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Executives

Alice Ryder -

Erik E. Prusch - Chief Executive Officer, President and Director

Hope F. Cochran - Chief Financial Officer

John Saw - Chief Technology Officer and Senior Vice President

Analysts

Jennifer M. Fritzsche - Wells Fargo Securities, LLC, Research Division

Walter Piecyk - BTIG, LLC, Research Division

Jonathan Chaplin - Crédit Suisse AG, Research Division

Philip Cusick - JP Morgan Chase & Co, Research Division

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

Simon Flannery - Morgan Stanley, Research Division

Michael J. Funk - BofA Merrill Lynch, Research Division

Anthony Klarman - Deutsche Bank AG, Research Division

Clearwire (CLWR) Q1 2012 Earnings Call April 26, 2012 4:15 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Clearwire Corporation First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Alice Ryder. Ma'am, you may begin.

Alice Ryder

Thank you, Shannon. Good afternoon, and welcome to Clearwire's first quarter 2012 financial results conference call.

With me today are Erik Prusch, Clearwire's President and Chief Executive 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. Unless otherwise mentioned, where applicable, all sequential comparisons in today's discussion reference fourth quarter 2011 financial measures and all year-over-year comparisons reference first quarter 2011.

In addition, today's call may contain forward-looking statements reflecting management's beliefs and assumptions concerning future events and trends and/or expectations regarding the financial results. Forward-looking statements include, among other things, our future financial and operating performance and financial condition, including projections and targets for 2012 and subsequent period, subscriber growth, network deployment or development plans, strategic plans and objectives and future liquidity.

These forward-looking statements are all based on currently available operating financial and competitive information and are subject to various risks and uncertainties. Listeners are cautioned not to put undue reliance on any forward-looking statements as they are not a guarantee of future performance.

Please refer to our press release or 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 statements.

Finally, all mentions of EBITDA on this call reference adjusted EBITDA as defined in our press release where listeners may find definitions and reconciliations for all non-GAAP measures discussed today.

I will now turn the call over to Erik Prusch.

Erik E. Prusch

Thank you, Alice. Good afternoon, everyone. I'm pleased to report today the great progress we have made in the first quarter. On our last call, I shared our plans to focus on 4 goals in 2012, which we believe are instrumental to Clearwire becoming a leading LTE provider in the United States.

Those goals were: first, to increase the cash contribution from our resell operations by a double-digit percentage. Second

[Audio Gap]

great start in achieving our first objective of increasing the cash contribution from our retail operations by a double-digit percentage. During the quarter, we rolled out our new no-contract retail offering in Earnest and supported it with a targeted marketing campaign. We also launched 3 new CLEAR devices this quarter, a hotspot, a wireless modem and the first USB in the country to offer instant 4G connectivity without either [ph] software.

We're already seeing very positive product reviews from CNET, PC Magazine and others, as well as positive impacts to our operating results from these marketing efforts. First quarter 2012 retail cash contribution more than doubled year-over-year primarily as a result of 16% growth in retail and other revenue. And 40% lower selling costs reflecting the low cost nature of our new retail offering.

Our customers are now purchasing their devices at unsubsidized prices, and we are selling our services through lower cost channels so commissions are substantially lower. While we expect a higher retail churn rate in 2012 when compared to 2011 due to the no-contract nature of the revised offering, early results thus far are strong and we continue to expect the net effect of the modifications will be incremental to cash.

As a result, we remain on track to generate double-digit growth in retail cash contribution and expect we will continue to reap the benefits of the investments we have made in our retail business over the past few years to transform this channel into a meaningful cash source for the company in 2012 and beyond.

Turning now to our second goal of making significant progress in our LTE Advanced-ready network build. After collaborating closely with Sprint over the past few months, we have finalized the identification of the first 5,000 sites we intend to build as part of our larger LTE overlay of up to 8,000 sites and have officially kicked off the build. The initial process for equipment testing and site preparation are now underway. And we remain on track to have the first 5,000 sites on-air by the end of June 2013.

These high-usage sites were carefully selected based on a detailed profitability and ROI analysis and our belief is they will not only enhance service for Sprint customers but also for the customers that Leap Wireless and other potential partners who would otherwise look to sell split in the central business districts and other high usage areas where we plan to make our LTE network available.

The initial 5,000 sites will be located in 31 top-tier markets, including New York, Los Angeles, San Francisco, Chicago and Seattle and are expected to come on-air over the course of the first half of 2013. We're also pleased to update you on recent developments in promoting the TDD-LTE ecosystem, our third goal.

During the first quarter, Clearwire became the first U.S. operator to achieve 3GPP standardization of Release 10 carrier aggregation in its spectrum, which will enable us to combine 2 20-megahertz channels to create an even better 40 megahertz pipe. By comparison, today's LTE deployments are only 5x5 or 10x10 configurations. As a result of this accomplishment, and our ownership and control of large swaps of CLEAR and contiguous spectrum nationwide today, we believe we will be the first operator in the U.S. to push the limits of LTE technology, giving us the advantage of offering the fastest speeds and the highest capacity network in the nation.

In addition to making technical progress to further leverage our deep spectrum portfolio, we also advanced the standardization of our globally harmonized spectrum band. Earlier this month, Band 41, our 2.5 gigahertz frequency band was officially activated for certification by the Global Certification Forum, the de facto entity, for device certification which assures operators that a mobile device will conform 3GPP standard specifications.

As a result, GCF is now accepting certification of Band 41 devices from the global device ecosystem, a crucial step in spurring the growth of Band 41-enabled devices. We also expect Sprint to be a key partner in furthering the ecosystem with their plan to deploy several Band 41 TDD-LTE compatible devices throughout 2013.

Our efforts to drive the global ecosystem as a founding member of the GTI consortium have also continued. We held our latest international summit during the Mobile World Congress event in February during which device and component providers unveiled their cutting-edge products. Pioneering TDD-LTE operators discussed among other things, deployment experiences, joint LTE TDD FDD product requirements and global roaming opportunities. We are enthusiastic about the recent commercial launches that TDD-LTE networks by 2 of the founding GTI members, SoftBank's wireless city planning in Japan and Bharti Airtel in India and look forward to seeing the global ecosystem continue to progress throughout the year.

We've also made solid progress with chipset vendors and OEMs and expect to have additional details to share in the near future. On the wholesale front, during the first quarter, we also announced strategic agreements with new wholesale partners, furthering our efforts on our fourth and most critical goal of growing the partner base.

On the LTE front, we were extremely pleased to announce our second LTE wholesale partner, Leap Wireless. They are now working closely on the integration of our planned LTE network that I described earlier.

Moving to the WiMAX front, we have welcomed Simplexity and FreedomPop as new wholesale partners, who will begin offering services this year. NetZero when we announced late last year, launched their 4G Mobile broadband offering in February. The positive initial response to their offering was fantastic and we are excited to partner with an innovative provider who is seizing an opportunity to compete with the established mobile data providers by leveraging our deep capacity network to offer low cost 4G Mobile Internet access.

Our Wholesale business is off to a great start for the year, with the signing of more agreements in the first few months of 2012 then we had in the past year. And we are committed to leveraging our ability as the only supplier of Free and CLEAR capacity today to drive further new business throughout the rest of the year.

Since the end of 2011, we have seen increasing interest in partner opportunities. We remain in active discussions with several potential partners and expect to make significant progress towards signing additional wholesale customers in 2012.

Now I would like to turn the call over to Hope to discuss our financial results and outlook in more detail. Hope?

Hope F. Cochran

Thanks, Erik. We are very pleased to share our first quarter 2012 our results, which demonstrate solid execution across all business fronts. Total net additions were 586,000 in the first quarter, bringing our total subscriber base to 11 million, up 80% from 6.1 million in first quarter of 2011.

Our retail business added 49,000 net subscribers in the first quarter to end the period with more than 1.3 million total subscribers. Churn for the period was 3.7%, up from 3.3% in the year-ago period and down from 3.9% in the fourth quarter due to seasonality.

Going forward, we expect to see retail churn trend upwards as the mix of local no-contract subscribers increases. Despite the elevated churn characteristics of these customers, with our new retail business model and more efficient distribution, we expect these customers to continue to generates significant cash flow for our business.

We ended the first quarter with 9.7 million wholesale subscribers on 537,000 net subscriber additions and 3% churn during the period. While wholesale subscriber growth has slowed based on the fixed nature of our WiMAX agreement with Sprint, which I'll review momentarily, we do not believe this metric is relevant nor do we expect it to have a material impact on our wholesale revenue in the near term.

We believe a more important metric, which indicates demand for our network, is usage. And we continue to see dramatic growth rates in this measure. Total tonnage, among smartphone subscribers, which represent a significant majority of the wholesale subscriber base grew by 14% sequentially, outpacing 6% subscriber growth and highlighting the growing demand for high-speed mobile data.

In late 2011, we renegotiated our wholesale terms with Sprint, one of our primary goals was to secure a stable and predictable stream of near-term cash flows necessary to fund their operations, which we successfully achieved. Under the terms of the new agreement, Sprint will pay a flat fee of $900 million for unlimited retail WiMAX services through 2012 and 2013 and then revert to usage-based pricing in 2014 and beyond.

In other words, as usage grows on our network in 2014 and beyond, our revenue will benefit, regardless of subscriber count. This will, of course, be positively impacted by Sprint's recent announcement to launch DSHS mobile and Virgin mobile U.S.A. pre-paid brand on our WiMAX network later this quarter. We will receive $600 million in 2012 and the remaining $300 million in 2013. The revenue recognition for these payments however, will differ from the timing of the cash flow.

Under U.S. GAAP, the total $900 million will be recognized as revenue on a straight-line basis over the 2-year period. As a result, the cash received for WiMAX wholesale services in 2012 will exceed the revenue reported for WiMAX wholesale services in the same period.

Turning our attention to financial performance. Total revenues in the first quarter increased 36% year-over-year to $323 million. As expected and as we communicated last quarter, total revenue was down 11% sequentially from fourth quarter 2011 as this was the first period in which the whole set -- the Sprint wholesale revenue was recognized on a straight-line basis.

Wholesale revenue was $118 million for the period representing a 93% year-over-year increase and a 28% sequential decrease, reflecting our intentional prioritization of cash flows above reported revenue and our new agreement with Sprint.

Retail and other revenue increased 16% year-over-year and 4% sequentially to a record $205 million in the first quarter on 7% year-over-year growth in subscribers and higher equipment sales. Retail ARPU was $46.83 for the period relatively flat for both first and fourth quarter 2011 ARPU.

We believe retail ARPU will decline modestly throughout the year due to lower lease revenue as a mix of retail customers shifts towards various purchasing CPE equipment under the new no-contract retail model. But again, it's consistent with the higher cash flow, lower risk retail business model.

On the expense side. First quarter cost of goods and services and network costs, excluding noncash expenses of $83 million, was $181 million, a 9% decrease year-over-year primarily due to the lower tower lease expense. Sequentially, cash COGS increased 5% due to higher CPE of cost of goods sold as we now sell rather than lease devices to customers. As well as costs associated with tower leases and ongoing maintenance for our WiMAX network.

Selling expenses for our retail business decreased $31 million from the year-ago period but increased $15 million quarter-over-quarter to $48 million. The sequential increase is primarily due to higher marketing costs related to the formal launch and promotion of our new no-contract retail offering. Despite the increase in total selling expense, retail CPGA declined 7% sequentially to $242 on higher growth ads reflecting the full quarter impact of our new low cost sales model.

As we consider 2012, we believe first quarter CPGA will be the high watermark for the year. And we expect CPGA to decline throughout the remainder of the year. We continue to benefit from the selling and marketing efficiencies from the new retail model, which we expect to result in low 200 CPGA for the full year.

G&A and other expenses of $95 million were flat quarter-over-quarter but down 30% from a year-ago period due to reduced headcount and other targeted cost-cutting actions. Total company headcount at the end of March was 830.

Noncash write-downs of $139 million in the first quarter were related primarily to reserve for equipment inventory and write-downs of uncompleted network projects that do not coincide with our recently determined LTE build plan. In terms of EBITDA performance. First quarter's EBITDA loss of $38 million represents $172 million improvement when compared to first quarter 2011 result. Sequentially, we saw a decline from the fourth quarter's positive $22 million EBITDA performance due to the incremental selling expense and the impact of the new Sprint agreement on revenue. Yes, for the first time, net cash provided by operating activities was positive, generating $66 million in the first quarter. Our strong operating cash flow in the first quarter reflects our emphasis on the timing of cash receipts and our negotiation with Sprint last year, the receipt of $77 million from Sprint for fourth quarter 2011 usage-based overage, as well as our continued focus on expense management.

Capital expenditures were $23 million in the first quarter and consisted primarily of WiMAX maintenance spend. While capital expenditures are flat sequentially, spend was down $107 million on a year-over-year basis as first quarter 2011 reflected our final quarter of WiMAX-build expenditures.

With regard to our LTE plan, the rigor place in design and site selection was the focus of Q1 and the development is now well underway. We remain on track with our original goal of placing the initial 5,000 LTE sites on-air by the end of June 2013.

While the total costs for the larger LTE deployment on up to 8,000 sites is projected to remain at approximately $600 million, we have rebalanced the timing of that spend between 2012 and 2013. Accordingly, total 2012 capital expenditures, including both WiMAX maintenance and the LTE build are not projected to be $350 million and $400 million, $100 million to $150 million lower than our previous guidance with the majority of the spend occurring in the second half of the year.

We expect to order the bulk of the equipment for the initial build in the third quarter and are targeting financing the majority of equipment purchases with vendor facilities. Although we are not updating guidance at this time, we now believe that the shift in the timing of the LTE spend, the momentum in our retail business and our continued focus on expense management may positively impact our EBITDA results in 2012. We will provide any updates to our full-year guidance on our Q2 earnings call.

Our liquidity at the end of the quarter was $1.4 billion, over $300 million more than the Q4 2011 period. This increase is due to the $295 million net proceeds from the January offering of senior notes combined with the positive Q1 cash flows from operations. As we consider our longer-term needs, we expect to receive future LTE payments from Sprint and continue to look at all potential sources of funding, including strategic partners, asset sales and the capital market.

Before I turn it over to Erik, I'd like to update you on the progress we have made on the sale of our International assets, which reflects our decision to focus our efforts and financial resources entirely on our domestic operations. We have recently completed the sale of our assets in Germany and Belgium. The financial impact of these transactions was immaterial to our financial statements and domestic operations. We continue to pursue opportunities to divest our remaining international operation in Spain.

Our first quarter results demonstrate that we are off to a strong start in 2012 and at the culmination of our retail cash generation, expense management efforts and the terms of the new Sprint agreement have strengthened our cash profile. I look forward to reporting back to you on our continued progress next quarter.

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

Erik E. Prusch

Thank you, Hope. Before we turn the call over to the operator for Q&A, I'd like to take a moment to share with you our thoughts on spectrum. Our industry is seeing explosive growth in mobile broadband demand. It is evident in the reports from other operators and more importantly, we see it in our own results. Aggregate wholesale 4G usage on our network more than doubled year-over-year in the first quarter, growing 134%. And the average 4G usage on smartphones increased 53% year-over-year. So it's no wonder the #1 priority for carriers in this industry is acquiring spectrum. To this end, we have seen operators take actions over the past year to try and address this need by entering into agreements to merge with other carriers or to acquire or swap spectrum assets. Despite these efforts, some of which may yet prove to be successful, we firmly believe that the supply of CLEAR and deployable greenfield spectrum in consideration today is insufficient to meet even the near-term demands of the consumer based on the trends we are seeing on our own 4G network.

Given these dynamics, Verizon's announcement plans to sell it's A and B Block 700 megahertz spectrum has received a great deal of attention over the past week. We do not believe that this spectrum represents a practical or comprehensive solution to the industry's needs for additional capacity due to the reported interference issues and lack of ecosystem with the A Block, as well as fragmented geographic coverage and limited depth of the B block spectrum.

In contrast, with our deep portfolio of approximately 160 megahertz of spectrum in the top 100 markets on average, we believe Clearwire is ideally suited to help operators meet this increasing demand. Moreover, our 2.5 gigahertz frequency is very conducive to broadband wireless data and is an apt capacity complement to the 4G coverage network carriers are launching in low or mid-band frequencies.

In fact, we believe the pending acquisition of the AWS high-frequency spectrum cooperates the value of high-frequency spectrum in general. It is now a well-known fact that in dense urban areas, higher frequency spectrum can carry higher numbers of subscribers and tonnage with faster speeds and fewer self-interference issues. It continues to be ideally suited to meet the requirements in central business districts or other dense usage areas.

In addition, their preference for the AWS spectrum to complement the 700 megahertz band, they already own also demonstrates a need for fat pipes in the broadband mobile world of today versus the thin channels used to support the voice-centric world of yesterday. In addition, our 2.5 gigahertz band is also the sweet spot of the Global TDD-LTE evolution and will offer carriers significant economies of scale. The 2.3 to 2.7 gigahertz ecosystem include spectrum that has been awarded in countries representing 45% of the world's population, including China, India, Japan and the U.S., setting up a vast ecosystem, which will enure to the benefit of our partners by driving down costs on infrastructure and devices.

In closing, given the voracious demand for mobile broadband data, Clearwire's ownership and control of large swathes of CLEAR and contiguous spectrum nationwide today, our 2.5 gigahertz spectrum is supported by a globally harmonized ecosystem and in contrast to the dirt of other suitable spectrum options for broadband data, we believe Clearwire has the right assets at the right time and is well-positioned to be the network to meet the demand for the future.

With that, I'd like to turn the call over to the operator for Q&A.

Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jennifer Fritzsche with Wells Fargo.

Jennifer M. Fritzsche - Wells Fargo Securities, LLC, Research Division

Great. I apologize if this has been addressed because I joined late. I just wanted to -- some of our texts had shown in conversations with Sprint that they might look to you to deploy more sites than initially thought, which I believe was initially a lot of 8,000. If you can offer any color on that without specific numbers but if directionally the conversation is going more higher toward the eventual offload of LTE types?

Erik E. Prusch

Yes. We're certainly encouraged by the relationship that we've got with Sprint and the cooperation that we've had around this initial part of our build. We think that it's a great opportunity, not only to focus on the 5,000 and up to the 8,000 but we think that there's even greater future to go beyond that down the road. We're certainly going to stay though focused on the 5,000 and 8,000 at this point, and we'll consider evolving that as we go down the path and as we see our experience in the LTE networks. But ultimately, the underlying demand we believe is insatiable, the ability for us to provide that optic network for Sprint and other partners is all very, very good for us and we feel like we're well-positioned to be able to take advantage of it.

Operator

Our next question comes from Walter Piecyk with BTIG.

Walter Piecyk - BTIG, LLC, Research Division

Just a first question is on the 500,000-plus wholesale net adds, can you give a sense or do you know what the mix of that is smartphone versus MyFi-type devices?

Erik E. Prusch

Yes. Walter, this is Erik. Certainly, most of the demand that we've seen has been concentrated on smartphones. We haven't broken it out because it is really Sprint's results that is driving the majority of that. But the majority that we've seen and experienced over the last year has been growth in smartphones.

Walter Piecyk - BTIG, LLC, Research Division

Okay, and then on CapEx with the new revised number, do you have a sense of what the 2013 CapEx would look like directionally?

Hope F. Cochran

Yes. Walter, this is Hope. Thanks for the question. If we look at the total LTE build and I'm really referring to the total complement of 8,000 sites, we look at that number as not changing, which is 600 million. So we look at that between 2012 and 2013. Also in 2013, you would just have your general maintenance for WiMAX that we've seen in the past few quarters. So you would have some WiMAX CapEx that would continue as it has and then you would have the remainder of that 600 million for the LTE build.

Walter Piecyk - BTIG, LLC, Research Division

Okay. And then the last question, I guess, is -- I don't if John Saw is in the room but maybe if you could give as any type of update from his prospective as far as the relationship with China Mobile or just talking about the ecosystem in general at your frequency band.

John Saw

Sure. We -- thanks, Walter, John here. We continue to work closely with China Mobile. In fact, last quarter, we announced basically joining our labs to test the devices with a common standard and specs. That is making great progress. I think in Barcelona, China Mobile themselves have announced that they are going to be putting up 20,000 TDD-LTE sites and 200,000 next year. That's great, that's a great message here to send to the ecosystem. We are extremely pleased with the progress that we have made in the past year on the TDD-LTE ecosystem. Certainly, the launch in Japan and India has helped a lot. We're pleased with the chipsets vendors, the progress they have made in terms of embedding TDD and FDD-LTE together in their single chipset. That's great progress, that's going to be a great enabler as well. So we are pleased with where the ecosystem is going. The footprint is growing as well. The GTI themselves are now forecasting 2 billion covered Pops by 2014. That's going to be a huge growth engine for the ecosystem.

Walter Piecyk - BTIG, LLC, Research Division

Do you think it's just -- I'm sorry, but one last follow-up. Do you think that chip market will be ready in calendar fourth quarter of this year to be ready for any new major product launches? I guess specifically, the iPhone obviously China Mobile has talked about wanting that. Is the chip development going to be on track for 2012? Or is that more of a 2013 event?

John Saw

I think I can tell you what the chip vendors have said themselves publicly. I think in particular QUALCOMM has talked about the Snapdragon line of family of chips the 8960 and 8930, 8974. So those are available as commercial samples towards the end of this year. So those are the building blocks that we will -- our carrier customers can use to build devices.

Operator

Our next question is from Jonathan Chaplin with Credit Suisse.

Jonathan Chaplin - Crédit Suisse AG, Research Division

I'm wondering if you could just spend a couple of minutes talking about potential sources of capital. I know that your preference is to fund the business through wholesale revenues and wholesale contracts that come with prepayments or revenue commitments to help a great deal towards that end. But I'm wondering if you could just talk a little bit about given it -- given that it's taking time to get wholesale contracts of that nature signed your willingness to sell spectrum?

Hope F. Cochran

Yes. Thanks, Jonathan, I appreciate the question. Well the excess this quarter Q1, one thing that we're encouraged by is the strong cash position that we have this quarter. We increased our cash position from Q4 to Q1. So we're leading off here on a strong place. As a look at future cash sources, you're right to point out that wholesale is the first place we'd like to go in terms of getting good wholesale revenue, strong wholesale revenue, as well as looking at maybe some possible prepayments in those contracts. So those are all things that we're currently working on. Beyond that, we've always taken a, I would, say balanced as well as opportunistic approach to the capital market as I watch the debt market, the equity market. And you actually pointed out our own assets here at Clearwire. We clearly have a significant spectrum portfolio and something that we can leverage. So we continue to watch all 3 avenues. And as we look at spectrum sales, while we're balancing that with what are the potential wholesale opportunities with that party across the table, so something that we're careful to make sure we're navigating.

Jonathan Chaplin - Crédit Suisse AG, Research Division

So, Hope, it's our concern is, is there carriers that would love to buy spectrum from you today. If they can't get it from you they'll go with -- they may be forced to go with a less attractive choice, buying spectrum from Verizon. And if wholesale deals don't come along -- if large wholesale deals don't come along quickly enough, you might lose that potential source of capital if you don't take advantage of it now.

Erik E. Prusch

This is Erik, Jonathan. No. Certainly we're aware of the dynamics in the industry. We just firmly believe that there isn't an availability of spectrum that's sufficient to actually solve the problem. And what we've got is that, that level of spectrum. As Hope mentioned, we are very focused on wholesale agreements. We believe that we're going to make a lot of progress this year on those wholesale agreements. We believe we're a better alternative to try to piece together fragments of spectrum and try to get that high-tonnage, high-capacity, high-speed type networks built. The ability for potential customers to offset with working with us, their own CapEx and the ability for them to have access to Free and CLEAR greenfield spectrum today is something that they just can't find anywhere else. So we appreciate the sensitivity, we have the sense of urgency to get this business scaled up. But at the same time, we don't think that there is a real viable threat out there at this point.

Operator

Our next question comes from Phil Cusick with JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

I wonder if Dr. Saw can talk a little bit about your vendors if you've decided on the 5,000 sites. Is there any update on who those vendors are going to be? And you mentioned getting financing from them, at what point could we see some announcements there?

John Saw

Phil, John here. We are still in the process of finalizing agreements with our vendors. And so we don't have any announcement right now.

Hope F. Cochran

And, Phil, in regards to financing, when we purchased that equipment and I indicated that, that would probably be in the Q3 period, as we receive those invoices in, I will be looking to finance those as we work with vendors as part of our vendor choosing process, I would say, to make sure that we've got the financing lined up alongside that agreement.

Philip Cusick - JP Morgan Chase & Co, Research Division

Okay. And then I'm not sure what you can say about this but outside from the 5,000 and then the 8,000 sites, what's the potential to really build the spectrum out further? Are there discussions with Sprint going on that would put the spectrum on the Sprint towers either in your footprint or more likely out of your footprint?

Erik E. Prusch

So Phil, we're looking at everything. And we're going to try and make decisions that not only serve our shareholders very well but are most capital efficient. We will continue to explore various opportunities, Network Vision has been one of those opportunities that we continue to look at and the cooperation that we've got with Sprint puts us both in good starting in terms of making some material progress. But the work we've done thus far in Q1 in terms of site identification and making certain that we can service their needs very well at least with this initial deployment of 5,000 is where we're focused.

Operator

Our next question comes from Ric Prentiss with Raymond James.

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

A couple questions if I could. Hope, you mentioned briefly the Virgin and Boost coming on to the wholesale platform. Can you talk just a little bit about your cost structure, how does bringing those on board affect your cost? How much of your network costs are fixed versus variable?

Hope F. Cochran

Yes. Thanks, Rick. When I think about our network cost, because we have so much capacity, I really do view them as almost entirely fixed. If we were capacity-constrained and didn't have the spectrum to service that capacity, I would do that differently meaning we would have to add radios or add towers to increase the capacity as people access our networks. But because we use such wide channels with spectrum and we can easily augment our capacity at the tower sites, I really do view the network cost as substantially fixed. And therefore bringing on that additional capacity through the prepaid subscribers that Sprint is planning to do, really does not put additional cost burden on the company.

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

Okay. And then on the 5,000 towers, they talked about -- sounds like you're going to order the equipment in the third quarter. I would assume you'd pay for it mostly fourth quarter, so might even be very rear-end loaded on CapEx. Just trying to take on the tower side, too, probably you will have to approach them for rents in the third or fourth quarter just from your cash management?

Hope F. Cochran

Yes, I think that's fair. I think you've got the timing right. In regards to ordering the equipment, in terms of accounting, you show that cost when you incur it. So when you order it or be committed to it. So I would anticipate that in Q3 and Q4. And then in regard to incremental tower costs, if we're having to put additional equipment on any tower, we do anticipate that the tower rentals will increase slightly and you'll start to see that in that second half of this year.

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

Okay. And with all 4 national carriers appearing to be fairly active this year, Verizon, AT&T, Sprint and T-Mobile looking like they're going to get going on their LTE buildout, any concerns that the Services business, the guys that hang the antennas or work on the sites that there could be a limited supply there, people that can actually achieve this to kind of hit your benchmark to hit 5,000 by June?

John Saw

Rick, John Saw here. What we're doing is actually adding LTE to existing WiMAX sites. So the requirements for services and cell tower labor is greatly reduced in this way. We're not building new sites, we are basically incrementally adding equipment. So we are very confident that we have the resources that we need to get to the June milestone.

Operator

Our next question is from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

On the CapEx changes, it sounds like you haven't changed your end date for the 5,000 sites. What was the sort of the main change in assumptions that caused you to push the 100, 150 into early next year from late this year? Was it network design or was it sort of vendors? What sort of changed? And just to make sure that you are still -- you haven't really pushed out the launch of the network. And then any updated thoughts on the life of your WiMAX network, you're signing new wholesale deals. Sprint's pushing the handsets through the prepaid channel. Are you thinking that maybe WiMAX will be around for longer than you originally expected?

Hope F. Cochran

Yes. Thanks, Simon. I will address your first question, which is the timing and the change in the CapEx. As we think about the build and it having that timing of 5,000 sites in that first half of 2013, you're right to point out that we didn't move that deadline of that milestone. We did however, rebalanced the spend of that CapEx through the 2012 and 2013 timeframe. The reason that occurred was because as we looked at Q1, we really spent a significant amount of time specifically planning each site. And therefore there was not a lot of spend associated with that and the spend is getting pushed back a little bit later. But the spend will happen more efficiently and faster as a result of the planning that's been done up front. What we are finding that's different in building a greenfield site we're not out searching for different sites, we're specifically looking at the sites we currently operate understanding the usage on those sites and making sure we're specifically choosing sites that we think will have a strong ROI for our company. So that's the time, but it was very specific planning and I think it will pay a dividend in as we, not only build the network, but then operate the network.

Erik E. Prusch

And Simon, this is Erik. As first the WiMAX network, I think that's really the beauty of what we've got from an asset base. We've got a deep level of spectrum position today that creates a lot of flexibility for us to maintain both of these networks. We don't really have to make decisions between the 2 networks. We also have a very good architecture plan that allows us to leverage the infrastructure of WiMAX in favor of LTE so that doesn't mean that we have to replace or start from scratch as we've talked about in the past. So as far as the end of WiMAX is concerned, we've got an agreement in place with Sprint that is a minimum level that we will support that network. We've also had new wholesale customers. They're beginning to come online as we speak. We've continued to see good demand from our WiMAX network, good performance out of the network. So right now, we can't call it yet. What I can say is that we'll be prudent, we'll be judicious in terms of the capital that we put to work and make certain that we're giving customers a great quality of service. And at the same time, make certain that we can continue to support the WiMAX effort during the next few years.

Operator

Our next question comes from Michael Funk with Bank of America.

Michael J. Funk - BofA Merrill Lynch, Research Division

Two quick ones. I thought that Sprint spoke more constructively about your participating in network vision. And I'm just wondering if in your view is the economics of participating there have changed after having discussions with Sprint. And then, the second you're on a CapEx rebalance in 2012 and '13. Just to confirm that this will not impact any of these success best based payments coming out of Sprint?

Erik E. Prusch

So Michael, it's Erik. There has been nothing but good news in terms of the cooperation with Sprint. We're going to continue to evaluate it. We're solely focused on the 5,000. We're not precluding any opportunities and we think that we're making a lot of good progress. And if the opportunity presents itself to be able to leverage, common infrastructure or common CapEx, we're going to go and pursue that. So I'm encouraged by it, I think that there's a lot of opportunity for us to work with Sprint on the next wave.

Hope F. Cochran

Yes. Regards to the payment timing, it's a good topic to bring up, Michael, so I appreciate that. The reason we are focused on that deadline is to make sure that we are well within that payment timing. So we're focused on making sure that we are prepayment and that deadline is protected.

Operator

Our last question comes from Anthony Klarman with Deutsche Bank.

Anthony Klarman - Deutsche Bank AG, Research Division

The question -- just a question maybe, Hope, they are clarification to what you've said I know that you have sort of adjusted the schedules. But is there any flexibility that you have in the timing of those payments from Sprint that are sort of set to the hurdle rates of the LTE rollout. Is there any flex that you have available to you in that contract that will let you sort of change the timing of those payments either forward or backwards based upon either meeting the deadlines faster or needing to push them back if necessary?

Hope F. Cochran

Yes. It is flexible. In the sense that it's triggered on when we make those milestones. So if we were to meet those milestones earlier, we would start to trigger that payment earlier. So that is something that we watch. And then if it gets delayed a little bit, it would reduce the prepayment but not by a lot. So it would be small, but we're very focused on making sure that deadline comes in on time. If anything, just for the opportunity of making sure we get to market on time.

Anthony Klarman - Deutsche Bank AG, Research Division

Got it. And is the right way to think about the net impact of that prepayment that you'll sort of get a $350 million LTE prepayment less the sort of inverse of the accrued benefit that you have in '12. It will be sort of an accrued liability that Sprint -- you'll be recording a higher revenue item from Sprint than what the actual cash coming in the door is. So the net impact is sort of a little bit less than the $350 million you've talked about previously?

Hope F. Cochran

Yes. That's right, Anthony. And so there's a couple of things of that payment. I mean, number one, it doesn't come in all at once, it does come in over a period of time. It comes in, in even payments. And then their revenue stream will be based on their usage of the network. So our revenue will be reflective of what they use. So I would anticipate that early on, we would have a deferred revenue that we would collect as the prepayment and that our revenue line would be lower than the cash we are receiving from them during that window.

Anthony Klarman - Deutsche Bank AG, Research Division

Got it. And maybe one final one. Erik, I know you mentioned about the Verizon spectrum auction and how it doesn't answer the spectrum needs that the market has. And I think most people would agree with you. And I think maybe, Hope, in the presentation you have made previously, you talked about the amounts of, sort of, theoretical access spectrum that you have in markets. Is there are reason why you guys wouldn't do something similar and run a public auction essentially for the spectrum even if it's 10 megahertz of nationwide spectrum, just to put this fear that the market has in terms of your ability to monetize the 2.5, 2.6 spectrum in a -- in something like an auction format. Why not, sort of, do something like Verizon Wireless is doing and crystallize what you guys believe is the value in that spectrum and sort of demonstrated the liquidity angle that the market is looking for?

Erik E. Prusch

Anthony, it's an interesting point. And it's certainly something that we should always consider. I guess we've got a good test case to watch what happens with Verizon in front of for us. And reflect on that and see whether or not this is the type of vehicle that we should use if and when we ever make a decision to sell spectrum. But I appreciate the comment.

With that, we're going to bring our call to a close. Thank you all for taking the time to listen in and participate. We're off to a strong start in 2012 and we remain focused on optimizing our current business, while furthering the LTE build an ecosystem and advancing key strategic developments and opportunities that will position Clearwire to be the 4G network partner for many in our industry. We look forward to providing you with an update on our progress on our next call. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day. You may now disconnect.

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