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Executives

Erik Prusch - Chief Operating Officer

Alice Ryder -

John Saw - Chief Technology Officer and Senior Vice President

Hope Cochran - Chief Financial Officer

John Stanton - Chairman, Interim Chief Executive Officer and Member of Strategic Committee

Analysts

John Hodulik - UBS Investment Bank

Philip Cusick - JP Morgan Chase & Co

Walter Piecyk - BTIG, LLC

Michael Funk - BofA Merrill Lynch

Jonathan Chaplin - Crédit Suisse AG

Richard Prentiss - Raymond James & Associates, Inc.

Michael Rollins - Citigroup Inc

Clearwire (CLWR) Q2 2011 Earnings Call August 3, 2011 4:15 PM ET

Operator

Good day, ladies and gentlemen, and welcome to your Q2 2011 Clearwire Corp. Earnings Conference Call. [Operator Instructions] As a reminder this is being recorded. I would now like to introduce Ms. Alice Ryder, Vice President of Investor Relations. You may begin.

Alice Ryder

Thank you, Mary. Good afternoon, and welcome to Clearwire's Second Quarter 2011 Financial Results Conference Call. With me today are John Stanton, our Chairman and interim CEO; Erik Prusch, Clearwire's Chief Operating Officer; and Hope Cochran, our Chief Financial Officer. John Saw, our Chief Technology Officer is also available for the question-and-answer session.

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. A reconciliation of pro forma financial information and any non-GAAP financial measures discussed in this call can also be found in our press release. In particular, we have pro forma income statements, including pro forma wholesale revenue and pro forma wholesale ARPU and pro forma net loss, which adjust for the timing of certain payments from Sprint in conjunction with the wholesale pricing agreement we signed and a related settlement payment we received during the second quarter.

In addition, today's call may contain forward-looking statements reflecting management's beliefs and assumptions concerning future events and trends in expectations regarding financial results. Forward-looking statements include, among other things, our future financial and operating performance and financial condition, including projections and targets for 2011 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. Unless otherwise specified, forward-looking statements made on this call excludes the impact of the company's recently announced plan to add LTE technology on its network. 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.

Additionally, all mentions of EBITDA on this call reference adjusted EBITDA as defined in our press release. Beginning in the second quarter, we have also updated our definition of adjusted EBITDA to exclude non-cash write-downs, which reflects the measurement our management uses to evaluate our operating performance. We believe this definition is also consistent with how investors and others evaluate our performance.

In addition, we are currently pursuing a sale of most of our international operations and as a result, starting in the second quarter, we are reporting these portions of our international operations as discontinued operations in our financial statements. The financial statements and metrics from continuing operations primarily reflect the domestic business and for comparative purposes, prior period figures have been adjusted to reflect this change.

I will now turn the call over to John Stanton.

John Stanton

Thank you, Alice, and thanks for joining us today. Our team is focused on achieving profitability. We have 4 simple goals. First, drive wholesale revenue growth, particularly with Sprint and our cable partners. Second, optimize the retail channel for cash generation. Third, cut costs. And fourth, develop and implement a long-term technology and funding plan.

On this call, Erik will describe our operating strategies, including our plans to grow revenue and cut costs and provide details of our network evolution plans. Hope will review the financial results, that specifically demonstrate our substantial progress towards achieving our goals.

For the last few months, we've been diligently working on the next strategic phase for Clearwire, which we would like to share with you today. Based on the success and insights from our now completed Phoenix trial, we plan to add LTE services to our present network in areas with high usage concentration where we can meet the needs of our current partners and other major carriers. Our carrier customers would use LTE capacity to supplement their offerings.

LTE will be implemented by overlaying most of our existing 4G network. We will not use Sprint's project vision in our existing markets because it is substantially more expensive compared to the cost of overlaying our own network. We are in discussions with Sprint about using vision in new build markets in the future.

We plan to maintain the WiMAX network for a significant period of time to serve our present customers. We believe WiMAX will continue to represent an appealing product for certain market segments.

There are 2 key reasons we can implement this strategy: our spectrum and our network. We have the largest, deepest spectrum position in the industry on the best and only globally coordinated band, differentiating ourselves from any other carrier or want-to-be 4G operator.

With an average of 160 megahertz of spectrum nationwide, we have more spectrum than even AT&T and T-Mobile combined. With all of our spectrum in one contiguous band, our spectrum depth enables us to deploy wider channels, or fatter pipes, to enhance the throughput speed and capacity.

Spectrum in the 2.5 gigahertz band is ideally suited for high-volume wireless data. High-frequency spectrum is much more conducive than low- or mid-band spectrum to meeting the usage and speed requirements of heavy tonnage users in densely populated markets.

The 2.5 gigahertz band is also the sweet spot of global TDD LTE evolution. Earlier this year, Clearwire cofounded the GTI consortium with China Mobile, Vodafone, SoftBank and Bharti. Clearwire was the only American carrier included in the consortium. The members of this consortium serve more than 1.3 billion customers, representing 4x the population of the U.S. This means that this group will be driving the lowest possible cost and greatest variety of devices.

The challenging -- the challenge in operating a network today is providing sufficient capacity to meet peak demands in each cell site at every hour of the day. After spending the last 25 years building coverage networks, I can tell you that in most of the country, coverage is now a commodity. It is capacity that is king.

The second key to our ability to quickly and efficiently offer LTE service is that generally, our existing 4G WiMAX network can easily be upgraded to include LTE. As Erik will describe, we can deploy LTE in our present markets for a modest amount of incremental capital within a year of commencing the deployment. Those markets, which include 35 of the top 40 MSAs in the country, represent the vast majority of high network usage areas in the country.

Our strategy going forward will be to provide all carriers in large markets with LTE capacity, where they want it, when they need it. Our LTE strategy is to be the Switzerland of urban 4G LTE capacity, meeting every customers' capacity needs.

I want to distinguish our position from that of a company called LightSquared. As most of you already know, that company is mired in a contentious dispute at the FCC with the FAA, the Department of Defense, the Department of Transportation, the U.S. NTIA, the GPS industry and many others, over whether it's L-Band satellite spectrum can safely be used for terrestrial LTE services. The dispute arose after testing ordered by the FCC clearly demonstrated that significant GPS interference would result from their original deployment plans. We have first-hand experience. As we reported to the FCC during LightSquared's 3-site trial in Las Vegas, they knocked one of Clearwire's sites off the air. LightSquared recently submitted a revised proposal to use only 2 x 10 channel for its networks. However, even this proposal faces strong opposition at the FCC and no one yet knows what, if any, spectrum will be available for use.

Even if their revised proposal is approved by the FCC, LightSquared would be competing with limited, mid-band coverage, not robust, high-band capacity. If they get approved for a 2 x 10 megahertz channel, our superior spectrum position will allow us to offer approximately 10x the capacity at each cell site. And if they only get a 2 x 5 megahertz channel, we will have more than 40x their capacity. Clearwire has built a network that serves nearly 8 million customers in urban areas across the country. We plan to continue to evolve our network to continue to meet the high capacity needs of carriers and customers as Erik will describe. Erik?

Erik Prusch

Thank you, John. During the second quarter, we continue to execute on our plan, demonstrating significant wholesale subscriber growth while managing retail for cash. We added 1.5 million net new wholesale subscribers in the quarter, bringing our total wholesale subscriber base to over 6.3 million. This represents 31% growth in the wholesale base quarter-over-quarter and a near doubling of our wholesale subscriber base since year end 2010.

As we discussed on the last quarter's call, we expect a slow growth in retail as we focus on our most cost-effective channels and reach profitability. In line with that plan, we added 39,000 retail subscribers to end the quarter with a retail base of 1.3 million, which represent a 17% increase from year end 2010. As we outlined last quarter, our plans for the second half of the year do call for a continued emphasis on profitability and diminishing retail net adds.

Revenue continued aggressive growth in the second quarter on strong contributions from both the retail and wholesale businesses. Retail revenue built on the impressive subscriber growth in the first quarter and a record high ARPU in Q2, while wholesale revenue benefited from strong quarterly subscriber growth and a 42% increase in aggregate, wholesale network tonnage from Q1. Smartphones continued to be the primary driver of wholesale subscriber growth, as well as aggregate network usage, as aggregate smartphone usage increased 74% from Q1 to Q2. With the usage space pricing agreement put in place with Sprint and the industry trends pointing to increasing smartphone penetration and data usage, we expect to see wholesale revenue representing an increasing share of total revenue in the second half of the year.

Looking beyond our quarterly results, I'd like to touch on a few industry developments that I think framed the tremendous opportunity that we have as the leading 4G wholesale provider in the U.S., with an unmatched spectrum position, all of which can concurrently be used for 4G broadband services.

According to data published by the Nielsen Company on smartphone usage, monthly data consumption on Android-based smartphones grew 86% from Q1 2010 to Q1 2011. Android-based smartphones are averaging almost 100 megabytes in usage per month, more than the iPhone and several hundred megabytes more than BlackBerry or Windows-based smartphones. Over that same period, total smartphone penetration increased from 23% to 36%. Wireless carriers with limited spectrum positions are already feeling the pressure of this increasing demand for data as evidenced by the discontinuation of most all unlimited data plans for smartphones in favor of tiered usage plans with overage charges.

While some in the industry see their customers increasing demand for data and their own finite capacity as a paradox that can only be resolved with restrictive offerings, we see opportunity for ourselves and for our wholesale partners to take advantage of a network that is in place today and which has unmatched spectrum depth and an unparalleled cost structure to deliver on the true value proposition of 4G.

As case in point, Sprint's recent success promoting and marketing unlimited 4G and the recently announced plans to wholesale 4G services are completely dependent on, and only made possible by, Clearwire's 4G network.

In addition to revenue growth, we also focused on optimizing costs as we execute on our plan to reach profitability. During the second quarter, we entered into outsourcing agreements with 2 of the premier managed services providers in the industry. In May, we announced that Ericsson would assume responsibility for day-to-day management of Clearwire's 4G network and in June, we transferred day-to-day responsibly for customer care and technical support to TeleTech.

These arrangements were designed specifically to take advantage of the scale of these service providers to lower our operational costs while maintaining a quality service level for our customers. As a result of these 2 outsourcing arrangements, we transferred approximately 1,400 employees to these companies.

In conjunction with the managed outsourcing, as well as other planned and natural attrition, Clearwire's domestic headcount decreased to approximately 1,260 employees at the end of the second quarter. We expect to continue realizing cost savings from these outsourcing agreements and the associated headcount reductions in third quarter of 2011 and continued savings as we exit the year.

I would like to conclude with a brief update on our 4G build, share with you some exciting results from our LTE trials in Phoenix and discuss our plan to add LTE technology to our network. We ended the quarter within 16,000 sites on-air and since the end of the first quarter, total 4G coverage has increased by 7 million to a total of 132 million POPs, including 2/3 of the population in the top 100 U.S. markets. The growth in covered POPs is primarily from build outs that satisfy certain FCC licensing requirements, as well as for minor network expansions in several launch markets, including New York City; Philadelphia; Washington, D.C.; San Francisco and Seattle. As we prepare to implement LTE technology on our network, we expect marginal expansion of our WiMAX coverage from limited augments and operating markets and fulfillment of our remaining FCC license requirements.

We are also pleased to report the results of our Phoenix LTE trials, which were brought to a conclusion during the second quarter. The objectives of the test were to understand the technical and operational issues associated with coexisting WiMAX and LTE networks and to push the limits of the LTE standards for performance on a wide-channel configuration. Bottom line, the tests were an unqualified success on both fronts. Our engineers reported that a significant portion of existing WiMAX infrastructure can be reused for LTE, allowing a cost effective implementation and simultaneous transmissions of both systems.

Even more exciting, by using a wide-channel configuration that will be supported by the LTE advanced standard, we were able to achieve sustained mobile throughputs of over 120 megabits per second. The rapid growth in high-bandwidth applications will make this type of performance necessary to meet future needs.

Since launching our first CLEAR markets in 2009, video has become the dominant application for our service with aggregate traffic growing by 10x to account for 50% of total tonnage as of June 2011. As more video-intensive smartphones and service offerings penetrate the market, we expect the bandwidth pressures to significantly stress other wireless networks. Again, we feel we are well-positioned to monetize these trends and achieve a cost per gig competitive advantage.

Based on these results which demonstrated our ability to operate 2 technologies on our network, and the unprecedented potential of dedicating our deep 2.5 gigahertz spectrum holdings towards broadband data applications, we have decided to proceed with an overlay of LTE technology on our existing network, subject to funding. The initial implementation will focus on the areas with the highest concentration of 4G usage in our existing operating markets where we believe our services will be needed most by both current and future wholesale customers.

This targeted deployment will complement our existing WiMAX network, which will continue to serve millions of devices and which will remain committed to operating at service levels our customers and wholesale partners have come to expect. When evaluating the strategic options for our LTE deployment, we consider 2 major factors. The first was our ability to leverage our existing flexible all-IP network infrastructure in order to realize significant capital savings. The second was the ability to leverage the operating experience and technical expertise that comes from being the first company to actually build a 4G network that already provides service to millions of customers of both our retail brand, as well as our wholesale partners. When considering the other options of either building a new network from scratch or relying on a third-party to provide hosted infrastructure in our existing markets, it became clear that the overlay approach presented the least execution risk and the most cost-effective means to bring our LTE network to market.

At present, our best estimate is that the CapEx cost of an LTE overlay in the high-tonnage areas of our 4G operating markets will be approximately $600 million and that a typical market overlay can be completed within 12 months of initiating the build. By dedicating our abundant spectrum and leveraging our existing WiMAX network infrastructure, we believe we will be able to deliver unmatched tonnage at unparalleled throughput speeds and continue to position Clearwire as the market leader in the 4G space.

With that, I'd like to turn it over to Hope.

Hope Cochran

Thanks, Erik. We are very pleased to share our record Q2 results, which demonstrate solid execution on all fronts. We believe we have delivered on our core financial metrics and are well-positioned to meet our 2011 goals.

With 7.6 million subscribers as of Q2, we are on pace to more than double our 2010 subscriber base this year. In fact, we've increased our 2011 subscriber guidance from 9.5 million to 10 million net adds this quarter. We've continued to achieve double-digit retail subscriber growth year-to-date and retail is already contributing meaningful cash to the overall business in 2011.

Wholesale has demonstrated tremendous subscriber growth coupled with impressive increases in usage on the network leading to record wholesale revenue. We said that we could turn EBITDA positive in 2012 and we believe our Q2 results clearly demonstrate, not only that this milestone is within reach, but that we can get there in the first quarter of 2012.

So let's talk about our Q2 2011 results. On a pro forma basis, revenue increased 16% to $294 million from prior quarter, with the growth coming from both the retail and the wholesale businesses. The Wholesale business had a record pro forma revenue of $103 million or 33% increase quarter-over-quarter and ARPU of $6.18. The ARPU was slightly lower than pro forma wholesale ARPU of $6.37 in the first quarter, despite a significant increase in overall network usage, due to the impact of volume pricing tiering and a product mix shift in the customer base, which we expect will continue throughout the year.

Retail revenue built on the impressive subscriber growth in the first quarter and a record high ARPU of $47.59 in Q2 to reach $101 million -- $191 million or 9% growth quarter-over-quarter.

In Q2, retail ARPU benefited $0.41 due to a onetime event and we anticipate it coming down slightly throughout 2011.

On the expense side, cost of goods and services and network costs increased 80% to $433 million quarter-over-quarter. Excluding non-cash expenses of $250 million, which I'll discuss in a moment, COGS decreased 6%, primarily as a result of the actions we took in Q1 2011 to lower network-related costs and 3G roaming expense.

SG&A decreased 17% quarter-over-quarter to $178 million. Sales and marketing declined as a result of purposely focusing on lower cost channels and cost-effective marketing.

In addition, the G&A cost structure was reduced due to employee reductions taken in the Q1 2011 time frame. As Erik discussed earlier, we plan to add LTE to our existing network and focus primarily on high usage areas. With this strategy in mind, we reevaluated our construction and progress balance to ensure that it reflected assets that would be placed in service in a timely manner. Through that analysis, we determined that of the over $4 billion in PP&E assets it would be prudent to take non-cash write-downs totaling $591 million. $215 million is included in COGS and $376 million is in the loss from abandonment of network and other assets. The rationale of the non-cash write-downs is primarily related to sites and equipment that have not been and that we don't intend to deploy in the current network based on our future plans for LTE in high usage areas, as well as continued lease terminations in line with our cost cutting efforts.

Now, let's turn to EBITDA performance. As a result of the revenue increase and operating expense improvement, pro forma EBITDA loss of $109 million improved $85 million quarter-over-quarter, demonstrating the powerful impact of coupling continued strong top-line growth with disciplined cost control measures. This puts us comfortably on the path to be EBITDA positive in Q1 2012.

Further evidence of our progress in expanding revenue and cutting costs are the results we see at the market level. Market EBITDA, which measures the profits generated by our market operations and excludes corporate G&A, spectrum lease expense and other noncash or onetime items, we believe indicates our progress in executing our plans to reach profitability.

Last quarter, we reported that the 4G markets that launched in 2009, which cover 35 million POPs reached market EBITDA positive as a group. In the second quarter, this group continued to expand and improved their margin to 32% market EBITDA margins, up from 7% in the first quarter.

In addition, I am very excited to announce that as of the second quarter, our entire 4G operating market portfolio, including those launched in 2010, is market EBITDA positive and is already generated double-digit market EBITDA margins. This impressive accomplishment is a result of both revenue growth and a disciplined focus on lowering operating expenses. We are very pleased to reach this important milestone when the markets are, on average, only 14 months old, which is much earlier than our 18-month expectation and gives us further confidence that we are well on the way to positive EBITDA as a company in early 2012.

Capital expenditures in the second quarter were $56 million, down significantly from $130 million in the first quarter when we we're still contemplating or completing the build out of recently launched markets. We continue to expect that 2011 capital expenditures will be less than $400 million and do not include incurring any expenditures related to our contemplated LTE deployment in 2011 without securing additional funding.

We ended the second quarter with $848 million of cash and cash equivalents and on July 29, we received a cash payment of $97 million from Sprint for the second installment of the prepayment and take-or-pay commitment for 2011.

With our present cash and the cash we expect to receive under our Sprint wholesale agreement, we continue to believe that we have sufficient liquidity to fund our WiMAX operations for at least the next 12 months, during which we expect our operations to begin generating positive EBITDA.

To fund the existing WiMAX business, we expect we will need between $150 million and $300 million of additional capital, primarily as a working capital buffer and to a lesser extent, to fund our business over the long-term. We plan to seek further capital to fund the LTE deployment or any future network expansion we may consider.

In the second quarter, we covered significant ground in our march towards positive EBITDA. In the second half of the year, we will continue to execute on our plan of driving wholesale revenue and subscriber growth while managing the retail customer base to contribute operating cash and focusing on cost control to position the company to achieve our goal of turning EBITDA positive in the first quarter 2012.

And now I'd like to turn the call back over to John for some closing remarks.

John Stanton

Thanks, Hope. Since last we spoke, our board and executive team have continued to participate in discussions with outside parties around an array of strategic alternatives. Some involve strategic equity investments, some involve sale of assets while others contemplate a form of debt financing, including vendor debt. While it is premature to discuss the specifics of those discussions, I assure you that we are considering all possible avenues available to Clearwire in determining the best path for our company and our shareholders.

We continue to search for a CEO. Our search committee has made good progress and we hope to announce a permanent CEO soon. I will continue to serve as the interim CEO until we name a replacement, after which time I intend to remain actively involved with the company as Chairman of the Board and Chairman of the Strategic Committee of the Board. I've been building wireless systems since 1982. Of the companies I've been involved with including McCaw Cellular, VoiceStream, Western Wireless and 2 dozen businesses around the world, Clearwire has the richest spectrum position, the largest network, the largest customer base and the best balance sheet at this stage of development of any company with which I have been associated. My family and I have invested our own money in this company and we remain excited about its opportunity.

With a rich and unencumbered spectrum position and flexible all-IP 4G network covering the most densely populated areas in the country, a growing customer base and revenue base and now, a clear path to next-generation LTE technology, this company is positioned for great success.

Mary, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Hodulik from UBS.

John Hodulik - UBS Investment Bank

I guess -- maybe first couple of questions on what's going on in retail. It looks like that's still a substantial portion of the revenues but you're going to concentrate less on that from a marketing standpoint. I saw churn picked up to about 3.9% and maybe, Hope, in your comments, you said you're going to manage it for cash. Does that mean we could expect the net adds to potentially turn negative? And if you could comment a little bit more on maybe on what do you think about from future trends in churn there. And then I guess, just getting back to the whole financing issue. I take it that you're still on hold with the new LTE strategy until you get some line of sight to the incremental $600 million. And then beyond that, can you talk about maybe what usable speeds you expect with the new infrastructure? And maybe at a little bit of commentary on the type -- or when we can expect potentially devices to be ready for this frequency with TDD, LTE? I mean, I know you mentioned that you're in development with some of the -- China Mobile and some of the other carriers, but if you could talk a little bit around the ecosystem there, that would be great.

John Stanton

Well, John, congratulations. I think you asked all of the questions. What I'd suggest is why don't -- Erik will comment on your question concerning retail. I'll talk a little bit about financing and then Erik can talk about the speed and the TDD issue. Why don't I just comment on the financing first since that -- and let Erik address the others and he might want to bring John Saw into the conversation. With respect to financing, we're having a number of conversations. We've been working on it through the summer and we continue to view that as a gating item as you suggested too, for the deployment of LTE. But, given our expectation of the timing and frankly, the speed to which we can deploy LTE, we don't think that, that will be problematic in terms of our relationships with our customers. And we continue to believe that this company can -- has access to the capital markets and we're looking for the best and right opportunity for us. Erik?

Erik Prusch

As far as retail is concerned, we're very pleased with the progress. We've mentioned upfront at the beginning of the year that we would be actively managing our retail channel, not only putting resources against our most optimal channels or sub-channels within the retail business, but also managing the business for cash. And so far so good. We've done a great job, we're exceeding our internal plans. We're still obviously positive from a net add standpoint and we continue to manage that business aggressively. The churn did elevate. We were going into a seasonal high period in terms of our low period in terms of Q2. As we come out of Q2, we're still bullish that we're going to be able to generate double-digit growth this year in terms of the subscriber base, and we feel very good about where we're headed.

John Saw

On the -- this is John Saw here. In terms of speed, in the trial that we did in Phoenix in a mobile environment, driving around we were able to see 50 to 90 megabits per second as an average speed. Peak speeds exceeded 120 megabits per second. These are obviously very impressive speeds and it's indicative of what this technology can do with the deep spectrum that we have. So we expect that our commercial customers are able to get speeds that's going to far exceed what is available today in any LTE networks. In terms of device ecosystem, we are extremely excited. The 23 to 27 gigahertz band where our spectrum sits right in the middle of, is considered the closest thing to a world band for 4G LTE. A lot of countries are adopting this band for 4G, including some of the largest operators in the world. Clearwire is one of the founding members for the global TD-LTE initiative, the GTI, together with some of the largest operators that together, have more than 1 billion customers that they serve today. And we are excited about the potential for this ecosystem, for TD-LTE to flourish.

Operator

Our next question comes from Walter Piecyk from BTIG.

Walter Piecyk - BTIG, LLC

Can you give any sense of what your time line is on the capital raise? You laid out a couple of different options. Obviously, the LTE is very exciting for you guys. How anxious are you to get that capital in and get that going?

John Stanton

I think I'll try and answer the question a little bit differently just to say that from our point of view, we need to be responsive to customers when they need and where they need it and because ours is represents enormous amounts of capacity and frankly, the deployment of LTE devices is not that extensive today with the Verizon network just being a few months old and really being the only one that's deployed at LTE. We believe that we can be responsive to that ecosystem with a network that supplements the other networks on a time frame even if we don't start the deployment for a couple of quarters. In terms of the capital -- If I can just finish, in terms of the capital markets, we're going to be opportunistic that the summer is rarely a good time to be raising money. We're in a position where the company is, as Hope's commentary suggested, well-financed well into 2012. We clearly need to be in the capital markets or in a strategic transaction. But bluntly, I don't want to create an artificial expectation that there's a deadline, nor do I want to send a signal that -- to the market that something's imminent. We are working on it, and we will be informing the market when we're ready.

Walter Piecyk - BTIG, LLC

And is the international sale part of that? I mean, is there -- is that a -- do you expect that to be a substantial amount of money? And is there a time line for that?

Hope Cochran

Walt, this is Hope. In regards to the international sale, as you can see in our financials this quarter, we have put them into a category of held for sale. So it is our intent that we will be selling them. We're not counting on funds from that sale to fund any expansion of a network in the United States.

Walter Piecyk - BTIG, LLC

Do you have any ballpark number of what you think that, that sale will raise in cash?

Hope Cochran

We're just starting down that process. I wouldn't say we have a ballpark at this time. I wouldn't expect it to be substantial.

Walter Piecyk - BTIG, LLC

Okay, and then just a last question on the operational. Maybe, John, you can answer this about what's the average usage like on your customers today? And how much spectrum are you planning to use for the TD-LTE deployment?

Erik Prusch

Well, it's Erik. In terms of our average usage, the last time we really reported usage other than growth was a few quarters ago. We're still seeing nice trends, nice growth on a per device basis across all of our lines of business. And that's a trend that we expect to continue and to continue to be able to monetize. Of course, on the wholesale front, there's direct revenue to those growth trends and we expect smartphones to continue on that as predicted. And so when you get a combination of both per device growth, as well as tons of devices coming on, that bodes very well from a revenue standpoint.

John Stanton

And, Walt, John here. In terms of spectrum use, LTE is going to be most spectrally efficient and we expect to start with 20 megahertz for a market and then continue to add 20 megahertz carriers as capacity demands.

Operator

Our next question comes from Phil Cusick from JPMorgan.

Philip Cusick - JP Morgan Chase & Co

So on the LTE overlay, I mean, it sounds like you're pretty realistic about timing here. Maybe you start in a couple of quarters, it takes a year to build. We really shouldn't look for any incremental sort of revenue there until probably '13. Is that fair?

Erik Prusch

I think that's absolutely fair.

Philip Cusick - JP Morgan Chase & Co

Okay. In terms of wholesale, the $6.18 this quarter, off a little bit sequentially. Is this a good run rate to use from here, Hope? Is that the right way to think about it?

Hope Cochran

Yes. Phil, as we look at the wholesale ARPU and it's specifically within the 2011 time frame, we do see it trending down slightly, primarily due to 2 reasons. One, is a product mix shift meaning that there'll be more smartphones within the product mix than single-mode RSUs and they just have a lower amount of usage. So you have a little bit of averaging down. In addition, you do have the tiers kicking in. As the usage increases we do have volumes tiers that brings the overall cost per gig down. So we do anticipate through 2011, it will trend down slightly, but not dramatically.

Philip Cusick - JP Morgan Chase & Co

Okay. And then last one for Hope also. On the cost cuts from here, where, really should we looking for that? So marketing cost has come down but cost of service sort of trending a little higher still. Can things start trending down again or really, we're scaling from here on the cost front?

Hope Cochran

Yes, it's a great question. We had some good cost reductions on our numbers this quarter that you can see. And a good improvement in EBITDA as a result of that. We will continue to see the cost reductions take shape throughout the year as really the outsourcing happens in the middle of Q2 to the end of Q2. But I would expect them to be less dramatic than the cost reductions you're seeing from Q1 to Q2.

Operator

Our next question comes from Michael Rollins from Citi Investment.

Michael Rollins - Citigroup Inc

John, I guess the first question I had is just thinking conceptually about quality of networks, so you talked about how the network evolution is more about the capacity and the amount of data you could throw at the customers and the market. Can you give us a sense of how Clearwire measures the quality of the network? The old days for voice, you had dropped calls and blocks. And can you talk about where your targets are and where the company is performing in the peak busy hours?

John Stanton

Yes. Michael, as far as the network quality, we're measuring a lot of the typical 4G measurements. So sustainability, availability of the network, where we cover, what kind of capacity we're able to deliver and what is our utilization of sites. So across the board, we feel like, again, with the depth of spectrum that we have that we're able to use spectrum to our advantage to relieve any capacity constraints and be able to deliver a quality of service that we can maintain indefinitely and actually match the needs of what customers have in marketplace today.

Michael Rollins - Citigroup Inc

And just a second question, just in terms of the cost profile of the business. How do you guys look at, over time, just what incremental margin should be for a dollar of data revenue? Is there some sort of number use average down -- so as you look at the model going forward, so as you're growing the business, we can think about the operating leverage?

Hope Cochran

Yes. An interesting question, Michael, because really, the way I think about it is that the network is primarily a fixed cost, so your variable costs, and that's mostly on your retail side in your CPGA. The only incremental cost you get on the network side is when you add capacity and because of our deep spectrum depth, we don't have a lot of incremental cost because it's quite easy to add capacity. Therefore, when you bring in revenue based on a usage model, most of it falls directly to the bottom line as you're overwriting that fixed cost. So when you say a margin based on a bit, we don't really think of it that way, we really think of trying to load up this network with a lot of bits. The amount of capacity our network can take on is tremendous and the more we can load it up, the greater that margin becomes.

Operator

Our next question comes from Jonathan Chaplin from Crédit Suisse.

Jonathan Chaplin - Crédit Suisse AG

Two quick questions. First around your decision to go with the TDD-LTE as opposed to FD, you sort of said that there are 2 objectives. One is to provide capacity to all carriers in the U.S. that need it, and the other one is to leverage the cost advantage you get from the massive scale that they'll be in TD. How do you align those 2 objectives? Do you -- is it a case that handsets will be both TD- and FD-capable so that U.S. carriers can roam onto your network when they need capacity or there'll be different sets of handsets on your network versus theirs?

John Stanton

Yes. I'll start the scene for Jonathan, and John Saw may want -- or Erik may want to help. It was a complex question, I'll kind of unwrap it this way. We would expect that virtually all LTE devices, within a year or so, will be both TDD- and FDD-capable. Obviously, TDD is a more efficient way to address data because of [indiscernible] in the up channel and down channel usage. And therefore, that in -- relative inefficiency of FDD, the ecosystem that we talked about with the biggest carriers in the world all committed to 2.5 TDD-LTE, we think gives us great visibility into the roadmap for devices, the ecosystem, if you will, and therefore, the availability on it. Moreover, because of spectrum scarcity in the U.S. relative to other places in the world, we know that the major national carriers are all very concerned already that they're going to blow through the gains that they get by converting their 3G networks to LTE very quickly and therefore they've been very receptive to the conversations that we've had to have, in effect, this ability to supplement their networks in the high-density, high-tonnage areas. So we have great confidence that this strategy fits. It's not only based on the technical successes that, and in fact, that the team got out of the Phoenix trial, but it's also based on conversations that we've had with carriers in the U.S. and carriers that we work with around the world.

John Saw

Jonathan, John here. The other thing to add as well, is that, in the particular format, TDD or FDD that you use for one spectrum has very little impact on what you do on another type of spectrum. As an example, if you look at the -- some of the 4Gs, most of all of 4G smartphones today like EVO, you have a mixture of FDD and TDD technologies in there. The 3G technology is obviously FDD and then you have WiMAX that is TDD, and then you have Wi-Fi as TDD. So clearly, it is not an issue at all when you're looking at basically a multimodal handset which they all are today.

Jonathan Chaplin - Crédit Suisse AG

But the handsets are perfectly interoperable between TD and FD systems. Is there anything else that the carriers need to do to be able to use your network for roaming purposes or for capacity purposes?

John Saw

I think the biggest thing you have to do is just to embed the chipset in the handsets and then part of our involvement with the GTI is to push the ecosystem that this to 2.3, 2.7 world-band chipset side will be widely available at the lowest possible cost.

Jonathan Chaplin - Crédit Suisse AG

Got it. And then a quick question for Hope, if I may. To ask the Rollins' question another way, what do you think your cost per gigabit will be once you sort of maxed out your first 20 megahertz carrier on LTE? And how does that cost per gigabit step down as you layer on additional carriers of the spectrum?

Hope Cochran

Jonathan, when you think about how much capacity we can run over our network and when you say load it up, the cost per gig would be incredibly low in that situation. So it really is just a matter of scale, how many bits we can get over the network and it's a fairly linear equation. Now when we add on a next carrier, the amount of OpEx that we incur when adding on another carrier is incredibly low because all we have to do is light up another channel of spectrum and therefore, the only additional OpEx that we are truly incurring is maybe a slight increase in a tower rental expense. There's really no additional backhaul cost, et cetera. Therefore, once we get to a point where we have to another carrier, the cost per gig diminishes dramatically even more.

Jonathan Chaplin - Crédit Suisse AG

But what should we be thinking of as a starting point, Hope. That -- a fully loaded 20 megahertz carrier, what's your cost per gig?

Hope Cochran

Jonathan, when we get there, we'll be thrilled. We have a lot of capacity on our network and we would love to be able to make sure that we are servicing lots of customers on that radio, but we haven't gotten there yet.

Operator

Our next question comes from Rick Prentiss from Raymond James.

Richard Prentiss - Raymond James & Associates, Inc.

Great. It's good to see John pick up the Switzerland flag again. It does look like [indiscernible] around over time. The $600 million for the LTE, assuming you get funding. Is that just CapEx or is there any OpEx that would be on top of that? And then, what physically, do you need to put in at the sites?

John Stanton

Hope should answer that. I do have to thank you for recalling the significance of Switzerland as a wireless metaphor.

Hope Cochran

Rick, your question about CapEx versus OpEx is similar to the prior question in the sense that the $600 million really is focused on the CapEx of adding LTE to our network. When we look at the additional OpEx to adding LTE to the network, it, again, is quite small and that goes to the amount of spectrum that we have in the sense that we can add LTE to our existing towers and all we're really incurring is that additional tower expense, which is minimal. The backhaul is already there at the site. It's ready to go. So the other OpEx is really minimal and the only additional OpEx that you're incurring, like I indicated, is a small increment for tower. So the $600 million, truly, is a CapEx-focused number.

Richard Prentiss - Raymond James & Associates, Inc.

Okay. And the physical equipment you're putting in? Is it mostly from the bay stations? Is it up as a radio?

John Saw

Rick, John Saw here. In many of the markets, we can simply add an additional line cart at a cell site and then just softly upgrade the radios on the towers. And in some of the older markets, we may have to add new some new radios and that's about it. I mean, we intend to reuse a lot of what we have already built for WiMAX, including the backhaul, the wide area networks, all of the switching centers and a lot of equipment at the cell site.

Richard Prentiss - Raymond James & Associates, Inc.

So is it antennas that you're putting up? I'm just still trying to figure out what exactly you have to buy with it.

John Saw

Like I say, in a lot of newer markets, very little, just the line carts and upgrading the backhaul. In the older markets, we may have to add some new radios and possibly some antennas.

Richard Prentiss - Raymond James & Associates, Inc.

Okay. And One quick question. Sprint had mentioned 1.7 million wholesale or WiMAX adds in their quarter. You mentioned $1.5 million. Should we assume there's been some churn from your other wholesale customers in the quarter? What kind of leads to the disconnect there?

John Stanton

It's the difference between gross and net. We're reporting 1.5 million net wholesale adds. That's across all of our partners.

Operator

In the interest of time, our last question will be from Michael Funk from Bank of America.

Michael Funk - BofA Merrill Lynch

A couple of quick ones. I mean, back to the LT conversion. You mentioned you'd looked at Network Vision and that wasn't cost-effective. I wonder if you could comment a bit more on what wasn't cost effective in Network Vision versus overlaying in your own. Second, can you talk a little bit about the tower lease amendments you're going to have to get for the overlay? And then finally if you think about the wholesale agreement with Sprint, if you could just remind me if that agreement included LTE as well as WiMAX. And if not, what would have to be done to amend that as well?

John Stanton

I'll address the question on Vision. We spent a great deal of time looking at and I suspect we were the first ones to look at the discussions on -- have the discussions on Vision. They actually date back to the end of last year. I think it's important to note, we continue to have a very important relationship with Sprint. And in a sense, we already have a sharing arrangement in that we are on -- we share -- 40% of our towers are shared with Sprint today. So there's already a network sharing, cost-sharing arrangement. But frankly, the vintage of our equipment was such that it was so inexpensive to add an additional technology to our network that it really represented a compelling economic advantage, both in terms of capital expenditures, in that frankly, if Sprint has have -- is in general, having to buy a new boxes where we're able to upgrade existing boxes. And there are couple of additional benefits on this that, from their and our point of view, it's far easier to maintain the WiMAX network. If we had gone on to Vision, in all likelihood, it would have prematurely ended the life of the WiMAX network. And because we've got the ability to operate both LTE and WiMAX on our existing spectrum position without any inefficiencies, we can view that as a separate product line. We can continue to maintain it, or frankly, if we determine that it's not, at any point in time, in any market, we determine it's not a good and profitable business, we can terminate the WiMAX with very little cost. So from our point of view, it was a very efficient way to deliver it. And as I indicated in my prepared remarks, in new markets where we are not operating today, I think that we would quite likely enter into an arrangement on Vision if we can come to reasonable terms with our good friends and partners at Sprint. Erik?

Erik Prusch

And as far as the tower lease amendments, I think that's the big key here is that it's very light in terms of the overlay. So at least for a large majority of our sites, we're not going to have to amend those leases because it's not any additional hardware that's being added to the sites. Obviously, there are corner cases in other cases that we may have to, and we'll work through those channels when we do.

Hope Cochran

And to address your third question in regards to the relationship with Sprint, that relationship is technology-agnostic.

John Stanton

Thank you very much for the opportunity to talk to you on this beautiful summer day from Seattle. We look forward to the opportunity to continue to grow and develop the business and we'll be updating you on our third quarter results in the dreary fall in Seattle. Thank you very much. Have a great summer.

Operator

Ladies and gentlemen, this does conclude today's conference. You may now disconnect, and have a wonderful day.

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