Clearwire Corporation Q4 2008 Earnings Call Transcript

| About: Sprint Corporation (S)
This article is now exclusive for PRO subscribers.

Clearwire Corporation (CLWR) Q4 2008 Earnings Call Transcript March 5, 2009 4:30 PM ET


Mary Ekman – VP, IR

Ben Wolff – CEO

Perry Satterlee – COO

David Sach – CFO


Rick Prentiss – Raymond James

Simon Flannery – Morgan Stanley

Eric Kainer – ThinkEquity

Jonathan Atkins – RBC Capital Markets


Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Clearwire Corporation earnings conference call. My name is Stacy and I will be your conference moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Mary Ekman. Please proceed.

Mary Ekman

Thank you, Stacy. Good afternoon, ladies and gentlemen. I'm Mary, Ekman, Vice President, Investor Relations with Clearwire, and I would like to welcome you today to our fourth quarter 2008 financial results conference call.

With me today are Ben Wolff, Chief Executive Officer, Perry Satterlee, Chief Operating Officer, David Sach, our new Chief Financial Officer, Barry West, President and Chief Architect, John Saw, Chief Technology Officer, and Hope Cochran, Senior Vice President, Finance and Treasurer.

During today’s call Ben will review Clearwire's results and accomplishments as well as our network expansion plans. Perry will discuss our WiMAX market progress as well as operating metrics for the quarter, and David will share his initial perspective on the business, highlight Q4 financial results and provide Clearwire's business outlook for 2009. Following our prepared remarks, we will open the lines for your questions.

This afternoon's call is scheduled to last approximately 45 minutes including Q and A. As a reminder to all listeners today's call is being webcast live on the Clearwire Investor Relations Web site and will be archived on that site and available for replay shortly after we conclude.

Hopefully you've all had an opportunity to read the earnings release we issued this afternoon which provides detailed financial information on Clearwire Corporation's 2008 fourth quarter results. A reconciliation of pro forma financial information and any non-GAAP financial measures discussed on this call can also be found in our press release.

Today's call may contain forward-looking statements reflecting management's beliefs and assumptions concerning future events and trends in or expectations regarding financial results. Forward-looking statements include among other things, our future financial and operating performance and financial condition, including projections and targets for 2009 and subsequent periods, subscriber growth, network development, and market launch plans, strategic plans and objectives and the need for additional financing.

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

Please refer to our press release and our filings with the SEC for more information concerning risk factors that could cause actual results to differ materially from those in the forward-looking statements. The company assumes no obligation to update any of these forward-looking statements.

At this time I would like to turn the call over to Ben Wolff.

Ben Wolff

Thank you, Mary. Good afternoon, everyone. I will begin by spending a few minutes reviewing some highlights from 2008. Next I will offer some preliminary observations following our launch of Clear in Portland, Oregon, and I will conclude my comments by outlining our expansion plans over the next two years and then I will turn the call over to Perry and David who will put a little more meat on the bones on each of these topics.

A little over a year ago we discussed with you Clearwire's priorities for 2008. Those priorities included, one, finding a way to collaborate with Sprint to build out our 4G network, two, raising additional capital to fund our network expansion, three, turning our domestic markets EBITDA positive as a group, and four, completing our first mobile WiMAX networks.

We are, of course, pleased to have achieved each of these objectives during 2008. As a result of our combination with Sprint's 4G business unit Clearwire now holds a nationwide spectrum portfolio that includes many times more spectrum that is available for 4G services than that of any other wireless carrier. In our business, more spectrum means more capacity and greater speeds which equals more opportunity.

In addition to the robust spectrum position, our transaction with Sprint enables us to offer our customers the ability to roam on Sprint's nationwide 3G network and gives us access to Sprint's network infrastructure and ways that we believe can speed our time to market and reduce our costs.

In other words, we believe that we have the best of both worlds. The advantages that come from being associated with an incumbent nationwide carrier coupled with the fact that we are autonomous and singularly focused on the deployment of one of the world's most capable next generation wireless networks.

We also raised $3.2 billion of new equity in a price of $17 per share. Perhaps as important as the amount that we raised is the fact that many of our investors in this financing round have a significant strategic interest in Clearwire success including Comcast, Intel, Time Warner, Google, and Bright House Networks, each of whom bring significant strategic value to Clearwire.

Specifically, Sprint with its approximately 50 million subscribers and our cable partners who together serve more than 60 million homes collectively represent a larger potential customer base for our services than any other wireless carrier in this country today.

In short, the transaction we closed just over 90 days ago has given Clearwire the resources and runway necessary to embark on new market deployments and the upgrade of many of our existing markets to mobile WiMAX technology while creating an expanded reach of our services well beyond what we previously could have accomplished on our own.

Turning to our operational results, our revenues and profitability continued on their upward trajectory despite the overall macro economic decline. Our pro forma consolidated revenue increased by 52% during 2008 including a 32% revenue increase for the fourth quarter, which is significant given our previously discussed midyear decision to significantly scale back sales and marketing activities in our pre-WiMAX markets.

We continue to demonstrate the financial strength of our business and our ability to compete by delivering a $2.31 increase in pro forma ARPU to $39.12 for the year, which is contra to the general decline in ARPU the industry experienced last year.

Clearwire ended December with 475,000 subscribers across 51 markets. Significantly, our 46 U.S. pre-WiMAX market as a group produced positive market EBITDA margins. Building steadily through 2008 their pro forma market EBITDA margin for the group of our 25 initial markets reached 40% in the fourth quarter up from just 11% in the fourth quarter only one year ago.

To put it succinctly, we believe that if we can generate these kinds of results with our pre-WiMAX networks it only gets better as we roll out mobile WiMAX services that hold the promise of greater differentiation across a broader array of services with higher ARPU opportunities. Importantly, we accomplish these objectives while prudently managing cash and ending the year with a strong balance sheet and tremendously strengthened cash reserves.

We firmly believe that the company is better positioned than ever to compete and succeed and that our competitive advantage is not measured in months but rather the strength of our assets. Foremost among those assets is our spectrum position.

Our unparalleled spectrum resource is a key differentiator for Clearwire now stand at over 43 billion megahertz pops of spectrum with an average of more than 120 megahertz in most major markets across the country, in a frequency band that is becoming de facto 4G band across Europe, Asia, and the Americas. This is almost three times the spectrum we held prior to the combination with Sprint.

In very basic terms, spectrum is the natural resource that fuels the wireless industry. The more you have, the more capacity you have to sell, which translates into better services for more customers which means greater revenue opportunities and lower costs. Unlike mobile voice where coverage is king, the key driver for mobile data is network capacity. This is an important but often underappreciated distinction.

For example, a recent report from Cisco noted that a single high-end phone like the iPhone or Blackberry generates more data traffic than 30 basic feature cell phones. While a single laptop air card generates more data traffic than 450 basic feature cell phones. Cisco projects that mobile data traffic will have increased 1,000 fold over the seven years from 2005 through 2012 with video driving most of the world’s mobile traffic growth.

Some of the most exciting innovations for the mobile consumers such as live video chat, online gaming and streaming HD video on demand require the kind of capacity that can only be delivered with a deep spectrum position. In fact, the ITU has said that minimum of 40 megahertz and ideally 100 megahertz of spectrum is required for next generation wireless services.

Clearly the industry is going to have to grapple with how many of the operators will have access to that quantity of spectrum and what that means from a competition and market share perspective as data services continue to be the primary driver of wireless growth going forward.

Many European operators are already feeling the strain of having too little spectrum in the face of surging bandwidth demand. Recent reports from Europe suggest that sales efforts are being cut back and usage based models are being adopted in an effort to deal with the problem. The conclusion is inescapable. No matter the technology, significant spectrum depth is required.

We began 2009 with the launch of our mobile WiMAX services in Portland, Oregon on January 6, with the services being sold under our Clear brand. While it is early days our initial network performance has exceeded the targets that we set for ourselves. And our customers are noticing. Right out of the gate our sales teams have been introducing new customers to Clear services at an unprecedented rate.

And while we are cautious not to draw premature conclusions based on such a short period we can say that the rapid initial subscriber uptake in Portland in the first two months has been more than double that of any of the company's prior 47 U.S. market launches. Of course, our early success in Portland is just the beginning of our plans to broadly extend the Clear WiMAX network.

As we shared with you in the past quarters we have developed our market launch plans to leverage the combined assets and progress of both Clearwire and Sprint, and to focus on the top 100 U.S. markets together with the suburban and rural areas that are proximate to the top 100 markets.

At the time we announced our strategic transactions in May 2008 we targeted an aggressive plan to cover at least 120 million people in the U.S. by the end of 2010. We spent much of last year focused on getting the transaction completed and ensuring a successful integration of the Clearwire and Sprint 4G businesses.

This caused a shift in our original market deployment plans. We believe then as we believe now that the price of getting it right and starting the new company off on a solid footing measured by the resulting delay in launching new WiMAX markets in late 2008 and early 2009 was well worth it.

With the deal behind us, and the first 90 days of the combined company under our belt, our expansion efforts are in full swing. I'm pleased to report that our board met this past Tuesday and approved a plan that would have us positioned to be able to launch WiMAX networks in more than 80 markets, including 75% of the top 50 markets as well as many others which would provide coverage to more than 120 million people by the end of 2010.

To be clear, this target is aggressive. To achieve it, we have markets covering 75 million people under development and construction today with some of these markets launching later this year and others in 2010. We're doing much of the long lead time low-cost site acquisition zoning and permitting work for the markets covering the remaining 45 million people over the course of this year so that we can hit the full 120 million person coverage target.

This represents over 18,000 cell sites that are now under development, giving us the flexibility to continue expansion based on our own market by market success, the macro economic environment and capital availability and at the same time making prudent use of our existing capital resources.

This summer we'll be expanding to Las Vegas and Atlanta adding more than 4.5 million people to the Clear coverage footprint. Construction is progressing well in these markets with nearly 1,000 square miles of combined coverage already being tested ahead of the launch.

Beyond these next two markets significant progress is underway for planned 2009 launches, in prominent markets, such as Chicago, Philadelphia, and Dallas-Fort Worth, along with relaunches plans for markets that we are upgrading mobile WiMAX this year such as Seattle, Honolulu and Charlotte.

It is important to note that these cities are just a handful of the total markets that we expect to introduce to Clear in 2009. Many more major markets are targeted for 2010 including cities such as New York, Boston, Washington, D.C., Houston and the San Francisco bay area.

Clearwire’s current cash position gives us significant resources to embark on the deployment plans I just outlined. Our future funding needs are based on how quickly we build out our markets and as we have often said before, one of the great things about our business model is our flexibility to modulate network growth plan to effectively respond to a changing capital environment. If capital is available earlier, we can move more quickly, particularly given the strong development pipeline we will continue to maintain.

Even with the rapid pace of our targeted development, clearly a nationwide footprint will not emerge overnight. And we hope that those who follow Clearwire understand that expanding our network across the top 100 U.S. markets doesn't need to happen overnight for us to succeed.

Our pre-WiMAX operations in 46 domestic markets made it clear that nationwide roaming is not a requisite for success. And early returns in Portland are reinforcing this fact. But we recognize that for some customers more ubiquitous coverage will be important. Assuming one or two other wireless operators enter the 4G space in the near-term, they too will not have a ubiquitous nationwide 4G footprint overnight.

It is important to remember that 2G to 3G upgrades which were far more straightforward than the effort that will be required to enable 3G and 4G networks to coexist took many years to complete. And even today, 3G networks do not have the same footprint as their 2G counterparts. Nevertheless the media loves a horse race. But no matter how you handicap the race one thing is clear. There will be fewer horses in this particular race.

As for those customers that I mentioned who will want more ubiquitous coverage during our build out period we can effectively serve the needs of these customers by offering wireless services over Sprint's 3G network. We are currently testing dual mode 3G and 4G product and expect to launch the first dual mode modem in our mobile WiMAX market this summer giving Clear subscribers access to the fastest nationwide mobile data network.

Additionally, our WiMAX ecosystem partners in the PC industry are moving forward at full speed as well. Together with Intel we now have a long list of supporters including Dell, Samsung, Acer, Asus, Fujitsu, Lenovo, Panasonic and Toshiba that are all delivering new Centrino 2 Processor powered notebooks with the integrated Intel WiMAX WiFi chipsets and advanced MIMO technology. There are 26 models that are WiMAX certified today and many more in the pipeline. A number of OEMs are also offering or plan to offer soon Intel Atom based Notebooks which enhances the affordability and reach of these products.

We expect there to be nearly 100 mobile WiMAX devices such as laptops, net books, handheld USBs and modems available by the end of the year including a personal hotspot device that will connect standard Wi-Fi devices to the Internet without needing to search for a WiFi hotspot.

Available at the end of March the personal hotspot creates a mobile Wi-Fi hotspot when paired with the Clear 4G service, opening the mobile WiMAX ecosystem to literally hundreds of WiFi enabled products ranging from the Apple iTouch to the Blackberry bold to the Sony PSP and countless others.

With that I would like to turn the call over to Perry Satterlee for a review of our operating highlights and key metrics for the fourth quarter.

Perry Satterlee

Thank you, Ben. 2008 was a pivotal year in our company's history. Not only for the transformational events that occurred with the close of the strategic transaction but also for the operational milestones that demonstrate the viability and scalability of the original Clearwire business model. We believe that these accomplishments serve as a blueprint and a prelude to the success of the new Clear branded mobile WiMAX markets that will launch in 2009 and beyond.

The solid fourth quarter pro forma financial results that we have reported are direct result of the focus that we have sustained through 2008 on operational efficiencies and revenue growth. We maintained our goal of enhancing profitability at the market level while carefully managing our cash resources in advance of the closing of the combination with Sprint.

This focus produced strong growth in the initial 25 markets which ended in 2008 with a market EBITDA margin of 40% or nearly four times the 11% margin in the same period in 2007. 2008 also saw the 46 domestic Clearwire pre WiMAX operating markets turn market EBITDA positive as a group for the first time. This group grew its market EBITDA margin from 4% in the second quarter to almost 20% at the end of the year.

ARPU consistently grew during 2008 driven by increased penetration of additional services and pricing stability in the core broadband offering. Consolidated ARPU grew by 10% during 2008 from $36.09 in Q4 2007 to $39.70 in the fourth quarter of this year. These gains are in contrast to some of our largest competitors in the industry who saw steadily declining broadband ARPU throughout the year and others who saw net subscriber losses for the year in their core broadband offerings.

Penetration of additional services into the pre-WiMAX space was one of the key objectives in 2008. During the year, we saw the number of VoIP customers in our pre WiMAX markets more than double. VoIP sales as a percentage of new broadband sales increased from 10% in Q4 2007 to 20% in the fourth quarter 2008. Attach rates for our pre-WiMAX PC card service which launched at the tail end of 2007 grew steadily throughout the year.

By the fourth quarter of 2008, PC card sales were 11% of residential broadband sales which is in line with our business plan. Over half of the PC card sales in 2008 were sold as part of a combination with home service, consistently demonstrating the value of a true broadband home and away experience.

We officially launched our first Clear branded market, Portland, Oregon, in early January with a mobile WiMAX coverage area of roughly 860 square miles, and more than 1.6 million people covered. To-date gross add penetration is exceeding our initial expectation and we are seeing excellent productivity across all sales channels including national retail, company-owned retail, local dealers, telesales and the web. We are also seeing good initial progress selling into the mobile workforce in Portland such as contractors, real estate agents and other service providers.

Similar to what I experienced in the early days at Nextel we are finding a diverse industry demand in the mobile workforce for a mobile product with a solid local coverage area. Early feedback from our new customer surveys in Portland indicate that customers are choosing Clear because of its simple value proposition and their enthusiasm for the new and exciting alternative that mobile WiMAX is delivering.

This feedback is reinforced by the fact that according to the survey, 65% of mobile service customers are new to broadband mobility, and over 70% of residential service customers already had existing high-speed broadband service at the time they signed up with us. The stated perception in these surveys of both residential and mobile service customers is that Clear's WiMAX service is fast, reliable and a great value.

The initial launch of Baltimore market by Sprint in late Q3 was the first demonstration of the commercial viability for WiMAX technology in the U.S. Mobile WiMAX coverage at launch was primarily focused on the core of Baltimore but lacked the continuity and depth in the surrounding residential suburbs. As such Sprint limited the amount of marketing spend at Baltimore prior to the transaction close.

After assessing the network footprint we decided to continue with the minimal amount of sales and marketing spend in the market until mobile WiMAX coverage is in line with our standards. Development is currently underway on the second phase of Baltimore network which will improve mobility and coverage in the existing footprint and expand the WiMAX network to the remainder of the Baltimore metro area. With the completion of the network expansion later this year we will relaunch under the Clear brand with a more comprehensive sales and marketing campaign.

As Ben mentioned earlier our build out strategy for the next two years emphasizes rapid expansion balance with the careful management of our cash in these challenging economic conditions. As a part of the strategy we are modifying our build plans to upgrade all of our domestic pre-WiMAX markets in 2009 in order to focus on the conversion of our largest pre-WiMAX market, Seattle, Honolulu and the North Carolina cluster.

In addition to these large markets we are planning to upgrade several of the pre-WiMAX market in Texas that are aligned with adjacent launching metroplexes. On our covered pop basis we will be upgrading roughly half of our U.S. pre-WiMAX network this year with the balance planned for the conversion by the end of 2010.

Ben also touched on the new WiMAX market that we are planning to launch in 2009 and 2010. Development in these markets is advancing at a pace that is enabled by the build progress that Sprint made prior to the transaction and at a level of cost efficiency that is a result of Clearwire's experience deploying networks nationwide.

For example, Clearwire's pioneering use of almost exclusively microwave backhaul with its negligible operating costs is central to the WiMAX market build. Both Atlanta and Las Vegas will have nearly 100% of its sites on microwave when they launch this summer.

Yankee group has estimated that U.S. cellular companies spend about 11 billion on terrestrial backhaul in 2000 eight. That equates to nearly $3.50 per subscriber per month or about 7% gross margin on a $50 ARPU. The cost effective use of microwave backhaul has been a significant contributor to the market EBITDA margin performance of our pre-WiMAX market, and we expect this benefit to continue in our new WiMAX markets as well.

Prior to the transaction close, we stated that legacy Clearwire had nearly 10,000 cell sites in various stages of development with the significant progress made since the close of the transaction the build out plan approved by the board of directors now includes more than 18,000 sites at some stage of development. As several industry media outlets have reported in recent months we are actively recruiting for additional engineering deployment leaders around the nation to accelerate this build.

It is clear that with the assets the momentum and the flexibility to effectively expand our mobile WiMAX network, we believe that our build plan for 2009-2010 will provide a robust addressable base for our wholesale partners to begin marketing mobile WiMAX services as a part of their core offerings. We have been actively engaged with the MSOs and Sprint since the close of the transaction collaborating on market footprint designs, back office integration and product development. We expect them to begin actively selling in our WiMAX market starting in the second half of 2009.

And now I would like to turn it over to our Chief Financial Officer, David Sach to give you his first impressions of the business and discuss the quarter's financial results.

David Sach

Thank you, Perry. I joined Clearwire because I thought it could offer a better customer experience than anything we had seen to-date in the wireless world. As I learn more about the business I am convinced that not only is this true, but that we have the opportunity to create a sustainable competitive advantage. The benefits from the depth of our spectrum provide us with unmatched capabilities.

As Ben mentioned the ability to utilize on average 120 Megahertz of spectrum in the network is powerful. Spectrum's depth is the key to delivering bandwidth to consumers and helps immeasurably in the design of the network to reduce interference and improve performance, both of which are critical to provide high quality customer experience.

In a world looking for increasing levels of speed and capacity from its wireless devices, it is difficult to envision how others will be able to provide a similar mobile broadband experience without equivalent levels of spectrum. Just as important to me though, are the economies of scale that the spectrum should give us, and we'll come back to this later.

Despite our spectrum advantage we are a young company in a competitive industry and it will take time to grow. First and foremost we need to expand the network. Fortunately, we believe our business model will enable us to reach profitability with relatively low levels of overall market penetration.

I strongly believe that we will be able to drive revenue growth because of the quality of our products and service offerings, especially complimented with a significant customer footprint of our strategic investors. The strength of these offerings should also help sustain our pricing. In today's world, it is critical to have competitive prices regardless of the strength of our competitive advantages. Fortunately though we are unlikely to face an environment of falling ARPUs.

I came to Clearwire from an emerging market mobile operator. In the emerging market environment there is a need to continually reduce prices to make the products and services affordable to the bulk of the population. This inevitably leads to falling ARPUs. Despite these ever decreasing ARPUs my former company became highly profitable because of the economies of scale that allowed it to improve its profitability even with falling prices.

The Clearwire business model is even better. The company is leveraging the latest technologies such as microwave backhaul to keep the cost base as low as possible. This should help drive economies of scale as we grow. The extent of the economies of scale will be driven by the trade-off between the costs of adding capacity to the core infrastructure versus the benefits of spreading additional customers over this relatively fixed cost space. Given the depth of our spectrum and the scalability of a microwave backhaul the cost of incremental capacity should be minor compared to the benefits of adding customers.

Furthermore, our ability to differentiate our products and services and to sell multiple services within a single account should have the added benefit of enabling us to grow ARPUs, particularly when the ecosystem develops further.

This dynamic of growing ARPUs coupled with a low cost base and strong economies of scale should enable us to start generating net profits with relatively low levels of overall market penetration. We estimate that the group will be able to reach a breakeven level of profitability at a point when average penetration levels of covered pops are still in the mid single digits across all of our markets.

Our modeling shows that generating a solid return on investment in our business is not dependent on the speed of the rollout. Whilst the returns could be better with a faster rollout, a slower rollout still delivers solid returns. We will decide how fast to build out based on the availability and cost of capital. The key to success is building out the network properly to produce a positive customer experience. This is our focus to the next two years.

I have also been impressed with the commitment, quality and the people. I look forward to working with the team to help implement this exciting business model.

Before turning to the results I would like to comment on the write-downs of some of our strategic investors made at year end relating to Clearwire because we are concerned these have been misinterpreted by some people. These write-downs were made to comply with technical accounting rules and are not a reflection of the views of our strategic investors regarding Clearwire's business model or the value of its underlying assets.

Let me start my review of the results by providing some background to the structure of the transaction. From an accounting perspective, the Sprint WiMAX business is considered the acquiring entity. As such the results for the prior period – the period prior to the closing of the deal on November 28th, 2008, are the results of the Sprint WiMAX business only. They exclude the results of the old Clearwire business.

Realizing the limited usefulness of this information we have also provided pro forma statements of operations for 2008 and 2007 to combine the results of the businesses as if the transaction had been completed at the beginning of 2007.

From an accounting perspective the old Clearwire company is the acquiree. As such, it was considered to be acquired at market value. The purchase price was deemed to be the closing share price of old Clearwire on the date before the completion of the deal. Consequently, the assets and liabilities of old Clearwire have been revalued based on this purchase price.

As part of the transaction the Sprint WiMAX business, the old Clearwire business, and the cash from the strategic investors were put into a partnership. At the same time the new parent company, newly listed on NASDAQ, was formed above the partnership which kept the Clearwire name.

This new parent company has 100% of the voting rights in the partnership and therefore fully consolidates all of the businesses within it. This is the entity that we are reporting on. Because Sprint and the strategic investors other than Google invested directly in the partnership they are considered non controlling interests in the reporting entity for accounting purposes.

Moving on to the numbers, I will comment on the pro forma annual and quarterly trends since these represent the most meaningful comparative information. You can see that the consolidated company grew its revenues at 52% for the full year and 32% in the fourth quarter of 2008 compared to 2007.

The increase in revenues was driven by the higher subscriber base. The growth was slower in the fourth quarter as the old Clearwire moderated its spending on sales and marking activities in the second half of 2008 prior to the completion of the transaction.

Perry has already commented on the operating metrics that drove the full year and fourth quarter revenue growth.

Cost of services grew 83% in the full year 2008 due to the expansion of the networks in both companies with significant increases in tower leases and related backhaul. Cost of services grew significantly less at 6% for the fourth quarter of 2008 due to moderated spending on network expansion by both companies in the second half of the year.

The higher depreciation and amortization and higher spectrum lease expense in the full year and fourth quarter of 2008 versus the comparable periods in 2007 reflects the investments made in both businesses during those periods. Pro forma interest expense has been adjusted to reflect the cost that would have been incurred had the financing at the time of the deal been in place throughout all of 2007 and 2008.

On a pro forma basis we ended 2008 with a full year adjusted EBITDA loss of $614 million and a fourth quarter adjusted EBITDA loss of $157 million. Most importantly, we ended the year with $3.1 billion of cash and short-term investments to fund much of our network expansion plans that we have announced today.

Looking forward, Clearwire's focus in 2009 and 2010 will be on development and expansion of its wireless 4G network. Given that we are in a network development phase for our mobile broadband business, we are providing limited guidance on our operating metrics. We expect ARPU to be sustained but anticipate churn to trend higher as we convert the pre-WiMAX operations and expect CPGA to also trend higher as we launch the new markets.

As Ben said earlier, in light of the current economic environment, we are managing our cash resources prudently and have set our current network development spending at a level to enable us to conserve sufficient cash to last into 2011 without additional funding. We are expecting net cash spend to be in the range of $1.5 billion to $1.9 billion in 2009. We are prepared to change the rate of spending on network deployment based on the availability of future capital.

With that I will turn the call back to Ben.

Ben Wolff

Thanks, David. I would like to close with a few comments that I recently circulated to all of my colleagues at Clearwire. Despite the economic downturn I firmly believe that Clearwire is in the right place at the right time. The fact is that wireless communications continue to be an incredible opportunity for growth in our country. And now the growth in the wireless industry has shifted almost entirely to data services.

Today, a plethora of devices are being embedded with the ability to be connected while social media is driving people's desire to stay connected. From the likes of social networking applications like Facebook to entertainment applications like YouTube the Internet is much more relevant and in demand when it is available whenever and wherever a person happens to be. This phenomenon has created a tremendous business opportunity for companies that are positioned to capitalize on it. And that's where we find ourselves now.

We're well positioned to capitalize on the opportunities resulting from the intersection of these compelling trends due to our next generation technology and network architecture, our deep spectrum holdings and our unique business model.

In times like these consumers are looking for more bang for their buck, better value proposition and superior products and services will win the day. Tough times and an economic downturn didn't stop Apple from making the iPod successful or stop IBM from making a new industry with the personal computer. What it did do is force these companies to focus on delivering an excellent value for the money which must be an exceptionally prudent and the way that they make use of their own financial and human resources. We have to do the same.

Our objective is to offer better differentiated products and services that people can't live without at a price that they can afford. If we can do this we will not only make it through these difficult times but we will prosper in ways that are hard to conceive today. And with that we would be happy to take some of your questions.

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of Rick Prentiss with Raymond James. Please proceed.

Rick Prentiss – Raymond James

Thanks. Good afternoon, guys.

David Sach

Hi, Rick.

Rick Prentiss – Raymond James

Hey. Want to hit first on the CapEx and the cash burn that you guys talked about. Appreciate the market names and the pops. Our quick math here looks like the pops of 75 million might be almost equally split between '09 and '010, kind of some quickie math we're looking at, maybe 35 million in '09, 36 million in '010. Talk to us a little bit about the timing of that. I think I heard Atlanta and Las Vegas maybe summer time, probably the rest are later in the year, but just trying to gauge how much CapEx we should be thinking on still maybe the high 20s, $30 a covered pop, how far in advance do you start spending on it, just getting your some thoughts about the burn rate if you will of the build out.

David Sach

Rick, the cost of building out coverage is roughly the same kind of numbers that we've talked about in the past on a CapEx per covered pop basis, $21 range, $22 range per pop for the sites and cover infrastructure, another $3 or so on kind of other network architecture and infrastructure, so same kind of numbers that we've talked about historically.

In terms of getting into the details of how many markets we'll launch in '09 versus 2010 we're really not prepared to give you much more in the way of granular definition on that. As you know, it takes 12 months to 24 months to build market. We had an awful lot of market under development between ourselves and Sprint, but the precise timing of what might fall into '09 versus February 2010 is a little too arbitrary at this point for us to try and put a fine point on so we are going to have to stick with the guidance, we have identified some cities that will fall in each year and we've talked about the fact that we're building out towards a target of a total of 120 million pops by the end of 2010 but not going to be able to get more granular than that.

Rick Prentiss – Raymond James

Sure, appreciate that. Then you mentioned Baltimore Sprint obviously had not gone very broad as far as the coverage goes. I think from Perry's comments it sounds like you guys do believe you need to have pretty good coverage of at least a local market area before really launching it correctly. If you think about the cities you have identified in the press release, Atlanta, Vegas, Chicago, Dallas, some of the new markets that don't have mobile WiMAX or even pre WiMAX, what kind of percent coverage do you really think you need to have at the launch date?

Ben Wolff

Rick, first of all, your observation is correct that you can expect us to launch those markets with very full coverage. The precise percentage really varies on a market by market basis and it's far more focused on what are the general areas of interest that people travel on a daily basis in their local communities. It wouldn't do you any good as you can imagine to say a threshold of like 90% but then ignore the 10% that happens to be the downtown core of a market, for example.

So arbitrary thresholds and percentages we find are misleading. They vary considerably from one market to the next, but when we look at Portland as an example, if you take a look at the coverage map on our Web site you can see that is fairly extensive coverage ranging all the way up into southwest Washington, all the way down – half way down to Salem, the state's capital in Oregon. It is a wide swath of large footprint and that's what you can expect to see us do in each subsequent WiMAX market launch.

Rick Prentiss – Raymond James

And as you convert the existing markets over, the Baltimore – not Baltimore, Honolulus and others, what exactly do you have to do? Is it putting new equipment on the cell site, so you got to run parallel networks for a while and then keep parallel equipment in place or just what's involved in an existing market turning it over to mobile WiMAX?

Ben Wolff

In most cases we are able to add the WiMAX radio to the tower, but use all of the same infrastructure and architecture that we had that was supporting the pre-WiMAX network. That's the beauty of a flat layer to Ethernet architecture. So very little work other than hanging new radios up on towers. In many markets we are adding some additional sites based on the premise that we are looking to sell a more mobile type of product. So previously we may not have covered some of the highways and byways in some of these markets but now that we are focused on greater or enhanced mobility with the new form factors that we have there that are coming out you will see us add some additional sites to some of these markets.

Our expectation at this point, based on early results that we've had in some markets that we have already done some transition work in is that we are likely to have the radios up and transition from the whole technologies, new technology relatively quickly. A while back we thought it would stretch out over a period of time. I think now our conclusions are that we will take advantage of a better market opportunity and have better marketing messages and everything else in the markets by making the transition happen sooner rather than later.

Rick Prentiss – Raymond James

Great. Thanks, guys. And David, welcome to the group.

David Sach

Thanks, Rick.


Your next question comes from the line of Simon Flannery with Morgan Stanley. Please proceed.

Simon Flannery – Morgan Stanley

Thanks very much. I think this one is for Perry. Could you talk a little about more about Portland in particular how you are working with Sprint there, and I think Comcast, maybe the cable company, early days, I know, but what's your sort of distribution of retail in any sort of partnership leverage that you are able to start getting? And if you have any stats on to what extent people are using the mobility, with WiMAX versus what you have seen in the pre WiMAX (inaudible). Thanks.

Perry Satterlee

Hey, Simon, at this point, right now, we have continued since the beginning of the close of the transaction working with both Sprint and the MSOs and Comcast of course in Portland to enable them through our back office systems to begin selling in Portland and that will come up mid-year here. So that hasn't started yet. When we look at the other specific statistics in the Portland what we're looking at is things from the sales channel and everything else, has exceeded our expectations in terms of how well the product has been received in the market.

Ben Wolff

Let me just add to that and be clear, that the sales results that we're seeing so far are before we have any distribution being facilitated by our MSO partners or by Sprint. So we're quite pleased that with our own distribution channels we're getting the kind of traction that we are. In terms of the customer take rates on the mobility products, I think it will just suffice to say it's significantly higher than what we've historically experienced in our pre WiMAX market.

Simon Flannery – Morgan Stanley

Okay. Thank you.


Your next question comes from the line of Eric Kainer with ThinkEquity. Please proceed.

Eric Kainer – ThinkEquity

Thanks very much for taking my call. Quick question is on the overlay markets, as you wind up rolling those out, I wonder if you can talk about the CPE swap, and obviously one of the devices that you are going to need is a fixed CPE that has Voice-over-IP in order to be able to fully swap out a market. When should we expect such a piece of CPE?

Perry Satterlee

CPE that has the VoIP ATA built in?

Eric Kainer – ThinkEquity

That's right.

Perry Satterlee

Is that the question? Yes, I think as we look at the swapping out of these markets, we believe that that will be one of the key elements of that. And that we're working with vendors today to have that come to market around the same time as we start to do the upgrades.

Eric Kainer – ThinkEquity

And that should be I'm guessing somewhere midyear, roughly speaking.

Perry Satterlee

The conversions will start – some will start midyear, but as we do the overlays, and has Ben said, some of the upgrade for mobility, we want to launch that altogether, so it may push it out towards third quarter and fourth quarter.

Eric Kainer – ThinkEquity

Okay, that makes sense. Now, as far as how you actually do that transition, especially given what you guys have said here about how quickly you might transition those overlay market into a full WiMAX market, what are the plans for CPE? Is there going to be kind of a swap there? Obviously you guys don’t – I think you are allergic to subsidizing, which I think is a good policy, but I wonder if you can tell us a little bit about your plans, and I assume that the pricing will be similar between WiMAX and pre-WiMAX as far as the grandfathered subscribers.

Perry Satterlee

We won't comment necessarily at this point on specific pricing but I think when you look at it, in a shortened time frame, we will try a number of – we will start with, as you have pointed out, our allergies to equipment subsidy. We'll start with selling the modem to the customers, and then over time we may transition as we get towards the end of the period to a different way of making sure that the transition is somewhat seamless to our current customer base.

Ben Wolff

I think one thing to note, Eric, is the most of our CPEs that are in the market today are leased. One of the things that we've got with the benefit of, frankly, straddling some of the conversions between '09 and 2010 is as we do some of the swap outs and consumers continue to lease the residential CPE at least, the residential modem, we can take back the old modem, recondition and redeploy it in some of our other pre-WiMAX markets. So we're kind of doing the best we can to try and take full advantage of all of the equipment that we have out there and to deal with on a cost effective basis.

Eric Kainer – ThinkEquity

Just one last question. Obviously the WiMAX forum put out a document, let's call it about a month ago now, talking about roaming relationships between various WiMAX vendors, kind of putting out some standard agreement terms or what have you. I wonder where you are as far as your thinking about roaming, both domestically as well as internationally.

Ben Wolff

We are big advocates of having more roaming established and doing it more quickly and not having large barriers to those kinds of roaming relationships at work. So we have a team that is focused on that aspect of the business, both from a business perspective, but more importantly, from a technology perspective. As you are rolling out a new technology it’s very important that you wind up having the same end user devices being able to operate on multiple vendors infrastructure as well as different operators' networks and we've got a team of folks that are very focused on making that happen on a global basis.

Eric Kainer – ThinkEquity

Great, well, congratulations and good luck.

Ben Wolff



Your next question comes from the line of Jonathan Atkins with RBC Capital Markets. Please proceed.

Jonathan Atkins – RBC Capital Markets

Yes, two questions. First, on EBITDA, the loss is a little bit wider than we were looking for. I just wanted to kind of get some commentary as to what growth ad was it in terms of acquisition costs in Portland or what were some of the factors behind that? And then with respect to potential sources of government funding what's your view particularly as you look at some of your pre-WiMAX markets which has a little bit more the low profile is there a possibility to get some broadband assistance to help fund with the overlay?

Perry Satterlee

Sure. So regarding the EBITDA loss, obviously that's on a pro forma basis that we provided you. So it's a combination of both companies. Don’t forget you got obviously the launch of Baltimore in there; you got the whole build out of that network from Sprint. So that's larger than you thought. It's probably because it's on a combined basis.

Ben Wolff

In terms of the – kind of the government assistance or government funding we've been very involved in what's going on with the stimulus plan, and we do think that there is a possibility that some of that funding could be used to help us build out some of the more rural areas, areas that frankly wouldn't necessarily be the top of our list from a just capital – deployment perspective from a capitalization perspective. But when we take a look at the importance of having rural areas and secondary markets build now as we focus on the top 100 it’s obviously very important from a government perspective from the continuity of travel pattern perspective within many of the regions we're building out. So we see it as an opportunity.

Time will tell in terms of how much capital is really available based on how the definitions – and implementation of the plan comes about and a lot of that work is going on now, MTIA [ph] at the USDA, our U.S. program, really it’s little early for anybody to be able to really define how much they expect to get. I can tell you the plans that we announced today, do not contemplate or rely on getting any government funding. So if we get any, it's a plus, but if not, something that's a requirement for us.

Jonathan Atkins – RBC Capital Markets

And then just in terms of the overall economy, the environment now is very different as it was in the fourth quarter as well from what you saw when some of the pre-WiMAX markets started hit EBITDA positive. I'm wondering the nature of the sale, the nature of the offer that you have mentioned to the market how is that changed?

Ben Wolff

Our offer terms haven’t changed at all. We have been very fortunate to be able to maintain the offers and really the one thing is any different that you see today compared to the six months ago were more is we’ve gone to – going to kind of market in Portland with a little different set of offer. Some had higher ends, some had lower end, basically given the customers more choice and obviously the mobility element in Portland are enhanced compared to what we have in the pre-WiMAX market.

What we're finding is that in this kind of an economy, the ability to have folks have both a home and away broadband connection is something that’s very desirable and as I mentioned in my comments people look at for better bang for their buck and Clearwire seems to be (inaudible) in that regard. So even with – virtually nothing in the way of material marketing or sales efforts in our historical leveraging markets we had a pretty solid number of gross adds that came to us, we find that lot of that comes from word of mouth so we don't have to spend a lot of money on advertising. And then when you offer the full compliment of the home and away product that we are in Portland it really seems to be the suite spot in a tough economy. So we think we are doing well.

Jonathan Atkins – RBC Capital Markets

Thank you.


At this time, we would like to thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.

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


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