Clearwire Q4 2007 Earnings Call Transcript

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Clearwire Corporation (CLWR) Q4 2007 Earnings Call March 4, 2008 11:00 AM ET


Hope F. Cochran - Vice President - Finance, Treasurer

Benjamin G. Wolff - Chief Executive Officer, Director

Perry S. Satterlee - President, Chief Operating Officer; President and CEO of Clearwire US LLC

John A. Butler - Chief Financial Officer


Jonathan Chaplin - J.P. Morgan

Phil Cusick - Bear Stearns

David Janazzo - Merrill Lynch


Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Clearwire Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Hope Cochran, Vice President of Finance and Treasurer. Please proceed, Madam.

Hope F. Cochran

Thank you. Thank you for joining us today for Clearwire's quarterly earnings call for the period ending December 31, 2007. On the call today you are also going to hear from Ben Wolff, our Chief Executive Officer; Perry Satterlee, our President and Chief Operating Officer; and John Butler, our Chief Financial Officer. Following our presentations we will open the lines up for questions.

I would like to point out that today’s call is being webcast on the Clearwire investor relations website. This call will be archived on that site and available for replay shortly after we conclude.

I hope everyone had an opportunity to read the press release, which provides detailed financial information on Clearwire Corporation’s fourth quarter and year-end 2007 results.

Before I turn things over to Ben, I’d like to caution all participants that this morning’s call may contain forward-looking statements reflecting management’s beliefs and assumptions concerning future events based on currently available information. Forward-looking statements include, among other things, our future financial and operating performance and financial condition, including projections and guidance for 2008 and subsequent periods, network development and launch plans, and the need for additional financing. Listeners are cautioned not to put undue reliance on these forward-looking statements as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from forecasts.

Please refer to our press release and our filings with the SEC for more information on these risk factors.

Additionally, a reconciliation of any non-GAAP financial measures discussed on this call can be found in our press release.

With that, I would like to turn the call over to Ben Wolff.

Benjamin G. Wolff

Thank you, Hope. It’s our pleasure to be with you today to discuss Clearwire's fourth quarter and full year 2007 financial and operating results, as well as provide you with an update on our outlook for 2008.

2007 was a banner year for Clearwire as we made significant progress in both our new market development and our existing market operations. On the new market development side of our business, our progress was marked by almost doubling the size of our network, launching 14 new operating markets, successfully completing initial trials of the mobile WiMAX technology and increasing our spectrum portfolio by more than 3 billion megahertz POPs.

With respect to the market operation side of our business, key milestones achieved during the year included almost doubling our subscriber numbers to just under 400,000 subscribers, more than doubling our service revenues year over year, expanding our service offerings to include residential voice and PC card services, and most importantly increasing the number of our operating markets that were cash flow positive on a market EBITDA basis from just four at the end of 2006 to 24 in the fourth quarter of 2007.

During the year, we continued to demonstrate that our fast, simple, portable, and reliable residential broadband service has mass market appeal, with penetration in some of our most successful markets now exceeding 20% of the homes covered by our network in these markets and we achieved this penetration in the face of vigorous competition from triple play cable and DSL providers and a weakening economy.

In fact, nearly two-thirds of our markets that have been in operation for 12 months or longer now have 10% or greater penetration of covered households, with more than a quarter of those markets ending the year with 15% penetration or greater, meaning that just under one in six households in these markets are Clearwire subscribers.

We achieved this penetration while intentionally shifting our attention mid-year to focus more on cash flow and less on top line growth, given what we anticipated would be a more challenging economic and financing environment. This shift allowed us to drive more than half of our domestic markets into positive EBITDA territory on a market level basis while still hitting the top end of our subscriber guidance that we provided at the time of our IPO one year ago.

Focusing on the new market development side of our business, of the 14 new markets we launched in 2007, 12 were domestic markets and two were international markets, increasing our total number of operating markets to 50. The networks in these new markets cover approximately 6.7 million people, bringing the total number of people covered by our networks at the end of 2007 to just under 16.3 million people, representing a more than 70% increase in the number of people who can now subscribe for Clearwire broadband services.

To put our 2007 development progress in perspective, just three years ago at the end of 2004, we operated in three markets covering less than 0.5 million people.

The ability to continue to construct new markets is largely dependent on having adequate raw land available. In our case, raw land means radio frequencies or wireless spectrum. As I mentioned earlier, we increased our spectrum holdings by more than 3 billion megahertz POPs in 2007, bringing our consolidated global spectrum holdings to more than 23 billion megahertz POPs.

Let me put last year’s acquisitions in perspective; the amount of spectrum we added this past year alone is equal to more than 80% of the amount of spectrum represented by the entire A or B blocks of spectrum in the 700-megahertz auction.

In the U.S., almost two-thirds of our spectrum is located in the top 100 markets. Approximately three-quarters of our domestic spectrum is leased under long-term leases, while more than half of our spectrum globally is owned outright.

Some in the analyst community have recently pointed out that there are some misperceptions about the spectrum that we use in our business. These misperceptions stem in part from the licensing scheme associated with the 2.5 gigahertz band, the historical absence of technology that could effectively make use of the 2.5 gigahertz frequency, myths relating to the hypothetical capital efficiencies of lower frequencies when used for wireless broadband services, and the virtual equivalency of long-term spectrum leases compared to ownership.

These analysts have also pointed out that these misperceptions have resulted in the marketplace inappropriately undervaluing our spectrum when compared to other spectrum bands.

To the extent that there is a silver lining associated with these misperceptions, it is that we have been able to acquire our spectrum, which is optimal for next generation broadband services, at a relatively low cost.

By way of example, more than $19.6 billion will be spent on licenses that give rights to a little over 15 billion megahertz POPs of 700-megahertz spectrum in the current FCC auction, with the entire $19.6 billion payable in full at the end of the auction.

In contrast, Clearwire has rights to approximately 15.1 billion megahertz POPs of spectrum in the U.S. while the remaining net present value of our payment obligations on all of this spectrum is only about $513 million, which we can pay for over the duration of our long-term leases rather than all at once.

Now I’d like to turn the discussion to our areas of focus for 2008. First, we expect to launch all of our new 2008 domestic markets using standards-based IEEE 802.16.e mobile WiMAX technology. We expect to soft-launch our first mobile WiMAX market, Portland, Oregon, in the middle of this year with three additional markets, Atlanta, Las Vegas, and Grand Rapids, Michigan, coming online before year-end, representing an additional 6 million people covered by our networks in 2008.

The performance of the mobile WiMAX technology is currently exceeding our expectations in our market trial. At our investor day at the end of January, we were able to demonstrate our home and away use case, including a consistent and seamless user experience across multiple devices and screen sizes on a fixed portable and most importantly mobile basis.

The demonstration was conducted over the mobile WiMAX network that we were building in Portland, which now includes 42 sites covering approximately 145 square miles. We consistently demonstrated five to six megabits per second on the down link, with speeds as high as nine megs and two to three megabits per second on the up link, while streaming music and video to a large plasma TV and conducting a video conference from multiple vehicles, all while moving at 60 miles per hour through 27 seamless mobile hand-offs along 22 miles of highway.

I think it is safe to say that this kind of network performance opens up a whole new frontier for our industry.

Consistent with the way we launched markets using pre-WiMAX technology, we will thoroughly stress test the new mobile WiMAX platform in Portland. Then, once we are satisfied, we will launch the other three markets, each of which cover different market densities, typographies, climates, demographics, and competitive landscapes, before we begin a much broader launch of the technology across the country.

It is interesting to note that with more than 400,000 households subscribing to our services today and approximately 2.5 people per household on average in the U.S., we ended the year with close to 1 million people living in homes with Clearwire services. We believe these 1 million individuals provide the foundation for our evolution from our current residential modem product, which is sold on a per household basis, to a fully mobile set of products that cater to individual users.

Next we will focus on driving meaningful improvements in the operating and financial performance of our existing markets. While we are making compelling penetration and market share gains, we will increase our emphasis on generating cash flow from our operating markets. We made great progress last year by significantly increasing the number of our markets that were EBITDA positive at the market level, and we expect this trend to continue in 2008.

One of the ways we expect to achieve improved financial results is through the sale of additional products and services. For example, we are beginning to gain traction in the sale of our residential voice and PC card services, which not only serve to drive ARPU increases but can also have a substantial impact on reducing churn. We expect to significantly increase the momentum behind these products in 2008.

Concurrently, we are working with our vendors to increase the breadth of devices that can connect to our network. In 2008, we expect to introduce express cards in our existing markets and we expect to see mobile WiMAX based residential gateway modems, PC cards, express cards, USB driven devices, and embedded chipsets in PCs beginning later this year.

We also expect to improve financial performance through achieving greater cost efficiencies as the business matures and scales. For example, as our Las Vegas and Pensacola call centers begin to mature and scale in 2008, we expect to improve first-time call resolution and become more efficient with respect to call handle times, which should translate into lower customer care costs.

Another key area of focus for us is to balance the tremendous growth opportunity we see in front of us with the realities of today’s financing environment. One of the great things about our business is that we can modulate our expansion plans up or down based on market conditions. We currently have new markets in various stages of design, construction, and development, representing over 36 million additional people that will be covered by our networks when these markets are launched.

As I stated earlier, under the current plan our expectation is to launch approximately 6 million new covered POPs in 2008. However, we will continue the progress on the additional 30 million POPs by completing some of the long lead time but lower cost items to advance these markets, giving us the flexibility to ramp up deployments when the capital is available to do so.

That being said, if we are not able to attract capital at rates in terms that we find acceptable, we are able to further modulate our development in the near-term to optimize our financial resources.

Lastly, we are focusing a significant amount of effort on capitalizing on the strategic opportunities that are in front of us, including those with Sprint and others. I have made it clear since last November that although we and Sprint decided against pursuing the joint build concept that the two companies were in active and regular discussions about how we might work together to achieve our common objectives. The joint build arrangement was one of many different alternatives that the companies have discussed. We concluded at the time that the joint build arrangement was not only complicated and cumbersome but also didn’t maximize the full potential of the opportunity.

Obviously Sprint has been preoccupied with refocusing its attention on its core business and a change in leadership. However in my opinion, Sprint is now fully focused on how it can make the most of its 4G opportunity and significant progresses being made between our companies on a number of fronts. We hope to be able to have something more definitive to discuss with you soon.

So that wraps up our areas of focus for 2008 and with that, I will turn the call over to Perry.

Perry S. Satterlee

Thank you, Ben. As of the end of Q4, we offered service in 46 markets in the U.S. and four markets in Europe. During the fourth quarter, we launched two new domestic markets -- Charlotte, North Carolina and Rochester, New York. With the addition of these markets and the expansion of coverage in existing markets, we ended the quarter and the year at 16.3 million covered POPs, an increase of 6.7 million from the end of 2006.

We continue to make progress expanding our network into these new markets and at the end of 2007, we had 2,359 sites on air, which is an increase of approximately 1,000 sites from the end of 2006.

With the launches in Q4, we closed the year with 12 of the top 100 markets in operation. In the second half of 2008, we expect to commercial launch our first mobile WiMAX markets -- Portland, Atlanta, Las Vegas, and Grand Rapids, all of which are top 100 markets, with Atlanta as our first top 10 market.

Assuming all of these markets are launched this year, we will add an additional 6 million covered POPs to our network, bringing our consolidated total to approximately 22 million. In addition to these markets, we entered 2008 with another 30 million WiMAX POPs in various stages of design, development, or construction. Based on the environment in the capital markets, or as other strategic initiatives present themselves, some of these POPs can be moved into 2008 or at a minimum be ready for a 2009 launch.

Consolidate net adds for Q4 were 47,000, with an ending subscriber base of 394,000 in 2007, which is at the top end of our original 2007 guidance and reflects an increase in Q4 of 7% year over year.

Our penetration rates in markets that are more than 12 months old continue to be robust. As Ben mentioned earlier, 25% of these markets have a household penetration rate of over 15% and some have more than 20% penetration. Overall, nearly two-thirds of the markets that are more than 12 months old have greater than 10% household penetration.

As we discussed during the third quarter call, we discontinued service to a group of wholesale subscribers and we continued clean-up efforts in our international markets, which resulted in a write-off of several thousand subscribers. Excluding these subscriber write-offs, net adds for the fourth quarter grew by 18% year over year. The tempering of net add growth in Q4 was partly attributable to the focus on profitability in our initial markets and the gradual increase in credit score requirements for new gross adds, which we implemented in part due to the softening economy.

Over the past three years, we have made significant progress in our business. Subscriber numbers have grown quickly, CPG has dropped by more than $200 per add and ARPU has grown nearly $10 per customer since 2005.

On a quarterly basis, consolidated ARPU for Q4 was $36.09, compared to $36.39 in the same period in 2006. The decline is partly attributable to the revenue adjustment made in our international markets as a result of the customer write-offs, as well as a more competitive promotional offers for our new customers.

These activities led to a reduction in ARPU in Q4 that will carry into the first few months of Q1. However, the fundamental building blocks of our revenue stream are strong. Domestic standard list pricing has been stable. Premium plan loading has ramped to more than 80% of new adds, and contributions from VOIP and other value-added services continue to grow. In addition, new domestic subscriber loading on the two-year contracts has steadily increased from just under 80% at the beginning of 2007 to over 90% at the end of the year.

Consolidated CPGA for Q4 was $477, which is down from $515 in the same period in 2006. Q4 marked the major launch of Clearwire's television advertising campaign, with spots running in support of our large markets and newly launching markets. Results thus far have been positive. Charlotte, which launched with TV support, has exceeded our sales expectations every month since launch and Seattle has seen its highest monthly penetration levels -- has achieved its highest monthly penetration levels ever in early Q1. In fact, we are experiencing a rebound in seasonal trends in our markets in Q1 as compared to Q4 2007.

While our TV advertising is undoubtedly effective, there is an interval between the initial TV spend and the contribution in gross adds as awareness in the marketplace grows. This lag in time can span quarters and have an impact on trailing CPGA, which is what we were observing in Q4 and Q1 -- between Q4 and Q1.

We also launched two large markets at the end of the quarter, which as we’ve discussed in previous quarters requires more sales and marketing costs without the corresponding contribution of gross adds as we build brand awareness in the market.

Consolidated churn in Q4 was 2.4% compared to 1.9% in the same period in 2006. Domestic churn was 2.1% for the quarter, which was up from 1.8% in the same period in 2006. International churn was 4.9% for the quarter, up from 3.0% for the same period in 2006, which is driven by the termination of a group of aged accounts.

In the domestic business, we experienced a write-off of customers from our wholesale subscriber base, which we discussed on our last call, and it had a 0.15 impact to churn. The combined write-off of domestic and international customer accounts contributed to 0.45 to the consolidated churn in Q4.

Now a quick update on the progress being made in our U.S. initial markets. Year over year, total subscribers in these markets have increased by over 40% to more than 215,000, which equates to an average household penetration level of just over 12%. This group of markets went market EBITDA positive in Q2 and since then have continued to improve its overall financial performance.

At the end of Q4, more than 80% of the individual markets in this group are market EBITDA positive with nearly one-third of them at or above 20% market EBITDA margins.

In addition to gross margin improvements, the other key metrics of this group, including CPG and ARPU, continue to outperform the company as a whole. We believe this group of markets continues to represent the effectiveness and scalability of the Clearwire business model.

Now I would like to provide an update on our key product initiatives, specifically our VOIP offering and our PC card. During Q4, we launched another [four] VOIP markets, bringing the total number of markets selling VOIP to 41. In Q1 of this year, we launched another three markets, leaving only two more existing markets to launch in 2008. We expect that the four WiMAX markets planned for launch later this year will offer VOIP service on day one.

During Q4, VOIP sales across all markets in which we have launched the VOIP product were 10% of overall broadband sales, a product mix trend that is consistent with our long-term business plan. The total ARPU from the VOIP product offering in Q4 was $31.52, which is competitive compared to other facilities based providers but higher than the over-the-top offerings. The total ARPU contribution is progressing at a pace that is consistent with our long-term model.

We officially launched our PC card offering in Q4 and in the first few months of commercial availability, we have seen an average of around 35% of new PC card sales bundled with the residential gateway service. We believe these bundled take rates provide early validation of the customer value proposition of having a single connectivity experience at home and away.

Beginning in late Q1, we have increased the share of PC card specific advertising across all media, including television, to continue to build momentum in the channel and educating customers on the benefits of the mobile Internet.

We view the PC card and the residential gateway bundles as an important step in the evolution of broadband mobility ecosystem and a differentiated service offering that will allow our customers to connect to the Internet anytime, anywhere. It is laying the foundation for the breadth of mobile offerings that will be available in the mobile WiMAX product set, starting with the express card and USB peripheral form factors, and evolving to embedded WiMAX chipsets in laptops and mobile Internet devices.

I will close with a quick update on some customer survey data collected during Q4. Consistent with previous quarters, two-thirds of our new customers had an existing broadband service when they signed up with Clearwire. Roughly 38% of new customers had cable modem service and 28% are coming from DSL service. Customer satisfaction with the sales and install process was north of 80% in Q4, which is consistent with the past two quarters, and nearly 70% of customers indicated it took them less than 15 minutes to set up the service.

The consistency of these results reaffirms that Clearwire continues to deliver a quality Internet service whose simplicity, speed, and flexibility exhibits broad appeal. It is the foundation of a customer-centric value that we will build upon as we enter the next phase of our evolution into mobile WiMAX.

Now I would like to turn it over to John Butler to review our financials.

John A. Butler

Thanks, Perry. Let’s begin our financial review by taking a look at the consolidated income statement for the year. Please note that in this discussion, comparisons to the prior year generally exclude the results of the [wireless broadband] equipment business sold to Motorola in 2006.

On a consolidated basis, annual service revenue for 2007 more than doubled to $151.4 million when compared to approximately $67.6 million we generated in the prior year. The increase was driven by the rapid growth in our subscriber base and the continued solid ARPU.

As mentioned by both Ben and Perry, we invested heavily in our network expansion and spectrum footprint in 2007, both of which we believe create real long-term shareholder value. There are costs that come with both, so our cost structure at Clearwire did move up in 2007.

Our direct operating expenses for the service business increased to $107.3 million in 2007 from $50.4 million in 2006. These expenses relate largely to [tower rents] and direct Internet access costs, and as we have stated previously, will continue to rise as we expand the size of our footprint.

In 2007, we added about 1,049 cell sites representing an increase of more than 80%. However, gross margins in dollar terms for the service business increased over 157% to $44.2 million, up from $17.2 million as the business continues to scale.

On a percentage basis, gross margins in the service business increased to $29.2 million from 25.4 -- to 29.2% from 25.4% in 2006.

Let’s shift over to review the drivers of our SG&A expenses. SG&A expenses were $360.7 million in 2007 versus 214.7 in 2006. The increases are driven by the most part by headcount and CPGA. The G&A increase was largely driven by the substantial increase in our employee base, or partners, as we describe them.

We ended 2007 with just under 2,000 partners, which included approximately 750 people added during the year, most of whom were in our new markets or call centers which we brought in-house.

We have approximately 400 people at corporate, which represents about 20% of our partner base, many of whom are focused on new market launches or forward-looking projects, such as the transition to mobile WiMAX.

Our EBITDA loss for the year was $414.3 million compared to an EBITDA loss of $197.2 million for 2006. When we adjust for non-cash items, such as stock compensation expense, non-cash [cell site rent] and non-cash spectrum lease expenses, our adjusted cash EBITDA loss for the year improves by approximately $125 million to a $289 million loss.

As Perry mentioned, we successfully launched five new markets in the third quarter and two additional large markets in the fourth quarter. These new markets push total capital expenditures for the year to $361.9 million, up from $191.7 million in the prior year. As mentioned earlier, we launched 1,049 sites in 2007 and have another 36 million POPs in various stages of design, development, and construction.

Moving to Q4 results, on a consolidated basis, service revenue for the quarter grew by approximately 91% to $45.4 million when compared to the approximately $23.7 million we generated in the same quarter of ’06. The increase was driven by the continued rapid growth in our subscriber base of approximately 47,000 net adds for the quarter and 188,000 net adds for the year and continued solid ARPU.

Now let’s go over the expense drivers for the quarter. Q4 gross margins in dollar terms were relatively flat in comparison to the prior year, as we launched most of our 2007 covered POPs in the third and fourth quarters. In percentage terms, the gross margin percentage for Q4 was reduced from 31% to 16% because of that 4.7 million increase in covered POPs launched during the last two quarters. I expect the margins to recover as the new markets begin to load customers.

SG&A expenses were $101.2 million for the quarter versus $72.1 million in Q406. As mentioned earlier, the largest components of SG&A are the employee headcount and CPGA.

Our EBITDA loss for the quarter was $133.8 million, compared to an EBITDA loss of $74.1 million in Q4 of 2006. When we adjust for non-cash items, such as stock compensation expense, non-cash tower rent, and non-cash spectrum lease expenses, our adjusted cash EBITDA loss for the quarter improves by $50 million to about an $83.1 million loss.

The construction and market deployment related expenditures for Charlotte and Rochester, which launched in Q407, as well as costs incurred on 2008 and 2009 markets, caused an increase in CapEx to $82.7 million for the quarter, up from $62.7 million in the same quarter last year.

Let’s move our discussion to our more mature initial 25 markets. As we’ve detailed previously, these markets may provide a better understanding of how the business is operating exclusive of the construction and development business, where new market launches and related capital investment tend to distort our consolidated results from quarter to quarter.

In particular during the second half of 2007, we began to increase our focus on driving profitability rather than market share. For the year 2007, initial markets showed solid improvement as service revenue rose to $85.7 million for the year compared to $45.7 million in 2006, representing an 88% increase in revenue. This up-tick in revenue was driven by the 42% gain in subscribers and continued ARPU gains.

Gross margins were 75% for the year, up from 65% in 2006 as the business continues to scale. As Ben mentioned and most importantly, the initial markets’ EBITDA ramped nicely as the number of market EBITDA positive markets increased dramatically during the year. As a result, market EBITDA in the initial 25 markets swung from a $25.7 million loss in 2006 to a $5.3 million positive for 2007.

During Q4, the initial market showed continued improvement as service revenue rose to $23.7 million for the quarter compared to $15.5 million in the same quarter prior year. The gain on subscribers was the primary driver for the 52% growth in revenue.

Gross margins were 76% for the quarter, up from 72% in the same period in 2006, despite the increase in churn due to the factors that Perry outlined. With continued improved scale and a large percentage of incremental revenue dollars falling to the bottom line, initial markets’ EBITDA continued its steady progress, moving to a positive $2.6 million and a market EBITDA margin of 11%.

We believe the performance in our initial markets validates the large investment in spectrum acquisitions, new market development, and a corresponding increased level of operating losses that come along with any construction and development business.

This premise is further validated by the 2006 markets, which are now beginning to turn market EBITDA positive, and the 2007 markets which are tracking and are largely expected to begin to turn cash flow positive before marketing expenses later this year.

Shifting over to guidance, on our investor day conference call, we provided guidance on covered POPs, total subscribers and revenue for 2008. We’ve added capital expenditures to our guidance and expect CapEx to run $275 million to $290 million. The capital expenditures guidance assumes we launch 6 million POPs, as Perry and Ben outlined, and continue to progress on our greater than 30 million POPs in the construction pipeline.

No other changes in guidance are being made at this time.

We often get questions regarding the capital costs of the [inaudible]. Some may find it useful to walk through our expected CapEx per covered POP as we shift from expedience to mobile WiMAX. We expect a typical mobile WiMAX cell site to cost on average $125,000 at the outset in 2008. Within that area, we expect to sign approximately 2,600 to 2,800 households or about 6,000 to 7,000 people. That implies a cost per covered POP of approximately $17 to $21. When you include other network elements and other capital needs, we estimate our cost per covered POP will stay in the neighborhood of $21 to $25, depending on market density and a variety of other factors.

And with that, I’ll turn the call back to our operator for questions and answers.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Jonathan Chaplin with J.P. Morgan. Please proceed.

Jonathan Chaplin - J.P. Morgan

Good morning. I wonder if I could ask two quick questions; firstly, just on the negotiations that are ongoing with Sprint, I’m wondering what the biggest stumbling block is to reaching an agreement there. Is it the deal you are trying to hammer out with Sprint or is it trying to work out the financing piece for whatever, you know, for whatever agreement you reach with Sprint to figure out how the financing comes in.

And if it’s really issues with Sprint that are taking a long time to negotiate, I’m wondering if you could give us some color around some of the specifics of what’s difficult to negotiate here.

And then on churn, 45 basis points of the churn was driven by disconnects that are one-time. Should we expect churn to come down by 45 basis points or so in the first quarter?

And then actually lastly, if you could just help me out a little bit with the non-cash spectrum lease expense, if I look at the spectrum lease expense on the income statement and the amortization for spectrum leases that you back out in the cash flow statement in the cash flow from operations section. I get to a different non-cash spectrum lease expense than you calculate in the EBITDA calculation. I’m just wondering what the differences are. Thanks.

Benjamin G. Wolff

All right, thanks, Jonathon. I’ll start off with the question about the Sprint negotiations. As I hope you can appreciate, it would be inappropriate for me to comment on the discussions that we are having and what the issues are. I think as quickly as we can, we will certainly come back to the marketplace with a better picture of what is going on but at this point, it really wouldn’t be appropriate for me to comment on the substance or even context of those discussions, so I will respectfully decline to comment on that one.

Perry, maybe you could respond to Jonathon’s question about churn.

Perry S. Satterlee

Sure. Jonathon, in Q4 we saw our normal trends, our seasonal trends with our voluntary churn as it came down again in Q4 but with the softening of the economy and the tightening of the credit, we also saw our non-pay churn tick up, which seasonally it hadn’t had. So when you look out into the forecast for Q1, there’s really two things out there that will impact it. One is that the non-pay portion of it as the economy still exists in the first quarter and then with regard to the international piece of it, we have claimed the majority of it but there will still be some residual left in the first quarter.

Jonathan Chaplin - J.P. Morgan

But the clean-up you did in the domestic piece is ongoing in the first half of 2008?

Perry S. Satterlee

No, no, the domestic piece was cleaned up in the fourth quarter, so that, the wholesale piece is behind us. And then the international is for the most part we cleaned up in Q4 but there may be some residual effect in Q1.

Jonathan Chaplin - J.P. Morgan

So when you tie it all together, at least in the international -- in the domestic piece, you should se churn improve in the first quarter it sounds like?

Perry S. Satterlee

Our expectation is that they should return to historical trends, other than the caveat around the non-pay issue.

Benjamin G. Wolff

And then John, maybe you could address the non-cash spectrum lease expense issue.

John A. Butler

Sure. So the GAAP financial statements and the cash don’t exactly tie up because from a GAAP perspective, we take the full set of scheduled increases and amortize over that, rather than actually what we spend in cash for the quarter, so there is always a bit of a difference there. And it’s fairly reasonably well-outlined in the reconciliation. If you have any additional specific questions, we can take those offline and walk you through it but it should tie back.

Jonathan Chaplin - J.P. Morgan

Okay, awesome. Thanks, John.


Your next question comes from the line of Phil Cusick with Bear Stearns. Please proceed.

Phil Cusick - Bear Stearns

I wonder if we could talk a little bit about the CapEx guidance for this year. Can you give us an idea as to how much of that is going into the markets that you don’t plan to launch this year? It’s a little more than some of us were expecting but I think given the amount of prep work we are doing, I shouldn’t be surprised. I just wonder if you could break that out a little. Thanks.

Benjamin G. Wolff

John, do you want to address the CapEx question?

John A. Butler

Yeah, I can give you some of the big pieces. I would say in the new markets for ’08, for ’07 -- for ’08 and a little bit into ’09, that should run in the neighborhood of $150 million or so.

For capacity and coverage in old markets, we’ll be adding in the neighborhood of $30 million or so. And then CPE, given how much we spend on residential gateways, which are treated as CapEx, should be in the neighborhood of about $25 million. Generally international runs in the 10% to 15% of overall CapEx, so those are kind of the big pieces that make up our CapEx.

Phil Cusick - Bear Stearns

Okay, that helps. And on your cash balance, any risk on the balance there from auction rate or anything else?

John A. Butler

Sure. As we mentioned last quarter, we do have some auction rate securities in our portfolio. In the grand scheme of things, they represented at peak around 10% of the portfolio. The cost basis we had in auction rate securities was about $95.9 million and we recognized -- have been reasonably aggressive in recognizing losses. In the 10-K, which gets -- should be published early next week, you’ll see great detail. We’ve been -- we’ve decided that we would create those as now long-term assets and that for the most part, we’re just taking them right through net income instead of other comprehensive income on a go-forward basis, so the loss on that portfolio for the total year is around $40 million.

Phil Cusick - Bear Stearns

Okay, thanks.


Your next question comes from the line of David Janazzo with Merrill Lynch.

David Janazzo - Merrill Lynch

Good morning. I haven’t heard you talk about the satellite partnerships in a while. You announced that last summer and I was wondering if you could give us an update there.

Benjamin G. Wolff

Sure. We are still working on the integration work, the back office integration work for both of those partners. One of the partners is doing some amount of selling on a limited basis but we don’t have the systems fully integrated. And I’ll be candid -- I think that we are really going to wait and see how that is going to evolve based on what kind of commitments Clearwire is going to make as it relates to further market rollouts and deployments and decisions around WiMAX versus expedience markets. So I think that we are going to have to see how that plays out over the next quarter or so.

David Janazzo - Merrill Lynch

Thank you.


(Operator Instructions)

Hope F. Cochran

I think we are complete. Thank you for your questions and we look forward to talking to you next quarter.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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