Back In TimeTuesday, March 13, 2007
I feel as though I am back in 2000 when every IPO to hit the Street was from a company that was losing money, said it had no prospect for making money in the foreseeable future and wanted to issue an IPO so it had some money to work with (and to make its founders rich or richer, at least on paper).
Last week, Clearwire went public and sold 24 million shares of stock for $25 per share to raise $600 million dollars. The 10K it filed for this offering makes interesting reading and I have to wonder whether people who decided to invest their money invested in Clearwire, WiMAX or the Craig McCaw/Intel team. Let's take a look at some of the information contained in the filing.
Clearwire is already $755.7 million in debt. This $600 million from the IPO should carry it through the next twelve months and then it will need more capital. Today, Clearwire covers 35 U.S. markets including 350 municipalities for a total of 8.6 million POPs, but it has licenses for spectrum covering 214 million POPs and is actively seeking more spectrum.
Intel, Motorola and Bell Canada have already invested $1.1 billion and the present stock ownership shows that Craig McCaw owns 53% of the company and Intel owns 32% of the outstanding stock. The financials show a total gross income of $100 million with operating expenses of $338 million for a net loss of $284 million on the year.
I realize that 10Ks have to tell it like it is and contain many statements pertaining to risks, and they are not usually read by people who already believe in the company. I pulled some quotes from this one that are worth repeating.
The first, "We have committed to deploy a wireless broadband network using mobile WiMAX technologies under certain circumstances, even if there are alternative technologies available in the future that would be technologically superior or more cost effective," indicates to me that Clearwire is stuck with WiMAX for as long as Intel wants the company to continue to use WiMAX, even if there is another, better technology available.
This is followed a little later by, "The industries in which we operate are continually evolving, which makes it difficult to evaluate our future prospects and increases the risk of your investment. Our products and services may become obsolete, and we may not be able to develop competitive products or services on a timely basis or at all." In other words, because one of our prime investors has tied our hands behind our back when it comes to technology choices going forward, we may not be able to upgrade to a better technology as quickly as our competitors. This is not a great situation to be in, especially for a company with a huge burn rate.
As if this were not enough, Clearwire also states that because it sold NextNet, its hardware supplier business, to Motorola, Motorola is its sole supplier by agreement for both infrastructure and customer premise equipment. Don't get me wrong, Motorola is a great company, but having a single source for WiMAX equipment on both ends of the network limits the company's ability to ensure it is acquiring the most equipment for the dollar or that it has the best equipment available.
The next quote is as realistic as it gets. "Many of our competitors are better established and have significantly greater resources than we have, which may make it difficult to attract and retain subscribers." No matter how much money you pour into a new network, it is the subscribers who pay the bills. You have to be competitive in the wireless business, or even the DSL and cable business, which means you have to be able to follow your competitors' prices as they lower them. This makes it even more difficult for a company rolling out green field services and building a new network to compete with existing cable and wired services. DSL and cable pricing has dropped every year while data speeds have increased. It will be tough to compete with the incumbents in the fixed-area market, and tougher to compete with the wireless, full mobility incumbents. Clearwire itself states that the majority of its markets are already served by DSL, cable and a number of wireless operators. In these areas, it will be going head-to-head with the established companies.
Clearwire realizes that data-only services will not make enough money in the long term so it plans to add video, TV and VoIP. It does not say in the 10K if this voice over IP will be to both fixed locations and mobile customers. What it does say is, "Certain aspects of our VoIP telephony services differ from traditional telephone service, which may limit the attractiveness of our services." The following points are made in the rest of the paragraph:
- Subscribers may experience lower call quality than with traditional wireless telephone companies, including static, echoes and transmission delays.
- Subscribers may experience higher dropped-call rates than with traditional wireline telephone companies.
- A power loss or Internet access interruption may cause service to be interrupted.
- And at this time Clearwire does not offer local number portability. (Comment: Even my cable company provides for keeping my same phone number!)
The Clearwire 10K is not all bad news. On page 35 it states: "During 2006 we achieved the following significant financial and operational milestones by:
- launching our services in 9 new U.S. markets covering an additional 4.8 million POPs;
- increasing our U.S. spectrum holdings from 6.7 billion to 12.0 billion MHz-POPs, an increase of 79.1%, and our international holdings from 4.0 billion to 8.7 billion MHz-POPs, a 117.5% increase;
- selling our NextNet subsidiary to Motorola and executing infrastructure and subscriber supply agreements with Motorola;
- entering into a mobile WiMAX collaboration agreement with Intel;
- raising approximately $1.5 billion in debt and equity financings;
- expanding our distribution channels as we entered into distribution agreements with AOL and Circuit City; and
- introducing our VoIP telephony services in 13 U.S. markets."
It is also interesting to compare the 10K with the Web site (www.clearwire.com). I typed in the address for the Merced, Calif. City Hall and found the following information:
For the first three months, customers can receive a per-month discount and not pay the activation fee for data services at the following speeds --
Standard: $29.99/mo. $36.99/mo. $49.99/mo.
Discount: $10.00/mo. $17.00/mo. None
Downlink: 768 Kbps 1.5 Mbps 1.5 Mbps
Uplink: 256 Kbps 256 Kbps 256 Kbps
Modem lease: $4.99/mo. $4.99/mo. $4.99/mo.
Optional with any plan: Unlimited local and long-distance calling at $34.99/mo.
Clearwire phone adapter: Was $49.99, now only $15.00
Back on the "about phone service" page, to Clearwire's credit, I found the following statement: "Clearwire Internet Phone Service 911 is different than traditional 911; availability may be delayed or disrupted by power failures, unavailability of broadband connections or delays in moving or establishing your phone number or address; details at clearwire.com/911. Requires minimum service commitment and equipment purchase. Rates exclude Clearwire broadband service."
But nowhere on any of the Web pages did I find any of the other warnings for phone customers that are included in the 10K filing. (Question: What if companies were required to describe the issues with their services listed in their 10K filing on their Web sites?)
As I said at the beginning, the Clearwire IPO appears to be along the lines of many IPOs issued in the 2000-2001 timeframe. Some of those companies are still around because they made it big, but for every one that survived, tens or even hundreds sank. It was the hype surrounding the Internet, or more precisely, the World Wide Web, that drove so many to buy stock in these new companies not because they had a great business model, but because it fired our imaginations. We envisioned great things so we turned our money over and watched in dismay as most of the companies took a nose dive.
Will this time be different? After all, Clearwire's major stakeholders have been around wireless for a long time as have many of the executives on the board and officers of the corporation. Intel is deeply invested in Clearwire and will probably open its deep pockets again if need be, as WiMAX is Intel's future as well as Clearwire's. Having said all of this, I still cannot identify a business model I can reduce to a spreadsheet that has anything but red ink at the bottom. I wonder how long Intel can continue to pour money into WiMAX millions at a time. After a while, it has to add up to some serious money.
Finally, in the three days since the IPO, the stock has fallen from an entry price of $25 per share to close on Monday at $21.39. But then, that was only the first three days (but the markets in general were all up). As we move forward, Clearwire will have to continue to build out its business and keep the investment community happy at the same time. Watch for a lot of press releases to be flying out the door.
How must Sprint feel about now? Intel invested in Sprint's WiMAX network, which, I believe, is the main reason Sprint opted for WiMAX. I wonder how the executives at Sprint feel about this statement in the Clearwire 10K: "In addition, we [Clearwire] and Intel Corporation, or Intel, have agreed to jointly develop, promote and market a mobile WiMAX service offering as a co-branded service available only over Clearwires mobile WiMAX network in the United States. This service will target users of notebook computers, ultramobile PCs, and other mobile computing devices containing Intel microprocessors. [emphasis added]
At the WCA conference in January, a Sprint executive said that seamless roaming from network to network, both in the United States and around the world, is one of the keys to the success of WiMAX. The statement above does not seem to indicate that roaming across the two networks will be happening anytime soon.