Karen Mulvany

Clearwire's Popularity as a Short Is Growing

Some of the data provided by public databases on closely held ownership is a bit confused, probably because the total shares outstanding include both A shares and B shares (held by strategic investors). Check out Clearwire's most recent proxy statement (p.17) for clarity: as of Feb 28, Sprint alone owned 51% of the outstanding vote and other long term investors owned 39% of the vote, including Intel (13.2%), Comcast (8.5%), Eagle River (controlled by Craig McCaw 5%), Google (4.1%), Time Warner Cable (4.5%), Motorola (2.3%) and Bell Canada (1.8%). That leaves only 10% of the outstanding shares for float. Consequently the short interest at 1% of the outstanding shares amounts to 10% of the float.

Clearwire Q1: Revenues In Line, Losses Keep Piling Up

Note that Clearwire ended the quarter with $2.8 billion in cash and equivalents. Short term debt was not included in that figure.

Clearwire: Potential for Improvement

Clearwire has not been cash flow positive as a company. That is because they are incurring expenses to expand the network. They have been cash flow positive on a market (think "city and surrounding area") basis for their first 25 pre-WiMax markets for several quarters, and more recently, all of their pre-WiMax markets as a whole. That analysis excludes the expenses/cash flow associated with new WiMax markets and other WiMax markets not yet in service. The point is, they know how to achieve positive cash flow in a given market over time.

The company is targeting coverage of up to 120 million POPs by the end of 2010, using existing capital. I don't know how much of that coverage is in the US with its population of 305 million but I'd assume most of it. But keep in mind that "nationwide" coverage will be achieved through a combination of Clearwire WiMax and Sprint or other 3G networks tapped by dual-band or multiband devices. WiMax doesn't need to be everywhere to achieve traction.


On Mar 24 11:59 AM Geddy wrote:

> Is it REALLY true that Clearwire has ever been cash flow positive?
> My understanding is that they haven't turned a profit yet in almost
> 6yrs of existence (yes, I believe everyone forgets they've had pre-WiMax/Expedience
> technology in markets for years now). With the economy currently
> in turmoil which affects borrowing & just over 3 billion in the
> bank to invest, I have a hard time believing they are even close
> to having enough cash to build out a significant nationwide market.

Clearwire: The Highway for Mobile Internet Devices

Daniel, you and I actually agree that Intel is not interested in WiMax for any other reason than to sell processor chips. For many years Intel has targeted "adjacencies" -- silicon that is adjacent to the core processor -- and their strategy has not been to make money on adjacencies, but to add value to the processor at little to zero cost to their customers. Over the years, Intel has deployed this strategy with various ethernet implementations and wireless as well, notably WiFi, which they single-handedly shoehorned into worldwide adoption. I believe it is Intel's long term strategy to offer WiMax connectivity at little to no cost with a processor purchase. Intel will certainly support other wireless technologies, but the cost to OEMs will be higher. Why? The alternative wireless approaches are burdened with proprietary IP (intellectual property) -- meaning some company is at least getting a royalty and jacking up the price of wireless connectivity. WiMax's lack of IP "overhead" was a core strategic reason for Intel's support.

This is the "trojan horse" element (in the classical sense, not the viral sense) of the Clearwire story. It's dramatically different from any existing phone-centric market today. Nobody would buy a mobile phone without wireless connectivity because it has no useful purpose without the service. This is not true of laptops. The trojan horse strategy is to sell the laptop on its own merits with connectivity thrown in for free. When you look at the traditional wireless players, growth is concentrated in the smartphone sector where the equipment subsidy cost per user is high, up to $375 per user in the case of the iPhone. This is why existing mobile service carriers must obtain a long-term contract to subsidize the cost of the phone. What will the marginal WiMax connectivity cost be? Ultimately, zero, or close to it.

Half of all mobile PCs in 2008 shipped with WiFi connectivity, and the adoption of WiFi has spilled over into the smartphone market. Most phones are multiband already, and the number of bands that each will support is expected to increase, not decrease, in the future. Intel's support for WiMax will, I believe, ensure that one of the supported bands will be WiMax. But even if you forget about the smartphone market, the market for connecting laptops and netbooks offers plenty of opportunity for Clearwire.




On Mar 20 05:25 AM Daniel Bizo wrote:

> Karen, thank you for pointing out some important facts, I am sorry
> for being too sloppy to make a quick background check of my mistaken
> knowledge.
>
> I am not trying to make it an LTE or WiMAX question, however, I fail
> to see how WiMAX remains important for the majority of its supporters,
> and I am thinking about Intel and Google particularly. Intel's core
> business is very clear: selling highly differentiated silicon estate,
> and that is microprocessors. The logic behind WiMAX has never been
> that it become a successful financial invetsment for Intel, or sell
> WiMAX chips. I was to stimulate demand for mobile computing devices,
> and for Intel's mobile processors through that. With WCDMA and CDMA2000
> networks flourishing around the world, and over 200 million with
> over 100% growth in 2008 YoY, and projected CAGR 30%+ through 2013.
>
>
> For Intel, there is really no strategic point in WiMAX any more.
> Mobile broadband is here anyway, without WiMAX. I expect Intel to
> cut back or completely seize investments in WiMAX, and might turn
> R&D to LTE. It's only politics and face saving now, and not business
> interests.
>
> The same goes for Google and other media companies, the difference
> is, that they have even less motivation for WiMAX, they only need
> decent mobile broadband services for highly personalized and location
> based contents and services.
>
> I am not suggesting risks. I am suggesting the majority of the opportunities
> for WiMAX are not there any more. They are passed and missed. I am
> suggesting that integrated communication packages are the future,
> and not standalone services. I highly doubt that with Sprint in the
> background, Clearwire will be allowed to offer multi-play service
> packages. I am suggesting economies of scale and opex efficiency
> is king.
>
> Of course, I may be mistaken, and Clearwire will become a huge financial
> success. I just don't see it coming.
>
> On Mar 16 10:45 AM Karen Mulvany wrote:

Cramer's Lightning Round - Taking a Shot at HSBC (3/17/09)

I went looking around theStreet.com for Cramer's rationale for selling Clearwire and could only find a "sell, sell, sell on this bounce." Other than that, there was a more dated Street.com article on Sprint which concluded that Sprint was looking into LTE, not for competitive information gathering purposes as the company stated, but because Sprint had a secret strategy to dump WiMax and deploy an LTE network. Sprint's inquiry into LTE specs was cited by theStreet.com author as the “nail in the coffin” for Clearwire. Perhaps the author thought that in merging its WiMax operations with the old Clearwire, Sprint was unloading its WiMax investment? In reality Sprint now owns 51% of the new Clearwire.

Of such stories buy opportunties are made.

Clearwire: Potential for Improvement

Hi Zach, thanks for the follow up.

I'd agree that an improvement of only 50% from current CLWR stock prices would still be well below book value, and would render an equity transaction unattractive. What's nice is, that goes for strategic investors too.

If the company were to do a dilutive equity deal, strategic investors would be diluted too, and they own the vast majority of the company. This makes it likely that the company will work with its strategics to consider other financing options. The strategic investors are among the most cash-rich companies in the US. Google has about $16 billion and Intel has about $12 billion in cash & equivalents on their respective balance sheets, and there is more on the balance sheets of Comcast and Time Warner Cable.

Having deep pocket strategics who are shareholders too gives investors a measure of antidilution protection. This is not a guarantee, but the incentives and the cash resources are aligned in the right direction.

If there's any creative financing to be done -- maybe debt with warrants? -- it could well be a strategic deal.



On Mar 18 04:54 PM Zachary Scheidt wrote:

> You have a good point. I honestly think that the company should be
> able to raise the necessary cash - and likely on terms that would
> not be dilutive to stockholders who buy at these levels.
>
> Now if the stock trades up 50%, buyers could see their purchase diluted
> if the company decides to do an all equity offer. There are plenty
> of creative ways to go about financing growth, if the credit markets
> begin to operate more normally. It's definitely not a given, but
> I would expect the odds of capital being more liquid to be good over
> the next 18 months.
>
> Thanks for the comment!
> Zach
> zachstocks.com

17 True 'Bottom Rung' Companies

Did you really intend to label Clearwire as a bankruptcy risk? The company has raised $3.2 billion in equity since their last 10-Q filing and only has $1.35 billion in long term debt. They have reported their December quarter to reflect the newly capitalized company but have not yet filed a 10-K. But, if you check their press release you will see that total cash & equivalents, net of debt, amounts to $1.75 billion.

Clearwire will certainly be unprofitable in 2009. That is by design, as they aggressively build out their broadband wireless network, which turns cash flow positive on a market-by-market basis over time. This is a well understood model executed in the past by cable TV and cellular companies decades ago, as well as by Clearwire itself in pre-WiMax markets to date.

Clearwire: Potential for Improvement

The Q4 results reported on March 5 showed that the company had $3.1 billion in cash, equivalents and short term investments. This amounts to $4.47 per share. Book value -- all tangible -- was $10.80 per share. The book value of their spectrum alone was valued at $6.38 per share. So it's definitely a good idea to cover any short positions, as the stock at $3.80-$4.00, while up 50% from recent lows, is trading at a significant discount to any of these numbers.

The company has not yet filed their 10-K so many financial databases have not been updated to reflect the new financials -- the merger with Sprint's WiMax operations and the $3.2 billion investments from Google, Intel, Time Warner, Comcast and Brighthouse Networks. An information vaccuum of this magnitude is unusual and will not last much longer.

As for the need to raise capital, provided that Clearwire is able to demonstrate market positive cash flow within 18 months, as they were able to do with their pre-WiMax markets, this should put them in a strong position to raise capital. After all, the broadband wireless market, fueled by the explosion in mobile internet devices, is a no brainer from a growth opportunity perspective. The larger concern is the pricing of any additional capital raise, as opposed to its viability. But keep in mind that the strategic investors -- who have tens of billions in cash still on their collective balance sheets -- invested $3.2 billion in Clearwire at $17 a share in November of 2008, when the stock market was crashing all around them and the stock was trading at $7.

Clearwire: The Highway for Mobile Internet Devices

You do a great job summarizing market concerns about Clearwire. Let me see if I can address them.

1. First, Intel, Comcast and others -- including Google, Time Warner Cable, and Brighthouse - completed their investment in Clearwire at $17 a share in Dec 08 when the stock was trading at $7 a share (and the stock market was collapsing.) They quickly wrote off a large portion of their investment because GAAP (generally accepted accounting principles) require them to carry a strategic investment on their balance sheets at the lower of cost or market. So, the writedown does not reflect what the strategic investors actually think the company is worth; it reflects where the stock has traded down to. Clearly the strategic investors think the stock was worth a lot more than where it is trading today. Personally I find it remarkable that the deal held together in such extraordinarily turbulent times, and I view it as an indication of the strategic investor's confidence in the company.

2. The most recent round of strategic investment occured in December 2008 and Clearwire has not yet filed its 10-K for the year ending 12/08. So the public databases which rely on SEC filings for their numbers -- check out Yahoo Finance for an example -- have not yet been updated to reflect the capital structure of the new Clearwire, including the $3.2 billion cash infusion. Check the company's Q4 press release to see the reported numbers.

3. Clearwire's management change has been painted as a negative by some members of the press, but clearly Bill Morrow, the new CEO, has great credentials having been CEO Vodaphone's cellular buisnesses in the UK, Europe and Japan, as well as Pacific Gas and Electric. Surely a guy like this has some choices available to him, and he chose Clearwire. In my mind, I see this as another validation of the company's prospects from somebody who is industry savy and has surely done his homework. The former CEO is staying on, also a good sign. It's not bad news when a strong CEO is added to the team.

4. The amount of capital and revenue they need to get to cash flow breakeven is a function of the pace of network expansion (that they choose) and time. Over time (around 2 years), Clearwire has already demonstrated its ability to turn cash flow b/e in individual markets with a precursor service offering. What drags down profitability and cash flow for the company as a whole is the depreciation for the overall network, which in the early stages as they have more cities in the construction phase than they have in service, will be relatively high. Over time, as more of the construction phase cities turn into service phase cities, the depreciation charges will be covered by revenue and produce cash flow and profits. This is not bad, it's just how these business models work -- as anyone who was around for the original cellualr rollout will remember (yes, I'm that old).

5. No argument that the existing mobile wireless companies can afford to pay for the 4G rollout. So can Clearwire. It takes capital, not profits. Having been in my past both a sell side analyst and an investment banker that worked with cellular companies, I believe this company will have no problem raising additional capital next year, especially if the economy flatlines. By then Clearwire will have proven the economic model for initial WiMax markets and nobody will disagree that the mobile broadband services market is going to be a high growth story, regardless of the economic trendline. As for the pace of rollout, Clearwire is targeting coverage of up to 120 million people by the end of 2010, which is more aggressive than the LTE rollout (although, as you note, behind their original forecasts made a number of years ago).

6. Having said that, I believe the flaw in the LTE vs. WiMax debate is the presumption that one or the other will fail. History would suggest that mutliple technologies and service providers will succeed in large, growth markets, which the broadband market clearly is (as detailed above.) Clearwire's biggest advantages are 1) time to market 2) being a new entrant with pricing flexibility (no need to protect legacy revenue streams, especially in voice) 3) a laser focus on data with voice as a "piggyback" to the data stream 4) deep and broad spectrum and 5) the Intel sponsorship of WiMax which can deliver cheaper handsests and MIBs. But that's not to say LTE won't succeed -- of course it will. So will Clearwire. This is a huge market.

7. Lastly, on Sprint, I think they did a very clever thing. They offloaded their WiMax business which required a dedicated focus, took a majority interest in a new company which has the spectrum holdings and the management team to succeed, but structured their investment so that they don't have to consolidate the P&L for the time being. They can convert their stock to consolidate the P&L at a later date. All the other strategic investors except Google adopted the same approach.

In summary, you make a lot of good points about risks in the Clearwire rollout, and the stregth of the incumbent players who will be deploying LTE. But the risks relative to the rewards and the inherent value in the balance sheet remain extraordinarily compelling in my view.

On Mar 16 07:02 AM Daniel Bizo wrote:

> This article is puzzling. Karen, if Clearwire is on the path towards
> financial success, then tell me, why Intel, Google, Comcast wrote
> almost fully off the value of their investments in the company? I
> don't really understand what kind of strategic investments you are
> talking about which are not reflected already. It recieved the infusions
> years ago.
>
> Or why CLWR shook up the leadership recently? Or why they are telling
> they would need 2 billion more just to achive a cash neutral point?
> Or an order of magnitude bigger revenue for breaking even?
>
> The viability of the business model for Clearwire is so broken on
> many levels. Big mobile carriers are easily financing the massive
> upgrades of their existing networks from their current huge revenue
> streams, which CLWR doesn't have, so they can afford more aggressive
> roll outs while bearing any temporary operational losses associated
> whith the new or enhanced services.
>
> Carriers also have a huge advantage in scale of opex economics, more
> efficient capex through lower prices from their supplires, in marketing,
> like in reaching their customers, brand recognition, customer services.
>
>
> So, with that kind of handicap, Clearwire has to have some kind of
> advantage in order to be a reasonable effort. Finding market niches,
> having superior technology, or both.
>
> Since CLWR goes after the mass market, it is not a niche, it is a
> head to head battle. Nor does it have superior technology. Not any
> more. It tried to be a first mover with the advanced data-centric
> WiMAX, and started in 2004, when mobile broadband was still in its
> infancy, but we are in 2009 now, and the enhanced 3G networks are
> catching up, providing "goodn enough" services, so WiMAX is nothing
> "killer breakgthrough", while the pre-4G/Super3G LTE-rollouts are
> beginning next year, with evolved LTE, real 4G around 2012, which
> will make WiMAX completely pointless.
>
> WiMAX is a low-volume technology, having 2,7 million subscibers worldwide
> according to Maravedis, while LTE-precedessor networks have hundreds
> of millions data subscriptions. This makes WiMAX equipment offerings
> narrower, pricier, with less ongoing R&D. LTE is the natural
> evolution of 3G networks.
>
> CLWR should completely change direction and avoid engaging with other
> carriers, and find some real market niches, like providing broadband
> coverage in rural areas, with the possibility of using WiMAX only
> for backhaul, while using Wi-Fi or wire for access delivery. Oh,
> what Sprint did is offloading a "toxic" business and technology.
>
>
> To sum up, I don't see CLWR being in a strong position, or neccessarily
> in any competitive position by 2012.

Clearwire: Is There Opportunity Amidst All the Fear and Uncertainty?

Point taken -- you are absolutely right, the stock is down from where it was when I first recommended it. It's up today in a down market, but it could just as easily move down again. But I just bought more stock anyway.

Since there are few stocks that are working in this market other than inverse ETFs, I'm largely cash but have 15-20% exposure to what I'll call "disruptive" plays -- companies at the forefront of a technology change that delivers better & cheaper service or products. That's because I have more confidence in the growth of industries like broadband wireless than I have in the growth of world GDP over the next few years.

Of these disruptive plays, the stock that is the most protected by its underlying asset value is Clearwire. The stock is dirt cheap -- cheaper than dirt, because the assets are worth more than twice the stock price.

I also like the fact that Google, Intel, Comcast, Time Warner and Brighthouse put $3.2 billion in at $17 a share in November when the market was collapsing and the stock was trading at $7 a share.

And I also like the fact that since last spring insiders have not been able to buy stock because they've been in a a)merger and b)Q4 quiet period -- a lockup which I suspect will end very shortly.

This is a very, very thinly traded stock. It won't take much to make this stock move fast. On stocks like these, if you're not early, chances are that you'll miss the boat entirely. So yes, the stock is down from where I first recommended it. My recommendation: be greedy -- others are fearful!







On Mar 08 09:48 PM anarchist wrote:

> CLWR was finished at $3.98 which is the date of your last favorable
> article about CLWR, last Friday it finished at $2.82. I'm too lazy
> to figure the % of loss but it has to be significant. OK, I did calculate
> it and it is a loss of 29% and change-ouch! got any more recommendations
> I can short?

Clearwire: Is There Opportunity Amidst All the Fear and Uncertainty?

For cellular voice, at least in the next few years, I think that CLWR will partner with Sprint and cede that business to them, while CLWR looks to capture high speed data revenues. To that end the company is expecting dual mode devices that support both Sprint's 3G network and Clearwire's WiMax to come available later this year.

Ultimately, though, as 4G networks are deployed nationwide, broadband wireless will evolve to be a one-stop shopping solution for most personal communications requirements. That's the promise of the industry long term.

On Mar 08 12:54 PM pragmatic not autopilot wrote:

> Thanks for covering CLWR in professional depth. Did you look into
> the postential of VOIP over WIMAX to impact cell phone use?

Why Clearwire Doesn't Need Capital

Yes, "needing" capital is a relative term. Many worry about the lack of nationwide WiMax coverage (and hence the theoretical need for immediate huge expenditures) but dual-mode wireless which supports both WiMax and 3G via Sprint is how this market will take off -- just like it did in the early days of plain old voice wireless when nobody had nationwide coverage either. Furthermore for many non-business-traveler applications such as residential broadband, college campus connectivity, etc., the demand for broadband wireless will be geographically local and nationwide coverage will be of less importance. So there will not be a requirement to create nationwide WiMax coverage overnight in order for Clearwire to make its case.

What's important is that Clearwire does have the capital to deploy in a 1-2 dozen markets and prove to investors that its business model works -- i.e. achieving positive EBITDA in the early individual markets. That's what the $3.2 billion investment was structured to achieve. It is naive to expect companies to raise all the capital they will ever need before they demonstrate the business model case. Fortunately for Clearwire, by the time it has proven its case, financial markets are likely to be much improved.