Clearwire Q2 2009 Earnings Call Transcript

| About: Sprint Corporation (S)

Clearwire Corporation (CLWR) Q2 2009 Earnings Call August 11, 2009 4:30 PM ET


Mary Ekman - Vice President, Investor Relations

William T. Morrow - Chief Executive Officer

David J. Sach - Chief Financial Officer, Principal Accounting Officer

G. Michael Sievert - Chief Commercial Officer

Hope F. Cochran - Senior Vice President - Finance and Treasurer

Dr. John Saw - Vice President, Chief Technology Officer


Rick Prentiss - Raymond James

Simon Flannery - Morgan Stanley

Phil Cusick - Macquarrie

Michael Rollins - Citigroup

Kevin Rowe - Rowe Equity Research


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

Mary Ekman

Thank you, Latrice. Good afternoon, ladies and gentlemen. I’m Mary Ekman, Vice President of Investor Relations with Clearwire and I’d like to welcome you to our second quarter 2009 financial results conference call. With me today are Bill Morrow, Chief Executive Officer; David Satch, Chief Financial Officer; John Saw, Chief Technology Officer; Mike Sievert, Chief Commercial Officer; and Hope Cochrane, Senior Vice President, Finance and Treasurer.

During today’s call, Bill will review Clearwire's key results and accomplishments and will discuss our network expansion plans. David will highlight Q2 operating metrics and financial results and recap 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 have all had an opportunity to read the earnings release we issued earlier this afternoon which provides detailed information on Clearwire Corporation’s 2009 second quarter financial 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 Forward-looking statements include, among other things, our future financial and operating performance and financial condition, including projections and targets for 2009 and subsequent periods, subscriber growth, network development and market launch plans, strategic plans and objectives and the company’s goals regarding 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. We do appreciate you taking the time with us today. Bottom line is we are pleased with our recent performance and as you will hear, it provides further evidence to three important beliefs -- first, there is a demand for a superior mobile data service beyond what is available today. Second, the technology that we are using is mature and delivering as promised and third, our team is able to execute in a manner consistent with our business plan.

For a while now, we have stressed many of the advantages that the company has but have emphasized three in particular -- our spectrum depth, giving us the best position on capacity; our low-cost all IP network, giving us the best position on speed and latency; and our strategic investors, giving us unprecedented access to over 100 million customers, the Internet expertise, and leading chip design. Our goal from the beginning has been to leverage all of these great assets to move our vision to reality and in the past quarter, we’ve made notable progress on multiple fronts.

First, as I hope you are already aware, we have launched two additional markets, expanding the nation’s first 4G service to 8 million POPs. By year-end, our service area is expected to cover more than 40 million people, of which 30 million will be served by 4G.

Second, key wholesale partners are now actively reselling our 4G mobile Internet service -- Sprint, Comcast, and Time Warner have all recently announced details about their plans to retail service this year.

Third, we completed our key network vendor selections, bringing together the best in class to deliver the quality of performance that differentiates our service. We have recent independent third-party comparative analysis showing our network is now dramatically faster, clearly outperforming anything else on the mobile marketplace today, thanks in part to our suppliers.

Finally, we ended the quarter with a strong cash and investment balance of $2.5 billion. We are increasingly encouraged about the prospects for securing the necessary additional funding on terms that we find acceptable to cover up to 120 million by the end of 2010.

I will touch on each of these topics in greater detail but before doing so, I would like to tell you about a few of the key performance indicators for the second quarter of 2009 and the growing momentum that has been apparent midway through the current quarter. When we compare Q209 to the pro forma results for Q208, our employees delivered a 40% increase in covered POPs, a 9% increase in consolidated revenue, an 11% increase in our subscriber base, and launched new markets with a lower-than-expected increase in CPGA to $524. The team achieved this while holding our ARPU stable at $39.47 and we ended the quarter with a strong cash and investment balance that I just mentioned.

Our management team is relentlessly focused on execution and now more than ever our company appears to be in the right place at the right time. Internet usage growth trends continue to be staggering and are largely fueled by trends in video, social network, music, and a range of high bandwidth applications. In addition to the applications driving demand, we are also seeing consumer electronics continue to evolve with greater connectivity to the Internet.

In order to reap the full benefits of these lifestyle trends, people want to connect to the Internet while they are on the go with a similar experience to the broadband connection at home. We strongly believe that given the current constraints of speed, capacity and latency from today’s wireless networks, most consumers will choose 4G.

We all saw the same thing occur on the fixed Internet with the transition from dial-up to broadband. It’s happening again in the mobile Internet space. People are expecting and demanding more and Clearwire, along with our wholesale partners, will be there to provide the at-home broadband experience with the mobility consumers need.

And to that end, let’s touch on our market growth. As you know, we now offer 4G services in Baltimore, Portland, Atlanta and Las Vegas. As I mentioned, we announced plans for our 4G network to cover over 30 million people in more than 25 markets by the end of this year. That’s a five-fold increase in mobile WiMAX network coverage in just the second half of this year alone. This will bring Clearwire's total network coverage in both legacy and 4G markets to over 40 million people.

As you may know, we tend to group our 4G market expansion into two categories -- conversion markets, where we operate pre-WiMAX services, and the new markets. Last week we announced that we will complete our first 10 conversion markets on September 1st. These include Boise, Idaho, [Bellingham], Washington, and eight Texas communities. In the fourth quarter, we plan to convert Charlotte, Seattle, Honolulu, and Maui.

In addition to the conversions, we are on track to launch our new markets this year, including Chicago, Dallas Fort Worth, and Philadelphia. And as I hope you’ve read, we have announced plans to add San Antonio and Austin, Texas, [Milledgeville], Georgia, Raleigh and Greensborough, North Carolina, and Salem, Oregon. All of these new markets are progressing towards a fourth quarter launch. We continue to target, covering up to 120 million people in 80 markets by the end of 2010.

Some of the markets slated for 2010 include New York, Boston, Washington, D.C., Houston, and the San Francisco Bay area, among many others.

During the second quarter, we increased our development pipeline to over 20,000 cell sites and as we have said before, the 120 million POP coverage plan does require additional funding and we can adjust the timing or scope of our expansion plans should it be necessary.

A few of you have asked for more individual market KPI details but until we have a few more markets and a bit more history with our 4G markets, it’s premature to report the specific subscriber numbers and operational metrics. But until we are at that point, I’d like to offer some generalities on how we are performing so far.

We saw strong revenue and subscriber growth in our 4G markets during the second quarter, even with the ongoing challenges in the economy. In Portland, we are tracking well against our monthly POPs penetration goals. In Atlanta, our first four weeks of gross adds are on plan and with the improvements we’ve made from our experience in Portland, our CPGA is coming in at lower levels and with an improved product bundle. And as I’ve mentioned a couple of times before, on each market we launch, we conduct improvement reviews so each successive market launch will benefit from the prior experience.

As we head into the third quarter with Las Vegas now launched. We have already seen the average daily 4G subscriber uptake in July outpace what we achieved in June by over 75%.

We are at an interesting transition point relative to our customer numbers. We are very pleased with our strong 4G adds and we also know that these numbers will continue to e somewhat offset by our planned attrition on our pre-WiMAX networks. This is exactly what we expected to occur and continue to expect until we have a larger 4G footprint which comes later this year.

So in all, how does this net out going forward? As I outlined earlier, we will be focused on our first wave of conversion markets in Q3 with our next set of larger new and conversion markets launching during Q4. Given our planned launch scheduled and assuming similar initial consumer responses in newly built markets, we anticipate fourth quarter net subscriber additions will be substantially higher than all other 2009 quarters combined.

We are also getting smarter about our target customers and refining our marketing efforts to align with the opportunities ahead of us. We just completed our own broader consumer survey with the Yankee Group in July. We are still getting the results but some interesting initial findings show that approximately 60% of the respondents are interested in true mobile broadband despite the broader challenges facing the economy. And in that same survey, there was heightened demand for speed beyond today’s 3G market offerings, especially for speeds above the 3 megabit per second.

Our brand continues to grow. Another recent survey of consumers reported the Clear brand is strongly associated with next generation Internet, a fresh approach, and Internet on the go.

We also continue to leverage robust retail distribution channels in all our new markets which include a handful of our own Clear stores, direct sales, target, web, and telesales marketing and a network of independent indirect dealers, as well as large national big box retailers.

As you know, our wholesale partners comprise probably the largest channel for us to provide user access to our service. During the second quarter, we initialized our back office platform, enabling third-party device provisioning, customer care, and billing. As you may have seen, Comcast began selling their Comcast high-speed to go branded service on our network in Portland at the end of June, followed by their launch in Atlanta at the end of July and they have also announced plans to offer service in Chicago, Philadelphia, and more before the end of the year.

On July 21st, Sprint announced that it plans to launch its Sprint 4G service in Las Vegas, Atlanta, and Portland this month. Sprint has also announced that its plans to deploy Sprint 4G in additional markets later this year, including Charlotte, Chicago, Dallas Forth Worth, Honolulu, Philadelphia, and Seattle.

Finally, on July 29th, Time Warner said it plans to launch a high-speed wireless broadband service this fall using our 4G network, starting with four cities, including Charlotte, North Carolina, and Dallas, Texas.

As we further expand the Clear 4G network, we expect to work with Sprint and our cable partners to more closely align our launch efforts. We believe this will better build the 4G category overall in our collective markets and will create an even stronger consumer awareness at the differentiated capabilities that our mobile 4G network delivers.

We have received many questions about our network and device ecosystem, so I would like to touch on a bit of the progress that we have in this area. As you may have seen earlier this morning, we announced the completion of our key 4G network infrastructure supplier selections. Most notably we added Huawei to our list of existing WiMAX radio equipment vendors, which already includes Motorola and Samsung. We also named and reaffirmed other key suppliers, including Cisco for the core Internet protocol infrastructure, Ciena for base station switching, and DragonWave for the network’s microwave back haul.

Together, we are building an all IP network that is efficient, low cost, upgradeable and scaleable using standards based technology. And in fact with all of this, we are experiencing excellent network performance. This is enabled by our depth of spectrum and our network architecture.

Our customers are enjoying the mobile Internet with far superior throughput speeds averaging three to six megabits per second with downloading bursts up to 10 megabit per second and upload speeds of up to a full megabit per second as well. And this of course depends on the service plan but this is what the technology is able to deliver. This means that Clear is at least four times faster on average than 3G. This, coupled with our spectrum and an all IP architecture, removes the constraints that are frustrating customers today.

Our 4G device ecosystem is also progressing. We are already pursuing early cost reductions and increasing performance in our residential and mobile modems. For the second half of 2009, we are expecting manufacturer pricing that is up to 40% less than a year ago. This demonstrates the increasing scale of the WiMAX ecosystem. In each of our newly launched 4G markets, we also offer our Clearspot accessory, which allows customers to create their own personal mobile hotspot, opening up the Clear network to the tremendous range of standard off-the-shelf WiFi enabled mobile devices.

On August 1st, we began offering a dual mode 4G WiMAX and 3G EVDO modem for customers who frequently travel outside of the clear coverage area. These customers will enjoy super fast mobile Internet service from our 4G network and will also have access to the Sprint national 3G network, creating a truly national footprint for the highly mobile customer.

In addition, by pairing the new Clear 4G plus modem with our Clearspot accessory, our customers can now create a dual mode mobile hotspot providing even greater convenience.

As our network expands, we are seeing the embedded device ecosystem make strides. In the second quarter, two more PC OEMs, Dell and Samsung, launched WiMAX configurations in their offerings. Dell introduced WiMAX options in its Latitude, Studio, Studio XPS, Precision and Vostra lines. With the MC10, Samsung launched the first netbook that supports our network. Intel’s Computex announcement of Evan’s Peak, which integrates WiMAX, WiFi, Bluetooth, and GPS on a shared 65-nanometer chipset will be important for the enablement of mobile Internet devices.

This month, Samsung launched Amandi, a mobile WiMAX enabled handheld device that combines the abilities of a PC with the size and portability of a mobile phone. This device newly expands our Clear gear lineup into the mid category and we are introducing the new Clear connection manager software for Mac, allowing owners of Apple Macintosh laptops to connect to the Clear network using our Clear USB 4G WiMAX only modems.

Mac compatibility for our dual mode modems is also expected to be rolled out in the fourth quarter of this year. As I said earlier, we are in the right place at the right time. There is both an insatiable appetite for broadband Internet and a growing demand for Internet access wherever our customers happen to be and Clearwire is at the intersection of both of these mega trends which we believe creates a compelling opportunity to build long-term value for our shareholders.

In short, we are pleased with our second quarter operational results and our year-to-date progress with launching the nation’s first 4G service. We have shared details of our second half 4G network rollout plan to cover over 30 million people in more than 25 markets by the end of this year.

Our wholesalers are now or will soon be actively reselling services on the 4G network to their customers. Our key vendors have been named, our balance sheet is strong, and we remain optimistic about the growth within our space and the market position of our company.

Our execution during the first half of 2009 has demonstrated we can deliver large scale markets, enable super fast throughput with low latency, maintain mobility and offer a depth of capacity and bandwidth that has yet to be seen by any existing wireless solution.

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

David J. Sach

Thank you, Bill. We are pleased with the progress that we are making on our primary objective of building out the network. The timely launches of Atlanta in mid-June and Las Vegas in July are examples of our progress in this area. As the build gains momentum, we are spending more time and resources on the other critical functions that will enable the rest of the business to scale in line with the network build-outs.

In Q2, we targeted our marketing efforts on certain key customer segments to improve the efficiency of our spend in this area. We initialized the wholesale support platforms. We substantially completed the high level design of our new AMDOCs billing system and we significantly ramped up our recruiting function.

These are just a few of the key projects that will enable us to scale the business for rapid growth whilst keeping operating costs under control. Looking at the Q2 results, the key operating metrics were fully as expected. Clearwire's subscriber base increased to approximately 511,000 at the end of June, which is up from approximately 461,000 for the same period last year with the addition of three new WiMAX markets, as well as subscriber increases in existing markets year over year. For the second quarter, we saw approximately 12,000 consolidated net adds.

As Bill mentioned earlier, we are in a transition period from a customer acquisition and churn perspective. 4G sales are strong and as you would expect, they are being somewhat offset by higher churn rates in our domestic pre-WiMAX markets. Notwithstanding, Q2 pre-WiMAX gross subscriber acquisitions surpassed our expectations, even as we endeavored to minimize customer disruption by limiting sales and advertising during the months leading up to the planned WiMAX market conversions.

As we look at how the third quarter is starting off, over 60% of our daily gross subscriber additions are currently coming from just our three Clear markets of Portland, Atlanta, and Las Vegas. We expect strong net additions to our subscriber base throughout the second half, particularly in Q4 as we rapidly expand our 4G network footprint.

Nonetheless throughout this year, our overall business results remain weighted towards the impact of 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 Q2 2009 results relative to pro forma Q2 2008 quarterly trends, since we believe these represent the most meaningful comparative information.

Consolidated average revenue per user, or ARPU, for the second quarter 2009 was $39.47, a modest increase of $0.19 from the prior year second quarter and similar to the $39.52 in the first quarter.

ARPU was sustained at this level as downward pressure from promotional pricing was offset by increased bundled sales of new services, such as VOIP and the PC card in our markets, as well as by the contribution from sales of higher priced mobile service plans in Clear markets.

Consolidated churn in Q2 was 2.8% compared to 2.6% in Q2 2008 and sequentially up from 2.6% last quarter. The higher churn was driven by our U.S. pre-WiMAX markets as a result of two primary factors.

First, the same seasonal up-swing in voluntary churn that has occurred in previous years which is driven in part by the typical pattern of customers moving at the end and start of the school year. And second, our decision to dedicate fewer financial resources to the existing markets in anticipation of the mobile WiMAX upgrades, which are now underway.

Second quarter consolidated CPGA increased to $524, up from $449 in the same period last year, primarily due to sales and marketing expenses in Portland and Atlanta. It is customary for early stage growing businesses in this industry to experience increasing levels of CPGA as sales and marketing costs are incurred ahead of the related subscriber additions.

Turning now to the P&L results, you can see that the consolidated company grew its revenues by 9% in the second quarter of 2009 compared to 2008. The increase in revenues was primarily driven by the higher subscriber base and sustained ARPU.

Cost of services and network costs grew 20% in the second quarter due to increases in the number of tower leases and related low cost back haul for new sites and for future market launches. We were incurring lease payments on approximately 12,000 cell sites at the end of June 2009.

Second quarter selling, general and administrative expense declined by 7% compared to the same period last year as a result of G&A related cost synergies from combining the old Clearwire with the Sprint WiMAX business. These synergies were partially offset by higher sales and marketing expenses related to the launch of the [inaudible] in mid-June.

As we mentioned on our first quarter earnings call, we have plans to significantly increase our workforce during 2009 in order to scale our organization for the rapid network and market expansion we have planned.

At the end of Q2, our total headcount was approximately 2,200 employees and at a time when many companies are scaling back operations, we anticipate increasing our employee base to approximately 3,000 by the end of this year.

Depreciation and amortization increased 65% in the second quarter of 2009 to $46.3 million compared to $28.1 million in the same period in 2008. This increase was driven by the $575 million of capital expenditures incurred during the past year.

On a sequential basis, depreciation and amortization in Q2 was less than the $48.5 million recorded for Q1 due to approximately $3 million of one-off accelerated depreciation recorded in Q1.

Adjusted OIBDA, or operating loss adjusted for non-cash expenses was $147 million in the second quarter compared to a pro forma OIBDA loss of $142 million for the same period last year. The higher adjusted OIBDA loss quarter over quarter was primarily a result of the higher cost of goods and services and network costs relating to our network expansion.

Capital expenditures for the second quarter were $251 million, compared to a pro forma total of $214 million in the same period last year and compared to $112 million in Q1 2009. Given our operational focus on network expansion, more than 80% of our Q2 CapEx was in support of new and planned market launches.

We are pleased that our CapEx per covered POP for the first half of 2009 has been trending slightly better than our target of $25 to $26. As we discussed last quarter, we are seeing and expect to continue 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 second quarter was $374 million, bringing year-to-date net cash spend to $646 million against our full-year 2009 target range of $1.5 billion to $1.9 billion. We ended June with approximately $2.5 billion of cash and short-term investments on our balance sheet. 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 business outlook remains the same. Clearwire's focus in 2009 and 2010 is on development and expansion of its wireless 4G network. We expect ARPU to be sustained at current levels during this period but as we have said before, 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 actively engaged in the development and construction of 4G networks, including the long lead time, low cost site acquisition zoning and permitting work necessary to enable us to over as many as 120 million people by the end of 2010.

As we have said, since setting this target in March, 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.

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

William T. Morrow

Thanks, David. Why don’t we just get right into your questions?

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Rick Prentiss with Raymond James.

Rick Prentiss - Raymond James

Two quick questions for you -- first on the financing side, can you talk about potential availability of vendor financing or development bank funding that might be available out there? And then on the ARPU side with the Comcast giving a lot more kind of firm details, I think their plan in Atlanta is like $50 promotional for a year for WiMAX plus home, and then it goes up to $70 after that. Does your wholesale ARPU from them change from the introductory period to the second-year period? In other words, are you kind of helping to support that? And what might be the effect on your ARPU given their promotional pricing?

David J. Sach

I’ll start with the financing, Rick -- we’re not giving any specifics on our financing discussions but I can tell you that we are looking at all options, including vendor financing and we are hoping that’s a piece of meeting our overall funding needs.

G. Michael Sievert

Just on your question about ARPU, the way it works with the wholesale partners is that the wholesale price is set as a discount to the Clear branded retail prices and there’s quite a bit of a complicated formula but that’s basically the principal about how it works and so to your question, it’s really not a function of what the retail pricing is of the partner. It’s a function of the retail pricing of the Clear branded service and the wholesale prices to the partner are selling at a discount to that.


Our next question comes from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Thank you very much. Good afternoon. David, you talked a little bit about the synergies on the cost side from the merger of Clearwire and the Sprint WiMAX operations. Perhaps you can just tell us -- is that sort of done now or is there some more to come out there in the second half? Obviously the heads are going up but are there some other things where you can get some savings from where we are today?

And then I wanted to understand a little bit about your -- if you want to call it [cost string] strategy. You are doing a lot in the Northwest, you are doing a lot in the Texas area. You’ll have a lot of Northeast markets turned on. How are you thinking about this? Is this something where you want to have a lot of big cities near each other turned up or are you actually going to be in a position where you can start connecting the corridors, so you are basically going to have a seamless footprint between all of those cities as we go out and launch in a lot of these markets? Thanks.

David J. Sach

Okay, I’ll start with the synergies -- I think we’ve had good success with synergies that you can see in our numbers. I think we’ll have continued success in that area but it’s going to be much more difficult for you to see going forward as we ramp up the rest of the business because of the network expansion. So yes, there’s a little bit more progress to be had there, Simon, but it’s going to be a lot more difficult for you to see that impact because of the offset of the build-out of the network expansion.

William T. Morrow

And Simon, this is Bill -- on the second part, as far as kind of the rollout approach that we have, you know, we look at the targeted segment that we are after, what’s their pattern of mobility that they have and we try to capture 90% of that. We can usually get a good portion of that within the city and that kind of in part determines the size of the coverage that we have within the city itself. We look at the density factors and the volume of users. As far as connecting corridors, that’s naturally a part of our plan, as well as kind of some remote hopping spots, I’ll call it, to where they may fly into a certain area at an airport, as an example, to be able to cover that while they are in transition to another city or another location.

This obviously evolves over time as we are studying the market data, talking to our customers about what is important to them but that’s the basic premise of where we start at right now.

Simon Flannery - Morgan Stanley

Great. Thank you.


Our next question comes from Phil Cusick with Macquarrie.

Phil Cusick - Macquarrie

Just a couple of clarifications -- first in terms of wholesale, how do you plan to present that going forward? Are you going to give us some sort of detailed breakout in terms of wholesale subscribers and revenue or is that going to be buried in the overall sub and revenue numbers?

And second of all on ARPU, sort of a follow-up there, do you -- the 36, or excuse me, the current level of ARPU that you plan to maintain, I assume that doesn’t include any wholesale dilution but I just want to confirm that. Thanks.

David J. Sach

Phil, taking the last part first, yes, that’s correct -- it’s retail only. That’s the focus. As far as how we are going to report wholesale going forward into the future, as we are collecting the data, clearly this is just launched for us so as we get more and more data on it, we will think about what is the most meaningful way to present to you to help you with your models and still yet kind of preserve our strategic critical components within the business.

So the short answer is we are going to provide something, we don’t know exactly what it is until we get more data under our belt.

Phil Cusick - Macquarrie

Okay, and just to follow-up on another question in terms of the wholesale pricing, can you help us think about how should we be modeling that? We can see Comcast out there with fairly aggressive at least introductory pricing which I think Rick was alluding to, but how should we be thinking of the revenues that generates for you? And are you targeting a dollar margin number that is coming in or a dollar percentage -- or excuse me, a percentage margin that is coming in from that revenue? How should we be modeling that going forward?

Hope F. Cochran

In regard to thinking about the wholesale revenue and margin, one of the things you want to remember is that the price that we are charging to our partners is not affected by the pricing that they charge to their customers, so as Mike indicated earlier, it really is a retail minded strategy and that will remain consistent, so you can model it from that perspective.

And I think the most important aspect to the retail pricing is that our intent is that the margin is neutral between the retail business and the wholesale business, so bottom line is we are agnostic to which channel it goes into because our margin remains neutral.

Phil Cusick - Macquarrie

Okay, so on the EBITDA percentage margin, approximately neutral long-term for retail versus wholesale, is that right?

Hope F. Cochran

You got it.

Phil Cusick - Macquarrie

Great, thanks.


Our next question comes from Michael Rollins with Citigroup.

Michael Rollins - Citigroup

Good afternoon. I was wondering if you could talk a little bit more about the usage experience for your customers. So as customers are migrating and using the new WiMAX from the transitional technology, are you seeing a change in the usage patterns and roughly how much does a customer use per month of the service? Thanks.

G. Michael Sievert

I’ll make a comment and then maybe somebody else will jump in to amplify. A couple of things -- one is the customers when they switch to WiMAX are experiencing a big uptake in usage and that was really nice for us to see. It’s I think a great validation of the quality of the WiMAX experience. Typical speeds for a typical customer range from 3 to 6 megabits but much faster in certain bursts. And by the way, that’s a typical customer experience which I know if you follow the industry, you know it’s very different from an advertised or a theoretical maximum that some of our competitors talk about instead. So a typical customer experience of 3 to 6 megabit down and about 1 megabit up.

What we are seeing when they shift from, for example, in our conversion markets where we’ve got some early experiences is that their usage, the total number of megabytes or gigabytes that they use in a month goes up pretty significantly right away. It starts to look more like a wireline type of customer than a 3G wireless type of customer and that makes a lot of sense because the usage experience, the speed, the latencies, the kinds of applications you can do are a lot more like a true broadband wireline service and so it’s a great validation of the WiMAX experience.

Dr. John Saw

Just to add to Mike’s point, we are seeing about two times the tonnage when a customer transitions from the old Expedience network to the WiMAX network. I think the lesson here is that the more capable the network we can provide our customer, we know they will use the bandwidth.

G. Michael Sievert

And that is exciting for us, Michael and for everybody else too. The phenomena that John just mentioned about higher speeds means more consumption is a validation over the trends that we are seeing on the broadband fixed line side and of course the limitations that exist on the incumbent networks today. By giving them more speeds, we know there is going to be more usage and it is going to further validate the approach that we are taking.

Michael Rollins - Citigroup

And if I could just follow-up for one more moment, while we are talking about the network, you talked about that you are running a little bit better than the budgeted CapEx per covered POP goals that you have. You added Huawei I think today, the announcement came out. Is that something that can more meaningfully reduce the CapEx per covered POP as you look at your build-out plans over the next 12 to 24 months?

David J. Sach

It’s early days yet. Obviously we’ve been working with our vendors to keep equipment pricing down and you saw that we are seeing prices from some of our suppliers either come down by 40% in some aspects of our business, so that’s an indication of falling equipment prices and we hope that that will continue but again, we are still in early days in terms of our network expansion. I’m hopeful -- cost control is obviously a key strategic objective of ours so we continue to be hopeful that we can keep that CapEx per POP number where it is trending currently.

G. Michael Sievert

Just to kind of add to that a little bit, what’s great about what John Saw and his team are doing is not only when we look at the supply chain management of bringing in more vendors to keep the cost down -- we are looking at different ways to engineer on the sites themselves using some technology that net lowers the cost, and this is from a pure engineering point of view. And in addition, the third component we are seeing, technological advances that are also making it more efficient, MIMO technology, those sorts of things are actually reducing the CapEx overall and that’s partly why we are seeing some of the better numbers today and we fully expect that it will continue forward into the future and we baked some of that in.

Michael Rollins - Citigroup

Thank you.


(Operator Instructions) And our next question comes from the line of Kevin Rowe with Rowe Equity Research. Please proceed.

Kevin Rowe - Rowe Equity Research

Thank you. Bill, can you talk a bit more about your experience in Portland? I think in the past you mentioned how early adopter techies were a lot of the original gross adds. What does the profile look like today? Is it a more mainstream customer as you penetrate deeper into that market?

William T. Morrow

We are seeing a variety of things, Kevin, but let me -- Mike’s been studying this data recently and let me have him give a little bit more detail on that.

G. Michael Sievert

Kevin, what you are suggesting with your question is exactly what is happening. As we launch a market, the first thing that happens is we attract the early adopters, the techies, the people that just love it because it’s new but then we quickly start to transition into the mass market. And we are definitely experiencing that now in Portland.

One of the things that’s interesting is that an early market for us, one of the segments, certainly not the only segment but one of the segments that is making their way to use are younger wireless centric people. You are probably aware that about 20% of U.S. households today on the telephone side are wireless only, meaning they have no wireline phone, they are wireless centric. And this just speaks to a mindset of people say under 35 who want to have their subscriptions related to them, not related to some building. And they found their way very quickly in the first year to Clearwire. They want their wireless that way too, their broadband that way. It’s simpler for them. They maybe are more transient at this stage in life and so we are tapping into that market and then very quickly moving into smaller businesses, people who have -- who work throughout the city and what we call female heads of households, or politicians call soccer moms. People that have a computer at home, have a laptop and want to move about and have connections wherever they go.

So it’s definitely transitioning a few months in into a multi-segment mass market.

William T. Morrow

I would just add to that -- remember, this is with the current devices that we have today and the current coverage situation. This is going to evolve over time and we are going to have a whole lot more that we are going to be able to access and we think a bit more data to help us refine our marketing plans going forward.

Kevin Rowe - Rowe Equity Research

Great and Bill, can you comment on your plans for international? Is this a strategic asset still?

William T. Morrow

You know, everything we own is naturally of value to us but our focus is the U.S. domestic right now.

Kevin Rowe - Rowe Equity Research

Okay, and lastly for David, you mentioned in your prepared remarks that the fourth quarter net adds, correct me if I’m wrong, would be substantially above the first three quarters combined -- how should we think about the third quarter? Is it going to look similar to the first couple of quarters but a better ramp because of the new markets launched and -- but material offset churn from the legacy markets? I’m trying to get a sense of what kind of ramp we should expect from now through the third quarter.

David J. Sach

Yeah, you are going to see a ramp, Kevin. We didn’t give specific guidance on the Q3 numbers but yeah, you can expect that we are at that elbow at the moment, we’ve turned a corner and Q3 is going to certainly accelerate versus Q2, so you can expect some acceleration.

G. Michael Sievert

I’ll just add a little color -- David mentioned in his remarks that the WiMAX markets are now the majority of our gross adds and you can kind of do the math that in the second quarter, we had for the majority of that quarter we had one market, we had some presales in our two additional markets, and this quarter we are in production in sales with three markets through most of the quarter. And remember we have offsetting churn primarily from our pre-WiMAX markets but just as a sense for the magnitude of our progress into the third quarter.

Kevin Rowe - Rowe Equity Research

That’s helpful. Will you report a 4G Clear sub number next quarter?

William T. Morrow

Not likely next quarter but more likely sometime next year.

Kevin Rowe - Rowe Equity Research

Very good. Thank you.


There are no further questions in queue at this time. I would like to turn the call back over to Ms. Mary Ekman for closing remarks.

Mary Ekman

Thank you. We appreciate everyone participating this afternoon on the call and listening to the webcast. Please join us again in early November for a discussion of Clearwire's third quarter 2009 financial results. That concludes our call.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and everyone have a great day.

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