availability of additional capital.

Cognizant of the prevailing economic environment, we are of course managing our cash resources prudently. We continue to expect net cash spend to be in the range of $1.5 billion to $1.9 billion for the full year 2009. We are prepared to change the rate of spending on network deployment if necessary and we believe we can respond effectively to a changing capital environment over the coming quarters.

And with that, let me hand it back over to Bill.

William T. Morrow

Thanks, David. Why don’t we just jump right into your questions now? I know we’ve been talking for about 30 minutes here, so Mary, do you want to take us through the --

Mary Ekman

The Operator will.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rick Prentiss of Raymond James. Please proceed.

Rick Prentiss - Raymond James

Thanks. Good afternoon, everybody. A couple of questions -- with the Atlanta launch coming up in June, we’ve actually been seeing some gorilla marketing already, kind of flyers being hung and kind of the pre-launch type stuff. What are the plans with the cable partner there? Is Comcast going to participate in Atlanta? Or when would the first time be that we expect your cable partners to participate in the market launches?

William T. Morrow

Well, obviously they are the best people to kind of get this relevant information. But what we can share with you, Rick, is that we are expecting to see the first cable partner come on I think this summer with Portland and that’s Comcast, and then Time Warner is intending to launch this year with one of the markets. That’s their commitment and that’s our plans.

Perry, do you want to add anything else to that?

Perry S. Satterlee

Yeah. I think, Rick, we’ve been working very closely with all of them to make sure that they are well-enabled to go to market as soon as possible, and as Bill said, I think it’s best -- we don’t necessarily -- it’s better for you to get that information directly from them.

Rick Prentiss - Raymond James

Sure. And then, I saw in the press release and Bill, I think you mentioned it a couple of times in your prepared remarks, about the pervasive network. Can you talk a little bit about what you guys mean by that word? Does that going deep in your coverage in the markets you’re in, or does that mean going broadly as far as where coverage is at? Or is that saying 4G and 3G combined together would be pervasive?

William T. Morrow

Well, no, I think first of all, if you look at consumer behavior, I know we like to think in terms of broad ubiquitous coverage across the United States, but the fact of the matter is each of us don’t travel in each of the geographical areas across the states. So when we look at this, it’s more in a market situation where most of the applicability is. So our intent is to go deep there to give them again this freedom to have what they have on the fixed broadband side but to offer mobility that way. And so this is why you are going to see the high [DPS], you are going to see the low latency, you are going to see the depth of capacity to where we don’t have to constrain our networks, we don’t have to lock and block some of the applications that are out there. And that’s what we mean by pervasive.

Rick Prentiss - Raymond James

Thanks.

Operator

Your next question comes from the line of John Hodulik of UBS.

John Hodulik - UBS

Thanks. I guess two quick questions -- first on the management changes, I guess both with Perry and Barry -- well, I guess Barry is not leaving but the international business is not exactly the core focus here -- Bill, can you just talk about the philosophy of the changes? Is this just a new CEO coming in and bringing in new guys, or do you expect it to lead to the company to change direction a bit or is -- are you just sort of bulking up here as you guys get to the next level?

And then secondly on the CapEx, I mean, what kind of order of magnitude or change are we talking about -- are we talking about doubling the CapEx budget on a year-over-year, on a quarterly basis? I just want to sort of get a sense for it to phase in the cash flows for the year.

William T. Morrow

Okay, great. I’ll take the structural question and then we’ll have David take the CapEx issue.

It’s a multitude of reasons as to why we are announcing the structure the way it is today. The first and foremost is be able to scale up the business. We obviously have a lot of work in front of us. You know, we’ve been a small company in the past and we are obviously going to be a medium-sized to large-sized company as we go forward into the future. We are convinced that the demand is going to be there to require us to do that.

So when you look at the structure today, we felt that we need to one, focus on the WiMAX community from a carrier perspective, and this is with Barry and his stature that he has around the world. He is going to garner all of the operators’ intent so we can demonstrate that WiMAX is here to stay and that WiMAX has a lot more demand associated than what perhaps is being written in the press today. And the collaborative efforts about how we can actually look at innovation, how we can look at product development, and maybe there’s even other synergies that we can look at on a legal basis across the international playing field.

And you’re right about the international operations not being that large.

On Perry, on here, you know, Perry has done a tremendous set of efforts. He has really taken the company to where it is today. He’s been the main operational guy within the company. He’s decided that he wants to go off and pursue some other things of this. We’re grateful to have had him for the time that he’s here and he is obviously going to stick around to be sure that this is a complete, seamless hand-over as we go forward.

So the scalability of the organization, the focus and concentration on bringing in some of the front-end commercial aspects that I mentioned with applications, with devices, with additional services, how we take the market on that, that’s what we were going to strengthen and again, the rest of the organization is performing quite well.

John Hodulik - UBS

Okay, great. So this is more of an affirmation of the WiMAX technology. I was thinking that Barry hadn’t been key to that decision, moving him sort of out of an operational role I think the initial interpretation may be that maybe you were thinking about going down a different avenue than where you are currently heading.

William T. Morrow

Yeah. No, let me be clear on that too -- our intent with Barry being in there is not to go spend any money overseas and to acquire and change the asset structure that we have outside of the United States. The U.S. is our focus but we believe the WiMAX community is bigger than the United States and Barry is the right guy to bring that together for us.

David J. Sach

Regarding the CapEx, as I mentioned in my script, most of the first quarter was spent developing the plans, due to the board approval in March. So Q1 was a little lower than we would have liked.

Yes, you can see Q2 double in CapEx, maybe even slightly more, but Q2 would then be more representative of a normal quarter for us and as I mentioned, it will start to build from there but obviously it’s not going to keep doubling each quarter. So yes, we expect Q2 to be significantly higher and then obviously trend up, but certainly not double from there on in.

John Hodulik - UBS

Great. That’s very helpful. Thanks.

Operator

Your next question comes from the line of Simon Flannery of Morgan Stanley. Please proceed.

Simon Flannery - Morgan Stanley

Okay. Thanks very much. Good afternoon. Could we talk a little bit more about Portland? I’m not sure how much more color you can give but what kind of users are you getting and what sort of plans are they signing up for, and any differences from what you were expecting coming into that? And also, I think you had mentioned higher usage -- is that something that may require you to add more back-haul, or is that sort of within the tolerances of the design? And also the sort of speeds that you are getting out of the network there and any signs of congestion where you’ve got on a college campus or something a concentration of users? Thanks.

William T. Morrow

Great, Simon. I’ll have actually Dr. Saw actually address what we are seeing from a performance point of view but I would start with the fact that we’ve designed it again for this depth and the pervasiveness of it and it’s consistent with what we have seen, but John, can you give some more color on that?

Dr. John Saw

Sure. Hi, Simon, John Saw here. I will answer your -- you have a sort of three-part question in terms of performance. For speeds, our customers are typically seeing anywhere between two to six megabits per second for speed, and they are able to burst at times above 10-megabits per second.

In terms of usage, what we are seeing is that our customers on WiMAX are using more than two times the [tonnage] than our customers on the [Expedience] network, which goes to show that when you have a faster network, the customers tend to use their services more for a lot of new applications.

In terms of whether our back haul can withstand capacity, our back haul is designed from day one to be able to scale extremely rapidly in a low cost sort of way to accommodate the massive amount of bandwidth that we have anticipated from a sales side, so I do not see any issues with our back-haul’s ability to scale for that.

We also, as you know, have ample spectrum that we can add multiple carriers on our cell sites to address any congestion in sectors, and so far we are staying way ahead of that in Portland.

Simon Flannery - Morgan Stanley

Great. And on the plans and the types of usage you are seeing?

Scott Richardson

What we are seeing in the market in the first quarter in Portland is consistent with a lot of the same customers we had with the Expedience network and technology, so we have a lot of home users. What I see that we are adding is a number of users in the mobile segment and that’s primarily consumers such as individual households, we have a large number of students using the product, and we’ve also increased our channel and our sales with the business users primarily for mobile business, or for mobile applications.

Simon Flannery - Morgan Stanley

Thank you.

William T. Morrow

You know, I’ll add on that, Simon -- the Clear Spot has been selling really well also in Portland and again, I think this is evidence of us being able to reach devices that already are out there, with no subsidies against them and we are seeing a strong take-up in this device.

Operator

Your next question comes from the line of Walter Piecyk of Pali Capital.

Walter Piecyk - Pali Capital

Thank you. Just something more on the cost side, I guess - I think on the network expense line, you had mentioned in the prepared comments about lower cost per cell site, because you look at network expense, it was down sequentially. Are these changes in price -- can you I guess characterize them on a per cell site basis? Is this just getting existing contracted volume discounts or was there a re-negotiation with tower companies? Can you just give a little bit more color on that?

And a similar question on the -- I forget what you call it, I guess just the rental for the spectrum? That also was down sequentially. I’m not sure -- how is that possible that your -- I guess your spectrum lease expense is down sequentially.

David J. Sach

Okay, let me take the -- in terms of the cell sites, obviously with the zone business coming over, we try to avail ourselves of deals that Sprint has with their towers, so we are benefiting from piggy-backing on the back of some of those Sprint deals, so that’s obviously benefiting our tower expense.

On the spectrum side, that’s --

Hope F. Cochran

You know, when you look at that spectrum lease expense, there are a lot of dynamics there to take into account. But one of the things we look at are one-time payments that go through, and so we did have some one-time payments since Q4 timeframe, both some cash implications as well as some non-cash items. And I am happy to walk you through those more specifically on a later call.

Walter Piecyk - Pali Capital

Okay, yeah. I was just looking for a more regular run-rate, since -- just to get the cash aspect.

Hope F. Cochran

You know, it’s a hard one to get a regular run-rate on. The best way to look at it is in our commitment foot notes in the 10-Q or K.

Walter Piecyk - Pali Capital

Okay. The last question on the more kind of marketing side, I guess -- you know, the -- Sprint and Verizon have I guess talked about their version of this hot spot thing, I forget the name of it -- my-fi? Just if you could speak to -- I know it doesn’t matter for you guys because you are going to be opening up the network but today there was discussion of -- like, say on the iPhone, for example, that they were going to allow the sling player but not allow it on a 3G network. For a traditional sale operator that has a product like this, the my-fi, basically the WAN to the WiFi hotspot, does that product enable them to be restrictive in the applications like they are with their devices today? Or is that basically going to open their networks up as well? Because I would guess that given their lack of spectrum and capacity, that that would probably be an issue for them if that product really got adopted. Thanks.

William T. Morrow

I will start with this and maybe Scott, you can add, or John can add some further color on it. I think again for us, the notion of what is happening here, again reaching these embedded WiFi gadgets that are out there is great, but so many of them want to use excessive or a lot of bandwidth and we are the only ones that we believe that are going to be able to provide that with the WiMAX technology, again the spectrum that we have and in the way that the core network is architected.

If somebody is using the my-fi device, I will assume that they are still going to have the network restriction because it is back to that 3G network once it goes from the my-fi device back up the macro base station. How they actually control that, you know, I think there’s a variety of different ways to deal with it but I am sure that would be specific to that company.

Scott Richardson

The only thing I would add I think just to color it, I think our customer experience is all about open access to our Internet life, and for us, with that particular device, the Clear Spot, we provide up to eight devices that can connect to it and we don’t do anything relative to limiting applications.

William T. Morrow

And again, I hate to keep harping on this but this is exactly the issue where we know that there’s a pent-up demand out there and this is why we get really excited because we have one of the only solutions, we think, that will not constrain the user from enjoying those services. So whether you look at what’s happening on the iPhone or you look at Skype applications or Hulu or Slingshot on this, you know, this is where we are going to come in and serve the demand well.

Walter Piecyk - Pali Capital

Great. Thank you very much.

Operator

Your next question comes from the line of Kevin Rowe of Rowe Equity Research. Please proceed.

Kevin Rowe - Rowe Equity Research

Thank you. Good afternoon. A couple of quick questions -- first for David, can you give us a progress report on any potential vendor financing? And is $21, $22 per covered POP still a good number, given your experience in Portland?

And the last question for Bill, can you update us on your thoughts on LTE and mobile WiMAX as complementary technologies and the potential for utilizing LTE in the future or at the very least selling dual mode LTE, mobile WiMAX modems or devices? Thank you.

David J. Sach

Okay. First, Kevin, on the funding side, yes, we are actively looking at all funding options, including vendor financing. To date, I don’t have anything specific to announce for you, so I’ll just let you know that we are looking at all of those options, including anything from strategic investors.

In terms of your $21 to $22 per covered POP, we’ve been saying $25 to $26 in public. I don’t know where you may have gotten that. What we’ve been looking at is $150,000 per tower and $6,000 per tower, so that would get you down into the $25, $26 range.

Kevin Rowe - Rowe Equity Research

Yeah, I think the $21, $22 was in your last call. I think you mentioned per covered POP as a pure CapEx, and then another three --

David J. Sach

For the core, correct. So -- exactly.

Kevin Rowe - Rowe Equity Research

That’s unchanged?

David J. Sach

Pardon?

Kevin Rowe - Rowe Equity Research

Those numbers are unchanged?

David J. Sach

Yes.

William T. Morrow

And Kevin, on the LTE versus WiMAX, I am glad you asked a question on this because I think there’s a lot of mis-understanding that perhaps may be out there relative to these two technologies and relative to Clearwire's approach. First of all, again, as you guys have heard many times, the technologies are very similar in nature. There’s not really one that has an advantage in terms of performance than the other. The benefits that actually see right now with WiMAX is that it’s here and available, commercially available right now. So there’s a first-to-market advantage that we are experiencing from that and I think it’s evidenced even in some of the results that we’ve taken you through with Portland.

The advantage, of course, could shift if that scale factors moves [inaudible] to LTE, but I am not so sure that the timing is right the way everybody is talking about this out there. And I understand people like Verizon are saying that they have certain cities that are going to launch next year but if you look at the aggregate across the world and more specifically, and not whether they have chosen LTE or WiMAX, but when they are going to deploy LTE, because that’s when the true demand will be there. And so if you think about it, let’s just take a time frame of three years before LTE gets to a point of any kind of critical mass. We have three years in the WiMAX community, not just Clearwire, to be able to show what this technology is capable of, to build an ecosystem out there that will in my view no doubt have a life of its own and be able to sustain itself in a co-existent way with LTE.

So we are comfortable that we are going to reap the benefits of this time to market with WiMAX and again, if you look at Clear Spot and those sorts of technologies, it’s just going to further the life cycle of this.

If it ever comes to, and I think this was stated in the past, I mean, much into the future, if economies of scale ever get to the point to where it’s advantageous for Clearwire to be also propagating LTE and offering LTE type technology to its end users, then of course we can do that.

As Dr. Saw has kind of said I think in the past to many of you, there is an architecture that is IP, that is independent as to whether it is LTE or WiMAX, and we have the ability to add that. Obviously there would be some cost in it. We don’t think at this point there would be any sort of write-off of the WiMAX because again, it’s going to have a life of its own and be able to sustain itself.

Kevin Rowe - Rowe Equity Research

That’s helpful. Thanks.

Operator

That concludes the question-and-answer session. I will now turn it back to Mary Ekman for closing remarks.

Mary Ekman

Thanks, Michelle, and we appreciate everyone participating this afternoon on the call and listening in on the webcast. Please join us again in August for a discussion of Clearwire's second quarter 2009 financial results. That concludes our call.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Clearwire Q1 2009 Earnings Call Transcript
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