*Clearnet (Canadian cdma carrier) strong sequential and YOY subscriber growth. Mention of thinphone, digital data.*
Clearnet Announces Second Quarter
1999 Results Network Revenue Growth Exceeds 100%
SCARBOROUGH, ON, Aug. 10 /CNW-PRN/ - Clearnet Communications Inc. (``Clearnet' or
``the Company') (TSE, ME - NET.A; NASDAQ - CLNTF) today reports its financial results and
commentary on the second quarter ended June 30, 1999.
Robert G. McFarlane, Clearnet's Vice President & Chief Financial Officer commented that, ``the
second quarter exhibited strong financial and operational progress. Based on results for the year to
date, it appears Clearnet is on track to achieve all of its operating metric objectives for 1999. Most
importantly, Clearnet again has reported strong network quarterly revenue growth (104% year over
year) in combination with only a 6% year over year increase in non-marketing cost of acquisition
expenses. Given the successful maintenance of a stable and efficient cost of acquisition per
subscriber addition, Clearnet's current strong subscriber growth is expected to generate significant
operating cash flow gains in the future.'
Financial Highlights:
Significant growth in the subscriber base and the consequent significant increase in network airtime
revenues resulted in second quarter 1999 revenue increasing 104% as compared to revenue for the
same quarter one year earlier. The combination of increased revenues partially offset by higher
marketing cost of acquisition expenses associated with a higher level of subscriber additions resulted
in negative earnings before interest, taxes and amortization (``EBITA') of $52.0 million for the
second quarter of 1999 being 22.6% lower than the result for the second quarter of 1998. Net loss
per share was $2.83 for the quarter ended June 30, 1999.
3 Months Ended June 30, 6 Months Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $79,892,000 $56,309,000 $148,729,000 $96,474,000
EBITA (51,970,000) (67,168,000) (97,405,000) (140,907,000)
Net Loss before
income taxes (153,249,000) (125,791,000) (279,142,000) (256,479,000)
Net Loss for
the period (153,954,000) (126,301,000) (280,552,000) (257,529,000)
Loss per share (2.83) (2.60) (5.17) (5.62)
Capital
Expenditures 71,668,000 79,564,000 120,974,000 126,290,000
Other Data:
Digital data represents combined Mike and PCS results.
3 Months Ended June 30, 6 Months Ended June 30,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Total
digital: - net subscriber
additions 61,573 52,410 100,030 99,330
(Mike &
PCS) - total end of
period 408,503 194,555 408,503 194,555
- ARPU, per month
(average revenue
per unit) $55.67 $59.15 $54.71 $58.08
- Churn, per month
(after 30 day
guarantee) 1.46% 1.19% 1.53% 1.10%
- Marketing cost of
acquisition $594 $607 $592 $645
Total digital & analogue
SMR subscribers 441,502 247,818 441,502 247,818
CORPORATE DEVELOPMENTS
Subscriber Growth -- Demand for wireless accelerated from already strong levels in Canada in the
second quarter of 1999. Canadian wireless industry net additions of 363,000 in the second quarter
of 1999 were 52% higher than the 238,000 net additions for the same period one year earlier. The
penetration rate of wireless services among the Canadian population has now reached
approximately 20% of Canada's 29.7 million population which based on the experience of more
mature wireless markets around the world is typically associated with a marked acceleration in the
rate of wireless adoption. Certain European countries now have penetration rates in excess of 50%.
Based on traditional seasonality, Canadian industry net additions for the first six months of 1999
correspond to annualized net additions of 1.5 to 1.6 million which would represent an approximate
40% increase over the previous record which was 1.1 million net additions in 1998.
Clearnet is benefiting from the strong level of wireless industry demand. Clearnet's subscriber
growth in the second quarter of 1999 was the highest of any non-fourth quarter in the Company's
history and was achieved without much benefit from the introduction of new handsets which
occurred late in the quarter.
Introduction of New Handsets -- Clearnet has introduced many new handsets recently which should
facilitate continuation of strong growth for Clearnet in the second half of 1999. Clearnet introduced
the new Nokia 6188 dual mode handset for clients of Clearnet's post-paid PCS service on June 14,
1999. The Say When Qualcom 1960 single-mode digital phone which operates on Clearnet's digital
network across Canada was also introduced on May 20, 1999. Later in the second quarter on July
9, 1999, Clearnet introduced the Mike i1000plus and Mike i500plus, two new Internet-ready
phones that integrate a digital phone, Mike's Direct Connect two-way radio and alphanumeric
paging with an Internet microbrowser, e-mail, fax and remote dial-up capabilities. These new
Internet-ready phones connect with virtually any digital device (including personal computers,
Personal Digital Assistants and industrial computing equipment) without the need for a modem,
allowing clients to send and receive e-mails and faxes, surf the Internet or access corporate intranets
and networks.
Introduction of Pre-paid Service -- Pre-paid services have encountered strong demand in Canada
and around the world where they have been introduced in recent years. Clearnet remains reluctant
to subsidize its digital handsets to a competitive level for pre-paid use in the absence of meaningful
recurring monthly access charges given the traditional lower ARPU, higher churn nature of such
pre-paid subscribers. In the second quarter of 1999, Clearnet launched its ``Say When' service in
an attempt to focus on a profitable niche of the pre-paid market, users who desire cost control, are
moderate to heavy users of wireless and who have necessary credit profiles. The Say When service
entails service plans similar to post-paid plans and requires payment of monthly access charges
which should result in a profitable ARPU profile. Clearnet continues to roll-out this product to its
distribution channel in the third quarter as until recently, roll-out of the new Nokia 6188 dual-mode
handset was prioritized. Pre-paid results were immaterial to second quarter results.
Operating Metrics -- The trend in operating metrics was quite positive in the second quarter of
1999. As compared to the first quarter of 1999, second quarter digital net subscriber additions
increased 60%, digital ARPU increased 4% to an industry leading $55.67, digital churn decreased
to an industry low 1.46% per month and digital marketing cost of acquisition per gross subscriber
addition remained stable at $594. A more detailed discussion of these metrics is provided in the
Management Discussion and Analysis of Financial results section below.
Business Plan Now Funded -- Public debt issues on February 16 and April 22, 1999 raised
proceeds of Cdn. $100 million from the sale of 10.75% Senior Discount Notes and US $256
million from the sale of 10.125% Senior Discount Notes, respectively. Combined with the April 22,
1999 closing of a Cdn. $350 million senior secured credit facility to be used for Clearnet's Mike
business, year-to-date financing has totaled approximately Cdn. $829 million. Clearnet has raised
approximately $2.8 billion in capital to fund its digital business plan and the new financing has
resulted in Clearnet being in the position of having its business plan fully funded into 2001 at a
reduced cost of capital.
Updated Statement of Risk Concerning Impact of the Year 2000 -- Many computer programs and
other date sensitive automated systems were designed and developed without considering the
impact of the upcoming change of the millennium. Such software and systems containing
microprocessors may be date-sensitive such that they have the potential to not function correctly.
For example, the year 2000 may be interpreted as the year 1900. Such date sensitivity issues may
arise before, during and after the year 2000. If not corrected, this could cause difficulties in
obtaining accurate system data and support throughout all areas of Clearnet's business.
To minimize exposure to this issue, Clearnet established a cross-functional year 2000 team to
identify the year 2000 readiness of its wireless network operating systems, internal and external
processes and systems, including dependencies with suppliers and clients. In addition, Clearnet's
year 2000 team has the responsibility to ensure the remediation of non-compliant systems as
necessary and to coordinate risk prevention and contingency efforts. Clearnet's year 2000 project
team has completed its inventory review and assessment phase and has conducted compliance
testing with emphasis on interoperability compliance of key system dependencies. Such testing
focused on mission-critical applications, network engineering and information technology
infrastructure components. Minor issues found during testing were remediated immediately, and all
production environments were year 2000 compliant as of June 30, 1999. All modifications to the
production environment subsequent to June 30 are required to be implemented subject to stringent
change management controls to ensure the maintenance of year 2000 compliance.
In February 1999, Clearnet conducted interoperability testing of the Mike and PCS networks along
with other major Canadian wireless and wireline carriers. Results of such testing were positive, and
provided high confidence that no year 2000 failures should occur. Clearnet's year 2000 project
team has also commenced enterprise wide contingency planning as well as participating in telecom
industry wide contingency planning initiatives. The purpose of year 2000 contingency planning is to
reduce the impact of any such failures, by identifying and addressing these disruptive incidents,
should they occur. Regardless of the extent of identifying potential internal or external exposures,
notwithstanding Clearnet's confidence that the products and systems of key suppliers (as well as the
nature of their interoperability) will be year 2000 compliant, and notwithstanding the above-noted
contingency plans, there can be no assurance that such products and systems will be modified,
converted or remediated as required on a timely basis. Such failures could have an adverse effect on
Clearnet.
Clearnet has substantially replaced or implemented new systems throughout its business since the
start of the build of its digital networks in October 1994, including billing and commissioning
systems, and switch and network operating systems. In addition, a new enterprise-wide financial
and planning system was implemented in 1998. Clearnet does not have a substantial number of
legacy systems and utilizes new operating systems that are year 2000 compliant. The Company has
completed all modifications and conversions required to become internally year 2000 compliant on
a timely basis, without material cost.
Based on its current assessment, Clearnet believes that the year 2000 issue will not have a material
adverse impact on the results, operations or financial condition of Clearnet. However, there can be
no assurance this will be the case.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
Revenue
-------------------------------------------------------------------------
Increase (decrease) $ in millions %
-------------------------------------------------------------------------
3 month periods ended June 30:
Network Revenue 33.6 104.1
Equipment sales, rental and service sales (10.0) (41.6)
-------------------------------------------------------------------------
6 month periods ended June 30:
Network Revenue 65.9 120.0
Equipment sales, rental and service sales (13.7) (32.9)
-------------------------------------------------------------------------
Clearnet's network revenue continues to grow with the expansion of its subscriber base with
increases of 20% over the first quarter of 1999 and 104% over the same quarter one year earlier.
Total digital and analogue subscribers were 441,502 as of June 30, 1999 representing a 15%
increase from March 31, 1999 and a 78% increase from 247,818 at June 30, 1998. Combined net
digital additions of 61,573 in the second quarter of 1999 were substantially all on post-paid plans
and increased total digital subscribers by 110% to 408,503 at June 30, 1999 from 194,555 one
year earlier.
PCS net additions of 39,318 in the second quarter of 1999 represented a 79% increase over the
21,977 net additions for the first quarter of 1999 and a 10% increase over the 35,754 net additions
for the second quarter of 1998. Clearnet expects this strong rate of subscriber loading to continue in
the balance of the year given the introduction of the new PCS handsets late in the second quarter.
Total PCS subscribers were 255,673 at June 30, 1999 representing a 112% annual increase.
Mike net additions of 22,255 in the second quarter of 1999 represented a 35% increase over the
16,480 net additions for the first quarter of 1998 and a 34% increase over the 16,656 net additions
for the same period one year earlier. The second quarter of 1999 was second only to the fourth
quarter of 1998 for Mike subscriber loading since commercial launch in 1996. Total Mike
subscribers were 152,830 at June 30, 1999 representing a 106% annual increase.
Total analogue SMR subscribers decreased to 32,999 at June 30, 1999 from 53,263 at June 30,
1998 with conversions in the second quarter of 1999 to the Mike network of 1,259 for a total of
2,489 year to date. Clearnet is encouraging its analogue SMR users to convert to the Mike network
and is not actively marketing analogue service in major urban areas. Accordingly, excluding SMR
business acquisitions, Clearnet's analogue subscriber base has decreased and is expected to do so
throughout the foreseeable future.
Digital ARPU of $55.67 per month in the second quarter of 1999 increased 4% from $53.59 per
month in the first quarter of 1999 but decreased from $59.15 per month for the same period one
year earlier. The increase in digital ARPU as compared to the first quarter of 1999 and the same
quarter one year earlier is attributable to an increase in minutes of use (``MOU') reflecting
successful adoption of flat rate evening and weekend pricing plans. MOU increased 17% to 299
minutes per month in the second quarter of 1999 from 256 minutes in the first quarter of 1999 and
increased 12% from 269 minutes per month in the second quarter of 1998. Mike ARPU decreased
6% to $70.27 per month for the second quarter of 1999 from $74.47 per month for the same
quarter one year earlier but increased 3% from $68.23 in the first quarter of 1999. PCS ARPU
decreased 6% to $46.96 per month for the second quarter of 1999 from $50.00 per month for the
same quarter one year earlier but increased 5% from $44.85 in the first quarter of 1999.
Digital churn was 1.46% per month after the 30-day guarantee period and was 1.61% per month
including deactivations within the 30-day guarantee period in the second quarter of 1999 as
compared to 1.62% and 1.75% per month, respectively, for the first quarter of 1999 and 1.19%
and 1.65% per month, respectively, for the second quarter of 1998. Clearnet's churn levels remain
at world class levels. Assuming normal economic conditions, Clearnet continues to expect digital
churn including deactivations within the 30-day guarantee period to remain in the future in the
approximate range of 1.5% to 2.0% per month. The analogue churn rate for the three month period
ended June 30, 1999 was 3.20% as compared to 3.00% and 2.64% for the three month periods
ended March 31, 1999 and June 30, 1998, respectively.
Equipment sales, rental and service revenue decreased significantly during the second quarter as
compared to the same period one year earlier as a result of digital handset price reductions and
decreased analogue SMR sales.
Network service costs
Increase (decrease) $ in millions %
3 month periods ended June 30 (0.2) (0.9)
6 month periods ended June 30 3.2 6.9
Network service costs consist of site related expenses, transmission costs, spectrum license fees,
roaming expenses and other direct costs related to network operations. Network service costs
decreased slightly for the second quarter of 1999, as compared to the same period one year earlier,
despite the increased costs associated with a significant increase in the number of cell sites in service
and expanded geographic coverage of both the Mike and PCS networks, mainly due to reductions
in the cost of leased transmission rates negotiated with a number of telecommunication carriers
effective in 1999. The population coverage at June 30, 1999 was 17.1 million and 14.3 million for
the Mike and PCS networks, respectively, as compared to 14.3 million and 11.6 million at June 30,
1998. At June 30, 1999 the population of the census metropolitan areas and census areas in which
Clearnet PCS provided digital service including areas not directly covered by digital Clearnet PCS
service was approximately 16 million. The expanded PCS national population coverage provided
through analogue roaming is approximately 27 million.
Equipment sales, rental and service costs
Increase (decrease) $ in millions %
3 month periods ended June 30 (0.8) (2.0)
6 month periods ended June 30 (9.1) (11.8)
Equipment costs include the full cost of handsets sold and activated, as well as all related
accessories sold, for Mike, PCS and SMR. Such costs include any subsidy portion which is
included in the marketing cost of acquisition calculations.
Costs with respect to equipment sales, rental and service decreased in the second quarter of 1999
as compared to the same quarter one year earlier primarily as a result of lower digital handset costs
and to a lesser extent, as a result of reduced analogue SMR sales.
Marketing expenses
Increase (decrease) $ in millions %
3 month periods ended June 30 5.2 40.0
6 month periods ended June 30 7.2 29.6
Marketing expenses consist of commissions and other distribution channel compensation expenses,
as well as advertising and promotion expenses, for both analogue and digital services. Marketing
expenditures do not include the cost of equipment. Marketing expenditures increased for the quarter
ended June 30, 1999 as compared to the quarter ended June 30, 1998 primarily because of
commissions paid to dealers, resulting from increased gross subscriber additions. Gross digital
subscriber additions were 79,892 in the second quarter of 1999 as compared to 60,656 for the
second quarter of 1998.
The digital marketing cost of acquisition (``COA') (which includes digital handset subsidies as well
as digital marketing expenses such as commissions and advertising & promotion expenses) was
$594, $588 and $607, respectively, for the quarters ended June 30, 1999, March 31, 1999 and
June 30, 1998. The decrease in the COA over the same quarter one year earlier was primarily due
to lower PCS handset subsidies. The digital COA for the second quarter of 1999 remained stable
with the COA for the first quarter of 1999 as higher COA expenses ($47.4 million as compared to
$32.7 million) were amortized over a proportionately higher number of gross subscriber additions.
There was no material difference between the COA for Mike and PCS in the second quarter of
1999.
General and administrative expenses
Increase (decrease) $ in millions %
3 month periods ended June 30 4.2 9.3
6 month periods ended June 30 7.4 8.3
General and administrative expenses consist of expenses related to employees, facilities, bad debt,
public listings, investor relations and various other general and administrative costs. General and
administrative expenses increased only slightly for the second quarter of 1999 as compared to the
same period one-year earlier primarily as a result of improved economies of scale. While the digital
subscriber base grew by 110% and network revenue by 120%, there was only an 8.3% increase in
general and administrative expenses in the first six months of 1999 as compared to the same period
one year earlier. As at June 30, 1999, Clearnet had 2,084 employees, which represented a 7%
increase from 1,939 employees at June 30, 1998.
Negative EBITA
Increase (decrease) $ in millions %
3 month periods ended June 30 15.2 22.6
6 month periods ended June 30 43.5 30.9
Negative EBITA was $52.0 million in the second quarter of 1999 as compared to $67.2 million and
$45.4 million, respectively, in the same quarter one year earlier and in the first quarter of 1999.
Negative EBITA improved significantly year over year primarily as a result of the increase in
network revenues from the growth in digital subscribers greatly exceeding the increase in operating
expenses. Negative EBITA increased in the second quarter of 1999, as compared to the first
quarter of 1999, primarily as a result of increased COA expenses related to significantly higher
subscriber additions.
The negative EBITA for the second quarter of 1999 consisted of negative EBITA before marketing
cost of acquisition expenses (``EBITA-COA') of $4.6 million and COA expenses of $47.4 million.
Negative EBITA-COA was $ 30.4 million and COA expenses were $36.8 million in the second
quarter of 1998. Negative EBITA-COA was $ 12.7 million and COA expenses were $32.7 million
in the first quarter of 1999. The year over year and quarter over quarter significant improvement in
EBITA-COA reflects significant revenue growth, particularly recurring network revenues, and
economies of scale realized on non-marketing expenses which are largely fixed in nature. Clearnet
continues to expect quarter over quarter improvements in EBITA-COA for the foreseeable future.
Clearnet expects the trend of a declining negative EBITA in future quarters with similar subscriber
activation levels.
Amortization
Increase (decrease) $ in millions %
3 month periods ended June 30 13.1 40.0
6 month periods ended June 30 22.2 35.1
Amortization increased for the three and six month periods ended June 30, 1998, primarily as a
result of the amortization of capital assets with respect to the expansion PCS and Mike networks.
Interest expense, net
Increase (decrease) $ in millions %
3 month periods ended June 30 24.3 92.5
6 month periods ended June 30 38.6 75.0
Net interest expense increased as a result of the discount notes issued in February 1999 and April
1999 which are due in 2009 and to a lesser extent as a result of a $6.0 million premium paid on the
repurchase of a portion of the 2005 notes. Cash interest paid for the three and six month periods
ended June 30, 1998 was $1.8 million and $7.3 million, respectively, which consisted primarily of
the accreted interest on senior bank financing. Cash interest income for the three and six month
periods ended June 30, 1999 was $1.3 million and $5.8 million, respectively.
Net loss per share
Increase (decrease) $ %
3 month periods ended June 30 0.23 8.9
6 month periods ended June 30 (0.45) (8.0)
The average Class A Non-voting shares outstanding for the three month periods ended, assuming
full conversion rights are exercised by the Class B, C and D shareholders, was 54,318,000 and
48,640,000, at June 30, 1999 and 1998, respectively. In addition, as at June 30, 1999 there were
1,211,100 warrants and 3,448,566 options outstanding. The increase in the average number of
shares outstanding was principally a result of the May 1998 issuance of 10,925,000 Class A
Non-Voting Shares. As of June 30, 1999, there were 54,338,877 Class A shares outstanding,
assuming full conversion rights are exercised by the Class B, C and D shareholders. The increase in
the net loss per share for the second quarter of 1999 as compared to the same quarter one year
earlier is substantially a result of increased non-cash charges, notably amortization and interest
expense.
Cash Flows
Clearnet used $27.8 million in cash from operating activities for the second quarter ended June 30,
1999, as compared to cash provided by operations of $18.5 million for the same quarter one year
earlier. Cash used in operations increased, despite lower EBITA losses resulting from revenue
expansion associated with the Mike and PCS subscriber bases, mainly due to a significant reduction
in accounts payable.
Cash provided by financing activities was $323.4 million for the second quarter of 1999, as
compared to $195.8 million for the same quarter one year earlier. The increase was a result of two
issues of Senior Discount Notes due in 2009 which generated aggregate net proceeds of $369.8
million, which was partially offset by a redemption of approximately $32 million of Senior Discount
Notes due in 2005.
Cash used in investing activities was $71.7 million and $79.6 million for the three month periods
ended June 30, 1999 and 1998, respectively. Cash used in investing activities in the second quarter
of 1999 consisted primarily of capital asset additions. Total capital asset additions attributable to
PCS and Mike for the second quarter of 1999 were $34.6 million and $37.1 million, respectively.
Clearnet is currently in the midst of a Mike and PCS capital expenditure program with
approximately $580 million in expenditures remaining on a $700 million program for the two years
ending December 31, 2000.
Clearnet had approximately $355.4 million in cash and marketable securities on hand as at June 30,
1999. In addition, Clearnet had $1,913.6 million in long-term debt outstanding consisting primarily
of senior discount notes, Lucent vendor financing and the Mike senior bank credit facility. As at
June 30, 1999, Clearnet had a shareholders' deficiency of $431.3 million.
FORWARD LOOKING STATEMENTS
Some statements in this release look forward in time and deal with other than historical or current
facts. Such statements are qualified in their entirety by the inherent risks and uncertainties
surrounding future expectations, including the risks associated with: changing local and regional
economic conditions, the costs of infrastructure and handsets, market acceptance of wireless
telephony generally and Mike and PCS specifically, average subscriber revenue levels, churn rates,
cost of acquisition, technological developments of ESMR and PCS and of present and future
competing products and services, EBITA, and capital expenditure trends and other risk factors
detailed in Clearnet's comprehensive public disclosure documents and other filings with securities
commissions. Clearnet's actual future experience may differ substantially from the expectations
described in such forward looking statements.
OTHER DATA:
Digital data for three months and six months ended June 30, 1999 represent Mike and PCS results.
3 Months Ended 6 Months Ended
June 30, June 30,
---------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Total
digital: - net subscriber
(Mike & additions 61,573 52,410 100,030 99,330
PCS) - total subscribers
end of period 408,503 194,555 408,503 194,555
- ARPU, per month
(average revenue
per unit) $55.67 $59.15 $54.71 $58.08
- Churn, per month
(after 30 day
guarantee) 1.46% 1.19% 1.53% 1.10%
- Churn, per month
(including 30
day guarantee) 1.61% 1.65% 1.68% 1.67%
- Marketing cost
of acquisition
(COA) $594 $607 $592 $645
- Minutes of use,
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