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Executives

Paul Blalock – Vice President, IR

Bill Morrow – Chief Executive Officer

Erik Prusch – Chief Financial Officer

Mike Sievert – Chief Commercial Officer

John Saw – Chief Technology Officer

Analysts

Sheng Yung – Citadel Securities

Rick Prentiss – Raymond James

Michael Nelson – Mizuho Securities

Simon Flannery – Morgan Stanley

Jonathan Chaplin – Credit Suisse

Walter Piecyk – BTIG

Sid Parakh – McAdams Wright Ragen

Kevin Roe – Roe Equity Research

Kevin Coyne – Goldman Sachs

Clearwire Corporation (CLWR) Q3 2010 Earnings Call November 4, 2010 4:30 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the Q3 2010 Clearwire Corporation Earnings Conference Call. My name is Keith, and I’ll be your Operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Paul Blalock, Vice President, Investor Relations. Please proceed, sir.

Paul Blalock

Thank you, Keith. Good afternoon. And welcome to Clearwire’s third quarter 2010 financial results conference call. With me today are Bill Morrow, Chief Executive Officer; and Erik Prusch, Chief Financial Officer, who will both discuss Clearwire’s third quarter results.

As a reminder to all listeners, today’s call is being webcast 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 release issued a few minutes ago, which provides detailed financial information regarding Clearwire’s third 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 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 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.

Bill Morrow

(Inaudible) everyone and thank you for your continued interest in our company. Record this quarter results once again demonstrate that consumer demand for mobile broadband is unprecedented and as yet, unmatched by any other U.S. carrier, and while Clearwire certainly faces a couple of near-term hurdles, which we’ll discuss with you on this call, we’re excited about the opportunities ahead for our industry but especially for Clearwire.

Today we are delivering a 4G service with speeds that far exceed traditional 3G services at a better price with a substantial range of commercially available devices through a powerful set of distribution channels and most importantly, with the necessary spectrum capacity to serve this amazing growth curve.

We know that you’re interested in our network build progress and it’s with pleasure that I report that as of today our sites on air have enabled our subscribers the ability to use our domestic 4G network across 100 million POPS. Our network continues to be the largest 4G deployment in the United States, with the most subscribers and the most POPS covered of any network so far.

Since the second quarter, we have expanded our domestic retail launched area by 47%. The new cities include Boston, Daytona Beach, Providence, Nashville, Orlando, Minneapolis, St. Paul and Pittsburgh. And earlier this week, we are very proud to have launched the first 4G service in New York City, our largest deployment ever.

Delivering 4G service in major markets is no small undertaking and it is a testament to our ability to execute, of course, anyone in the wireless industry knows you are never truly done building coverage, but at launch our New York network covers nearly 12 million people. Regionally, service covers six counties in north New Jersey from Middlesex to Bergen County and the five Boroughs of New York City.

Our entire management team remains laser focused on our ambitious goal of expanding our network to reach up to 120 million people by the end of the year.

This larger 4G footprint and the success of 4G handsets has led to a quarter ending record customer base of 2.84 million, which represents more than a 400% gain from the 566,000 subscriber base in the third quarter of last year.

Breaking this down somewhat, we saw our retail base grow by 150,000 to 1 million and our wholesale base grew by 1.1 million to 1.83 million. It is important to note that this marks the first time that our wholesale subscriber base has eclipsed that of our retail group. Due to this phenomenal growth, we are once again updating our subscriber guidance as we now believe we will end this year in excess of 4 million total subscribers, nearly doubling our original 2010 guidance of just over 2 million.

As I’ve said before, I’d like to emphasize a degree of caution in modeling as many of these wholesale subscribers are being sold in markets where we have yet to build 4G coverage. You’ll hear more about this shortly from Erik.

Regarding usage and pricing plans across our retail arm, we continue to see subscriber usage in excess of 7 gigabytes per month. We believe the combination of the superior speed and the unlimited pricing plans differentiate us from the competition and allow our users the freedom to access the Internet in ways similar to their fixed broadband competition with the added benefit of being mobile.

This differentiation is further evident when you consider the fact that if our average retail customers took their 4G usage to our competitors 3G networks their average bill would be $150 to $200 per month and that only tells parts of the story. The bulk of data usage and the growth is driven by video.

3G networks by design are not well suited for video applications due to latency and buffering. All of this simply validates the advantages of 4G technology and our unique spectrum depth that provides the capacity and economies of scale to offer superior pricing.

On the wholesale front, our largest reseller, Sprint, has had a very positive impact on our net adds. Thanks in part to their two new 4G smart phones.

Our cable partners are also gearing up for expansion. To put some numbers behind this, our cable partners currently resell our services in 53 markets and we believe that number should grow to 60 by year end.

With our efforts to further grow our wholesale distribution channels, we are pleased with the progress being made with our new partners, Best Buy and Cbeyond, both of whom are slated to begin reselling early next year. We look forward to all of our wholesale channels contributing to our overall growth in 2011.

Complementing the network and distribution expansion is the work completed on providing devices to consumers. We currently have approximately 57 total WiMAX device SKUs in the marketplace and expect the number to increase over time. It is evident that the WiMAX ecosystem has matured and is a competitive differentiator in the marketplace.

With the progress we’ve made in our strategy to expand the wholesale model. We feel it is an appropriate time to include in our disclosure this quarter a more consolidated set of business metrics. This should help to build a model that better reflects our combined wholesale and retail businesses.

On a combined basis, our third quarter consolidated ARPU is now approximately $21. Consolidated CPGA is approximately $92 and combined churn is approximately 2.3%.

And finally, before I turn it over to Erik, I’d like to update everyone on the status of additional funding. The company continues to pursue a number of options to fulfill our capital needs, including the issuance of new equity to either existing or new strategic owners, debt financing and the sale of certain assets, including a portion of our spectrum that we do not believe is essential to our business.

Additionally, a special committee of our Board has been formed to explore and consider strategic alternatives. We remain cautiously optimistic that we will resolve our short-term funding needs in the near future.

However, because we have not yet secured additional funding, prudence dictates that we take appropriate cash preservation initiatives. These initiatives are hopefully temporary as we remain relentless in the pursuit of all meaningful funding options. We remain confident that our unmatched spectrum portfolio and our all-IP based network will keep us extremely well positioned in this dynamic and burgeoning market. We will continue to keep you posted, as appropriate. Erik?

Erik Prusch

Thank you, Bill. Third quarter results continue to validate our business model and strong customer demand for 4G services. As mentioned, our subscriber guidance has now increased to over 4 million subscribers at year end. You should be aware that approximately 45% of our September 30th wholesale subscribers live outside of our launched markets.

In addition to the new consolidated business metrics Bill just mentioned, we also continue to report the separate metrics for retail and for the first time, we have added wholesale metrics.

On the retail front, ARPU grew in the third quarter to $42.74, up from $39.71 a year ago and up from $41.58 in the second quarter. We now anticipate that retail ARPU will average above $42 for the full year, up from our last guidance of over $41. We also recently increased retail price points by $5 and we now expect fourth quarter ARPU to be around $44.

It is also important to note that during the third quarter, we adjusted the beginning subscriber base downward by 65,000 to keep our retail subscriber definition better and more conservatively aligned with our revenue recognition policy.

Specifically, we no longer recognize as subscribers people who have canceled service but have not yet returned equipment and people with bills past due more than 30 days. We are taking a more conservative approach to excluding these customers and we consider the impact to be one time in nature. Lastly, we also sold 12,000 international subscribers in the Ireland sale.

Retail CPGA was $505 in the third quarter and we now expect that it will average in the mid $400s for the full year, an improvement from our previous guidance of the low $500s.

Consolidated CPGA was $92 for the third quarter. It is interesting to note the year-to-date trend in consolidated CPGA was $293 in Q1, $112 in Q2 and $92 in Q3, primarily driven by the increase in the wholesale business, which has no CPGA cost.

On the churn front, in the third quarter retail churn was approximately 3.5%. Wholesale churn as 1.3% and consolidated churn was 2.3%, down from Q2 consolidated churn of 3.2%. We expect retail churn to stay elevated as we continue to build out and fill in our network.

Third quarter record subscriber additions led to revenues of $146.9 million in the third quarter, which represents 114% improvement year-over-year. I should point out that while the vast majority of our revenue at this point is still generated through our retail channel, we expect that wholesale revenue will ramp significantly in future quarters.

On the wholesale front, we booked revenue in the third quarter of approximately $16.5 million. Wholesale revenue does not include up to $17 million in potential additional revenue for the third quarter that we did not recognize due to unresolved issues relating to the application of existing wholesale pricing provisions to certain types of 4G devices. We continue to discuss these issues with one of our wholesale partners and we believe we will be able to resolve these issues in a satisfactory manner.

Wholesale ARPU is booked at $4.46 for the third quarter and could average as high as approximately $9 in the third quarter if the wholesale pricing issues are resolved favorably. To provide more color, it is important to understand our current wholesale economic model.

As we have said previously, there are three determining factors which create our blended wholesale ARPU.

First are the subscribers which are out of market. We currently generate a nominal ARPU from these. We believe these subscribers demonstrate the power of our business mode because we are able to secure these customers and monetize these customers before we even launch a market.

The second factor is the subscribers in market. When we launch markets, subscribers who are secured pre-launch are immediately converted to the end market subscribers. In general, we experience a significant lift in ARPU from these subscribers.

As we continue to launch markets, the percentage of our wholesale subscribers residing in launched markets will increase from 55% at the end of the third quarter, up to approximately 70% to 75% by the end of this year and thus will no longer be subject to a nominal out of market pricing.

The third and final factor is usage, as you can expect in our current construct, as usage increases so does ARPU. Our experience has shown that customers ramp their 4G usage through time and that we expect these trends to continue well into the future. The smart phones on our network already consume very significant amounts of 3G data. Overtime, we expect the devices to continue to improve to facilitate significantly greater usage on the 4G side.

To summarize, the wholesale business continues to grow exponentially in size and important for us. We believe the model differentiates us from others, has very significant opportunities for per customer revenue growth and we believe we can take advantage of it to bring greater returns for our shareholders.

Moving to cash flow, during the third quarter we utilized $875 million in cash and we ended the quarter with $1.4 billion in cash and short-term investments. Overall, we are projecting a 2010 net cash spending range between $3.2 and $3.4 billion, potentially up from or near the high-end of the previous projection of $3 to $3.2 billion.

The potential cash spending increase is due mainly to the following. One, the anticipated capacity augments we discussed last quarter, which is a result of the significantly higher than anticipated demand, two, higher construction costs in our three most expensive markets, New York, LA and San Francisco, and three, the decrease in working capital due to the reduced pace of spending in the fourth quarter. We currently believe that our cash and investments will be sufficient to cover our liquidity needs until the middle of 2011.

As Bill discussed previously, we are pursuing a number of options to resolve our funding needs and we remain cautiously optimistic in our ability to do so.

For the third quarter, the reported GAAP net loss attributable to Clearwire was $139.4 million or $0.58 per basic share. The adjusted EBITDA loss for the third quarter decreased from a Q2 loss of $363.2 million to a Q3 adjusted EBITDA loss of $330.7 million.

Capital expenditures were $763 million in the third quarter, higher than some external projections but only modestly higher than our expectations in projecting our full year cash spending as we expect a significant decline in fourth quarter capital expenditures. Overall, the cost-to-build our 4G network coverage continues to be in the mid $20 range per covered POP.

As Bill mentioned, we are implementing certain measures to preserve cash until we have our next round of funding secured. Our specific initiatives include a substantial reduction in Clear retail sales and marketing spend in both existing markets and selected new market launches. A suspension of Clear branded retail market launches in the Denver and Miami markets, a delay in Clear smartphone launches nationally.

In addition, we are anticipating a sizable reduction in the contractor workforce, a 15% reduction in the number of employees and a suspicion of development of future cell sites not required for our current build plan until such time as additional funding becomes available.

Overall, we believe these initiatives will provide for substantial savings of approximately $100 to $200 million in 2010 and an additional $100 to $200 million in savings again in the first half of 2011.

Lastly, I’d also like to update everyone on our path to profitability metrics from our earliest market launches.

Previously, we disclosed the gross margin, total POP penetration rates and retail CPGA in our three earliest launch markets. This quarter, I would like to expand on this analysis to now include all 2009 launches. This includes approximately 24 markets with an average age of approximately 11 months. The total POP penetration rates in these markets is now an average of 3.3%, including both wholesale and retail operations. The gross margin is approximately 36% and the consolidated CPGA is approximately $127.

The three earliest markets of Portland, Las Vegas and Atlanta have now reached an average age of 16 months and I’m pleased to report that one of those markets has reported two positive months of local market EBITDA. In addition, these three earliest markets are currently forecasted to reach positive market level EBITDA around the 18-month timeframe.

Given that cash conservation measures have potentially affect our growth rates in the near-term, it is difficult to estimate how the EBITDA breakeven analysis will be impacted going forward.

In summary, we believe our overall results demonstrate that Clearwire is delivering on our commitments 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.

With that, I’d like to turn it back over to Bill.

Bill Morrow

Thank you, Erik. I hope you’ll agree that based on the numbers we are making significant progress but it is fair to say that we also have a few hurdles in front of us. But, again, we remain confident in the value of the company and our future.

The lack of concrete funding at this point has caused us to make some very difficult and painful decisions that will impact the speed of our growth, but will also impact multiple upstanding individuals who have made significant contributions to our company and I’d like to take every chance I can, including this one to thank them.

On the competitive front, as we’ve said multiple times, we don’t need to detail on the big incumbents in order to be a successful business. We recognize that we soon won’t be alone in our markets offering 4G service and we believe that is a positive for the mobile broadband market as a whole and equally so for Clearwire and our partners.

I would like to again emphasize the importance and value of the unique asset we have in being in the right place at the right time. With our belief that we will eventually secure the necessary financing, we continue to look and plan ahead in ways that will keep us in our leadership position.

One example of this includes using our superior spectrum position in ways that differentiate and exploits this very valuable asset.

Our trial in Phoenix at the LTE and WiMAX co-existing networks is still underway. But I can say, we are thrilled with the 90 megabit download and 30 megabit upload speeds we are currently experiencing on the LTE 40 megahertz channel configuration.

We know some in the industry are quick to point out that these are unloaded networks, which they are, but the fact remains that we are testing commercially available equipment and devices. We expect the fully developed and standardized LTE 2X technology to produce twice the throughput of the LTE version that other carriers must limit themselves to as a result of their spectrum constraints.

In short, we’ve delivered on our commitments time and time again. We’ve delivered the first and largest 4G network of its kind in the country, whose signal now reaches 100 million people and will be up to 120 million by the year’s end. We’ve delivered on securing world class wholesale partners with a vested interest in the success of mobile broadband. We’ve delivered a rapidly growing customer base of millions of people, which has caused us to nearly double our year-end guidance since the beginning of the year.

We’ve delivered a product portfolio of 4G devices that will be unmatched for the near-term even with the entrance of larger competitors. And with our recent technical trials, we delivered on the promise that our spectrum position can handle more speed and capacity than anybody else, regardless of the technology they are or have plans to deploy. We know we need further funding and we intend to deliver this too.

So, with that, let’s go right to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of [Sheng Yung] with Citadel Securities. Please proceed.

Sheng Yung – Citadel Securities

Yeah. Hi, folks. Thanks for taking the question. Regarding your funding, I know you say you’re considering several options, one of them continues to be an equity raise. We’ve heard some comments from some of your strategic investors about their readiness to contribute more capital should you pursue an equity raise?

And my interpretation of some of their comments seems to be that it sounds like their willingness to contribute more equity sort of depends on whether you’re able to find at least more strategic investor. I wanted to hear you comments on that. Do you see a possibility of potentially raising equity even if you’re not able to find a strategic investor or is that kind of or is that avenue contingent on your ability to find some new strategic investors?

And also on the point of equity, at what point might you consider potentially doing a public offering? Thanks.

Bill Morrow

Sheng, I’ll take the first part and I’ll ask Erik to address the public equity piece. Relative to strategic investors in the Company, we continue to have discussions and options both with existing and with new players that are not a part of the Clearwire family today. Nothing has been concluded and so it’s too early to predict what will happen but we consider both of them as viable options still.

Erik Prusch

As far as public equity is concerned, we are exploring all of the options. There isn’t -- we’re not limited to any one option. Certainly where our focus has been has been on, I’ll say, strategic equity that’s both SIG and outside of SIG, as well as debt markets and of course, the spectrum as well. So we will continue to look at all available options.

Sheng Yung – Citadel Securities

Great. Thanks, guys.

Erik Prusch

Thank you.

Bill Morrow

Thank you.

Operator

Your next question is from the line of Rick Prentiss with Raymond James. Please proceed.

Rick Prentiss – Raymond James

Thanks. Good afternoon. Okay. Couple of questions, one, we’ll try a few more questions on the funding. Do you want and try and have the funding all wrapped together in an announcement. Meaning, could you do debt prior to other or are you trying to like really wrap into a complete solution and when you say short-term funding, is it something you’re just trying to resolve, say, the 2011 gap as opposed to anything that might be a larger gap?

Erik Prusch

So, Rick. Its Erik. As far as wrapping it all together, I think there has been a pace that we’ve demonstrated in the past. If you look at what we did last year, we led with equity and we followed with debt and we believe that we were very successful with that.

I won’t say that there’s a perfect picture. We do have very aggressive plans for the future. We’d like to make certain that we’re well funded and adequately funded in order to be able to not only begin on that but also to be able to conclude on it. But in terms of short-term versus long-term, it’s both, we need to solve both issues.

Rick Prentiss – Raymond James

Okay. And then, Erik, I think last quarter when you gave us kind of the market level information it was good. CPGA, I think, was $294. I wasn’t sure, now that you’re able to breakout wholesale for us, last quarter when you gave us information on penetration rates, CPGA and gross margins was that consolidated or was that retail?

Erik Prusch

It was just retail last time.

Rick Prentiss – Raymond James

Okay.

Erik Prusch

Now we’re breaking out both wholesale and retail and because our business has met an inflection point with the wholesale business, we think it’s very appropriate for us to also start sharing consolidated metrics.

Rick Prentiss – Raymond James

Okay. Can you provide us with the retail component of that was this time, particularly like on the CPGA or penetration?

Erik Prusch

For the individual markets we’re not doing it because we’re moving forward with consolidated metrics.

Rick Prentiss – Raymond James

Okay. And then a final question for you guys. I appreciate the color on the wholesale, a lot more information there. Mentioning that you get so much when it’s out of market, so much when the market is launched, is there any difference between, excuse me, all that when a market is launched versus when a market maybe is commercially available? Bill, I think you mentioned you’re not at a 100 million POPS available even though they’re not launched. Does that have any impact on the wholesale agreement?

Mike Sievert

Hey. It’s Mike Sievert. Yeah. It does. So, it depends on the partner and when they go ahead and begin authenticating. That’s their decision. In most cases, the partners authenticate as soon as the network becomes available. So you start to see increased usage as soon as the network is available and then even more increased usage once it’s commercially launched.

Rick Prentiss – Raymond James

Makes sense. Okay. Thank you.

Operator

Your next question is from the line of Michael Nelson with Mizuho Securities. Please proceed.

Michael Nelson – Mizuho Securities

Thanks for taking the question and congratulations on the strong sub growth. I appreciate the color around your cash conservation measures. But I’m hoping you could expand on that and explain how you plan to continue the impressive subscriber growth while preserving cash?

And then, kind of related to that, it sounds like you’ve identified thousands of sites beyond the 120 million POPS, if and when you receive additional funding. I’m wondering how long it would take you to launch a market once you receive additional funding? Thanks.

Erik Prusch

Michael. It’s Erik Prusch. As far as subscriber growth and cash recognize that what we’ve basically said is that we’re slowing down some of the retail prospective launches. What that allows us to do is conserve cash and as you realize, on the wholesale front it’s not very cash intensive upfront, in fact, there is no CPGA cost related to wholesale. We can continue to grow our base, both retail and wholesale, but we’re certainly going to leverage the fact that they lower cost structure on the wholesale side.

Bill Morrow

And, Michael, let me take the last part. Relative to the sites, again, as we’ve said, last year we think we set the record in terms of building 5,000 sites on air. This year we were going to double that with 10,000. That’s still our intent and so we’ll have about 15,000 on air and I’m speaking roughly now. There’s still another 4 or 5,000 that we’ll have some lease payments on that are geared for the future.

At this point, until we actually have our funding secured, we’re not going to be able to predict how many markets will come on. You can use a general rule of thumb that market depending on its complexity and size may take anywhere from nine to 18 months to turn up.

Michael Nelson – Mizuho Securities

Great. That’s helpful. Thanks. Good luck, guys.

Erik Prusch

Thanks.

Operator

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

Simon Flannery – Morgan Stanley

Thank you. On the cash conservation measures, perhaps you could just talk us through the timing for implementing these, has it already started, how long will it take to sort of reach that run rate? And in particular, what will you be doing in your existing retail markets, are you going to be eliminating advertising, are you going to be shutting stores, will you have any market presence or how should we be thinking about that and the impact there on gross adds?

And then secondly, you just talked about the churn drivers and I think you said it would remain at an elevated level, any thoughts about how that can -- you can mitigate that going forward?

Erik Prusch

Simon, it’s Erik. I’ll take the first one. The expense reductions have already started. We obviously expect them to improve through the course of the quarter. We do expect significant savings in Q4 and for that savings to carry on into the first half of next year as well.

Simon Flannery – Morgan Stanley

And on the retail markets?

Mike Sievert

Yeah. And on the-- It’s Mike Sievert. On the retail markets, generally think about it as being a significant reduction in our marketing and sales activities but a temporary reduction and it’s really during this period of cash conservation. We won’t be removing our presence completely. We’ve designed the plan to conserve cash but retain our ability to scale back up to our normal business model once our funding is brought in. I think on the…

Simon Flannery – Morgan Stanley

Retain your stores?

Mike Sievert

Where we’re operating them by and large, yeah, there are certain stores that we had planned. One of the things that Erik mentioned in his remarks is that some launches are going to be scaled back. So there are markets where we’ve not yet launched, where we will be doing less stores than we would have otherwise planned.

Bill Morrow

But, Simon, there’s a low effort on stores to begin with, so it’s not like a classic model.

Simon Flannery – Morgan Stanley

So a lot of this will be advertising spend?

Mike Sievert

Right.

Bill Morrow

And CPGA.

Mike Sievert

Overall sales and distribution spending.

Simon Flannery – Morgan Stanley

Okay. And then on the churn?

Mike Sievert

So it’s-- churn on the retail side has been coming in about like we’ve been guiding you and it’s driven by a number of different things. One is the ongoing conversion that we’re doing from the pre-4G markets to 4G.

Second is the relative age of the retail subscriber base, which, by the way due to these cash conservation measures will continue, because the number of gross adds coming in as a proportion of the base will not be as significant.

And then finally, the ongoing network build, particularly the fill-in sites that are one of our priorities for funding. And so those are all things that contribute to churn and why Erik commented that he expects churn to remain elevated.

Simon Flannery – Morgan Stanley

And are the congestion or the capacity issues, are they starting to ease now or is that still fairly stable?

Mike Sievert

Yeah. The capacity issues that you heard about are starting to ease. One of the things that Erik mentioned was that we have spent in the second half of this year a fairly significant amount of money on capacity augments. These are projects to go and add carriers and use a little more of our spectrum on our towers and we’ve seen improvement since that program has begun.

Simon Flannery – Morgan Stanley

Thanks.

Operator

Your next question is from the line of Jonathan Chaplin with Credit Suisse. Please proceed.

Jonathan Chaplin – Credit Suisse

Hi. So, two quick ones. First, will the cutback in spending impede your ability to provide good service in the markets that you’ve already launched in any way? So, are you still going to be able to add capacity in those markets as you load subscribers, the 15% of the people that you’re getting rid of, are any of them integral to supporting your network in those markets?

And then second, on the cost savings, it sounds like you’re getting $100 to $200 million in savings for the fourth quarter. Why shouldn’t we just assume that that’s the quarterly savings rate for 2011 until such time as you get new funding? So why isn’t it more like double that amount in the first half of 2011? Thanks.

Bill Morrow

Right, Jonathan. So let me take the first part. We’ll have Erik kind of chime in on the second but I may even address a bit of that. As far as the impeding of any service, we don’t believe that to be the case. We’ve built a model based on what this 120 million POPS should look like. We’ve validated against some of the markets that we have maturity against. This was reported in Erik’s entry presentation and so we’re not so worried about that.

The idea of the reduction of 15% of our workforce, a large part of that if you think of this big growth curve that we have in 2010, there’s natural reductions that would kind of stem off and the other thing I would say about the personnel side, just to give you some comfort about that, is if you consider the fact of where we were last year with 3,600 employees, we’re 4,200 today. We’re probably going to drop about 600 employees and we’ll still be a net gain of 200 from year-over-year. So we’re still keeping a workforce to be able to serve the customer and be ready for as Mike says, to come out of this temporary delay and preservation of cash.

Erik Prusch

And, Jonathan, as far as the timing of the savings, it is going to be a little bit lumpy at first and a little bit more concentrated in terms of Q4 when some of the expense savings are due to hit, relative to what we had originally planned. But it should continue on going forward as well. There are some one-timers in that but there’s also some ongoing expense drivers that we would see past Q2 for instance.

Jonathan Chaplin – Credit Suisse

So, Erik, just to follow up. Are you going to reduce your cost base by $1 to $200 million in 4Q and that continues and then you reduce it by an incremental $1 to $200 million in the first half of 2011 so that the total reduction will be to your sort of ongoing cost base will be more like $2 to $400 million.

Erik Prusch

That’s about right. We currently are estimating up until that mid 2011 period, that we’d get a cost savings of between $200 and $400 million assuming nothing else.

Jonathan Chaplin – Credit Suisse

One last one, if I may. It seems like one of the, we keep hearing that one of the big issues that Sprint has been pushing for is for you to cutback on your retail business. And you’re, it seems like most of the savings are coming from cutting back on the retail business. Is it too much to assume from this that you and Sprint are closer to reaching an agreement on funding?

Bill Morrow

You know, Jon, idea about where our cash preservation models is stuff that we’ve looked at, Jonathan, and we think is just prudent. Again, I want to emphasize the temporary nature, there’s no correlation to the funding and/or our shareholders.

Jonathan Chaplin – Credit Suisse

Okay. Thank you very much.

Operator

Your next question is from the line of Walter Piecyk with BTIG. Please proceed.

Walter Piecyk – BTIG

Great. Thank you. Can you just give some more details on what this dispute is over specifically? Is this related to, you said it’s different devices. It’s just because it’s a phone as opposed to a 3G, 4G hotspot type device?

Mike Sievert

Yeah. Walter, it’s Mike Sievert. The issue has to do with pricing for smartphones. We do have an agreement in place that sets pricing for smartphones but the two parties are interpreting that agreement differently, so we’re in active negotiation and expect to resolve the issue.

In his remarks, Erik mentioned that we’re recognizing revenue very conservatively for smartphones until the issue is resolved. And we think we’re entitled under the agreement to significantly more than we recognized, which would have put ARPU more in the $9 range, as he mentioned for Q3. We see a lot of opportunity for ARPU growth overtime from that figure but we’re just getting started with smartphones and expect to see 4G usage per customer grow materially overtime.

Walter Piecyk – BTIG

Is there any existing agreement in place between you and your wholesale partners that dictates, because you refer to usage and how that’s the third element, how usage is going to go up, I think Bill had mentioned that in his comments, is there a cap on that? Is that based on like per megabyte? Is it based on percent of the ARPU of that underlying mobile phone or handset that has the data usage or what’s the existing structure in that wholesale pricing arrangement?

Mike Sievert

Yeah. Walter, I can’t give you details. I’m sorry about that. All I can do is to say, yeah. We do have an agreement between the parties. What we have right now is a difference in interpretation of it. I will tell you that usage is one of the components in our pricing model though and so the higher the usage the more revenue you can expect.

Walter Piecyk – BTIG

But is it usage based on, hey, there’s a mix of usage 4G versus 3G and that relates to the overall ARPU or is it kind of like, hey. For example, Leap has a roaming agreement with Sprint and they’re going to pay a certain price per megabit. If their customers go crazy that expense is going to go up. So is there a similar type of thing where regardless of what the revenue is that the wholesale partner is getting, they’re going to be billed on a per megabit basis?

Bill Morrow

Hey, Walter, this is Bill. I understand the need for you to know that information. At this point, because we’re in the middle of the negotiations, there’s really nothing else that we can guess. But when we get it sorted out, we’ll look at what we can provide to you to help you with your modeling.

Walter Piecyk – BTIG

Okay. So I guess the last question is, I mean, which is kind of the same question, sorry, but Simon Flannery had asked on the Sprint call, whether they expect a material increase in their payments to you guys. Maybe I misunderstood (inaudible) response, but I’m looking at it right now and he’s pretty much saying that he doesn’t expect any material increase in payments to you guys as you light up new markets, so how ultimately does something like that get resolved?

Bill Morrow

Again, there’s a standard process that we’re confident that we’re going to resolve this issue and that’s why we’ve reported in a conservative manner right now and as soon as we do get it resolved we’ll let you know.

Walter Piecyk – BTIG

Awesome. Thank you.

Bill Morrow

Thank you.

Operator

Your next question is from the line of Sid Parakh with McAdams Wright Ragen. Please proceed.

Sid Parakh – McAdams Wright Ragen

Hey. Good afternoon, guys. A question on pricing here, Erik, you mentioned you raised prices earlier in October by about $5. Have you seen kind of an impact on or maybe a moderation of subscriber uptick since?

Mike Sievert

No. Not, certainly not due to the pricing. This is something that we test marketed pretty carefully and found that the demand for our services would be just as strong, certainly revenue positive and that’s why were able to outlook. Erik, in his remarks, mentioned that we would expect Q4 ARPU to be in the $44 range.

Sid Parakh – McAdams Wright Ragen

Okay. And then, a second question is. Do your wholesale issues kind of tie into this ASP increase on the retail side or does the retail pricing have no bearing on what wholesale pricing is?

Mike Sievert

They’re not really tied at all. But I will say it’s not tied to that price increase but we do have a retail-minus construct as we’ve explained in the past. So our wholesale prices do in part depend upon our retail prices.

Sid Parakh – McAdams Wright Ragen

Okay. But that’s not the issue under negotiation?

Mike Sievert

Right.

Sid Parakh – McAdams Wright Ragen

Okay. And then a second question is, you’ve talked about increased capacity related CapEx. Can you give us a flavor for going into certain markets what you do build out in terms of capacity and how much more you’ve had to layer on since, say, subscribers have come on to the network?

John Saw

Hey, Sid, John Saw here. I can best answer the question in terms of how much spectrum we start with.

Sid Parakh – McAdams Wright Ragen

Sure.

John Saw

We typically start every market with about 30 megahertz of spectrum, 10 megahertz per sector and then we will watch the growth. I think what happened recently, with the tremendous growth in number of subscribers is that we do have to add more carriers in terms of spectrum and that’s what we’re doing.

Sid Parakh – McAdams Wright Ragen

Okay. Then final question for me. The cost cuts you’ve identified are appear fairly disruptive in terms of when you say you’re going to cut-off 15% of your workforce. Rehiring and redeploying can be quite a challenge, I mean, how do you foresee picking up traction as soon as you have funding in place? I mean, should we expect that timeframe from when you get funding to when you start-off with all these new activities all over again, what kind of lag should we see there?

Bill Morrow

Yeah, Sid. We don’t see these as that bad. These, again, are designed to be temporary to where when we secure the funding we can bring back the workload, reestablish the momentum that we have. We’re preserving a lot of things in place to be able to do just that. So, as far as the timing, again, I’m going to wait until we actually secure the funding and depending on the amount and that timing then I’ll give you a more accurate depiction of what that will look like.

Sid Parakh – McAdams Wright Ragen

All right. Thank you.

Bill Morrow

Thanks, Sid.

Operator

Your next question is from the line of Kevin Roe with Roe Equity Research. Please proceed.

Kevin Roe – Roe Equity Research

Thank you. Bill in your initial comments you mentioned the formation of a special committee. Is their mandate independent of your search for funding or does the special committee go away if funding is secured? And you’ve seen the T-Mobile 4G marketing stand or network claim. What’s your response to that and what action may you take if any?

And the last question for Erik, on the cost reductions specifically headcount, 15% target. When do you hope to achieve that 15% reduction by year-end for instance? Thank you.

Bill Morrow

Thanks, Kevin. On the special committee, again, this is to look at all strategic options for us to address value creation for our shareholders. If we secure the necessary funding the Board will make that decision at the time but I suspect that it wouldn’t be necessary once we secure that.

Relative to the marketing messages that are out in the marketplace right now around 3G and 4G and all of that, what I will tell you, Kevin is that, we see the customer and consumer behavior that demonstrates when you put a true 4G service out there we know that it’s necessary to provide speeds and not only speeds from the initial deployment but speed when the network is truly loaded up. Again, as we talked about 2.84 million subscribers that have access to our network and still having the speeds that are more consistent with the 4G service. You have latency issues that also you need to be careful to manage.

But bottom line, again, we’ve talked about this before, capacity is king when you consider 7 gigabytes consumption and so from our point of view, when we look at this, we really like the fact that what we deliver to our customers, most of them don’t even understand 3G and 4G and quite frankly, don’t care.

Erik Prusch

And, Kevin, to address the headcount question, it really differs by function. But in general I’d say that we would expect that around year end we would be complete.

Kevin Roe – Roe Equity Research

That’s helpful. Thank you.

Operator

Your final question comes from the line of Kevin Coyne with Goldman Sachs. Please proceed.

Kevin Coyne – Goldman Sachs

Hi. Thank you for taking my call, my question and most of my questions have been asked and answered. I was just wondering, with the expected cuts in employees, will there be severance and cash outflows and also, would the -- when would you expect them to leave the payroll?

Erik Prusch

So there are modest several packages that are typical and common within the industry and we are executing on these right away. The bulk of them would be immediate.

Kevin Coyne – Goldman Sachs

Great. And because you view it as potentially temporary, are you going to leave them on benefits as a type of flow or will they lose benefits as well?

Erik Prusch

No. They’ll lose benefits as well, but the idea is that for our top performing people, we’re hoping to keep the relationship with we can open up the door in the event that we get our funding quickly.

Kevin Coyne – Goldman Sachs

Great. Thank you.

Operator

I’d like to turn the call back over to Mr. Bill Morrow for closing remarks.

Bill Morrow

Well, again, you guys, we really appreciate you taking the time. We know that we’re at this unique inflection point in the company’s history and as the first to bring true mobile broadband to millions of Americans, we understand that the convergence between mobility and broadband Internet will dramatically enhance the way which people live, work and communicate of course.

We fully intend to retain our 4G leadership position and capitalize on the opportunity. As you, hopefully, can see by the numbers, we see ARPUs coming up, we see the management of churn taking place, the lowering of the CPGA, the rebalancing to more of a wholesale model as we go forward, the build of a network that is really unprecedented and quite frankly, record builds consistent with what you’ve told you. So we want to get this funding issue resolved and we will be putting a priority on that.

And with that, again, thank you and we’ll be talking to some of you individually here shortly.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for participating. You may now disconnect. Have a great day, everyone.

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