March 24, 2007, 9:47 pm


Disclosure: at date of post to blog(3/24) does have a position in FCSX.

Original analysis piece for subscribers to was available on 3/8, prior to fcsx 3/16 debut.

FCSX - FCStone Group

FCSX - FCStone Group plans on offering 5.3 million shares (assuming over-allotments) at a range of $21-$24. BMO Capital and Banc of America will be lead managing the deal. William Blair, Raymond James and Sandler O'Neill will be co-managing. BMO is a bit of a wild card here as this will be their first lead slot in a US ipo. BMO Capital was formed as currently constructed in 2006 from BMO Financial and Nesbitt Burns. They've had a hand co-managing a few US and Canadian ipos the past year including MA/AVR.

Post-offering FCSX will have 17.6 million shares outstanding for a market cap of $396 million on a $22 1/2 pricing.

IPO proceeds will be used to redeem a portion of shares outstanding, pay down debt and for general corporate purposes.

Directors and officers will own 16% of FCSX post-ipo.

From the prospectus:

'We are an integrated commodity risk management company providing risk management consulting and transaction execution services to commercial commodity intermediaries, end-users and producers. We assist primarily middle-market customers in optimizing their profit margins and mitigating their exposure to commodity price risk. In addition to our risk management consulting services, we operate one of the leading independent clearing and execution platforms for exchange-traded futures and options contracts.'

'Keywords' that garner immediate attention: commodity, derivatives and the phrase 'clearing and execution platform for exchange traded commodity futures and options.'

FCSX has over 7,500 customers and in FY '06 (ending 8/31/06) executed 50.2 million derivative contracts.

FCSX began as a grain elevator risk management cooperative in 1968. In 2005, FCSX recapitalized from a member-owned cooperative into a stock corporation. While they have four operating segments, 'Commodity & Risk Management Consulting' and 'Trade Execution & Clearing' are the clear profit drivers.

Essentially what we've got here is a company that provides risk management consulting and trade clearing/execution in commodity derivatives. Commodity derivative trading has boomed this decade as evidenced by the success of related ipos- CME / BOT/ NMX / GFIG the past few years. Exchange/OTC commodity derivatives have grown in volume/total derivative value by approximately 25% this decade. Interestingly, the OTC commodity derivative market is 5 X's larger than the exchange traded market. The OTC market reflects the demand for non-standard products and also reflects the need for an expertise company such as FCSX.

What has been driving this growth? FCSX lists a number of reasons, many of which have been outlined in the commodity exchange analysis pieces: 1) Increasing acceptance of market risk has led to increased use of sophisticated hedging with options/futures; 2) higher prices and higher volatility have increased derivative volumes; 3) the shift to electronic trading; 4) Product innovation - in the past 6 years, CME and BOT have doubled their listed derivative product offerings; 5) Proliferation of hedge funds and professional traders; 6) worldwide deregulation.

FCSX business segments

Commodity & Risk Management:

FCSX provides risk management consulting to companies that supply or consume commodities or end-products. Companies that produce or consume hefty quantities of various commodities hire FCSX to implement and execute a successful commodity risk management program. FCSX has 100 risk management consultants that work with customers to mitigate commodity price risks in their business.

End client segments include 1) Commercial Grain - elevators, processors, manufacturers, traders; 2)Energy - focusing on producers, refiners, wholesalers, transportation companies, convenience store chains, auto and truck fleet operators, industrial companies, railroads and municipalities; 3)Introducing Brokers - agricultural producer 'middle-men'; 4) Latin America & Brazil - FCSX has developed a niche in consulting customers involved in all aspects of agribusiness in Mexico and Brazil; 5) China - 'middle men' operations conducting business on the US commodity exchanges as well as agricultural producers; 6) Renewable Fuels - Ethanol. FCSX provides risk management consulting to companies producing over 20% of ethanol in the US; 7) Other - forest products, food services, transportation and weather-related hedging products.

FCSX has their hands in risk management consulting in a number of newer and fast growing customer bases, as well as traditional domestic agriculture and energy. Their business plan is to initially provide full service risk management consulting to new customers and have them execute that plan via FCSX's own commodity derivative execution and clearing platforms. As clients increase their knowledge and acceptance of risk management practices, they become more independent in their hedging decision-making and, in some cases, will transition to fully self-directed trading over a three- to five-year period. Often FCSX will continue to provide some form of consulting service to even long-term clients. FCSX has a nice set-up here. They develop relationships early with participants in emerging commodity risk management sectors, and then provide both risk management and clearing and trade execution to that client long-term. Even if a client eventually gets to the point of having their own in-house risk management team, they still will tend to utilize FCSX trade execution and clearing platforms and services. That is a nice business plan in what has been a booming sector, commodity derivatives.

FCSX's Commodity and Risk Management went ballistic in FY '06, growing approximately 50% in client contract volume. Note that for FCSX much of the growth was driven by specialized OTC risk management products as well as by traditional exchange traded products.

Clearing & Execution Services:

As noted, most of FCSX risk management clients will also utilize FCSX's clearing & execution services to execute their risk management plans. In addition, through their own trading platforms FCSX clears for a variety of institutional and professional traders. FCSX is a member of all major U.S. commodity futures exchanges including the CME, CBOT, NYMEX, COMEX Division of NYMEX, NYBOT, Kansas City Board of Trade and the Minneapolis Grain Exchange. Of note FCSX believes they hold the largest share of the professional floor trader market at the NYBOT and the COMEX Division of NYMEX.

Note - On many of their clearing/execution services involving OTC derivative contracts, FCSX will often take the other side of the trade. They'll then look to offset that risk by laying it off on other participants. OTC trades are those specialized derivative products not listed on one of the major commodity exchanges.

In the past four fiscal years, contract trade volume within FCSX's 'Clearing and Execution' segment has grown an average of 48% annually. Pretty powerful growth.

As noted above, FCSX's revenue/earnings drivers are these two segments above. They also participate in two other business segments: 1) Financial services - Grain financing and facilitation business in which FCSX lends to grain related companies against future grain production. FCSX also participated in energy and renewable fuel financing. 2) Grain Merchandising - FCSX acts as an intermediary to facilitate the purchase and sale of grain. A capital intensive low margin business, FCSX is looking to sell this segment and exit the grain merchandising business.


Approximately $100 million in debt minus cash post-offering. Note that FCSX debt/cash levels tend to shift substantially due to the nature of their business. these cash levels do not take into account the rather significant daily cash on hand levels due to their clearing/trading business. FCSX derives quite a bit more revenues in interest, then their annual debt servicing costs even with the official debt minus cash number.

Dividends - It appears FCSX does plan on paying quarterly dividends. I would anticipate these to be rather small, most likely yielding 1% or less annually for shareholders.

1.3 X's book value on a $22 1/2 pricing.

Note that FCSX fiscal years ends 8/31 annually. FY '07 will end 8/31/07. Also FCSX grain merchandising segment really distorts annual revenues as FCSX takes physical possession of the grains and books all revenues/costs of such. A better indicator of overall revenues is including just net revenues from this low margin business. Doing this does not alter net earnings at all and is more indicative of FCSX's overall revenues and revenue growth. Factor in too, FCSX is looking to exit this grain merchandising segment.

FY '06 - Total revenues were $182 million, approximately 50% growth over FY '05. Exchange contract volume grew 30%, while OTC contract volume doubled. Net margins were 9%, earnings per share were $0.90. On a $22 1/2 pricing, FCSX would be trading 25 X's FY '06 earnings.

FY '07 - Seasonally the first quarter each year tends to be FCSX strongest due to the grain harvest. However the rise in derivative transactions the past few years has smoothed this out a bit. Even for a traditionally strong quarter, FCSX blew out the doors first quarter of FY '07. OTC contract volume tripled from the 11/30/06 quarter, while exchange traded volume rose 25%. Revenues were $57 million, a whopping 46% increase over the same quarter a year earlier. Note that this number excludes the large increase in gross grain sales and only includes the net grain sales of $6 million, compared to $5 million in the 11/30/06 quarter. The growth was fueled by the commodity consulting and clearing/execution segments as well as interest gains. The interest gains were fueled by a 55% increase in customer assets. By any measure, FCSX business is going gangbusters as of 11/30/06. Net margins for the quarter were 12% and earnings per share were $0.38. How to forecast the remainder of the year? The commodities derivative exchanges are all forecasting sustained strong growth through 2007. Let's be very conservative here and assume FCSX just flatlines revenues and earnings quarterly the remainder of FY '07(the final three quarters. If we do so, FCSX should book approximately $240 million in revenues, a 33% increase over FY '06. This is a very conservative number. At that run rate, earnings per share should be in the $1.60 - $1.65 range. Again, this is a number I feel is quite conservative and pretty much eliminates further growth from the blowout first Q '07. On a pricing of $22 1/2, FCSX would be trading 14 X's very conservative FY '07 earnings estimates.

Conclusion - A very strong business model focused squarely on a red hot sector...and coming off a simply blowout first quarter to their 2007 fiscal year. In range, FCSX is being priced for appreciation. Recommend strongly.

March 19, 2007, 6:25 am


As SLRY has drifted back to pricing, thought might be a good pick for this week's free blog piece. This piece was available to subscribers at before SLRY debuted.


SLRY - plans on offering 5.75 million shares (including over-allotments) at a range of $8-$10. 1.5 million shares in the offering will be sold by insiders. Weisel is lead managing the deal, Wachovia, Pacific Crest, Needham, and William Blair co-managing. Post-offering SLRY will have 14.3 million shares outstanding for a market cap of $129 million on a pricing of $9. IPO proceeds will be used to repay debt and for general working capital.

Founder, President, Chairman and CEO Kent Plunkett will (directly and indirectly) own 25% of outstanding shares post-offering.

From the prospectus:

' is a leading provider of on-demand compensation management solutions. Our comprehensive on-demand software applications are integrated with our proprietary data sets to automate the essential elements of our customers’ compensation management processes. As a result, our solutions can significantly improve the effectiveness of our customers’ compensation spending.'

Salary and compensation data - To me this sounds as if it would be a nice piece of a larger company's business line, not the entire business itself. SLRY goal is (and has been) to replace the traditional approaches to compensation management, including paper-based surveys, consultants, internally developed software applications and spreadsheets. SLRY believes their website enables companies to determine how much to pay new and existing employees and to manage overall compensation programs.

SLRY's data sets include pay and benefits data that cover position titles held by 73% of the US workforce as well as comparison data for top executives in over 10,000 US public companies. SLRY offers two products: 1) the flagship CompAnalyst which is a suite of compensation management applications that integrates SLRY's data, third party survey data and a customer’s own pay data in a complete analytics package; 2) TalentManager - employee life-cycle performance management application that links employee pay to performance.

Both CompAnalyst and TalentManager are offered in annual or multi-year subscription packages. Current subscriber base is over 1,700 companies who spend between $2,000 and $100,000 annually. Customer base includes Wal-Mart, Home Depot, Procter & Gamble, Merrill Lynch, UPS and Cisco Systems. In addition, SLRY offers information to individuals and small businesses for a fee through their website

In 2006, was ranked in the top 10 websites for 'Financial Information & Advice.' Currently on, is ranked as the 5,081 most popular website in the world.

Market - In an independent study conducted in April 2006, the compensation management technology market, which includes software and online compensation data offerings, is estimated at approximately $320 million for 2006. This is not a large market at all, that is a small overall pie for a public company. SLRY believes however that revenues from compensation consulting firms and human resource business process outsourcers should be included in their overall target market. Including those revenues would bump the market size up to $1.2 billion annually. For our purposes, SLRY's target market then derives somewhere between $320 million and $1.2 billion annually.

SLRY currently employs approximately 200 people.

My question is, 'Where does SLRY derive their proprietary salary and compensation data?' The answer - a number of sources, including major consulting firms, SEC filings, US Government agency studies and data, 'other' third parties, and from SLRY’s own research efforts.

Note - In 2/07 Mercer, the consulting arm of March and McLennan filed a complaint against SLRY alleging copyright infringement, unfair competition, false representation, fraud, breach of contract and tortious interference with business relations.


$2 a share in cash, no debt.

Revenues - SLRY does run ads on their site, however advertising revenues account for only 10%-15% of revenues annually. The bulk of SLRY's revenues are derived from corporate subscriptions.

Revenues were essentially in start-up stage in 2002 and for FY '06 (ending 3/31/06) totaled $15.3 million. SLRY has increased revenues sequentially quarter to quarter for 3 years now. Normally I look at this as a positive with a small growing company. However with SLRY we should note two negatives: 1) Even with 12 straight quarterly revenue increases, SLRY has yet to book a break even quarter operationally, and 2) Even with folding out stock compensation charges, SLRY is increasing revenues quarterly only by about as much as they're increase their 'sales & marketing' expense line. The latter to me indicates there is no surging demand for their product; the growing revenues are simply a function of throwing more money at sales & marketing. In other words, SLRY appears to be 'buying' their revenue growth. Factor in the fact that other expenses are increasing about the same rate too and for years now SLRY has been losing in the $600k to $1.2 million ballpark operationally quarter after quarter. So yes they've increased revenues sequentially, but for the past few years have been doing no better than 'running in place' at a quarterly operational loss.

FY 2006 (ending 3/31/06) - Revenues were $15.3 million, a healthy increase over FY '05's $10 million. Gross margins were in the 80% ballpark. Unfortunately overall operating expenses were approximately equal to revenues themselves. Result was a loss of $0.20.

FY '07 (ending 3/31/07) - Through first 3 quarters, revenues look to increase by 45% or so to $22.1 million. Again the top-line % growth looks good, however keep in mind that operating expenses are keeping pace growth-wise as well here. Gross margins look like they're contracting slightly to 78%. Again, operating expenses equaled overall revenues, meaning more losses. Due to increased stock compensation charges SLRY looks to lose approximately $0.35 in FY '07. Note that operationally when folding out stock compensation charges, the loss here would mirror FY '06's.

Conclusion - I usually like small online ipos and I do like the topline growth here. However SLRY appears to be really just a small niche company and that plays out in their overall revenue base and lack of operating margins. With their current business model, they don't seem to be gaining any margin traction whatsoever. Yes they're growing revenues. However that growth appears due to increased money spent on sales & marketing expenses, not organic revenue growth. In fact revenues have been growing annually on a 1 to 1 basis to operating expense growth. Factor in also the overall small market pie here and SLRY appears to be more suited as an arm of another larger company's business, not a single standing public company. Pass here.

March 14, 2007, 5:01 pm

Tech ipos

It has been a pretty ugly time for tech ipos lately. They've been pricing nearly every one above range still(fire/bbnd):

FIRE: Currently trading 90 X's '07 earnings, broke above range pricing, currently 18% above day 1 open:

CLWR: no '07 earnings, broke top of range pricing, and 25% below day 1 open:

OPXT: Currently trading 80 X's '07 earnings, has not broken top of range pricing and 1% below day 1 open:

SLRY: no '07 earnings, has not broken above range pricing, 15% below day 1 open.

SDXC: no '07 earnings, not broken above range pricing(yet), 18% below day 1 open:

MLNX: 40 X's '07 earnings, has broken an above range pricing, 20% below day 1 open:

ISLN: no '07 earnings, has not broken an above range pricing, currently 20% below day 1 open:

DBTK: 30 X's '07 earnings, has broken top of range pricing, currently 4% above day 1 open:

GUID: 110 X's '07 estimates, has broken a below range pricing, currently 11% below day 1 open:

IPGP: Currently 30 X's '07 estimates, has not broken above range pricing, currently 30% below day 1 open:

NLST: currently 14 X's '07 estimates, has broken a bottom of range pricing, currently trades flat with opening prints:

OPTM: 30 X's '07(untaxed) earnings, has not broken above range pricing currently 13% below open prints:

APKT: 42 X's '07 estimates, has not broken an above range pricing, currently flat with opening prints:

CVLT: 32 X's '07 earnings, has not broken top of range pricing, slightly above opening prints:

DIVX: 45 X's 07 earnings, has not broken an above range pricing, slightly above opening prints:

RVBD: 90 X's '07 earnings, has not broken an above range pricing, currently nearly 100% above opening prints:

pretty eye-opening huh.....take-away is: aggressive pricings and even more aggressive openings, no earnings or very high multiples, and overall a lot of money lost if buying and holding those opening prints.

They've simply been pricing and opening these tech ipos way too aggressively overall since the success of RVBD/DIVX. Been nothing short of a disaster overall since for anyone eager to buy as soon as they open for trading on their first day.

Disclosure: has no position in any of the above stocks at time of post. We may or may not take a position in any of the above stocks mentioned at some future time.

March 8, 2007, 7:11 am

Clearwire - CLWR

CLWR - Clearwire

CLWR - Clearwire plans on offering 23 million shares (assuming over-allotments) at a range of $23-$25. JP Morgan, Merrill Lynch and Morgan Stanley will be lead managing the deal, seven other firms co-managing. Post-offering CLWR will have 161 million shares outstanding for a market cap of $3.864 billion on a $24 pricing.

CLWR also has what I consider excessive option and warrant shares outstanding. Over the next 1-2 years there will most likely be a 35-37 million shares dilution coming from already exercisable options and warrants. That is at minimum a 21% dilution in sharecount to ipo shareholders directly due to options and warrants. CLWR will also need to access the capital markets at some point in the future. There is a very strong chance of at least one dilutive secondary over the next year or so.

IPO proceeds will be used for market and network expansion, spectrum acquisitions and general corporate purposes.

Entities controlled by Founder and Chairman Craig McCaw and CEO Benjamin Wolff will own 33% of CLWR post-ipo, Intel will own 29%. Motorola will also have a 10% ownership stake post-ipo. Craig McCaw and Benjamin Wolff will retain voting control of the public CLWR through a separate share class. Both Intel and Motorola made a substantial investment in CLWR in 2006. In return for the cash infusion, each received shares and agreements to partner with CLWR in building out a WiMAX network and producing equipment for said network.

Mr. McCaw is the reason this CLWR is getting done at this hefty market cap. Mr. McCaw, age 57, is a cellular phone pioneer who sold his company McCaw Cellular Communications, to AT&T Corp. in 1997 for $11.4 billion.

From the prospectus:

'We build and operate next generation wireless broadband networks that enable fast, simple, portable, reliable and affordable Internet communications. Our wireless broadband networks cover entire communities and deliver a high-speed Internet connection that not only creates a new communications path into the home or office, but also provides a broadband connection anytime and anywhere within our coverage area. We intend to evolve our network and the services we provide to facilitate a greater range of mobile communications services than we currently offer.'

CLWR is building their high speed wireless network based on WiMAX technology. CLWR's goal is to provide high speed wireline type services over broad area wireless networks. CLWR believes WiMAX technology enables them to combine the best features of cellular, cable modem, DSL, and WiFi networks into a single service offering that legacy networks cannot match.

CLWR feels their advantages over existing wireless networks include: 1) speeds competitive with wireline broadband offerings; 2) Portable - accessible anywhere within a CLWR enabled community. 3) Reliable - CLWR is the sole licensee on their networks, which enables them to minimize interference common on certain wireless networks that use unlicensed or shared radio frequencies.

CLWR was founded in October 2003 by Craig McCaw. Their first network was launched fairly recently, in August 2004. As of 12/31/06 CLWR's network in the United States is deployed in 34 markets across more than 350 municipalities and covers an estimated 8.6 million people. Considering the US population is approximately 300 million, CLWR's coverage area is still fairly limited, available to a little less than 3% of the current US population. In addition CLWR offers their wireless broadband services in Brussels, Belgium and Dublin, Ireland, where the network covers approximately 1.0 million people.

As of 12/31/06 wireless broadband Internet subscribers totaled 206,200. For the most part, CLWR's covered areas have consisted of 'test cases' in smaller metro areas. In late '06, CLWR launched their service in their first 'top 20' metro area, Seattle. Prices for the service range from $25-$40 monthly for Internet access. At the lower pricing, the speed is comparable to low speed DSL. At the higher end, speed is slightly lower than high speed cable. CLWR also offers Internet phone service for an additional charge. Note, currently CLWR's wireless modem requires to be plugged in to operate. So, while Internet access in a given area is 'anytime/anywhere', one does need to be near an electrical outlet. Also, all users in a given area share the throughput. More users could lead to slower speeds without either additional spectrum licenses or more towers.

In 2006, CLWR launched service in 9 new metro areas, 7 during the second half of the year.

WiMAX - I'll just quote from the prospectus here: 'Our advanced wireless broadband network currently relies on network infrastructure equipment that is based on proprietary non-line-of-sight, or NLOS, Orthogonal Frequency Division Multiplexing, or OFDM, technologies. We have committed to deploy networks based on the IEEE mobile Worldwide Interoperability of Microwave Access 802.16e-2005, or mobile WiMAX, standard once mobile WiMAX equipment is commercially available and meets our requirements.' Note the phrase, 'once WiMAX equipment is commercially available.' As of now, mobile WiMAX technologies have not yet become commercially available. CLWR will have a $3.8 billion market cap on a $24 pricing, and the equipment to communicate over the planned network buildout is not yet commercially available. Currently CLWR's networks and equipment do not operate on WiMAX; they are using something CLWR refers to as 'pre-WiMAX' or 'Expedience'.

Intel and CLWR are developing a mobile WiMAX service that will be available only over CLWR's network. Intel is a minority owner of CLWR and has devoted substantial R&D expense developing WiMAX equipment and networks. Intel is also manufacturing equipment for this expected service. Currently Motorola manufactures CLWR's 'Expedience' equipment.

CLWR believes they've the second largest 2.5G spectrum license position in the US. Sprint - Nextel has the largest 2.5G spectrum license position. After factoring in the recent purchase of all of AT&T's 2.5G spectrum licenses, CLWR's 2.5G licenses will cover areas in which approximately 250 million US residents reside. In addition CLWR has 3.5G spectrum licenses that cover approximately 200 million residents in Europe.

Industry - The US residential broadband market is anticipated to grow 14% annually over the next 4 years and exceed 68% penetration of US households by 2010. The North American WiMAX market is expected to increase from the current 30,000 installed bases to 21+ million by 2011. As broadband penetration grows, CLWR also hopes demand for anywhere high speed wireless Internet access via WiMAX will also increase substantially.

Strategic relationships - CLWR is still in the early stage of their buildout. Currently they offer services in areas in which only 3% or so of the US population resides. In addition, their focus is on the fledgling WiMAX technology for which mass produced equipment does not yet exist. Money and partnerships will be a key to whether or not CLWR sinks or swims. They do have three strong partners in their minority shareholders- Intel, Motorola, and Bell Canada. Currently, and in the future CLWR will need to rely on the three partners for access to equipment, deployment of mobile WiMAX and development of other value added services, such as VoIP telephony.

Competition - In this space, the competition is brutal. Cable, DSL, cell companies developing and promoting 3G and other high-speed wireless networks, municipalities installing Wi-fi city-wide, satellite name it pretty much. What this means is that high speed data communications will become a commoditized product offering over time. Fully expect more speed at lower prices over time as this occurs. As is often the case, this commoditization tends to benefit those whose networks are already in place and operational. They're much more able to compete purely on price than an operation such as CLWR still in a very early buildout stage. CLWR is a cash burning network buildout upstart that is operating in a sector whose product sold will continue to decrease in price due to competition.


$1.5 billion in cash post-ipo, $644 million in debt. While it appears here that cash minus debt is in the $5-$6 a share area, keep in mind CLWR's cash burn is massive. CLWR lost $1.75 per share in 2006, spent over $200 million in capital expenditures and a hefty additional amount on spectrum licenses. All told, CLWR's direct cash flow drain from operations/investment in 2006 was approximately $1.1 billion. Yes, $1.1 billion went out the door in 2006! This will continue to be a hefty cash burn operation for the foreseeable future as well. CLWR is really in the infancy of their planned buildout. Their financial situation on ipo looks fine, that will not be the case by early 2008 without an additional cash infusion. CLWR expects to burn through an astounding $5 a share in cash in 2007, which will actually be a bit of a decrease from 2006. This even assumes a doubling to tripling of revenues in '07. Expect cash per share (minus debt) to be closer to $1 per share by the end of 2007. This will mean CLWR will need more cash no later than the first half of 2008. Fully expect a pretty hefty dilutive secondary here sometime the first 12 months post-ipo. If market conditions allow, I would fully expect a similar size (20+ million shares) dilutive secondary as the ipo.

Note - CLWR founder as well as senior management have been very successful in the cellular phone business over the years. This is not a low risk ipo however. We've got a cash burning machine with little current market penetration planning on using an unproven technology. All that at a $3.864 billion market cap. In structure, this ipo resembles many of the fiber/wireless network ipos of 1999/2000. Some of those succeeded, many went bankrupt. Many of the ones that succeeded went through very dark days in 2001-2003. CLWR is a bet that some very smart people can pull off a high risk endeavor. A big factor here to me is the fat initial market cap for such a high risk venture still in relative infancy stage.

CLWR began their service in 2004. Revenues have grown strongly as CLWR has added service to communities and metro areas. 2005 revenues totaled $33 million. 2006 revenues tripled to $100 million. 2006 also marked the first year that CLWR experienced positive gross margins on their service and equipment sales. I would expect that trend to continue to get stronger as CLWR continues to expand. That does not mean CLWR is profitable however. While CLWR tripled revenues to $100 million in 2006, they also doubled SGA expense to $215 million. That disparity itself indicates CLWR is many years away from break-even. Expect that SGA expense line to continue to grow rapidly as CLWR advertises extensively in their coverage areas.

CLWR's losses are accelerating with their revenues. As noted above, expect that trend to continue over the next few years. Losses were approximately $1.75 per share officially in 2006. With 161 shares outstanding on ipo, that's a pretty hefty loss. Expect larger losses in 2007 and 2008. Cash flow drain will actually be more extensive for CLWR than the posted losses annually.

Revenues in 2007 should continue to grow strongly as CLWR expands their service. I would not be surprised if CLWR doubles or triples 2007 revenues to $200-$300 million. Much will depend on the timing of roll-outs. Note - CLWR sold their equipment segment to Motorola in the summer of 2006. They will no longer be receiving similar equipment revenues going forward. In 2006, approximately 35% of the revenues were from equipment sales. Going forward, the bulk of CLWR's revenues will be service revenues from customers subscribing to their Internet and phone plans. This could slow revenue growth a bit in 2007, however I would still expect revenue growth to be double or triple that of 2006. Regardless of revenue growth, do not look for anything but hefty losses here for the next few years.

Financially CLWR looks an awful lot like the network buildout ipos of 1999 and 2000. Note: 15% of CLWR's 2006 revenues appear to have come from related-party equipment sales in connection with a company controlled by CLWR founder Mr. McCaw. Similarly 15%-20% of 2005 revenues were also derived from related-party transactions with a company controlled by Mr. McCaw.


We'll start with the positives. 1) Senior executives with a solid track record in opening nationwide cellular communications networks. That is the driver of this ipo. CLWR's founder was instrumental in shifting cellular communications to a national voice network; 2) The financial backing of Intel/Motorola. Two strong partners. 3) A solid financial position on ipo. 4) A competitive product at a competitive price-point. I would use the Clearwire service were it available in my area.

Really, all things being equal, this would be enough to recommend this deal. However, all things are not equal here. CLWR is facing a slew of hurdles. 1) The cash burn rate figures to be enormous the next few years as CLWR builds out their network; 2) Competition is fierce. As CLWR spends to build out their network, the price points for broadband communication figure to shrink; 3) Dilution. Options and warrants alone figure to dilute those buying on ipo by 20% over the next two years. CLWR will also need more money. Expect a secondary in the first year. That will further dilute ipo holders by 10%+. That is 30% dilution for those buying the ipo. Fully expect CLWR's market cap in two years to be closer to $5 billion than $3.86 even if the price remains in the $24 ballpark. That is a hefty dilution for those buying ipo and for me trumps everything else.

Can CLWR be successful? I think it is possible. How much success is built in on a $4-$5 billion market cap? I would say more than a little. I've no idea really how this ipo will perform short or mid-term. For me though it really comes down to one factor: CLWR is coming public because they absolutely positively need the ipo money. I avoid ipos that come public out of a dire need for that ipo cash. It often bodes poorly for the long term prospects of that company. I'm passing on CLWR here. I realize there has been an awful lot of hype and attention on this ipo. There are just too many things here I do not like for this market cap. I wish Mr. McCaw and company well. I would use their product (if it were available in my area) but I won't be buying the stock.

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