Clearwire Management Discusses Q2 2012 Results - Earnings Call Transcript

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Clearwire (CLWR) Q2 2012 Earnings Call July 26, 2012 4:30 PM ET


Alice Ryder

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

Hope F. Cochran - Chief Financial Officer and Senior Vice President

John C. B. Saw - Chief Technology Officer and Senior Vice President


Walter Piecyk - BTIG, LLC, Research Division

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

Jonathan Chaplin - Crédit Suisse AG, Research Division

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

Michael J. Funk - BofA Merrill Lynch, Research Division

Shing Yin - Guggenheim Securities, LLC, Research Division

Philip Cusick - JP Morgan Chase & Co, Research Division


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

Alice Ryder

Thank you, Shannon. Good afternoon, and welcome to Clearwire's Second Quarter 2012 Financial Results Conference Call.

With me today are Erik Prusch, Clearwire's President and Chief Executive Officer; and Hope Cochran, our Chief Financial Officer. John Saw, our Chief Technology Officer, is also available for the question-and-answer session.

Today's call is being webcast live on the Clearwire Investor Relations website and will be archived on that site and available for replay shortly after we conclude.

Unless otherwise mentioned, where applicable, all sequential comparisons in today's discussion reference first quarter 2012 financial measures and all year-over-year comparisons reference second quarter 2011 financial measures.

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

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

Please refer to our press release 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 statements.

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

And all mentions of retail cash contribution represent retail revenue, less cost of goods and services sold to retail customers, general and administrative expenses, such as customer care, bad debt and sales and marketing expenses and CapEx related to leased CPE under our original retail model.

I will now turn the call over to Erik Prusch.

Erik E. Prusch

Thank you, Alice. Good afternoon. Before I update you on our progress in the second quarter, I'd like to take a moment to provide some perspective on recent events. During the second quarter, we continued to see notable spectrum activity on the part of several carriers in various forms, including swaps, regional or individual market tuck-in acquisitions and efforts to make impaired spectrum more usable.

While these actions may prove marginally helpful in alleviating some of the growing demand on carriers' networks, we do not believe any of these transactions provide a comprehensive solution to their capacity needs, especially in high usage, dense urban markets.

In contrast, Clearwire's deep portfolio of 160 megahertz of spectrum on average in the top 100 U.S. markets is ideally suited to help operators capitalize on this growing demand. Not only is our 2.5 gigahertz frequency highly conducive to transmitting massive amounts of data, but our large swaps of continuous spectrum also enable us to push the limits of LTE technology with fat 20-megahertz pipes or even fatter 40-megahertz pipes with carrier aggregation.

This is a key advantage as it produces the fastest speeds in the industry, offering users a better experience and also offers carriers an option to deliver data in a very capital efficient manner. In addition, we believe that rapid global adoption of our frequency band, which is expected to drive significant device and infrastructure economies of scale further enhances our spectrum value.

Major carriers are reporting increasing data revenue despite consumer price hikes, making it clear consumers love their data access and are likely to continue to demand even more for mobile networks as the number of connected devices continues to increase. And each new version offers more features and capabilities, further compounding the demands on the network.

Our own customers provide evidence of this dynamic as we've seen an increasing share of total network tonnage from video and other streaming applications. As a result, we believe wireless operators will inevitably be forced to add network capacity, and there are a few readily available options for spectrum resources outside of Clearwire.

We also have fundamental beliefs that fit. IDC fittingly points out in our release today, and I quote, "Clearwire is able to operate on a single bandwidth in approximately 160 megahertz of spectrum on average in top 100 markets where capacity constraints are most likely to emerge for other carriers. As result, Clearwire has the capability to offer greater capacity and better network performance by virtue of a significantly fatter pipe. With several tier 1 operators already seeing a point in the not-too-distant future at which their existing LTE capacity is fully loaded, wholesale partnerships provide the ability to augment capacity in the most constrained markets."

As we have mentioned in the past, we have been and remain in active discussions with various parties who are interested in leveraging our assets to address the growing demand for broadband data in various ways, including, but not limited to spectrum acquisition.

While we understand investors are anxious for additional details chronicling our progress, we believe it is in the best interest of the company and its shareholders to remain discreet on such matters. And while we have a sense of urgency in arriving at a strategic solution, we also believe our strong cash position provides us runway to be patient enough to strike not just any deal, but the right deal or set of deals for the company and its shareholders.

Turning now to our business update. As we noted at the beginning of this year, we have 4 goals for 2012, which we believe are instrumental to realizing our vision of becoming a leading LTE provider in the United States. Those goals are: first, to increase the cash contribution from our retail operations by double-digit percentage; second, make significant progress in our LTE Advanced-ready network build; third, promote development of the TDD-LTE ecosystem; and fourth, grow the wholesale partner base.

I'll provide an update on the progress we've made on each of these objectives, and then turn it over to Hope for a financial update.

I'm pleased to report that in the second quarter, we grew revenue 8%, and we also drove year-over-year improvement in EBITDA. We also continued to achieve retail cash contribution improvements. And as a result, we are ahead of plan in achieving our first objective of increasing the cash contribution from our retail operations by a double-digit percentage.

We continue to see strong results from the new no-contract retail offering, which has resonated with consumers. And most importantly, its positive impacts are reflected in our financial results, including our lower-than-expected cash burn.

Second quarter 2012 retail cash contribution increased more than 60% year-over-year, primarily as a result of the cost savings initiatives we implemented last year, including the outsourcing of customer care and lower selling costs related to our new retail offering.

While we have started to see the expected impact of higher churn that is typical of no-contract customers in the second quarter, the continued improvement in retail cash generation supports our view that the trade-off for no-contract or higher-churn customers is worthwhile and beneficial to our objective of driving double-digit percentage growth in retail contribution to convert this channel into a meaningful cash source for the company in 2012 and beyond.

Turning now to our second goal of making significant progress in our LTE Advanced-ready network build. During the first half of the year, we began our site development work, including leasing, zoning and permitting efforts that are prerequisite to equipment installation.

These site development activities were initiated in parallel with lab and network interoperability testing. Given the fact that many of our planned LTE sites utilize equipment that is LTE-ready, our site preparation efforts have progressed quickly. As a result, we already have approximately 1,800 notice to proceeds for cell sites, demonstrating our network team's expeditions work in keeping us on target to bring the initial Phase 1 sites on-air by the end of June 2013, in time to satisfy our LTE prepayment milestones under the terms of our November 2011 agreement with Sprint.

During the quarter, we also continued to dialogue with various vendors with the goal of finalizing our selection process in line with our plans to start ramping equipment purchases in the third quarter, and we look forward to updating you on that process in October.

We also made significant progress in the second quarter in promoting the TDD-LTE ecosystem, our third goal. On our previous call, I referred to the progress we were making with chipset vendors, and we were extremely pleased to follow-up with announcements from both Qualcomm and Sequans, 2 premiere silicon suppliers.

Specifically, Qualcomm announced plans to add support for Band 41, the radio frequency band our TDD-LTE network will utilize to its lineup of multimode LTE chipsets, including the ubiquitous Snapdragon and Gobi series.

In doing so, OEMs around the world will be able to offer cost-effective developed devices that will operate on both FDD and TDD-LTE networks, including ours. We expect sample chipsets to be available later this year in time to be incorporated in TDD-LTE devices in 2013.

We are also pleased to build on our relationship with Sequans, one of the largest chip providers for WiMAX devices and an early leader in TDD-LTE chip technology. Sequans was also one of the first to provide China Mobile with working silicon for the launch of the world's first TDD-LTE network demonstrations in Shanghai in May 2010.

In collaborating with Sequans on the development of LTE devices for our network, our technology team will work with Sequans on performance testing and certification, standards development and the creation of devices to support TDD-LTE solutions.

We believe these developments are extremely positive, not only for Clearwire, but also for consumers and the entire wireless ecosystem. We also believe that having world-leading chipset manufacturers supporting TDD-LTE in our Band 41 speaks volumes to the relevance of our network and is a monumental step forward in ensuring the availability of devices that operate seamlessly across various LTE networks, a key factor in our ability to succeed in becoming the capacity offload partner to many wireless carriers.

We've also seen progress on the ecosystem with carriers worldwide. We recently entered into an MOU with China Mobile that lays the foundation for international roaming between China and the United States on TDD-LTE. Under the terms of the agreement, we will collaborate with China Mobile to define and institute the technical and business processes necessary to allow international roaming.

We expect the results of this collaboration to serve as a blueprint for future roaming agreements with other members of the global TD-LTE initiative, which has more than 40 operator members around the world.

We are thrilled by the potential of expanding our relationship with China Mobile, which had been primarily centered on the development of the TDD-LTE ecosystem to a revenue-generating relationship, as well as the opportunity to become the first international LTE roaming partner to the world's largest carrier in terms of network scale, customer base and market value.

Additionally, SoftBank Mobile has made significant progress since commercially launching their TDD-LTE network in Japan, amassing more than 100,000 TD-LTE customers within the first 3 months despite only offering data devices to date. We look forward to following their progress and are especially keen to see the response to their first TDD-LTE smartphone when it comes to market.

And furthering our efforts on our fourth goal of growing the partner base, we announced an agreement with new wholesale partner, Jolt in the second quarter, a carrier that targets niche markets with affordable prepaid plans. Our agreement allows them to add mobile broadband to the mix using our WiMAX network initially. And as our LTE network comes on line, we expect to pursue an agreement with Jolt to offer their customers even faster speeds.

Additionally, we have completed the on-boarding process with Simplexity, who has already signed up 2 partners who will purchase our 4G WiMAX service.

These developments further validate our model of serving a variety of providers, including national and regional operators, MVNOs and nontraditional entrants. We now have 10 wholesale partners on board with Clearwire.

We remain committed to leveraging our ability to provide, by far, the largest supply of free and clear capacity today to drive further new business through the rest of the year. We continue to have active discussions with several potential partners. The knowledge that connected devices and smartphone penetration continue to increase at spectacular rates while the quantity of available spectrum has remained static gives us continued confidence in the role Clearwire will play as a wholesale provider of broadband capacity.

Now I'd like to turn the call over to Hope. Hope?

Hope F. Cochran

Thank you, Erik. Our second quarter results highlights the positive momentum created from our laser-like focus on managing the business for cash while preparing for our next phase of growth. Revenue, EBITDA and cash burn all delivered year-over-year improvement to second quarter 2011 pro forma results and exceeded our own expectations.

The improved execution against our financial plan has allowed us to raise our full year 2012 revenue and EBITDA guidance. And as a result, we anticipate ending the year with a stronger liquidity position than our original plan.

Second quarter total revenues of $317 million increased 8% year-over-year as compared to pro forma second quarter 2011 revenues of $294 million on higher wholesale and retail revenue, which increased 15% and 4%, respectively. On a sequential basis, second quarter revenue was down slightly due to a 3% decline in retail revenue, primarily driven by lower equipment sales on fewer gross adds and a seasonally slower quarter.

On a year-over-year basis, retail and other revenue of $199 million increased 4% on a 3% increase in subscribers and a higher equipment sales related to our new retail purchase model.

As anticipated, retail ARPU declined as the mix of retail customers continued to shift towards those of purchasing rather than leasing CPE equipment, and we expect this trend to continue throughout the remainder of the year. Retail ARPU for the period was $46.12, down from both first quarter 2012 and second quarter 2011.

Wholesale revenue of $118 million was flat sequentially, reflecting the fixed nature of our WiMAX wholesale agreement with Sprint. As a reminder, under the terms of the agreement, Sprint will pay a flat fee of $900 million for unlimited retail WiMAX services through 2012 and 2013, and then revert to a usage-based pricing in 2014 and beyond. We will receive $600 million in 2012 and the remaining $300 million in 2013.

However, under U.S. GAAP, revenue will be recognized on a straight-line basis over the 2-year period. The primary goal of our late 2011 negotiations with Sprint was to secure a stable and predictable stream of near-term WiMAX cash flows necessary to fund our operations regardless of subscriber performance, which we have successfully achieved.

Total subscribers remained relatively flat, following a net subscriber loss of 41,000 in the period on lower gross adds and higher churn. We ended the second quarter with 11 million total subscribers, up 43% from 7.6 million in the second quarter 2011.

During the second quarter, which we expect to be the seasonal low point for retail gross adds this year, we saw our retail subscriber base remain flat sequentially at 1.3 million subscribers, reflecting an 8,000 net subscriber loss.

Churn for the period was 4.4%, up from 3.9% in the year-ago period and up from 3.7% in the first quarter. As expected, retail churn began trending upward, primarily due to the increasing mix of no-contract subscribers.

Despite the elevated churn and the lower ARPU characteristics of the no-contract model, we expect these customers to continue to generate significant cash and return for our business. We expect retail cash contribution in the back half of 2012 to remain at levels similar to the second quarter.

We ended the period with 9.6 million wholesale subscribers, relatively flat with the first quarter after a 34,000 net subscriber loss, and a second quarter wholesale churn of 3.6% was higher on both a sequential and year-over-year basis.

We believe the subscriber and churn performance in Q2 are primarily attributable to Sprint's marketing focus on iPhone sales.

Wholesale subscriber figures include all wholesale WiMAX devices, regardless of whether or not they're active on our network. And while the total wholesale base declined slightly, average devices with usage on the network increased by 259,000 during the second quarter, highlighting growth among subscribers that would contribute to the wholesale WiMAX revenue in 2014 when our agreement with Sprint is usage-based.

We believe usage is a more important metric in measuring the potential of our wholesale business model. And we continue to see strong usage on our network in the second quarter as total wholesale tonnage increased 50% year-over-year, despite Sprint's implementation of customer usage management beginning last fall. And our experience has been that when customers have an unconstrained environment, they use even more. As shown by our customers on a truly unlimited plan, whose average usage increased 38% over the same period.

The growing demand for high-speed data is evident across the industry, and customers clearly prefer an unconstrained experience. Yet carriers are opting to limit their experience by installing data caps or slower throughput speeds. We've seen the strategy of constrain across the industry, including recently introduced share data plans by the 2 largest carriers, which effectively shrunk data allowances and increased costs for many customers, followed by the Kindle 3G usage now being capped at 50 megs per month.

We believe this unnatural bending of the demand curve will eventually be disrupted, whether by the carriers themselves or new entrants. And a network like ours is ideally positioned to satisfy that burgeoning need.

Looking forward, we expect the wholesale subscriber base to decline in the balance of the year as an increasing number of Sprint's new customers and those coming off contracts may choose non-WiMAX devices, including the iPhone and LTE devices, which they have recently begun marketing. However, as we mentioned last quarter, due to the fixed nature of our WiMAX agreement with Sprint, wholesale subscriber performance has become increasingly irrelevant having no material impact on wholesale revenue in the near term.

As we review the expense side of the business, we are pleased to report that we reduced our cash expenses by more than 12% year-over-year, saving over $200 million on an annualized basis. Over the past year, expenses have been reduced throughout the business, primarily related to the outsourcing of care and network management, transitioning to a new retail model and overall reductions in G&A and headcount.

During the second quarter, cost of goods and services and network costs, excluding noncash expenses of $51 million was $174 million, a 4% decrease year-over-year

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expense and our 2011 cost-cutting initiatives. Sequentially, cash COGS also decreased 4% due to lower CPE cost of goods sold.

Selling expenses for our retail business decreased to by $10 million sequentially and by $20 million from a year-ago period to $38 million. The sequential decrease is primarily due to the lower gross adds in the second quarter and the higher marketing costs in the first quarter related to the formal launch and promotion of our new no-contract retail offering. The year-over-year decrease was driven by the new commission structure of our low-cost distribution strategy.

Retail CPGA declined 7% sequentially and 28% from the year-ago period to $226. Looking forward, we believe CPGA will decline throughout the remainder of the year. We continue to benefit from the selling and marketing efficiencies from the new retail model and are well on our way to achieving low 200s CPGA for the full year.

G&A and other expenses of $100 million were up 5% sequentially, in part due to termination costs associated with exiting retail and sales facilities. G&A spend was down 17%, however, from the year-ago period due to reduced headcount and other targeted cost-cutting actions.

Total headcount at the end of June increased to 870 as we began ramping network resources to support the rollout of our LTE network.

Now let's turn our focus to EBITDA performance. Second quarter EBITDA loss of $34 million reflects a $74 million improvement when compared to pro forma second quarter 2011 results. Sequentially, we saw a $4 million improvement in EBITDA performance, primarily due to lower selling expense and cash COGS.

Capital expenditures were $24 million in the second quarter and consisted primarily of WiMAX maintenance and LTE deployment spend. While capital expenditures were relatively flat sequentially, spend was down $32 million on a year-over-year basis as second quarter 2011 included WiMAX build spend, as well as capitalized CPE costs related to our original retail model, which lease devices.

With efforts of our LTE build intensifying late in the quarter, we expect LTE equipment purchases for the initial phase of the build to begin ramping in the third quarter, with the majority of the equipment to be financed through equipment financing vehicles. We continue to expect the total cost for the larger LTE build of up to 8,000 sites to be approximately $600 million, which will be spent in 2012 and 2013.

We expect the momentum in our retail business and our continued focus on expense management to positively impact our revenue and EBITDA results in 2012.

We now forecast the full year of 2012 revenue of $1.2 billion to $1.3 billion, representing a $50 million increase at the midpoint to previous guidance of $1.15 billion to $1.25 billion.

Similarly, we now forecast the full year 2012 EBITDA loss of approximately $175 million to $225 million, representing $100 million improvement at the midpoint to previous guidance of $250 million to $350 million.

While we are not updating 2012 capital expenditures at this time, we do expect capital expenditures to increase in the second half of 2012 as compared to the first half of the year, as we ramp our LTE build effort. With a stronger revenue and EBITDA guidance, we expect to be in a stronger liquidity position at year-end than we had previously planned.

From a liquidity perspective, cash at the end of the quarter was $1.2 billion. The net cash spend of approximately $200 million is primarily related to the interest payments and offset by approximately $60 million proceeds from the controlled equity facility.

We have now elected to cease further sales under this facility. Based upon our current liquidity and our outlook for the operations over the near term, we believe we have sufficient cash to fund the business for at least the next 12 months.

As we consider our longer-term liquidity needs, we expect to receive future LTE payments from Sprint and continue to evaluate all potential sources, particularly strategic transactions and asset sales.

Our second quarter results continue to demonstrate that our focus on execution while preparing for future growth, in combination with the terms of the new Sprint agreement, have extended our cash runway. We've had a financially strong first half of 2012, and I look forward to reporting back to you on our continued progress next quarter.

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

Erik E. Prusch

Thank you, Hope. We are pleased that we are ahead of our financial plan in 2012 and making solid progress on our long-term goals for the business. I'm proud of what our team has accomplished to date and have confidence in our ability to continue executing on our plan to achieve our 4 goals.

We have always sought to play the role of disruptor in the mobile broadband space, since forcing the acceleration of the industry's transition to 4G with the launch of our WiMAX network in 2009.

The goal for our LTE network is no different. We believe our future network deployment will bring realization of the true measure of value of future wireless networks, deep capacity resources. Our spectrum advantage will enable continued unlimited usage offers at a lower cost per bit than competing networks. This will be a significant competitive advantage for Clearwire, and ultimately, for our wholesale partners.

Globally, we are leveraging the huge global potential of the TDD-LTE ecosystem. Our close working relationship with chipset vendors, infrastructure companies, device manufacturers and major wireless operators have continued to yield progress, and we expect this momentum to continue.

It's worth noting that independent telecom research firm Mobim now recommends even mobile operators who have no plans to deploy TDD in the next couple of years should build TDD support into their vendor proposals to ensure they have the option of supporting the technology in the future, and that operators should take steps now to secure unpaired TDD spectrum before demand increases and drives TDD spectrum values higher.

Regardless of LTE technology, the ability of any future wireless carrier to monetize the growing demand for broadband access will depend on the spectrum resources available to serve the demand. The pending movement of small pieces of spectrum in the first half is a positive development, but none of these transactions are sufficient to address the growing capacity demand carriers face. And we believe Clearwire, with more available spectrum than any other operator today, is ideally positioned to help meet this inevitable demand.

Before we turn it over to the operator for Q&A, I'd like to recognize the appointment of former U.S. Senator and Attorney General of the State of Washington, Slade Gorton, to our Board of Directors. Slade brings to Clearwire a very deep experience in business, law and government, and his insights will be invaluable to our company at this very important juncture in our history. We're really looking forward to Slade's contribution on our board. Operator, we're ready for some Q&A. Please instruct the callers on entering the queue for questions.

Question-and-Answer Session


[Operator Instructions] Our first question is from Walter Piecyk with BTIG.

Walter Piecyk - BTIG, LLC, Research Division

First, could you provide some type of usage update on a sequential basis just for the wholesale business, did that go up? Because there were some commentary about the customers that had churned off or nonuse customers, you added use customers, can you give us just an overall usage on a sequential basis?

Hope F. Cochran

Walt, this is Hope. As we look at our sequential usage, we did not give a sequential update this quarter, but we do indicate that we do have more customers accessing the network and utilizing it. The metric we did reference was 50% increase year-over-year. And of course, we've talked about how the smartphone usage on a per user basis has continued to go up as those customers have accessed it in an unconstrained environment.

Walter Piecyk - BTIG, LLC, Research Division

Okay. You also, I think, had referenced, Hope, on your comments about liquidity, strategic transactions and asset sales. Can you, I guess, just give a general definition for strategic transactions? I guess what I'm specifically getting at is, can we assume that a wholesale deal is not considered a strategic transaction, that you'd be referencing specifically some type of equity investment or loan from a strategic partner?

Erik E. Prusch

Walter, this is Erik. Yes, in terms of strategic transactions, we're looking at more complex transactions. Obviously, it would be something more than a straight commercial agreement, and we will consider those as straight wholesale deal. And so when we refer to strategic transactions, it's encompassing more than just a wholesale agreement.

Walter Piecyk - BTIG, LLC, Research Division

Okay. And then just on that, I guess, could you just, I guess -- first of all, let us know who at the company is specifically dealing with China Mobile in this latest agreement that you've signed, I guess on a roaming basis? Like at what level, what person at Clearwire is dealing with that situation?

Erik E. Prusch

Yes, it's a cross-functional team. But John Saw has led the efforts for us.

Walter Piecyk - BTIG, LLC, Research Division

Okay. And then just the last question, sorry. Do you think the spectrum code deal is holding up any of the discussions that you're having, either on a strategic wholesale signing or on any other asset sale basis? Is this -- if this stuff is cleared up in the next couple of months. I guess Verizon keeps claiming August, but let's assume it's October. Will that change the ability to make some of these things happen?

Erik E. Prusch

Yes, I don't think it's necessarily holding up things. It certainly has delayed some things for others. And everyone is watching very carefully to see how this actually comes about, what's going to be the conclusion of it. Will it be permitted? Will there be any other concessions made? But I think the general consensus is transactions are taking place. The market is open. We've seen more transactions in the last 6 months in terms of spectrum moving about than I think we have in the previous year.


Our next question is from Jennifer Fritzsche with Wells Fargo.

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

I am sorry I missed this, I joined late. But can you talk about the volume increase sequentially, Hope, that you realized in the network? And I don't know if Dr. Saw is in, but I was just wondering if he could give a little bit color around carrier aggregation? And it seemed like you were the first approved there and the significance of that, any color there would be great.

John C. B. Saw

Sure, I'll -- Jennifer, John here. In terms of carrier aggregation, we did say last quarter, happy to announce then that we were the first U.S. carrier to have the carrier aggregation standard certified by the 3GPP for our spectrum. I think the significance of that is that it's going to help us further leverage our spectrum position. What it means that it will allow us to actually build some really fat channels. I'm talking about 40 megahertz and even beyond that. And that basically gives our customers a much higher throughput and a much higher capacity. So absolutely, it's a strategic advantage for us. And it helps us to leverage the spectrum even more.

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

And John, can I just add, is that part -- an integral part of the conversation as you get in the weeds with partners right now? Does that play a key role in those discussions?

John C. B. Saw

I think it is a key enabler that we can bring to the table that not many other carriers are able to do, certainly with the fat channels that we can bring to the table. Also, I want to add that a lot of the radios that we have installed today is actually carry aggregation ready. So that actually makes it simpler for us to enable that once the feature is available. So certainly it's an attractive feature for any carrier that requires capacity and high speeds.


Our next question comes from Jonathan Chaplin with Crédit Suisse.

Jonathan Chaplin - Crédit Suisse AG, Research Division

I was wondering if you could just run through for us quickly what would change in terms of your sort of strategic flexibility if the cable companies sold their equity stakes as part of the spectrum co transaction?

Erik E. Prusch

Frankly, Jonathan, not that much changes for us. But certainly, there are other players that may be attracted to us if the cable cos are not a part of the company. But I think fundamentally, what we're trying to do in setting up for strategic transactions and making certain networks boring [ph] all opportunities is to create as much flexibility as possible to attract the right kind of capital, the right kind of partner with the right alignment of interest for us to be able to succeed long term.

Jonathan Chaplin - Crédit Suisse AG, Research Division

But -- so the shareholder agreement that's in place at the moment, Erik, does it prevent you from entering into a significant spectrum sale or selling a significant chunk of equity to a DBS provider? Just wondering what might be behind the filing that DTV made this week?

Erik E. Prusch

Yes. We can't speak for DIRECTV and their filing. Their -- it really doesn't prevent us from selling a chunk of spectrum or pursuing other types of strategic transactions. What we have in terms of our Equityholders' Agreement are some confinements, which permits us to sell spectrum to lots of parties as long as it's deemed excess for the company, which we have a ton of spectrum, and that's -- it's a good news for us. But I can't actually tell you what the perspective of DIRECTV is and what was behind their goal.


Our next question is from Rick Prentiss with Raymond James.

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

A couple of questions. First since cash is so critical, can you give us the number again as to how many cell sites you're up at notice to proceed? And then how have you got the process laid out as far as getting to that Phase 1 Sprint number by June 13?

John C. B. Saw

Rick, it's John Saw here. We have 1,800 notice to proceeds in hand for cell sites that we are ready to add LTE to. That is tremendous progress, and will ultimately help us a long way in getting there. I think as Erik mentioned in his script, in parallel, we are also finishing up interoperability network testing, in particular, with Sprint to make sure that both networks are working seamlessly, especially during a handover, so that the customers will have a good experience. So all that are good progress, will help us meet our goals next year.

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

And as far as what equipment you need, interesting, on Sprint call earlier today, they actually said they were being hung up by some osprey nests, where they couldn't hang some of their equipment. For you guys to go out and touch a cell site, remind us again of what you physically have to do? I know it probably varies by the original equipment bandwidth.

John C. B. Saw

Yes. So, Rick, many of our sites are actually LTE-ready. So they are actually fairly light touch. And in fact, in many of those sites, we don't have to climb the tower. So if there are osprey nests there, we actually don't have to -- it doesn't -- it's not an obstacle for us. A lot of the sites require just a lying cart [ph] change on the ground unit and a software reflash. So we don't expect that for those sites that we'll run into a lot of obstacles.

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

And, Hope, you mentioned the ramping in the third quarter. The CapEx being higher second half versus first half. And I think you mentioned the equipment financing vehicles. Can you kind of let us know what that translates to? It sounds like, is it no longer vendor financing? Is it some kind of alternate means? And what kind of market is there out there for that?

Hope F. Cochran

Yes. Rick, it's very much in line with what we've talked about before, which is any equipment that we purchase. We are talking to the vendors about financing that as well. In certain situations, I'll work through a third party with that vendor, meaning that they're very much a part of that and they're supporting it, but might not be a direct agreement with that particular vendor. But that is very critical to our vendor selection.

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

Vendor selection should be happening here in the next couple of months, I guess?

Hope F. Cochran

We're looking at announcing that in the October time frame.


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

Michael J. Funk - BofA Merrill Lynch, Research Division

If you could just reiterate maybe what the intention was with the controlled equity offering? What your plan is from here on that? And I also have a follow-up as well.

Hope F. Cochran

Absolutely. Thanks, Michael. Yes, as we look at the controlled equity offering, we were able to access the markets in that Q2 time frame. But clearly, the stock has been under significant pressure here recently. And the entire intent of that facility was that we would only access it if we felt like it wouldn't impact the price. So right now, we clearly don't feel like there's a good environment for that type of facility. And we are looking at -- any sort of transaction we did have a more strategic impact.

Michael J. Funk - BofA Merrill Lynch, Research Division

Great. And then in terms of bringing on more wholesale partners, I mean are there advantages to signing those earlier as you actually build in the network? And still potentially flexibility in the site placement versus selling those later. And how is it influencing your discussions that you're having right now?

Erik E. Prusch

In terms of who we sign and when, obviously, the earlier, the better. It creates more flexibility for us and it creates more flexibility for them. At the end of the day, we need to get the network up in order to produce the revenue. So we do have a lead time. The good news for us is the strategy that we're embarking on is a hotspot strategy. It's about being in the urban core, and all the carriers have the exact same issues there. So where we're building first is always going to be a priority for everyone. And that is actually consistent with making a lot of progress in 2012 to that to further that strategy.


Our next question is from Shing Yin from Guggenheim.

Shing Yin - Guggenheim Securities, LLC, Research Division

In some your discussions at various parties that the spectrum co transaction may have been a factor in maybe delaying other people's decisions. And I just wondered there's another proceeding before the SEC for DISH's spectrum. Has that been a factor in some of your discussions? Do you feel like that's something -- the resolution of that is something that other parties may be waiting to hear about?

Erik E. Prusch

Again, I feel it's the exact same, which is there's a series of transactions. There's some FCC efforts. There are other efforts going in place. We're encouraged by the level of activity that's going on. And we believe that we're the only player that has the capability in the near term to bring relief from a capacity standpoint, with no exception. So the ability for us to commercialize it and recognize the opportunity in terms of smartphone penetration, growth in the industry and the contention that's already existing, we're the only ones who can do it. So while all of these efforts are in various stages, we believe fundamentally that the level of activity is only going to increase from this point forward.

Shing Yin - Guggenheim Securities, LLC, Research Division

Can you give a little insight into what the thinking is behind there? I mean is it a sense that the DISH spectrum could be considered an alternative to yours? Is that kind of why people are waiting to see how that plays out?

Erik E. Prusch

Yes. I wouldn't want to speculate on that. I don't think DISH has declared yet what their intentions are. And certainly, they've got a piece of spectrum. But as we all recognize and understand, the need is much greater than any of the supply in the next 3 to 5 years. So right now, it's about making certain that you're picking the right technology, the right infrastructure to bring that capacity to market and relieving the point of contention and offering customers exactly what they want, which is unlimited data.


Our last question is from Phil Cusick with JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

So help me, just remind me, is the October timing -- it seems a little later than we thought? And how much of that -- if that's right, how much of that later sort of build timing went into the higher EBITDA guidance for the year?

Erik E. Prusch

In terms of the timing on announcing vendors, that's pretty much consistent with what we've said. We've always thought that the equipment was going to start to be purchased in Q3. We wanted to make certain that we have the right vendors on board. We have selected some vendors, but we're not in a position to announce it yet. And we feel good about our ability to ramp up the build, because it is a light build for the most part, and accomplish our goals into 2013.

Hope F. Cochran

On the EBITDA question, Phil, it's a great question. As you look at the improvement in that, a good portion of that is direct result of the revenue increase that we guided to. So that's going straight to the bottom line. And then the remainder of that is coming from the fact that we continue to be very focused here on watching every dollar that goes out the door, so a good portion is coming from that. And there is some ability to make sure that those network costs stay in line through the remainder of the year. But I would actually argue that the vast majority of that improvement in EBITDA is due to the revenue and just expense management.

Philip Cusick - JP Morgan Chase & Co, Research Division

Good. That was my next question. Network costs down again sequentially. Should we look at this as the new run rate? Or should that pop up a little bit? Or could that go even lower going forward?

Hope F. Cochran

Yes. I look at it as it's at a good low point. Like I said, we continue to manage every dollar. But as we do overlay the network with that LTE technology, the tower leases will go up slightly. So if anything, it'll tick up slightly in the next few quarters as we get that build going. But we have worked hard to get it to the nice low run rate.

Erik E. Prusch

Thanks, Phil. With that, we're going to bring the call to a close. We thank you for your interest in Clearwire.


Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.

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