Spending Starts to Catch Up to Clearwire

November 5th, 2010 by · 9 Comments

For clwr life has always been a race, but I'm not referring to LTE and WiMAX.  Clearwire's race has always been against itself and itself.  By that I mean the triple competition between how much cash it can raise, how fast it can spend that cash to build out the infrastructure, and how quickly subscribers sign on to use it.  In yesterday's earnings release, we saw awesome subscriber growth, steady spending and building, but a faltering effort to raise money to keep it all going.  And unless they fix that last part, the race will soon end - so they took some drastic actions to give themselves some breathing room.

Net subscribers grew by a very impressive 1.23M, of which some 1.1M came from wholesale partners.  That gives them 2.84M in total, and they now expect to hit 4M by the end of the year.  The buildout now covers some 100M people, including areas not yet commercially launched, and will hit 120M by the end of the year.  But revenues necessarily lag spending, and this quarter's $147M remained pitiful alongside the company's expenses - EBITDA margins of -225% (shudder).  They don't win until subscriber growth catches up, and they need cash to make that happen.

Since they haven't figured out the funding, the company decided that prudence require the wielding of a rather large axe.  Or was it a broadsword or a scythe...  Whatever, it was sharp:

  • a 15% reduction in the number of employees,
  • 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,
  • discontinuation of development activities for sites not required for its current build plan.
  • suspension of zoning and permitting in a portion of sites not required for its current build plan

Ouch, that 15% workforce reduction will hurt.  They expect these actions to save $100-200M in 2010 and again in the first half of 2011.  That will make a dent in their cash burn, but it won't cure it.  The easiest way to bring back the good times will be for them to raise some money.  Perhaps they will follow through with that possible spectrum sale after all.

How far behind is subscriber growth in the race?  How many subscribers does Clearwire need to make its network at least come close to paying for itself sustainably?  It's hard to separate their ongoing costs from buildout costs, so I can only guess.  Looks to me like that number is in the range of 15-20M, something that is a few years off yet unless they continue to accelerate.  Anybody have a better number?  If they had sufficient funding, where would they break even?

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Categories: Financials · Wireless

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9 Comments So Far


  • en_ron_hubbard says:

    Rob,

    Morgan Stanley’s upside case (a $12.50 stock price) is for the following metrics by 2016:

    — 200 million covered pops
    — 13.8% penetration
    — EBITDA breakeven by 2013

    To get there they need SIGNIFICANT new funding and that is the cloud. The austerity measures seem to indicate that might not be coming anytime soon, although Sprint would seem to have an incentive to maintain the Wi-Max timing advantage and support the roll-out. Who knows.

    BTW the MS downside case is a $1.50 stock price where covered pops only get to 120 million by 2016. EBITDA B/E is still 2013 but that, of course, doesn’t mean FCF B/E, and again it is the capital requirements that are the driving factor– does Sprint believe? and what are the terms? Interesting, but maybe not a stock to own right now, or ever.

  • Anonymous says:

    Enron –

    What are your current top picks in telecom?

    • en_ron_hubbard says:

      Anonymous,
      Depends what profile you want– do you want low beta, high FCF yield along with a superior and safe dividend (stock A)? Do you want superior growth, higher beta (stock B)? Are you willing to invest in a “story stock” based solely on projections of glory, but unproven (stock C). Do you want to invest only in undervalued situations (stock D) If you want a combination of the above and create a diversified portfolio, here FWIW is what I own:

      A– At&t, Qwest/CTL

      B– TWTC, SVVS, CCOI

      C– LVLT (although I dumped most all holdings when the credit crissi hit)

      D– XOHO– trades at 60 cents but worth $2.00+ if ever sold

      My largest holding over the past five years has been AMT (tower stock)– valued highly but a business model that is unbeatable– L/T contracts with escalators and a must have product in a rapidly gowing sector (wireless data). AMT has morphed from a C to a B and will soon be an A– converting to a REIT with a large dividend.

      Everyone has different views which makes investing a great sport. I think what is key if , for example, you like telecom is to create a portfolio– it is sad to read the LVLT board where it sees so many tied their future to one (high promise) position that has so far failed miserably. I shared their pain but it wasn’t a material hit to overall performance. But what do I know?

  • bance says:

    Enron,
    I was wondering what you think of GLBC. Seems to offer strong ebitda growth, on the cusp of fcf, and trades at low multiple to ebitda while a takeout candidate.

    • en_ron_hubbard says:

      OOPS– I also own GLBC but not in size. They are shouting out that they are willing to buy/sell. They need local connectivity and LVLT is the obvious partner. How to get a deal done is the issue. While we wait, as you say it seems cheap compared to others– perhaps a result of its history.

  • bance says:

    Enron,
    I can’t see them as a serious buyer under any circumstances (at least a company of any size) given their low multiple stock as poor currency. If GLBC was acquired, what multiple of current/future ebitda would you guess?

    • en_ron_hubbard says:

      bance,

      GLBC has for some reason always traded at a meaningful discount to its peers. The historical range has been in the EV equals 3.7- 5.2 X forward EBITDA expectation. GLBC currently trades at 4.3x FY’11 EBITDA of ~ $450 million. The sector average is closer to 6X.

      Now, figuring a take-out price is obviously trickier. Specifically how much combination savings and synergies might be attained? Some very imprecise assumptions can probably get us a directionally useful estimate. Let’s assume:

      — that 20% of GLBC’s SG&A would be duplicative ($85 million)
      — that beyond that (for the right acquiror) local access costs could be reduced by ~$30 million
      — that (again for the right acquiror) route redundancy, etc might save $30 million in OPEX

      Putting in another assumption — that GLBC gets credit for 40% of those savings in the price negotiations– you arrive at the following:

      — FY’11 EBITDA estimate of $450 million
      — imputed share of cost savings– ~$60 million
      — total $510 million in EBITDA

      Let’s remember that in this scenario an ideal aquiror would be getting closer to $600 million in total EBITDA, but using the $510 figure and applying a range of multiples of 5.25- 5.75, which is non dilutive to most anyone who would be interested you get to a price range of $26 to $31 (the 5.25 calc is set out below:

      60 million share x $26 = $1,560
      plus net debt $1,080= $2,640
      divided by $510 = 5.2 x EBITDA

      On this basis the “real multiple” would be 4.4 x factoring in all cost savings.

      This sort of price obviously represents a big premium to where GLBC trades but that is what this package of assumptions suggests. Perhaps my savings estimates are too high or perhaps GLBC repersents real value in an acquisition scenario. Anyway, the above gives a framework for thinking about the question– use different assumptions and you will get a different price.

      • bance says:

        Enron,
        Thank you for your always insightful response. I follow your comments on IV LVLT board with interest. Our thought are similar but I used 80 m shares (18m preferred).

  • en_ron_hubbard says:

    bance,

    I took the share count from the cover page of the latest Q and did miss the convert, which is in the money– my bad, caused by a rush to publish.

    Using the same assumptions, that changes the range to $20-$23 per share– still a nice premium

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