Clearwire Corporation, a leading provider of wireless broadband services and operator of the first 4G mobile broadband network in the country, today reported its financial and operating results for the third quarter of 2010.
“This quarter we saw continued strong demand for the nation’s first 4G mobile broadband service, which drove a record 1.23 million new subscribers for an ending third quarter subscriber base in excess of 2.84 million. Due to this phenomenal growth, we now believe we will end this year in excess of 4 million total subscribers, nearly doubling our original 2010 expectation of just over 2 million,” said Bill Morrow, Clearwire’s CEO.
“In the last few days Clearwire launched the first 4G network in New York, which is now the world’s largest 4G market. And as of today our domestic 4G network reaches areas of the U.S. that cover approximately 100 million people,” continued Morrow. “In addition, we have announced planned December launches for San Francisco and Los Angeles, and we continue to expect to cover up to 120 million people with our 4G network by year end. While we continue to exceed our subscriber and operational goals, we have not yet secured future funding and prudence dictates that we take appropriate cash conservation steps to reduce costs. We continue to pursue all options for future funding including debt, equity or a potential sale of excess spectrum or other assets, and we remain cautiously optimistic that we will resolve our short-term funding needs in the near future. We continue to believe that our unmatched spectrum portfolio and our all-IP based network will keep us extremely well positioned in the dynamic and burgeoning market for mobile data.”
Clearwire ended the third quarter with 2.84 million total subscribers, consisting of 1.01 million retail subscribers and 1.83 million wholesale subscribers. This marks the first time the Company’s wholesale subscriber base has eclipsed its retail business. During the third quarter, Clearwire added 1.23 million total net new subscribers, including 150,000 retail additions and 1.1 million wholesale additions. This dramatic increase in wholesale subscribers includes users of multi-mode 3G/4G devices in areas where the Company has not yet launched 4G service, but from whom it currently expects to receive nominal revenue. As of September 30, approximately 45% of the Company’s wholesale subscribers resided outside of Clearwire’s launched markets.
At the end of the third quarter, Clearwire had launched its network covering areas where approximately 71 million people reside globally, including international and domestic pre-4G coverage. The Company’s domestic 4G coverage in launched markets reached approximately 66 million people as of the end of the third quarter. As of November 1, the Company’s global network coverage in launched markets reached areas where approximately 87 million people reside, and the Company’s domestic 4G coverage reached approximately 82 million people in launched markets. Including areas not yet commercially launched, as of November 1 Clearwire’s domestic 4G network now reaches areas of the U.S. where approximately 100 million people reside.
Revenue for the third quarter was $147 million, a 114% increase over third quarter 2009 revenue of $68.8 million. Consolidated average revenue per subscriber (ARPU) was $21.19, composed of retail ARPU of $42.74 and wholesale ARPU of $4.46 in the third quarter. While wholesale subscriber growth remained robust, wholesale revenue reflects the impact of nominal pricing for the 45% of wholesale subscribers outside of the Company’s launched markets with no or little usage of the Company’s network. Wholesale revenue in the third quarter was $16.5 million and is based upon minimal wholesale ARPU and usage assumptions due to unresolved issues around wholesale pricing. The issues relate to the application of existing wholesale pricing provisions to certain types of 4G devices. Once these issues are resolved, the Company expects to receive up to approximately $17 million in potential additional wholesale revenue from these 4G devices for the three month period ending September 30, 2010.
Consolidated cost per gross subscriber addition (CPGA) was $92 in the third quarter, composed of $505 CPGA in the retail business and no CPGA in the wholesale business. Consolidated monthly subscriber churn was 2.3% in the third quarter, consisting of 3.5% in the retail business and 1.3% in the wholesale business.
The third quarter 2010 net loss attributable to Clearwire was ($139.4) million, or ($0.58) per basic share.
The third quarter 2010 adjusted earnings before interest, taxes, depreciation and amortization and non-cash expenses related to capital assets (adjusted EBITDA) loss was ($330.7) million, as compared with third quarter 2009 adjusted EBITDA loss of ($193.8) million and second quarter 2010 adjusted EBITDA loss of ($363.2) million.
2010 Business Outlook
Clearwire continues to expect to reach up to 120 million people with its 4G network by the end of 2010. Within this footprint, services are expected to be offered under both the CLEAR® brand name, and/or those of the Company’s strategic wholesale customers which will vary across individual markets.
The Company now expects that its total subscribers will be above 4 million by the end of 2010, including a portion which may be out-of-market wholesale subscribers from whom the Company expects to receive nominal revenue. This growth has doubled from the 2 million projected subscriber target anticipated at the start of the year.
The Company now expects retail CPGA to be in the mid $400’s for the full year 2010, an improvement from the previous guidance of retail CPGA in the low $500’s for the full year. In addition the Company now expects average retail ARPU to be above $42 for the full year 2010, an improvement from its previous guidance for retail ARPU to be over $41 for the full year.
The timing and extent of Clearwire’s plans are subject to a number of conditions, including the performance of its network in its launched markets and access to additional funding. The Company now expects its targeted cash spending to be approximately $3.2 to $3.4 billion in 2010 and includes the previously disclosed capacity augments driven by faster than expected subscriber loading in certain markets.
Additional Funding; Cash Conservation Measures
The Company is actively pursuing a number of options to resolve its need for additional capital. The Company is in discussions with a number of its major shareholders and other third parties about a number of options, including potential strategic transactions, additional debt or equity financings and/or asset sales. While the Company is cautiously optimistic it will resolve its short-term funding needs in the near future, there can be no assurances. Thus, it is implementing a series of significant cash conservation measures to reduce costs, including: a substantial reduction in sales and marketing spending, a suspension of additional retail channel market launches of the CLEAR-branded operations in select markets including Denver and Miami, delays in the introduction of CLEAR-branded smartphones, a substantial reduction in the contractor workforce, a 15% reduction in the number of employees, and the discontinuation of development activities for sites not required for its current build plan. The Company currently has thousands of sites in various stages of planning and construction beyond its current build plan, and it intends to suspend zoning and permitting in a portion of those sites until such time as additional funding becomes available. These contemplated initiatives are intended to result in potential cost savings of between $100 million to $200 million in 2010 and again in the first half of 2011.
LTE 2X Technology Trials
In August, Clearwire announced it would test coexistence scenarios for WiMAX and LTE in Phoenix using both Frequency Division Duplex (FDD) configurations using 40 MHz of spectrum paired in 2 x 20 MHz contiguous channels (“LTE 2X”), and Time Division Duplex (TDD) configurations using 20 MHz of spectrum. Initial tests have recently confirmed that the Company’s LTE 2X trial network achieved peak download speeds on commercially available equipment and devices in excess of 90 Mbps and upload speeds of more than 30 Mbps. The tests, which are anticipated to be concluded in the first quarter 2011, continue and are expected to confirm the unprecedented speed and capacity potential using Clearwire's unmatched spectrum position.
Other Results of Operations
Cost of goods and services and network costs for the third quarter 2010 increased 148% to $241.3 million compared to $97.5 million for the third quarter 2009, primarily due to an increase in tower lease and backhaul expenses resulting from the current and expected launches of new 4G markets and an increase in write-offs and obsolescence and shrinkage allowances described below. During the three months ended September 30, 2010, the Company incurred approximately $10.8 million of expense related to an increase in its obsolescence and shrinkage allowance, $10.8 million related primarily to impairment charges on international assets and $9.4 million related to cost abandonments associated with market redesigns.
Selling, General and Administrative (SG&A) expense for the third quarter 2010 increased 71% to $248.3 million compared to $145.3 million for the third quarter 2009. The increase is primarily due to higher sales and marketing and customer care expenses in support of the launch of new markets, as well as additional resources, headcount and shared services that Clearwire has utilized as it continues to build and launch its 4G markets.
Higher network expansion activities led to an increase in Capital Expenditures (CapEx) to $763 million in the third quarter 2010 and $2.1 billion for the nine months ended September 30, 2010 from CapEx of $410 million for the third quarter 2009. Cash spent on operations, CapEx and spectrum was $2.8 billion for the nine months ended 2010. This was offset by net proceeds from financing activities of approximately $336 million in the nine months ended September 30, 2010, primarily generated from the proceeds of the rights offering and the final closing of the equity investment initiated in the fourth quarter of 2009. The Company ended the third quarter of 2010 with cash and investments of approximately $1.4 billion invested primarily in U.S. Treasury securities.