Is Clearwire a long-term buy?

The company may be able to extend agreements with Sprint. But it needs more than that to right the ship.

By Benzinga Oct 27, 2011 4:49PM

By Abe Raymond, Benzinga Staff Writer

Clearwire (CLWR) is best known for its collaboration with Sprint (S) to develop its 4G wireless network.

But over the last year, the two companies have been dancing around each other, trying to figure out the best way to work together. Sprint currently owns 54% of Clearwire and has agreed to pay it $1 billion through 2012. 

Clearwire shares jumped more than 20% this week on reports that the two companies were negotiating contracts to extend broadband agreements past 2012. Does this revelation mean that Clearwire is a long-term buy?

The company is bleeding money. Over the last five quarters, gross margins have been negative even though Clearwire has slowly reduced costs of goods sold. Yet Clearwire has also been consistently growing revenue over time.

If Clearwire negotiates with Sprint well, it could continue significant sales growth into the next few quarters. It would also have to contain its costs of goods sold along with operating expenses. If it does, earnings may eventually become positive and would be more attractive to investors.

The biggest problem with Clearwire is that its business model inherently requires huge costs. Clearwire requires large capital expenditures to maintain its broadband towers in order to run its business. It does not seem like Sprint is setting up its own towers for the broadband technology, based on the numbers.

Moreover, Clearwire has ramped up its Spectrum lease expenses, which are essentially tied to its facilities' growth. SG&A expenses have also increased dramatically, and the firm is unclear in its financial statements as to what exactly increased the line item so much. If it is salary-based, Clearwire should consider decreasing salaries until steady revenue streams are established.

It appears that capital expenditures consistently eat up a lot of Clearwire's cash on a quarterly basis. Debt repayments also hurt cash flows from financing activities. In terms of operating cash, negative net income along with a failure to alter its working capital has leaked a lot of cash for Clearwire.

Clearwire's balance sheet also shows an alarming story: Cash reserves are drying up. By the end of the second quarter, cash had fallen to $830 million from $2 billion a year earlier. It does not have much else in assets; there aren't many inventories to take care of and it appears to be on top of its accounts receivable. Oddly, despite the consistent capital expenditure payments per quarter, property, plant, and equipment have dwindled over the last few quarters. Partly due to depreciation, but the gross amount appears to have decreased as well.

Investors may or may not think that Clearwire is a buy now that it may extend agreements with Sprint. This is an extremely risky strategy and relies purely on hope. After considering the numbers, Clearwire is going to need much more than a contract extension to turn around. It may be an appropriate long-term play depending on investors' risk profiles.

Clearwire closed down about 2.5% Thursday to $1.91. Shares have fallen more than 62% in 2011.


Bullish View:
Traders who believe that Clearwire is an appropriate long investment might want to consider the following trades:

  • A contract extension with Sprint would likely increase revenues significantly.
  • Clearwire has steadily decreased costs over the last several quarters, meaning that margins may become extremely high after contract renewal.
  • Sprint's 4G technology is becoming increasingly popular, which may mean that Clearwire's products are a success, which could fuel further contract negotiations.

Traders who believe that Clearwire is more suited for a short play may consider an alternate position:

  • It's books have been shrinking despite growing revenue, which may mean that its current asset allocation model is unsustainable.
  • There are no guarantees that Sprint and Clearwire will successfully re-negotiate their contract. If that doesn't happen, the existing agreements will only last until the end of 2012.
  • The Clearwire play is purely speculative, and may not be appropriate for everyone's risk appetite.

Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security.

More from Benzinga:

Tags: BenzingaS
Oct 27, 2011 6:06PM
I think Clearwire is doomed. They can't possibly be that cash-flow negative for so many months and still think that they have a future.
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