Clearwire Corporation. Q2 2008 Earnings Call Transcript

| About: Sprint Corporation (S)

Clearwire Corporation. (CLWR) Q2 2008 Earnings Call August 7, 2008 4:30 PM ET


Mary Ekman - VP, IR

Ben Wolff - CEO

Perry Satterlee - President and COO

John Butler - CFO

John Saw - CTO

Hope Cochran - VP, Finance and Treasurer


Simon Flannery - Morgan Stanley

Rick Prentiss - Raymond James

Eric Kainer - Thinkpanmure

Sid Parakh - McAdams Wright Ragen


Good day, ladies and gentlemen and welcome to the Clearwire Corporation second quarter 2008 earnings conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's 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 conference Ms. Mary Ekman with Clearwire.

Mary Ekman

Thank you, Michelle. Good afternoon ladies and gentlemen, I am Mary Ekman, Vice President Investor Relations with Clearwire. I would like to welcome you to our second quarter 2008 financial results conference call. With me today are Ben Wolff, Chief Executive Officer, Perry Satterlee, President and Chief Operating Officer; John Butler, Chief Financial Officer, John Saw, Chief Technology Officer, and Hope Cochran, Vice President Finance and Treasurer.

During today's call, Ben will review Clearwire's key results and accomplishments, as well as provide an update on our pending Sprint transaction. Perry will discuss our WiMAX market progress, as well as business results and operating metrics for the quarter. John Butler, will highlight the key drivers behind our second quarter financial results and provide an update on our 2008 target. Following our prepared remarks, we will open the line for your questions.

This afternoon's call is schedule to last approximately 45 minutes including Q&A. As a reminder to our listeners, today's call is being webcast live on the Clearwire's investor relations website and will be archived on that site and available for replay shortly after we conclude. Hopefully, you have all had an opportunity to read the earnings release we issued earlier this afternoon, which provides detail financial information on Clearwire Corporation's 2008 second quarter results.

Today's call may contain forward-looking statements reflecting management's beliefs and assumptions concerning future events and turns in or expectations regarding financial results. Forward-looking statements include, among other things, our future financial and operating performance and financial conditions, including projections and targets for 2008 and subsequent periods, subscriber growth, network development and launch plans, strategic plans and objective for both transaction and the need for the 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. Additionally, a reconciliation of any non-GAAP financial measures discussed on this call can be found in our press release.

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

Ben Wolff

Thank you, Mary and thank you to everyone on the call for joining us today. As we discuss Clearwire's second quarter 2008 financial and operating results.

At every opportunity we have been sharing with you the progress our company has been consistently making in preparing for our planed nationwide mobile WiMAX deployment, which we believe has the potential to transform the communication landscape, and the way that all of us use the internet and the second quarter was certainly no exception in terms of great progress. At a high level there are four areas that we like to focus on today.

First, our pending combination with Sprint's 4G business, coupled with a $3.2 billion capital infusion from our strategic investor group is on track for our fourth quarter closing and our preparation to integrate the businesses is well underway. Second, the network deployment in our first for our planned mobile WiMAX markets is ramping well in terms of sites and progress, network readiness testing and end-user device testing.

Next we have been moderating the rate of sales growth of our current residential broadband services in order to direct our resources more fully toward accelerating the upgrade of our existing markets to mobile WiMAX technology. Much of which we now anticipate completing during 2009 assuming the Sprint transaction closes as expected. Lastly, but very importantly, we continue to demonstrate the long term scalability and profitability of our business through the consistent upward trends in the financial performance of our operating markets.

As we are once again demonstrating with our solid second quarter consolidating financial results that we reported today. As we discussed at the time that we announced the transaction with Sprint, there are a few conditions that need to be satisfied prior to closing the transaction. These conditions include securing the necessary regulatory approvals from the Department of Justice and the Federal Communications Commission and securing the approval of Clearwire shareholders.

With respect to the DOJ process, I am pleased to report that the waiting period under the Hart-Scott-Rodino Act has expired without the issuance of a second request by the DOJ. The parties are free at this juncture to move forward with the closing of the transaction, once the other closing conditions are satisfied. The DOJs continue to review certain issues relating to the disclosure of competitive information and the coordination of business decisions following the closing of the transaction to ensure our ongoing compliance with the anti-trust laws.

In terms of the FCC process, public comments regarding the transaction will require to be submitted to the FCC by July 24th. We were very pleased that more than 100 parties expressed unconditional support that the transactions in public interest and should be expeditiously approved by the FCC. We were also pleased that only two oppositions were filed, and that neither raises substantive objections in our view.

In fact, the only major carrier to comment made clear in its filing, that it does not fundamentally oppose the transaction. We are confident that the transaction is in the public interest, since we expect the transaction to increase competition offer consumers more choice and stimulate innovation. As for our shareholders approval, look on our proxy solicitation materials necessary to our shareholder vote is well underway, and we anticipate filing these materials with the Securities and Exchange Commission within the next 30 days.

So the net result is that we continue to expect the transaction to close during the fourth quarter. Based on our ongoing conversations all participants meaning, Clearwire, Sprint, Intel, Google, Comcast, Time Warner Cable and Bright House Networks, remain enthusiastic and committed to the transaction. Collectively we are focused on completing the necessary steps to closing as expeditiously as possible.

The extent permitted under our existing agreements and applicable law, we are working jointly with our counter partner Sprint on comprehensive integration plan. Work in this area includes identifying the priorities and goals for the new Clearwire and creating a plan for the integration of our employee partners, networks, deployment process, back office platforms, and sales and distribution efforts, in order to provide for a seamless combination of our businesses and our teams.

We recognize that conventional wisdom will say the most mergers face their biggest challenges after closing and during integrations. We are fortunate to have a board and a management team experienced in merger and integration process. We are we incorporating the lessons learnt from those past experiences in to the integration of Clearwire and Sprint's WiMAX businesses to make the transition a smooth one.

While we are cognizance of the amount of time, attention and effort it will require, we also believe that combining with Sprints WiMAX business will be relatively straight forward. Each of our businesses has complementary areas of focus that call us well. Leveraging our shared values and operating principles, the combined new Clearwire team is committed to cutting-edge innovation, exceeding the expectations of our customers and delivering execution excellence in the deployment of the first nationwide mobile WiMAX network.

The infusion of $3.2 billion in committed capital at closing will give the new Clearwire sufficient resources and runway to rapidly embark on our ambitious growth plan, including new market deployments and the accelerated conversion of our existing markets to mobile WiMAX technology. We will soon bring together all the key elements we believe are necessary for a next-generation communication's company to succeed.

These elements include vast spectrum resources, a real time to market advantage, next-generation technology that is commercialized today, key distribution partners and experienced team and substantial financing. This is truly an unprecedented opportunity to address the clear market demand with a differentiated service offering support by assets and strategic partners that we believe give us a distinct competitive advantage.

Network site development, network readiness testing and consumer device testing and advance of launching Clearwire's first WiMAX market in Portland, Oregon are all progressing well. During the second quarter, we nearly tripled our geographic coverage area in Portland, bringing the number of people covered by our WiMAX network to approximately 1.2 million.

Nearly all of the additional sites that we need to launch in the market are now in some stage of the development and construction process. Our Portland market is now moving from network readiness testing into operational readiness testing. Our recent operational tests continue to demonstrate the significant differentiation of mobile WiMAX performance. With peak data rates of more then 15 megabits per second to an end user device and mean data rates of over 6 megabits per second.

By combining our superior download speed with a very low mean latency performance we are experiencing the potential for mobile WiMAX to support real time services by online gaming, VoIP and video streaming services is truly revolutionary. This rapidly growing industry is supported by a robust vendor ecosystem is paving the road to the mobile internet. According to the WiMAX form the global support of WiMAX continues to build momentum with more then 300 WiMAX deployments in 118 countries.

For example, just recently major incumbent cellular operators in Russia and India, announced additional commitments to deploy mobile WiMAX networks. Plans for new WiMAX enable consumer devices continue to expand with more than 80 suppliers providing a range of more then 480 devices from base stations and CPEs to PC Cards, and handsets. Based on the recent industry new releases more than 100 new certified products are slated to be introduced in the next six to 12 months alone.

The other with Intel, we are testing laptops and notebook PCs from Lenovo, Toshiba, ASUS and Acer on our mobile WiMax network in Portland. We are pleased with the initial performance. Many more notebooks are on their way, thanks to the strong commitment from global PC OEMs to deliver embedded WiMAX products. When combined with this robust pipeline of devices and services, we believe that our mobile WiMax network will greatly improve our customer's wireless broadband experience, far beyond what is achievable by any other wireless network and service today.

Moreover, the considerable upgrade for our customers in terms of speed, available end user devices, features and overall experience has accelerated our decision to drive towards converting our pre-WiMAX operating markets to mobile WiMAX technology as soon as possible. Perry will update you on these plans in a few moments. During the second quarter, we continue to make good progress in our other initial WiMAX markets as well. These markets included Atlanta, Las Vegas, and Grand Rapids.

We are currently well positioned to have the majority of the build in each of our first four WiMAX markets complete by the end of this year, although completion and commercial launch of these markets is dependent on the timing of the closing of the Sprint transaction, and whether we choose to secure additional funding during the interim period. We are making every effort to appropriately balance our capital spending and progress in our initial WiMAX markets with our capital resources and expectations concerning the timing of the funding associated with the Sprint transaction.

If any point we believe the transaction will take longer to close than currently expected and we are not able to secure interim financing on terms that we find acceptable. We will further moderate our spending or we will attempt to do so in a manner that does positions us to most expeditiously launch new markets, once our transaction is complete.

As we previously discussed in addition to our first four WiMAX markets, we have approximately 30 million mobile WiMAX POPs in various stages of development in markets throughout the US. This number does not include any POPs covered by WiMAX networks underdevelopment by Sprint.

Our extensive broadband network infrastructure portfolio which includes all towers on air, as well as, our robust pipeline of sites in various stages of development now stands at nearly 10,000 sites. We believe the state of deployment readiness will allow us following the closing of our transaction to quickly begin implementation of the prioritize market launch schedule that our integration teams are planning for.

In continuing our efforts to enhanced profitability rather than focusing on market penetration, Clearwire ended the second quarter with a total of 31 markets achieving market EBITDA positive, more than twice the number at this time last year. Marking an important targeted inflection point for our domestic business, our US operating markets in the aggregates, achieved a positive market EBITDA margin as a group for the first time in Clearwire's history.

Moreover, with respect to our largest markets Honolulu is now EBIDTA positive and Seattle is on the same trajectory. We continue to see strong profitability increases in our existing US markets. Clearly, illustrating the strong gains in operating efficiency we are achieving, every one of the initial 25 markets is now market EBIDTA positive and as a group the initial market posted a 34% market EBIDTA margin for Q2. A number of our initial markets have broken through 40% market EBIDTA margins and some are now approaching 50%.

Our decisions in the latter half of the last year to focus our resources on new WiMAX market deployments and our increasing market level profitability, together with our recent decision to accelerate the conversion of our existing markets to mobile WiMAX technology, resulted in part in a slowdown of new customer acquisitions, which we expect will continue for the balance of this year.

Clearwire ended the second quarter with just over 4,060 subscribers across 50 markets, 54% year-over-year subscriber growth in combination with strong domestic ARPU gains of more than $2.50 for the quarter, led to consolidated revenue growth of 65% in Q2. During the quarter, we also succeeded in acquiring more spectrum; our key strategic advantage in deployment of a nationwide wireless broadband network.

Our Spectrum Holdings now stand at approximately 15.8 billion megahertz POPs of spectrum in the US covering more than 250 million people. Furthermore the spectrum in European markets covers approximately 200 million people, giving us one of the largest portfolios of spectrum that is specifically identified by the mobile WiMAX standard. With the closing of the combination with Sprint, our domestic spectrum holdings will substantially increase to more than 42 billion megahertz POPs of spectrum.

You may have seen recent reports with the International Telecommunication Union or ITU recently approved the technical requirements for the next generation mobile broadband technology which the ITU cause IMT-Advanced, more commonly referred to as 4G. It is significant to note, that the ITU has recommended that 4G technology needs at least 40 megahertz's of spectrum and preferable up to after 100 megahertz's of spectrum in each market, irrespective of the frequency used, in order to provide sufficient channel width to enable the data throughput that 4G services will demand.

Importantly, after closing our transaction with Sprint, our spectrum position will exceed the high end of the ITU recommended range in most markets across the country, making our 4G spectrum position the best in the US for the delivery of 4G services.

In contrast, some of our largest competitors are talking about attempting to the play 4G services on 20 or 22 megahertz's of recently acquired spectrum, since as one of them has recently stated clearing legacy technology from PCS and cellular spectrum can be a slow process and using narrow slivers of spectrum for LTE, limits data rates and the number of customers that can be supported on the network. A number of incumbent cellular operators have made clear that the key to delivering wireless bandwidth is spectrum.

One large domestic operator is on record within the past couple of months saying that, greater spectrum availability will translate into faster broadband access as demand for that service continues to grow. Mobile operators in this country have already spend more than $50 billion on spectrum since 2000, at auction and appears that they still may not have an adequate spectrum available for 4G services.

With the combination of our spectrum assets with Sprints we will be uniquely positioned to deliver next-generation wireless services with more than 100 megahertz's of spectrum in most markets across the country.

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

Perry Satterlee

Thank you, Ben. We are very pleased with the development progress in our first four WiMAX markets. As of the end of July, we have approximately 1.2 million POPs on air and operating in Portland. With this progress, we are in a great position to be able to launch the market by the end of the year, but as Ben mentioned earlier, this is based on a timely close of the Sprint transaction and whether we choose to secure additional financing in the interim.

The appointment of the remaining parts in the additional three WiMAX markets, Atlanta, Las Vegas, and Grand Rapids are also on track. Our engineering team is currently testing the core elements of these networks utilizing the important lessons learned from the early stage testing we completed in Portland. We have approximately 1,250 sites under development in our first four WiMAX networks. Including what we have on year-to-date, and what we have in active development, our total site portfolio is nearly 10,000 sites.

This is approximately one-half of the total sites expected to be on air by the end of 2010. Just to put this number in context, it is approximately three times the total number of sites that Nextel Partners had when I left to join Clearwire. We believe that our progress with our WiMAX market, together with the successful integration planning that we are accomplishing with our colleagues at Sprint represent the considerable leap forward in the establishment of WiMAX as a dominant next generation technology for mobile broadband services.

We have built significant momentum behind WiMAX during the last six months, and have determined that accelerating the upgrade of our pre-WiMAX market makes the most sense for the business and for our customers. By starting the upgrade process now, we currently expected the bulk of our pre-WiMAX markets will be upgraded to mobile WiMAX by the end of 2009.

By quickly accelerating the upgrade of existing markets to mobile WiMAX, we will be able to offer a new more robust product set to improve our customer's experience. We believe expanding the focus of the business from our current largely fixed offering to a highly mobile wireless internet experience is clearly the largest growth opportunity that exists in today's market.

As an example of this opportunity, Verizon and AT&T reported in their second quarter results that the growth in wireless data comprised approximately 60% to 70% of total wireless service revenue growth for each company. While we will certainly continue to deliver great residential services, Clearwire is having the mobile wireless arena in an industry changing way, by delivering through broadband to mobile consumers from a single low cost network.

In line with our previously stated priorities, and understanding that second quarter has historically been a slow growth quarter for broadband, we moderated our new residential subscriber growth rate and are shifting our focus to the deployment and upgrade of our mobile WiMAX markets. To that end, we reduced our second quarter sales and marketing spend by over 20% from the same quarter last year, and by almost 30% from the first quarter of 2008.

As a result, consolidated net subscriber additions in Q2 were 80,400. This brings the total number of subscribers to 461,000 which represent a 54% subscriber growth rate from the second quarter of last year. As we discussed during last quarter's earnings call, we expected churn to increase through the second quarter as we entered a period of seasonally high voluntary churn, and as we continued to operate in a challenging macroeconomic environment.

One symptom of the broader economic issues facing the American consumer is that, card credit default rate have increased to levels at/above the peak reach during the 2001 recession. This has had an impact on our business which relies primarily on unabated credit card and billing and collection for service fees. Domestic churn was 2.3% for the quarter, which is up from 2% last quarter and 1.7% during the same period in 2007.

We are experiencing the same seasonal upswing in voluntary churn that has occurred in previous years which is driven in part by the typical pattern of customers moving at the end and the start of a school year. Consolidated churn in Q2 was 2.6% compared with 2.2% last quarter, and 2% during the same period in 2007. We expected consolidated churn to rise in the second half of the year as we dedicate fewer financial resources to the existing markets in anticipation of the WiMAX upgrade and as we continue to navigate the challenging consumer credit environment.

While return is not as low as the current wireless competitors, it is lower than churn for the cable and DSL competitors which analyst have estimated will be in a range of 2.7% to 3.5% for 2008. We believe the unique attributes of our current product set will enable us to remain at churn levels this fall and this comparable range until we begin offering the differentiate set of mobile WiMAX services.

In Q2, consolidated ARPU was a record high of $39.28 which is an increase of $1.35 from the same period 2007 and a sequential quarterly increase of $2.42. Both year-over-year and sequential ARPU growth were driven by the continued penetration of our VoIP and PC Card services. Additionally, the strong growth in ARPU is propelled by the transition of subscribers added during the holiday promotional period to pull price rate plan.

We believe our long standing emphasis on pricing stability, premium plan loading, and the approved news of promotional offers has pushed our ARPU upwards while the pricing strategies at some of our larger competitors has led to a decline in theirs. Our progress in marketing multiple services to our customer's should allow to maintain or increase ARPU in our existing markets as we begin the mobile WiMAX upgrade process.

We see an opportunity to strengthen ARPU through increased penetration of multiple services for existing customers which will contribute to improved margins and set the stage for the multiple services offerings of mobile WiMAX model that we envisioned for Portland and beyond.

Consolidated CPGA for Q2 was $404 which is up slightly from the $393 last quarter, and down significantly from the $471 during the same period last year. The year-over-year improvement in CPGA is illustrative of our efforts during the last several quarters to drive efficiency and profitability in our operating markets. CPGA for the domestic business declined slightly on a sequential quarterly basis in Q2, and we expect a continued trend of lower overall customer acquisition spending in our pre-WiMAX markets for the remainder of the year.

As we prepare for the launch of our mobile WiMAX markets, we expect an increase in spend as we build distribution channels to begin to create awareness in the markets. As we have experienced in previous quarters where we have launched new markets, these expenses are not offset by corresponding production process and as such they contribute to a higher CPGA before and through the launch period.

Our initial 25 market continue to improve across multiple performance metrics. It is important to note that all 25 markets in this group were market EBITDA positive in Q2. The market EBITDA margin of the group was 34% in Q2, which is up from 21% in Q1, and from 5% in the second quarter of 2007. This rapid margin increase during the past year has been significant, and while we continue to expect to grow the initial market EBITDA margin going forward, we do not expect that the increases would be of the same magnitude over the last two quarters.

CPGA in the initial markets was $329 in Q2, compared to $343 last quarter, and $400 in the second quarter of 2007. ARPU in these markets grew to $38.56 in Q2, compared with $36.90 last quarter, and $37.99 in the second quarter of 2007.

In the past, we have referred to these initial 25 markets as our blueprint for our operating markets to achieve profitability. This statement was amplified in the second quarter, as for the first time our 46 domestic operating markets are market EBITDA positive as it grew.

This is an important milestone for Clearwire and our continued demonstration of the scalability of our business model. We believe it bodes well for the continued operating margin improvement as we upgrade these markets and graduate to a larger mobile product set and a larger target market in the mobile WiMAX world.

As we discussed earlier, the penetration of additional service is critical for ARPU emerging growth in our operating markets. During Q2, we continue to make good progress with our VoIP offering. VoIP sales as a percentage of residential broadband sales grew from 10% last quarter to approximately 15% in Q2.

As we discussed during last quarter's earnings call, we have seen positive initial progress with our PC Card offering, especially in the take ways of the combined residential and mobile service. Given that we did not expect the availability of this expressed card form factor until late Q2, early Q3, we limited PC Card marketing and distribution, while maintaining sales at a consistent 5% of residential broadband additions in the second quarter.

The initial quantities of the express card began to hit the market in early July and since their arrival, we have seen a noticeable uplift in PC Card sales. With the availability of this form factor, we expect that the efficiency of our sales and marketing efforts around PC Card will steadily improve. As with our VoIP service, we see a tremendous opportunity with the PC Card to drive multiple services into our new and existing customer base.

Our demonstrated ability to sell multiple products to our customers, both at the point sale and through existing customer relations will be leveraged further in the coming quarter as we continue to focus on improving margins.

Now, I would like to turn it over to our Chief Financial Officer, John Butler.

John Butler

Thanks, Perry. Its been highlighted at the top of the call and as we have been discussing with you for the past several quarters, our consolidated financial results for Q2 reflect the results of our focus on driving profitability rather than emphasizing top line growth as we prepare to close the Sprint transaction.

On a consolidated basis, service revenue for the second quarter increased 65% to $58.6 million, up from $35.5 million in the same quarter of '07. The increase was primarily driven by a 54% year-over-year increase in our subscriber base which has grown to 461,000 from 299,000 at the end of Q2 '07.

Also driving higher service revenue was the continued growth in ARPU. As Perry mentioned, ARPU rose to a record $39.28 for Q2, compared to $37.93 for the same period in 07'. Cost of services expenses which represent the direct operating cost by markets, market tower rents, and direct internet access cost increased to $42.2 million in the second quarter of '08 from $23.3 million at the end of second quarter '07.

This increase is driven by the significant number of sites that have complete the acquisition, zoning, and permitting phase, or what we call, AZP, and are under lease but waiting for our both materials to be installed for new market launches. Specifically, we now have almost 2500 sites and service and producing revenue. Over 3200 sites through the AZP phase, and in various stages of construction they were paying red-on but our markets, so we have have not yet turned up.

Gross margin on sequential basis increased modestly to 28% in Q2 '08 from 26% in Q1, and decreased as compared to 34% in the same period last year for the reasons just mentioned. Our SG&A expenses were $94.8 million for the second quarter, which is slightly higher then the $87.4 million spend in Q2 '07. The largest component of the $7.4 million year-over-year increase with customer care cost for our larger subscriber base across more markets.

On a sequential quarter basis however, our SG&A was approximately $4 million lower then the previous quarter. This reflects our continued focus on cost containment in the areas of sales and marketing and corporate overhead expenses. As we have slowed our subscriber growth in anticipation of upgrading markets to our mobile WiMAX network in 09'. We ended the second quarter with approximately 1,821 employees or partners as we call them. EBITDA for the quarter was a $117.7 million loss, compared to an EBITDA loss for the same quarter last year of $90.6 million.

When we adjusted non-cash items such as stock compensation expense, non-cash total rent, non-cash spectrum lease expenses, input Sprint transaction expense, our adjusted EBITDA loss for the quarter was $75.3 million versus $70.2 million in 2Q '07. On a sequential basis, this marks the third quarter in a row, where we have seen our adjusted EBIDTA losses narrow, as we are highly focused on driving profitability in the existing markets.

Looking ahead, Clearwire continues to be an asset intensive business, consistent with our experience of a cost cellular, Nextel and Nextel Partners, as our network footprints expands and new markets open, our direct costs in new markets are spread over a small customer base, and both new customer acquisition costs and new market development expenses increase.

This flows to our P&L, when new market launches begin again, we expect our losses to increase until the new markets begin to mature. This is a same pattern we have seen in our existing pre-WiMAX market, and that all wireless carriers have faced during the buildup phase. Second quarter net loss was a $199.1 million compared to net loss of $118.1 million in the same quarter of '07. This included other than temporary impairment loss on investments, of $27.9 million in the second quarter of '08, in recognition of decline in value of certain auction rate securities.

We also reported transaction related expenses of $10.2 million in the second quarter of '08, related to our pending Sprint transaction. For a review of six month year-to-date financial highlights, please refer to today's press release, as well as, to our second quarter 10-Q, that will be available within the next two business days.

Moving to capital expenditures. Capital expenditures for Q2 totaled $62.3 million as compared to $90.2 million in the second quarter of last year. During the quarter just ended, approximately $60 million was spent on the domestic business, and of that about two/third will spent on the network and site development, approximately 14% on CPE, and the balance on IT, billing and facilities.

Now just move to our Initial Markets, our initial 25 markets posted record market EBIDTA growth for the quarter driven by service revenue which increased by 25% to $26.5 million in Q2 as compared to $21.2 million for the same period in 2007. Gross margin increased slightly to 77% for the quarter, up from 76% in Q2 last year. The initial markets reported market EBIDTA of $9.1 million and a market EBIDTA margin of 34% for Q2, representing a 13 point improvement in margin, compared to the first quarter.

It also represented a 29 point improvement over the 5% market EBIDTA margin in Q2 '07. This strong growth and profitability for the initial markets helped reach another key milestone in the second quarter. The initial markets effectively turned free cash flow positive as their operations more than covered the ongoing CapEx needs in the initial markets and generated excess cash flow back into the core business. As you heard each of us say today, the financial result of our 25 initial markets reflect positively on the replicable and scalable nature of our business. What is interesting is that these results have been achieved primarily with only one product our residential modem.

With the transition of mobile WiMAX and all of the network and device ecosystems will offer in terms of improved performance, expanded products and greater mobility for home and way usage. We believe our results both in terms of customer adoption and market profitability should improve significantly. We are already beginning to see it with early results from our VoIP and PC Card services as Perry mentioned.

Let's move to the balance sheet. As we mentioned several times already until the Sprint transaction is completed, we are focused on moderating our cash uses. We ended June 30 '08 with approximately $528 million in cash and short-term investment. We are focusing our spend until closing on our new WiMAX network deployment while we continue integration planning throughout the enterprise.

Our transaction with Sprint and strategic investors will bring in an additional $3.2 million in cash at closing. Our spectrum holdings will nearly triple. Following that infusion, we are well positioned to focus on rapid nationwide network deployment while looking to raise future capital opportunistically, when the financial markets improve.

Given the large increase in our spectrum portfolio on closing and significant capital infusion, we believe we will be available to tap the debt markets on better terms, once the capital markets return to more historical norms. We continue to target our previously stated 2008 goal for revenue in the range of $205 million to $215 million. With respect to CapEx, we expect to end the year well below the $275 million to $290 million we originally targeted.

We are now expecting CapEx in the range of $220 million to $240 million, although this remains subject to the timing of the closing of Sprint transaction and whether we chose to secure additional financing in the interim. Given our decision to significantly lower marketing spends and direct those resources towards accelerating conversion of existing markets to mobile WiMAX, we did not expect to add materially to our total subscriber base over the remainder of this year.

We currently have covered POPs of $16.8 million and when we launch our first four WiMAX markets, we expect to e at approximately $22 million covered POPs. We remain highly focused on a successful closing and integration of Sprint transaction which we believe will put us in an excellent position to quickly accelerate growth towards of longer term goals.

With that, I will turn the call back over to Ben.

Ben Wolff

Thanks, John. We recognize that there is quite a bit of anticipation and interest surrounding our pending transaction with Sprint and the launch of our first mobile WiMAX market. The upcoming $3.2 billion cash investment at an investment price of between $17 and $23 per share, coupled with a best-in-class spectrum position will allow us to aggressively pursue the exciting growth opportunities ahead for the new Clearwire.

We plan to offer communication services that are both competitive with and complimentary to today's mobile and wireline and voice and data services, all from a single low cost mobile WiMAX network, delivering four times the performance for one tenth the cost of legacy wireless networks.

We believe the foundation we have built, demonstrates Clearwire has a successful business model, which shows a clear path to profitability and positive cash flow. By transforming our business to deliver a robust suite of wireless broadband services to consumers, we believe we are on the right path to build tremendous long-term value for our shareholders.

With that, we will be happy to take your questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Simon Flannery of Morgan Stanley. Please proceed.

Simon Flannery - Morgan Stanley

Okay. Thank you. Good afternoon. If we could focus on the churn number for a second, have you been able to get any analysis from your customers on exactly what it is, how much of this is due to seasonality, how much is due to the economy or any other issues going to cable modem or whatever because the speed is not, what people are looking for some of the things we have seen in the DSL arena that I think mobile WiMAX will certainly address on some level?

Then the clarification you gave some revenue guidance, you gave some CapEx guidance. Can you help us to think about OpEx in the second half of the year, I think you talked about some of the initiatives you are taking. How much of a drop might we see in OpEx between first half and second half? Thanks

Perry Satterlee

Okay. Simon, this is Perry. When you look at some of the detail around the churn, when you look at the voluntary churn as it was up slightly in second quarter and we have historically seen a drop in the fourth and first quarter. However, the majority of our churn is driven primarily by the non-pay issue.

Really we have launched it as a parallel credit card to default rate, as a parallel the mortgage crisis and everything else, and it has risen and we would expect that as we end towards this economic cycle we will continue to follow that. If that changes, so will our churn rate.

Simon Flannery - Morgan Stanley

Are you changing your credit standards or?

Perry Satterlee

We have changed our credit standards. We did that in the first quarter of 2007 and we continue to on a market-by-market basis, where we have some geographies of the US have had higher churn rates. We continue to ratchet those up on a monthly and quarterly basis.

Simon Flannery - Morgan Stanley

Okay, great.

Perry Satterlee

Then on your OpEx question, John, could you respond to that?

John Butler

Sure. We are obviously focused on cash and OpEx and I would say, between first quarter and second quarter on the domestic side of the business, we dropped our OpEx about $24 million, international stayed about the same. We had some great spectrum opportunities, they were up over what we would expected, but remain lower than the prior quarter.

So net-net for the most recent quarter we were $24 million lower in terms of burn rate than the prior quarter. We have adopted a number of steps and expect that burn rate to continue to drop over the coming quarters, particularly given some of things we done in international and elsewhere.

Simon Flannery - Morgan Stanley

Okay. Anymore specifics, I mean is this 24 a quarter could drop from Q2 to Q3, and Q3 to Q4, or is that too much?

John Butler

Simon, I do not think we have given that level of guidance at this stage and probably are not prepared to do so. Needless to say, we have adopted a number of steps that will continue to drop the burn rate in a meaningful way over the next couple of quarters.

Simon Flannery - Morgan Stanley

Okay, thanks.


Your next question comes from the line of Rick Prentiss of Raymond James. Please proceed.

Rick Prentiss - Raymond James

Hi, good afternoon. Questions, couple of questions for you. First, with the acceleration, I am trying to get the bulk of your pre-WiMAX moved over to mobile WiMAX by the end of '09, couple of questions on that. First, can you walk us through what exactly has to be done in the network?

Second, what kind of cost do you think it would take OpEx and CapEx wise to make those changes and will you accelerate or force the subscribers to move over or it will be more natural, as far as getting them move from pre to mobile WiMax equipment?

Ben Wolff

Alright, thanks Rich. In most of our markets we are going to be focused on doing a WiMax overlay while and that really means is being able to keep our experience system up in operating while we overlay mobile WiMax technology on top of the network infrastructure that we have already build. That will obviously involve less in the way of CapEx and OpEx than if you were doing a Greenfield start up as we are in Portland, Atlanta, and all the new WiMax markets.

So we have not given and I think today we are not prepared to give specific guidance on what the exact cost will be associated with the conversion or the upgrade. We will look at providing with some more detail on that in the future, as we get closure to that point in time. However, it is a fraction of the cost of doing a Greenfield build.

In terms of hat we do with our customers again the intention is that we will allow customers to continue to use the Nextel net, our experience equipment if they have. Not force the transmission that could result in premature churn. Instead, as the churn occurs on the natural course with experienced network we will decide at what point in the future it make sense to no longer support that network from an OpEx perspective and take that network down.

However, one of the real beauties of the transaction with Sprint as it gives us enough spectrum debt in almost every market that we are in, to be able to really operate the network side-by-side.

Rick Prentiss - Raymond James

Now I assume that means the overlay putting in a new base station at the bottom, you need more antennas up on the towers stood and have a different signal, or can you use the same antennas?

Ben Wolff

We will add antennas and also a small footprint gear at the base of the tower.

Rick Prentiss - Raymond James

Okay, next question for you. John, you were talking about all of the actually it was 3200 sites that you have already got ready to go with the zoning and permitting and planning and was it AZT, AZP or ATP?

John Butler

Sure. Acquisitions, zoning, and permitting, right.

Rick Prentiss - Raymond James

There you go. Are you paying full lease expense and as you said, you are paying rent, but have you just reserve spot on the towers, just trying to think if there is going to be a higher expense tick up when you actually, physically put the equipment on there? A side question is, how much should we expect the mobile WiMAX equipment to cost on a per cell site per tower basis?

John Butler

So the 3200 towers that I mentioned are, we are paying full build-on and you will not see an expected increase in the rent rate on those towers.

Rick Prentiss - Raymond James

As far as CapEx, as far as when you start putting the equipment in at those 3,200 sites, how much should we expect?

John Butler

Those would be new WiMAX sites. So those materials there run about $50,000.

Rick Prentiss - Raymond James

Thanks. Then you mentioned a couple of times, I think most of you touched on it obviously, while this is all contingent on the timing of the closing with Sprint possibility of interim financing. As you look at interim financing, what are the gating factors? Is it delays in the closing that would cause you to go that way? Is it the market opening? I am just trying to think what would cause you the jump into an interim financing mode?

Ben Wolff

I think its really being able to take advantage of the opportunity that is in front of us Rick. I mean, when you think about the ability to get these markets converted over sooner to get more of the network build that more quickly, its really just a question of making sure we are being prudent with the cash that we have available to us and not shorting that runway unnecessary. So I think depending on the cost of capital we could see that we could get a good return if we were to take down some capital in the interim and launch these plan sooner rather than later.

Frankly whether the Sprint transaction would happen or not, I mean we are excited about what we are seeing with WiMAX and want to move the business forward. So it is really just a cost benefit analysis of the cost of capital versus, and the timing of the Sprint transaction versus getting going with our plans that we talked about here today.

Rick Prentiss - Raymond James

Okay. Well, sounds like you are ready to play some golf, let's get going.

Ben Wolff

Thanks, Rick.


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

Eric Kainer - Thinkpanmure

Thank you very much for taking my question. First question is about the initial market EBIDTA performance which for the second consecutive quarter is quite frankly, shockingly, a good number. One of the things that is, maybe a curiosity there is that the initial market ARPU is a little touch below the overall ARPU. Is that because of a lower penetration of the VoIP product? If so, are there any programs that up sell the existing base?

Perry Satterlee

Eric, it is Perry. When we found that, I think we have talked about our previous calls that when we actually launched the product with a combined set of services, our penetration rates are higher. So as we go back into the existing markets with the older basis, the take rate is not as high as it is on new launched market. So that is your first question.

The second question, are we actively promoting it to the base? Yes we are actively, as we now have the express card form factor, we actively go back and market our base very aggressively for both he VoIP and the PC card offer.

Eric Kainer - Thinkpanmure

Okay, great. Let's see, next question is about the availability of dual and tri-mode devices, obviously, for the post merger network. Can you give us any sense of what the timeline looks like for those devices?

Ben Wolff

There are a number of different manufacturers that are talking to, I believe both us and Sprint about dual-mode and tri-mode devices. I believe we will see some of the first devices that are dual-mode towards the end of this year. Then we will see a larger assortment of devices in the first half of '09. As far as we are concerned right now, we do believe there will be dual-mode devices towards the end of this year.

Eric Kainer - Thinkpanmure

Excellent. Thank you. The last topic I really wanted to touch on is really around your retail/wholesale strategy. So obviously, post merger you can not talk now about a lot of things specific to Sprint. However, I believe you probably can give us a little bit of insight as far as your thinking, as far bringing on other wholesale partners? I was wondering whether you have had meaningful conversations relating to that? I would imagine there are some people who've come to you with some ideas about ways to launch what is effectively a WiMAX MVNO?

Ben Wolff

So as you pointed out, I mean Sprint is expected to be a wholesale partner of ours. Comcast and Time Warner and Bright House obviously, wholesale partners as well. So we have got a number of wholesale partners that will start off with as part of our transaction. In terms of our willingness to, and interest level on having other wholesale partners, we are absolutely open to it.

As you can appreciate, we typically do not talk about discussions that we have had or things that are just underway without actually having something baked and ready to present it on in a final form. So I will respectfully beg off on answering the question about a, specific conversations that we are having.

Eric Kainer - Thinkpanmure

Okay. Thank you and good luck.

Ben Wolff

Thank you very much, Eric.


Your final question will come from the line of Sid Parakh of McAdams Wright Ragen. Please proceed.

Sid Parakh - McAdams Wright Ragen

Good afternoon. I just wanted to touch upon the revenue guidance, for 2008 you are targeting revenues of $205 million to $215 million. However, if I look at the first half, you are already at $110 million. What is it driving the revenue run rate lower? Is it lower subscribers or lower ARPU or, a mix of both?

Ben Wolff

No Sid, I think that we retain the original guidance. I mean our expectation is that the subscriber base will largely remain about the same on a go forward basis for the balance of this year until we start the acceleration of the WiMAX sales.

Sid Parakh - McAdams Wright Ragen

Okay. Then can you also give me a sense for your VoIP, Voice over IP penetration is at this point?

Ben Wolff

I am sorry, I broke up.

Sid Parakh - McAdams Wright Ragen

Can you also give me a sense for your Voice over IP penetration?

Ben Wolff

Got it, sure. We have been selling at a rate of about 15%, and we ended the quarter just north of [18,000] VoIP customers.

Sid Parakh - McAdams Wright Ragen

Okay. Then finally, can you walk us through the rationale of maybe accelerating upgrades to existing markets versus in the past way you decided to do it later on?

Ben Wolff

As we look at the performance that we are getting out of WiMAX, and the ability to deliver increase speeds and a greater variety of services to our customers, we think we have got a great opportunity to deploy these WiMAX networks and frankly, without pressing our customers to do so, we provide an opportunity to up-sell them into other types of products and services that we think will do two things.

Number one, have a potential to increase ARPU, also number two, increase stickiness with our customers that reduces churn. So when you start talking about being able to deliver download speed to the home of 4 or 6 megs, compared to the 1.5 or 2 that we are offering today, we think that is a real benefit. When you take a look at the cost to convert existing markets if not a tremendous amount of money, again as I said, if not the same as a Greenfield start up, and we can do it relatively quickly.

So the typical time to build a new market from scratch is anywhere from 12 to 18 months and frankly even the larger more dense and complicated markets that can range up to 24 months as we talked about in the past. To do a conversion of a existing pre-WiMAX market to full mobile WiMAX, we think can take depending on the market 6 to 12 months on average as opposed to that 12 to 24 range. So a lot of good reasons from our perspective to take advantage of the infrastructure structure that we already have.

Sid Parakh - McAdams Wright Ragen

Okay, got it. Then I was just curious, but have you tested these upgrades in a sense that they are easy to implement and there are not any major hurdles there?

Perry Satterlee

We are going to begin the testing of that, but we have similar types of upgrades in our previous slides in this as Ben mentioned earlier in the overlay. So we have a lot of experience in doing.

Sid Parakh - McAdams Wright Ragen

Okay. Then finally, when subscribers do migrate over to the new network, how do the rates change? I mean, are rates expected to go higher or will they be paying what they pay today?

Ben Wolff

It really just depends on what service it is that they are opting for. We believe that with mobile WiMAX services we will be able to provide a wider array of plans and options for customers. They will have more of the ability to pick and choose what features and functionality they want. So, it is tough. I mean, I do not think that we would expect, in fact, I am certain that a customer that has a fixed level of service today that migrates to WiMAX with the same fixed level of service would not be paying more.

At the same time, we will provide other levels of service that they might be enticed to pay us more because it is a different quite quality or service level. So I think that we do say, have a real shot at increasing not only the ARPU on a individual RGU basis but also we have the opportunity to sell additional products and services into the home once we deploy mobile WiMAX.

Sid Parakh - McAdams Wright Ragen

Okay. Thank you.

Ben Wolff

Thank you, Sid.


That does conclude the question and answer session. I will now turn it back to management for closing remarks.

Mary Ekman

Thanks everyone for joining us today. That concludes our call.


Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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