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Published: August 5, 2010
In the world of high-speed wireless
technology, known as 4G, you can bet on two horses: WiMax, which
is a long-distance version of Wi-Fi, or LTE, which stands for
Long-Term Evolution. Sprint (NYSE: S) has staked its
fortunes on WiMax, and has an early head start, while Verizon
Wireless (NYSE: VZ) and AT&T (NYSE: T) are expected
to roll out LTE later this year and into 2011.
Sprint made that WiMax bet after becoming a major shareholder in
Clearwire (Nasdaq: CLWR), a pure-play high-speed wireless
provider in the process of rolling out service in major American
cities. Trouble is, Clearwire just announced it is having second
thoughts. Perhaps LTE is indeed a solid choice after all, mused
company CEO Bill Morrow on a conference call with investors
Wednesday night. He conceded what many industry watchers already
knew: that LTE is capable of carrying much higher volumes of
high-speed data than WiMax. That's bit hard to swallow for
investors, as Clearwire has already consumed massive amounts of
capital with its WiMax bet.
More customers = more losses
Clearwire has been an impressive growth story -- as long as you
ignore the rest of the company's
income statement. In the second quarter, the company added
more than 700,000 net subscribers, and now has around 1.7
million in the fold. That led to a +93% spike in revenue from a
year ago. Strong growth should continue as Clearwire expands
into new cities.
Yet all those new subscribers aren't helping the company
break-even. Clearwire has now lost about -$0.50 a share in each
of the last four quarters is expected to lose money at that pace
at least through 2011. In fact, the company's EBITDA losses are
on track to rise for the sixth straight year, and will likely
exceed $1 billion.
Stubbornly high operating losses coupled with the money needed
to expand into new cities and perhaps even shift technologies
will of course lead to new sources of funding. Clearwire is
expected to spend $3 billion just this year and is on pace to
run through its current cash balance by early 2011. UBS believes
an additional $3 billion will need to be raised. If the company
simply sold stock to raise that money, it would need to issue
more than 400 million shares, effectively tripling the share
count.
Actual dilution will likely be somewhat
less as the company can try to borrow more funds, but with $2.7
billion in
long-term debt already on the books, there are limits to how
much more debt it can take on. As it stands, Clearwire is paying
double-digit interest rates on its debt, highlighting the very
risky nature of this underfunded
business model. Existing debt covenants imply that Clearwire
would need to raise $2 in stock for every additional dollar it
borrows. So that may work out to $2 billion more in stock sales
and $1 billion more in debt. That would lead to nearly 300
million shares being issued, more than doubling the current
share count.
Management could also look to sell off some of the wireless
spectrum the company owns, but that would diminish any long-term
potential the company may have.
Deceivingly robust ARPU
Clearwire derives more than $40 in average revenue per user (ARPU),
but the company hasn't really seen any major competition for its
wireless broadband services yet. What happens when companies
like AT&T and Verizon enter the market? If history is any guide,
they'll try to steal Clearwire's thunder by undercutting it on
price. In a battle for
market share, price wars inevitably ensue once market shares
have been established. Since AT&T and Verizon Wireless do not
want to lose any customers, you can be sure that market share
rather than peak prices will be a priority.
Playing chicken with Sprint
Clearwire's willingness to embrace LTE is also seen as a bid to
find other partners such as T-Mobile that cannot migrate to
WiMax. Trouble is, Sprint has an option to boost its stake in
Clearwire and could then veto such a move. Clearwire is playing
a game of chicken that could well backfire.
Action to Take --> Wall
Street loves Clearwire, as it continually needs bankers to raise
more money. But it's increasingly clear that the company's
never-ending dilution, technology zigzags, and competitive
positioning vis-a-vis Verizon Wireless and AT&T Wireless has
turned this into a very risky story. Investors looking to add
shorts to their portfolio should give this stock a close look.
-- David Sterman
Staff Writer
StreetAuthority |
