Can Clearwire escape financial doom?

While Clearwire added 1.23 million new subscribers in the third quarter of 2010, its operating expenses continued to dwarf its revenues and the company could go bust soon without new capital, the company acknowledges.

Let's start off with some good news: Clearwire has made significant subscriber additions since last year, as its 1 million retail subscribers and 1.8 million wholesale subscribers total more than five times the 555,000 subscribers the company had one year ago.  The company's revenues have also seen strong growth, as the company has reported $376 million through three quarters of 2010, compared to $195 million in revenues through the first three quarters of 2009.

The state of 4G in 2010

But that's pretty much where the good news ends, as the company's operating expenses have erased whatever gains it's made in operating revenues. Through the first three quarters of 2010, Clearwire has incurred operating expenses of $1.8 billion, a 92% increase from the $960 million in operating expenses that it incurred through the first three quarters of 2009.  On the year, the company so far has incurred a $1.55 billion net loss, which is 87% greater than the $830 million net loss it incurred through the first three quarters of 2009.

The increased operating expenses have come as the company has more than doubled its capital expenditures, increasing from $730 million in the first three quarters of 2009 to $1.95 billion in the first three quarters of 2010.  Clearwire says that the vast majority of capital expenditures were incurred from network build-outs that the company projects will cover every major U.S. market by the end of the year.

The result has been that Clearwire does not expect to see any positive cash flows over the next year and the company says that its cash could be depleted as soon as mid-2011 if it fails to raise any additional capital.  In its third-quarter earnings report, the company said it would save money by letting go of 15% of its workforce and that it would enact plans to raise short-term capital to stay solvent.

Forrester Research analyst Charles Golvin says that Clearwire's cash crunch was somewhat inevitable given its need to spend significant sums of money to build out its network nationwide, especially since the company entered the 4G market without a big preexisting subscriber base like Verizon or AT&T.

"This is just the reality of what happens when you build a new network from scratch," Golvin says. "And people won't want your service if it's not broadly available.  So it costs a lot of money to get your service everywhere."

The two most obvious ways for Clearwire to raise capital will be through either issuing more debt in the form of corporate bonds or more shares for investors to purchase.  Both strategies have obvious drawbacks, as issuing new debt will only increase the company's future financial obligations while issuing new shares will dilute the value of their shareholders' equity. The firm concedes that it might not even be able to enact these measures as its "ability to raise sufficient additional capital in the near and long-term on acceptable terms, or at all, remains uncertain."

The firm is also considering selling off pieces of its formidable spectrum portfolio, which the company has said could support complementary WiMAX and LTE networks.

"We believe that the fair market value of our spectrum portfolio exceeds our outstanding debt limits and that a portion of our spectrum is not essential to our business," the company writes in its third-quarter report.  "We have initiated a process whereby we are seeking bids to potentially sell the excess spectrum assets."

Clearwire and Sprint first formed a joint WiMAX venture back in 2008, when they secured $3.2 billion in total investments from several major tech and communications companies, including Google, Intel, Comcast, Time-Warner Cable and Bright House Networks.  Since then Clearwire has worked to build out a nationwide network that the company projects will span all major U.S. markets and will cover 120 million points of presence by the end of the year.  The majority of Clearwire WiMAX customers get their access wholesale from third-party providers such as Sprint, Comcast and Time-Warner Cable.

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