Clearwire Q2 2010 Earnings Call Transcript

Aug. 5.10 | About: Sprint Corporation (S)

Clearwire (CLWR) Q2 2010 Earnings Call August 4, 2010 4:30 PM ET

Executives

John Saw - Chief Technology Officer and Senior Vice President

William Morrow - Chief Executive Officer and Director

G. Sievert - Chief Commercial Officer

Erik Prusch - Chief Financial Officer

Paul Blalock - Senior Vice President, Investor Relations

Analysts

Anthony Klarman II

Jonathan Chaplin - JPMorgan

John Hodulik - UBS

Walter Piecyk - BTIG, LLC

Sid Parakh - McAdams Wright Ragen, Inc.

Kevin Coyne - Goldman Sachs

Simon Flannery - Morgan Stanley

Richard Prentiss - Raymond James & Associates

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Clearwire Financial Results Conference Call. My name is Alicia, and I’ll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today, Paul Blalock. Please proceed, sir.

Paul Blalock

Thank you, Alicia. Good afternoon, everyone, and welcome to Clearwire's Second Quarter 2010 Financial Results Conference Call. With me today are Bill Morrow, Chief Executive Officer; and Erik Prusch, our Chief Financial Officer, who will discuss Clearwire's second 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 the call. Hopefully, you've all had an opportunity to read the release, issued a few minutes ago, which provides detailed financial information regarding our second quarter results.

Today's call may contain forward-looking statements reflecting management's beliefs and assumptions concerning future events and trends in our 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 2010 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 the 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.

And lastly, a reconciliation of any non-GAAP financial measures discussed today on this call can be found in our press release. I will now turn the call over to Bill Morrow.

William Morrow

Thanks, Bob, and good afternoon. Again, we want to thank all of you for your continued interest in Clearwire. And as you've heard us say many times before, we have expected 2010 to be a growth year, and I'm pleased to say that our strong second quarter is further evidence of this. Our all-IP network, our unmatched spectrum position and our ability to deliver data at a low cost continues to differentiate Clearwire and position us well in this high-growth emerging market.

Nearly all of the analytical data available supports the fact that mobile Internet continues to grow at considerably faster rates than the fixed Internet did. In particular, mobile computing broadband subscribers are projected to surpass all other types of Internet access by early 2013. It is increasingly clear that people want untethered broadband, and we believe that this trend will accelerate even more dramatically as 4G expands. And this, of course, will be good news for our company and for you as our shareholders.

During the quarter, we expanded our domestic 4G POPs by 37% to 56 million, so the growth of 15 million people. We launched several new markets, including Washington DC, St. Louis, Salt Lake City and Kansas City, among others. When adding our international operations and our pre-4G service, we covered a total of 62 million global POPs at the end of the second quarter. The larger footprint and the launch of the first 4G handset by our wholesale customer, Sprint, has led to a quarter-ending customer base of 1.7 million. This represents a 74% gain from last quarter with 722,000 net adds and is up 231% from just a year ago. Breaking this down somewhat, we saw our Retail base grow by 127,000 to 940,000, and our Wholesale base grow by 595,000 to 752,000.

As you can assess, our Retail segment is experiencing strong growth and our Wholesale segment is even stronger. When you consider where we are right now, I'm proud to tell you our Wholesale subscriber base has surprised the 1 million mark. And due to this higher-than-expected growth, we are updating guidance as we now believe we will end this year with approximately 3 million total subscribers, up from our previous guidance of just over 2 million. I'd like to emphasize a degree of caution in modeling as this projection includes a number of subscribers where their home-base market has yet to launch our 4G service. We do receive nominal revenue from these customers and believe it will increase as their home market is launched.

The subscriber growth has led to revenues of $123 million in the second quarter, representing a 15% improvement from last quarter and a 93% improvement year over year. And as Erik will explain, the vast majority of our revenue at this point is generated through our Retail channel.

In terms of customer behavior, we continue to see that while coverage is important, speed and capacity are king. The appetite for high consumption is evidenced by our mobile customers who continue to use more than seven gigabytes a month, and as you know, this is several times the amount of a typical 3G mobile data user. And while this level of data usage will be very important for us and the industry to watch, it does validate the advantage given to those carriers with the right technology and spectrum depth.

In short, we have a larger network, with more customers and greater revenue than ever before, and we don't expect the trajectory to change as the market and Clearwire continue to grow. I'll now turn things over to Erik who will take you through the additional details of our results.

Erik Prusch

Thanks, Bill. Second quarter results continue to validate our business model and strong customer demand for 4G services. As Bill mentioned, our subscriber guidance has now increased from just over 2 million at the end of this year to approximately 3 million subscribers at year end. You should also be aware that approximately 52% of our June 30 Wholesale subscribers live in non-launched markets. We also expect to end the year with a portion of our 3 million subscribers to be in non-launched markets as well. This means that the nominal revenue we receive from them dilutes our Wholesale ARPU, but as a pure margin service, it is good for the business. In total, Wholesale revenue remained nominal in the second quarter. We expect to provide a breakout for Wholesale revenue in future quarters.

Retail ARPU was $41.58, consistent with our guidance to be above $41 for the full year. Retail CPGA came in better than forecast at $443 versus $439 in the first quarter. While we expect Retail CPGA to increase in the second half of the year, it is trending better than expected, and we are improving our Retail CPGA guidance to now be in the low 500s versus our previous guidance of full year Retail CPGA in the mid-500s. This expected improvement in Retail CPGA marks the third time we have improved our guidance.

Last quarter, we increased our Retail ARPU guidance, and this quarter we have improved both our subscriber and Retail CPGA guidance. Retail churn was 3.2% in the second quarter, up slightly as expected over first quarter Retail churn of 3% percent, but down significantly from fourth quarter levels of 3.6%. While we do not specifically forecast churn, we do expect that it will be elevated in the second half of this year due to market launches, conversion market activity and ongoing network construction. In particular, Q3 typically has the highest seasonality in terms of Retail subscriber churn.

As Bill mentioned previously, revenue finished at $123 million, a 93% increase from one year ago. Cost of goods and services and network costs for the second quarter was $260.6 million and includes $79 million in second quarter write-offs and charges. Excluding the one-time impact of the write-off, costs would have been $182 million, up 25% from the first quarter level of $145 million, driven by an increase in the number of tower leases and backhaul expenses resulting from the build-out of our 4G network.

The $79 million is composed of $34 million related to an increase in obsolescence and shrinkage allowance for our WiMAX equipment, $39 million related to write-offs of network-based station equipment, which is the old ground-based units from zones no longer in use, and approximately $6 million related to write-offs of early-generation customer premise equipment as we transition to newer technology.

We continue to carefully focus on managing the entire supply chain as we look to mitigate the material weakness we noted in the fourth quarter last year. The reported GAAP net loss attributable to Clearwire was $125.9 million or $0.61 per share in the second quarter and includes the $0.09 per share impact of the $79 million in write-offs.

Capital expenditures were $622 million in the second quarter, down from first quarter $690 million and consistent with our expectations. However, our previously projected 2010 net cash spending range of $2.8 billion to $3.2 billion is expected to narrow to between $3 billion and $3.2 billion. This range includes additional success-based capital for incremental capacity, driven by higher subscriber loading and strong usage. The additional anticipated spending has been essentially offset by the proceeds of the rights offering, which generates $290.3 million in proceeds and substantially increased our float.

During the second quarter, we launched the POPs we expected, reached our covered POPs goal and the initial cost of builds remains consistent with the guidance we have provided. I'd also like to update everyone on the path of profitability analysis presented last quarter. While the majority of our launch markets were in the fourth quarter of 2009, our three earliest markets of Atlanta, Las Vegas and Portland, taken together as a group, had an average age of approximately 13 months at June 30, a total POP penetration of 3.3%, Retail CPGA of $294 and a gross margin of 55%. These markets are collectively on track to reach market-level EBITDA break even within approximately 18 months after launch. As of the second quarter, these three markets had POP penetration rate -- as of the first quarter, these three markets had POP penetration rate of 2.7%, CPGA of $353 and combined gross margins of 47%.

In summary, these results demonstrate that Clearwire is delivering on our commitment, and we remain confident in our ability to continue to offer customers unmatched wireless broadband services. We remain 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

Thank you, Erik. So I hope you’ll agree that based on the numbers, we're making significant progress. Since our last earnings call, we have launched our 4G service in areas covering 17 million additional POPs, including this week’s launches in California, Michigan, Delaware and Florida. And I'm also pleased to share that in just a few short weeks, we’ll launch service in Boston as our next major market. And while we remain focused on our goal of covering up to 120 million POPs, I will reemphasize what I've said in the past and that is this is a challenging, unprecedented network build.

We have been pleased with our execution of launching markets thus far, however, we are now entering the steep part of the build curve. In short, we’re aiming to double the size of our network in the next five months. In almost every market so far, we have accomplished our launch goal within weeks of our initial target and we don't expect this to change. We continue to believe that we can accomplish our goals, and we will keep you posted if there are significant changes.

As we expand our footprint, we're also expanding our market reach. On the last call, I mentioned that we intended to expand our Wholesale distribution, and I'm proud to report progress in this area. As you saw last week, we announced a new wholesale partnership with Best Buy in which they plan to use our 4G network to offer service under their own powerful brand. This agreement is particularly strategic for our ‘network of networks’ business model. Not only is this the first major wholesale agreement beyond our group of strategic investors, but it also demonstrates the value of our network to companies outside the traditional service provider space who are looking to capitalize on 4G access to the Internet.

In addition to Best Buy, I'm pleased to share that we have signed a similar agreement with Cbeyond, a specialized provider of voice and data services to small business across the country. Cbeyond plans to offer 4G service under its own brand using our 4G network. We expect both of these wholesale partners to be important contributors to our future growth, and are again a sign of a new and emerging MB&O model that uses high-speed Internet access to complement their existing revenue streams.

On the device front, we have just this morning announced a new product called the iSpot. This is a unique 4G WiFi hotspot built for Apple users to connect their iPad, iPod Touch or iPhone to the CLEAR 4G network. The iSpot will support up to eight of these devices at a time, and we think customers will be drawn to its initial pricing plan of $25 for unlimited data plan with no contract required.

In addition to the iSpot, we also recently introduced two new CLEAR Spot devices as well as two new USB modems, which add to the dozens of 4G-ready laptops already available today. So you can see that our ecosystem of partners and devices continues to expand, and we are continuing to focus on offerings that are affordable, simple to use and targeted at meeting the demand for mobile broadband.

Shifting topics, I'd like to comment on the groundbreaking technical trials we announced today. As you've seen, we plan to conduct 4G LTE technology trials expected to yield unmatched and unplanned speeds here in the U.S. and to test multiple coexistence scenarios between LTE and WiMAX radio technologies. We expect the test to show that our all-IP network and unique depth of spectrum will enable us to deliver mobile broadband services at faster speeds and with more capacity than any other incumbent wireless carrier, regardless of the radio technology they plan to use. In fact, we believe we can show real world download speeds of 20 to 70 megabits per second versus the five to 12 anticipated by other local carriers. It's exciting from a technical and asset perspective, because we are the only service provider in the nation with the spectrum necessary to be able to conduct tests of this nature and on this scale. And we can do it while reusing our existing core infrastructure and backhaul and using commercially available LTE equipment.

We plan to conduct the tests in collaboration with Huawei who is the same infrastructure provider which deployed the world's first commercial LTE network in Europe. This commercially deployed equipment is operating at the same frequency as our spectrum band, so the equipment is off-the-shelf with no customization.

We will also be testing with Samsung's base station platform, which as you know, is one of our other key suppliers today. During the trials, we will also be collaborating with the same and other partners to determine the best methods for enabling end-user devices to take advantage of a potential multi-mode WiMAX/LTE network. And we plan to share news of other participating vendors at a later date. And due to that global prominence of the 2.5 to 2.6 gigahertz spectrum band for 4G deployments, we also expect that a number of other large wireless operators around the world will participate in these trials.

As we have consistently stated, we remain technology agnostic. WiMAX provides us with the ability to offer consumers the most robust device choices today, and we remain committed to using WiMAX for our current build plans. If we elect to add LTE to our network at some point, we could do so while reusing our existing core and infrastructure and backhaul. Part of our technical due diligence at Clearwire is to be ready to leverage a number of possible opportunities as we future-proof our network, and that's our goal with these tests.

Ultimately, we know that consumers don't care about technical acronyms, but they do care about quality and affordable Internet services that work where and when they want, and that's why we're focused on delivering. As many industry captains have opined, the mobile broadband market is facing enormous growth and the existing incumbent carriers’ technology and spectrum holdings cannot support the capacity nor cost structure necessary to satisfy the consumer appetite. We are, at the same time, exploring opportunities to secure additional funding necessary for our current business plans and future expansion that will enable us to capture the value associated with this growth. We believe greater breadth and depth across our markets will bring greater value to our shareholders.

We are considering a number of funding options and are currently engaged in discussions with existing and new strategic investors. Other alternative sources are also being considered that include the possibility of issuing additional debt and/or selling a small portion of our assets, which may include spectrum that is not critical to our business plan. Any spectrum sell, however, would still leave us with the spectrum advantage that supports flexibility on technology, superior capacity and economies of scale advantage. Again, we see multiple funding options which we will be evaluating to determine what are the best terms possible and, if prudent to do so, we will select that which optimizes shareholder return.

I'd like to close by saying that as the nation's largest 4G operator, with an unmatched spectrum portfolio and almost 2 million subscribers, using unrivaled levels of data on our 4G network today, we are confident that we will continue to stay at the forefront of this high-demand 4G market. We do have other exciting initiatives planned for the remainder of the year, including the launch of cities like New York, San Francisco and Los Angeles, and of course the introduction of our own 4G smartphones, but we'll share more details on those activities in the coming weeks and months. So let's go ahead and get to your questions.

Question-and-Answer Session

Operator

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

Richard Prentiss - Raymond James & Associates

First, appreciate that we'll be getting some wholesale detail in the coming quarters. Just a quickie look at the ARPU calculation suggests maybe Wholesale revenues are in the $6 million range, which obviously means pretty nominal for the very large number of Wholesale customers you put on, which is very impressive. 52% of the subscriber base outside of the Wholesale subscriber base outside of where you have covered, what kind of timing should we look for as far as looking at those funding options that you mentioned, the existing and new strategic debt and selling spectrum to kind of get more POPs built so you can collect more money?

William Morrow

As far as the Wholesale ARPU is concerned, I think it's important to understand the timing of when a lot of the loading came on in the quarter. We are saying it's nominal. We've kind of described it as we are operating on a Retail-minus structure, and we're going to continue to do that. We’ve started to articulate what is being done in markets that we’ve launched, which has a different structure than in those markets we have yet to launch. So we're trying to provide as much transparency on that. What you'll see in coming quarters, as you mentioned, is that we'll start to break out -- or we intend to break out Wholesale as its own reportable segment so you'll be able to see those revenues. Please don't interpret the $12 million in the press release as just the indicator of what Wholesale revenue is. That's not quite precise and we are staying in total the revenue is nominal.

Erik Prusch

And then, Rick, on the timing issue around our funding options, we're working through all of them right now. We're not necessarily urgently pressed for time, so what we want to do is find the best terms for the company that make sense, economic sense, and again take advantage of the assets that we have. I wouldn't look for anything realistically until probably the fourth quarter. Something could pop sooner than that, but that's would be my current forecast at the moment. Does that make sense?

Richard Prentiss - Raymond James & Associates

And then there's been a lot of speculation out there about Sprint owning about 54% but not consolidating. What would be involved if Sprint wanted to consolidate the results? I know they don't have board control or operational control, but how do you think about Sprint's 54% and if there might be any kind of change in consolidation?

William Morrow

We can't, of course, speculate on what Sprint is going to do, Rick. But I would say that the reason that they don't consolidate today is because they don't have control of the company. They don't control the board. They obviously are able to appoint seven of the 13 seats that we have, but to take major decisions on the direction of the company it requires a supermajority, which is 10 of the 13, and that includes, for example, just looking at management control if that's one of the indicators that people look to whether or not you have control which then leads to consolidation.

Operator

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

Sid Parakh - McAdams Wright Ragen, Inc.

I just have a broader strategic question here. As your Wholesale subscribers kind of ramp up to some pretty large numbers, how do you think about putting resources on the Retail side of that? Clearly, that's a more expensive way of going to market, so how do you figure out those things?

G. Sievert

This is Mike Sievert. We look at both sides of the business as being strategic for our growth. And right now, as you know, Retail represents the majority of our business. It's a big part of our growth. It's the vast majority of our revenues. And we’re a scaled business. This is a business where you deploy a lot of capital and then you get return on that capital by penetrating the market with the most possible customers. And our strategy is to have multiple brands, the CLEAR retail brand, plus to be the network of networks that attracts other leading brands, then that way we maximize our scale and get the return on investment.

Sid Parakh - McAdams Wright Ragen, Inc.

And then second on the handset strategy, I know you kind of touched on it last quarter. I mean, is there any update there in terms of what to expect from a device standpoint? The reason I'm bringing that up is you obviously see more and more smartphones come to the market, I mean, they're clearly largely driven by Android, and given that commonality of the operating system, how do you plan on differentiating your devices versus what's already out there?

G. Sievert

This is Mike again. I'm anxious to lay out the details on the smartphones. We mentioned in the last call that we would be targeting to have them by the end of this year and Bill in his remarks I think mentioned it again. But any details will have to wait until we're ready to roll them out.

Operator

Your next question comes from the line of Walter Piecyk from BTIG.

Walter Piecyk - BTIG, LLC

Does Sprint or any of your strategic partners have the ability to block a wholesale agreement or a sale of spectrum? That's the first question. The second one is the wholesale subs with the low ARPU, how does that evolve over time? So when you launch in New York, for example, and you have customers that are, I guess, wholesale, the very low ARPU customers there, does that change automatically when you launch in the market? And then similarly, like if you take an EVO customer today that's on 3G, if they start using your 4G network like crazy as you launch these -- more of these networks, is Sprint still just going to pay you a nominal fee for that usage? And then how does that -- how do the economics work for you on that, if someone is using your network and only paying you a nominal amount?

William Morrow

I'll take the issue around kind of the governance decision-making factor, and we'll have Mike deal with the issue on ARPU on the wholesale. So the way it kind of works from a governance point of view from a wholesale agreement, at least typically, when they reach a certain amount would come to the board and it's a simple majority that the board would actually make the decision. If there is a conflict, let's say with Sprint or -- yes, Sprint would be the only case as they’re the only ones that really have board members that are carriers. If there's a conflict, they have to recuse themself and so they wouldn’t necessarily get involved in the decision. So the board makes the decision on behalf of the economic prudence and/or value to the company. So we wouldn't anticipate any kind of problem at all. Let's just say, the largest arch enemy of our top shareholder kind of came in and said we’re going to offer you great economic terms, I think the reality is, is if that made sense to us, we'd still get that approved. We'd naturally take into account all actions or what would affect us from a value standpoint.

Walter Piecyk - BTIG, LLC

Same thing for a spectrum sell?

William Morrow

Well, on a spectrum sell, if it's up to a certain level, it is again a simple majority of the board. If it goes to the next level, it goes to a supermajority of the board, and of course if it goes beyond a large level, then it ends up in the hands of the shareholders. So our view at this point is that we're going to sell spectrum, that falls in a reasonable amount of spectrum that doesn't jeopardize the advantage we carry in the marketplace, and we think that, that would fall into the simple majority construct. But until we actually get further down the road, we really can't say one way or another.

G. Sievert

Walter, on the wholesale question, your question is supposed to be answered correctly. So as we launch markets, what happens is the devices that are already in those markets begin to have access to 4G, and that helps to drive our ARPU up. And the ARPU is based on a number of different things, but usage is certainly part of the calculation. And so obviously, as we launch the markets, our in-market ARPU is higher. And as we launch, there's an opportunity for ARPU growth therefore.

Walter Piecyk - BTIG, LLC

So if look at these large wholesale numbers, obviously a lot added at end of the quarter with the launch of the EVO, between the getting three months in future quarters as well as usage-based pricing between you and whoever the wholesale partner is, theoretically, that ARPU for those wholesale numbers should actually go up over time?

G. Sievert

We certainly would expect ARPU to grow on the Wholesale business for the reasons that you mentioned. In the current quarter, we had a lot of part months because June in particular was a really big quarter for us. And then you're right, as we launch the cities, there's an opportunity to get that higher usage end market.

William Morrow

So if I could, Walter, just add to that, I mean, this is part of kind of a growing business, so we're going to have these sorts of issues that aren't going to be steady state factors for quite some time. So we appreciate you asking the question and understanding within your own models that there are some nuances here.

Operator

Your next question comes from the line of Jonathan Chaplin from Credit Suisse.

Jonathan Chaplin - JPMorgan

So to start off following up on Walter's question, I'm curious as to whether selling spectrum is something that you're considering just because sources of funding are difficult, or whether you’d do it under -- under any circumstances. It just seems to me that part of the value of your spectrum collectively is that you have so much -- you have almost 30% of the spectrum available to other carriers. And if you don't sell the spectrum, then those carriers are ultimately going to come to you for wholesale services, which you probably get a better return on than selling the spectrum. And then separately, just wondering what gives you so much greater throughput in your LTE trials than some of the other people rolling out LTE? Is it the frequency of the spectrum or the sheer magnitude of the spectrum, the fact that you're using 20 megahertz channels? And then finally, with the cash inflow coming late in the fourth quarter, what does that mean for the pace that you're able to build out during 2011? Are you able to build out at the pace that you're going to be at by the end of this year?

William Morrow

Jonathan, I'll take the first one on spectrum, we'll have Dr. Saw take the second one on throughput, and then Erik on the cash in the fourth quarter. Again, the reason that we're considering this as a source of funding is we just want to be able to look and compare all terms and what is the maximum value. We really believe that we have something rare, unique and highly valuable. And while again we have interest from outside, we have interest in funding certain components from certain strategic investors today, we want to be sure that we're taking the best possible terms that are just going to maximize shareholder return for all of you guys. So that's why we're looking at it in this way, and we think it's prudent to do so. We have a very rich spectrum position, and at some point we may have to use that to maximize the value.

Jonathan Chaplin - JPMorgan

It's rare, unique, valuable, and add to that, that the value is only going to go up over time. So I understand that it is something you consider in the realm of all things that should be considered, but why would it make sense to sell it now?

William Morrow

Well, indeed, Jonathan, but remember, when we sell at the price, we presume the buyer will understand your very comments as well.

John Saw

Jonathan, John Saw here. With regards to your questions on throughput, yes, this LTE call network we were testing it is not our private LTE network. It is going to be very disruptive in the sense that we are really leveraging our spectrum strength to tap a lot of new capabilities that no other carrier in the country can do. As an example, since you bring up throughput, in areas we have DD-LTE, we intend to be testing a 20 megahertz plus 20 megahertz at DD pair. That is significantly much broader pipe than what our competitors are planning to roll out, which is they are limited to 10 megahertz and 10 megahertz. So the higher throughputs that we expect to get is basically from the much bigger bandwidth and pipes that we are processing the LTE.

William Morrow

And Jonathan, I just want to underscore this and what Dr. Saw is saying. Two of these 20 megahertz channels is what has been commercially deployed over in areas within Europe. It's been a part of the standard since LTE was approved, so either 10 megahertz channels or 20 megahertz channels, the equipment makers have built all of this in. That's why this is an off-the-shelf product that we've put into our test bed and we’ll see speeds far greater than what anybody that is restricted to a 10 megahertz channel is. The way the spectrum is allocated to the carriers in the U.S., Clearwire is the only one that can do this 20 megahertz arrangement and therefore our leading position in terms of disruptive service opportunities will continue as we think about the future should we decide to go down this path.

G. Sievert

Then, Jonathan, in terms of timing of funding and the build into 2011, clearly we're focused on 2010. This is the largest build in telecom history. It's taking everything for us to get up to that 120 million POPs of coverage by year end. The sooner funding comes in obviously has greater impact in 2011, but at this point, we are solely focused on 2010.

Operator

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

John Hodulik - UBS

First following up on Walt's question on the wholesale economics. As you build out more -- I get the sort of the economic change that happens when you build out these markets and you guys are suddenly in market. Can you give us a sense of maybe what that -- the 52% right now, where that goes? And obviously, you're not going to know where you're selling these, but maybe where is it now that you’ve brought on new markets since the end of the quarter? And just from a modeling standpoint, should we expect that to go up over time as you increase the number of POPs? It would make sense that it would. And then two quick other things. From a funding standpoint, you talked about selling some spectrum and debt. You didn't mention equity. Does that mean equity is not -- is sort of off the table as it relates to this round? And then lastly, if we can get some characterization about these -- the Best Buy and the Cbeyond, these new wholesale contracts. Are there any minimum commitments associated with these, are they exclusive agreements, and are the economics meaningfully different than what the founders have?

G. Sievert

Let me answer the first one and then the third one, it's Mike Sievert. On the wholesale piece, yes. I mean, the way it works is as we launch the market, there's a chance for ARPU growth. And so that's basically the model. And I can't unpack for you in detail the difference in ARPU between the people that are in-market versus out-of-market. I can give you a couple of trend lines though, which is obviously as we’re building, we still have tens of millions of POPs to go. So obviously, the trend will be that more of them, a higher proportion, would be in-market, and therefore there's a chance for ARPU growth. That said, as we finish the year with that approximately 3 million subscribers, several hundred thousand of them will be out-of-market. So there will be remaining opportunity beyond 2010 as well.

John Hodulik - UBS

I guess just again from a modeling standpoint, I think the ARPUs are so dramatically different whether they are in-market or out-of-market. I mean, if you have, based on the way you’ve modeled this thing, 80% in-market by the time you're done, I mean, your revenues are going to be a lot different than if they shared 50% I would imagine, right?

G. Sievert

I mean, one way to think about it is that when you're out-of-market, while the ARPUs are low, this is really just a fantastic margin opportunity for us. It's incremental to our business, it's monetizing the asset even where we haven't had to deploy major costs. And so while it dilutes ARPU, it's a really, really great thing for our business model that we think about as being incremental while we build the network. It’s a nice development for us. To your question about the wholesale agreements, I’m sorry to disappoint you, I won't be able to give you much on that. It’s just these are agreements that we're very excited about. As Bill said in his remarks, they’re strategic, both of these new companies that are working with us, Best Buy and Cbeyond, will be rolling out under our wholesale agreement. I can't really address though questions like guarantees or minimums or timelines.

William Morrow

And as far as funding, certainly we’re looking at all of the available vehicles that we have. Equity is one of them. Debt in our current debt basket is another one. And then obviously, as Bill stated, the spectrum sell. All of them are fair game for us. We haven't made any decisions and we are looking to make certain that we maximize the value to our shareholders.

Operator

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

Anthony Klarman II

I wanted to ask a few questions. First, in terms of talking to other carriers about wholesale arrangements, is there any benefit to either waiting until your POP coverage is more fully built out or you sort of decide on your path of WiMAX versus LTE, or is that something that still would be on the front burner, ignoring the potential for any investments a carrier might make, just thinking about it from an operational perspective of POP coverage and sort of finalizing the technology path?

William Morrow

Let me start with that and see if Mike has any further details that he wants to add. Regarding the discussions that we have with carriers, right now is the opportune time because it just so happens, you hit about that 100 million POP coverage mark, and that's the kind of scale a lot of these people are looking for. Typically, if they’re locally geographic based, we're hitting the right markets for them to kind of get involved. National potential wholesale customers, like the Best Buy, say, okay, I want to get things going now, they’re not going to start to deploy until early next year because they want that 100 million POP scale factor to be in place. So that's -- they are looking at that, and they think 100 million is reasonable. They know there's no commitment yet from us as to when we're going to expand beyond that. So that's why with all the discussions that we have, we think we're at that kind of threshold point to be able to get several more additional wholesale customers. On the issue of technology, again I want to emphasize we haven't made any decision to move to LTE. And our view at this point, is that WiMAX is important to us and the ecosystem that is already here, the ecosystem that's around the corner that's being generated, that’s going to come in. We can see a model again that looks at LTE and WiMAX carrying forward for a certain period of time. Our spectrum position, the way that the company is architected to network, all supports the flexibility to be able to do this. If it were a case of somebody saying you're shutting WiMAX down tomorrow, why would I want to do a wholesale on that, that would be a concern, but that's really not our intent at this point. So usually, after a fairly brief discussion with them around our strategies and thinking on how technology works, most of the customers drop that from their points of interest.

Anthony Klarman II

When you talk about the multiple coexistence scenarios, if we just presume that you sort of do these trials and you find that LTE is a path that you want to go down, are we talking about overlaying that over the existing POPs that have already been covered with WiMAX or rolling that out in the future POPs going forward past the 120 million?

G. Sievert

Again, this is where we’ve not reached any conclusion. I mean, Dr. Saw, we pressure him all the time for lots of answers to be able to model various scenarios, and this is why he said I need to see the trial results before he can help us kind of complete those models. But, Anthony, there is so much that is really uncertain at this point on what could happen. For example, you could see certain geographical areas doing a flash cut. You could see models to where you're doing on overlay because the spectrum position allows to where you carry WiMAX on for a long period of time. You build your FDD channels around that, offering this 20 plus 20 that John was talking about that no one else can match, and that has a different economic structure as you look forward. Remember, by working with Hashim [ph](50:59.5) and some of the other chip manufacturers, they're starting to integrate under the same piece of silicon LTE and WiMAX technology. As we start to deploy those devices with that integrated chip, then it makes things easier to be able to either start to build out in one technology or another and/or to do transitions at no impact to the customer and a very low cost from a device change-out point of view to the company. But that's why I can't give you as much detail as you all are going to be looking for to build into your models. I’ll emphasize again we have the ability to transition. We don't want to let go of the momentum that we have with WiMAX. We're just building ourselves options to stay ahead of the game, to be that disruptive service provider out there in that entrepreneurial company that's willing to change the status quo.

Operator

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

Simon Flannery - Morgan Stanley

Could you touch on I guess, Erik, touch on the churn number, just talk about what the drivers are there? And I think you talked about it spiking or going up in Q3 on seasonality. But when do you think we can start seeing this sort of dip below the 3% level? Is it an issue of coverage in building penetration, congestion? What are the sort of drivers of that and how do you address them? And then we've seen LightSquared obviously make a big push here in the last few weeks. Perhaps you can just talk about any impact that announcement has had on your conversations with potential wholesale customers and how you sort of see that sort of changing the dynamic work via the sort of the wholesale business model.

G. Sievert

This is Mike Sievert. I'll take the first piece and then Bill the second. Churn is primarily driven by the customer's perception of their network experiencem and our network is of course still under construction. And so that's really the fundamental dynamic on why we're living into threes. As we finish the network and as we continue to add site in the cities where we’re already operating, those are two opportunities to make a material change. In the meantime, it’s driven by some seasonal effects, both seasonality that all carriers see, like that 3Q phenomenon that Erik mentioned in his remarks, and also things like shadow effects from previous gross adds. We had a really great first quarter that was disproportionately great and churn’s highest in that three- to six-month period of a customer’s life. And so you do get some shadow effects through it, it modulates around, but the fundamental dynamic is really driven by us continuing to complete that network build. That's what drives the fundamental operating assumptions going forward.

Erik Prusch

Simon, on LightSquared, I categorize or summarize it as we’re pleased that they have done what they have done. By them coming into the market, by them advertising a model that's very consistent to Clearwire is actually advertisement for us. The idea about being able to raise money against that, when we look at it, we have a superior spectrum position, we have a jump and a lead on the marketplace, we already have established customers, and we have guaranteed practically wholesalers with our strategic investors. So anything that they’re out pushing, we suspect n an investor would say, well, great, I have a choice of Clearwire or LightSquared, and we think we’d be the superior investment to make. Now also we think that it demonstrates the fact that everything that we keep harping on quarter after quarter with this emerging demand that is just skyrocketing, and we think that these people see that opportunity as well, see the limitations with the existing incumbents, and so it's a reaffirmation, if you will, of our whole belief around why we're in such a sweet spot. Now you asked specifically about how it impacts our discussions with our wholesale customers, and I would say it’s just reinforcing it. I mean, we know what it's like to get a market launch, we know what it's like to get funding, and again, they don't have the advantage of the key strategic investors that we have that have a dependence on us. So we know that any wholesale customer they talk to it’s likely that they're going to have to come over and talk to us because we have that superior spectrum position to give, those world-class speeds, ultimate capacity, greatest flexibility, economies of scale to get the price down, so we like it.

Operator

Your next question comes from Kevin Coyne from Goldman Sachs.

Kevin Coyne - Goldman Sachs

Just a question on debt capacity. I was wondering if you could give us a sense in 4Q, assuming you raise the capital with debt only, and I know this answer could change if you also raise some equity along with it, but can you give us a sense as to how much first-lien debt you can raise with your current baskets and carve-outs?

Erik Prusch

It's Erik Prusch. With the rights offering success, we actually have about $143 million, $150 million of first-lien capacity. We've got about $500 million in second-lien capacity now, and then an unsecured basket as well.

Operator

Your next question comes from the line of Minesh Jane [ph]( 56:15.9) from JPMorgan.

Unidentified Analyst

First one, I just wanted to get a sense of how much incremental cost could that -- should an LTE build -- do you envision an LTE build being incremental to $25 per POP that you're spending today? And then second of all, I just wanted to get a sense of how much you've explored opportunities to wholesale your microwave backhaul capabilities.

William Morrow

I’ll take the first one and I’ll ask Dr. Saw to talk about the wholesale opportunities on the microwave backhaul. That is his baby, he designed it and it’s fantastic. On the cost of the LTE build, again as I mentioned before, Minesh, [ph] the problem with giving any specifics at this point is way too premature because we don't know what model it will be. I think if you looked at it in a pure kind of greenfield approach, you can assume similar numbers within the range that we gave you before. Obviously, if we're in an overlay construct, there is going to be incremental costs behind it. That incremental cost, again, you have to look at components around adding the equipment, looking out what you were going to do with your device side, how you would manage the incremental spares, the idea of the overall operations from a surveillance point of view and a call center point of view. All of those things are going to be impacted by which scenario that we choose should we choose to go down the LTE path. So all I can say is that if we go down there and we do an overlay, it's likely to be incremental from where we are today. But I can't unfortunately give you any more specifics than that.

John Saw

Minesh, [ph] it’s John here. With regards to the backhaul network, certainly you touch on the one expert network that not many talks about, but for any great 4G network, you need a great backhaul. We certainly have a nice scalable backhaul network, as you know. It is currently not a focus for us to look at wholesale in the backhaul capacity, but it's certainly something that we are open to exploring in the future. But right now we are, as you know, very busy making sure that we meet our commitments for 2010.

William Morrow

Well, with that, we'd like to thank all of you again for taking the time with us today. And we're really proud of the progress that the company's making, and we’re incredibly excited about the future progress that we're going to continue this path on. And we look forward to having some individual discussions with you.

Operator

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

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