Is Clearwire a Long-Term Buy Now?

Clearwire is best known for its collaboration with Sprint S to develop its 4G wireless network. Over the last year or so, the two companies have been dancing around each other, trying to figure out the best way to synergize each other's abilities. Sprint currently owns 54% of Clearwire and has laid out contracts totaling $1 billion through 2012. Recently, Clearwire shares jumped over 20% when reports came out that the two companies were negotiating contracts to extend broadband agreements past 2012. Does this revelation mean that Clearwire is a long-term buy?

Currently, Clearwire is bleeding money. Over the last five quarters, gross margins have been negative. It appears that Clearwire has been slowly cutting down on costs of goods sold. Clearwire has also been consistently growing revenues 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 COGS along with operating expenses. If it does, EPS may eventually become positive and would attractive even more investors.

The biggest problem with Clearwire is that its business model inherently requires huge costs. Clearwire requires large capital expenditures to maintain and add to its existing 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.

Clearwire has also been bleeding cash over the last several quarters. 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. The company's cash reserves are drying up very quickly. In Q2 2010, Clearwire had $2 billion in cash; it had $830 million by the end of Q2 2011. As expected, 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 Sprint may elongate their existing agreements with each other. 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 the business. It may be an appropriate long-term play depending on investors' risk profile.

Clearwire is currently trading at $1.93, down over 62% in 2011.

• 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.

• 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.