Globalstar, Inc. (GSAT) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Globalstar Inc. Earnings Conference Call. My name is Dominique, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Dean Hirasawa. Please proceed, sir.

Good afternoon, everyone. Thank you for joining us for today's conference call to discuss Globalstar's 3 months results for the period ended March 31, 2012. Before we begin, please note the following. This call may contain forward-looking statements within the meaning of federal securities law. 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 quarterly report on Form 10-Q for the period ended March 31, 2012, which will be filed shortly. The press release of this conference call and the associated slide presentation, which is available on the Investor Relations page of our company website, include 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, Thursday, May 10, 2012. A press release containing certain financial information is available on the company 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. Joining Mr. Monroe are our Corporate Controller, Rebecca Clary; and President of Global Operations, Mr. 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.

Thanks, Dean, and good afternoon, everyone. Globalstar concluded the first quarter of 2012 by continuing the positive momentum in growth and profitability that began late last year. We also continued to improve our satellite voice coverage as we deployed additional satellites, and we've continued initiatives with companies such as ADS-B Technologies, who's developing our space-based next-gen air traffic management solution. I will discuss these events in detail shortly, but first, Globalstar's Corporate Controller, Rebecca Clary, will lead off with our financial review. I will then provide a short operational update for the company and a summary and overview of the potential we see from our spectrum and network initiatives. We'll conclude the call with a Q&A session, in which Rebecca, Tony and I will be available to respond to questions. I'll now turn the call over to Rebecca to provide a review of our financial results for the past quarter.

Thank you, Jay, and good afternoon, everyone. I am pleased to report that, in the first quarter of 2012, the company had positive adjusted EBITDA for the second consecutive quarter. The company's adjusted EBITDA for the first quarter was $1.4 million, an improvement of $3.9 million from the first quarter of 2011. This improvement was due to a combination of increased revenue and a reduction in operating expenses. Our revenue was $16.7 million in the first quarter of 2012 compared to $16.3 million in 2011, after adjusting for nonrecurring revenue of $2 million recognized in the first quarter 2011. A nonrecurring revenue was the result of the termination of the company's Open Range lease agreement. Service revenue accounted for most of the increase in total revenue, and the equipment sales were flat year-over-year. The growth in service revenue resulted primarily from a $1.1 million or 27% increase in SPOT service revenue. The continued growth in our average subscriber base, which increased 31% to over 200,000 subscribers, was the main driver of this increase. The growth in SPOT service revenue was offset by a decrease of $900,000 in duplex service revenue compared to the first quarter of 2011. This decrease, which was in line with our expectations, was due to a [ph] 14% decline in ARPU and a slight decrease in average subscribers. Lower-rate plans, in effect in the first quarter of 2012, were the primary reasons for the ARPU decrease. With increasing coverage and improving call completion rates, we expect to see higher ARPU amounts that are more reflective of our call quality and dependability in the future. As discussed in our last call, the cost-saving initiatives implemented in late 2011 continued to benefit the company's operations and liquidity position. In the first quarter 2012, operating expenses decreased by $3.4 million or 21% from first quarter of 2011, excluding EBITDA adjustments. This decrease was due primarily to a 30% reduction in payroll costs. The company's net loss in the first quarter 2012 increased by $18 million to $24.5 million. This was driven primarily by noncash items, including a $12.9 million swing in the derivative loss year-over-year, as well as a $4.1 million increase in depreciation expense due to the company placing additional second-generation satellite into service throughout 2011 and first quarter of 2012. And now a few comments about our liquidity position. As of March 31, 2012, the company had unrestricted cash of $7.7 million, $3 million of availability in our COFACE facility and $27.3 million in our contingent equity account. In addition, we held $2.5 million in a debt service account, which will be used to help fund our remaining 2012 interest payment under the COFACE facility. During the first quarter, we drew down a total of $18.5 million from the contingent equity account and expect to make additional draws throughout the remainder of the year. As highlighted in March, we entered into a significant amendment to the COFACE facility, which extended the start of the principal repayment requirement by one year to mid-2013 to better align the repayment schedule with the updated launch schedule. We have also continued to work to secure additional senior debt financing to help fund our capital expenditure demand, including the remaining portion of our second-generation ground infrastructure and the construction and launch of additional second-generation satellites beyond the first 24. We expect that the resolution of the Thales arbitration will be a significant driver to secure this financing, as the company's long-term capital needs will then be more sharply defined. As disclosed in our Form 10-Q, which will be filed with the SEC today, 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 anticipated contractual obligations in 2012 without additional external financing. We remain encouraged in our proven ability to control operating expenses and believe that the focused strategy implemented in late 2011 will be sustainable for the remainder of 2012 and going forward. However, we know that revenue growth, particularly in our duplex business, is the key driver of the company's performance. I will now turn the call back over to Jay.

Thanks, Rebecca. As you just heard, we're pleased with the continued positive financial momentum we began in the fourth quarter of last year, and we are encouraged with our financial progress. These past 2 quarters demonstrated turnaround for our business and are a result of restructuring the operations which we began last year. As explained in March, with increased discipline in sales, marketing, product development plus the new constellation offering improved coverage and the return of the MSS industry in this highest-quality voice service, we're laying a strong foundation for future growth in the business. Globalstar continues to make the necessary investments in the operational improvements to best realize the significant opportunities that lie ahead. And we continue our focus on increasing revenue and profitability in 2012. We also continue to expect these trends will be manifest more in the second half of the year. Today, we're just one launch away from restoring full coverage. Throughout the quarter, we continued to deploy new satellites, further improving our call success rate. The company anticipates returning to sustained duplex revenue growth later this year as additional second-generation satellites are placed into service. Currently, our customers in key markets are experiencing increased connection rates. These rates are expected to improve further in the near term as 4 new second-generation satellites are scheduled to be placed into service over the next couple of months. With these additional satellites in operation, call connection rates are expected to increase to between 80% and 90% in our key markets by August. Further increases are projected as additional satellites are placed in service throughout the remainder of the year. The increase in the service levels are expected to drive both usage and new subscriber additions. We remain on track for our fourth launch in the second half of this year. With this launch, we expect to return to the level of service our customers enjoyed just a few years ago. We will update you with further information once our launch date is finalized. Also, the momentum we are reaching we had previously discussed has had no significant impact on service levels, and none of the satellites launched in late December has shown any indication of being affected. We continue to work diligently with our satellite manufacturer and others on the development of the software patch designed to correct the problem. Since our last call, further development simulations in California and France validated the proposed fix, and we expect to implement the software upgrade in 2 phases beginning as early as June. We reiterate, once installed, we expect that all of our new satellites will successfully complete their 15-year mission. I know many of you remain keenly interested in the status of the commercial arbitration with Thales regarding our rights to order additional satellites under our contract. Since our last call, the arbitration panel has closed the record in the proceeding, and we anticipate the ruling at any time now. We look forward to putting this dispute behind us and continuing our longstanding relationship with Thales. As Rebecca stated earlier, service revenue from our SPOT devices increased by approximately 27% in the first quarter compared to the same period in 2011. Due to the continued success of SPOT and related consumer products, Globalstar has received orders to ship a total of 370,000 SPOT devices to our retail points of distribution worldwide. These award-winning devices have been responsible for the initiation of more than 1,800 rescues around the globe, 100 more than at the end of 2011. Also, as Rebecca pointed out, during the quarter, we announced important and positive changes to the COFACE facility, and we're pleased with the amendment and remain grateful for the consideration shown by all parties involved for recognizing the need for this amendment while we complete the launch of the second-generation constellation. I'd like to update you on our space-based next-gen air traffic management initiative with ADS-B Technologies. We initially discussed this on our last earnings call. During the first quarter, ADS-B continued development of its next-generation air traffic surveillance product. This solution uses the Globalstar system to provide realtime aircraft surveillance data from remote areas where a conventional line of sight connection to a terrestrial ADS-B ground station is not possible or impractical. ADS-B Tech and Globalstar have been working on this solution for almost 2 years. In April, ADS-B successfully tested the capability of the system in a second series of demonstration flights, verifying the feasibility of space-based air-traffic surveillance using Globalstar's LEO constellation. We're very excited about these recent test results, and they proved the technical feasibility of using the Globalstar system. In other words, this is not a "pie in the sky" idea that may be implemented many years from now. It's a proven concept using existing Globalstar satellites and ground infrastructure, with equipment newly installed in aircraft. We are pleased to say that ADS-B solution is now gaining attention of the FAA, and are very excited about the global revenue opportunity that space-based aircraft management systems represent around the world. Globalstar's unique bent-pipe architecture, in a network of ground stations, not only provides a low-cost solution but also is the only satellite network that can handle the amount of data required reliably and with no latency concerns. We'll update you further regarding the initiatives during our next earnings call. Shifting gears just a little bit, we spent the last few years inwardly focused on getting a new constellation built. But since the new year, and that constellation is largely completed, it probably makes sense to step back and think about the business opportunity that we can finally realize upon. Here's the way we, as company management and significant shareholders, look at the future of Globalstar. Globalstar's at an inflection point now. We have a low-cost, second-generation satellite and ground infrastructure. It has the daily capacity to transmit 30 billion small messages, be those text messages, M2M transmissions or other small messages. It has the ability to transmit 19 million voice and data minutes. It's the industry's lowest-cost, best voice quality, and this system was built at only 10% to 15% of the first-generation network cost, allowing us to exploit many more opportunities profitably. Globalstar's inflection point includes breakthrough mass market consumer products, like SPOT. And lastly, Globalstar controls a non-replicable 25 megahertz of global spectrum, with 19 megahertz of that authorized for terrestrial broadband use in the United States. With this constellation, inexpensive MSS consumer market products and the spectrum, we have an enormous addressable market. We think of this market of Globalstar as 4 buckets. One, there are about 1 billion people who live beyond traditional wireless and wireline coverage. Amazingly, that wireless and wireline coverage covers only 25% of the landmass of the world. So there's 1 billion people that live beyond that. It's 1 billion people in the second bucket who either work or play beyond wireless coverage. There's a third bucket, which changes in terms of numbers annually, and that's, where connectivity fails, Globalstar shines. So whether it's a natural disaster or the people that service those natural disasters, Globalstar shines. It's also effective in countries where known political repression or other situations like that exists and people can dial around in those countries the traditional wireless and wireline networks in them. Lastly, there's a bucket of a low-cost alternative to high-cost roaming at $0.10 a minute versus international roaming of $2 a minute. This is a $60 billion a year market by 2015 that we can penetrate. And Globalstar has the network capacity to address these markets. [Indiscernible] Globalstar has just fungible capacity. If you think about it in terms of text messaging or small messaging, asset tracking and so forth, and if you think a normal user would use 20 messages per day, you can support 1.7 billion users on Globalstar's new network. If you think about them as users using 50 minutes a month, you can support 11 million of those, or the standby users who average only 10 minutes a month, you can support 55 million users on this network. So if you just take an average of remote and standby users, it's about 30 million users that we can support on the network. And if you assume just a marginal ARPU of only $10, instead of what we expect long term, we have a $3.5 billion business with an 80% EBITDA margin. So the question becomes simply sales and marketing. This is how we do it now, and this is how we'll do it going forward. And at the top, you'll see a list of some of the participants in our 10,000 points of retail distribution. But at 10,000 points, it's clearly not enough to address the full market that we've described. So going forward, we will work with domestic and international carriers to establish broader sales channels, whether it's Vodafone, China Mobile, America Movil, Deutsche Telekom or others, those companies offer Globalstar the opportunity to have a much, much broader reach and consume some of this capacity we talked about a moment ago. There's a third bucket, and that third bucket is cooperation with technology companies who might want to have this capacity available to them in order to satisfy their individual product offerings, whether it is Apple or Dell, Microsoft or Google, all of these companies have a need to reach their customers in what the marketing advantage that comes from being able to provide service to their customers everywhere as opposed to something limited to the terrestrial networks. With these 3 distinct distribution channels, we can fully utilize our capacity offering, expensive -- inexpensive, excuse me. Stop. With these 3 distinct distribution channels, we can fully utilize our capacity, offering inexpensive consumer products, something that, apparently, no other MSS company seems to want to go after. To end the call today, I want to discuss spectrum. First, not all spectrum is created equal. Globalstar's is actually no exception. Noise and interference directly impact network capacity, if you're going to use spectrum terrestrially. This is why a small amount of low-noise spectrum can carry significantly more data than a much larger parcel of noise- and interference-limited spectrum. Globalstar's spectrum has extremely low noise and interference characteristics. As you can see on this 3D spectrograph, which shows the usable spectrum for terrestrial between roughly 300 and 3,000 megahertz, Globalstar's spectrum sits in uniquely quiet bands, assuring high throughput and making it very attractive for terrestrial wireless use. How does that spectrum get used to fulfill the needs of a terrestrial wireless company? [indiscernible] the need for more spectrum and the impending spectrum deficit. The FCC is doing its best to add more to the inventory for terrestrial wireless use and with some substantial success. And if you look at this chart that the FCC has set on the broadband plan is we have 547 megahertz of spectrum that's available today. And by 2015, given the rapid increase in data usage, we will need 847 megahertz. And this bridge shows you how you get to 847 from 547. Unfortunately, the 120 megahertz, which is designated from the broadcasters, is not going to come in in any reasonable period of time, and it will never appear as 120 megahertz. The WCS spectrum of 20 megahertz has come into the inventory, but the federal government has pushed back on the AWS's 60 megahertz allocation and has indicated that it could come in over the next 10 years but it would come in at a cost of $15 billion to $18 billion of relocation. The D Block has been given to public safety, so it's not available. And that leaves MSS providers to fill the gap. LightSquared is in peril. DISH is going through the process now and will be approved shortly, and Globalstar is right behind that from regulatory process. And as you're aware, the broadband plan has encouraged the use of this MSS spectrum to deliver terrestrial capacity. In March, the FCC announced a notice to propose rulemaking regarding the use of the 2 gigahertz MSS spectrum transferred to DISH Network's. In this, the FCC has proposed to eliminate virtually all of the gating criteria for the use of the spectrum, which permits it to be used exactly like all other terrestrial spectrum. They also stated in the NPRM that they would address Globalstar's spectrum once DISH is finished. In our conversations with the FCC, they have told us that they plan to use DISH as a model for Globalstar's NPRM. Ultimately, we expect the FCC to grant all MSS providers with additional flexibility to utilize our spectrum terrestrially to better serve the customers with new services and to treat all MSS providers similarly. So in summary, Globalstar concluded the first quarter by continuing the positive momentum in growth and profitability that we began last year. We continued to lay the products and business operations foundation necessary to grow our subscribe base and technology offerings with an increased concentration on driving revenue and profitability in 2012 and beyond. And we plan to creatively deal with the spectrum opportunity before us this year. Thank you all for your time, and I look forward to speaking to you again in August. Tony, Rebecca and I are now available to answer your questions.

Thank you, Jay. That concludes the prepared portion of the presentation. We will now move on to the Q&A portion the call. Operator, can you please proceed with the first question?

[Operator Instructions] Your first question comes from the line of David Yongo [ph] of Globalstar.

What's going -- since the converts are now current on the books, what do you plan to do with them?

Are you talking about the 575 converts?

Correct, 71 million left.

Right. Well, we're definitely very aware of it, and we'll make our decision on how we intend to deal with those, David, over the upcoming months.

Do you have enough money for your line to take care of these converts for next year?

Not at this moment.

[Operator Instructions]

Operator, it looks like we have no additional questions at this time, so we will sign off for today. And thank you all for joining the call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.