Clearwire inches closer to LTE deployment, hints spectrum sales could fund future growth

Clearwire Corp. (CLWR) said it plans to begin trialing LTE services in the Phoenix area this fall and that it may tap into its vast spectrum holdings to fund future network growth.
The carrier said its LTE trial will include technology partners Huawei Technologies Co. Ltd. and Samsung Electronics Co. Ltd. for network infrastructure and Beceem Communications Inc. and other partners for chips and other technologies. The trial will include both FDD LTE and TDD LTE technologies.
For the FDD LTE trial Clearwire said it will use 40 megahertz of spectrum in a 20 x 20 megahertz pairing from its 2.5 GHz spectrum holdings that it claims will provide “real-world” network speeds of between 20 megabits per second and 70 Mbps. Verizon Wireless, which is planning to launch commercial LTE services by the end of the year, recently produced a video of its trials in the Boston area that showed network speeds on a personal computer of between 2.8 and 8.55 Mbps. While not naming Verizon Wireless, Clearwire noted that other carriers are using a 10 x 10 spectrum pairing for their LTE networks.
For the TDD LTE trial the carrier said it will use 20 megahertz of spectrum, which is twice the amount it currently uses for its commercial WiMAX deployment. Clearwire claims network speeds for its WiMAX network at 6 Mbps for the downlink and 1 Mbps for the uplink.
Clearwire’s management noted several times during its conference call that while it would begin trialing LTE, it was still very committed to WiMAX and was looking at the developing ecosystem of dual-mode capabilities that could allow it to operate both technologies on its network.
Clearwire noted during its first quarter conference call that it had made arrangements with Intel Corp. to revise an agreement that would allow the carrier to deploy a network technology other than LTE on its network with a 30 day notice. The previous deal tied Clearwire exclusively to WiMAX through early 2012.
Funding growth
Clearwire also reiterated that it was on track to meet its goal of covering 120 million potential customers with its WiMAX network by the end of the year, but that it was now just entering the “steep part of the build curve” where it would be doubling its current network coverage over the next five months. The carrier said it has spent $1.3 billion on capital expenditures during the first half of this year and that it would spend another $1.7 billion to $1.9 billion during the second half of the year. The company ended the second quarter with approximately $2.3 billion in cash and investments.
While not admitting to any difficulties, the carrier’s CEO Bill Morrow did hint that investors should be aware that the difficult part of its deployment was just ahead.
To help fund continued growth into next year, Morrow also said the carrier was looking at possibly selling off some of its 2.5 GHz spectrum holdings. The carrier’s spectrum holdings vary across its markets, but in general are in excess of 150 megahertz in most markets.
Investors questioned whether it was wise to sell something to a competitor that had so much intrinsic value to Clearwire when it might be possible that those competitors might eventually be driven to partner with Clearwire on future network plans should they run into capacity constraints. Clearwire said it was taking all possible scenarios into account and that it would only dip into its spectrum holdings if it made sense financially.
“We are not urgently pressed for time on funding,” Morrow explained, adding that any plans would likely not be looked at until the fourth quarter.
Q2 results
Operationally, Clearwire said it added 722,000 net customers during the quarter, pushing its total customer base to 1.7 million subscribers. The carrier noted that its Q2 growth was dominated by customers added through its wholesale partnerships that accounted for 595,000 net subscriber additions, while its direct additions through its Clear service totaled 127,000 net additions. At the end of the quarter direct customers accounted for 940,000 subscribers of its total base while wholesale customers numbered 752,000 subscribers. The carrier’s largest wholesale partners include Sprint Nextel Corp., Comcast Corp. and Time Warner Cable, though it recently announced new deals with Best Buy Co. Inc. and Cbeyond.
As with its first quarter results, Clearwire noted that its strong wholesale growth included customers that were living outside of markets where it offers WiMAX services and that it was receiving “nominal” revenues from their use of Sprint Nextel’s 3G network. The carrier added that currently just over half of its wholesale customer base resided outside of its WiMAX markets.
This discrepency has lead to the carrier’s direct customer base contributing to a “vast majority” of its subscriber revenues. The carrier reported that revenues had nearly doubled year-over-year to $122.5 million during the second quarter, with average revenue per user from its direct customer base rising more than 5% to $41.58.
Investors expressed some concern over Clearwire’s reported 3.2% customer churn rate during the quarter, which was an increase from the 2.8% it posted in the second quarter of 2009. The carrier noted that churn was still higher than it wanted, but that the number was tough to control as customer perception of network coverage was impacting the result.
“Churn is driven by network perception and our network is still under construction,” explained Michael Sievert, Clearwire’s chief commercial officer.
Network build out costs continued to pressure the carrier’s bottom line as net losses climbed from $73.4 million in 2009, a loss of 38 cents per share, to $125.9 million this year, a loss of 61 cents per share.
Clearwire did note that it expects to surpass the 3 million subscriber mark by the end of the year and that it was reducing guidance on cost per gross acquisitions from the mid-$550 range to the low $500 range for the rest of the year.