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CLWR > SEC Filings for CLWR > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for CLEARWIRE CORP /DE

Form 10-Q for CLEARWIRE CORP /DE


26-Oct-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis summarizes the significant factors affecting our results of operations, financial conditions and liquidity position for the three and nine months ended September 30, 2012 and 2011, and should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this filing. Forward-Looking Statements
Statements and information included in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "believe," "expect," "anticipate," "intend," "estimate," "evaluate," "opinion," "may," "could," "future," "potential," "probable," "if," "will" and similar expressions generally identify forward-looking statements.
Forward-looking statements in this Quarterly Report on Form 10-Q represent our beliefs, projections and predictions about future events. These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievement described in or implied by such statements. Actual results may differ materially from the expected results described in our forward-looking statements, including with respect to the correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of publicly available information relating to the factors upon which our business strategy is based, or the success of our business. The factors or uncertainties that could cause actual results, performance or achievement to differ materially from forward-looking statements contained in this report are described in Part II, Item 1A, Risk Factors, and elsewhere in this report.

Overview

We are a leading provider of fourth generation, or 4G, wireless broadband services. We build and operate next generation mobile broadband networks that provide high-speed mobile Internet and residential Internet access services in communities throughout the country. As of September 30, 2012, we offered our services in 88 markets in the United States covering an estimated 135 million people, including an estimated 133 million people covered by our 4G mobile broadband networks in 71 markets. Our 4G mobile broadband network provides a connection anywhere within our coverage area.

In our current 4G mobile broadband markets in the United States, we offer our services through retail channels and through our wholesale partners. Sprint Nextel Corporation, which we refer to as Sprint, accounts for primarily all of our wholesale sales to date, and offers services in each of our 4G markets. In addition to Sprint and our other existing wholesale partners, we have also recently entered into wholesale arrangements with Earthlink, Simplexity, FreedomPop, Leap Wireless, and Jolt Mobile. We ended the quarter with approximately 1.4 million retail and 9.1 million wholesale subscribers. An amendment of the 4G MVNO agreement with Sprint signed in November 2011, which we refer to as the November 2011 4G MVNO Amendment, provides for unlimited WiMAX service to Sprint retail customers in exchange for fixed payments in 2012 and 2013, so fluctuations in the wholesale subscriber base will not necessarily correlate to wholesale revenue. We are currently focused on growing our revenue by continuing to build our wholesale business and leveraging our retail business, reducing expenses, and seeking additional capital for our current business and to continue the development of our network.

Over the long term, we will need to expand our revenue base by increasing sales to our existing wholesale partners and by adding additional wholesale partners. To be successful with either, we believe it is necessary that we deploy Long Term Evolution, which we refer to as LTE technology, which is currently being adopted by most wireless operators globally as their next generation wireless technology.
We believe that, as the demand for mobile broadband services continues its rapid growth, Sprint and other service providers will find it difficult, if not impossible, to satisfy their customers' demands with their existing spectrum holdings. By deploying LTE, we believe that we will be able to take advantage of our leading spectrum position, which includes approximately 160 MHz of spectrum on average in the 100 largest markets in the United States, to offer offload data capacity to Sprint and other existing and future mobile broadband service providers for resale to their customers on a cost effective basis. Subject to availability of funding, we plan to overlay up to 8,000 existing sites that currently operate on the Worldwide Interoperability of Microwave Access technology 802.16e standard, which we refer to as mobile WiMAX, with Time Division Duplex LTE, which we refer to as TDD-LTE, operating over 20 MHz-wide channels. The initial phase of the overlay,


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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)

anticipated to be completed by the end of June 2013, includes approximately 2,000 sites focused primarily in densely populated urban areas where we currently experience the highest concentration of usage of our mobile WiMAX services. We believe the timing of the completion of the initial phase allows us to better align our capital expenditures with the expected receipt of LTE revenues.Our planned deployment of the initial 2,000 sites by June 30, 2013 will satisfy a LTE prepayment milestone under the terms of our recently amended agreements with Sprint.
The success of our current plans will depend to a large extent on whether we succeed in the following areas: adding new wholesale partners with substantial offload data capacity needs and generating or exceeding the revenue levels we currently expect for the wholesale portion of our business; maintaining our retail base and revenues while continuing to realize the benefits from cost savings initiatives; deploying LTE technology on our network; and raising additional capital. Our ability to satisfy the requirements of our current plans in each of these areas remains uncertain. Given this uncertainty, we regularly review our current plans and other strategic options, and we may elect to pursue new or alternative strategies which we believe would be beneficial to our business and maximize shareholder value.

Liquidity and Capital Resource Requirements

During the nine months ended September 30, 2012, we incurred $1.31 billion of net losses from continuing operations. We utilized $181.7 million of cash from operating activities of continuing operations and spent $73.2 million of cash on capital expenditures in the improvement and maintenance of our existing networks and for the deployment of our LTE network.

As of September 30, 2012, we had available cash and short-term investments of approximately $1.18 billion. On January 27, 2012, we announced the completion of an offering by our operating subsidiary, Clearwire Communications LLC, which we refer to as Clearwire Communications, of $300.0 million aggregate principal amount of 14.75% first-priority senior secured notes due 2016, which we refer to as the 2016 Senior Secured Notes, at an issue price of 100%. On March 15, 2012, we entered into securities purchase agreements with certain institutional investors, pursuant to which we sold shares of Clearwire Corporation Class A common stock, which we refer to as Class A Common Stock, for an aggregate price of $83.5 million, which we refer to as the Purchase Price, and in connection with the sale, Clearwire Communications repurchased $100.0 million in aggregate principal amount of our 8.25% exchangeable notes due 2040, which we refer to as Exchangeable Notes, for a total price equal to the Purchase Price.

On May 4, 2012, we entered into a sales agreement with Cantor Fitzgerald & Co., which we refer to as CF&Co, pursuant to which we may offer and sell shares of our Class A Common Stock having an aggregate offering price of up to $300.0 million from time to time through CF&Co, as sales agent. We received net proceeds of approximately $58.5 million related to this agreement. On July 26, 2012, we announced that we elected to cease further sales under this sales agreement.

Under the November 2011 4G MVNO Amendment, Sprint will pay us $925.9 million for unlimited 4G mobile WiMAX services for resale to its retail subscribers in 2012 and 2013, approximately two-thirds of which is payable for service provided in 2012, and the remainder for service provided in 2013. Of the $925.9 million, $175.9 million will be paid as an offset to principal and interest due under a $150.0 million promissory note issued by us to Sprint. We also expect to receive the final $10.7 million in prepayments from Sprint by October 2012, which will be applied against re-wholesaling revenue in 2012 and 2013, usage-based LTE revenue and usage-based WiMAX revenue in 2014 and thereafter.

As of September 30, 2012, we believe that we had sufficient cash to fund the near-term liquidity needs of our business for the next twelve months. We do not expect our operations to generate cumulative positive cash flows during the next twelve months. Our cash projections are based on the cash and short term investments we had on hand as of the end of the quarter, the ongoing impact of our cost containment efforts and our current LTE deployment plans, including our plan to deploy approximately 2,000 sites by June 30, 2013. They also rely upon assumptions as to the amount of cash we will receive for our mobile WiMAX services from our retail business and from Sprint under the November 2011 4G MVNO Amendment. If any of the assumptions underlying our cash projections prove to be inaccurate, we may be required to raise additional capital to fund our current business during the twelve-month period. Also, we will need to raise substantial additional capital to fund our business and meet our financial obligations beyond the end of the period.

The amount of additional capital we will need in either case, and the timing of our capital needs, will depend on a number of factors, many of which are outside of our control and subject to a number of uncertainties. Our capital requirements will largely


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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)

be predicated on the amount of cash we receive from Sprint for our services beyond the minimum commitments specified in the November 2011 4G MVNO Amendment and our ability to secure commitments from new wholesale partners with significant data capacity needs that generate substantial revenues for us in a timely manner. Each will primarily depend on whether our construction of an LTE network is successful and completed according to the design architecture and deployment requirements of these parties, the extent to which the parties' customers utilize that network, and the level of Sprint's usage of our WiMAX network beyond 2013. Other factors significantly affecting our capital needs include the amount of cash generated by our retail business, our ability to maintain reduced operating expenses and the accuracy of our other projections of future financial performance. Accordingly, any delays in the deployment of our planned LTE network, such as those that would occur if our vendors are unable to meet our planned timelines or we are unable to integrate with Sprint's network in a timely manner, delays in current and prospective wholesale partners' rollout of LTE services that rely on our network or unexpected increases in the costs we incur in deploying our LTE network, which would result if we are unable to secure equipment or services from vendors on the terms we expect or we encounter other unexpected problems with the deployment, may materially increase the additional capital we require for our business.

Whether we will be able to successfully fulfill our additional capital needs in a timely manner is uncertain. We continue to pursue various alternatives for securing additional capital. These alternatives include obtaining additional equity and debt financing from a number of possible sources such as new and existing strategic investors, private or public offerings and vendors; however, we face a number of challenges. Our recent equity financings were dilutive to our shareholders and, with the current trading price of our Class A Common Stock, any additional equity financings could result in significant additional dilution for our stockholders and may not generate the proceeds we need. With our existing level of indebtedness and inability to issue additional secured indebtedness under our existing indentures, additional debt financings may not be available on acceptable terms or at all and, even if available, could increase our future financial commitments, including aggregate interest payments on our existing and new indebtedness, to levels that we find unsustainable. Other sources of additional capital could include, among other things, a sale of certain of our assets that we believe are not essential for our business, such as excess spectrum. However, our ability to consummate a sale of assets that would generate sufficient proceeds to meet our capital needs on acceptable terms in a timely manner is uncertain.

Additionally, as previously stated, we regularly evaluate our plans and other strategic options, and we may elect to pursue new or alternative strategies which we believe would be beneficial to our business. Such changes to our plans could also substantially change our capital requirements in the near and/or long term.
If we are unable to raise sufficient additional capital to fulfill our funding needs in a timely manner, or we fail to generate sufficient additional revenue from our wholesale and retail businesses to meet our obligations over the long term, our business prospects, financial condition and results of operations will likely be materially and adversely affected, and we will be forced to consider all available alternatives.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates used, including those related to long-lived assets and intangible assets, including spectrum, derivatives, operating leases and deferred tax asset valuation allowance.

Our accounting policies require management to make complex and subjective judgments. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, observance of trends in the industry, or information provided by outside sources, as appropriate. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. These factors could have a material impact on our financial statements, the presentation of our financial condition, changes in financial condition or results of operations.


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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)

We have identified the following significant change in our critical accounting estimates during the nine months ended September 30, 2012 as compared to the critical accounting estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Property, Plant and Equipment
A significant portion of our total assets is property, plant and equipment, which we refer to as PP&E. PP&E represented $2.35 billion of our $8.15 billion in total assets as of September 30, 2012. We calculate depreciation on these assets using the straight-line method based on estimated economic useful lives. The estimated useful life of equipment is determined based on historical usage of identical or similar equipment, with consideration given to technological changes and industry trends that could impact the network architecture and asset utilization. Since changes in technology or in our intended use of these assets, as well as changes in broad economic or industry factors, may cause the estimated period of use of these assets to change, we periodically review these factors to assess the remaining life of our asset base. When these factors indicate that an asset's useful life is different from the previous assessment, we depreciate the remaining book values prospectively over the adjusted remaining estimated useful life.
During the third quarter of 2012, based on the LTE equipment vendor selection process and compatibility of existing network equipment, we identified a portion of WiMAX network equipment that we are planning to change or upgrade during our deployment of LTE technology. We concluded that the useful lives of certain WiMAX equipment should be accelerated beginning in the third quarter of 2012. This resulted in the weighted-average remaining useful life of WiMAX network assets to decrease from approximately four years to approximately three years based on the expected date of equipment removal. We will continue to monitor the estimated useful lives of our network assets as our plans evolve. During the first quarter of 2012, as a result of Sprint's recent announcement that it plans to decommission its iDEN network, we evaluated the remaining useful lives of our Network and base station equipment co-located at iDEN sites identified by Sprint to be decommissioned. We concluded that, for certain of the Network and base station equipment at these sites, it is not likely that we would continue to operate our equipment at the current location once Sprint decommissions its site and therefore, we determined the useful lives of the Network and base station equipment at these sites should be accelerated beginning in the first quarter of 2012 from a weighted-average remaining useful life of approximately five years to approximately one - two years based on the expected date of decommissioning.


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               CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)


Results of Operations
The following table sets forth operating data for the periods presented (in
thousands, except percentages).

                             Three Months Ended September 30,        Percentage         Nine Months Ended September 30,        Percentage
                                2012                  2011             Change              2012                 2011             Change
Revenues:
Retail revenues          $        197,215       $       194,789         1.2%        $       601,181       $       560,613         7.2%
Wholesale revenues                116,498               137,162        (15.1)%              351,879               329,579         6.8%
Other revenues                        169                   226        (25.2)%                  393                 1,404        (72.0)%
Total revenues                    313,882               332,177        (5.5)%               953,453               891,596         6.9%
Operating expenses:
Cost of goods and
services and network
costs (exclusive of
items shown separately
below)                            211,540               282,459        (25.1)%              699,756               955,967        (26.8)%
Selling, general and
administrative expense            139,365               176,469        (21.0)%              419,713               569,565        (26.3)%
Depreciation and
amortization                      210,781               165,560         27.3%               573,320               517,674         10.7%
Spectrum lease expense             82,513                77,696         6.2%                243,411               229,137         6.2%
Loss from abandonment
of network and other
assets                              2,588                29,129        (91.1)%               83,305               577,341        (85.6)%
Total operating
expenses                          646,787               731,313        (11.6)%            2,019,505             2,849,684        (29.1)%
Operating loss                   (332,905 )            (399,136 )       16.6%            (1,066,052 )          (1,958,088 )       45.6%
Other income
(expense):
Interest income                       555                   534         3.9%                  1,352                 2,063        (34.5)%
Interest expense                 (139,040 )            (128,596 )      (8.1)%              (414,382 )            (377,133 )      (9.9)%
Gain (loss) on
derivative instruments               (906 )              59,729       (101.5)%                4,895               148,227        (96.7)%
Other income
(expense), net                        137                (1,261 )       110.9 %             (13,414 )                 966          N/M
Total other income
(expense), net                   (139,254 )             (69,594 )      100.1%              (421,549 )            (225,877 )      (86.6)%
Loss from continuing
operations before
income taxes                     (472,159 )            (468,730 )      (0.7)%            (1,487,601 )          (2,183,965 )       31.9%
Income tax benefit
(provision)                       151,749               (10,727 )        N/M                175,138               (28,422 )       716.2 %
Net loss from
continuing operations            (320,410 )            (479,457 )       33.2%            (1,312,463 )          (2,212,387 )       40.7%
Less: non-controlling
interests in net loss
from continuing
operations of
consolidated
subsidiaries                      279,066               395,955        (29.5)%              945,886             1,751,483        (46.0)%
Net loss from
continuing operations
attributable to
Clearwire Corporation             (41,344 )             (83,502 )       50.5%              (366,577 )            (460,904 )       20.5%
Net loss from
discontinued
operations
attributable to
Clearwire Corporation            (172,437 )              (1,289 )        -%                (174,836 )             (19,580 )     (792.9)%
Net loss attributable
to Clearwire
Corporation              $       (213,781 )     $       (84,791 )     (152.1)%      $      (541,413 )     $      (480,484 )      (12.7)%

Revenues

Retail revenues are primarily generated from subscription fees for our 4G and Pre-4G services, as well as from sales of 4G devices. Wholesale revenues are primarily generated from service fees for our 4G services.

The increase in retail revenues for the three and nine months ended September 30, 2012 of $2.4 million and $40.6 million,


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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)

respectively, as compared to the same periods in 2011 is due primarily to growth in subscribers and an increase in equipment revenues as we have discontinued the option for our new retail customers to lease equipment in favor of a purchase-only model under our new no-contract retail offering. Our ending retail subscribers were 1.4 million at September 30, 2012. While we expect retail revenues to remain relatively consistent with the amount recognized in 2011, we continue to focus on maximizing cash flow from our retail business.

Recognition of wholesale revenue during the three and nine months ended September 30, 2012 compared to the same period in the prior year in 2011 changed from usage-based pricing to fixed pricing. Under the November 2011 4G MVNO Amendment, Sprint will pay us $925.9 million for unlimited 4G mobile WiMAX services for resale to its retail subscribers in 2012 and 2013, approximately two-thirds of which is payable for service provided in 2012, and the remainder for service provided in 2013. Of the $925.9 million, $175.9 million will be paid as an offset to principal and interest due under a $150.0 million promissory note issued by us to Sprint. Of the amount due, $900.0 million is being recognized on a straight-line basis over 2012 and 2013 and the remaining $25.9 million is being recorded as an offset to the interest cost associated with the promissory note. As a result, the amount of wholesale revenue from Sprint that will be recognized in 2012 and 2013 will not be impacted by either the number of Sprint's retail customers or by their usage during the period. Wholesale revenue of $116.5 million and $351.9 million during the three and nine months ended September 30, 2012 primarily represents the current period straight-line recognition of the $900.0 million due from Sprint.

Wholesale revenue of $137.2 million and $329.6 million during the three and nine months ended September 30, 2011 is comprised of usage-based fees received from our wholesale partners, primarily Sprint. Wholesale revenue during the nine months ended September 30, 2011 included approximately $15.4 million of a $28.2 million settlement payment, representing the amount allocated to the settlement of 2010 pricing disputes.

Sprint is a significant wholesale customer of our 4G wireless broadband services. During the three months ended September 30, 2012 and 2011, wholesale revenue recorded attributable to Sprint comprised approximately 37% and 40% of total revenues, respectively, and substantially all of our wholesale revenues. During the nine months ended September 30, 2012 and 2011, wholesale revenue recorded attributable to Sprint comprised approximately 36% of total revenues and substantially all of our wholesale revenues. Due to the significance of wholesale revenue from Sprint to total revenues and the impact of changing from usage-based pricing to fixed pricing agreed to in the November 2011 4G MVNO Amendment, we currently expect total wholesale revenues for 2012 to be less than that recognized in 2011. Therefore, in order to grow our revenues beyond the fixed fees for WiMAX services in 2012 and 2013 provided in the November 2011 4G MVNO Amendment, we are focusing our efforts on deploying our LTE network and leveraging that network to add new wholesale partners and to generate usage-based revenue from Sprint under the November 2011 4G MVNO Amendment. Cost of Goods and Services and Network Costs (exclusive of depreciation and amortization)

Cost of goods and services and network costs primarily includes tower and network costs, provision for excessive and obsolete equipment, cost of goods sold and cost of services. Tower costs include rents, utilities, and backhaul, which is the transporting of data traffic between distributed sites and a central point in the market or Point of Presence, which we refer to as POP. Network costs primarily consist of network repair and maintenance costs, rent for POP facilities and costs to transport data traffic between POP sites. Cost of goods sold include the cost of customer premise equipment sold to subscribers, and cost of services include, among other things, costs incurred to provide 3G wireless services to our dual-mode customers.

The change in Cost of goods and services and network costs during the three and nine months ended September 30, 2012 as compared to the same period in 2011 resulted primarily from a decrease in the charges for excessive and obsolete equipment The charges related to the provision for excessive and obsolete equipment were $3.0 million and $58.4 million for the three and nine months . . .

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