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Clearwire: So much of its fate rests with Sprint

Clearwire, best known for its 4G WiMax network, is so intertwined with Sprint that the company's financials and future network ride shotgun with the carrier.
Written by Larry Dignan, Contributor

Clearwire, best known for its 4G WiMax network, is so intertwined with Sprint that the company's financials and future network ride shotgun with the carrier.

The network provider reported another hefty loss in its fourth quarter and added 126,000 net retail customers, below estimates. Clearwire added 1.4 million wholesale customers and ended the year with 4.4 million subscribers. Clearwire has built out its network so it can reach 119 million points of presence, but now is cash constrained. The company raised funding via a debt offering, but now needs to renegotiate a wholesale deal with Sprint to make its business model work.

And it's unclear whether Clearwire can make the financials work. The company aims to double its subscriber base in 2011, but posted a net loss of $128 million, or 53 cents a share, on revenue of $180.7 million. For 2010, Clearwire lost $487.4 million on revenue of $556.8 million.

Bill Morrow, CEO of Clearwire, said on an earnings conference call that a pricing agreement for wholesale services was imminent. Clearwire's move to downplay its retail operations and focus on wholesale network services has apparently smoothed over talks with Sprint. At issue is the cut of smartphone revenue Clearwire gets and the extra load on its 4G network.

Morrow said:

Now closer to home, I would like to also update you on our partnership with Sprint. As you are well-aware, this is a unique multi-dimensional arrangement where we work together in many ways. Sprint is our largest investor, they are our primary wholesale customer, and they are one of our key suppliers and partners in building out the network. Albeit complex, I am pleased to report that the relationship is healthy and strong. I know there have been a lot of comments in the press and in your reports, but we are working very well together, and we share a common vision for the future.

Over the past few weeks, we have held a number of productive discussions with Sprint about the outstanding wholesale pricing issues. And while nothing has yet been finalized, we believe that an agreement with Sprint is imminent, and should result in a substantial additional revenues for Clearwire. Dan Hesse and I have regular discussions, and we are both encouraged by the progress of our teams.

With respect to funding, resolving our smartphone pricing issue has taken priority as our wholesale business is a critical part of our operating model. We continue to explore other sources of additional funding that will fuel the development and expansion of our 4G network. These sources include equity and debt financing, as well as potential asset sales. We anticipate ramping up these efforts once a resolution on smartphone pricing has been reached.

So let's assume this Sprint squabble works out. Then what? Clearwire expects that it will be EBITDA (earnings minus all the bad stuff) positive in 2012.

But the bigger item revolves around network harmonization. Sprint's Hesse has indicated that the carrier sees a move to Long-Term Evolution (LTE) in the future. Morrow said Clearwire would talk more with Sprint on its network vision when the wholesale agreement is worked out.

For its part, Clearwire is already testing joint WiMax-LTE networks. In the meantime, Clearwire needs more money and is evaluating the sale of wireless spectrum to make ends meet.

In any case, Clearwire depends on Sprint. And Sprint needs Clearwire---at least until it can build an LTE network. "While we believe Clearwire's position in the Sprint dispute is meritorious, the reality becomes that it may be difficult to fully enforce the contract in their favor if it places Sprint in a position where it may need to fully re-evaluate the partnership under those terms. Therefore, we believe a compromise becomes a necessity for both parties, regardless of what the existing contract terms might support," said Kaufman Bros. analyst Ben Abramovitz.

Related: Sprint Q4 results, subscriber additions solid; Potential Clearwire infusion looms

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