Clearwire Q1 2010 Earnings Call Transcript

| About: Sprint Corporation (S)

Clearwire (CLWR) Q1 2010 Earnings Call May 5, 2010 4:30 PM ET

Executives

John Saw - Chief Technology Officer and Senior Vice President

G. Sievert - Chief Commercial Officer

Erik Prusch - Chief Financial Officer

William Morrow - Chief Executive Officer and Director

Paul Blalock - Senior Vice President, Investor Relations

Analysts

Sid Parakh - McAdams Wright Ragen, Inc.

Jonathan Atkin - RBC Capital Markets Corporation

John Hodulik - UBS Investment Bank

Michael McCormack - JP Morgan Chase & Co

Simon Flannery - Morgan Stanley

Phil Cusick - Macquarie Research

Michael Rollins - Citigroup Inc

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Clearwire Corporation Earnings Conference Call. My name is Janeta, and I will be your operator for today. [Operator Instructions] I will now like to turn the conference over to your host for today, Mr. Paul Blalock, Vice President of Investor Relations. Please proceed.

Paul Blalock

Thank you, Janeta. Good afternoon, ladies and gentlemen, and I'd like to welcome you to our first quarter 2010 Financial Results Conference Call. With me today are Bill Morrow, our Chief Executive Officer; Erik Prusch, our Chief Financial Officer, who will discuss Clearwire's first quarter results. 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 press release we issued a few moments ago, which provides detailed financial information on Clearwire's first quarter results.

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 condition, including projections and targets for 2010 and subsequent periods, subscriber growth, network development and market launch plans as well as 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.

I will now turn the call over to Bill Morrow.

William Morrow

Thank you, Paul. Good afternoon, everyone. I know you've heard us say many times that Clearwire is in the right place at the right time with the right assets, and this quarter proved it again. We all know that mobile Internet penetration is ramping far faster than it did in the wired world. In fact, some forecasts now suggest that the number of mobile Internet devices could reach 10x the number of fixed devices within just the next few years. The government also expects the demand to increase well above our current national capacity. And we applaud the SEC's recognition of the importance of wireless spectrum as the key integral asset needed to fuel the growth of this next phase of the Internet.

As you know, the plan calls for 300 megahertz of spectrum to be allocated by 2015 and over half of this resides in or is paired with bands north of two gigahertz. We see this as a reaffirmation of the value utility and ultimate scalability of Clearwire's 2.5 gigahertz spectrum holdings, which is as you know, averages around 150 megahertz of depth in the top 100 U.S. markets.

Analysts’ and government predictions are one thing, but the ultimate indicator of having the right product service and cost model are the historic results themselves. The results for our first quarter was substantially improved over the prior quarter, including a 20% improvement in 4G coverage expanding to 41 million POPs, and when combined with international and our pre-4G service, we now have over 51 million Covered Pops. This in turn has led to a 41% improvement in our ending subscriber base, moving up to 971,000 customers, which includes a tripling of those who come through our wholesale channel partners.

Specific to our retail base, we are reporting a substantial improvement in our retail ARPU, reaching over $41 for the first time. The net of the top line, therefore, is a 33% improvement in revenue ending with $107 million. We've also controlled our cost drivers with a 30% improvement in our retail CPGA coming down to $439 and a 17% improvement in retail churn, now down to 3%.

And finally, our EBITDA loss narrowed from the previous quarter by 15% to $252 million. In a mobile Internet world, capacity is king as evidenced by our customers where they continue to use approximately seven gigabytes of mobile data per month. This is three to 4x that of a typical 3G mobile data user. This type of customer demand is a transformative event for the wireless industry and validates the need for our unmatched spectrum portfolio, as well as our network of networks approach to 4G.

Clearwire's network has become the mobile data foundation for leading communications service providers such as Sprint, Comcast and Time Warner. I'll stop here for now and let Erik take you through additional details of our results.

Erik Prusch

Thank you, Bill. I'm pleased to report that Clearwire's first quarter results demonstrate solid financial performance across the board. Our subscriber growth was strong, and we remain on track to triple our subscriber base and expect to end the year with more than 2 million customers. The 971,000 subscribers that Bill mentioned was a 94% increase over last year. We added 283,000 net new subscribers, including 172,000 new retail subscribers and 111,000 wholesale subscribers. We now have approximately 157,000 wholesale subscribers from our strategic partners of Sprint, Comcast and Time Warner Cable. It should also be noted that the wholesale subscriber base includes subscribers currently being sold dual-mode 3G/4G products across the country and even in markets where we have not yet launched, which is a great new development for our business. We received modest revenue from our wholesale partners for each of these units, and therefore, we are monetizing our network asset in future 4G markets.

Of the 157,000 wholesale subscribers, over 1/3 do not live in a 4G market. I should also emphasize that having the market preceded with dual-mode devices helps our customer’s experience when they visit a 4G market, but it also helps load the network faster once each market comes online.

Moving to other operating performance metrics, retail CPGA improved from $624 in the fourth quarter 2009 to $439 in the first quarter of 2010, and was driven by fewer market launches and more efficient advertising for the CLEAR brand as well as much stronger subscriber growth.

As we move through the year, we expect to launch new markets, so you should expect an increase in average CPGA going forward, but consistent with the mid-$500 level we averaged in 2009. Retail churn improved from 3.6% in the fourth quarter of 2009 to 3% in the first quarter of 2010, which was driven by accelerating growth in gross additions and reduced impact of conversions, as well as a seasonal reduction in involuntary churn.

It is worth noting that during the first quarter, we completed the conversions of Seattle, Hawaii and Carolina markets from pre-4G to 4G, and therefore, the reported churn figure of 3% includes upward pressure from those conversions. We estimate that churn in the non-conversion markets was approximately 2.7%.

Retail ARPU also improved during the first quarter to $42.77 from fourth quarter's $39.86. Retail ARPU in the first quarter includes the positive impact of $1.22 and accounting adjustments related to the prior-period effect of a change in accounting methodology to account for incentive discounts over the lives of customer contracts. Without this adjustment, first quarter ARPU was $41.55, which represents great progress for our business. Going forward, we believe ARPU will average above $41 for 2010.

While most of our metrics have been sequential, it is interesting to note that total revenue for the first quarter 2010 was $107 million, which is up 72% year-over-year, as compared with the first quarter 2009 revenue of $62 million.

Total operating expenses were relatively flat with the fourth quarter and the operating loss improvement slightly from the fourth quarter. The first quarter EBITDA loss was $252 million, an improvement from 4Q 2009 EBITDA loss of $296 million. The net loss attributable to Clearwire was $94.1 million, down from the fourth quarter 2009 net loss attributable to the company of $98.7 million.

Capital expenditures were $690 million for the first quarter with net cash spending of $842 million. This was in line with our internal plans. We continue to expect to spend approximately $2.8 billion to $3.2 billion in total cash during the year. It's important to note that the capital expenditure portion of our total spending plan is significantly more first half loaded during the year, and we expect it to decline as we move into the second half of the year.

During the first quarter, we launched the markets we expected, and we reached our Covered Pop goals. We remain committed to reach up to 120 million Covered Pops by year end, and the initial cost to build remains consistent with the guidance we have given for 2010 for mid-$20 capital expenditure per Covered POP figures. On the financing front, we have the upcoming rights offering in late June, which we could raise approximately $300 million dollars, and we have completed two new vendor financing arrangements on favorable terms.

Before I turn it back to Bill, I'd like to answer a question we have received from investors regarding the progress we are seeing towards the path to profitability in our initial launch markets.

I am pleased to report that our oldest markets of Portland, Atlanta and Las Vegas have an average age of about 10 months through first quarter results. And on a combined basis, are on track to reach market EBITDA breakeven, excluding corporate overhead and spectrum costs, around 18 months after launch. So we have growing confidence in the business model we have created along with our ability to hit targeted breakeven periods. The penetration rates of these three markets combined is approximately 2.7%. EPGA is approximately $353 and gross margins of approximately 47% on a market-level basis.

In summary, these results demonstrate that Clearwire is delivering on our commitments and we remain confident in our ability to continue to offer customers unmatched wireless broadband service. We are laser-focused on delivering on our 2010 financial and operating plans.

And with that, I'd like to turn it back over to Bill.

William Morrow

Thanks, Erik. So it's clear from the numbers that significant progress has been made. And while we remain confident, I will remind everyone that the biggest challenge for this year continues to be our record build to cover up to 120 million POPs. Erik's last point on the path to profitability of our three initial 4G markets is instructive for everyone to understand that this is how we will expect to run our business. We are seeing progress on the 4G ecosystem and, in particular, with WiMAX devices.

Over the near term, we expect to launch new and improved CLEAR spot devices that connect up to eight Wi-Fi-enabled devices at anytime, including the new Apple iPad. And we’re often asked about handsets and I'm pleased to announce that we will have two new 4G WiMAX handsets by the end of this year. We're working with Samsung on an Android-based device optimized for heavy video communications that leverage the high capacity, low latency, high-speed characteristic of our network. In addition, we're working with HTC on a second 3G/4G/WiFi-enabled phone.

Throughout 2010, we will continue to focus on the mobile computing space, but the Smartphone introduction is based on our belief that Smartphones will further shift usage from voice to data. The insatiable appetite for data reaffirms that Clearwire as the right spectrum position and data-centric network architecture that will deliver the needed capacity and cost structure to serve the increasing consumer demand.

Relative to technology, we have stated many times that we are technology agnostic. Our strategy is to build a low-cost network that is ready and compatible with that which will deliver the best possible service and cost structure to our customers. We believe that technological progress in chipset design is enabling the virtual convergence of multiple modes and there are suppliers who have already announced their integrated product lines.

Also exciting for us is how, together with Intel, we are finalizing plans with Best Buy to drive a greater range and volume of WiMAX-embedded netbooks and notebooks. This is a great development and while we're not ready to discuss the specific details of our arrangements, it underscores the close collaboration that we enjoy with Intel. Now I also want to share with you that Intel and Clearwire have made a number of changes to our working agreement to enable these kinds of growth opportunities.

In addition to updating some business terms between us, we have mutually agreed to a clause which allows either side to terminate the agreement with 30 days notice without prejudice to provide us both with the flexibility to adapt our plans and business approach to evolving market needs.

Over the course of 2010, the company has and will be expanding our 4G mobile broadband network services in three main tranches. The first was over the past few weeks, which included Houston, Harrisburg, Reading, Lancaster and New York. The second tranche will be this summer and will include 19 additional cities and finally, the third tranche will be later in the year and will include New York, Los Angeles, Boston, Denver, Minneapolis, the San Francisco Bay Area, Miami, Cincinnati, Cleveland and Pittsburgh, among others.

So there is no doubt that we are being noticed. And as many of you may have read, Clearwire was selected by a Fast Company magazine as one of the top 10 most innovative mobile companies. The list includes the likes of Google, Apple, HTC and QUALCOMM. And as investors in the company, we hope that you share our pride in this recognition.

Lastly, I thought you might be interested to know that we continue to have talks with a number of different companies regarding wholesale opportunities. While we aren't ready to make any announcements today, it is fair to say, there is a great deal of interest in our company, and we fully expect to have additional wholesale partners as part of our overall execution plan in the near future.

In summary, we did have a record-breaking quarter. Thanks to the tremendous efforts of our team. I can tell you that the management team is focused. They’re working very well together. We see the opportunity. We're making the changes and the improvements to deliver quarters like we just reported on and even better as we go forward into the future. And with that, let's answer what questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Rick Prentiss with Raymond James.

Richard Prentiss, Jr.

First, on the vendor financing and general funding that Erik was talking about. You mentioned vendor financing on favorable terms. Is this funding for the 2010 build plan? Or is this should be thought of funding for 2011. Any more color you can give us on the vendor financing.

Erik Prusch

This is Erik. This is for our 2010 build. Obviously, we're excited to have vendors that are committed to Clearwire’s success and providing us good terms for financing. We mentioned that this is one of the vehicles for us in terms of our total debt capacity or total capacity to be able to fund our build plan. And we look at this as a good movement forward.

Richard Prentiss, Jr.

And then Sprint’s indicated they would like to see more funding come in for a 2011 and beyond to get more mobility. Any update as far as when would like to bring money on board this calendar year to be ready to launch maybe more markets in 2011?

Erik Prusch

Yes, Rick. So as we think about 2011, naturally, our company is prepared to continue the network growth should the opportunity present itself with additional funds. At this point, there has been some interest that has been expressed, nothing that we can report on today. I would say that we're comfortable kind of taking this out towards the end of the year and still being able to grow beyond the 120 million, but we're really -- it's too early to really be specific right now. We do have, as you know, the rights offering. And Erik, you want to talk a little bit about where we are with that?

Erik Prusch

Our rights offering is due to expire on June 21. We do believe that this could be a potential source of funds for us upwards of $300 million and we'll stay tuned in terms of how successful that is during the course of this quarter.

Richard Prentiss, Jr.

Harbinger, SkyTerra has been a lot in the news lately. It was on several of the tower company calls brought up. What are your thoughts as far as Harbinger, SkyTerra? Is that changing anything in your wholesale negotiations? Or who you might be bringing on board? Or just any thoughts you might have on that plan that Harbinger, SkyTerra has thrown out there.

William Morrow

Our view is that, first of all, we have to wait and see. We see a number of issues and concerns within the spectrum allocation. We know firsthand that it takes an awful lot to be able to build a network out. There's economic profitable [ph] issues that somebody else has to look at. Now having said all of that, we welcome competition because of the very fact that demand outpaces capacity right now and we think that's going to continue in the future. The idea that people are focused on this, one, reaffirms our value. Two, it also brings a greater ecosystem to it with more applications, more usage, more devices and more demand.

Operator

Your next question comes from the line of Mike McCormack with JPMorgan.

Michael McCormack - JP Morgan Chase & Co

Can you just give us a sense of -- pretty good ARPU quarter, just your thoughts on where pricing might go ultimately? And whether or not you think there's an opportunity at some point to move into tiered pricing?

G. Sievert

This is Mike Sievert. We're really pleased with the progress here. We've seen a steady increase in ARPU and we're really glad to have been able to bring through about $41 this quarter and talk about staying above $41. It's really due to a number of different things, and one of them is our progress at reducing discounts in our pricing. Those first six months at a steeply discounted price in order to acquire customers. We've been doing a lot less of that. We just don't need to do it as much. And secondly, we're doing a lot better job driving bundles, where people have a home and a mobile product' and that of course, drives ARPU up. So those are the two operational things that we are doing to drive results. I hesitate to speculate on future pricing. I will say that we've heard a lot of about carriers going to tiered-up prices and, of course, we have tiered-up prices today, as well. We have pricing that isn't unlimited. But by far the most popular offer that we offer is our unlimited. And it speaks to consumers’ sentiment, they just don't want to feel like they're on the clock. And what we're happy about is the spectrum position that we have that allows us to lead with unlimited offers as our most popular offers.

Operator

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

John Hodulik - UBS Investment Bank

First, you mentioned improvement in the EBITDA losses this quarter, but then again, you got some big market launches coming up later this year. I mean and at this point, would you say that we've seen an inflection in sort of the worst of the losses are behind us or you think that we'll sort of double dip as the big launches come out. And then, as it relates to the Intel deal, I guess my interpretation is that you've agreed that if the switch to LTE or the addition of LTE is a new opportunity or seen as a big opportunity by Clearwire management, you're free to pursue that. Could you maybe talk to that a bit and is that fact the case or there is something else that I'm not seeing in that. Were you working on that deal? And then maybe talk a little bit about the cost of adding layering on LTE or even switching over the base itself to LTE if it looks reasonable.

Erik Prusch

This is Erik Prusch. As far as kind of the plans around spending and losses and EPA, the first thing to understand is we have guided to between $2.8 billion and $3.2 billion total spending for the year. It is concentrated on the first half of the year. We do however expect to launch a lot of big markets towards the end of the year and as you know, the nature of this business is that we're going to experience high CPGA during that period of time so we do expect our losses to continue throughout this year and potentially build slightly from where we are at, based on the size of markets and the number of markets launching to 120 million POPs.

John Hodulik - UBS Investment Bank

But you've come a long way and in the fourth quarter, you lost almost $300 million in adjusted EBITDA, is that kind of magnitude from here?

Erik Prusch

That's correct. We've made tremendous progress. We are trying to manage this business very tightly and make certain that we're delivering on it, but in terms of providing any additional color or detail, we're not prepared at this time.

William Morrow

John, on the second issue relative to kind of Intel agreement that we have, as many of you know, there was an agreement before that was really a commercial deal between Intel and Clearwire that would restrict us from using anything other than WiMAX up to, I think, is February of 2012. That deal is no longer in effect. It's kind of this 30-day notice. It does give us the flexibility that if you want to do a commercial launch on LTE or some other technology, that Intel would not be holding us back. But I want to emphasize a couple of things. This is seen on a collaborative approach, we believe that technology needs to converge as we go forward, and in the future, there's so many similarities, probably an 80% over the lap of the TD or LTE and WiMAX; and so Intel, we believe, sees that too. And we all have to start thinking differently. In addition, you look at the evolution and the silicon-based technology front, people are integrating more and more of this. So we don't have the technology wars in the future that we've seen in the past. As far as your question on the cost of layering on the LTE, I'll say that our models; we're modeling a lot of this right now to see what's possible. We haven't made any decisions to go in either direction right now. It's all about flexibility and focusing on what is here today, which when you look at ecosystem; you look at the delivery; we are cruising down a very comfortable path the right now, and we're not going to lose the advantage that we have so we'll keep evolving as we go forward.

Operator

Your next question comes from the line of Michael Rollins with Citi Investment Research.

Michael Rollins - Citigroup Inc

Just a follow-up, how should we think about, in your mind, what it means to be very competitive from a national footprint? Where does that footprint for you, whether it's on WiMAX or LTE overtime, have to get to? And as you think about what that number is, can you help us think through the sensitivity of what might be required from a funding perspective to get there?

William Morrow

Again, just to re-emphasize the points that we've been making all along, we have a sustainable business model, if we only hit 120 million POPs in terms of coverage. And remember, I'll state a couple of things that I try to kind of pull out in my introductory side of it. Unlike where we were with the voice game or even kind of the slide packet game that was involved in mobile before, this is a capacity issue. It's less of a coverage issue than the way your voice networks work. If you don't have the depth of capacity, you're not going to be able to have a competitive product. So that's why we feel comfortable with our 120 million POP coverage to be able to get to the point of profitability and about the business plan like we are already seeing. Now as competition comes in and increases, and you meet that first fundamental issue with capacity, then of course, coverage does start to enter into it. And we see our coverage expansion without additional funding being able to occur organically and naturally with the numbers that we've given you in the past, of roughly 18 months to profitability and then eventually, we'll use those funds to be able to expand beyond the 120 million, again, with our own funds that we earn. Now this is why we believe, with other interested parties, saying, well boy, if we invested in Clearwire; we can see you accelerate and that growth out to a certain ideal number of Covered Pops, and that's why people are talking to us about that value creation and investment we would get from that.

Operator

Your next question comes from the line of Phil Cusick with Macquarie.

Phil Cusick - Macquarie Research

I wonder if you can start with just the momentum of the business. Can you talk about -- are we still going up into the right in terms of ads as you launch new markets or should we start thinking about seasonality, either in the wholesale or the retail businesses. And maybe we can start there.

G. Sievert

It's Mike Sievert. It was a great quarter and not just seasonally. It just really shows that the operations of the business are starting to perform and we are really delighted with it. Our overall penetration against POPs that we had built out were some of the best we've seen. POP is really working. With that said, it really gives us confidence to go and accomplish the ambitious things we communicated with your prior, which is to exceed 2 million total subscribers by the end of the year and more than triple from our December 31 total. So certainly in the year, it's too early for us to make any updates on that. We are entering into a period in Q2 that at least in the past for wireless carriers in general, has been a little seasonably soft. But make no mistake, Q1 was really strong and we are feeling confident on the year.

Phil Cusick - Macquarie Research

And then maybe second of all, what percentage of -- can you give us a rough number of customers carrying two devices and then if that correlated at all to churn and is that sort of a better churn customizing?

Erik Prusch

I can't unpack that for you in detail, sorry. It's turning out to be very popular though and it's one of the things that's driving our ARPU up and we were really happy to be able to not only report ARPU growth that was in excess of what we have predicted for you, but to also tell you that we expect it to remain higher than we've previously predicted. And that's on the strength partly of these bundles. The churn profiles for the bundled customers looks good but I can't unpack for you today, specifics of how they compare to the non-bundled customers.

Phil Cusick - Macquarie Research

You mentioned two handsets this year, Samsung and HTC, which I think is the same as Sprint is doing. Is that EVDO one of those that's going to launch next week? And will you be launching it about the same time frame or should we be thinking later in the year?

William Morrow

The Sprint announcement is different than our retail announcement. So this phones are unique to our retail brand, CLEAR.

Operator

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

Simon Flannery - Morgan Stanley

If you talk about some of the usage characteristics that you're seeing; I guess you said before some 7-gigabits a month for typical user, what's the characteristics of some of the new users coming on wholesale versus retail given -- I know some of them aren't on that right now but and how that plays into your backhaul plans. I think you talked a couple of months of in the press release about investing more in driving backhaul increasing capacity of the towers.

G. Sievert

It's Mike Sievert. I'll just out on this one and perhaps John will add to it. The usage we are seeing is as you probably would expect. Is the things that 4G is a lot better at. So we see a higher proportion of video streaming, of peer-to-peer protocols, those kinds of things that 4G is really best at. And I often get asked what's the killer app? What's the thing that users can do with your service that we can't do with 3G and it runs the gamut but certainly higher definition video, peer-to-peer communications, those kinds of things. Low latency driven gaming applications are far better on our network but the real answer is that everything works better. That's part of what has driven the usage up. And we all lived through in a few years ago on the wireline side when we first got through broadband, we just started using it more because it's a far more rewarding experience. You can see that in the numbers with our average mobile user on the CLEAR brand exceeding 7-gigabytes. That's more than the cap, the total you're allowed to use with some of the other carriers. And so it really shows the value of the service. And then you asked backhaul, I'll hand it to John.

John Saw

John Saw, here. We saw this coming and one of the things that Clearwire has done well is to put in on day one, a backhaul architecture that we know we'll scale and is also flexible enough for us to scale on a success basis. As the subscribers capacity demand grows, we can readily add capacity on our backhaul. As you know, it's mostly microwave-based on a ring configuration. It's extremely reliable and it also gives a lot of flexibility to add backhaul bandwidth as we need them. And the other thing that also is with the same architecture, we don't really have a lot of Op-Ex. So on a cost per map basis and the backhaul, it's extremely efficient.

Operator

Your next question comes from the line of Jonathan Atkin with RBC.

Jonathan Atkin - RBC Capital Markets Corporation

I wondered if you could tell us how much spectrum you're actually using -- actively using in your more mature markets? And also in your more mature markets, give us a sense of kind of sales velocity? Has it kind of reached peak monthly levels? Or is it still kind of a crescendo upwards.

John Saw

Jonathan, John Saw, here. We typically start every market with 30-megahertz of spectrum. That's our basic design start point. And then we would continue to add spectrum as capacity demands it and as we need to deliver performance to make sure that we have optimal performance against interference. So our basic number, we start with 30-megahertz in every market.

William Morrow

Just on the sales rates, Jonathan, we won't be able to give you too much more than what Erik shared with his remarks which is, one thing that you can look to is our first three CLEAR markets: Portland, Atlanta, and Las Vegas. Roughly 10-11 months in, we penetrated those markets across retail and wholesale to about 2.7% of the population. And that puts us on pace to take those markets as a group to their EBITDA positive at a market level by about the 18th month. And it really shows the business model as we envisioned it is supported by the facts as we're now about a year into it in some of our markets.

Jonathan Atkin - RBC Capital Markets Corporation

And then finally on the cash flow guidance, it sounds like that's unchanged, it's still a fairly wide range. I'm wondering are you -- do think you're going to come in towards the midpoint or on either side of that at this point in the year.

William Morrow

We're not updating it further. We do think is still within that range of $2.8 billion and $3.2 billion.

Jonathan Atkin - RBC Capital Markets Corporation

I may have missed the answer to the question about potential LGE-CapEx; if you can put anymore color around that, if you were to go that route [indiscernible].

William Morrow

We haven't given the actual number. What we have indicated in the past is that if you look at kind of the radio portion of the network build, it typically represents 10% to 15% of your total network build, so you can use that to kind of extrapolate some data for your models. But we really haven't given any other details and I can tell you that a lot of the discussions we're having with certain manufacturers, we're trying to better understand this and think about the ways if we were to go down that path to keep that cost to a minimum.

Jonathan Atkin - RBC Capital Markets Corporation

Lastly on the distribution, for the indirect sales channel for your CLEAR-branded product, what are you fighting to be some of the more productive channels. Is it the big POPs, regional retail, is it mom-and-pop?

William Morrow

It's actually about evenly split between the national and directs and the more local and directs, where we usually contract with them through master dealers. Both of them are really productive channels for us. You probably saw the CPGA go down this quarter and there a lot of dynamics that drove that. But one of them is channel management. We've been relying on average more on some of our lower-cost direct channels like Web and telesales, along with some more efficient approaches to marketing and media buying. Along with some seasonal dynamics, contributed to some big improvements in CPGA this quarter.

Operator

Your next question comes from the line of Brian Kraft with Cross Research.

Brian Kraft

First, are you contemplating renegotiating the structure the wholesale rate card with Sprint or the other partners to something that's more flexible pricing structure? Secondly, I wanted to see if you could elaborate a bit on your plans for marketing Smartphones at retail. How much proportion is that going to be for the company and what is required of you to do a from a distribution standpoint. And then lastly, real quick, I was wondering if you can comment on the rough split between the cable and the Sprint wholesale customers that you're picking up?

William Morrow

Let me start off, Brian, with kind of the wholesale plans. Relative to pricing on it, there's a pre-agreed-upon construct with the shareholders agreement, and while there some flexibility to change things forward in the past, we really can't comment on what we're contemplating right now. There is an evolution that we expect over time based on what we see in the marketplace, but it's too early to really give any kind of directional indication of how that's going to go. And relative to new wholesale subscribers, we have more latitude there to have different contracts but there are certain implications that we have. So we're not giving out any of those details as many of those are confidential with the wholesale customers that we would have. Mike, you want to take a issue around Smartphones?

G. Sievert

Brian, I'm sorry; I probably won't be able to satisfy you much on it. We wanted to share today that we are in development with Samsung and HTC really just to give you an update because we have previously talked about our aspirations to get started on Smartphone towards the end of this year and were just back saying yes, were tracking towards that and we're working with some of the biggest and best-known companies to develop these WiMAX-enabled devices. It just underscores we've said in the past. It's not our big unveil, so we don't have much detail to share with you yet but I can promise you as we get a little closer, we'll do that.

William Morrow

On the wholesale break out again, no details that we can give at this point.

Brian Kraft

Has that shifted at all, versus last quarter I know you still very early...

William Morrow

I can tell you that all three of them are ramping up and excited about it and pushing the product.

Operator

Your next question comes from the line of Anthony Klarman with Deutsche Bank.

Anthony Klarman

A couple of questions. I was hoping you can shed some light on what the experience has been when you go to convert some of the legacy subscribers to the new sort of a new platform, with the experience with respect to both churn and ARPU? I would imagine there were some people who the price point may cause them to churn off, but I would imagine that you realize a higher ARPU for some of those. So what does that experience been like, and what do you think is there some sort of a big push being made, or how is the push being made as you launch markets for 4G to go ahead go through the conversion process?

G. Sievert

Anthony, Mike Sievert here. The conversions have done really nicely. What happens is generally, they come across with relatively flat ARPU because we honor the prices that people had on their pre-4G. Now it does start to trickle up following the conversion because there opportunities around bundling and chance to take advantage of additional services, et cetera, but it generally comes across about flat. And at the time of conversion as we've told you in the past and also in today's specifics, at the time of conversion, there's some incremental churn. Some people just don't make it across for whatever reason. So for example, in this quarter, our overall churn was 3%, but excluding the effect of market conversions, our churn was 2.7%. So in those converted markets during about a three-month period, you get some incremental churn as some of the customers just don't make it across for a variety of reasons. I don't if that gives you...

Anthony Klarman

The churn that you're reporting is actually I don't want to say overstated but it sort of it's not necessarily representative of what you would call your sort of core retail net subscriber churn. It's including the legacy churn.

William Morrow

In this quarter and last quarter, we've given you both numbers and try to help you understand that effect. So this quarter, it was 3% overall churn but 2.7% when you exclude the effect of the conversions.

Jonathan Atkin - RBC Capital Markets Corporation

And how Bobby on the ARPU side. What has the ARPU impact been for the successful conversions? It sounds like in other words what does that bundling upsell that you've been successful in getting?

William Morrow

I want to say it comes across at the time of conversion about flat that there's a little bit of upside after the conversion and there's some markets now where we've been converted for several months. But overall ARPU comes across, at least initially, about flat. The people do get much more tied to the service though. And I do think that the long-term health of the business reflects that, and one of the statistics is they just started using the service a lot more. It really shows you that when you give people the speed and the performance and the experience that we do with our 4G services, they use it and we've seen the overall usage in our converted markets approximately double after the conversion versus before the conversion.

Anthony Klarman

And then in the press release, it mentioned obviously when we talked about SG&A, obviously, the big increase in headcount of his as he launched markets on a year-over-year basis. How do you manage that on a sort of per market basis in terms of the number of folks you're adding to each market as you try to manage the cash burn of the business and the relative expense associated with the new market launches? Is there a target or sort of on employee headcount increase relative to the launch to where the coverage of 120 million POPs?

William Morrow

Anthony, this is Bill. Again, we take the whole philosophy that we don't want to spend more than we need to. Many of us have been around a lot to see that roller coaster ride, so we try to stay efficient right from the beginning. The kind of headcount growth that we're seeing is predominantly in the new markets that launched, keeping to a bare minimum the marketing staff, looking at sales, is kind of the growth. We're roughly at about 3,600 employees today. This when you kind of look, compared to a year ago, we were about 2,000. We think we're geared for the growth that is in front of us. You'll see some upticks as we kind of move forward into the future, but not to that magnitude that we've seen over this past year. So it’s efficient and again, the predominance of the growth is within the new markets that we're launching.

Unidentified Analyst

On the rights offering, I just wanted to double-check. I believe that was at $7.33. Is that right?

William Morrow

That's correct.

Unidentified Analyst

So if the stock were to sort of stay in this range or hopefully higher than that, that would be a viable source of proceeds for you?

William Morrow

That's what we hope, yes.

Operator

Your next question comes from the line of Gerard Hallaren with Town Hall.

Gerard Hallaren

Hi, this is Gerard from Town Hall. The reason -- by the way, congratulations, on a very good quarter. And especially on the wholesale side that continues to come in stronger than certainly we’ve expected. I was wondering if you could give a little bit more color about how that gets reported out. I know that you talked a lot about 3G and 4G devices and so many of them being out of territory. Is that reported with any kind of lag or lead? And are you selling those same kinds of plans and are obliged to pay Sprint a similar payment? And how does that affect your numbers.

Erik Prusch

Gerard, this is Erik Prusch. I'll take the first one. As far as what we're trying to provide from a transparency standpoint is, last quarter, we started to provide the wholesale number and recognized that we haven't been a market from a wholesale standpoint very long. We launched it really in Q4. This is really our second quarter of operations under wholesale and we've seen tremendous success on it. In the spirit of further transparency, this quarter, we've now started to provide those customers under wholesale that are in our launched markets versus those customers that are outside of our launch markets. And we've said it's a little over a 1/3. So what we're trying to do is show you the strength of the business model that we're creating. We’ve actually got a seeding methodology here or seeding strategy that really kind of takes some of the wind out of the room and allows us to be much more competitive. And we're excited about it. The growth that we've seen in the wholesale market has been very, very solid. And we expect it to continue to go.

William Morrow

This is really nice for us for two points. One is that customers that may not live under the specific coverage that we offer today can still benefit from the products. And they buy a multi-mode product and they roam into the city that we do have coverage and they can benefit from the high-speed, high-capacity, better cost structure network. And then as Erik points out, we're pre-seeded. As that new market launches, there's already an embedded base of customers that are using that service right from the get-go. And all of these customers, I just want to make sure that it's clear, we are getting revenue from our partners that sell these customers. So it is accretive for us. It's a very good for the customer and it helps us in terms of the pre-market launches that we're emphasizing.

Unidentified Analyst

Yes. Is that reported on the same -- with any lag to you? Or does it go off the same month-by-month in the quarter?

William Morrow

Same month-by-month.

Unidentified Analyst

And are your rates back to Sprint about the same as they are to you?

William Morrow

We won’t go into the rates specifically, but I will say the CLEAR brand does sell 3G/4G-based devices. In the case of the CLEAR brand, though, they’re the vast minority. What's most popular with the CLEAR brand are the purely 4G offers across both mobile and fixed.

Operator

Your next question comes from the line of Sid Parakh with McAdams Wright Regan.

Sid Parakh - McAdams Wright Ragen, Inc.

Just a question on the Smartphones here. I mean will these Smartphones be running mobile Wi-Fi? Or is it still going to use Sprint’s 3G network?

G. Sievert

When we get started, Sid, it’s Mike Sievert. We think it makes the most sense to get the voice, at least. I call it, quality-of-service voice, backed by the carrier to be cellular. And that means that it would most likely be on the Sprint network. Now we do have aspirations to have VoIP in the long run. I mean we've got a great network that transmits voice in a high-quality way. But we're still building it. So when we're fully national, I think that’s when it makes a lot more sense to base most of our voice offering on VoIP. That said, even from the get-go though, it's becoming more and more popular for consumers to use applications, whether it's Skype applications or other services that they can get from the application marketplace and have unlimited calling on VoIP even from the get-go.

Sid Parakh - McAdams Wright Ragen, Inc.

And then can you comment on device pricing? Or just pricing plans for some of these phones?

William Morrow

No, sorry, won’t be able to do that quite yet.

Sid Parakh - McAdams Wright Ragen, Inc.

In the past, if I remember right, you've talked about mid-single digit penetration in each market to be EBITDA positive. Does that still hold true? Or do you think there’s reason to believe that it would be better than that?

Erik Prusch

Sid, this is at Erik Prusch. We’re still holding to that. That’s the experience that we've seen before. And when we built our models, we built them based on our history. So that, we believe, is a comfortable statistic for us to go forward with and build our business plans on.

William Morrow

I believe that's the final question. And again, if I can kind of end the call with this. A lot of the parts are starting to come together. We're seeing very good evidence that what we had believed, my hypothesis and part theory is actually coming to life. But I want to make sure it's clear, there's a lot of work in front of us and the management team, our employees, our partners are all heads-down focused on this. We think we, again, are in the right place at the right time, with the right architecture, the right spectrum position, and we don't want to lose that opportunity. So we're seizing it. So we look forward to keeping you updated. And we'll see all of you hopefully on the next quarterly call.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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