Why You Need Not Worry About Clearwire
Wireless provider Clearwire (NAS: CLWR) recently posted a year-over-year increase in revenue during its first quarter, beating Street expectations in the process.
However, the company also recorded a sequential drop in revenue, which might have worried a few investors since it's in the process of rolling out its own LTE network by next year. Let's find out the reason for the revenue drop.
A new deal
Clearwire's largest partner, Sprint Nextel (NYS: S) , recently renegotiated a deal with the company. Clearwire is now entitled to a flat fee of $900 million for giving Sprint access to its network in 2012 and 2013, regardless of the number of users involved, instead of the monthly $6 per 4G subscriber fee Sprint used to pay before.
So while this resulted in lower revenue sequentially, I feel the deal brings a sense of certainty to Clearwire's future cash flow, which should, at least in part, ensure the success of its LTE ambitions. Besides, Clearwire has been able to reduce its dependence on Sprint to some degree by signing up many other service providers, including Leap Wireless, FreedomPop, and Simplexity.
But apart from the buzz about lower revenue, some have expressed concern over Verizon's (NYS: VZ) planned spectrum sale.
Verizon recently announced plans to sell A and B blocks of its 700 Mhz spectrum, which sparked fears that Clearwire might lose future customers. Luckily for Clearwire, the spectrum in question has many shortcomings. At the same time, Clearwire also feels that Verizon's spectrum sale is unlikely to solve the overall spectrum shortage in the industry, and the company's probably right about it. Thus, Clearwire and its investors have really nothing to worry about.
So far, so good
Clearwire is on the right track, as it recently announced that out of 8,000 LTE sites it plans to deploy in total, 5,000 of them would reach 31 cities like New York and Los Angeles by 2013.
Clearwire's operating cash flows have also given investors reason to cheer, as it turned positive for the first time.
Plus, Clearwire's cost-cutting initiatives have also been on track -- in the first quarter, general and administrative costs also fell 30% year-over-year because of "targeted cost cutting actions" and a decline in head count.
Despite all these positives, Clearwire's bottom line has been consistently in the red; even its most-recent first quarter reflected $182 million in losses. Clearwire also has a lot of catching up to do, as rivals Verizon and AT&T are already way ahead in the 4G LTE race, and Sprint is already setting up LTE this year -- ahead of Clearwire.
Nevertheless, the way I see it, Clearwire does stand a chance given its success in cutting costs and securing funds for its LTE plans, coupled with its large collection of 2.5 Ghz spectrum licenses in a spectrum-deficient industry. But whether Clearwire will definitely be successful is yet to be seen. I'll be keeping a close eye on Clearwire, and you should, too, by adding it to your very own free watchlist.
Clearwire might face difficulty in competing with other well-established players in the 4G arena, so it might not be wise to jump in right away. However, there are many other opportunities out there in the mobile hardware space. I suggest you read this special free report brought to you by the brightest minds at The Motley Fool, which would let you cash in on "The Next Trillion-Dollar Revolution" in mobile computing. Get it while it's still available!
At the time this article was published Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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