Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Alice Ryder -

Hope F. Cochran - Chief Financial Officer

Erik E. Prusch - Chief Executive officer and President

Analysts

Philip Cusick - JP Morgan Chase & Co, Research Division

Michael Gary Nelson - Mizuho Securities USA Inc., Research Division

Michael Rollins - Citigroup Inc, Research Division

Jonathan Chaplin - Crédit Suisse AG, Research Division

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Walter Piecyk - BTIG, LLC, Research Division

Clearwire (CLWR) Q3 2011 Earnings Call November 2, 2011 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Clearwire Corporation Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Alice Ryder. You may begin.

Alice Ryder

Thank you, Stephanie. Good afternoon, and welcome to Clearwire's third quarter 2011 financial results conference call. With me today are Erik Prusch, Clearwire's President and 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 the 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.

Unless otherwise mentioned, where applicable, all sequential quarter-over-quarter comparisons in today's discussion reference pro forma second quarter 2011 financial measures and all mentions of EBITDA on this call reference adjusted EBITDA as defined in our press release.

In addition, today's call may contain forward-looking statements reflecting management's beliefs and assumptions concerning future events and trends in or expectations regarding financial results. Forward-looking statements include, among other things, our future financial and operating performance and financial condition, including projections and targets for 2011 and subsequent periods, subscriber growth, network development 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 exclude the impact of the company's 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.

I will now turn the call over to Erik Prusch.

Erik E. Prusch

Thank you, Alice, and thank you to everyone on the call for joining us today. This quarter's results proved once again that demand for high-speed, mobile broadband remains strong and the capacity required to deliver these services is a scarce and precious asset. We drove another quarter of sequential growth in wholesale subscribers, mostly due to strong smartphone demand and in the average tonnage consumed by those subscribers. We believe Clearwire is the only service provider that has the network and the spectrum depth to accommodate both today's demand and the inevitable future growth.

By building on the foundation of on unmatched spectrum asset with the next generation of standards-based, globally adopted TDD-LTE network infrastructure, we expect to be in a unique decision to continue providing the true benefits of 4G to both our wholesale and retail customers.

Today, we will share with you the progress we are making in executing against our business model. We will review operating and financial results and further discuss our strategy to overlay a high-capacity LTE Advanced-ready network subject to funding.

Starting with operating results. Q3 was another record quarter for Clearwire in terms of both subscriber additions and revenue. We added 1.9 million customers to end the quarter with a total subscriber base of 9.5 million. This represents sequential growth in total subscribers of 25% from last quarter and year-over-year growth of 240%. Nearly all of this quarter's subscriber growth came from the wholesale channel, which experienced accelerating net adds. In fact, with 1.9 million 4G net adds, our wholesale channel added roughly 0.5 million more devices than the nation's largest carrier reported for Q3 LTE sales.

Wholesale churn for the quarter was 1.5%, which is up from 1.3% for the previous quarter. The continued growth of the wholesale business underscores the opportunities we have in cultivating that channel by expanding our partner base. Earlier today, we signed another wholesale customer, United Online through its NetZero brand. They will begin leveraging our 4G network in 2012. NetZero will offer USD modems and personal hotspots to its customers. This new wholesale customer has great potential to deliver growth and we look forward to a strong and productive relationship.

Switching now to the retail business. We continue to execute against our plan of maximizing cash generation from this channel during the third quarter. Retail added 35,000 customers to end the quarter with a base of just over 1.3 million. Yesterday, after successful trials during Q3, we launched the streamlined retail offering nationwide, focusing on unlimited, "no contract" rate plans for 4G home and mobile services. This new offer combined the consumer benefits of 4G broadband and flexible terms with a more simple simplified and cost-effective distribution model. In other words, we believe we are exceeding customer expectations by providing them the best quality 4G service in a structure that let's them determine how and when they want to use it. Ultimately, we believe this is a great value proposition for customers and we have confidence that it will be well received in the marketplace.

We also achieved another significant milestone on the network build this quarter. Earlier this week, we made filings, along with our spectrum licensees to meet the FCC's construction deadline for our spectrum portfolio of more than 2,000 BRS and EBS licenses, which largely fulfilled our outstanding substantial service requirements.

As a result of this initiative, Clearwire expanded its network, secured its valuable spectrum portfolio and enabled its educational partners to further their missions through the use of Clearwire service. Our network now has approximately 16,000 sites on-air and it is available to deliver 4G services to 133 million POPs today and serves 35 of the top 40 metropolitan areas in the U.S.

Our strong third quarter operating results further demonstrate that our unmatched spectrum position is delivering a competitive advantage in the marketplace. Moving forward, we believe that this advantage will be even more crucial as evidenced by recent industry stats. A new survey from Instep reveals that 75% of mobile consumers now consider 4G to be an ideal feature, indicating in our view that consumers are starting to demand the network capabilities that can unlock the power of their smartphones. And illustrating one of the primary drivers of that demand is a new report from Sandvine, which shows that streaming media such as Netflix and YouTube is the top consuming application for both peak mobile bandwidth and fixed bandwidth. We see similar trends in our own traffic patterns, with more than 50% of total downlink traffic consisting of video and streaming media, regardless of device type. We believe these broader industry trends, coupled with what we are seeing on our network today, support Clearwire's unique potential to offer its wholesale and retail customers the capacity that mobile broadband will demand in the future.

We recognize that while our spectrum position gives us a unique capacity advantage, we must also align ourselves with the most advanced, scalable and global technology platform in order to fully monetize that capacity. It's for that reason, we recently announced our plans to overlay LTE in the high-density, high-usage areas of our existing markets. We believe that providing LTE offload capacity in these high traffic areas will yield the biggest benefit to our customers in the most cost-effective manner for the company.

In September, we announced we are collaborating with China Mobile, the world's largest mobile operator on a subscriber basis to advance the development of TDD-LTE devices and cultivate the multimode, multiband ecosystem. This effort is an extension of the Global TDD-LTE Initiative or GTI consortium we cofounded with the global block of operators, who will deploy the TDD variant of LTE on 2.3 to 2.7 gigahertz spectrum. Together, the members of the consortium represents more than 1 billion wireless subscribers today.

Developments such as our collaboration with China Mobile underscore that our assets and technology choices have positioned us to leverage global momentum and scale. With the choice to adopt TDD, we plan to leverage a standards definition, which ensures long-term compatibility with FDD from the major silicon vendors. TDD affords more spectral efficiency for data traffic and thus we believe it is the optimal choice for Clearwire's 2.5 gigahertz spectrum.

While we control substantially all the 2.5 gigahertz spectrum in the U.S., 2.5 is by no means an outlier on the global stage. Our spectrum sits in the heart of the 2.3, 2.7 gigahertz range, which in aggregate represents the overwhelming majority of available 4G spectrum around the world. We believe our 2.5 spectrum is well suited for the dense urban deployments we are targeting, where management of interference is critical and where demand for capacity is most acute.

Another area often overlooked in the discussion around LTE is the need for wide channels, commonly referred to as fat pipes and the value of spectrum that is both deep and contiguous. Many 4G operators or aspiring 4G operators in the U.S. will need to stitch together and reform spectrum from multiple bands just to get to the bare minimum, 20 megahertz channel width, relying on both spectrum availability and the channel aggregation features of the future LTE Release 11. Because our spectrum holdings are both deep and contiguous today, we will not face this issue or experience the time-consuming and arduous process of spectrum reforming in order to utilize fat channels today. We will be well positioned to leverage channel aggregation in the upcoming LTE advanced standards to build even fatter channels in the near future to deliver even higher speeds and more capacity for customers.

It's no secret that standardization drives mass adoption, and mass adoption drives economies of scale. Over the last decade, we have seen cost of CDMA-based devices decline significantly as adoption exploded beyond the U.S. into the Asian markets. We believe that we can expect similar cost curves for TDD-LTE devices in the future, as manufacturers take advantage of the scale afforded by the global adoption of TDD-LTE in the 2.5 gigahertz band across billions of POPs.

By aligning ourselves with these global standards, and leveraging our unique assets, we believe we can capitalize on performance and scale as we pursue our LTE strategy.

With that, I would like to turn to Hope to discuss the financial results.

Hope F. Cochran

Thanks, Erik. We are very pleased to share our record third quarter results, which demonstrate solid execution on all fronts. On the revenue front, we continue to see significant growth, driven primarily by growth in our wholesale subscriber base, as Erik discussed. Total revenues increased 134% year-over-year and 13% sequentially to a record $332 million. Retail revenue increased $195 million in the third quarter and retail ARPU was $47.05 for the period. The sequential decrease from the second quarter ARPU of $47.59 is primarily due to a $0.41 onetime benefit we saw in the previous quarter ARPU. Wholesale revenue increased 34% sequentially to $137 million in the third quarter as we saw a 29% growth in our wholesale subscriber base.

And despite our previous expectations, the wholesale ARPU declined after we have reported second quarter 2011 ARPU of $6.18, third quarter wholesale ARPU was slightly higher at $6.20 as growth in smartphone usage levels rose more than and made up for the expected decline in the mix of high-usage PC cards and fixed devices.

In the third quarter, we saw a continued improvement on the expense side. Cost of goods and services and network costs declined 35% quarter-over-quarter to $282 million. Excluding noncash expenses of $252 million and $104 million in second and third quarter 2011, respectively, COGS decreased 1.3% quarter-over-quarter due to a full quarter's benefit of outsourcing efficiencies.

SG&A decreased 1% quarter-over-quarter to $176 million. The decrease was primarily due to lower employee-related costs on reduced headcount in the third quarter as well as full quarter benefit from our outsourcing arrangement, which was implemented during the previous quarter. This decrease was mostly offset by higher noncash cost related to building rents and stock compensation. Additionally, retail CPGA in third quarter 2011 was $288, down from $313 in second quarter 2011, reflecting further reductions in marketing expenditures.

Third quarter EBITDA loss improved by 57% from a loss of $109 million in the previous quarter to a loss of $46 million. This result exceeded our own expectations and reflects improvement month-to-month throughout the quarter. This progress underscores our strong revenue growth, driven by increased usage in devices on the network, combined with the impact of our cost-cutting measures throughout the year.

Another metric that highlights the meaningful cost-cutting measures over the past year is our headcount. At the end of the third quarter, Clearwire had approximately 1,100 employees, down from approximately 4,300 employees a year ago. We also saw a continued progress in profitability at the market level in the third quarter. Last quarter, we noted that our entire 4G operating market portfolio turned positive and was already generating double-digit market EBITDA margins. And in the third quarter, we saw a more than 10-point expansion in market EBITDA margin to 29% for the group.

Even more impressive is the fact that our 2010 market at an average age of 13 months are already positive with 21% market EBITDA margins for the group. This is much earlier than our 18-month expectation and further demonstrates the significant leverage inherent in our primarily fixed cost business model as we grow our revenue base.

Capital expenditures in the third quarter were $17 million, down significantly from the $56 million in the second quarter due to a $37 million of favorable settlements on prior CapEx purchases and other adjustments. Excluding these credits, third quarter CapEx would have remained relatively flat at $54 million.

Looking ahead and taking into account our future network maintenance and the completion of the FCC substantial service build requirements this month, we now expect 2011 capital expenditures to be less than $300 million for the year, approximately $100 million lower than our previous guidance.

With respect to subscribers, based on the strong growth we've experienced year-to-date, we expect to exceed our previous guidance and end 2011 with more than 10 million subscribers. As to liquidity, we ended third quarter 2011 with $711 million of cash and investments. And in October, we received cash payments totaling $110 million from Sprint for the third installment of the prepayment and take-or-pay commitment for 2011.

As of the quarter end, with our cash and investment, the expected impact of our recent expense reductions, the cash we expected to receive for our mobile WiMAX services over the term of our Sprint wholesale agreement and our decision to condition any further network development upon receipt of additional capital, we believe we have sufficient liquidity to fund our business for the next 12 months.

We do believe, however, that we need to raise additional capital to support our operations and meet our obligations beyond the next 12 months. The amount of capital we need for our operations depends on the expectation for future wholesale revenue. Due to recent actions taken by Sprint, which include: steps to limit their subscriber usage on our network, their launch of a 3G-only iPhone; their commitment to sell mobile WiMAX devices only through 2012, our network usage could be affected. We are in the early stages of evaluating the potential impact these announcements may have on our future wholesale revenue and we are not able to update our guidance on our funding need and our ability to generate positive EBITDA at this time.

As we look forward -- as we look to funding our LTE overlay, and operating needs, we are working with our team of advisors to pursue all avenues available to us including equity, debt, and the sale of excess spectrum assets. Due to the challenging environment, it is important that we take a balanced approach by accessing both sides of the capital structure. We are working towards an even distribution between equity and debt. As an example of the advantages to adding equity to our balance sheet, it's to open up more first lien debt capacity. In addition, we are working with our vendors to support us on an LTE overlay transition through financing the equipment, both through secured and unsecured capacity.

As the outlook for available spectrum continues to be scarce, we field inquires for our own -- for our asset spectrum portfolio. Through it all, we remain focused on leveraging our key assets, utilizing our deep spectrum portfolios through our deployment of an LTE platform that will position us well to serve the future capacity needs for the U.S. mobile broadband market.

With that, I'll turn it over to Erik for some closing remarks.

Erik E. Prusch

Thank you, Hope. Before we open up the call to Q&A, I'd like to make a few closing comments. First, I'd like to address our partnership with Sprint. We've made solid progress with them over the past several weeks. As Sprint mentioned on their earnings call last week, we entered into a nonbinding agreement to collaborate on the technical specifications of our respective LTE deployments to ensure a seamless handoff for customers as they traverse the 2 networks, as well as collaborating on site selection, timing of builds and joint work with OEMs to design compatible chipsets and devices.

While we are pleased to have an MOU agreement on technical network terms, we remain focused on, first, extending our current WiMAX agreement and entering into a long-term commercial LTE supply agreement that will enable us to become profitable. And second, raising additional capital from Sprint, other strategic partners and other third parties that will enable us to build our LTE overlay network and therefore attract additional wholesale customers. We have had numerous discussions with Sprint but there remains a gap. We remain committed to getting to a mutually beneficial agreement and one that positions us to accomplish our goals.

Last month, at 4G World, Sprint stated that 20% of their traffic will be running over our network by the end of this year. In addition, their 4G WiMAX customers, all of which are on the Clearwire network, branded as Sprint 4G services, are their most satisfied customers. Average usage per smartphone has increased sequentially every quarter for the past year and with over 20% of their Sprint-branded postpaid subscribers now using a 4G-capable device, Sprint has relied on us to deliver on their value proposition of unlimited usage and 4G speeds.

We remain aligned with Sprint on our common goal of delivering a superior 4G experience. We are executing on our plan and this execution validates the business model we established at the end of last year, which was solidified by the Sprint wholesale agreement signed in April of this year. Underpinning the performance, we have achieved is a constant, something that is unassailable even as uncertainty is introduced by other developments. That constant is the intrinsic value of our spectrum assets and the potential it affords us to leapfrog the rest of the U.S. carriers with a more advanced and a high-performance TDD-LTE network, which is based on global standards and supported by a global ecosystem.

Finally, I'm proud of the operational results that our team has posted this quarter. While we've covered some challenging developments today, I don't want this to overshadow the considerable progress that we've made in growing our subscriber base, reducing costs, improving EBITDA and positioning ourselves to lead in the Global TDD-LTE. We have achieved these results consistently throughout the year and well ahead of plan. We have a strong business model with the opportunity to build competitive advantage and at the same time, disrupt competitive offerings. I look forward to updating you on our team's performance on our Q4 and full year 2011 conference call.

And now, I'd like to turn it over to the operator for some Q&A. Operator, we're now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Phil Cusick from JP Morgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

Maybe you can start with just helping us out with some of the order of action from here. Sprint talked a month ago, actually less than that, about the technical agreement that sort of allows you guys to talk about -- to each other on the 4G side. There's been some chatter about a commercial agreement and you talked about having conversations there. But what are the things that have to be done to sort of move forward with the Sprint agreement, or get sort of signs [ph] Under financing or sell spectrum? Can you help us out there?

Erik E. Prusch

Yes, Phil. This is Erik. In terms of where we go from here, we're still pursuing the same path. First and foremost, we're focused on execution. Beyond execution, we need to make certain that we've got a source of funding that's going to give us an opportunity to get to an LTE overlay and we need a long-term commercial agreement in place, not only for WiMAX but for LTE. These are both very critical and important steps for us. We need to get to profitability and be able maximize the return for all of our shareholders but funding is a critical component of that. We're going to continue discussions with Sprint and make certain that we've got an agreement that gets us to those goals.

Philip Cusick - JP Morgan Chase & Co, Research Division

Okay. And, Hope, you pulled back from the EBITDA positive. I thought the EBITDA this quarter was surprisingly good and so the revenue grows just on a sort of growing into the subscribers you have and getting to the 10 million, costs coming down a little more seems like you get pretty close to that EBITDA positive. But at this point, you're just not confident that you can quite get there?

Hope F. Cochran

Phil, I think we just need to watch it over the next few months. And you're right, we made great strides in the Q3 time frame in regards to the EBITDA trajectory. We are really pleased to see that both on the revenue front and the continual cost-cutting front. That's something that we will be very focused on here and going forward as well. We are continually looking at our expense structure to see how we can bring it in line. But as we watch Sprint usage over the network, we are cognizant of the fact that they're watching their high-end users and they've got some other initiatives, so we're watching to see how that affects the usage on our network.

Philip Cusick - JP Morgan Chase & Co, Research Division

Last question, I'll turn it over. Can you give us any idea what the traction or the trajectory has been in the wholesale adds over the last few weeks Sprint -- since Sprint launched the iPhone?

Erik E. Prusch

Yes, Phil, we're not in a position to comment on it. Clearly, this has been a couple of weeks in market. We want to see what the distribution of adds looks like in comparison to the prior quarter and also the prior experience that we've seen when others have adopted the iPhone. We feel comfortable by the fact that we've seen Android-based phones mixing well in an entire ecosystem. But we're going to remain reserved until we have enough data to suggest where it's heading.

Operator

Our next question comes from Walter Piecyk from BTIG.

Walter Piecyk - BTIG, LLC, Research Division

There's been some suggestions, I guess, that maybe wholesale net adds would fall to 0 in the fourth quarter obviously with the guidance implying that you're going to see some growth in the fourth quarter. Can you talk about where you get that confidence from? Obviously, it's only been a month, so that's 1/3 of the quarter. Are you still seeing growth in your wholesale subscriber base with the iPhone having been around from a month? And again, what makes you -- or what gives you the confidence that, that will continue with the remaining 2 months of the year?

Erik E. Prusch

Again, Walt, we look at this on a daily basis, what we effectively did was raise guidance in terms of the number of subscribers that we have by the year end. We've done that consistently throughout the year. We built the models that demonstrate that and actually performed to it. So we're watching it day to day. We're going to look forward to being able to update everybody at Q4 once we've got enough facts, enough data underneath us. And until then, we're comfortable with our guidance.

Philip Cusick - JP Morgan Chase & Co, Research Division

Can you at least confirm that, that base has continued to grow over the last 30 days? I mean, if you're guiding to at least more than 0.5 million in the quarter, obviously it's going to be higher than that if you're over 10 million. Wouldn't that suggest that you've grown the base over the past month?

Erik E. Prusch

It absolutely means that we have grown and we will continue to grow in order to get to that guidance number.

Walter Piecyk - BTIG, LLC, Research Division

And then the second is, you and Sprint both appear to be more willing to talk about just usage characteristics, 20% and some other factor that I think that Sprint talked about recently. Can you give us a sense of where is the average usage? I mean, you said it was up sequentially every quarter. Can you give us a ballpark number on what type of usage a typical smartphone customer has and what the mix of 4G to 3G might be?

Erik E. Prusch

Yes, we can't provide Sprint's data to you. All we can suggest is that it continues to grow. We feel very satisfied that the growth of smartphones on our network is solid, robust and continues to improve sequentially. We feel that, that is the underlying premise to our business model, that we will continue to see growth through time and that we're in a unique position to leverage our spectrum assets to match that growth. And that's about as far as we're willing to go at this point.

Walter Piecyk - BTIG, LLC, Research Division

Okay. And then the last question is you've had some noncash rents, I guess, or noncash-related rents that hit your network expense. Is that going to continue to grow? And at what point do those --is that like a payable for the future? What's the time line on when that would need to get paid? And is that an expense that will grow going forward as far as the reported EBITDA?

Hope F. Cochran

Yes, thanks, Walt. That is really a onetime increase. It's related to -- we are continually going through and letting tower companies or backhaul companies know that we are not using any particular towers as we're evaluating the hotspot model. And therefore, we recognize the deferred payments and a onetime event. And so that increase you're seeing in the noncash tower rents is really a onetime increase for this quarter.

Walter Piecyk - BTIG, LLC, Research Division

And when would those -- is that obviously a liability that's going to be paid in the future? And what would be the timing of that payment?

Hope F. Cochran

It is a liability. It's booked on our balance sheet as a liability and it will be amortized over the time of those leases. So those leases are on average, I would say, 4 to 5 years long.

Operator

Our next question comes from Michael Rollins from Citi.

Michael Rollins - Citigroup Inc, Research Division

A couple of questions. First, as you look at going to the prepaid model from the postpaid model, what's the CPGA savings that you could realize? And is it -- could that be a significant contributor to help the cash flow outlook over the next 12 months?

Erik E. Prusch

Yes, absolutely. I mean, one of the benefits for us in going to this purchase model is a more effective, lower-cost distribution channel. We're really excited about it. We feel like we're again going to be uniquely positioned in the marketplace to give a great value proposition to customers. This purchase model requires obviously a purchase upfront. It's a fixed fee, unlimited usage model for basically $50 and the CPGA cost are going to be less than $200 is what we're expecting them to be.

Michael Rollins - Citigroup Inc, Research Division

And then the second question is, given the comments around the EBITDA that you made and I think you were talking about the actions that Sprint is taking that's giving you that uncertainty on how to look at EBITDA, so do you expect that to manifest itself in your numbers vis-à-vis lower volume? Or would you say that's a lower ARPU? Or is it both? Like how should we think about the impact to the model that Sprint's actions could have?

Hope F. Cochran

I really do think that it's lower usage, which would translate to a lower ARPU. As they look at those high-usage customers and they try and manage through that, it would bring down the overall amount of usage per subscriber. And like I said, all we're doing is watching that. It will take several months for us to see if that has effects in our numbers. And we haven't seen that yet. As you can see with the Q3 numbers, they're nice and strong. We'll just have to see if those actions trickle through in the next few months. So we're just evaluating that.

Michael Rollins - Citigroup Inc, Research Division

And the last question is, so you hit looks like EBITDA positive before acquisition costs in the quarter and you brought your CapEx down. What's the minimum cash balance that you need to keep on hand to have the liquidity that keeps you comfortable? Is there a certain minimum that you guys need, a line in the sand, so to speak, that you're watching for?

Hope F. Cochran

Yes, it's a great question, Mike. And I would just say that, of course, we don't have any covenants or anything that requires a certain amount of cash balance, so I think it's a more subjective in nature. I tend to look at how much our interest payments are. So if you look at an interest payment in the mid-200s, that's the number that I watch for.

Operator

Our next question comes from Jonathan Chaplin from Credit Suisse.

Jonathan Chaplin - Crédit Suisse AG, Research Division

Two quick questions. So first of all, I'm wondering if you could give us a sense of how rapidly the smartphone rate -- the smartphone base grew sequentially. So we know that usage growth per use -- usage for smartphones grew 43%, I'm just wondering what the growth, the sequential growth, in usage per user was? And then secondly, I'm wondering if you could give us some insights into where the big sticking points are between you and Sprint? Is it all -- is the entire disagreement based around the wholesale rate that you charge Sprint? Or there are big difference about technology and network configuration and other elements as well?

Hope F. Cochran

I'll take your first question and then Erik will take your second. In regards to the increase on a per subscriber basis, some of the metrics that I look at are: we did increase the wholesale subscriber base by about 29%. It's fair to say that, that increase is primarily driven by smartphone increase. So as you look at that 29%, while 1.9 million subscribers coming on to the network, that's primarily smartphones. In regards to the usage for the quarter from Q2 to Q3, our wholesale usage increased by about 34%. So that just gives you some relative numbers to look at and you can see a lot of that usage increase was driven by new subscribers but a good amount was driven by subscribers increasing their usage on a per device basis as well.

Jonathan Chaplin - Crédit Suisse AG, Research Division

So just on that before we go on to the second question, Hope. The wholesale subs grew 29% but the smartphone component of wholesale must've grown quite a lot faster than that, so that's the piece that I'm looking for.

Hope F. Cochran

Jonathan, primarily, I mean, the large portion of our wholesale subscribers are smartphones. So the percentages are very consistent.

Erik E. Prusch

And then, Jonathan, in terms of the Sprint agreement. Obviously, we've made a lot of progress with the nonbinding MOU that we entered into which really helped resolved some of the issues around seamless handoff for customers, our technology, how the networks are going to work together, the timing of the builds, joint work with OEMs, site selection, et cetera. So that part was very good. We made a lot of progress on that. I think the other parts that I alluded to, which is really extending our current WiMAX agreement and entering into a long-term commercial LTE supply agreement and then raising capital are the elements that are most important to us and they're the necessary goals for us to be able to achieve profitability and therefore we're driving those into any subsequent agreements that we have.

Jonathan Chaplin - Crédit Suisse AG, Research Division

So where is the sticking points in that agreement, Erik, where is the big disagreement between the 2 of you?

Erik E. Prusch

I don't really want to get into the specifics of it. All I'd say is, those are the general buckets that we're in discussion about and have been in discussion about and that's what's most important to us.

Operator

Our next question comes from Michael Nelson with Mizuho Securities.

Michael Gary Nelson - Mizuho Securities USA Inc., Research Division

So earlier today, you announced a new wholesale agreement. I mean, can you give us a sense of how the deal was structured? Is it simply a pay-as-you-use-it agreement? And also, do you feel like you're close to signing an agreement with any of the top, say 5 or 6 wireless carriers aside from Sprint? It seems like most of the carriers have discussed their need for additional spectrum and it seems like there should be a logical fit for you guys to either resell capacity or cell spectrum?

Erik E. Prusch

In terms of the United Online or NetZero, it's great agreement for us. It's a WiMAX-centered agreement, it's straight wholesale agreement. And where we've gone to us at least traditionally now is making certain that we're charging on a per gig basis for capacity. The good news for us is, I think, this just clearly affirms that there is interest from the wholesalers out there, that we've got a network that's performing where we can provide differentiated offers for those customers and let their business models expand. We're expecting good things out of this agreement and have high expectations for it. As far as other potential wholesale agreements, we're still in numerous discussions. We won't calibrate it as close or far. We'll just say that we haven't announced anything further. We do hope to be able to announce new wholesale agreements. We think that with our spectrum position and our capacity that we have on our network, we can host a number of different carriers on our network, particularly in an offload capacity way. And we're excited about that future and hopefully we can demonstrate that and show them the value proposition embedded with them.

Michael Gary Nelson - Mizuho Securities USA Inc., Research Division

Let me ask a follow-up to that. Has the AT&T, T-Mobile deal had any effect on your discussion with other carriers? I'm wondering if you have a sense that maybe carriers maybe holding off doing a transaction with you until they see what opportunities they may have to acquire divested assets?

Erik E. Prusch

Yes, what I would say is that, that's kind of a two-part answer. The first part is the AT&T merger with T-Mobile has certainly changed the landscape or potentially changes the landscape in the industry and it's created some delays in terms of the maturing of the industry and where it's going. At the same time, it is a perfect example of the need for additional spectrum. Our whole premise or our belief of that acquisition is all predicated on requiring additional spectrum to be able to serve the needs of the customers into the future. And I think it's case in point for us in a position that we're in, that we can do that equally as well if not better. And we've got the spectrum now that's operational and we're ready to go from a capacity standpoint.

Operator

Our last question comes from Rick Prentiss from Raymond James.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

A couple of questions if I could. Hope, you talked a little bit about how the -- enough money for the next 12 months without needing extra financing, absent the LTE. It would depend on several wholesale revenue items, the usage, and the 3G phones, do you feel comfortable that you have enough money regardless of what happens with the WiMAX usage that you're watching for the next couple of months, regardless of what happens with the iPhone sales impacting WiMAX sales to make it to that 12-month number?

Hope F. Cochran

Yes, a good clarification, Rick. As we look to 2012, and we look at our liquidity situation, the take-or-pay from Sprint, which is $550 million in 2012, plus an $83 million prepayment come into play as we look at our liquidity situation. So that is regardless of the usage on the network. And those are the numbers that we're looking at when we're evaluating that situation.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Okay, and then as far as looking at the not able to update guidance on positive EBITDA, that relates to I assume the usage, the 3G phones. If you were to rank-order it, I assume the usage is the higher component, that is concerning you and that you're watching as opposed to 3G iPhones?

Hope F. Cochran

Yes, I think that's a fair statement, primarily because it'll take us longer to evaluate the impact of that. As they notify customers, it takes several months for that notification to have an impact on the numbers. So that for us is the thing that is unknown at this point and something that we have to see in our usage statistics before we know how it'll impact us.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Okay. And then more kind of a philosophical question. Obviously a lot of discussion on wholesale immediately goes to Sprint because they're the vast majority of the wholesale adds. Why is cable partners, why are they not selling the service? Is it the devices, is it the network? Is it that they don't need this in their bundle? But what's -- why don't cable guys need what you're able to provide them?

Erik E. Prusch

I wouldn't go that far. I would say that this is a natural growth scenario for them. They've committed a lot of capital to it. They have been slower because it's away from the base business model. I think they're learning quite a bit but we've experienced nice growth albeit on a much lower level. But nice growth from our cable partners and we'll look forward to continuing that improvement in out quarters from here. But again, from the standpoint of the business model, this isn't core into their business model. It's adjacent to their business model and we'll see that develop through time.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

And is it that they need more time? Just trying to think is it the devices or is it just educating the customers? What do you think creates a tipping point that says, "Oh, now we start pushing it." What should we be looking [ph] At over whether it's 1 year, 5 years. What creates the demand do you think?

Erik E. Prusch

I think it's more content getting down into mobile types of devices. I think it is the 4G networks maturing to be able to get that content particularly around video as a case in point. And I think it's their own experience base what's selling into these customers the devices, these plans.

Okay, thank you very much.

Operator

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Clearwire Management Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts