Globalstar, Inc. (GSAT) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2011 Globalstar Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Dean Hirasawa, Director of Public and Investor Relations for Globalstar. Please proceed.

Thank you, operator, and good morning, everyone. Thank you for joining us for today's conference call to discuss Globalstar's 3 month and full year results for the period ended December 31, 2011. Before we begin, please note the following. This call may contain forward-looking statements within the meaning of federal securities laws. Factors that could cause results to differ materially are described in the Safe Harbor section of today's press release and in Globalstar's SEC filings, including the annual report on Form 10-K for the period ended December 31, 2011, which will be filed soon. The press release, this conference call and the associated slide presentation, which is available on the Investor Relations page of our company website, include the discussions of certain non-GAAP financial measures as defined under SEC rules. The press release provides a reconciliation of each of those non-GAAP measures to the most comparable GAAP measure. Please note that the information in this call is accurate only as of today, Monday, March 12, 2012. Today's press release, contains certain financial information is available on the company's website at www.globalstar.com. Later today, an audio recording of this conference call will also be available via telephone dial-in, and a webcast recording, along with a copy of the slide presentation, will also be made available on the company website. Today's call is being hosted by Mr. Jay Monroe, Chairman and CEO of Globalstar, Inc. Today's -- joining Mr. Monroe are Corporate Controller, Rebecca Clary; and President of Global Operations, Tony Navarra. Each will be available for questions following the prepared remarks. At this time, I would like to turn the call over to Mr. Monroe.

Thank you, Dean, and good morning, everyone. Globalstar has had many significant accomplishments throughout 2011, and we ended the year in rather dramatic fashion with a successful third launch in late December and fourth quarter financial results that mark a turnaround for our business and our shareholders. I'll discuss these events in more detail later in the call. But first, we will lead off with a review of the company's financial performance by Rebecca Clary, Globalstar's Corporate Controller. I'll then provide an update on some important milestone activities for the company, followed by Q&A session in which Rebecca, Tony Navarra and I will be available to respond to questions. I'm pleased to introduce Rebecca Clary to the earnings call. Rebecca is Globalstar's Controller and a tremendous asset to the company. She came to us from PriceWaterhouseCoopers as one of the many talented people recruited when we transitioned our headquarters to Louisiana. Rebecca is here to provide a review of our financial results for the fourth quarter and for the full year 2011. Rebecca?

Thank you, Jay, and good morning, everyone. I'm pleased to report that in the fourth quarter of 2011, the company had positive quarterly adjusted EBITDA for the first time in 4 years. The company's adjusted EBITDA for the fourth quarter was $1.6 million, an improvement of $5.9 million from the fourth quarter 2010. This improvement was due to a combination of increased revenue and a reduction in operating expenses as we improved and streamlined our operations during the quarter. With the renewed focus on our core operations, we were successful in reducing operating expenses, excluding EBITDA adjustments, by approximately $5 million or 24% for the fourth quarter 2011 compared to the fourth quarter of 2010. Approximately half of the expense reductions were payroll related. The remaining cost reductions related to all other areas of the company segment. We believe these expense reductions are sustainable in 2012 before considering prudent investments in the company's business processes and IT infrastructure. Our revenues increased $0.9 million to $17.4 million in the fourth quarter of 2011 compared to $16.5 million in the fourth quarter 2010. Service revenue grew $1.4 million while equipment sales revenue decreased $0.5 million. The growth in service revenue resulted primarily from a $2.3 million increase in SPOT and commercial Simplex revenue. This increase resulted from the continued growth in our subscriber base. The average number of SPOT subscribers increased 35% while the average number of Simplex subscribers increased 8%. This revenue growth was offset by a decrease in $1.1 million in duplex service revenue. Although the significant satellite delivery delay for Thales had impacted the company's revenue recovery, we expect duplex revenue to increase with continued service level improvements as additional second-generation satellites are placed into service throughout 2012. Equipment sales revenue decreased due primarily to delays in the production of our Simplex asset-tracking products, resulting from a change in manufacturer during the second half of 2011. Adjusted EBITDA for the year-end December 31, 2011, also improved compared to 2010. Adjusted EBITDA was a negative $3.6 million in 2011, an improvement of $4.9 million over 2010. This improvement was less than the quarter-to-quarter improvement because our cost-saving initiatives were not implemented until the end of the third quarter 2011. Total revenues for the year also increased by $4.9 million. The company's net loss in the fourth quarter 2011 increased by $15.6 million to $33.7 million. This is driven primarily by noncash items including a $10.3 million derivative loss in the fourth quarter 2011 and -- as compared to a $12.2 million derivative gain in the fourth quarter 2010. The company's net loss for the full year 2011 decreased $42.6 million to $54.9 million. This improvement was due primarily to derivative gains and revenue increases offset by higher depreciation expense. We ended 2011 with $10 million of unrestricted cash, $8 million remaining in our COFACE facility and $46 million in our contingent equity account. During the fourth quarter, we withdrew a total of $14 million from this account to pay certain operating expenses, inventory purchases and interest obligations. We expect to continue to draw from this account throughout 2012. As disclosed last week, we successfully completed an amendment to our COFACE facility, which, among other things, deferred our first repayment date to 2013. We believe this amendment demonstrates the willingness of our banking group to align the repayment schedule and covenant levels with the updated launch schedule and concurrent service improvement. With no principal payments in 2012, we expect to be able to enter a period of new price revenue recovery prior to the beginning of the facility amortization period. As discussed previously, we continue to work towards securing longer-term financing to help fund future capital expenditures, including the remaining portion of our second-generation ground infrastructure and the construction and launch of additional second-generation satellite beyond the first 24. As disclosed in our Form 10-K, which we file with the SEC tomorrow, we believe that our cash on hand, the funds available in our contingent equity account, cash flow from operations and the remaining availability under our COFACE facility will be sufficient to meet our contractual and anticipated capital obligations in 2012 without additional financing. Going forward, although we remain encouraged by our fourth quarter performance, management continues its focus on improving profitability and increasing revenue. Although the improvements in performance over the past quarter were due to increased SPOT and Simplex revenue, combined with lower costs, we expect that the main future driver of cash flow will be the full restoration of our duplex service. I will now turn the call back over to Jay.

Thank you, Rebecca. As you just heard, we are very pleased with the positive adjusted EBITDA the company generated last quarter. It has been a longtime since we reported such a result. We're encouraged with our financial progress and believe this past quarter is an inflection point for Globalstar and demonstrates a turnaround in our business. We accomplish this by restructuring our operations when it makes sense to do so. As an example in late 2011, we undertook an initiative to streamline the manufacturing process to better align it with current product strategies. We signed agreements with new third-party contract manufacturers for our SPOT, SPOT Connect and Simplex-based asset-tracking products. Changing manufacturers is never an easy task, and in this case, our supply chain was negatively affected in the first quarter. However, we expect this initiative to result in reduced costs and other efficiencies and to ensure a long-term, stabilized supply chain for our Simplex and consumer product lines. With increased discipline in the areas of sales, marketing and product development, plus a new constellation offering improved coverage and a return to the industry's highest quality service for our customers, we are laying a strong foundation for this business. Throughout 2011, Globalstar made the necessary investments in operational improvements to best realize the significant opportunities that lay ahead. We are focused on increasing our revenue and adjusted EBITDA in 2012, which we expect will be manifest more as the year progresses. At the most fundamental level, last year, we launched 12 new satellites, which means we are now only one launch away from restoring full coverage. Many of these new satellites have reached their final orbital altitude and are in service providing our subscriber base with enhanced service quality. We're happy to announce that duplex and voice service levels have more than doubled since the beginning of 2011. With 3 launches now complete, we expect to achieve an 80% to 90% call connection rate for customers located in our key markets, once only the already launched satellites are in service. With Simplex services like SPOT, we are at full coverage now. Our customers have responded to improved coverage by increasing the usage of the network, and they are once again showing interest in purchasing new equipment and higher ARPU airtime plans. Our customers can expect continued improvement in their service quality as we place additional satellites into orbit throughout the balance of 2012. We plan our fourth launch in the second half of this year. That launch will complete the constellation and return us to the service level our customers enjoyed just a few years ago. We will update you with the actual timing of the fourth launch as that campaign progresses and a launch date is finalized. And as an update, the momentum-wheel issue we have previously discussed has had no significant impact on our customers, and none of the satellites launched in late December has shown any indication of being affected. We're working diligently with our satellite manufacturer and others to develop a software patch to correct the problem, and we are encouraged that recently completed computer simulations in both California and France were successful. There is additional development work necessary over the coming months but we expect to implement the fix sometime in the next 6 months. We are using the same basic solution as has been successfully implemented on other satellite systems previously. Once installed, we expect all of the satellites to successfully complete their 15-year missions. I know many of you are interested in the status of the commercial arbitration with Thales regarding our rights to order additional satellites under our contract. We participated in an evidentiary hearing in New York in late January and are in the midst of filing our post-hearing briefs now. We expect the arbitration panel to render a decision in the near future. Lastly, Globalstar announced important and positive changes to the COFACE supported loan agreement we have with our 5 French banks. Following the efforts of both COFACE and the bank group, the agreement was modified to take into account the delayed delivery of our satellites. We're pleased with the amendment and would like to acknowledge and thank COFACE, members of the lending group and all other parties involved for recognizing the need for this amendment while we complete the launch of the new constellation. As always, a brief update regarding Globalstar's spectrum is in order. As most of you're aware, the FCC's National Broadband Plan has encouraged the use of additional spectrum, including Globalstar's, to deliver wireless terrestrial broadband services. Recently, the FCC announced a Notice of Proposed Rulemaking regarding the use of a 2 gigahertz spectrum previously held by ICO and TerraStar, which is now being transferred to DISH Network. We support the FCC's decision to address these issues in the context of a rulemaking, and we intend to participate actively in the proceeding. Ultimately, we expect the FCC to provide MSS operators with additional flexibility to utilize our spectrum terrestrially, so as to better serve their customers with new innovative services and help solve the nation's intending spectrum shortfall. In summary, 2011 was an exciting year for us. We completed the licensing and registration of our second-generation constellation permitting its operation throughout the Globalstar coverage area. In the fourth quarter, we reported positive adjusted EBITDA for the first time in 4 years. We substantially improved satellite coverage and service quality by launching 12 new satellites. We streamlined our operations and reduced costs. We modified our third-party manufacturing relationships for increased efficiency and reduced delivery times, and just last week, we announced substantial and important modifications to our COFACE loan agreement. As we move forward in 2012, we will continue to build on all of these accomplishments while working on a numerous new and exciting opportunities such as the following: We're working with ADS-B Technologies on a global next-generation, satellite-based air traffic control management system and are confident that Globalstar and ADS-B will provide the best solution to meeting the requirements for air traffic management organizations around the world. We are also providing low-cost, innovative solutions to the MSS market as part of Globalstar's corporate DNA, and that same DNA will drive our innovation in the MSS voice and duplex data markets. We are working on new products and technologies that we feel are nothing short of revolutionary, and we anticipate making important technology partnership announcements in the very near future. As we complete the deployment of our new constellation, we're also experiencing an increased interest in establishing new gateways in underserved parts of the world. We have previously announced an agreement to restart the Globalstar gateway in Saudi Arabia, and we expect to enter into additional Gateway agreements around the world that will further expand our footprint. In short, we are laying the product and business operations foundation necessary to grow our subscriber base with an increased concentration on driving revenue and profitability in 2012 and beyond. And while some certainties remain, I firmly believe that Globalstar will return to the high EBITDA margin business that we enjoyed prior to 2007. Thank you all for your time today, and I look forward to speaking with you again in about 2 months. Rebecca, Tony and I are now available to answer your questions.

[Operator Instructions] Our first question will come from the line of Jim McIlree with Dominick & Dominick.

When do you think it would be reasonable to expect a resumption in growth in duplex subscribers? And also, can you help me understand why the ARPU for duplex was so much lower Q4 versus Q3?

Sure, Jim. Let me take the questions in that order. First, we expect to see recovery during the course of this year in duplex. Every time we add another satellite to the constellation, the service quality to the customer increases. And as it increases over a certain threshold, they become more excited about buying the service. We have what we believe is substantial pent-up demand with people that already own Globalstar equipment and, as a result, expect to see that increase rather dramatically over the course of 2012. On the question of ARPU, I think I'd like to toss back to Rebecca.

Jim, the fourth quarter 2011 included a onetime revenue adjustment at one of our international subs. That's kind of skewing that ARPU amount. I think a better representation of kind of the trends that we're seeing in more normalized levels will be to look at the year-to-date amount, which also would show a decrease, but a more moderate decrease. And I think at certain level of attrition among our subscriber base in the duplex side is expected, which of course, is going to bring down your revenues. And also just from a marketing perspective, over the past year or so, we have transitioned certain of our subscribers from kind of the legacy, higher-cost, higher-ARPU plans to lower-cost plans.

But the biggest part of that $3 plus quarter-to-quarter decline in ARPU was the onetime revenue adjustment, is that correct?

That's correct.

Okay. And then on the first question that I asked, as you bring the new satellites into the constellation, you said that will be the driver of better duplex results. Can you remind us how many of the launched satellites are currently active?

I sure can. In fact, I'd like Tony to answer that question. And for the people listening, Tony is on the road today, so he joined us remotely. Tony, can you answer that one for Jim?

Yes. Jim, the answer to your question is all of the satellites that have been launched are active, and we have them in various states of operations as we orbit rate [ph] them into their final satellite orbital plane.

And when will they be -- when will all of them be operational?

The plan is to have all of the satellites that have been launched into service, that is from batch 3, as early as this month. We begin to bring those into service, then we plan to have all the satellites in service by later this summer.

And our next question will come from the line of Bill Oppenheimer with Oppenheimer.

I'm all set. The question's been answered.

And our next question will come from the line of Brian Davidson with Stark investments.

This is actually Alex Sammarco for Brian. I have a couple of follow-up questions from the commentary. First is thank you very much for the liquidity update. I noticed that your cash balance actually improved by about $4 million in the quarter. Can you just talk a little bit about what happened there, if that's a onetime working capital change on the balance sheet? And then second, Rebecca, to the extent that you foresee having enough cash and liquidity to make it through the end of 2012, can you talk a little bit -- you did a good job in going through the source's side. Can you just talk a little bit about the expected uses? Then I have a couple of follow-up questions.

Sure. To address your first question as it relates to our working capital, as you probably noticed, we did make 2 draws during the fourth quarter from our contingent equity account, which totaled $14 million. So that would, of course, increase our cash balance. In terms of capital obligations during 2012, currently the contract state that we owe moftin [ph] payments of $84 million. That -- it's really kind of roughly half is space, half is ground, and then we have $20 million of interest payments due during 2012.

Alex, a quick note to -- on those numbers. When you look at the ground portion of the CapEx this year, as you know, the ground portion is something we've been working with Ericsson and Hughes on for some time. I mean, we'll continue to work with them in order to time the development of the second-generation ground to our cash ability to pay, and they have been working with us in order to adjust that schedule to recognize the delays that we've seen in the satellites themselves. So we would not expect to spend all of that in this year at all.

Okay. And as I understand it, noticing from how the Hughes-Ericsson relationships have developed over the past 24 months, as you've experienced satellite delays, it seems like they've been pretty willing to work with you. Can you just comment on that, and maybe do you have extensions in place or discussions underway?

We do have certain extensions in place, and we always have discussions with them. Both are tremendously valuable, long-term suppliers to Globalstar. With -- and the nature of the relationship goes way beyond the first deliverables, and so there is a considerable incentive on the part of both Globalstar and these 2 companies in order to continue to work together. They are large, large companies, and the value of the work that we're doing with them is relatively small compared to a lot of what they do. And they've known us for a very long time. So they keep working with us, and we find ways to massage the schedule to accommodate the revenue recovery that we see once the satellites are up and ARPU and duplex revenue picks up again for us.

Great. I appreciate that update. Jay, another question. In your scripted remarks, you mentioned negative developments in the supply chain. Can you just expand on that a little bit?

Sure. We were in the second half of 2011 reviewing who was going to build some of our consumer products, and we made a change during that period of time. And when you make a change like that, there are inevitably issues of transition. And for us, we wanted to make absolutely certain that the quality of the product that we were delivering was unassailable. So we took our time with the new vendors making certain that everything imaginable in those products was fully and completely vetted on the ground here. And so the effect of that was that deliveries that we would have expected for SPOT were somewhat delayed in the first quarter, and deliveries for our other Simplex products were delayed into the first quarter. And so it's just -- it's a function of running your inventory as close to 0 as you can. In this case, we ran it below that and we had backlog, which we're filling right now.

Okay, great. Because I noticed this -- an implied real uptick in the fourth quarter of SPOT and Simplex, so I was just -- just wanted to kind of close that loop. And if I may, if I've got time, I just wanted to ask one quick question on spectrum. I was wondering if assuming that there's a natural relaxation of the MSS regulation, and that ultimately, the Notice of Proposed Rulemaking with regard to the S-band for DISH results in greater terrestrial flexibility there. Can you talk a little bit -- or maybe can someone talk a little bit about Globalstar's pairing? There's a lot of speculation around there that the pairing of the Big LEO band being asymmetrical with just over 7 megahertz for uplink and over 11 megahertz for downlink might cause an issue. So is that appropriate, for example, time division, LTE or emerging technologies for LTE advanced? And then kind of related to that, iridium. I don't mean for you to comment on iridium specifically, but they have a much narrower spectrum allocation. Is it anticipated -- or do you think it's reasonable to believe that Globalstar can -- while the MSS business and a monetization or -- of excess spectrum are not mutually exclusive in other words, perhaps having a 4G network strategy of living alongside in MSS narrow band strategy.

I can answer that for you, I think, Alex. The -- let me just sort of wander through the subject a couple of different ways. First of all, in terms of coexistence, there are clearly ways to coexist, and we're evaluating those currently. I have no concerns that we will be able to find something that is acceptable to our existing and future MSS customers, as well as for terrestrial strategy. Secondly, on the issue of whether the spectrum is satisfactory for LTE versus LTE advanced, I don't think we have a view on that at this point. A little bit of that depends upon or maybe a lot of it depends upon the party that we partner with for the utilization of that spectrum. Lastly, the asymmetrical nature of the spectrum actually mirrors what's going on with the data consumption right now anyway. As you can imagine, most of the use in the data network is downstream. In other words, you're receiving a Netflix movie, and what you're doing upstream is sending an e-mail or surfing the web. So the asymmetrical nature of the spectrum is not proving to be an inhibition in any of the conversations that Globalstar is having. And lastly, in terms of the NPR itself with DISH, we're going to support that. We're going to be a participant in it, and we will -- we'll see what comes out of it. We're optimistic that the type of relaxation of the gating items is exactly going to be the result of that process, and that would presumably benefit us as well, even if our process necessarily goes down a slightly different track and perhaps at a slightly different time than their NPRM.

[Operator Instructions] And our next question will come from the line of Gus Cardenas with Satellite Communication Services.

This call -- this question may be directed at Tony, maybe. It has to do with the launch of that fourth satellite and the fourth launch if you have. Is that a considered delay or on schedule, or is it caused by the issues over at your Kazakhstan launch pad facility? Or is it the satellite not being delivered yet to you for them to be launched? And secondly, I've noticed there's some issues with some SPOT outages in South America. If you could address those for me, please.

Gus, first of all, launching satellite is always a complex plan or requirement of matching your assets to what you want to launch. First and foremost, Soyuz has a number of launches where they're going to be leaving both Baikonur and Kourou later this year, something in excess of 14 launches. So Kourou is currently working with both Thales and with Arianespace to select the best window for the launch, which, as we've described, will be in the second half of this year. And specifically, the question on South America, I assume that you're talking about some of the results from the solar flares recently. And from our perspective, we have had no issues that have interrupted our service based upon activities on the South Atlantic or caused by the solar flares.

Ladies and gentlemen, at this time, we have no further questions in queue. I would like to turn the call back over to Dean Hirasawa for any closing remarks.

Thank you, operator. With that, we'll bring the conference call to an end. Thank you again for joining us. And please be reminded that later today, an audio recording of the conference call will become available by telephone dial-in, and the webcast recording and a copy of the presentation will also be made available on the Globalstar website. Thank you, and good morning.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.