Clearwire Corporation (CLWR) failed to encourage investors during its first quarter earnings release last week. The company posted revenue growth of 76% and subscriber growth of 443,000. However, the net loss figures continued to widen to $1.08 per share for the first quarter alone. Management made a valiant effort at putting a positive spin on the numbers. There were three additional markets which turned EBITDA positive during the quarter bringing the profitable total to 27. The bottom line is that now nearly 60% of domestic markets are EBITDA positive. Despite this “exciting” news, the financial burden of rolling out new technology will continue to weigh on the company for several years. At the same time, management noted that the cost per gross addition was higher over the last quarter as promotion efforts are not cheap.

Clearwire is banking on the fact that as it expands and brings in new subscribers, it will gain enough incremental revenue to offset its rapidly rising cost structure. While this model typifies many technological startup companies, the model has some drawbacks when working with billion dollar expense levels. As the economy has become more challenging, the strategy has been revised to reduce the number of new markets the company will expand into. While this decreases the additional rollout costs for now, it also pressures assumptions as to new subscriber additions which is the lifeblood of a growing company. Additionally, management has decided to turn to voice as well as data as it attempts to sign on new subscribers. While the public story is that this move leverages existing relationships with clients, there is reason to believe this move was necessary because the data rollout was coming along slower than expected.

Net subscriber additions came in a bit higher than expectations, but looking at the way this number is calculated raises additional concerns. The number is affected both by gross subscriber adds (new customers) and by the churn rate (loss of existing customers). The gross subscriber additions were much higher than some analysts expected which is certainly a positive data point. However, the churn rate came in above expectations which may or may not be due to customers dis-satisfaction with the products offered. At any rate, a higher churn rate coupled with rising costs to acquire new subscribers is a recipe for losses. Management is guiding analysts to expect higher churn rates and this metric bears close watching in the coming quarters.

The biggest concern when looking at the long-term condition of the company is a funding gap of roughly $2.1 to $2.3 billion that Clearwire must raise in order to complete its nationwide buildout of its data network. With credit markets still in an illiquid position, and the stock dropping below pre-IPO levels, there are not many attractive ways that management could raise capital without hurting current investors. Debt financing is not likely to be available on the billion dollar scale for a technology company that is EBITDA negative to the tune of 81.2 million per quarter. At the same time, if a block of stock is sold via an underwriting transaction, it will likely push the stock down another 10 to 20% with the underwriters taking another large chunk of the capital as their fee.

Despite the low price of the stock, it appears that the concerns on the horizon make an investment in this stock difficult to rationalize. The story appears to be one of huge potential long-term growth, overshadowed by huge potential short term risk. In an environment that does not reward uncertainty, there is little to encourage an investment in this stock.

CLWR Notes

FD: Author has a short position in CLWR

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