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February 15, 2007
Clearwire IPO gearing up but watch out for turbulence
Clearwire, the well-funded broadband wireless company, disclosed the expected valuation for its upcoming IPO in an amended SEC filing this week and the numbers are pretty heady. With a projected per-share price range of $23 to $25, the money-losing creation of cellular pioneer Craig McCaw is looking at an equity market value of almost $4 billion.
But the lofty valuation is no surprise given the more than $1 billion of venture capital already at work not to mention close partnerships with tech industry giants Intel (INTC) and Motorola (MOT). This is no run of the mill or fly-by-night money-losing start-up. The big names and hyped-up future technology almost guarantee a blockbuster IPO. But for long-term investors, the history of satellite radio, mobile phone companies and even cable TV suggests there will be much cheaper entry points in coming months and years.
Despite the pedigree, we're talking about a company which lost $192 million in the first nine months of 2006 on revenue of just $76 million and fewer than 175,000 subscribers worldwide at the end of September. When will the losses end? Not anytime soon. Clearwire's filing says expansion plans will cause "significant operating losses over the next five years or more as we expand the area covered by our network and invest to build our brand and develop subscriber loyalty." Ouch. At some point in those next five years, the media will turn on the company and the stock will get crushed. That's probably the time to buy.
Clearwire's eventual wireless broadband network will be based on the standard known as IEEE mobile Worldwide Interoperability of Microwave Access 802.16e-2005 (catchy, huh?) or mobile WiMAX for short. With strong backing from Intel, WiMax is expected to blow away slower competition from existing wifi hotspots and pose a serious threat even to wired broadband services from the telcos and cable operators. And if the IPO goes off as planned, the company will be sitting on a cash hoard of almost $1.7 billion versus anticipated cash needs of $800 million in 2007.
Still, there's not much to get excited about in the company's current business. Despite offering service in 34 U.S. markets with 8.6 million people by the end of 2006, Clearwire had signed up just 184,000 subscribers, or about 2% of the potential customers. They have another 22,000 subscribers in Europe. The slow up-take and small subscriber base have a likely culprit: Clearwire doesn't actually have a WiMAX network yet because the gear isn't ready. The company says its suppliers, Intel and Motorola, say they'll have stuff ready to go by the fourth quarter but who knows.
In the meantime, the company is putting some of its airwave licenses to work using a cheesy, slower broadband network it calls Expedience that's based on an older cellular standard called Orthogonal Frequency-Division Multiplexing or OFDM. And there's some serious Vonage-like myopia about whether and when the Expedience network will be profitable. The IPO registration statement says 25 out of 26 U.S. markets in operation since at least the end of 2005 had "positive cash flow from operations before marketing expenses." Well, duh. But marketing expenses are a continuing -- and often growing -- expense for new entrants in high tech markets like broadband.
McCaw is a visionary and the promise of WiMAX looks appealing. Neither makes the IPO a great play, unfortunately.
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