Clearwire Corp is expected to float on the US market today, executing its IPO despite last week’s market slump. The WiMax service provider is a rare example of a telecom IPO, and clearly hopes to not flame out as badly as the last big one – Vonage.
With young, pre-standards services and a capital-intensive business plan that will see likely see it tap the markets for hundreds of millions more before it sees a profit, the company can be seen as a risky proposition.
While the firm offers a very different kind of service to Vonage — Clearwire offers mobile broadband internet access and Vonage is a fixed-line IP voice provider — there are some similarities in the two companies’ businesses that could chill would-be investors.
Clearwire also competes with the big DSL, cellular and cable incumbents in the US and European residential and small business markets. In the US, it offers a download speed of 1.5Mbps for $34.99 to $37.99 a month, slower than both cable and DSL for about the same price.
Because it uses WiMax, subscribers can get wireless network access anywhere within range of a Clearwire tower, rather than being tethered to their homes or businesses like they are with WiFi.
It’s a capital-intensive business. The company has to build out its network and aggressively market its services, while competing against larger companies that have far better brand recognition, proven technology and lower customer acquisition costs.
Clearwire lost $284m in 2006, on $100m of revenue, compared to a loss of $140m on revenue of $33m in 2005. The firm has racked up more than $458.6m in losses in its first three years of operation.
It has priced its shares at $23 to $25 each and plans to raise raise about $480m and value itself at $4.2bn. But the company says that it will need to raise even more capital in future, beyond the IPO money and the $1.5bn in private financing it has already secured.
We are not seeking to satisfy all of our anticipated capital needs through this offering, the firm says in it S-1 stock registration statement. The proceeds of this offering are expected to provide only a portion of the capital we believe necessary to implement our business strategy.
If the idea of an already heavily funded company executing an IPO to raise the money it needs to compete against entrenched incumbents is not already reminiscent of Vonage, then its customer acquisition metrics may be.
The company had 206,000 subscribers at the end of 2006, an increase of 143,000 on 2005, and spent $38.4m in marketing to get them. That works out to about $266 per net subscriber add, somewhat more than Vonage was paying to acquire customers when it filed its IPO documents.
Clearwire says its average monthly churn rate is 1.9% of subscribers, a little better than the 2.1% Vonage reported when it filed to go public a year ago.
The company does have a substantial licensed spectrum ownership that gives it something of a competitive advantage. At the end of December, its spectrum rights in the US covered an estimated 214 million people, over a third of the population.
And it’s not done yet. The company expects to spend $75m on spectrum licenses this year, and another $300m to buy up spectrum in the south-east US currently owned by AT&T Corp.
But that pales compared to the $800m it expects to spend to fund operating losses, capital expenditures and working capital in 2007.
Clearwire’s chief executive Craig McCaw and Intel Capital, its main investor, will continue to keep a tight rein on the company even after the IPO. In fact, a McCaw-controlled company, Eagle River, will have substantial powers over Clearwire even if he sells his entire stake.
Between McCaw and Intel Capital, they control 84% of the shareholder voting power, and expect to own 79% of the voting power after the IPO. Technically, it will be a controlled company, and Clearwire intends to ask Nasdaq for exemptions from certain governance controls.
This will be Clearwire’s second attempt at an IPO. The first, announced last May, was yanked in July after the company instead decided to raise $900m in a private round that saw the $600m from Intel Capital investment and $300m from Motorola Inc.