Sprint, Clearwire Call Off WiMAX Partnership

Clearwire and Sprint abandoned the deal after failing to “reach final agreement” on terms, Sprint said. The teaming “was likely to introduce a level of additional complexity to each party’s business that would be inconsistent with each company’s focus on simplicity and the customer experience,” Clearwire added.

Clearwire and Sprint’s contrasting business perspectives are a recent development, Wolff said. Wolff and ex-Sprint CEO Gary Forsee, who left in early October, believed they could complete the letter in 60 days, Wolff said. “Clearly we were wrong, as issues arose and events unfolded after our announcement.”

“Sprint is reviewing its WiMAX business plans and outlook,” but “remains fully committed” to developing and deploying the technology, Sprint said. “We are on track for soft launch late this year” in Chicago, Baltimore and Washington, D.C. and “commercial launch in 2008,” said Keith Cowan, Sprint strategic planning president. Sprint expects to comment further on the WiMAX review “early next year,” it said.

Sprint and Clearwire are still talking, Clearwire said. “Discussions continue regarding the best means to accomplish the benefits that were expected under the letter of intent,” it said. The parties are talking about “roaming, frequency interference coordination, spectrum exchanges, technology evolution and development and network standards,” Sprint said. However, “there can be no assurance that a transaction or agreement between Clearwire and Sprint Nextel will be concluded,” Clearwire said. Clearwire could pursue “other strategic transactions and/or partnerships which may or may not include Sprint in the future,” Wolff said, adding that the 700 MHz spectrum and other factors have increased focus on Clearwire’s wireless broadband space.

Clearwire is targeting mid-2008 for commercial WiMAX deployment, Wolff said. However, the split with Sprint will delay subsequent rollout, said chief operating officer Perry Satterlee. “In anticipation of the Sprint transaction, development progress was temporarily suspended in many of our markets planned for launch in 2008,” he said. “Those markets are now targeted for launch in 2009.”

The delay means Clearwire could be “back to square one” on meeting its funding gap, the amount of capital Clearwire needs to raise before it can generate sufficient cash flows to support further business and network development, Schildkraut said. Previous to its agreement with Sprint, Clearwire said the gap was $1.6 billion, but “with Sprint taking over some of the network construction and marketing costs, that gap would have come down,” he said. Wolff evaded a Schildkraut question on the subject in the Q3 call, explaining Clearwire hasn’t had much time to look at the funding gap because Friday’s announcement came less than 48 hours after the decision to call the deal off. Market launch delays mean less spending this quarter and early 2008, but Clearwire “will need to get back to the marketplace with regard to what our view is both on our deployment for ‘08 and ‘09, and what that means or implies for our funding gap,” Wolff said.

The lack of a “clear mandate from [Sprint] senior leadership” was part of the reason the deal collapsed, Schildkraut said. However, it was also just a “complicated arrangement” to work out, since the companies needed to decided who would own the customer, how the service would be sold and how it would be branded, he said. Clearwire may also have been wary of Sprint’s failed relationships with old PCS affiliates, he said. One old affiliate, iPCS, filed suit against Sprint after the national carrier allegedly violated a territorial exclusivity agreement.

“The headline is bad for Clearwire,” but the company’s relationship with Sprint is still intact, Schildkraut said. A Clearwire sale to Sprint or a Sprint WiMAX spinoff to Clearwire remain possible, but neither will happen before Sprint installs a new CEO, he said. In the near term, the companies could swap spectrum in certain markets, he said.

Sprint shouldn’t abandon WiMAX because the carrier needs the technology to make up ground on rivals, Schildkraut said.

“Sprint must push forward” with WiMAX to make a comeback, he said. No one besides Sprint would bid for Clearwire, Schildkraut added. Clearwire partnerships “not including Sprint” that Wolff hinted at are more likely to be co- branding relationships similar to AT&T Yahoo! High Speed Internet, he said.

Amid Sprint talk, Clearwire reported increased revenue in the third quarter. Revenue was up 54 percent year-over- year to $41.3 million, driven by 49,000 net subscriber adds. About 80 percent of Clearwire’s initial 25 U.S. operating markets reported profits. In Q3 2006, only one market was earnings-positive; last quarter, 14 markets. Together, the 25 markets increased revenue 75 percent year-over-year to $22.7 million. Clearwire ended the quarter with 348,000 customers, 115 percent more than it had in Q3 2006. Clearwire also reduced churn 10 basis points year-over-year to 2.3 percent and added $1.95 to average revenue per user, driven by growth of its residential voice service, Clearwire said.

However, ballooning costs kept Clearwire from profitability. It reported a net loss of $328.6 million, 450 percent higher than Q3 2006. Network construction and deployment, market launch costs and increased subscriber acquisition costs drove operating expenses up 163 percent year-over-year to $183.8 million. Clearwire launched five new markets in the quarter: Corpus Christi, Texas; Syracuse; Dayton; Nashville; and Seville, Spain. In addition, Clearwire spent $159.2 million to refinance debt and lost $14.2 million “due to other-than-temporary impairments in Clearwire’s investment portfolio due primarily to exposure in auction rate securities.”

Clearwire expects to continue build out, it said. A recent $250 million addition to Clearwire’s credit will be used to construct networks, launch markets and “opportunistically acquire additional spectrum,” it said.

Clearwire WiMAX testing in Portland, Ore. is on track, Wolff said. Clearwire has expanded its Portland WiMAX tests to about 40 cell sites comprising a 145 square mile space and is “starting to load test participants onto the network,” Wolff said. Test results are “consistent with expectations of the technology,” said John Saw, chief technology officer. “The bandwidth throughput we're seeing at our cell sites is very close to design targets. Our backhaul network… is performing extremely well.” The results are “quite promising,” but there is still “a lot of work to do,” Wolff said.